Kohl's Begins Rapid Deceleration

And here it comes. Kohl's reported earnings this morning starts the accelerated drop in same-store sales I was expecting. Falling back on the well-worn excuse these days of a particularly harsh winter, the retailer can't escape the notion that its performance is deteriorating at a rapid rate regardless of what the weather outside is doing.

Sales at Kohl's tumbled more than 3% to $4.07 billion even though it had five more stores open than it did last year, while profits plunged 15% to $125 million, or $0.60 per share, missing Wall Street consensus estimates by $0.02 per share. But it said that as the quarter progressed, its operations improved such that when it offered guidance for the full year, the mid-tier retailer maintained the outlook of $4.05 to $4.45 per share that it issued for 2014 back in February.

Don't count on that remaining in stasis as the year progresses. Although it says the national brands it's focusing on were its strongest performers -- doing better than its exclusive, private-label brands, just as they have for three straight quarters -- I'm not certain that will continue to play out.

As I've noted in the past, J.C. Penney tried that exact same maneuver, reducing private labels from 50% of its inventory mix down to 30%, but consumers relied on the exclusive value that brands like St. John's Bay provided in a difficult economy, and removing them from the racks caused the customer to flee. Penney's has since reintroduced the exclusive brands and will have them at their historical levels going forward, and thus far Penney has regained traction. It reports its first-quarter earnings after the markets close today and we'll get to see whether that trend continues. I think it will.

Kohl's, though, had similar breakdowns between the two points and plans to reduce private labels in favor of more national brands, and as it skews more heavily toward that one end, customer responsiveness might not be so favorable. It reported that its AUR, or average unit retail, the amount that was sold at an average price, was about 2.5% higher in the quarter, and it was its private-label brands that drove that higher, not the national ones. And since they had much less clearance in the quarter, it helped prop AUR up. With Kohl's store traffic down 4.5%, I'm concerned its reliance on national brands will hurt.

More important, although Kohl's maintained its full-year fiscal guidance, it actually reduced its capital expenditure expectations by an amount that should impact earnings by about $0.15 per share, and when questioned about that, management said there was no real basis for maintaining its range other than the fact that it was early in the year and it was a pretty wide gap, so they believe they should maintain it for the time being. Without a firm foundation for its guidance -- management did say they believed sales would improve generally -- I'll be expecting that to be reduced sooner rather than later.

I noted earlier today that Kohl's executive suite is in the midst of turmoil at the moment. That along with a tougher competitive environment with Macy's on one side and Wal-Mart and Target on the other, and a resurgent Penney's itself targeting the same demographic, suggests that the tough times it's facing will be more challenging than the supposed weather impacts it endured in the first quarter.

The retailer's stock is down only 2.5% in midday trading, meaning that while investors were disappointed, they're not so down in the mouth, but if the next few quarters roll around without showing much improvement and the fourth quarter gets as promotional as it was last year, the displeasure felt this quarter may turn to depression by year's end.

Will this stock be your next multibagger?
Give me five minutes and I'll show how you could own the best stock for 2014. Every year, The Motley Fool's chief investment officer hand-picks one stock with outstanding potential. But it's not just any run-of-the-mill company. It's a stock perfectly positioned to cash in on one of the upcoming year's most lucrative trends. Last year, his pick skyrocketed 134%. And previous top picks have gained upwards of 908%, 1,252%, and 1,303% over the subsequent years! Believe me, you don't want to miss what could be his biggest winner yet! Just click here to download your free copy of "The Motley Fool's Top Stock for 2014" today.

The article Kohl's Begins Rapid Deceleration originally appeared on Fool.com.

Rich Duprey has no position in any stocks mentioned, and neither does The Motley Fool. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2014 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Read Full Story