Shares of Kohl’s (NYSE: KSS) fell sharply Thursday after the department retail store chain reduced its financial guidance again this year as its customers grappled with higher costs, denting the demand for apparel, shoes, and other items.
How Did Kohl’s Do in Q2?
The company’s Q2 2022 results beat lowered analysts’ estimates. Kohl’s reported Q2 adjusted EPS of $1.11, topping the consensus estimates of $1.03. Net income for the quarter plunged to $143 million, down from $382 million in the year-ago period.
Revenue stood at $4.09 billion in the three-month period, above the analyst consensus of $3.85 billion, down 8.1% year-over-year. Same-store sales fell 7.7% in the quarter.
Kohl’s said its customers are visiting stores less frequently, and are spending less money per transaction as they opt for more affordable brands. As such, in-house brands have been outperforming national brands for the past two quarters, said the retailer.
The company also said its home goods and children’s apparel units underperformed. Its apparel for younger women had a particularly weak performance in the quarter, while men’s business beat the company’s overall performance thanks to the high demand for outdoor gear.
Kohl’s inventory swelled 48% from the year-ago quarter due to weaker overall sales and its recent investments in beauty products for its Sepora partnership as well as its plan to pack and store more goods.
In fact, beauty was one of Kohl’s best-performing businesses in the quarter as demand for lipsticks, eye shadows, and other beauty products remained strong in spite of higher prices.
The retailer has been investing heavily in beauty, with plans to open up to 400 Sephora shops in its stores in 2022, and an additional 250 next year. The company also said it intends to open a mini variant of those Sephora shops in another 300 Kohl’s locations, with an aim to provide its customers with a Sephora experience across all of its stores.
Kohl’s noted it is seeing new buyers in its stores who come to visit their Sephora shops. The company’s CEO Michelle Gass said June was the most difficult month in the last quarter as customers started shifting their buying habits. The buyers were mostly looking at discounted and more affordable items, which resulted in fewer apparel purchases – a key Kohl’s segment.
Gass said it expects profits to remain facing headwinds in the short run as rival retail companies add heavy discounts in a bid to empty their shelves ahead of the holiday season.
Kohl’s now expects its net sales for the full fiscal year 2022 to be down 5% to 6%, down from the previous forecast of 0% to 1%. The company now estimates adjusted EPS in the range of $2.80 to $3.20, down from the earlier guidance of $6.45 to $6.85.
Ditching Sale Plans
Kohl’s weak guidance comes after the retailer abandoned its plans to sell its business to the Franchise Group, due to the turmoil in the retail sector. The company has been facing increasing pressure from activist investors to sell the business in recent months.
The retailer’s team argued it was difficult to strike a “fully executable agreement” for the sale due to the challenging financing and retail environment. Earlier this week rivals Walmart and Target also reiterated their full-year guidance despite inflationary pressures.
Activist hedge fund Starboard Value trimmed its stake in Kohl’s last week by over 80% in the second quarter, regulatory filings showed. Starboard, which was also one of the companies interested in buying Kohl’s for $9 billion, offloaded 2.8 million shares of KSS in the second quarter.
The company held 535,029 shares on June 30.
Summary
Kohl’s shares are sharply lower this week after the company aggressively slashed its guidance to reflect slowing spending trends.
