Kohl's Q4 Earnings Likely To Rise: Here's Why

Kohl's Corporation KSS is slated to release fourth-quarter fiscal 2017 results on Mar 1. While the company reported a negative earnings surprise in the last quarter, the departmental store retailer has outperformed the Zacks Consensus Estimate by an average of 12.5% in the trailing four quarters. We expect the company to continue gaining from its robust sales driving efforts, which also helped the company to put up solid holiday sales numbers, which was revealed last month.

Let's delve deeper into these factors, which appear to be major growth drivers for Kohl's — also giving out positive signals for the upcoming results.

Factors Driving the Quarter

Kohl's has been gaining from its various sales-driving initiatives, which also helped it witness its first quarterly comparable store sales (comps) growth in a long time, when it reported third-quarter fiscal 2017 results. Among its various efforts, alliance with online giant Amazon AMZN seems to be yielding results for Kohl's. Incidentally, the company started accepting returns from Amazon's customers on select products. This move followed Kohl's decision to sell Amazon devices, accessories and smart home devices across 10 selected stores in Los Angeles and Chicago.  Additionally, the company is gaining from enhanced focus on prominent brands such as Nike NKE and Adidas ADDYY. Further, Kohl's has been regularly introducing brands to keep inventory assortment fresh and drive customer traffic to stores and website.

Also, Kohl's gained significant market share in active apparel and footwear up until the third quarter, and expects the trend to continue, based on assortment improvements. Such efforts to expand store traffic and sales are reflected in the company's share price performance. Kohl's shares have gained 60.1% in a year, compared with the  industry's increase of 9.9%.

Holiday Results Hint at a Strong Q4

Fueled by these factors, Kohl's revealed that both, comparable store sales (comps) and total sales of the company advanced 6.9% year over year, for the combined November and December 2017 period. Notably, this marks a significant improvement from a 2.1% and 2.7% respective drop in comps and total sales witnessed in the 2016 holiday season. Notably, Kohl's performance remained sturdy throughout November and December, backed by positive comps across all businesses and regions. This, in turn was fueled by Kohl's robust strategies, which helped it attract strong traffic and record solid digital sales during the season.

Final Thoughts & Q4 Expectations

We believe that sustained focus on technology improvements and omni-channel expansion is likely to fuel further growth at Kohl's. In fact, the department store retailer's better-than-expected holiday performance and optimistic anticipations for January stimulated management to raise its fiscal 2017 earnings outlook. Nonetheless, management stated that the updated guidance doesn't include any impact from the latest tax reforms, which is likely to have a favorable effect on the company's effective tax rate.

Apart from this, the company has also been undertaking several initiatives to reduce its inventory, in order to boost its profits. During third-quarter fiscal 2017, the company made additional progress on its initiatives and as a result, inventory per store decreased 2%, while units per store were 4% lower. Lower inventory levels led to improvement in merchandise margins, and the company continues to expect inventory to be down low to mid-single digits for fiscal 2017. Clearly, all these factors bode well for the fourth quarter.