KOHL’S CORP. HITS NEW YORK
BARNSTORMING THE MODERATE MARKET

Byline: David Moin

WEST PATERSON, N.J. — There’s nothing dazzling, mysterious or revolutionary about Kohl’s. Nevertheless, with its simple formula of catering to the masses with moderate national brands, and a relatively small annual volume of $4.5 billion, the Menomonee Falls, Wis., chain is reshaping the retail scene, sweeping into the metro area this week with 18 store openings and prowling for more real estate.
Its stock price has been holding up while the rest of retail droops to 52-week lows. On Wednesday, a day after Kohl’s reported a 28.2 percent increase in fourth-quarter earnings, the stock closed at 80, up 4 9/16.
Kohl’s officially opens 11 stores in New Jersey and seven on Long Island on Friday, and another 14 are slated in April in Connecticut and New York’s Dutchess, Rockland and Westchester Counties. One in Baltimore will also open then. They are all former Caldor locations, converted to Kohl’s at a cost of $5 million to $6 million per site.
With its bold expansion into the metro New York market, the chain may just be skimming the surface.
“Our whole thing is about taking market share,” stated Kevin Mansell, president, during an interview at one of the new Kohl’s units here. “In Chicago, which has a population of eight million, we have 35 stores, and we could have 40. New York has a population of 18 million-plus, so there is a lot of opportunity. There could be 70 or 80 stores.”
Kohl’s, or any other retailer, for that matter, is not about to edge out Federated Department Stores from its dominant department store stance in the metro area, attained through its huge downtown flagships and large suburban branches. Nor is Kohl’s likely to come up with another acquisition soon of the magnitude of the 32 Caldor sites, bought last year after Caldor went bankrupt.
Kohl’s is among the chains often rumored as interested in purchasing Mervyn’s sites, which are concentrated in California and owned by Target Corp. While Kohl’s has yet to enter California, store officials point out that Mervyn’s is largely situated in more expensive mall locations with bigger boxes, while Kohl’s is concentrated in strip and power centers, limiting its interest.
With its potent, narrow and deep assortment of well-known mass brands — about a quarter of which are discounted weekly — Kohl’s could eventually grab $600 million in annual sales through its 32 New York-New Jersey-Connecticut locations, according to some analysts.
Indeed, with the New York area beyond overstored, volume for any newcomer has got to come out of other retailers’ pockets. In the case of Kohl’s, most likely, Federated’s Stern’s division and J.C. Penney, Sears Roebuck, Kmart and Target will be affected. To a lesser extent, Macy’s, another Federated division, will feel the pinch, but most of Macy’s assortments are higher-priced and more fashionable.
Kohl’s, with its family-oriented, junior department store format featuring primarily soft goods, is hardly flashy in fashion. Yet it does what few other retailers really do — it keeps the consumer in mind with a presentation that’s among the cleanest and neatest of any in retail, and among the easiest to navigate.
“I find Kohl’s well-lit, clean, convenient and easy to shop,” said George Strachan, vice president of research at Goldman Sachs. “They sell very recognizable, popular middle-market national brands. They are constantly on sale, and they make very intensive use of circulars. There’s a tremendous value proposition. Department stores tend to take the middle-priced piece of the mix and put it in the back of store. Moderate is a second citizen. These guys [at Kohl’s] put moderate up front.”
“The execution, the way the stores are stocked, the way they look, the visual standpoint, is masterful because they’ve kept it simple,” said Robert Kerson, managing director of Korn Ferry’s global retail search practice. “The stores are very easy to shop. It’s visually clean. They are very user friendly, as opposed to the way Caldor was or Kmart. Sometimes these stores were in disarray. In every market that Kohl’s has moved into, they’re major players and continue to gain momentum.”
Some analysts suggest that with only half the U.S. covered, and some markets, such as Philadelphia and Washington, only recently penetrated, the 259-unit Kohl’s has enormous potential. In the mid-Nineties, analysts were estimating that Kohl’s could ultimately generate $15 billion to $20 billion. With Kohl’s getting more ambitious with its market entries, estimates are currently running as high as $30 billion in sales.
Sixty new stores are planned in 2000, and between 55 to 60 stores are planned for 2001. Last year, Kohl’s opened 46 stores and marched into the Denver, Dallas and St. Louis markets.
It’s a pure bricks-and-mortar operation, but that could change soon. Plans to sell on the Internet are in the works, but officials won’t specify when e-commerce will be up and running.
