Kohl's Profit Rises on Higher Margins

Kohl's Corp. (KSS) Thursday said second-quarter net income rose, slightly beating Wall Street's average forecast, as gross margins increased and it curbed clearance markdowns.

The fast-growing retail chain, which recently struggled with bloated inventory and shaky sales, expects new clothing lines to help turn its same store sales around.

The Menomonee Falls, Wis.-based company, which runs a chain of mid-priced department stores, said second-quarter net income rose to $155.8 million, or 45 cents per share from $112.1 million, or 33 cents, a year earlier.

Analysts, on average, had expected earnings of 44 cents per share, according to Reuters Estimates. Kohl's projected earnings of 44 cents to 45 cents per share for the quarter.

Total sales increased 13.1 percent to $2.5 billion, while sales at stores open at least one year, a key metric known as same-store sales, fell 1.1 percent.

Gross margins rose to 36.4 percent from 33.4 percent.

Shares rose after hours on INET to $45.62 from their $43.70 New York Stock Exchange (search) close.

Kohl's forecast third-quarter earnings per share in a range of 41 cents to 44 cents, assumes a low single digit same store store sales increase. It also backed its full year view of $2.13 to $2.21 per share.

Analysts, on average, had been expecting it to earn 44 cents per share for the third quarter and $2.16 per share for the year, according to Reuters Estimates.

A flurry of new merchandise launches will help it return to positive same-store store sales increases in the third quarter, Kohl's said.

"The ugly stuff we saw in stores last year is history," said Bill Dreher, retail analyst with Deutsche Bank. "What we're seeing now is clean stores, well-organized with lean inventories and attractive back to school merchandise."

Kohl's is rolling out several new clothing lines this year, which it is expecting will boost sales in the second half. The brands include everGirl, apt. 9, Chaps, and a clothing line by model Daisy Fuentes, which will be launched nationwide after strong sales in a limited market.

It will also enter the beauty business with cosmetics company Estee Lauder Cos (search). Kohl's will exclusively carry three new brands, American Beauty, Flirt and Good Skin.

Last year, poor apparel choices gave Kohl's hefty stockpiles of unsold clothing, which it eventually sold for as much as 80 percent off, eating into profits and raising doubts about whether it was still in tune with customers' tastes.

Target Corp and retail behemoth Wal-Mart Stores Inc (WMT), which reported earnings on Thursday morning, complained about high oil prices crimping summer sales. But for Kohl's, known for its neighborhood locations, the price of gas isn't a problem.

"When you look at the price of gas, our concept being convenient locations, you don't have to drive far to get there, I look at that as almost maybe a positive," one executive said on the conference call.

Kohl's plans to open 48 stores in the third quarter and a total of 95 stores in fiscal 2004. For fiscal 2005, it expects to open another 95 stores, half in the first quarter.