The Kohl's of old makes its return

MENOMONEE FALLS, WIS. — Climbing back on track after a string of recent earnings disappointments, Kohl's Corp. pushed profits up almost 40 percent in a breakaway second quarter as it returned to something like its old form.

Sales at the rapidly growing mid-price retailer expanded 13.1 percent, due entirely to continued expansion. But the crucial gauge of same-store sales declined 1.1 percent, weakening further after a 0.1 percent decline in the prior quarter.

Driving the turnaround at the bottom line, Kohl's played a winning hand of stronger margins, a deep cut in interest expense and tight inventory controls.

In a boost to profits, the retailer widened its average gross margin 300 basis points, to 36.4 percent from 33.4 percent the preceding year. Gross margin dollars, getting an extra kick from the double-digit gain in sales, climbed 23.5 percent, to $910 million from $736.8 million.

In another big assist to the bottom line, Kohl's pared interest costs more than a third, or 35.3 percent, to $15 million from $23.2 million last year, generating a cash savings of $8.2 million.

Capping stockpiles, Kohl's limited inventory growth to less than 4 percent, substantially beneath the 13.1 percent growth in sales. Inventories rose just 3.1 percent, to $1.8 billion from $1.7 billion during the same quarter a year ago.

The one performance metric that disappointed was operating costs, which rose 130 basis points, or 1.3 percent, to 22.8 percent of sales from 21.5 percent the preceding year.

Larry Montgomery, chairman and CEO, commented, "We made significant progress on our 2004 initiatives as evidenced by our strong earnings performance for the quarter. We are very comfortable with the level and content of our inventory and the controls we have in place to maintain the appropriate level. At the same time, our in-store efforts to create a better shopping environment have been well received by the customer."

Montgomery added, "We have seen continued improvement in the selling of new receipts throughout the second quarter. This fact, along with our planned new merchandise launches through the third quarter, gives us confidence that we will return to positive comparable-store-sales increases in the third quarter."

During the first half of the year, Kohl's continued to open doors at a rapid pace, adding 47 new stores, including entries into Sacramento, Calif., San Diego, Calif., Fresno, Calif., and Memphis, Tenn. The company said it plans to add another 48 stores during the current third quarter.