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Kohl’s Posts Q2 Surprise, But Warns of Sales Slowdown Ahead

While second-quarter earnings topped than Wall Street’s consensus expectations, Kohl’s warned of continuing pandemic fallout on its business.

In a Nutshell: Because of uncertainty around the coronavirus crisis, Kohl’s said it was planning its business conservatively and prepared to chase unfolding trends. Anticipating that customers to get a head start on their holiday shopping this year, “we will meet their needs accordingly,” Kohl’s said in a quarterly company presentation.

The chain plans Lands’ End and Toms launches in the second half, along with a holiday assortment emphasizing home, active, the cozy and comfort apparel and footwear that consumers are reaching for, and toys, after eliminating eight underperforming brands earlier this year.

“Our organization continues to navigate through a period of extraordinary change and uncertainty presented by the COVID-19 crisis,” CEO Michelle Gass said, noting the company’s “significant progress” in rebuilding the business during the second quarter.

“We reopened all of our stores with new safety and operating procedures, accelerated digital growth, and showed great discipline in managing inventory and expenses meaningfully lower,” she added. “In doing so, we generated positive operating cash flow and further enhanced our financial position.”

In a Wall Street analyst conference call, Gass said Kohl’s is busy at work adapting to the myriad changes not just on the consumer front but within retail as well.

“We will continue to manage our business with great discipline, knowing the environment will remain challenging in the near term,” she added.

She also noted the retailer’s strong omnichannel foundation and customer loyalty, and a merchandising mix that will serve the increasingly casual-first fashion consumer. “Kohl’s has always been known as a casual destination,” she said.

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Sales in July were down in areas that saw an uptick in Covid-19 infections, while the back-to-school selling season is off to a slow start. “We are still operating in the midst of a pandemic,” she said, adding that the company doesn’t expect any change in the near term.

The company will expand its athleisure mix, and increase its Champion offerings. Active will also be a key category going forward, as well as beauty, Gass said. And the company’s Curated by Kohl’s in-store concept will be expanded to 300 stores, she said. The company has been partnering with Amazon by using the store as an option for returns, a move that has brought in more store traffic to its doors. Gass said the Amazon returns section has been moved to the back of the store to better help with social distancing.

Net Sales: For the period ended Aug. 1, total revenue fell 23.1 percent to $3.41 billion from $4.43 billion, which included a 22.9 percent decline in net sales to $3.21 billion from $4.17 billion.

Digital sales rose 58 percent in the quarter. The company also said that its gross margin, 33.1 percent in the quarter, shrank thanks to more frequent promotions, merchandise mix and higher cost of shipping. Inventory at the end of the quarter was 26 percent lower than last year.

The company said that at the end of the quarter, it operated 1,163 stores, and has a database of 65 million customers, of which 30 million are members of its loyalty program.

For the six months, total revenue fell 20.7 percent to $3.94 billion from $4.97 billion, while net sales decreased 32.8 percent to $5.37 billion from $7.99 billion.

Earnings: The retailer posted an 80.5 percent drop in net income to $47 million, or 30 cents a diluted share, from $241 million, or $1.51, in the year-ago quarter. On an adjusted basis, Kohl’s posted a loss per share of 25 cents.

Wall Street was expecting an adjusted diluted loss per share of 83 cents on revenue of $3.09 billion.

The company said it ended the quarter with $2.43 billion in cash, and the disciplined management of expenses and inventory resulted in positive operating cash flow.

For the six months, the retailer swung to a net loss of $494 million, or $3.21 a diluted share, against net income of $303 million, or $1.89, in the year-ago period.

CEO’s Take: “As we look ahead, we are planning for the crisis to continue to impact our business in the near-term,” Gass said. “We are well-positioned to capitalize on evolving customer behaviors and the retail industry disruption, which we believe will drive long-term growth and increased market share.”