Kohl's forecast disappoints, Target sees pickup

Thu Feb 23, 2012 5:48pm EST

Shoppers fill a Target Store in Chicago, November 25, 2011. REUTERS/John Gress

Shoppers fill a Target Store in Chicago, November 25, 2011.

Credit: Reuters/John Gress

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(Reuters) - Department-store operator Kohl's Corp on Thursday gave a profit forecast that came in below Wall Street expectations this year as customers balked at its attempts to pass on rising costs, while Target Corp said it would be helped by its credit card business.

Results and forecasts from those two retailers showed that consumers at the low to mid-end of the U.S. economy are pressured by rising gasoline prices and still high unemployment even as Dillard's Inc, which caters to a more affluent customer, posted better sales during the holiday quarter.

Both Kohl's and Target tried to protect margins as best they could during the holiday quarter by not slashing prices beyond a certain point, but that came at the cost of disappointing sales for both retailers.

"We did see resistance from our customer," Kohl's Chief Executive Kevin Mansell told analysts on a conference call, referring to prices hikes put in the place to counteract higher product costs.

That cost the company customers, leading to same-store sales falling 2.1 percent over the holiday quarter despite a stepped-up advertising campaign.

Kohl's may have little choice but to relent on those price hikes.

"They absolutely have to stand out as the promotional department store that they are," said Matt Arnold, an analyst with Edward Jones.

Kohl's said it expects same-store sales to be up 2 percent this year, while Macy's on Tuesday forecast a 3.5 percent gain.

It also said online sales passed $1 billion last year. But those sales came at the expense of those at its brick-and-mortar stores. As a result, it plans to slow the pace of new store openings and shift some of its capital expenditure to its online business.

Kohl's said it would earn $4.75 per share in fiscal 2012, below the $4.95 that Wall Street analysts were projecting. It

Kohl's forecast gross margin would fall 1.6 percentage points in the current quarter compared with a year ago

Kohl's shares were down 5.8 percent to $49.17 in afternoon trading, while Dillard's were up 9.2 percent. Target shares were up 2.4 percent.

ON TARGET

Target got some relief from the growing popularity of its debit and credit cards that give shoppers a 5 percent discount. And after a tough holiday season, the discounter said sales trends are returning to normal. It expects same-store sales to be up 3 percent this year.

The trendy discounter was largely able to contain the damage to its gross margin, which edged down 0.3 percentage point to 28.4 percent of sales, helped by more sales rung up through its credit and debit card rewards. The erosion to gross margin was more moderate than what analysts expected.

Customers continued to respond to Target's credit and debit cards. Target said 10.8 percent of sales were made using those cards, compared with 7.4 percent a year earlier, and it expects that percentage to rise again this year.

"We expect U.S. momentum to improve following a disappointing holiday season," said Bernstein Research analyst Colin McGranahan, noting that Target shares were undervalued.

Target expects to earn between $4.05 and $4.25 per share this year, compared with analyst expectations of $4.27. But without costs associated to its expansion into Canada, with the first stores there set to open next year, earnings would be 50 cents per share higher.

Target previously said fourth-quarter sales rose 3.3 percent to $20.94 billion. Sales at stores open at least a year, or same-store sales, rose 2.2 percent, down from a 2.4 percent rise during the year-earlier holiday season.

Separately, Dillard's Inc reported net income during the holiday quarter rose 29 percent to $141.5 million, helped in part by a gross margin from its retail operations edged up 0.3 points to 35.9 percent.

Dillard's saw its margins rise and same-store sales rise 3 percent.

(Reporting by Phil Wahba in New York. Additional reporting by Jessica Wohl in Chicago)

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