Kohl’s (KSS) Q12023 quarterly earnings

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Kohl’s Shares soared on Wednesday as the embattled retailer posted a surprise profit and reaffirmed its full-year guidance as it chases a turnaround.

The company’s shares rose more than 5% on Wednesday, after jumping even higher earlier in the day.

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Across the retail industry, Walmart, Target, Foot locker and others have talked about how high food prices have made it harder to sell clothes, sneakers and other discretionary goods. Kohl’s, however, must tackle a more fundamental hurdle: Proving that its brand still resonates with customers and getting back on track with consistent sales growth.

On a call with analysts, Kohl’s CEO Tom Kingsbury and CFO Jill Timm emphasized the changes the retailer has made to win back customers and attract new ones. It is opening more Sephora stores, expanding into product categories such as pet and home decor and introducing gift items ahead of the holidays.

Every time customers walk into a store, Kingsbury said they now see “something new, something different, something really talented, and a different look.”

Kohl’s confirmed its full-year outlook. It said it expects net sales to decline between 2% and 4%, including the roughly 1% impact of having another week of sales this year. It said it expects earnings per share to be between $2.10 and $2.70, excluding non-recurring charges.

Here’s how the retailer did for the quarter ended April 29 compared to Wall Street expectations, based on a survey of analysts by Refinitiv:

  • Earnings per share: 13 cents vs an expected loss of 42 cents
  • Revenue: $3.36 billion vs. $3.34 billion

In the first fiscal quarter, Kohl’s net sales fell to $3.36 billion from $3.47 billion in the year-ago period.

Comparable sales declined 4.3% in the quarter, roughly in line with the 4.5% drop expected by Wall Street, according to StreetAccount.

The company reported net income of $14 million, or 13 cents per share, compared with $14 million, or 11 cents per share, a year earlier.

Kohl’s surprising quarterly profit comes after several quarters of disappointing sales and a sinking stock price. Last year, the retailer became the target of activist investors Ancora Holdings and Macellum Capital, which pushed the company to oust CEO Michelle Gass and shake up its board. Kohl’s also considered and then finalized an offer last year to sell its business to the owner of Vitamin Shoppe Franchise Group.

Since then, Kohl’s has tapped Kingsbury, a former executive at an off-price retailer, as its new CEO. Burlington Shops. He stepped into the role as interim CEO and later the permanent one after Gass, his former CEO, left to become its next CEO Levi Strauss.

Over the past year, Kohl’s efforts to reinvent itself and woo customers have run into challenges as middle-income shoppers feel squeezed by inflation. and buying fewer discretionary items, such as clothing. That contributed to a big loss in Kohl’s holiday quarter and a weak outlook, the Wisconsin-based company reiterated Wednesday.

On the analyst call, Kingsbury said “the middle-income customer is being squeezed,” but said Kohl’s can attract those customers by emphasizing value.

Despite challenging economic conditions, Kohl’s made progress in the first fiscal quarter. Store traffic increased and when customers visited stores, they added more items to their baskets, Kingsbury said.

Average ticket went down as Kohl’s had clearance events to sell through additional merchandise. Inventory was $3.5 billion at the end of the quarter, a 6% year-over-year drop. Investors have watched these levels closely, as overstocking at many retailers has led to higher markups and lower profits.

Kohl’s margins improved in the quarter, as online freight and shipping costs fell and the company became more strategic about markdowns. Kingsbury said the company wants to simplify markdowns for customers, but also has targeted offers and clearance events instead of sweeping cuts.

During the quarter, Kohl’s had its strongest sales performance in February. March came in below the company’s expectations and April was in line with its expectations, Kingsbury said.

Sales in May so far have been slower than expected, Timm said. She said Kohl’s plans were to make up for the weakness in June, which was the weakest sales period in the fourth quarter last year. She said some Company changes will give Kohl’s a boost in the latter half of the year, including efforts to introduce new products under the Kohl’s brand and opening new Sephora stores.

Kohl’s hired Nick Jones, a retail veteran and former chief merchandiser of UK-based department store Marks & Spencer, as chief merchandising and digital officer in February.

Sephora has also been one of Kohl’s biggest traffic and sales drivers. He started opening Sephora shops in his stores two years ago. It plans to add the shops to all of its 1,100 stores, and will have more than 900 by the end of the year, Kingsbury said.

Beauty sales at Kohl’s increased 150% year over year, he said. At the Sephora locations that have been open for the past two years, comparable beauty sales grew in the mid-teens. Sales trends at the newest stores also exceeded expectations and gave people more reasons to visit stores, he said.

“We are bringing in new customers and they are buying more than twice as often as our average customer,” he said.

Kohl’s shares closed Tuesday at $19.27. That’s less than half of its 52-high, which was $47.63. The company’s stock has fallen nearly 23% so far this year — even as the S&P 500 has risen about 8% and the retail-focused XRT has fallen nearly 2%.

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