Kohl’s Corp., already well into its rollout of Sephora shops and buildup of casual and activewear, has a new “suite” of initiatives to further the growth agenda and convince investors that it’s on a profitable path.
The $19.4 billion retailer, evolving from “a department store to a more focused lifestyle concept,” intends to roll out 100 smaller, localized stores over the next four years thereby adding about $500 million in sales.
It’s also taking steps to “reignite” its women’s business including dipping its toes into premium denim to see how customers respond and beefing up dresses, outerwear, swim and inclusive size offerings.
And Kohl’s has a clear sense of exactly what Sephora should mean to the business — $2 billion in sales by 2025, after it’s been operating awhile inside 850 Kohl’s locations. But executives don’t see any actual cap on the potential. The $2 billion includes Sephora sales generated at Kohl’s stores and on kohls.com.
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These and other growth targets and initiatives were spelled out during Kohl’s Investor Day meeting held virtually on Monday morning.
The retailer has been under pressure from activist investors to increase shareholder value, and consider selling the company, monetizing its real estate, or separating its dot-com and brick-and-mortar store businesses into separate companies. Kohl’s has rejected those ideas and at least two unsolicited takeover bids, but has been working with advisers and Goldman Sachs to engage with possible future unsolicited offers. In addition, Kohl’s set up a poison pill, called a limited-duration shareholder rights plan, to discourage takeover bids.
“We have positioned this business with a new suite of initiatives that were never in our playbook before,” Michelle Gass, Kohl’s chief executive officer, said in an interview with WWD right after the investor meeting. “We have a really strong growth plan.”
Gass told WWD that the company has been experimenting with a smaller store format — 35,000 square feet — and is prepared to launch the first prototype in Seattle in the fall. Most noticeable will be an intensified assortment of outerwear that’s localized and tailored to the Seattle climate and customer base.
“There’s a level of flexibility and hyper localization” to the prototype strategy, Gass explained.
In the South, Gass said, Kohl’s would open small-sized formats containing more swimwear, sandals and lighter-weight apparel than its traditional full-size stores. The smaller formats are seen opening around the country and providing the company with greater real estate flexibility and the opportunity to enter markets that couldn’t support full-size Kohl’s stores, which average 80,000 square feet.
“We have restructured the business for profitability and our results show it. We delivered record earnings per share [$7.33 in 2021] and record operating margin,” of 8.6 percent, Gass said.
Gass on Monday reiterated her familiar message that Sephora is “a game-changer” and during the conference, Sephora was cited as generating $2.2 million to $2.4 million in sales per Kohl’s store. Executives also said that 25 percent of those shopping Sephora at Kohl’s are new to the store and many decide to shop other categories at the store. Sephora is currently in about 200 Kohl’s doors, will be in another 400 by the end of this year, and 850 by the end of 2023.
In the interview, Gass discussed how Kohl’s is updating its store fleet with “refreshes” that have been inspired by the addition of Sephora to the sales floor. The refreshes involve repositioning activewear to the front near Sephora, changing the flow of adjacencies, brightening the interior, and reducing inventory which she said is good for profitability and shopability. “We feel like it’s a new, modernized Kohl’s that is still true to its core DNA.”
With premium denim, Kohl’s will launch Buffalo Jeans and an exclusive offering from Levi’s Silvertab label later this year. Gass called them “capsule collections.” Kohl’s is also in talks with other premium denim brands.
“We feel good about our brand portfolio. That being said, we are constantly reaching out for unique partnerships,” Gass said.
On other news emanating from the investor meeting, Kohl’s disclosed:
- For spring, dress destinations are being added increasing the category’s footprint by 75 percent. Nine West, Lauren Conrad, Simply Vera Vera Wang, Sonoma, Draper James are key brands.
- A new private label called In Tempo will launch later this year to attract younger and diverse audiences.
- Kohl’s is experimenting with a marketplace format online and partnered with Mirakl, a tech firm that engineers online marketplaces.
