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Kohl’s Lowers Fiscal Year Guidance After Q3 Miss

Kohl’s Corp. lowered its full-year forecast after a rocky third quarter, including misses on revenue and earnings per share.

In a Nutshell: CEO Michelle Gass said, “We are pleased to report that our business returned to growth during the third quarter, with a comparable sales increase of 0.4 percent. The quarter started off positive in August with another successful back-to-school season and ended strong in October.”

In a call to Wall Street analysts, Gass noted an acceleration of the retailer’s active business, continued strength in digital and improved performance in stores. Plus, the Amazon Returns partnership is now available in all stores nationwide for the holiday period, “which will drive additional traffic into our stores,” she added.

While Gass saw some progress on the company’s initiatives–it also has new launches slated for the fourth quarter in time for holiday sales, with some debuting last month–Wall Street wasn’t so thrilled with third-quarter results, especially because Kohl’s missed consensus estimates on both earnings per share and revenues for the three-month period.

In an early recap of results, Dana Telsey of Telsey Advisory Group noted that the department store chain’s EPS of 74 cents was “well below our in-line estimate of 86 cents as the company came up short on comp sales, gross margin and had elevated expenses as it prepares for the holiday season.”

The 0.4 percent comps was below the 9 percent consensus expectation. One plus Telsey noted was that inventory at the quarter-end was up 0.9 percent year-over-year, an improvement from the 2.4 percent increase in the second quarter of 2019.

Retail analyst Jessica Ramirez at Jane Hali & Associates said that while the retailer has a “great shopping experience” online and on its shopping app, the “in-store experience is not good.” The stores need an update, which could “lift the experience” in the physical channel, she added.

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Net Sales: Total revenues for the quarter ended Nov. 2 dipped 0.06 percent to $4.625 million from $4.628 million. Revenues included a 0.3 percent slip in net sales to $4.36 million. Comparable sales rose 0.4 percent, but were down from the 2.5 percent gain in the year-ago quarter.

By category, men’s, accessories and footwear outperformed in the quarter, while home and children’s were in-line and women’s apparel–down 1 percent–was below the company average.

Gass told analysts that sales in its active category rose 7 percent compared with last year. “Active apparel sales increased at a high-single digit rate driven by strong performance from our three key national brands, Nike, Under Armour and Adidas, as well as additional relevant brands, including Champion,” Gass said, noting that active footwear returned to positive growth with solid results from Adidas, Under Armour, Vans and Asics.

In the men’s business, sales were strong in active and Big & Tall. In contrast, women’s saw strong performance in active and intimates, but results in casual apparel were mixed. Moves to strengthen the performance of the category include exiting the Dana Buchman brand and introducing Nine West and Elizabeth and James. Kohl’s also reflowed the layout of the women’s area in its stores, Gass said.

Kohl’s gross margin rate slipped slightly to 36.3 percent in the quarter, from 37 percent a year ago, and operating income fell 20.9 percent to $204 million from $258 million.

Christina Boni, vice president at credit ratings firm Moody’s Investors Service, said pricing investments to build market share, which gave comps a boost, were a “significant headwind” due to the decrease in operating income.

“Gross margins declined 67 basis points, given its sharper pricing and marketing to build momentum into the holiday season. Its strategic decision to protect its value position into holiday is expected to continue to depress its profitability,” Boni said.

Earnings: Net income fell 23.6 percent to $123 million, or 78 cents a diluted share, from $161 million, or 98 cents, a year ago. On an adjusted basis, diluted EPS was 74 cents for the third quarter.

Wall Street was expecting adjusted diluted EPS of 86 cents on revenues of $4.4 billion.

The company lowered guidance for fiscal 2019 and is now forecasting diluted EPS at between $4.75 to $4.95. That compares with prior guidance of $5.15 to $5.45. Wall Street’s consensus forecast was $5.19 on revenues of $18.99 billion.

CEO’s Take: According to Gass, “We enter the holiday period with momentum and are strategically increasing our investments to take advantage of the unique opportunity to fuel growth and customer acquisition. We believe that investing in the short-term will support our strategies to drive profitable growth over the long-term.”