UPDATE 4-Kohl's sees sales weakness, more costs ahead

* Q2 EPS 75 cents vs. Street est 74 cents

* Q2 sales up 2.2 pct

* Sees Q3, Q4 earnings below Street estimates

* Sees higher costs in the second half of year

* Shares up 0.2 pct (Adds analyst, exec comment; updates stock price)

By Aarthi Sivaraman

SEATTLE, Aug 13 (Reuters) - Kohl's Corp (KSS.N) posted a better-than-expected quarterly profit on Thursday and said it would carry on opening new stores this year, as it seeks to gain market share in the recession that has shoppers seeking out lower-priced, but still trendy, merchandise.

The department store operator also issued a disappointing outlook for the rest of 2009, as those store openings lead to higher costs.

Kohl's shares closed up slightly, in line with the wider stock market.

Kohl's said last year it would take over 31 Mervyn's stores after that retail chain went bankrupt last summer. It is reopening several of those stores throughout 2009, adding to costs for the period.

For the third and fourth quarters, Kohl's forecast earnings below analysts' estimates, as selling, general and administrative costs are expected to rise 3 to 4 percent.

Chief Executive Kevin Mansell said the higher costs in the near term would pay off in the long run as Kohl's stands to gain market share.

"We are outperforming from an investment perspective," Mansell said in an interview.

Standard & Poor's analyst Jason Asaeda said in a note that "we look for (Kohl's) to gain market share in California and the Southwest" with its new stores.

"We also expect the company to strengthen its value proposition with further enhancements in product mix and the in-store shopping experience."

Department stores have endured some of the steepest sales declines in the past year, as consumers shun their offerings and choose to spend on items like groceries instead.

But the Kohl's penchant for affordable but trendy items, and exclusive brands like Dana Buchman and Simply Vera Vera Wang, has made it fare better than some others.

Kohl's expects to earn 40 cents to 44 cents a share in the current, third quarter. Analysts on average, expected 47 cents, according to Reuters Estimates.

For the fourth quarter, it expects to earn 99 cents to $1.06 a share, while analysts were expecting $1.13.

Menomonee Falls, Wisconsin-based Kohl's also sees comparable-store sales falling 3 percent to 5 percent and total sales ranging between a fall of 1 percent and a rise of 1 percent in both periods.

SECOND QUARTER EXCEEDS ESTIMATES

Kohl's net profit fell to $229 million, or 75 cents a share, in the second quarter ended Aug. 1 from $236 million, or 77 cents a share, a year earlier.

Analysts expected a profit of 74 cents, Reuters Estimates showed.

Separately, retail leader Wal-Mart Stores Inc (WMT.N) and specialty clothing and home goods retailer Urban Outfitters Inc (URBN.O) also posted better-than-expected results on Thursday. [ID:nN13399911] [ID:nBNG381192]

Kohl's said net sales rose 2.2 percent to $3.8 billion.

Earlier this month, Kohl's posted a 0.4 percent increase in July sales at stores open at least one year, citing strong demand for footwear, home goods and accessories.

The company, which opened 19 stores in its first two quarters, expects to open an additional 37 later this year.

In 2010, Kohl's plans to open about 20 to 25 new stores. Mansell said more consolidation was possible in the industry, and that the company's balance sheet and cash flow "will allow us to act aggressively if that happens."

Kohl's expects the business to remain rough as it heads into the holiday sales season, as shoppers favor deep discounts and essential items in the recession.

"We would expect the second half of this year to continue to be a fight for market share," Mansell said.

Kohl's shares rose 12 cents, or 0.23 percent, to close at $52.39 on the New York Stock Exchange. (Additional reporting by Dhanya Skariachan in Bangalore; Editing by Derek Caney, Lisa Von Ahn and Richard Chang)