Kohl's shares give up gains as promotions boosted sales, but may steal from second half

Key Points
  • Kohl's reports fiscal first-quarter earnings that beat expectations on the top and bottom lines.
  • The retailer has been improving margins by focusing on better managing of inventory and markdowns.
  • Kohl's has been looking to drive traffic through creative partnerships, including with Aldi and Amazon.
People approaching Kohl's department store in Mount Kisco, New York.
Scott Mlyn | CNBC
Kohl's stock turned negative Tuesday after investors learned the timing of a promotional event helped boost sales in the latest quarter, but could steal momentum from the second half of the year.

The retailer reported same-store sales growth of 3.6 percent for the first quarter, beating expectations of 2.7 percent. First-quarter earnings also topped expectations, helped by tighter controls on the goods it sells in its stores.

Although the retailer raised its earnings forecast, it help its expectations for same-store sales growth steady.

On a call with analysts, Chief Financial Officer Bruce Besanko said the increase was driven by higher average transaction values, while the number of transactions was relatively flat for the quarter.

Kohl's "Friends and Family" sales event before Mother's Day also helped boost comparable sales, Besanko said. The event also will help the second quarter, but could be a "headwind" in the third and fourth quarters, the company said.

Shares of Kohl's closed down 7.4 percent Tuesday. The initially rose 6 percent in premarket trading, before changing course.
Here's how the company did compared with what Wall Street expected:
  • Earnings: 64 cents per share vs. 50 cents per share forecast by Thomson Reuters
  • Revenue: $4.21 billion vs. $3.95 billion forecast by Thomson Reuters
  • Same-store sales growth: 3.6 percent vs. 2.7 percent forecast by Thomson Reuters

The retailer last year began a partnership with Amazon to sell the online retailer's smart home products and accept its returns. The company hasn't yet provided specific performance data for the venture.

Kohl's also announced a partnership with discount grocer Aldi to lease the vacant space left behind by its downsized stores. It plans more such partnerships down the road.

Unlike other department stores, Kohl's has benefited from having its stores located away from malls, where the number of shoppers is declining.

Meantime, Kohl's efforts to more efficiently order and stock the goods in its stores also continue to pay off. Two years ago, Kohl's launched a five-year plan to improve its inventory management, in aims of minimizing the costs of discounts and unbought goods.

"We exceeded the high end of our margin expectations through continued focus on inventory management," Gass said.

Jefferies analyst Randal Konik reiterated his buy on Kohl's after the earnings report, saying Kohl's pricing power is "better" and the business is running more efficiently. He also cited "powerful" cash flow and clean inventories for his stance.

Kohl's for the quarter reported net income of $75 million, or 45 cents a share, higher than the $66 million, or 39 cents a share, it reported a year ago.

Excluding $500 million in debt Kohl's paid down the past quarter, the company earned $107 million, or 64 cents a share, marking a 62 percent jump over the same quarter a year prior.

Sales rose 3.5 percent to $4.21 billion over the same quarter a year prior. That was higher than the $3.95 billion, analysts were expecting.

Kohl's raised its earnings forecast for the year, and now expects earnings of $5.05 to $5.50 per share, compared with previous expectations of $4.95 to $5.45 per share. Including the impact of debt payment, to earn between $4.86 and $5.31 per share a year ago.