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Kohl’s Corporation (KSS - Analyst Report) is set to report fourth quarter fiscal 2014 results before the opening bell on Feb 27. Last quarter, this specialty retailer posted a negative surprise of 5.81%. Let’s see how things are shaping up prior to the announcement.

Factors to Consider

Kohl’s has been facing the brunt of a challenging retail environment since the last few quarters. Sluggish comps, higher inventory levels and higher operating expenses remain concerns. Last quarter, Kohl’s earnings and revenues lagged the Zacks Consensus Estimate and the year- ago levels due to lower comps owing to a challenging retail environment. Gross and operating margins shrank due to lower revenues and higher operating expenses. Moreover, Kohl’s high inventory levels and rising commodity costs added to the woes.

Kohl’s expects weakness to continue in the fourth quarter as well and thus slashed the guidance for the fourth quarter and fiscal 2014 on Feb 07, 2014.

For the fourth quarter, this Menomonee Falls, Wis.-based retailer expects comparable store sales to decline 2.0%, at the high end of the previous expectation of 0%–2% decline. Though comp sales improved 0.8% in November and December, the company witnessed lower-than-expected sales in January due to a decline in traffic and lower merchandise on clearance. A volatile retail sales environment and lower consumer confidence resulted in lower traffic. 

Further, lower comparable sales along with higher-than-expected costs, due to unanticipated expenses related to its e-commerce business led the company to cut its fourth quarter earnings guidance. The company now anticipates earnings to be approximately $1.53 in fourth quarter fiscal 2014, compared with the previous guidance of $1.59 –$1.74 per share.

Kohl’s also slashed its earnings view for fiscal 2014 to approximately $4.03, compared with the previous guidance of $4.08 to $4.23 per share, owing to soft comparable sales. The company had earlier lowered its earnings guidance due to soft third quarter results.

Not only Kohl’s, several retailers, including Wal-Mart Stores Inc. (WMT - Analyst Report), GameStop Corp (GME) and hhgregg Inc. (HGG) have cut their fourth-quarter outlooks.

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 ESP and a Zacks Rank of #1, 2 or 3 for this to happen. That is not the case here as you will see below.

Zacks ESP: The Expected Surprise Prediction or ESP for Kohl’s is 0.00% as both the Zacks Consensus Estimate and the Most Accurate estimate stand at $1.53 per share.

Zacks Rank #3 (Hold): Kohl’s’ Zacks Rank #3 when combined with an ESP of 0.00% makes surprise prediction difficult.

We caution against stocks with Zacks Ranks #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

Other stocks in the retail sector that have both a positive earnings ESP and a favorable Zacks Rank are:

Foot Locker Inc. (FL - Snapshot Report), with an Earnings ESP of +8.00% and a Zacks Rank #3.

Mens Warehouse, Inc. (MW - Snapshot Report), with an Earnings ESP of +9.09% and a Zacks Rank #3.

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