Despite gains in consumer spending, U.S. mid-tier retailer Kohl’s (NYSE:KSS) just wasn’t able to make a good showing last holiday shopping season. Now that the company has just released first quarter earnings, let’s revisit this stock and see if its deep discounts have been able to attract better business.

Company Overview

Headquartered in Milwaukee, Wisconsin, Kohl’s  is the 20th largest retailer in the U.S. in terms of annual sales. With a 66 year history, Kohl’s is known for stocking brand-name clothing, furniture, jewelry and housewares for modest prices. The company employs 30,000 across 1,134 stores in 49 states.

Earnings Buzz

Kohl’s announced lackluster first-quarter operating results before the opening bell today. According to management, the price cuts designed to entice shoppers actually hurt its gross margin. Compared with the same quarter last year, net income declined 23% to $154 million, or 63 cents per share.

Nonetheless, analysts forecast earnings of 61 cents per share, so Kohl’s posted a 3% earnings surprise. Over the same period, net sales climbed 1.9% to $4.24 billion; this just missed the $4.25 billion consensus sales estimate. Although the first-quarter earnings announcement was pretty weak, company leadership is more optimistic about the next few quarters, in particular, back-to-school season.

Industry Breakdown

There are currently 35 companies in the Department Stores industry. Of those, Kohl’s is 12th largest in terms of market capitalization. The company also stands out in terms of its 2.5% annual dividend yield, which is fourth highest in the industry, and its long-term growth rate, which is fifth in the industry.

The company’s Price/Earnings to Growth ratio, earnings growth and return on equity fall in the top half of Department stores. Meanwhile, its sales growth weighs in at no. 19.

Kohl’s main competitors are Target (NYSE:TGT) as well as  THX Companies  (NYSE:TJX). Of these three chains, Kohl’s has the highest gross and operating margin but has the lowest sales growth.

Current Ratings

Before you buy any stock, you should always run it through my free Portfolio Grader ratings system. Over the past 10 months, this stock has remained at a hold. That’s because all down the line, this is a fundamentally lackluster company. Kohl’s is especially weak in terms of sales growth and its track record of beating analyst earnings surprises.

Additionally, there is plenty of room for improvement on the earnings growth and operating margin growth front. At the same time, Kohl’s is solid in terms of cash flow and return on equity. As the final nail in the coffin, buying pressure for this stock is mediocre.

Bottom Line: KSS is currently a C-rated hold, but after this weak earnings report it is possible that I may downgrade this stock over the weekend. If you hold shares of KSS, I recommend that you revisit my Portfolio Grader page this Monday to see if there have been any updates.

Recommendation: Hold

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