- Swimwear shops are being maintained year-round for the first time.
- With the Kohl’s Media Network, “We are rapidly scaling this business,” said Greg Revelle, chief marketing officer. It could lead to a couple of 100 million dollars in ad sales in a couple of years, Revelle said.
- Self-serve returns are being piloted in over 100 stores. Self-checkouts will be tested later this year.
- Investing in a new data platform and utilizing more data science for better, more granular buying decisions and enhancing personalization.
“Make no mistake, this is a transformation, it is complete reinvention of our business model and our brand,” Gass told investors. “We are evolving our position from a department store to a more focused lifestyle concept, centered around the active and casual lifestyle. This is unique and we can own this space.”
She said Amazon is bringing in millions of new customers. Kohl’s accepts returns of Amazon orders at all of its stores.
For 2022, Kohl’s expects net sales to increase 2 percent to 3 percent; operating margin in the range of 7.2 percent to 7.5 percent, and EPS in the range of $7 to $7.50, excluding any non-recurring charges. Kohl’s executives also forecast kohls.com eventually growing to $8 billion in sales, from the current $6 billion.
Kohl’s has set a capital expenditures budget of about $850 million, including expansion of its Sephora partnership involving rolling out Sephora shops inside Kohl’s stores, and store refresh activity.
Regarding initiatives, “We will accelerate growth in active and in beauty through our partnership in Sephora,” said Doug Howe, chief merchandising officer, during the meeting. “We will build our outdoor and inclusive sizing businesses. We are reigniting women’s and will maintain strength in home, men’s and kids. This unique combination of businesses is a key differentiator to fuel our growth.”
“Eighty-six percent of consumers regularly wear athleisure to work. Seven in 10 adults describe their wardrobe as casual,” said Gass. “As people return to the office, they are planning to dress more comfortably. While you may dress up a bit more than you would when you were taking a Zoom call from your home office, you may still want to wear sneakers to the office versus dress shoes, or a blazer made from stretch or performance fabric but still look great.”
Sales of activewear currently represent over 20 percent of total business, and surpassed $4 billion in sales in 2021. “It’s more productive and faster-turning than the company average,” according to Howe. Key active brands are Nike, Under Armour, Adidas, Champion and the private Tek Gear and FLX brands.
Kohl’s total women’s business generates about $5 billion in annual sales. “Admittedly, our performance [in women’s] has been inconsistent. It’s been disproportionately impacted by massive supply chain headwinds,” said Howe.
“Currently we are under-penetrated in dresses. Dresses ranks among our top search terms on our digital platform,” said Howe.
With outerwear, “For growth we are leaning into strength in Columbia, Lands’ End and Eddie Bauer,” said Howe.
Kohl’s for months has been under fire by certain activist investors, in particular Macellum Advisors, a long-term holder of nearly 5 percent of the outstanding common shares of the retailer. Macellum is seeking to control the board with its own slate of 10 proposed directors that is subject to shareholder approval. Engine Capital has also been putting pressure on Kohl’s.
Last Tuesday, the Menomonee Falls, Wisc.-based Kohl’s reported that its fourth-quarter net income — impacted by inventory shortages, slowed traffic due to Omicron and some tax implications — declined 13 percent but noted that its operating income, which eliminates the impact of the tax difference, was up 42 percent, and that for all of 2021, the company swung into profitability.
The company said it has been planning for continued disruption in supply chain which it sees as likely for another year, as well as the headwinds around increases in freight costs and wages, and costs associated with growing digital sales. The company is investing in higher-speed ocean transport, automation, moving volume out of L.A. and Long Beach ports to less congested ports, and reducing some fixed costs to mitigate the macro headwinds.
This year, Kohl’s celebrates 60 years in business. The company says it serves more than 65 million customers nationwide; has more than 100,000 employees, operates almost 1,200 stores and that 80 percent of Americans live within 15 miles of a Kohl’s.