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Markdowns and Impairment Charges Hit Kohl’s 1Q16 Margins

Sharon Bailey

What Caused a 51% Drop in Kohl’s 1Q16 Earnings?

(Continued from Prior Part)

Gross margin in 1Q16

Kohl’s (KSS) gross margin in 1Q16 ended April 30, 2016, fell by about 140 basis points to 35.5% on a year-over-year basis. This significant decline in Kohl’s 1Q16 gross margin was primarily caused by clearance markdowns taken by the company to clear excess merchandise.

Operating margin contracts in 1Q16

Kohl’s operating margin in 1Q16 fell to 2.7% compared to 6.8% in 1Q15. Though selling, general, and administrative (or SG&A) expenses declined on a dollar basis, they were up when measured as a percentage of sales. This was because of higher store payroll costs, marketing expenses, and information technology (or IT) expenses as a percentage of sales.

Operating margin in 1Q16 was also hit by $64 million of charges related to the planned store closures and corporate restructuring. These charges included $53 million of impairment charges associated with the 18 stores that the company plans to close later this year and charges of $11 million associated with the termination benefits for employees impacted by the store closures and restructuring.

Kohl’s operating margin in 1Q16 was also impacted by higher depreciation and amortization, primarily due to higher IT amortization. The iShares Russell Mid-Cap ETF (IWR) has 0.1% exposure to Kohl’s.

Margins of peers

Macy’s  (M)  operating margin fell to 4.8% in 1Q16 from 6.6% in 1Q15 due to growth investments and non-cash settlement charges related to the company’s defined benefit retirement plans. Nordstrom’s (JWN) operating margin declined to 3.3% in 1Q16 from 7.6% in 1Q15 due to lower gross profit, higher credit chargebacks, severance charges, and increased fulfillment and technology costs related to the company’s growth initiatives. The 1Q16 operating margin of Dillard’s (DDS) declined to 8.8% from 11.3% in 1Q15. This decline was caused by higher markdowns and insurance expenses.

We will discuss the impact of Kohl’s 1Q16 results on its valuation in the concluding part of this series.

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