Kohl's Beats, Re-Affirms 2012 View

Kohl’s Corporation ( KSS - Analyst Report ) has started the year 2012 with operating earnings of 63 cents in first quarter, beating the Zacks Consensus Estimate by 3 cents driven by top-line growth. The earnings, however, missed the prior-year quarter’s earnings by 6 cents due to lower pricing.

Sales and Margins

Net sales climbed up 1.9% to $4.243 billion in the quarter. However, the results slightly missed the Zacks Consensus Sales Estimate of $4.256 billion.

Kohl’s same-store sales for the quarter ending April 28 increased 0.2%, while total sales climbed 1.9%, driven by accessories and home divisions along with positive response in men's items.

However, comparable store sales dipped 3.5% for the four-weeks ended April 28, 2012, after an increase of 10.2% in the four-week month ended April 30, 2011. Kohl’s total sales dipped 1.9% in the month of April 2012 to $1.25 billion, as compared to 12.1% growth with sales of $1.28 billion in the year-ago month. The total sales for the period decreased, due to early arrival of Easter and warm weather in the month of March.

The gross margin shrank by 220 basis points to 35.9%, as the management implemented lower pricing to provide value to consumers. Increased cost of merchandise also led to the decline in gross margins. Operating margin contracted 180 basis points to 7.6% due to lower gross margins during the quarter.

Store Update

Kohl’s opened 9 stores (includes one relocated store) and closed one store during the quarter, and now operates 1,134 stores in 49 states, compared to 1,097 stores a year ago.

Management Guided

For the second quarter 2012, the company expects earnings per share to grow in the range of 96 cents to $1.02 per share, on the back of an expected sales increase in the range of 2% to 3% and a comparable store sales increase in the range of flat to 1%. The company also plans to buyback shares worth $250 million in the second quarter of 2012.

Kohl’s continues to expect its 2012 earnings per share to be $4.75. Further, the company plans to open approximately 10 more stores in the fall season, and remodel approximately 50 stores in 2012.

Our Recommendation

Kohl’s has had a consistent merchandise mix over the past few years. In addition, the company’s pricing strategy, expense management and overall profitability culture is focused on maintaining a low-cost structure. A strong balance sheet coupled with strong cash balances and attractive dividend yields makes the stock attractive.

Kohl’s, which competes with Ross Stores Inc. ( ROST - Snapshot Report ) , holds a Zacks #3 Rank (short-term ‘Hold’ rating). We maintain a long-term Neutral recommendation on the stock.