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Why Shares of Kohl's Corp. Dropped Today

By Timothy Green – May 14, 2015 at 12:08PM

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Kohl's mixed earnings results weren't all that bad, but the stock may have gotten ahead of itself over the past year.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of department store operator Kohl's (KSS -1.75%) slumped on Thursday after the company reported mixed first-quarter earnings, falling short of analyst expectations for revenue. By noon, Kohl's stock had fallen by about 11.5%.

So what: Kohl's reported revenue of $4.12 billion, up 1.3% year-over-year, driven by 1.4% comparable-store sales growth. This fell short of the average analyst estimate for revenue by $70 million, and was modestly below the company's original expectations for the quarter, according to CEO Kevin Mansell.

Kohl's reported EPS of $0.63, up 5% year-over-year and eight cents better than what analysts were expecting. The earnings results were buoyed by a more balanced promotional environment compared to the same period last year, as well as strong expense control, according to Mansell.

Now what: Kohl's results weren't bad, but the stock was severely punished for missing sales estimates. The quarter was a vast improvement over the first quarter of 2014, when comparable-store sales fell by 3.4%, and Kohl's profitability was far better than what analysts expected.

The stock has run up quite a bit over the past year, rising about 33%, and the stock traded at about 17.5 times earnings before it tumbled today, so this extreme reaction may have been partially valuation-driven. Kohl's has struggled to grow over the past two years, and it has dramatically reduced its rate of opening new stores, so the stock may have gotten a bit ahead of itself.

Timothy Green has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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