Kohl's on Thursday reported lower-than-expected profits in the third quarter, which sent shares down more than 9% in premarket trading, but sales — which rose 0.1% to $4.33 billion in the quarter — slightly outpaced a Thomson Reuters I/B/E/S expectation cited by Reuters for $4.30 billion.
Same-store sales also rose 0.1% percent, besting the Thomson Reuters I/B/E/S expectation for a 0.7% decline.
But Q3 net income fell 19.9% to $117 million or 70 cents per share, down from $146 million or 83 cents per share in the year-ago quarter, which missed the Thomson Reuters I/B/E/S expectation cited by Reuters for 72 cents per share. Operating income fell 14.6% to $257 million in the quarter from $301 million a year ago.
Sales improvements are partially thanks to a strong back-to-school season and a busy second half of October after a tamp-down from hurricane-related disruptions, CEO Kevin Mansell said in a statement regarding the third quarter. "We are pleased to report an increase in comp sales for the quarter as the traffic momentum we saw in the first half of the year continued," he said.
Indeed, he should be pleased. Considering Kohl’s ongoing struggles for several quarters now, its sales growth, small as it is, is nothing to sneeze at. But its profit declines are worrisome. "While a comparable sales rise of 0.1% may be meager, the fact that it brings to an end an extended period of decline is significant," GlobalData Retail Managing Director Neil Saunders told Retail Dive in an email. "Unfortunately for Kohl's, the uplift was not reflected on the bottom line."
Kohl’s sales accomplishment is a reflection of its effort to boost traffic to its stores, which has included not just its curious decision to invite in Amazon but also new products, like its recent tie-up with Under Armour.
While many observers have criticized the Amazon partnership as an invitation to the enemy, Saunders said it’s a good use of the department store’s excess space. "The move was criticized in some quarters for giving aid to a rival, but in our view, it is a creative solution to the problem of Amazon's continued growth," he said. "In any case, we have seen no evidence that this service has resulted in Amazon stealing more share or customers from Kohl's than it was already doing."
But in an era of stiff competition in retail and growing online sales and in light of its paltry sales improvements, Kohl’s may have to get even more radical, Saunders warned. The answer could be found in part at Kohl’s new smaller format stores, he said. With 60% less space and 25% less inventory than a standard Kohl's store the locations are resonating with customers. "It allows Kohl's to tap dense urban markets, which provides a lucrative future growth opportunity," Saunders said. "The concept is also more profitable which, over time, should help the bottom line."
Saunders hailed Kohl’s momentum, but warned against leaning on discounts to further drive movement in sales and traffic. "As much as this is a necessary evil, we believe that it could have a negative impact on an already weakening bottom line," he said. "This is something Kohl's will need to remedy if it is to reap the rewards of improved customer numbers."