Why Kohl's is outshining Macy's

Cramer's stock to watch: Kohl's
Cramer's stock to watch: Kohl's

Shares of Kohl's jumped 7 percent on Thursday, after the low-price department store topped Wall Street's sales and earnings forecasts.

The news was a welcome surprise to investors following Macy's disappointing third-quarter results, announced one day earlier, which had sent shares of Kohl's 5 percent lower in sympathy.

Though Kohl's results were not blockbuster by any means — same-store sales increased by 1 percent, despite posting a 1.8 percent decline one year ago — they did indicate that parts of its reinvention strategy are starting to take hold.

Among them: A revamped loyalty program that counts 34 million members, nearly double the number it had at this point last year. In addition to boasting twice as many members, these customers are entering the holiday shopping season having already accrued points, giving them more incentive to shop at Kohl's.

The company is taking this strategy one step further by running a fourth-quarter campaign that encourages its loyalty members to sign up for its credit program, by prescreening them to let them know if they qualify.

"This is the one time of year when people really use their rewards," management said on the company's earnings call, noting that redemption rates tend to jump from the low 30s to 40 percent in the final three months of the year.

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Kohl's is also upping its investments in holiday marketing by about 14 percent, which it said is probably the biggest increase it's had in a long time. It's part of the company's goal to make its stores a destination (they tend not to be placed in malls) and drive traffic for the holidays.

The retailer, which said it achieved its first $100 million sales day on Wednesday, also maintained its full-year guidance of $4.40 to $4.60 a share.

Kohl's results stand in stark contrast to the performance of mid-tier department store Macy's, which on Wednesday said that same-store sales fell 3.6 percent during the third quarter, and lowered its full-year guidance to $4.20 to $4.30, from $4.70 to $4.80.

"Kohl's results are surprisingly good, especially considering Macy's miss yesterday," Citi analyst Paul Lejuez told investors. "Still, as we look to [the fourth quarter], the competitive environment appears more challenging than usual, and we expect it to be tough for Kohl's to outperform."

A Kohl’s department store in Jersey City, New Jersey.
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Not only are Kohl's and Macy's facing external headwinds — among them, consumers who are more interested in spending on experiences or dining out; a long stretch of warmer than usual temperatures; and heavy discounting — they both have higher-than-anticipated inventories. This will likely to lead to further price cuts during the fourth quarter, as they look to sell through these stockpiles.

Kohl's said it did not want to minimize that it expects the fourth quarter to be "very competitive."

"You can manage the best you can but if you don't get the sales you're not going to make your numbers," the company said.

Recovering department store J.C. Penney on Wednesday preannounced that its same-store sales increased 6.4 percent in the third quarter. It will announce its full results for the third quarter on Friday.