Kohl's cools off in first quarter

Cliff Annicelli, Don Hogsett, May 19, 2003

Making the point the hard way that even the highest of flyers is subject to the law of gravity, Kohl's has started to cool off, as its sales and earnings slowing down and starting to lose momentum.

Profits in the opening quarter edged up just 4.1 percent, to $111.0 million from $106.6 million last year. Putting it into perspective, in the same period a year ago profits surged ahead by 42.0 percent.

Ditto sales. First-quarter sales, boosted by rapid expansion and the opening of 35 stores, still climbed higher at a strong double-digit pace, rising by 13.2 percent, to $2.1 billion from $1.9 billion.

But sales in last year's opening quarter moved up at even faster pace, rising almost twice as fast, by 25.7 percent. And in a striking, perhaps telling, departure from historical practice, Kohl's did not break out same-store sales in its earnings release as it always has in the past.

Average gross margin declined slightly, an uncommon, though not unheard of, event at Kohl's, slipping by 10 basis points, or one-tenth of a percentage point, to 35.0 percent from 35.1 percent a year ago. But lifted by rising sales, gross margin dollars still improved at a double-digit pace, increasing by 12.9 percent, to $741.3 million from $656.8 million.

Adding an extra layer of pressure on the bottom line, operating costs climbed higher by 40 basis points, or four-tenths of a percentage point, to 22.4 percent of sales from 22.0 percent a year ago. Measured in absolute dollars, costs climbed faster than sales, rising by 15.1 percent, to $474.1 million from $411.8 million.

With sales starting to slow, operating profits rose just 6.6 percent in the quarter, to $196.2 million from $184.0 million. In the year-ago quarter, in stark contrast, operating profits raced ahead more than five times as fast, jumping up by 38.9 percent.

Putting even more pressure on earnings, interest expense raced ahead by more than 40 percent, to $17.8 million from $12.6 million, pulling about $5.21 million away from the bottom line.

Still building sales by opening new doors, Kohl's said it plans to open about 45 new stores during the second quarter, making its debut in the Phoenix market with 10 stores, opening two in Tucson and one in Flagstaff, AZ.

Penetrating further into the Southwest, Las Vegas gets three stores. Next year, the company said it will open 95 to 100 stores, expanding its presence in the California market with new stores in Los Angeles and opening new markets in Sacramento, San Diego and Fresno.

Kohl's Corp.

Qtr. 5/3 (x000) 2003 2002 % change
Sales $2,117,744 $1,870,588 13.2
Oper. income (EBIT) 196,241 184,032 6.6
Net income 111,013 106,621 4.1
Per share (diluted) 0.32 0.31 3.2
Average gross margin 35.0% 35.1%
SG&A expenses 22.4% 22.0%

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