Kohl's sees home among strongest businesses in 3Q

Reverse auctions to increase

Retail Editor 8, Carole Sloan, November 11, 2010

Menomonee Falls, Wis. - Even though home is admittedly one of the two lines of business most impacted by the rising costs of raw materials, Kohl's Corp. has managed to "navigate, mitigate and execute" around the problem - so much so that its home business proved a top performing category during the retailer's third quarter.

"The two categories that are being most impacted by higher costs are footwear and home. And it's footwear and home that are leading the company in terms of increases for the year while running slightly against the company trend in terms of average retail because of these higher costs," explained Kevin Mansell, chairman, president and ceo, during Kohl's earnings call this morning.

Kohl's home comps for the third quarter rose in the low single-digit range and were up in by mid single digits for the year to date.

Kohl's "has found ways to mitigate" the problem via several efforts, such as "doing things like reverse auctions, and we're expanding it. They are an aggressive way to get these costs to the lowest level," he said. Kohl's is also "holding on to raw materials as long as we can" as well as "continuing to consolidate our vendor structure overseas. We have a very concentrated supplier base as it is," he continued.

But it is Kohl's growth that is "our really great weapon," Mansell went on. "We have seen consistent growth in last two-and-a-half year in this tough economy. We have been there for our supplier partners," later adding, "We are always looking at different countries of production, [alternatives] in construction...In that way, our partnership with Li & Fung has helped us."

Ultimately, Kohl's goal is to shield shoppers from price increases.

"I like to think we know how to deal with this situation better than our competitors," Mansell said. "We are employing all things we know how to do to mitigate this ultimately for our customer. We believe we still have a consumer who is buying cautiously, so they are less likely to pay higher prices. We will go out of our way so the customer doesn't have to see the impact of those rising costs."

Net income for the third quarter, ended Oct. 30, rose 0.5% to $194 million, or 63 cents per share, compared with $193 million, or 63 cents per share, a year ago.

Sales increased 4.1% to $4.2 billion, while comps were up 1.8%.

Year to date, net income for the nine-month period increased 16% to $652 million, or $2.12 per share. The results exclude the lease accounting corrections.

Sales increased 7.4% to $12.4 billion, and comp store sales rose 4.4%.

"This sales performance, along with strong inventory management, allowed us to continue to increase our gross margin rate," Mansell said. "We are pleased with the expense management discipline across the company that allowed us to grow our expenses less than we originally planned."

A highlight in the third quarter was the performance of private and exclusive brands, which increased by almost 300 basis points and comprised 48% of total sales for the period. Particularly strong brands included Simply Vera Vera Wang and Food Network, which experienced sales increases of 15% or more.

Looking ahead to the fourth quarter, Kohl's expects total sales to increase between 4.5% and 6.5%, comparable store sales to increase 2% to 4%, and gross margin as a percent of sales to increase 20 to 40 basis points over last year. The company expects earnings per share of $1.51 to $1.59 for the fourth quarter.

In 2011, Kohl's plans to open 40 new stores - 10 in the spring and 30 in the fall, representing "a slight increase" over what the retailer had originally expected.


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