By Savyata Mishra

(Reuters) -Kohl's on Tuesday forecast annual sales and profit largely below market expectations, joining department store retailers such as Macy's and Nordstrom to warn of muted growth this year.

Shares of Kohl's, which gained about 14% in 2023, fell 1% before the bell even as it posted a smaller-than-expected drop in fourth-quarter sales.

The retailer's results round up a tough year for American department store chains, which have struggled to maintain growth amid limited consumer spending on non-essential items.

Kohl's, which is more exposed to lower- to middle-income customers compared to rivals like Macy's and Nordstrom, saw its sales decline for eight quarters in a row.

"While Kohl's beat bottom-line expectations by managing inventory down and boosting its margins, it has plenty more work to do as its top-line results fell short," said Zak Stambor, senior analyst at Insider Intelligence.

Inventory declined 10% in the fourth quarter, helping a 937 basis points jump in gross margin.

It forecast annual earnings per share in the range of $2.10 to $2.70, the mid-point of which was below analysts' average estimate of $2.61, according to LSEG data.

Kohl's expects to spend about $500 million to expand its partnership with LVMH-owned beauty brand Sephora and other store-related investments.

The company also warned of an impact from a new credit card late fee ruling in the second half and forecast net sales between a 1% decline and 1% increase, compared to estimates of 0.4% drop.

Despite weaker demand, CEO Tom Kingsbury's bet on fresher styles, leaner inventories, shift to monthly discounts instead of seasonal, and more Sephora shops helped the company drive traffic during the holiday season.

The U.S. department store retailer posted net sales decline of 1.1% of $5.71 billion in the quarter, compared to expectation of a 1.3% drop to $5.70 billion.

Earnings per share came in at $1.67, above estimates of $1.28.

(Reporting by Savyata Mishra in Bengaluru; Editing by Arun Koyyur)