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Kohl Earnings Call, Third Quarter 2008
Author: Maclintosh Kuhlengisa
Last Update: 5:05 AM ET November 17 2008


The specialty department store reported a 0.6% drop in sales to $3.8 billion as comparable sales decreased driven largely by lower transactions per store. Net income was $160 million or 52 cents a share, down 18% on higher expenses and weaker revenue.

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This summary is based on the third quarter fiscal 2008 earnings call conducted by Kohlís Corp. (KSS) on November 13, 2008.


- Chief Financial Officer: Wesley S. McDonald
- Chairman: Larry Montgomery
- President, Chief Executive Officer: Kevin Mansell

Key Investors Issues

- Total sales were $3.8 billion, down 0.6% from $3.83 billion in 2007.
- Net income was $160 million or 52 cents a share, down 18%.

Year to Date Highlights:

- Total sales increased 1.5% to $11.2 billion from $10.99 billion in the prior year.
- Net income was $549.1 million or $1.79 a share, down 18% from $672 million or $2.09 a share last year.
- The firm repurchased 6 million shares of stock for $261 million at an average price of $43.19.

Third Quarter Highlights

Total sales were $3.8 billion, down 0.6% from $3.83 billion in the prior year as comparable sales decreased 6.7% driven largely by lower transactions per store which decreased 6.1%.

- Average unit retail increased 3.2% but was offset by a 3.8 decline in units per transaction, resulting in a 0.6 decrease in average transaction value.
- Credit share was 46.7%, an increase of approximately 229 basis points over the prior year quarter.
- Gross margin rate was 37.4% up 33 basis points from last year reflecting strong inventory management, lower clearance levels and higher penetrations of both private and exclusive brands.
- SG&A increased 5% which was faster than sales growth but lower than both new store growth.

Stores advertising and corporate expenses did not leverage due to lower than planned sales, continued desire to maintain a positive customer in-store experience, and ongoing efforts to drive additional traffic.

- Depreciation expense was $135 million, up 17.6% due to new store growth.
- Pre-opening expenses were $21 million for the current year quarter versus $38 million last year with the decrease reflecting the decrease in the number of fall openings, 47 in 2008 compared to 95 in 2007.
- Net interest expense increased to $28 million from $19 million in the prior year due to the $1 billion in debt issued in September of 2007.

Net income was $160 million or 52 cents a share, down 18% from $194 million or 61 cents a share in 2007 due to higher expenses and weaker revenue.

- The firm currently operates 1,004 stores compared to 914 stores at this time last year with gross square footage of 88,979, an increase of 9.5%; selling square footage of 74,992, an increase of 8.9%.
- The firm had $381 million in short and long term investments at quarter end 2008 compared to $26 million last year.
- Total inventory was $3.7 billion, a decrease of 5% as inventory per store is down approximately 14%.

Strategic Initiatives:

- Exclusive and private brands were up over 150 basis points in penetration to 42% of sales, primarily due to the exclusive national brands.
- The customer continues to respond well to all of the exclusive brand launches, including the most recent launch with Fila Sport.
- Latest marketing campaign is designed to showcase Kohlís as the one stop destination for shoppers looking to get the most for their money during a challenging economic environment.
- The firm has increased its overall marketing budget over last year by increasing the investment in the best performing mediums such as direct mail, Internet advertising and e-mail.

Store Experience and Expansion Plans:

- In 2009, the firm is going to continue to utilize its strong financial position to continue to expand in new and existing markets, and continue the remodel program in order to grow market share in a very difficult environment.
Ė It is planning to open approximately 50 stores in 2009 with about 20 opening in the spring.
- In addition, it plans to remodel 60 stores in the spring season, which is an increase from 36 this year.

Fiscal 2008 Outlook:

- For the fourth quarter, expect a total sales decrease of negative 4 to negative 8%; a comp sales decrease of negative 8 to negative 12%; and a gross margin increase of 20 to 40 basis points.
- The result of lowering sales guidance would result in earnings per diluted share of 90 cents to $1.05 for the fourth quarter.
- Earnings per diluted share for fiscal 2008 of $2.69 to $2.84 are expected.

Key questions and answers from the third quarter earnings call conducted by Kohlís Corp. (KSS) on November 13, 2008.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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