Kohl's shares jump as retailer reports a surprise profit

Key Points
  • Kohl's reported an unexpected first-quarter profit Wednesday.
  • The company's shares closed more than 7% higher.
  • Kohl's reaffirmed its full-year outlook.
People walk near a Kohl's department store entranceway on June 07, 2022 in Doral, Florida.
Joe Raedle | Getty Images

Kohl's shares spiked Wednesday as the struggling retailer posted a surprise profit and affirmed its full-year guidance while it chases a turnaround.

Shares of the company closed more than 7% higher Wednesday, after jumping even higher earlier in the day.

Across the retail industry, Walmart, Target, Foot Locker and others have spoken about how high food prices have made selling clothing, sneakers and other discretionary merchandise tougher. Kohl's, however, has had to tackle a more fundamental hurdle: Proving that its brand still resonates with shoppers and getting back on track with consistent sales growth.

On a call with analysts, Kohl's CEO Tom Kingsbury and CFO Jill Timm stressed changes the retailer has made to win back customers and attract new ones. It is opening more Sephora shops, expanding in merchandise categories like pet and home decor and featuring gift-giving items ahead of holidays.

Every time shoppers walk into a store, Kingsbury said they now see "something new, something different, something very giftable, and a different look."

Kohl's reiterated its full-year outlook. It said it expects net sales to range between a decline of 2% and 4%, including the approximately 1% impact from having one more week of sales this year. It said it expects earnings per share to range from $2.10 to $2.70, excluding nonrecurring charges.

Here's how the retailer did for the quarter that ended April 29 compared with what Wall Street was anticipating, based on a survey of analysts by Refinitiv:

  • Earnings per share: 13 cents vs. a loss of 42 cents expected
  • Revenue: $3.36 billion vs. $3.34 billion

In the fiscal first quarter, Kohl's net sales fell 3.3% to $3.36 billion from $3.47 billion in the year-ago period.

Comparable sales declined 4.3% in the quarter, roughly in line with the 4.5% drop expected by Wall Street, according to StreetAccount.

The company reported net income of $14 million, or 13 cents per share, compared with $14 million, or 11 cents per share, a year earlier.

Kohl's surprise quarterly profit comes after multiple quarters of disappointing sales and a sinking stock price. Last year, the retailer became a target for activist investors Ancora Holdings and Macellum Capital, which pushed the company to oust its then-CEO Michelle Gass and shake up its board. Kohl's also discussed and then ended a bid last year to sell its business to Vitamin Shoppe owner Franchise Group.

Since then, Kohl's has tapped its new CEO Kingsbury, former chief executive of off-price retailer Burlington Stores. He stepped into the role as interim CEO and later the permanent one after Gass, its former CEO, left to become the next leader of Levi Strauss.

Over the past year, Kohl's efforts to reinvent itself and woo shoppers have run into challenges as middle-income consumers feel pinched by inflation and buy fewer discretionary items, such as clothing. That contributed to a big loss in Kohl's holiday quarter and weak outlook, which the Wisconsin-based company reiterated Wednesday.

On the analyst call, Kingsbury said "the middle-income customer is being squeezed," but said Kohl's can attract those shoppers by emphasizing value.

Despite a challenging economic backdrop, Kohl's made progress in the fiscal first quarter. Store traffic rose and when shoppers visited stores, they put more items in their baskets, Kingsbury said.

Average ticket declined as Kohl's had clearance events to sell through extra merchandise. Inventory was $3.5 billion at the end of the quarter, a drop of 6% year over year. Investors have closely watched those levels, since the glut of merchandise at many retailers has led to higher markdowns and lower profits.

Kohl's margins improved in the quarter, as costs of freight and online shipping costs dropped and the company got more strategic about markdowns. Kingsbury said the company wants to simplify markdowns for customers, but also have targeted offers and clearance events instead of across-the-board cuts.

During the quarter, Kohl's had its strongest sales performance in February. March came in lower than the company anticipated and April was in line with its expectations, Kingsbury said.

May sales so far have been slower than anticipated, Timm said. She said Kohl's plans to make up for the weakness in June, which was a weaker sales period in the year-ago quarter. She added that some company changes will boost Kohl's in the back half of the year, including efforts to bring in fresh products under Kohl's new chief merchant and open new Sephora stores.

Kohl's hired Nick Jones, a retail veteran and former chief merchant from U.K.-based department store Marks & Spencer, as its chief merchandising and digital officer in February.

Sephora has also been one of Kohl's biggest traffic and sales drivers. It began opening Sephora shops in its stores two years ago. It plans to add the shops to all of its more than 1,100 stores, and will have more than 900 by the end of the year, Kingsbury said.

Beauty sales at Kohl's increased 150% year over year, he said. At the Sephora locations open for the past two years, comparable beauty sales grew by the mid-teens. Sales trends at the newer shops also surpassed expectations and gave people more reasons to visit stores, he said.

"We are bringing in new customers and they are shopping at more than twice the frequency of our average customer," he said.

Shares of Kohl's closed Tuesday at $19.27. That's less than half of its 52-high, which was $47.63. The company's stock has tumbled nearly 23% so far this year — even as the S&P 500 has risen about 8% and the retail-focused XRT has fallen nearly 2%.