Kohl’s Corp. managed to lift its bottom line in the second quarter despite challenging sales trends across most categories.
The Menomonee Falls, Wisc.-based retailer on Wednesday reported that for the second quarter ended Aug. 3 net income rose to $66 million, or $0.59 per diluted share, from $58 million, or $0.52 per diluted share in the year-ago period.
Net sales decreased 4.2 percent and comparable sales fell 5.1 percent. Gross margin increased 59 basis points. Inventory declined 9 percent.
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Based on the weak second-quarter selling trends, Kohl’s lowered its sales outlook for the year to a decline of 4 to 6 percent while comparable sales are seen falling 3 to 5 percent. However, the company lifted its outlook on profits, with diluted earnings per share now projected in the range of $1.75 to $2.25.
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That compares to guidance earlier in the year of a net sales decrease of 2 to 4 percent, and a comparable sales decline of 1 to 3 percent, and diluted earnings per share from $1.25 to $1.85.
Early in the day, Kohl’s share price jumped 7 percent, with Wall Street apparently impressed by the improved outlook on earnings for this year. But trading simmered down, with the stock price closing up just 0.26 percent to $19.65.
“We have taken significant action to reposition Kohl’s for future growth. However, our efforts have yet to fully yield the intended outcome due in part to a continued challenging consumer environment and softness in our core business,” Tom Kingsbury, Kohl’s chief executive officer, said in a statement. Core categories include women’s and men’s sportswear and activewear.
“During the second quarter, our customers exhibited more discretion in their spending, which pressured our sales even as customers transacted more frequently,” Kingsbury added. “This overshadowed strong performance in our key growth areas, including Sephora, home decor, gifting and impulse. In spite of this, we continued to execute well operationally, enabling us to deliver a 13 percent increase in earnings driven by gross margin expansion and strong inventory and expense management.
“Looking ahead, we are focused on ensuring that the substantial work that we’ve done across product, value and experience is fully recognized by both new and existing customers,” Kingsbury added. “We will also capitalize on new opportunities such as our partnership with Babies ‘R’ Us and expect to continue to benefit from our key growth areas. Our conviction in our strategy remains strong and our operating discipline, solid cash flow generation, and healthy balance sheet will continue to support us as we work to return Kohl’s to growth.”
The retailer has been aggressive remaking its mix as it strives to win over much-needed younger clients. Most significantly, Kohl’s rollout of Sephora shops inside its stores is in advanced stages; a rollout of Babies “R” Us is just underway; dress shops in 700 of its locations are up and running, and better brands are being sought to augment an over-reliance on proprietary labels. Last year, Kohl’s revamped its home assortment with pumped-up presentations of wall art, botanicals, storage, frames, glass, ceramics, gifting and impulse items, as well as introducing pet supply and lighting categories to the selling floor.
With all those assortment changes and more to come, Kohl’s is seeking $2 billion in additional sales volume over several years, although the remerchandising hasn’t yet reversed declining sales trends as Americans hold back on spending.
During a conference call with investors and retail analysts, Kingsbury said, “Our outlook for the balance of the year assumes the macroeconomic environment will remain challenging. Importantly, our operating discipline, our solid cash flow generation and healthy balance sheet will continue to provide meaningful support as we work to return Kohl’s to growth, as demonstrated by our second-quarter operating performance. Through all of this, we will remain focused on executing against our four strategic priorities — enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline and further strengthening our balance sheet.”
There were some positives seen during the quarter. As Kingsbury said, Sephora sales increased 45 percent in the second quarter, with fragrance, bath and body and skin care especially strong. He said Haus Labs by Lady Gaga and Ariana Grande fragrance will be added to the assortment. He also said the buildup in home continues to make progress with decor, storage, wall art, glassware and products growing. Also, he said the holiday gift assortment is being expanded. Kohl’s is also expecting to get a lift from the rollout of Babies “R” Us shops to 200 stores. Already, 100 Babies “R” Us shops are up and running, and the balance is seen opening in September.
However, Kingsbury also told analysts, “We know we have more work to do in our core apparel and footwear business to improve the sales trends, which frankly have been disappointing. To be clear, we remain confident that the product we are offering today is more relevant to our customers. This is supported by recent customer insight that indicates more of our customers feel Kohl’s resonates with them and by an increase in conversion we experienced in the second quarter.” He also cited some loss in jewelry sales resulting from making space for Sephora on the selling floor, though for holiday, fine jewelry will be reintroduced to 200 stores, and bridge jewelry will be extended into some aisles.
“We are delivering growth in our new products including dresses, which are benefiting from expanded space and market brands in our stores.…We are seeing promising initial sell-through trends in newly introduced brands, such as Aéropostale and Limited Too. We are also encouraged by trend improvement in active. Our private brands in active, including FLX and Tek Gear, grew low-double digits, and we delivered positive growth in several national brands including Nike, Skechers, Columbia and Eddie Bauer.
At its stores, Kohl’s is adding a layer of management to “drive a consistent experience across the chain, and online, personalization is being increased and the retailer is leaning more into social media to draw younger audiences,” Kingsbury said.
“Kohl’s second quarter highlighted the company’s continued top-line challenges, with sales down 4 percent and lowered revenue guidance for the year. The company’s difficult top-line trajectory is likely the result of both a pullback in consumer discretionary goods spending and Kohl’s-specific execution challenges,” said David Silverman, senior director at Fitch Ratings, in a research report Wednesday. “The company did demonstrate some good execution against expense and inventory management and raised its earnings guidance for the year, although Fitch expects the uplift is primarily due to Kohl’s decision to exclude the impact of credit card late fee changes in its guidance given uncertainty. Fitch continues to look for signs that Kohl’s top-line initiatives are taking hold to provide confidence that the company can stabilize revenue and defend share longer term in a difficult department store space.”