With possibly the most challenging holiday selling season fast approaching, the retail sector is beginning to feel the pinch from consumers.  Yesterday after the close of a crazy session, the Wisconsin-based retailer reported a 17-percent decline in net income from a year ago.  They did, however, beat analysts earnings estimates by a cent… coming in at 52 cents per diluted share, a 15-percent drop from the same quarter last year.  Shares were down for most of the day touching below $27 for only the second time in the last 10 years, before President Bush’s speech sent markets into a frenzied rally with Kohl’s (KSS: 30.04, -0.53 (-1.73%)) gaining over 5 percent at the close.

Numbers Are Hurting

A week ago, retail sales reports were released for the month of October, and no one was expecting such awful news after an already dismal report for September.  The International Council of Shopping (ICSC) reported that sales for the month of October were the worst they had seen for that month in over 35 years, with 56% of retailers polled missing already-low estimates.  Among them was Kohl’s, with same store sales down 9 percent, Gap (GPS: 11.77, -0.53 (-4.31%)) down 16-percent, JC Penney (JCP: 17.76, -1.52 (-7.88%)) down 13-percent, and Target (TGT: 34.47, -0.86 (-2.43%)) down 4.8-percent.  As the majority of stores missed, one bright spot was Wal-Mart (WMT: 53.87, -1.06 (-1.93%)), who actually grew same store sales at 2.4-percent and beat analysts expectations of 1.6-percent growth. With two-thirds of the economy supported by consumer spending, further news pointing towards fewer sales could spell more trouble for the economy in the next six months.  These numbers set the stage for Kohl’s same store sales declining almost 7 percent over the third quarter in 2008 with net sales down .6 percent to $3.8 billion.

Guidance Not Good

On the heels of the steep drop in sales, there is now a concern that this holiday season will not stop the blood-letting of the retail industry.  Kohl’s provided forward looking guidance for the fourth quarter, including further declines in same store sales of 8 to 12 percent and slashed their earnings range to $.90-$1.05 from $1.26-$1.34.  They also cut full year guidance from $3.02-$3.18 per diluted share to $2.69-$2.84 per diluted share.

Still, after successfully opening 75 new stores in the last nine months, they have plans on opening 50 more stores next year in hopes of grabbing more of the market and expanding their reach in their niche markets.

“We remain conservative in our sales expectations for the fourth quarter and will manage our business accordingly. We expect the holiday season to be the most challenging in years and will be very competitive in order to gain market share.”
- President and CEO Kevin Mansell

Don’t Expect a Holiday Recovery

As the October retail sales numbers highlighted, things are getting worse for the consumer and are not going to rebound anytime soon.  The ICSC cut its outlook for November and December sales from an earlier projection of a 1.7 percent increase to only a 1 percent.  Sure, this means growth… but with some stores counting on 50 percent of their yearly sales coming from the Thanksgiving to New Years holiday season, profits will continue to slide as U.S. consumer’s decide to sleep in on Black Friday and skip the early-bird specials. The retail industry has been hurting in 2008, and investors can really only wait and see what unfolds over the next few months.

- Chris Barrella

Disclosure: none