The initial reaction to the third quarter earnings report from retailer Kohl's (KSS 38.72, -2.07, -5.1%) has not been a favorable one. Shares of KSS are down 5%, although it was even worse in pre-market action when the stock was down as much as 9%.
The response seems a little cold-hearted considering Kohl's managed to register a comparable sales increase for the period. It was a small one at just 0.1%, yet positive comparable sales haven't been easy to come by for mall-based retailers even against easy comparisons.
Kohl's said it was aided by continued traffic momentum, but where investor sentiment cooled off was in the understanding that Kohl's gross margin rate contracted 30 basis points to 36.8%. The contraction in gross margin hinted to many that Kohl's used price as a traffic driver and will likely be forced to continue to do so in what could prove to be one of the most competitive holiday shopping seasons yet.
To its credit, Kohl's managed its merchandise inventories well. They decreased 1.9% year-over-year against a 0.1% increase in total sales of $4.33 billion for the third quarter.
The sales gain, though, was offset by the lower gross margin and higher SG&A expenses. Those factors contributed to a 13% decline in diluted earnings per share of $0.70, which came up shy of analysts' average expectation.
Kohl's noted that the middle of the third quarter was disrupted by the hurricanes and other unseasonal weather, but that the quarter closed with strong sales in the second half of October. Management said on the company's conference call that it expects sales improvements to continue, if not accelerate, through the holiday season.
That positive view of matters has helped KSS pare its pre-market losses. What won't be known until after the holiday, though, is the role promotional activity played in fueling the expected sales improvements.
Kohl's expects its adjusted diluted earnings per share for fiscal 2017 to range from $3.60 to $3.80, compared to its prior guidance of $3.50 to $3.80. It's good to see the retailer raise the low end of its guidance range, yet it would have been more satisfying for investors to see Kohl's raise the bar on the high end of its guidance range.
Perhaps Kohl's will share some better than expected fourth quarter sales and earnings news when it is all said and done. For now, though, it has been left out in the cold as investors have placed the burden of operational proof on the company.