Costs bring Kohl's down to Earth

Don Hogsett, May 17, 2004

Once one of America's highest-flying retailers, Kohl's Corp. was headed down to Earth during first quarter, with profits and same-store sales barely budging from last year's levels as costs climbed.

Earnings at the heartland mid-pricer edged up just 2.5 percent, to $113.8 million from $111 million last year. Putting that mingy gain into perspective, until recently Kohl's routinely put up earnings increases well in excess of 30 percent. At the close of 2001, Kohl's proudly trumpeted a fifth consecutive year of earnings growth over 30 percent.

Putting earnings under pressure during the opening quarter were stalled-out same-store sales and rocketing costs, which more than any offset margin improvement.

Kohl's sales increased 12.4 percent, to $2.4 billion from $2.1 billion, aided by continued expansion. But same-store sales, in stark contrast, declined slightly, by 0.1 percent.

Margins gained strength during the period, rising 60 basis points, or six-tenths of a percentage point, to 35.6 percent from 35 percent a year ago. But costs climbed even higher, more than offsetting any improvement in margins. When measured as a percentage of sales, costs climbed 140 basis points, or 1.4 percentage points, to 23.8 percent from 22.4 percent during the same quarter a year ago. In absolute dollars, costs jumped 19.3 percent, sharply faster than the rate of sales growth, to $565.6 million from $474.1 million.

Providing some relief to the bottom line, the retailer pared interest expense 15.3 percent, to $15 million from $17.7 million last year, realizing a savings of $2.7 million —almost the distance between a profit and a loss.

Larry Montgomery, chairman and CEO, commented, "Although we are disappointed with our comparable sales performance, we are pleased with our new market entries during the quarter: Sacramento, San Diego, Fresno and Bakersfield, Calif.; and Memphis, Tenn."

Inventories climbed 2.9 percent, to $1.9 million, and over-lean stockpiles and empty shelves were part of the problem with sales, Montgomery suggested. "With the return to appropriate inventory levels, the customer now has the shopping environment that she has come to expect from Kohl's."

Kohl's corp.

Qtr. 5/1 (x000) 2004 2003 % chg
Sales $2,380,200 $2,117,700 12.4
Oper. income (EBIT) 281,800 267,200 5.5
Net income 113,800 111,000 2.5
Per share (diluted) 0.33 0.32 3.1
Average gross margin 35.6% 35.0%
SG&A expenses 23.8% 22.4%

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