Kohl’s Corp. is the retailer aiming to rejigger its brick-and-mortar portfolio.
The Menomonee Falls, Wisc.-based company said Thursday that it plans to close 18 of its 1,162 stores, becoming the latest firm seeking to adapt to the growing shift by consumers to online and mobile shopping. The department store retailer revealed digital sales leaped 30 percent.
While not a significant number of stores out of its overall portfolio, the closures will have a financial impact.
“The closures are expected to generate annual selling, general and administrative expense savings of approximately $45 million and annual depreciation sales savings of approximately $10 million,” said chief executive officer Kevin Mansell. “As a result of the store closures and the organizational realignment, we expect to incur approximately $150 million to $170 million in charges that will be recognized in the first and second quarters of 2016.”
Kohl’s is also planning a new, smaller-store format that it is testing with seven new locations. The stores are about 35,000 square feet. In addition, it is expanding into the outlet space, planning to open 12 Fila outlet units.
Even as the company missed its earnings and sales estimates, the store closures and other plans boosted the retailer’s shares, which rose 2.2 percent to close at $46.67.
The department store retailer tried to focus on the positive, but diluted earnings per share in the fourth quarter of $1.58 were far short of the FactSet estimate of $1.75 and lower than last year’s $1.83. Net income was $296 million, also lower than last year’s $369 million.
Sales for the fourth quarter were $6.38 billion, which was lower than the FactSet estimate of $6.42 billion, but an increase over last year’s $6.33 billion. Comparable-store sales increased 0.4 percent for the quarter, but again that was lower than last year’s increase of 3.7 percent. Kohl’s, like other retailers, suffered from the warm winter, but the average transaction value increased during the holiday.
The increased promotional environment led to a drop of 80 basis points in gross margin for the fourth quarter. Too many markdowns in the holiday and higher shipping costs for online orders were to blame. Kohl’s originally guided gross margins for the full year to be flat to up 20 basis points; instead they dropped 27 basis points for the year.
The growth of its digital business also impacted the bottom line, with an increase in shipping costs. Kohl’s is building another distribution center for its online business and is trying to make its digital business more efficient. The company initially built its e-commerce team separately from its physical store team, but the business got big quickly and the retailer decided it was best to combine them.
Looking ahead, Kohl’s expects earnings per diluted share in the range of $4.05 to $4.25, which is lower than the Capital IQ estimate of $4.23. Kohl’s stock is higher by 3 percent to $47.05 in early trading. The company also increased its dividend by 11 percent to 50 cents and plans on buying back $600 million in share buybacks.
Paul Lejuez, a Citigroup analyst, believes that while the guidance is not bad, it may prove to be optimistic. He wrote, “The company has missed its initial guidance in three of the past four years. Kohl’s enters 2016 with high inventory in what has been a highly promotional and competitive retail sector.”
Oliver Chen, an analyst at Cowen & Co., raised his EPS estimate from $4.04 to $4.15 and raised the price target from $45 to $47. Chen is sticking with his market perform rating. He likes what the company is doing and believes the strategies are sound, but he’s waiting on the sidelines for now.