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Earnings Results: Kohl’s stock dives after profit outlook slashed over actions to cut excess inventory, inflation pressure on middle-income customers

Shares of Kohl’s Corp. took a dive Thursday after the home-goods retailer missed fiscal second-quarter profit expectations and slashed its full-year outlook, as high inflation hurt its middle-income customers and it started taking action to reduce excess inventory.

On the post-earnings conference call with analysts, Chief Executive Michelle Gass said given the retailer’s lean toward selling discretionary general merchandise, such as apparel, Kohl’s is being “disproportionately” hurt as high inflation and a slowing economy crimp consumer spending.

The stock

fell 7.7% to $31.33. The selloff comes a day after the stock closed at a seven-week high, after running up 33.3% off the 20-month closing low of $26.32 on July 26.

For the quarter to July 31, net income dropped to $143 million, or $1.11 a share, from $382 million, or $2.48 a share, in the same period a year ago. Excluding nonrecurring items, adjusted earnings per share (EPS) of $1.11 missed the FactSet consensus of $1.12.

Revenue fell 8.1% to $4.09 billion, below the average analyst estimate of $4.12 billion, according to FactSet, while same-store sales declined 7.7% to beat expectations of an 8.1% decline.

Cost of goods sold fell less than revenue, declining 3.9% to $2.33 billion, as the gross margin rate contracted to 39.6% to 42.5%.

“Our second-quarter results reflect a middle-income customer that has become more cost conscious and is feeling greater pressure on their budgets,” CEO Gass said, according to a FactSet transcript. “Therefore, we are seeing customers make fewer shopping trips, spend less per transaction and shift towards our value-oriented private brands.”

Gass said the company was “taking action” to adjust to a softer demand outlook and to reduce inventory, such as by increasing promotions.

But being a little late to the game could put more pressure on margins, as Kohl’s announcement comes months after fellow broadline retailers, such as Target Corp. TGT and Walmart Inc. WMT, announced aggressive actions to reduce inventory.

“We’re being aggressive on clearing excess inventory,” Gass said. “We acknowledge that many others are taking similar actions, which will likely make for a more promotional environment in the near term.”

For the full fiscal year, the company chopped its guidance ranges for adjusted EPS to $2.80 to $3.20 from $6.45 to $6.85, for sales growth to a decline of 5% to 6% from flat to up 1% and for operating margin to 4.2% to 4.5% from 7.0% to 7.2%.

Chief Financial Officer Jill Timm said on the call that inventory is expected to end fiscal 2022 up in the “high teens” percentage range from 2021, compared with previous guidance of “high single digits.”

The pains the company are taking to deal with an inventory glut comes after it said in early July that it ended merger talks with Franchise Group Inc.
as the current financing and retail environment “created significant obstacles” to reaching an acceptable buyout deal.

Separately, the company said it has entered into an accelerated share repurchase agreement (ASR) to buy back $500 million worth of its stock. Based on current stock prices, the ASR represents about 12% of the company’s market capitalization of $4.12 billion.

The ASR agreement was a little later than expected, as CFO Timm had said in mid-May that a $500 million ASR was expected to be executed in the second quarter. “We did not repurchase any shares in the second quarter, given the strategic review process,” Timm said.

She also said on the call Thursday that the company was “leveraging a competitive process” to determine ways to “monetize” some it its real-estate assets.

“As we have done in the past, we will focus on opportunities that will enhance our financial flexibility and maintain our healthy balance sheet,” Timm said.

Kohl’s also announced Thursday that it was expanding its partnership with beauty products retailer Sephora, to include a Sephora presence at all of Kohl’s more than 1,100 locations. There are currently about 600 Kohl’s stores with a Sephora presence.

Kohl’s stock has tumbled 30.4% over the past three months, while the SPDR S&P Retail exchange-traded fund

has rallied 14.4% and the S&P 500 index

has gained 9.8%.

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