Kohls (NYSE:KSS) recently reported better than expected Q2 2014 earnings while missing sales expectations for the quarter. In spite of missing sales once again, and showing a reduction in sales YOY, the stock managed a significant gain during the trading day on the heels of a strong month of July sales performance. Let's take a look now at exactly what the department store retailer results were in the 2nd quarter of 2014.
- Net income was slightly better than last year for the quarter and diluted earnings per share increased 9% to $1.13 for the quarter. Year-to-date, EPS increased 2% to $1.73. Net income was $232 million for the quarter and $357 million year-to-date.
- Comps sales decreased 1.3% for the quarter. Components of the comp were as follows, average unit retail up 3%, units per transaction down 1.1% for an average transaction value increase of 1.9%. Transactions per store decreased 3.2%.
- Total sales for the quarter were $4.2 billion, a decrease of 1.1% from the second quarter last year. Year-to-date comp sales decreased 2.3% and total sales decreased 2.1% to $8.3 billion.
- Gross margin rate for the quarter was 39.0%, which were 6 basis points lower than the second quarter of last year.
As investors can clearly see, once you get beyond the bottom line results, the quarter was once again weak for the retailer with comparison sales falling, total sales falling and gross margins contracting. Aside from beating top-line expectations, Kohl's management did not lower full-year guidance which some of its peers have already done ahead of the company reporting. This may have also helped spur confidence from investors as the stock rose during the trading session after the company reported 2nd quarter results. Notably, both Target Corp. (NYSE:TGT) and Wal-Mart (NYSE:WMT) had already lowered their full-year outlook.
The most important factor that stimulated bottom line results YOY for Kohl's was the continued strong share repurchase program with incremental SG&A reduction during the quarter. Kohl's continues to repurchase, on average, roughly $250mm of stock each quarter and depending on the share price. Sometimes the company does not achieve this goal, but for the balance of 2014 the company plans to buy back $1bn in stock. This initiative has helped to buoy the stock whenever it seems to dip below $52 a share as it did recently and before the subsequent appreciation to greater than $55 per share. Such dedication to this share repurchase program has made it difficult for short speculators to make a great deal of money on shorting shares of Kohl's for the last several quarters, even as the company failed to grow sales and has missed guidance consistently over the last 12 months. Aiding the company's strong share repurchase program is strengthened cash flow year-over-year. Kohl's ended the quarter with $746 million of cash and cash equivalents and generated almost $300 million of free cash flow for the season.
During the 2nd quarter of 2014, the company's SG&A expenses decreased 2% and leveraged 20 basis points compared to the second quarter of last year. Kohl's made strong efforts to cut payroll and corporate expenses during the quarter vs. the year ago period. One would assume that with less foot traffic in its brick & mortar stores and greater sales through its developing E-commerce platform, the company could afford to take these measures. During the 2nd quarter conference call with analysts, the company did discuss E-Commerce fulfillment centers reported higher costs in the most recently ended reporting period.
Compared to the 1st quarter of 2014, the company's retail foot print has remained constant. Kohl's ended the quarter with 1,160 stores, gross square footage of 100.34 million and selling square footage of 83.72 million. During the 3rd quarter of 2014, Kohl's plans to open 4 new stores. Kohl's completed 16 remodels during the quarter. This is an addition to the 15 that were completed in the first quarter. Only 2 more remodels are slated for the back half of the year.
As far as the company's product mix, Kohl's plans to expand national brand offerings in the rapidly growing active and wellness area. In the spring of 2015, the company will launch the Puma brand in its retail stores and on-line. During the 3rd quarter of 2014, however, Kohl's will launch Gaiam Yoga product, IZOD and Juicy Couture. Kohl's continues to witness national brand selling strength year-over-year. During the conference call, CEO Kevin Mansell stated the following:
As you know, national brands are a key component of our greatness agenda and one of the many areas that we are focused on to increase traffic and grow sales. National brand comps were higher than private and exclusive comps for the fourth consecutive quarter and were positive for the first time in many quarters. Year-to-date, national brand penetration has increased 90 basis points to 46% of sales.
When looking at the aforementioned quarterly results from Kohl's, investors can't help but to see a mixed bag which may lead to some indecisiveness when considering investing on either the long or short side of the stock. In the last 4 reporting quarters, the company has only met or beat earnings expectations twice. Additionally, the company has seen sales drop in each of the last 4 reported quarters and in spite of all its strong efforts to increase sku count, develop its E-commerce sales channel, open new stores and remodel older stores. But Kohl's is not alone with respect to underachieving results in a difficult retail landscape.
It should be recognized that the retail landscape is and will continue to evolve at the most alarming pace in history as the consumer seeks greater shopping convenience through E-commerce sales channels. Kohl's, like many other retailers, has been developing its E-commerce platform over the last few years and in the latest quarter the company reaped the rewards from its efforts. During the month of July, the company posted a 30% increase in E-commerce sales after a very expansive overhaul of its kohls.com platform from last year. This helped the company achieve a positive total sales comp for the month of July of 2 percent. While this increase from E-commerce sales may be a one-off event so far as percentage increase, the company believes they can continue to grow E-commerce sales at a rate of 20% YOY for the foreseeable future as noted by the company's CFO.
We plan to grow E-Commerce 20% a year. So we underachieved that for a variety of reasons in the first quarter. We are going to overachieve that in July, August, September for sure, and then it should go back to a normalized 20% going forward.
In order to see these results come to fruition, Kohl's continues to develop its E-commerce platform. The addition of applying "buy on-line, pick up in-store" features to its E-commerce business, should go a long way toward helping the company achieve its stated objective. Kohl's will be piloting this program at 100 store locations this Fall. In addition to driving E-commerce sales, the company will continue to strive to achieve greater foot traffic and sales in its traditional brick and mortar stores. As noted previously, the company is adding national brands to its product assortment, but the company is also adding an entire new department in stores.
Beauty is another sales channel that Kohl's hopes to develop moving forward. Since beginning the beauty department initiative last year, the company has added another 47 stores to the list of stores selling beauty products. Kohl's has plans to expand this product assortment reach to another 178 stores in August and September. The company has updated its plans to include beauty in another 400 stores next year which will give the company close to 900 stores by the end of fiscal 2015. It is important to note that the company is witnessing that stores with a new beauty department continue to outperform other stores, both in the beauty department and across the entire store. Kohl's CFO stated the company continue to see lifts versus its control groups of approximately 2% in the higher volume stores simply by implementing a beauty department.
Based on recent mixed results in Kohl's fundamental performance and boosted by the assistance of a strong share repurchase program, investors will likely need to pay greater relevance to the technicals of the stock's performance. For the better part of the last 12 months the stock has been stuck in a pretty safe trading range between $58 a share and $51.00 a share, only falling below $51 in February of 2014 briefly and only extending beyond $58 in November of 2013 briefly. Given the stagnation in the stock performance at the upper end of the technical channel, which the stock is presently approaching, investors might be inclined to use this as a profit taking point for later re-entry.
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