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Kohl’s Beats Expectations Despite Inventory Shortages and Discounting

Kohl’s Corporation, the Wisconsin based mid-range department store, posted falling Q1 profits as a result of its new pricing strategy that aims to replace temporary sales with permanent discounting. The company also had trouble keeping up with high consumer demand for its store-label brands.

Despite the falling profits and inventory issues, the company beat analysts’ expectations, posting a profit of 63 cents per share, versus 60 cents expected. Profits fell from $201 million in Q1 2011 to $154 million for the same period in 2012. Net sales were $4.2 billion, an increase of 1.9% for the quarter. Kohl’s is squeezing profit margins in order to keep customers coming in against a still-tight national retail backdrop.

Kevin Mansell, Kohl’s chairman, president and chief executive officer, said, “Our first quarter results reflect the implementation of our strategy to initiate lower pricing in order to provide greater value to our customers. This planned action led to significantly lower gross margins for the quarter. Strong management of expenses allowed us to achieve our earnings goal for the quarter. We have accelerated new receipts into second quarter to ensure we are well-positioned from an inventory perspective for the Back-to-School season. The combination of these two actions should allow us to greatly improve our sales for the fall season.”

Despite this optimistic prediction, Kohl’s does not expect to meet analysts’ expectations for Q2. The company’s gross margin fell 2.2 percentage points, reflecting the discounting strategy, but the company benefited from efficiencies and cost cutting, reducing its operating expenses by $2 million before depreciation and amortization. The company also boosted inventories by $250 million, in line with expectations that demand will stay strong. Mansell predicts that gross margins will start improving in the fall as a result of lower costs for clothing.