Kohl's 10% Yield Comes Into High Fashion Kohl's 10% dividend comes into high fashion following a better-than-expected report, margin improvement, debt reduction and a commitment to paying distribution.

There are many reasons to have been bearish on Kohl's (NYSE: KSS) Q1 outlook, but the company has proven naysayers wrong. The company's Q1 report has many things to like, but the #1 is a commitment to the dividend. The dividend is worth 10% annually (or was worth 10% now that shares are spiking) and offers investors a lot of return. The company isn't out of the weeds yet but is progressing toward its goals, which will drive value. The news has short-sellers covering their positions; now, the question is whether the stock can continue higher or remain range-bound at current levels. Either way, investors will get paid to own it.

"Remains committed to strengthening the balance sheet and to maintaining current dividend," said Kohl's in the Q1 press release. Among the signs the company can continue to pay the yield is the solid Q1 performance and the reduction in debt that it allowed. The company retired $164 million in debt and is on track to retire another $111 by the end of the year, which has and will free up cash flow.

The analysts' activity in Kohl's has been mixed this year, but you have to assume the group is rethinking its outlook. There aren't any new revisions yet, but they are coming. Until then, the sentiment and price target have been trending lower, but 13 analysts still average at Hold, which is telling. Institutions also own about 95% of the stock and have been buying for two consecutive quarters, which suggests a firm bottom could be in play.

Kohl's Gives The Market Everything It Wanted

Kohl's didn't have a perfect quarter, with revenue falling 4% to $3.57 compared to last year, but it gave the market everything it could want. The revenue beat the consensus estimate by 600 basis points and is compounded by a wider gross margin and lower SG&A expense. The revenue is driven by a 3.3% decline in net sales and a 4.3% decline in comps driven by shifting consumer trends.

The key points are that sales remain solid despite an increasingly promotional environment, and margins are widening. The gross margin widened by 67 bps while the SG&A expense declined by 420. The combined effect is that operating income and GAAP earnings increased YOY to counter the top-line weakness. Operating income increased by 55 bps, and GAAP EPS of $0.13 beat by $0.54, negating an expected loss.

The full-year guidance is also solid but overshadowed by the fact that Q1 was so strong. The guidance was reiterated at the previous level, which is above the consensus estimate but suggests Q2, Q3, and Q4 will be weaker than expected. The opportunity is that Kohl's execution and position will allow outperformance, catalyzing higher share prices. Until then, the company expects revenue to fall 2% to 4% and for EPS of $2.10 to $2.72 ($2.41 mid-point) compared to the consensus of $2.32.

Kohl's Dividend, Not Without Risks

Kohl's dividend is not without risks. The company cash flow was negative for the quarter, but the balance sheet is rapidly improving, and FY EPS will at least cover the distribution. This means another year of double-digit returns for investors.

The chart is favorable, but the 20% short interest drives the action. Even if the shorts continue to cover their positions and this turns into a sustained short-covering rally, there will be a correction. If not, the stock will likely pull back from the post-release highs and provide a better opportunity to get in.