Shoppers enter the Kohl's store in South Burlington, Vt., on . Kohl's Corp.'s fourth-quarter net income increased 14 percent as merchandise profit margins improved through exclusive brand offerings and tight inventory managementEarns Kohls, South Burlington, USA

Kohl’s Corp. posted fourth-quarter results that beat Wall Street’s expectations, but the best might be yet to come.

The retailer on Thursday said it is focused on store optimization, and that also means potentially adding “traffic driving retailers” to better utilize some of the extra space inside stores, said Kevin Mansell, chairman, chief executive officer and president, during a conference call to Wall Street analysts. It has condensed inventory to clear out space in about 300 of its 1,000 stores, and now it just needs to find sub-tenants to fill the vacated areas.

The company’s first pilot partnership is with discount grocery store Aldi, which will be in five to 10 locations this year, although Mansell told analysts that “the size of the opportunity in our eyes is the 500 stores that by the end of this year would have moved from a standard footprint to a small footprint.”

The chairman explained that smaller footprints have improved operational efficiency, noting that they also contribute to “phenomenal improved in customer engagement scores, which is driven by improved findability, ease of shopping, standards in housekeeping…” And he said the company’s store base are in strip centers or freestanding in areas that are highly sought after, the kinds of locations that growing companies want to continue to expand in to build their market base.

“In terms of where we see this going, I think we’re focused on traffic driving retailers with good strong balance sheets and outlooks. So certainly, the one that we’re doing the pilots with falls into that category. Generally, I think we would all say that the filters start at places like groceries, supermarket chains, just because they drive a lot of traffic, but it’s certainly not limited to that,” Mansell said.

As for what else might be potential pairings inside a Kohl’s, the chairman cited the fitness category as one possibility but emphasized that “there’s many others.” Mansell also emphasized that as for criteria, “its traffic drivers, strong brands, strong balance sheets where we know that we can coexist together for a long time.”

The retailer already has a partnership with Amazon in certain locations where consumers can facilitate returns at a Kohl’s store. There are also Amazon shops in select locations.

Mansell declined to elaborate on specifics connected with its Amazon partnership. He said, “Given that the pilot has now been running for only four months and most of that time was in the holiday season, we need more time to draw conclusions that could be applied more broadly. In fact, package-less returns, which is a key element of the overall return experience, has been in place only since late January.” He noted that the customer feedback has been “extremely positive,” and said there’s been an initial discussion with Amazon about “how and where we will expand the pilot” and that the company would share those details when they are finalized.

For the quarter ended Feb. 3, net income rose 85.7 percent to $468 million, or $2.81 a diluted share, on a net sales gain of 9.2 percent to $6.78 billion. Comparable store sales increased 6.3 percent. On an adjusted basis, earnings per share were $1.87. Wall Street was expecting income of $1.77 on sales of $6.74 billion.

Mansell said categories that outperformed in the quarter were footwear, men’s and home, although he noted that all categories including women’s apparel were “positive for the quarter.”

Matthew R. Boss, analyst at J.P. Morgan, said he sees incremental upside potential for fiscal 2018 driven in part by traffic partnerships, such as with Amazon.

 

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