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Kohl’s Corporation (KSS - Analyst Report) is set to report second quarter fiscal 2013 results on Aug 15. Last quarter, it posted a 15.8% positive surprise. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Kohl’s has been struggling with high inventory levels since the last few quarters. The inability to attract consumers in the last holiday season further increased its inventory. The slow inventory turnover along with improper pricing and ineffective marketing strategies have gradually slowed down the company’s sales. Moreover, clearing the stock at the cost of its margin is also hurting the company’s profitability.

However, in order to reduce inventory levels and drive sales, the company aggressively promoted its brands and invested in marketing and e-commerce initiatives throughout fiscal 2012. Kohl’s also introduced a new merchandise team in fiscal 2012, which aims to increase assortments and expand the number of private and exclusive brands.

These initiatives bore fruits in the first quarter and we believe that continued product innovation and initiatives taken up by the company will benefit in the upcoming quarters as well. Kohl’s tight expense management and lower share count owing to share buybacks are also expected to boost earnings in the second quarter.

Earnings Whispers?

Our proven model does not conclusively show that Kohl’s is likely to beat earnings this quarter. That is because a stock needs to have both a positive earnings expected surprise prediction (ESP) (Read: Zacks Earnings ESP: A Better Method) and a Zacks Rank #1, #2 or #3 for this to happen. That is not the case here as shown below.

Negative Zacks ESP: The Most Accurate estimate stands at $1.02 while the Zacks Consensus Estimate is higher at $1.03. That is a difference of -0.97%.

Zacks Rank #3 (Hold): Kohl’s Zacks Rank #3 (Hold) lowers the predictive power of ESP because the Zacks Rank #3 when combined with a negative ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and #5 (Sell rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some other companies in the retail sector that can be considered as our model shows that they have the right combination of elements to post an earnings beat this quarter:

Ross Stores Inc (ROST - Analyst Report), Earnings ESP of +1.08% and Zacks Rank #2 (Buy).

Family Dollar Stores Inc (FDO - Analyst Report), Earnings ESP of +1.19% and Zacks Rank #3 (Hold).

SuperValu Inc. (SVU - Analyst Report), Earnings ESP of +10.0% and Zacks Rank #3 (Hold).

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