Kohl's - Solid Quarter As Long-Term Appeal Remains

Aug.19.13 | About: Kohl's Corporation (KSS)

Shares of Kohl's Corporation (NYSE:KSS) jumped upwards in Thursday's trading session after reporting second quarter earnings in line with market estimates.

While investors were relieved that results didn't' fall short of expectations, shares witnessed a modest correction following the initial enthusiasm.

Despite witnessing solid year to date results, shares of Kohl's still offer appeal for the long term, trading at attractive valuation multiples while paying a solid dividend.

Second Quarter Results

Kohl's generated second quarter revenues of $4.29 billion, up 2.0% on the year before. Underlying revenue growth was driven by a 0.9% increase in comparable sales. Last year, Kohl's reported a 2.7% decline in same store sales.

Overall, sales were in line with consensus estimates of $4.29 billion.

Net income fell by 4% towards $231 million over the past quarter. Yet earnings per share rose by 4% to $1.04 per share on the back of sizable share repurchase programs. Earnings per share came in exactly in line with analysts expectations.

CEO and Chairman Kevin Mansell commented on the developments during the second quarter, "We are pleased with our progress in the second quarter. Sales improved significantly over the first quarter and our gross margin improved over last year. Expenses were well-managed and we ended the quarter with inventory per store up mid-single digits while funding our E-Commerce growth. I would like to thank each of our associates for their contribution to our results."

Looking Into The Results..

The modest revenue growth was supported by comparable sales growth of 0.9% which fell slightly short of consensus estimates of 1.1%.

Gross margins rose by a very modest 3 basis points to 39.08% of total sales over the past quarter. Disappointing was the 2.6% increase in selling, general & administrative expenses which came in exactly at $1 billion, and rose by 13 basis points on a relative basis to 23.32% of total revenues.

While absolute net income fell to $231 million, Kohl's has repurchased some 7.5% of its share base over the past year, the reason why earnings per share rose by 4 percent.

..And The Rest Of The Year

For the current third quarter, Kohl's guides for earnings between $0.83 and $0.92 per diluted share. Underlying this guidance is total sales growth of 1 to 3 percent, driven by comparable sales which are seen between flat and 2 percent growth.

The earnings guidance fell short of consensus estimates of $0.94 per share, while the guided revenue growth was solid compared to consensus estimates for 1.4% growth in sales.

Kohl's has slightly lowered the high end of its upper guidance for full year earnings per share. Kohl's now sees full year earnings between $4.15 and $4.35 per share, down from a previously guided $4.15 to $4.45 per share.

Valuation

Kohl's ended its second quarter with $592 million in cash and equivalents. The company operates with $2.49 billion in long term debt, and almost $2.1 billion in capital lease and other long term financing obligations.

For the first six months of Kohl's fiscal year of 2013, the company generated revenues of $8.49 billion which is up 0.5% on the year before. Earnings fell by 4% to $378 million.

At this pace full year revenues could come in between $19 and $20 billion. Net earnings should come in between $920 and $960 million.

Trading around $52 per share, the market values Kohl's at $11.5 billion. This values operating assets of the firm at 0.6 times annual revenues and around 12 times annual earnings.

Kohl's currently pays a quarterly dividend of $0.35 per share, for an annual dividend yield of 2.7%.

Some Historical Perspective

Long term investors in Kohl's have seen poor returns. Shares traded as high as $80 back in 2007 before the economic crisis send shares all the way back towards lows of around $30 in 2008.

Ever since, shares have been trading between $40 and $60 per share. Fortunately for shareholders, Kohl's has initiated a quarterly dividend in 2011, accompanied by sizable share repurchase programs.

Between the fiscal year of 2009 and 2012, Kohl's has increased its annual revenues by a cumulative 12% to $19.3 billion. Net income has stagnated just below the $1 billion mark. Earnings per share have seen decent growth after Kohl's retired over a quarter of its share base.

Investment Thesis

Investors were happy with the earnings report of Kohl's, even as the company failed to exceed expectations, and the company guided for soft third quarter earnings. I must say, I am a bit worried about the 9.5% increase in the built up in inventories to $3.85 billion.

Kohl's saw a modest 0.9% increase in comparable sales, entirely driven by greater quantities of sales. Kohl's reported a 4.8% increase in units per transaction, offset by a 3.6% decline in prices and a 0.3% decline in the number of transactions. Note that strong e-commerce sales, which were up by 28% on the year before, added 160 basis points in comparable store sales.

Yet investors are pleased as some investors were nervous after a weak quarterly report from Wal-Mart (NYSE:WMT) and other US retailers in recent weeks. Shoppers at Wal-Mart made fewer trips to Wal-Mart's stores on the back of higher gas prices, while spending was impacted by higher payroll taxes.

Back at the start of 2013, I last took a look at Kohl's prospects after the company put on a big experiment during the holiday season. This experiment led to ballooning inventories and significant pressure on earnings as the company was holding clearance sales to get rid of inventories.

Since January shares have risen some 22% to current levels around $52 per share. Trading at 12 times earnings and offering a 2.7% dividend yield, shares continue to offer appeal, although shares are less appealing compared to the start of the year. The additional share repurchases are just ice on the cake for shareholders.

As the long term attractiveness of the shares remains intact, Kohl's could be part of any well-diversified investment portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.