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Tickers in this Article: KSS, M, JCP, DDS, SHLD
Kohl's (NYSE: KSS) furnished the market with another high-quality quarter, but the market chose to ignore the positives and slammed the retailer's stock. Investors emphasized higher costs and lower guidance from the company while dismissing its strong operational results. Does the market have it right?

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Kohl's Income, Revenue Rise
Comparable same-store sales increased for the quarter by 4.6 percent, which led to net sales of $4.1 billion, compared to $3.8 billion in last year's same quarter. Net income rose to $260 million, or 84 cents a share, up from $229 million, or 75 cents a share in Q2 of last year. Gross margin edged up to 40.3% from 40%.

The six months' totals on Kohl's show similar results. Same-store sales are up 5.9 percent. Net income is $459 million, or $1.48 per diluted share, up 25 percent. Sales for the first six months are up 9.1 percent.

The Market's Issues
Investors and traders focused on the company's forecast for a decelerated pace of sales growth for the remainder of the year, projected to be at 2-4%. Also, Kohl's has cited projected costs in its credit card division, which may impact net income by as much as $40 million in the next six months. Thus, the company lowered its full-year profit forecast to $3.57 to $3.70 a share, where the Street had previously looked for $3.76. EPS for the Q3 was similarly scaled back to the 57 to 63 cent range, down from the 74 cents forecast. These projections, coupled with the Street's nervousness about the macroeconomy going forward, were enough to provoke selling in the stock.

Department Stores
Macy's (NYSE: M) recently hit a home run with its earnings report. Revenue, income and guidance were all up, as the revamping of Macy's looks to be paying off. J.C. Penney (NYSE: JCP), which has been clawing its way back, has a lower bar to aim for than Kohl's, as its earnings comparisons reflect a deep trough last year, its fiscal 2010. Dillard's (NYSE: DDS) has also been doing better after an awful 2009. Even Sears (Nasdaq: SHLD), more of a hybrid department store and discounter with its K Mart stores, has shown progress in the last couple of years. Yet all, along with Kohl's, still face the headwinds of a tough economy and beleaguered consumers whose commitment to spend on retail goods is as thin as their job security may be.

The company admitted its projections were conservative going forward. Despite the shortcomings in its quarterly report, Kohl's remains a long-term retail star. With its strong management and operational success, it has historically performed well on a sustained basis and should continue to do so, even with these temporarily lower expectations.

Kohl's Stock
The market has driven Kohl's stock to near a 52-week low, at $44.58 as of this writing. Kohl's is a great company that still has the opportunity to grow its business, even in this slow-growth or no-growth economy. We've written before what a value Kohl's is with its stock price driven down, so the market's overreaction to the earnings report makes it even a better bargain. The market has Kohl's wrong for the long term. (For related reading, see Analyzing Retail Stocks.)

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