Don’t Be Fooled by Strong January Sales at Kohl’s Corporation (KSS)

On Thursday, Kohl’s Corporation (NYSE:KSS) reported unexpectedly strong comparable-store sales growth for January. Comparable-store sales increased 13.3%, while total sales increased by 34.1% for the month due to the inclusion of an additional week in the company’s fiscal year. Analysts had expected a comparable-store sales increase of just 3.1%.

However, investors should not get too excited about this accomplishment. January is one of the lightest-volume months of the year for department stores. Moreover, Kohl’s achieved strong sales growth last month because of its underperformance during the holiday season. This left lots of clearance merchandise in the stores. However, clearance merchandise is sold at very low gross margin (and sometimes at a loss), which will put pressure on Kohl’s profitability this quarter.

A good January is a small consolation
January tends to be the weakest sales month for retailers as consumers “recover” from the holiday season. By contrast, November and December are the strongest months of the year. As a result, it is virtually impossible to make up for a weak holiday season with strong January sales. Kohl’s averaged sales of $226 million per week during the five-week January period, compared to sales of $579 million per week for the nine-week November-December period. Thus, even a large percentage increase in January sales has relatively little impact on total quarterly revenue.

In this case, Kohl’s performed very poorly during the critical holiday season, with comparable sales up just 0.1% in the combined November-December period. Even after the 13.3% increase in January comparable-store sales, total fourth-quarter comparable-store sales grew by just 1.9%. This was well below the company’s initial guidance (issued in the third quarter earnings release) for a comparable-store sales increase of 3% to 4% in the fourth quarter.

Some of the underperformance can be attributed to the effects of Hurricane Sandy, which hit the East Coast around the beginning of “fiscal November” (Oct. 28, 2012). However, other chains, such as Macy’s, Inc. (NYSE:M) , performed much better despite having at least as much exposure to the Northeast.

Late sales, low margins
Moreover, Kohl’s Corporation (NYSE:KSS) needed to discount heavily in December and January in order to get merchandise moving. When the company announced December sales results in early January, Kohl’s CEO Kevin Mansell commented:

December sales were lower than planned. Additionally, sales came late in the holiday shopping season and, as a result, were at deeper discounts than planned. We are taking the necessary markdowns in the fourth quarter to manage our inventory as we transition into the Spring season.

Accordingly, Kohl’s reduced its fourth-quarter EPS guidance to a range of $1.60 to $1.62 at that time, compared to a prior range of $2.00 to $2.08. Given that November and December sales were so weak, it is good that the company was able to clear its inventory in January. However, the earnings benefit of higher January sales was probably minimal, because clearance merchandise is sold at such a low gross margin.