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Kohl’s Corporation (KSS - Analyst Report) is set to report first quarter 2013 results on May 16, before the market opens. In the fourth quarter of 2012, Kohl’s delivered a 1.84% positive surprise. Let’s see how things are shaping up prior to this announcement.

Factors to Consider this Quarter

Kohl’s slow inventory turnover along with improper pricing and ineffective marketing strategies are expected to dent the company’s sales in the near term. The company has been struggling with higher inventory levels since the last few quarters. In order to reduce the burden of inventory and increase sales in the fourth quarter, the company sold its merchandises at a lower margin. Moreover, Kohl’s inability to attract consumers in the last holiday season (November-December 2012) has further increased its inventory levels. Lower consumer confidence toward the company also forced Kohl’s to give more-than-expected discounts to its customers.

Though the company is aggressively promoting its brands and investing in marketing and e-commerce initiatives to drive sales, we believe that these efforts might hurt margins in the upcoming quarter. Furthermore, through its global inventory visibility project, Kohl’s aims to better manage in-store inventory. However we do not expect that these initiatives will provide any benefit in the upcoming 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 56 cents while the Zacks Consensus Estimate is higher at 58 cents. That is a difference of -3.45%.

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. The Zacks Consensus Estimate for the first quarter moved down by 3.33% to 58 cents per share over the last 30 days as the tendency for a downward revision was more obvious.

Other Stocks to Consider

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

Harris Teeter Supermarkets Inc , Earnings ESP of +1.47% and Zacks Rank #2 (Buy).

Costco Wholesale Corporation (COST - Analyst Report), Earnings ESP of +1.96% and Zacks Rank #2 (Buy).

Saks Inc. , Earnings ESP of +5.26% and Zacks Rank #3 (Hold).

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