Kohl's Beats Earnings, Cuts View

Kohl’s Corporation ( KSS - Analyst Report ) reported operating earnings of $1.00 per diluted share in the second quarter of 2012, beating the Zacks Consensus Estimate by 4%. Earnings, however, missed the prior-year quarter’s earnings by 7.4% due to decline in revenues and comparable store sales.

Sales and Margins

Net sales declined 1.0% from the prior-year quarter to $4.2 billion in the second quarter of 2012 due to a decline in comparable store sales. The company results were in line with the Zacks Consensus Estimate.

Kohl’s comparable store sales declined 2.7% from the prior-year quarter. However, management highlighted that sales picked up in July, driven by an improvement in inventory levels to match pent-up demand.

Gross margin declined 170 basis points to 39.0% due to lower revenues and slightly increased cost of merchandise. Operating margin contracted 200 basis points to 10.9% due to lower gross margins.

Store Update

Kohl’s opened 9 stores (includes one relocated store) and closed 1 store during the first half of the year. The company now operates 1,134 stores in 49 states, compared with 1,097 stores a year ago. Kohl's completed remodeling of 40 stores by the end of the quarter.

Guidance

Following the lukewarm second quarter results and muted third quarter outlook, Kohl’s reduced its earnings expectation for fiscal 2012. The guidance was brought down from $4.75 per share to a range of $4.50 to $4.65 per share.

In the third quarter, Kohl’s expects to post earnings of 83 cents to 89 cents. The company expects sales growth in a range of 1% to 3% while comparable-store sales growth is expected to be flat to 2%. This guidance also includes expected third quarter share repurchases of $300 million. Further, the company plans to open approximately 12 more stores and remodel 10 more by September 2012.

Dividend Announcement

On August 7, 2012 Kohl’s declared a quarterly cash dividend of 32 cents per share which will be paid on September 26, 2012 to stockholders of record as of September 5, 2012.

Our Recommendation

Currently, we have a Neutral recommendation on Kohl's Corporation. The stock carries a Zacks #3 Rank (a short-term Hold rating).

We are encouraged by prudent expense management across many of Kohl’s stores. A strong balance sheet coupled with strong cash balance and attractive dividend yield makes the stock attractive. However, we remain concerned about the rising commodity costs, increased volatility in the financial markets and overall uncertainty in the macroeconomic environment.