Kohl’s stock exploded higher on Wednesday, jumping as much as 24% after the company delivered a second-quarter report that had analysts scrambling to raise their price targets.
The earnings beat was just part of the story as management’s optimistic forward guidance really got investors excited about what’s coming next.
The massive spike represents a dramatic shift in sentiment for a stock that’s been through the wringer lately.
Investors have been sitting on the sidelines for months, unsure about whether Kohl’s could navigate its leadership shake-up while dealing with sluggish sales and the broader challenges hammering retail stocks across the board.
Kohl’s stock: Earnings beat and raised outlook drive momentum
Kohl’s crushed expectations in the second quarter, giving investors reason to believe the retailer’s turnaround efforts are finally paying off.
The company posted net income of $153 million, or $1.35 per share, for the quarter ended August 2, more than double the $66 million, or $0.59 per share, from the same period last year.
The results blew past what Wall Street was expecting. Even adjusted earnings of $0.56 per share came in well above analyst forecasts, showing this wasn’t just a one-time boost from accounting adjustments.
What’s really grabbing attention is how much better Kohl’s got at managing its costs. The company cut its selling, general and administrative expenses by 4.1% while growing sales, exactly what you want to see from a business getting its act together.
Operating margins jumped from 4.5% to 7.9% of revenue, which is a massive improvement that shows management is executing on its recovery plan.
The sales numbers weren’t pretty as revenue dropped 5.1% and comparable sales were down 4.2%, but Wall Street had been expecting worse, so Kohl’s actually managed to clear the low bar analysts had set.
When you’re dealing with consumers who are cutting back on spending, sometimes not losing as much as expected passes for good news.
The real story is in the margins. Despite selling less stuff, Kohl’s actually improved its gross margin to 39.9%, up from where it was a year ago.
The company’s been working to carry less inventory as they’re sitting on 5% less merchandise than last year, which means they’re not stuck with a bunch of items they have to mark down heavily to get rid of.
What analysts say?
Wall Street’s reaction to Kohl’s big day has been all over the map, though most analysts seem willing to give the company some credit for finally delivering results that don’t disappoint.
Gordon Haskett made the biggest move, bumping Kohl’s from “Reduce” to “Hold” after seeing how well management executed on the margin front.
They’re impressed with the operational improvements, even if they’re not ready to get fully bullish yet.
JPMorgan took a similar approach as they’re still not fans of the stock with their “Underweight” rating, but they couldn’t ignore the better profitability picture and moved their price target from $8 to $10.
Not everyone’s jumping on board though. Telsey Advisory and Baird are staying cautious with “Market Perform” and “Neutral” calls, pointing out that sales are still heading in the wrong direction and all the leadership changes make it hard to know what’s really sustainable here.
Goldman Sachs is even more skeptical, sticking with their “Sell” rating because they think the sales problems are bigger than the operational fixes can solve.
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