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Kohl's Net Down 23% On Pricing Shift

05/10/2012 | 11:45am US/Eastern
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--First-quarter earnings fall 23%

--Second quarter looks weak

--Chief executive sees a better Fall

(Updates throughout with further information about first-quarter earnings. Also includes comment from chief executive and analyst comment. Updates stock price)

   By Karen Talley and Mia Lamar 
   Of  
 

Kohl's Corp.'s (>> Kohl's Corporation) first-quarter earnings fell 23% as the department store's efforts to bring in customers by lowering prices and offering more exclusive merchandise sputtered.

The pricing shift appears likely to hit Kohl's second-quarter profit as well, as the retailer predicted earnings for the period that are well below current Wall Street expectations.

Kohl's competes most directly with Macy's Inc. (>> Macy's, Inc.) which posted strong earnings Wednesday, and J.C. Penney Co. (JCP) which reports first-quarter earnings next week. It was hoped that Kohl's, like Macy's, would get business from J.C. Penney customers as the retailer remodels its stores and has switched to a pricing strategy that pretty much eschews promotions.

Instead, Kohl's showed its own operations are having difficulties. The problems come as the retailer has been dropping prices and bringing in exclusive lines like those from Jennifer Lopez and Marc Anthony.

"Our first-quarter results reflect the implementation of our strategy to initiate lower pricing in order to provide greater value to our customers," Chief Executive Kevin Mansell said.

Mansell said measures including bringing in back-to-school merchandise early and strong expense controls should help "greatly improve" sales for the fall season.

Kohl's results are "bringing some of the bears out of hibernation, as the combination of heavy inventory levels, gross profit margin erosion and second-quarter guidance below Wall Street's expectations are focal points," said Charles Grom, retail analyst with Deutsche Bank.

For the second quarter Kohl's forecast earnings of 96 cents to $1.02 a share on a total sales increase of 2% to 3%. Analysts polled by Thomson Reuters currently expect earnings of $1.13 a share on 3% sales growth.

The company also predicted second-quarter same-store sales will be flat to up 1% and backed its full-year profit guidance for $4.75 a share.

Like many of its fellow retailers, Kohl's turned in a strong showing in March with help from an early Easter holiday that boosted sales of its children's apparel. That momentum stalled in April, however, reminding investors that consumers are still shopping cautiously amid a slow recovery in the U.S. economy.

For the quarter ended April 28, Kohl's reported a profit of $154 million, or 63 cents a share, down from a year-earlier profit of $201 million, or 69 cents a share. The company in February forecast earnings of 60 cents a share, well below analyst estimates at the time.

Gross margin, a measure of the profitability of sales, narrowed to 35.9% from 38.1%.

Kohl's recently reported its sales for the quarter rose 1.9% to $4.24 billion, weaker than its February forecast for 3% growth. Same-store sales inched up 0.2%, also below its forecast for a 1% gain.

Shares were recently down 4.3% to $48.67.

-By Karen Talley and Mia Lamar, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

Stocks mentioned in the article : Kohl's Corporation, Macy's, Inc.
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