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Kohl’s Q3 Sales and Earnings Fall Short of Expectations on Soft Traffic

Kohl’s Corporation reported third-quarter sales and earnings results that fell short of the recently lowered analyst expectations. Expectations were revised down last month after the company issued a warning that quarterly and full-year earnings would be negatively impacted by weak October sales.

Total sales at its 1,163 physical stores and e-commerce site declined by 1.6% to $4.37 billion, a tad short of Wall Street’s expected $4.4 million. Same-store sales fell by 1.8%.

Gross margin declined by 28 basis points to 37.2% of net sales in the quarter. National brands, which earn a lower margin than private label merchandise, comprised a higher percentage of sales in the period. However, gross margin remains flat on a year-to-date basis.

Net income was $142 million, or $0.70 per share, compared to $177 million, or $0.81 per share, in the prior year period, and analyst expectations of $0.74 per share.

On the quarterly earnings conference call, CFO Wes McDonald reported that transactions per store were down by 2.6% in the quarter, though average transaction size was up by 0.8% and unit retail increased by 2.6%. Though store traffic is declining, conversion rates are up a bit. Chairman, CEO and president Kevin Mansell reported that children’s apparel continued to outperform the company, both online and in-store. Accessories (particularly beauty and handbags), footwear and men’s were slightly negative, but outperformed the company. Home and women’s underperformed the company, and remain the most challenging merchandise areas.

The Midwest was the strongest geographic region in the country, while the South Central was the weakest.

In early October, Kohl’s rolled out its Yes 2 You loyalty program to all its stores. Unrelated to its credit card program, the loyalty program rewards customers with points based on expenditures that are converted to dollars to spend at Kohl’s. For every $100 spent, a member receives a $5 coupon. It now has a total of 17 million customers (and growing) enrolled in the program. Tests have shown that loyalty program customers visit stores more frequently and spend more, on average, than non-loyalty customers. The program gives Kohl’s the ability to customize product offerings to individual customers.

Kohl’s is also enhancing its omnichannel marketing. Buy Online/Pick-up in Store is being tested in three key markets, with expected rollout next year, and shipping from stores will expand to 800 stores for holiday 2014.