Kohl’s Corp. is bucking the department store sector’s blahs.
The Menomonee Falls, Wisc.-based retailer’s shares rose 6.1 percent Thursday to close at $45.79 after it reported better-than-expected results for the third quarter ended Oct. 31. The shares slid back 1.2 percent after the market closed, however, and Nordstrom reported a 43 percent drop in profits for the period, sending its shares down 18 percent. Nordstrom’s poor results followed the disappointing numbers a day earlier from Macy’s Inc.
Kohl’s reported earnings per share of 75 cents for the third quarter, beating Wall Street’s estimates by 6 cents. Expense controls contributed to the EPS beat even as net profits slipped 15 percent from $142 million in the 2014 third quarter to $120 million in the 2015 third quarter.
But the retailer saw growth across the board. Comp-store sales rose 1 percent versus a 1.8 percent decline in the 2014 third quarter. This is Kohl’s fourth consecutive quarter of positive same-store sales. Total sales were $4.43 billion, a 1.2 percent gain over $4.37 billion in last year’s third quarter.
Gross margins declined 10 basis points to 37.1 percent from 37.2 percent in the third quarter of 2014. Selling, general and administrative expenses declined to 24.8 percent, from 25.1 percent in the same period last year.
The results were an indication that chairman and chief executive officer Kevin Mansell’s greatness agenda, a set of initiatives based on five pillars, seems to be working.
“It’s been one year since we introduced the greatness agenda and against the generally soft macro backdrop we compete in,” Mansell said during a conference call with Wall Street analysts. “We’ve turned our sales from negative to positive. While we’ve changed the trend of our business, we’re well aware that we must accelerate. We announced the evolution of our plan. Our intent is to accelerate our growth rate in the fourth quarter of this year and into the next fiscal year.”
In terms of business, footwear and women’s performed better than the company overall, while men’s was in line with the company trend and children’s, accessories and home performed below par.
“We’ve renewed our focus on the women’s business,” Mansell said. “We intend to grow that category faster than the stores result. We’re already seeing results. Women’s produced a better in-store performance in the third quarter.”
Two areas of success for Kohl’s have been activewear and wellness, both initiatives of the greatness agenda strategy. “Both continued to produce double-digit increases in the third quarter,” Mansell said. “Nike’s sales increased almost 30 percent. Giam and Fitbit also drove active growth.” Kohl’s penetration of national brands rose to 52 percent for the quarter, he said.
Mansell said online-generated demand “continues to exceed our multiyear growth plans. We launched a new mobile platform in September, and we started nationally marketing buy online, pick up in store. Mobile has reached 50 percent of our total online traffic. Buy online, pick-up-in-store is better than our expectations.”
Kohl’s mobile app has been downloaded nine million times. The retailer is also activating a series of initiatives to appeal to segments of its audience such as Millennials and Hispanics.
The ceo described the new retail formats that Kohl’s plans to launch, including a 35,000-square-foot prototype that will provide access to smaller markets and urban markets. “We intend to launch an outlet model, with 10 to 15 Fila stores, one of our exclusive brands, and we’ll launch two more stores for our Off-Kohl’s concept,” he said.
“Capital expenditures are $551 million year-to-date,” Mansell said, which is $10 million lower than last year’s capex.
“We are seeing more innovation and culture change at Kohl’s,” said Daniel Binder, a retail analyst at Jefferies. “There is a sense of urgency and management is taking measured risks to test new ideas while accelerating other initiatives. Not every idea is groundbreaking for the industry, but they are incremental to Kohl’s, which ups it chances for relative out-performance to competitors.” Binder added that Kohl’s continues to shift to faster cycle times as it reacts faster to fast-fashion players.
“This is going to be a very competitive Christmas,” Mansell said. “We’ve made a pretty [significant] increase in our marketing expenditures. We have an expectation that if we’re going to win, we have to drive traffic.”
“If we run between a 2 percent and 3 percent comp, which was kind of what we expect, then we’ll get a gross margin increase,” said Wesley McDonald, chief financial officer. “If our comp doesn’t improve, we’ll have to take more markdowns than we anticipate today. So fourth quarter’s all about sales. I’ve been in this business a long time. It’s always all about sales in the fourth quarter.”
The company didn’t provide an update to its 2015 EPS guidance range of $4.40 to $4.60, but had previously indicated that it expects adjusted EPS to be at the low end of the range. McDonald reiterated that, saying that if Kohl’s achieves the 2 percent to 3 percent same-store sales increase, “we can hit the low end of the $4.40 range we talked about last quarter, given what our expectations are for gross margin and expenses.”