Quarterly declines at Kohl’s Corp. aren’t altering the course of strategic initiatives for the long term.
After on Thursday reporting a 63 percent drop in second-quarter income and an 8.5 percent decline in sales, Kohl’s indicated it’s ramping up its Sephora rollout to all 1,100 stores, boosting its gift assortment and dresses for holiday 2022, and continuing to revamp its stores to play up active and casual categories, in close proximity to Sephora.
“We are right-sizing our inventory to reflect a more modest sales plan, but we still have plenty of fresh receipts coming in. There will be a lot of newness” for holiday, Michelle Gass, the chief executive officer of Kohl’s, told WWD right after the company issued its mostly disappointing, though not surprising, results for the period ended June 30.
“The tailwind is that we didn’t have enough inventory last holiday. That won’t be the case this year.…This is an extraordinary environment. Between inflation and dampened consumer spending and the pressures on them considering what they are paying for food and gas, we’ve got to make sure we show up in a relevant and compelling way,” Gass said in an interview. “The macro headwinds are going to persist.”
Kohl’s lowered its forecast for the year, which along with the reported declines, pushed the price of the retailer’s shares down 5.8 percent, or $1.96, to $31.99 around midday.
Kohl’s net income declined to $143 million, from $382 million a year ago; comparable sales dropped 7.7 percent, and net sales were $3.86 billion versus $4.22 billion a year ago.
Gass said the Menomonee Falls, Wisconsin-based Kohl’s is reducing inventory by cutting receipts, promoting more and running clearances. The company said fourth-quarter inventories will be up 19 percent from 2019.
“In the near term, the balance of this year, we are assuming a more promotional environment than last because of the inventory level, and because consumers are looking for deals,” Gass added.
Some retailers and industry analysts are expecting all-time high levels of price promoting for the upcoming holiday season, due to consumers cutting back on discretionary spending, fears of a recession, excess inventories and higher prices. Gass couldn’t say whether it will be a record holiday season for promotions, though charged-up discounting across retailing would be an advantage for Kohl’s, which historically has been among the industry’s most aggressive and innovative with staging promotions. For the fourth quarter, Kohl’s has in its arsenal “new tools for how we price and promote,” Gass told WWD.
Category-wise, Kohl’s performance last quarter was mixed.
“We had some challenge in juniors,” Gass said, noting the category was disrupted because it was relocated to a different part of the store, as others were put more front and center. “The bigger issue was we had too much fashion, some too bold for our customer who was looking for more staples, things with greater versatility.” In addition, “typically our junior supply chain cycle time is really short. That’s been more difficult this year.”
Dresses, she said, have been selling well and it’s an area where Kohl’s has stepped up investments. Kohl’s has a new dress shop in its stores, with greater space.
Gass also said “elevated casual, more polished casual is doing well, with people getting out more.” She cited Nine West, Lauren Conrad and Simply Vera Vera Wang as top-performing labels. She also said Tommy Hilfiger is selling well and is being rolled out to additional doors.
The core active business didn’t perform as well, partly because it was lapping “big numbers” a year ago, Gass said. However, the athleisure and outdoors categories did well, including Columbia and Eddie Bauer. Under Armour outerwear is being introduced for fall. Home was also soft.
Gass pointed out more strength in sales of private brands, for the second quarter in a row, compared to national labels. Key private brands include Nine West, Simply Vera Vera Wang, Lauren Conrad and Sonoma. Private brands are generally cheaper and Kohl’s has more price flexibility in private brands, compared to national ones. In women’s, private brands account for 70 percent of sales. For the overall Kohl’s business, private brands account for 35 to 40 percent of the volume.
Officials later told WWD that Kohl’s is taking a closer look at monetizing real estate.
“We have done select sale leasebacks from time to time in the past and will consider them when they make sense for the business,” a spokeswoman told WWD. “We are currently going through a competitive process to determine potential opportunities to monetize a select portion of our real estate assets. On a broader level, we’re focused on opportunities that will enhance our financial flexibility and maintain our healthy balance sheet for the company.”
During a conference call with Wall Street analysts, Gass recapped how Sephora was doing so far inside the Kohl’s stores. “In the 200 stores opened last year, we have maintained a high-single-digit percent lift relative to the balance of the chain. And in the nearly 400 stores opened this year, we are seeing a midsingle-digit percent sales lift, which is consistent with the initial performance in the first 200 stores. As these Sephora openings follow the curve of last year’s openings, we would expect sales to accelerate in the months to come.”
The plan to install Sephora shops in 850 stores by 2023 has changed. As Gass said, “Given the success of the partnership we are seeing to date, we are working with Sephora to design a smaller footprint concept for our remaining 300 stores, creating a Sephora presence across our entire store base. We are in the early stages of this concept.”
Additionally, Kohl’s will begin to accept any Sephora gift card regardless of where customers bought it, and is testing Sephora online orders at Kohl’s stores. Top-selling brands at Sephora have been the Sephora Collection, Fenty, Charlotte Tilbury, Nars and Too Faced.
“We have acquired more than 1 million new customers since launching last August. The new customers are younger and more diverse and shop more frequently than our average customer,” Gass said.
During the last quarter, Gass said that Kohl’s middle-income customers were particularly impacted by high inflation. “We have adjusted our plans, implementing actions to reduce inventory and lower expenses to account for a softer demand outlook,” Gass added. “Kohl’s has navigated difficult periods in the past and I am confident in our ability to successfully manage through the current uncertainty.”
Kohl’s is now projecting sales for this year to decline in the range of 5 to 6 percent, compared to an earlier forecast of sales being flat to up 1 percent.
The operating margin is expected to be in the range of 4.2 to 4.5 percent, compared to the previous forecast of 7 to 7.2 percent.
Earnings per share are now expected to be in the range of $2.80 to $3.20, excluding any non-recurring charges, compared to the earlier forecast of $6.45 to $6.85.
For months, the company has been under pressure from activist shareholders to raise revenues and profits, and last month talks with The Franchise Group, which offered to buy Kohl’s, were called off.
Kohl’s isn’t alone in feeling the impact of low- and middle-income shoppers pulling back on spending due to inflation, recession fears and without the benefit of last year’s stimulus. On Wednesday, Target Corp. reported a 90 percent decline in earnings due to increased markdowns resulting from excess inventory. Walmart Inc., however, on Tuesday reported both income and revenue gains for its second quarter, citing a lift from stronger grocery sales and improved supply chain costs. Still, Walmart has canceled billions of dollars in orders, expecting headwinds in the second half.
“While 2022 has turned out to be more challenging than initially expected, Kohl’s remains a financially strong company with significant long-term growth potential,” Gass said.
Kohl’s also on Thursday unveiled an accelerated share repurchase agreement, pursuant to its previously announced share repurchase program, to buy back about $500 million in common stock. The program, Gass said, “underscores our steadfast confidence in Kohl’s future and focus on creating shareholder value. We also remain firmly committed to our current dividend.
“We continue to execute on our transformation strategy and are pleased to deliver outsized performance in the nearly 600 stores which have been refreshed and elevated, featuring Sephora as a key cornerstone,” Gass said.