Kohl's Holiday Gifting Truck
The Kohl's Holiday Gifting Truck event at Gansevoort Plaza on December 5, 2015 in New York City.  Photograph by Brad Barket—WireImage

Here’s Why Kohl’s Shares Are Going Through the Roof

Nov 10, 2016

Kohl's (kss) shares rose 8% on Thursday in pre-market trading after the department store chain reported a better-than-expected profit that was helped by improved inventory management.

The retailer, whose no-frills stores are a mainstay for suburban parents on a budget, also alleviated concerns about shoppers' mindset at the start of the peak shopping season, coming on the heels of what CEO Kevin Mansell called a "strong" back-to-school season.

"We are encouraged by these trends as we enter the Holiday season. Our teams did an excellent job managing inventory," Mansell said in a statement.

The company's net income rose 21.7% to $146 million, or 83 cents per share, in the third quarter ended Oct. 29. Excluding items, Kohl's earned 80 cents per share, much better than the 70 cents per share analysts expected, according to Thomson Reuters I/B/E/S.

How did Kohl's pull that off? By ordering more cautiously and judiciously at a time its sales are still declining. That means less merchandise is likely to remain unsold at the end of the season, and ultimately heavily discounted. Though sales were hurt by warm weather in September and October, and likely delayed the purchase of winter clothing by many shoppers, Kohl's isn't flooded with inventory, which was down 10.1% at the end of the quarter.

That said, not all is perfect in Kohl's-land. For its entire prowess in cost cutting and gross profit boosting, its overall business is still hurting. Comparable sales, which eliminate the impact of weak stores that have recently closed, fell 1.7%, the third straight quarterly drop.

The Menomonee Falls, Wis.-based company's net sales fell 2.3% to $4.33 billion, a hair above the average analyst estimate of $4.32 billion. Kohl's also re-affirmed its full-year adjusted earnings forecast of $3.80-$4.00 per share, largely above the average estimate of $3.87 per share.

There is, however, one reason for Kohl's to feel optimistic on the eve of the holidays: as first reported by Fortune last week, it is about to start selling the Apple (apple) Watch at 400 stores, a move that will help it draw more affluent and different shoppers. It also recently launched a mobile payment app it expects will improve customer service and spur spending.

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