Kohl's Surprises with Profit and Maintains Full-Year Outlook, Shares Rise

Kohl's, the struggling retailer, experienced a surge in its shares on Wednesday after reporting an unexpected profit and reaffirming its full-year guidance as it continues its quest for a turnaround. The company's stock rose over 5% on Wednesday, with even higher gains earlier in the day.

While other retailers, including Walmart, Target, and Foot Locker, have discussed the challenges of selling discretionary merchandise due to high food prices, Kohl's has faced a more fundamental hurdle: proving that its brand still resonates with shoppers and achieving consistent sales growth.

During an analyst call, Kohl's CEO Tom Kingsbury and CFO Jill Timm emphasized the changes the retailer has made to win back customers and attract new ones. These include opening more Sephora shops, expanding merchandise categories like pet and home decor, and featuring gift-giving items ahead of holidays. Kingsbury highlighted that every time shoppers enter a Kohl's store, they encounter "something new, something different, something very giftable, and a different look."

Kohl's reiterated its full-year outlook, expecting net sales to decline between 2% and 4%, factoring in the approximately 1% impact from having one additional week of sales this year. The company also anticipates earnings per share ranging from $2.10 to $2.70, excluding nonrecurring charges.

The retailer's performance for the quarter ending April 29 surpassed Wall Street's expectations:

• Earnings per share: 13 cents versus an expected loss of 42 cents

• Revenue: $3.36 billion versus $3.34 billion anticipated

In the fiscal first quarter, Kohl's experienced a decline in net sales, reaching $3.36 billion compared to $3.47 billion in the same period last year. Comparable sales dropped by 4.3%, in line with Wall Street's forecast of a 4.5% decline.

The company reported a net income of $14 million, or 13 cents per share, compared to $14 million, or 11 cents per share, in the previous year.

Kohl's surprise quarterly profit follows multiple quarters of disappointing sales and a declining stock price. Last year, the retailer faced pressure from activist investors Ancora Holdings and Macellum Capital, which urged the company to remove its then-CEO Michelle Gass and revamp its board. Kohl's also explored and eventually abandoned a bid to sell its business to Vitamin Shoppe owner Franchise Group.

Since then, Kohl's appointed its new CEO, Tom Kingsbury, the former chief executive of off-price retailer Burlington Stores. Kingsbury initially served as interim CEO before assuming the permanent position after Gass's departure to lead Levi Strauss.

Over the past year, Kohl's efforts to reinvent itself and attract shoppers have encountered challenges as middle-income consumers face financial constraints caused by inflation, resulting in reduced purchases of discretionary items like clothing. This contributed to significant losses for Kohl's in the holiday quarter and a weak outlook, which the Wisconsin-based company reconfirmed on Wednesday.

During the analyst call, Kingsbury acknowledged that the middle-income customer segment is under pressure but expressed confidence that Kohl's can attract these shoppers by emphasizing value. Despite the challenging economic environment, Kohl's made progress in the fiscal first quarter, with increased store traffic and higher average basket sizes as shoppers placed more items in their carts. The company employed clearance events to sell excess merchandise, resulting in a decline in the average ticket. Inventory decreased by 6% year over year to $3.5 billion. Investors have been closely monitoring inventory levels, as excess merchandise in the retail sector has led to higher markdowns and reduced profits.

Kohl's margins improved in the quarter, benefiting from lower freight and online shipping costs, as well as a more strategic approach to markdowns. Kingsbury mentioned the company's intention to simplify markdowns for customers while offering targeted promotions and clearance events instead of across-the-board reductions. The first quarter saw Kohl's strongest sales performance in February, although March fell below expectations. April's results were in line with the company's projections. However, May's sales have been slower than anticipated, and Kohl's plans to compensate for this weakness in June, which had weaker sales in the previous year. The company expects a boost in the second half of the year through initiatives such as introducing fresh products under the leadership of Kohl's new chief merchant and opening additional Sephora stores.

In February, Kohl's appointed Nick Jones, a retail veteran and former chief merchant of U.K.-based department store Marks & Spencer, as its chief merchandising and digital officer.

The Sephora partnership has proven to be one of Kohl's most effective drivers of traffic and sales. The company began incorporating Sephora shops into its stores two years ago and plans to have them in all of its 1,100+ locations by the end of this year, with over 900 already in operation. Beauty sales at Kohl's increased by 150% year over year, and comparable beauty sales at the established Sephora locations grew by double digits. The newer Sephora shops exceeded expectations and attracted more customers to Kohl's stores.

Despite the positive developments, Kohl's stock closed at $19.27 on Tuesday, less than half of its 52-week high of $47.63. The company's shares have declined nearly 23% this year, while the S&P 500 has risen approximately 8%, and the retail-focused XRT index has fallen nearly 2%.