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In May, department store operator Kohl’s (NYSE: KSS) fell more than 10% after providing a weak first-quarter earnings report. At that time, management said the company was under pressure from a number of external factors, including inventory disruptions caused by the port strikes, as well as the brutal winter weather.
This time around, while the external influences are different, the overarching story remains the same. Kohl’s reported second-quarter earnings before Thursday’s opening bell, and once again it missed analyst expectations. The stock opened down 10% and closed the day’s trading down just under 9%.
Another Ugly Quarter
Kohl’s earned $1.07 per share in adjusted profits during the second quarter. That missed analyst expectations of $1.16 per share, according to estimates compiled by Thomson Reuters. Sales clocked in at $4.27 billion, up 0.6% year-over-year, but that also missed expectations of $4.31 billion.
Same-store sales – a critical metric for retailers that measures sales at locations open at least one year – ticked up only 0.1%, widely missing the 1.7% same-store sales growth expected by Wall Street.
Net profit came in at just $130 million, which represented a 44% drop year-over-year. But this decline was due mostly to a $170 million loss to due debt financing, which is why Kohl’s reported the adjusted figure.
For the full year, Kohl’s expects adjusted earnings to fall toward the low end of its $4.40-$4.60 per share guidance.
Blame Back-to-School Shift
Many analysts were expecting fairly decent Kohl’s earnings numbers this quarter, as the headwinds that suppressed its results last quarter had largely abated. The weather improved as summer rolled in, as did the ports situation in the U.S.
But this time around, management said the reason for its poor results was a shift in the tax holiday associated with the back-to-school season.
In the U.S., states allow a three-day sales tax holiday on back-to-school shopping. Usually, the holiday occurs in July. But this year, the holiday has been pushed into August. This created a difficult comparison period for Kohl’s, as last year’s comparable quarter sales were boosted by this holiday.
Kohl’s core customer demographic is primarily low-to-middle income shoppers who rely on this tax holiday as part of back-to-school shopping. Without it, last quarter’s results were weaker than expected.
Of course, the flip side of this coin is that the current quarter’s results should benefit from the tax holiday tailwind, and will see an easier comparison period as well. It will be critical for Kohl’s to produce a satisfactory quarter this time around, particularly since there won’t be any more excuses available.
Kohl’s Desperately Needs a Good Quarter
Kohl’s stock has performed poorly this year. At $55 per share, shares of Kohl’s are down 10% year-to-date, and are actually down 30% from their 52-week high of $79 per share. The stock got off to a great start earlier this year, on rising optimism over the improving economy and labor market in the United States.
But recently, the bloom has fallen off the rose. Kohl’s needs a better performance next quarter if investors are going to pay higher prices for this stock. At the very least, the stock is cheap at just 13 times earnings, and it offers investors a solid 3% dividend yield. Its attractive valuation and high dividend yield could provide a floor for the stock if the company can improve its fundamentals going forward.
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