Should We Believe Kohl's Excuse for Missing Earnings Estimates?

Kohl's blames shifting calendars for its poor second quarter performance, but that doesn't seem to be the case. Photo: Mike Mozart.

Kohl's surprised analysts earlier this month when its second quarter sales and profits came in below expectations, but tried to calm jitters by saying it was more of a timing issue than anything else as the back-to-school season this year shifted from July to August.

The retailer said that while its average unit retail -- or the average price it was able to sell something at -- rose 2.3%, the number of items sold in eachtransaction, as well as the number oftransactions per store, fell about 1% each because state tax-free holidays also shifted to a later month.

That caused net sales to barely inch higher, rising just 0.6% to $4.27 billion, while net income fell 44% to $130 million. While lower spending on clothes and accessories has hurt and consumers in general have cut back on spending as the economic miasma has lingered, Kohl's said its full-year earnings will now come in at the low end of its prior guidance.

The retailer's stock has fallen some 16% in the weeks since it reported earnings, and investors should brace themselves for further declines -- because the "soft back-to-school season based on shifts in tax-free holidays" story doesn't seem to hold up under scrutiny.

Take a holidayAccording to the Federation of Tax Administrators, an organization serving state tax authorities, some 18 states hold tax-free holidays for school supplies in the weeks leading up to the September school bell (some also have themfor emergency preparedness and energy efficient appliances, but they occurat different times of the year). The first such holiday occurred in Florida in 2007, and other states soon jumped on board to help energize lacklusterretail sales. They typically run three days in length, but Florida has a full 10 days of tax-free shopping.

As Kohl's noted, the state holidays this year occurred primarily in early August, but that's where the retailer's excuse falls apart. When you look at the FTA's tax holiday calendar for 2014, almost all the states held them around the same time, with only Mississippi holding it in late July --and it's the same thing when you look at 2013 and 2012, too.

The most wonderful time of the yearAnd is back-to-school starting later this year? Well, last year Kohl's said the end of July was when the back-to-school season kicked off, and it doesn't appear to be any different this time around.

It's not so easy for Staples to ring up sales anymore, but it still counts on the back-to-school season to energize the back half of its fiscal year. Photo: Steven Depolo.

Oneretailer that counts onback-to-school sales as much as Kohl's is office supplies retailer Staples , which says its business is somewhat seasonal, with the back-to-school season occurring in the third quarter and the "back-to-business" season starting in January, or its fiscal fourth quarter.

Rubber band manStapleskicked off its back-to-school promotions for the period in late July to early August, the 29th such event for the retailer. When it reported its second quarter results recently, it said sales were going according to plan and it was actually looking forward to the the bulk of the sales season ahead of it.

In reality, it's not so much a calendar shift that's causing Kohl's back-to-school season to appear later, but rather consumer shopping patterns that are shifting. Consumers no longer have to rely upon waiting forstores to offerdeals, and can instead buy supplies on the Internet whenever they choose.

According to a survey conducted by consulting firm Deloitte, online shopping is now the second most popular way to buy school supplies for parents of K-12 kids (and the third most popular for those with college-aged kids). But more ominously for retailers like Kohl's, because consumers are picking up supplies throughout the year or are reusing supplies from the previous year, back-to-school spending will remain virtually unchanged from the year ago period with an average spend of $375.

Exercising due cautionWhile the National Retail Federation pegs the total average amount spent at a higher level than does Deloitte at more than $630 (though that includes electronics, clothes, and supplies), that's actually down 6% from the year ago season when consumers spent almost $75 million. The trade group also said that online shopping is going to play a larger role in spending decisions this year, with almost 36% saying they'll be going to the web for supplies.

So the back-to-school season isn't actually starting later for retailers, it's just that parents are stocking up online earlier, andwhatever leftover spending they still need to do for school will occur later.

Parents are using different channels to make their purchases, and for a retail sector already in the doldrums, that could be an even bigger problem, one that can't be glossed over with shifting tax holidays and later starts to sales.

The article Should We Believe Kohl's Excuse for Missing Earnings Estimates? originally appeared on

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