By Eric Smith

Kohl’s Corp. rode a strong back-to-school performance and an advantageous partnership with Amazon to a second-quarter earnings and revenue beat. But costly promotions tempered the quarter while looming tariff increases sparked Kohl’s to lower profit margin expectations for the year.

Kohl’s on Tuesday reported adjusted diluted earnings per share of $1.55 for the quarter ended August 3, ahead of Wall Street’s consensus estimate of $1.53. Diluted earnings per share were $1.51.

And the company reported revenue of $4.4 billion, which was down 3.1 percent from the year-ago period but ahead of Wall Street’s estimates by $180 million. Comparable sales decreased 2.9 percent in the period due to unseasonably cool and wet weather from May to June that stunted demand for the company’s spring seasonal goods.

Highlights for the quarter include apparel sales comping positively for the combined June and July period in addition to an acceleration in digital sales growth, continued positive momentum in the company’s active division and sequential improvement in Kohl’s home business.

“We are off to a good start with the back-to-school season and are confident that our upcoming brand launches, program expansions, and increased traffic from the Amazon returns program will incrementally contribute to our performance during the balance of the year and beyond,” CEO Michelle Gass said on Tuesday’s earnings call with analysts.

The company also affirmed adjusted annual diluted earnings per share guidance of $5.15 to $5.45, but pressure on those earnings could sink profit margins 35 to 45 basis points, which is down from a previously projected decline of 20 to 30 basis points—primarily because of the impact of tariffs, Gass said.

Because of that, shares of Kohl’s fell $3.32, or 6.9 percent, to $44.88 at market close Tuesday.

But while Kohl’s expects some pressure from rising tariffs rise, Gass said the company has taken and continues to take, steps to mitigate them.

“We recognize there are uncertainties in the market given the impending tariff on apparel and footwear,” she said. “We will approach our path forward thoughtfully with a focus on doing what’s right, not only for our business but also what’s right for our customers over the long-term. We know that our customers are driven by our value proposition so we will ensure that our customers continue to receive the value they expect from Kohl’s. We have been executing against a sourcing diversification strategy for quite some time. And this year, our team has been working closely with our vendors to ensure that we are prepared for any potential tariff escalation.”

What does that look like? Gass pointed to reducing exposure to China for sourcing and production, working with vendors to ensure the most cost-effective sourcing and continuing to monitor pricing. Mitigation will take a unified front from Kohl’s and all its channel partners.

“I’d say our partners—our vendors—have really stepped up and everybody has been very well prepared to take this on,” she said. “And I’d say we’re all aligned to make sure that we can do whatever we can to protect the customer and our market share. While clearly this is still a fluid situation, I feel really good. First and foremost, we are ensuring that we can be competitive through the balance of the year and beyond.”

Click here for more about Kohl’s second-quarter earnings report.

Tariffs somewhat took a toll on the company’s margins in Q2, which fell 72 basis points to 38.8 percent. But the real culprits were increased shipping costs and more promotions, the latter of which was intended to “defend market share,” the company said.

“Margins contracted more than we expected, driven by a higher penetration of digital sales, resulting in increased cost of shipping, as well as from pricing and promotional adjustments implemented during the period,” said CFO Bruce Besanko.

The company affirmed its adjusted annual earnings per diluted share guidance of $5.15 to $5.45, which excludes 26 cents per diluted share related to impairments, store closing and other costs recognized in the first six months of 2019.

As Kohl’s looks ahead to the remainder of the year and beyond, it is counting on the expanded Amazon Returns program, which SGB outlined last quarter, to bolster the company as headwinds swirl.

After piloting the program in the Los Angeles, CA, Chicago, IL, and Milwaukee, WI, markets, Kohl’s and Amazon in July started rolling it out to all of Kohl’s 1,150-plus locations across 48 states. Kohl’s will accept eligible Amazon items, without a box or label, and return them for customers for free, providing additional service and convenience to Amazon customers.

In May, Gass called the program “the single biggest initiative of the year.” Fast forward to Tuesday and Kohl’s is seeing a “mixture of existing customers and new younger customers using the service,” she said.

“We began supporting the program in mid-July with a robust marketing plan, including print, digital, and national broadcast TV,” she said. “We’re focused on optimizing sales and driving conversion to ensure that we fully capitalize on the traffic coming into our stores. To date, we’re seeing conversion consistent with our pilot stores, and are particularly encouraged with how our customers are engaging with our proprietary brands. So, while it’s early, we’re pleased with the initial results and remain confident in our ability to drive the intended benefit of this program over the long-term. It’s important to note that we expect the Amazon returns program to have a positive contribution to operating income in 2019.”

But while the program increases traffic in Kohl’s stores, it also creates a bump in expenses—”increased payroll in the store to manage the returns, and reverse logistics costs,” Besanko said. “In the second quarter, we obviously saw some of those costs incurred, and then, we also had some additional one-time expenses for training the store associates and so on. So, we do have our costs embedded for Amazon in the back half and that’s included in our SG&A outlook.”

Despite the increase in SG&A, Kohl’s remains bullish on the program, especially as the tariff increases approach.

“It is a very significant initiative of ours and a great example of our innovative spirit,” Gass said. “Our unique partnership with Amazon leverages our collective strength. Our strong nationwide off-mile store footprint and best-in-class omnichannel capabilities and Amazon’s expensive customer reach and world-class digital capabilities.”

Photo courtesy Kohl’s Corp.