Kohl's swings to surprise loss as margins crumble on steep discounts

Kohl's Corp reported a surprise quarterly loss and forecast full-year profit well below analysts' estimates on Wednesday, as steep discounts to boost sluggish demand for apparel shredded the retailer's margins.

The department store operator's shares dropped nearly 7% in premarket trading and triggered a 2% fall in shares of rivals Macy's Inc and Nordstrom Inc ahead of their results on Thursday.

Surging costs of rent and food over the last year have forced customers to cut back on spending on non-essential products, pushing Kohl's and other retailers into steeper discounts and promotions to clear excess stocks of casual apparel.

Those discounts were the major contributor to a more than 10 percentage point decline in fourth-quarter gross margins to 23%, Kohl's said.

The company is especially hard hit as the lower-income customers it typically caters to are among the worst hit from surging prices.

Kohl's reported a loss of $2.49 per share for the fourth quarter ended Jan. 28, compared with estimates for a profit of 98 cents.

The results reflect "sales pressure driven by the ongoing persistent inflationary environment," newly appointed Chief Executive Officer Tom Kingsbury said in a statement.

The company expects fiscal 2023 earnings per share of $2.10 to $2.70, compared with analysts' estimates of $3.20, according to Refinitiv IBES data.

U.S. retailers including Walmart and Target Corp are taking a conservative approach to their expectations for 2023, as accelerating consumer prices amplify fears that the Federal Reserve could further lift borrowing costs to cool demand, likely tipping the economy into a recession.

Comparable sales at Kohl's fell 6.6% in the fourth quarter, compared with analysts' estimate of a 3.7% decrease.

Separately, apparel maker Abercrombie & Fitch also missed holiday quarter earnings estimates on Wednesday, hit by higher costs of cotton.