“We believe our formula for brands, value and convenience would be a pretty good play online,” Mansell said. “We’re not there yet, but when we get there, there will be a lot of consumer friendliness.”
As there is in the stores.
Kohl’s units average 87,000 square feet, though the West Paterson store has 110,000 square feet. Aside from that, West Paterson closely resembles other units of Kohl’s, which maintains a focused, cookie-cutter program for growth.
“Our focus is narrower, and the execution piece is simpler, but it has to be or else you are not going to be a big company,” Mansell said.
The stores have very wide aisles, particularly at the entrance; the one in West Paterson is 20 feet wide. The main aisle that runs through the store like a racetrack is 8 feet wide. For Friday’s grand opening, the West Paterson store was generously stocked with merchandise and heavily rigged with small sale signs promoting 10 to 30 percent off merchandise. At Kohl’s, it’s easy to see clear across the store from almost any spot, and with 16 checkout lanes and brands clearly signed, shopping is fast and easy.
Fast and easy, perhaps, but not necessarily an exhilarating experience. Among apparel markets, the moderate side has been the most stagnant. There’s been far more news and fashion coming out of other categories, but that doesn’t seem to faze Mansell: “The reality is, most of America shops in the moderate price points that we sell. It doesn’t matter if they live in the tri-state area or the middle of Missouri.”
The chain was founded in 1961 by Max Kohl, originally as a supermarket. Six years later, apparel was added and Kohl’s soon vacated the supermarket business. In 1973, the former Batus Retail bought the chain, and more than a decade after that, management took it private through a leveraged buyout, one of the few in retailing that survived and thrived, quickly getting aggressive in acquisitions.
Although Kohl’s has been successful with expansion throughout the Midwest and mid-Atlantic states, success in the New York metro area is not a given. New York is among the most competitive markets, along with Chicago and Los Angeles, and Kohl’s is a virtual unknown here. The company has been advertising heavily, broadcasting its grand openings as far back as millennium weekend, when ads ran on the jumbotron in Times Square. On Jan. 17, Kohl’s started broadcasting on network television and has also been advertising heavily on radio, which puts pressure on earnings.
At such locations as West Paterson, “the awareness factor is critical,” Mansell said. “This is not a location where people expect to find a department store. That [advertising] buildup is really critical.” He declined to specify how much the company was spending on ads.
Even before Kohl’s gets into full swing in the area, it continues to eye real estate for potential stores. Another acquisition the size of the Caldor purchase probably won’t happen soon, but Kohl’s constantly eyes occupancy opportunities. New York City is largely out of bounds due to space requirements, including large parking lots; high building costs, and prohibitive rents that would throw off Kohl’s low-cost operating structure. “We won’t be in Manhattan,” Mansell said. “Our concept probably wouldn’t play very well there. We had an opportunity in Queens, but we passed on it. I don’t see us opening in the city, though Staten Island is a possibility.”
For the first year in the metro area, Kohl’s is seeking to generate volumes of around 80 percent of more mature Kohl’s stores, which average $19 million in sales. “We need to do the kind of volumes we do in other metro areas and we’d be happy. But I think there is a lot of upside potential” in New York, Mansell said.
Outside the New York area, the potential for expansion is huge, particularly considering Kohl’s has not even entered Florida or California, two of the nation’s most populated and retail-saturated markets. The chain plans to enter Atlanta in 2001. Kohl’s either builds stores from scratch or sweeps into communities through acquisitions. In addition to buying the Caldor sites, Kohl’s has purchased sites from other chains that went out of business, including the Main Street and Gold Circle chains, both formerly operated by Federated.
“It’s one of the few retailers Wall Street likes,” observed Isaac Lagnado, president of Tactical Retail Solutions. “The price-earnings ratio has been 1.5 to 2 times that of the industry, and even higher than Wal-Mart’s, and higher than Target’s and many, many times higher than Kmart and J.C. Penney.” Lagnado also credited Kohl’s with a strong private label program, which represents about 20 percent of the overall volume. The most extensive private brand is under the Sonoma label, which cuts across all categories. In its quarterly report, the company said women’s apparel overall had been vibrant for the past 2 1/2 years. Fueling the gains have been Villager, an exclusive brand made by Liz Claiborne, and Sag Harbor, as well as an intensified focus on key items, helping to drive the misses area. Bath and body products, introduced last year, are spurring sales among younger customers, particularly teenagers. About 20 percent of Kohl’s inventory is in home products, including tableware, candles, pillows, bedding, luggage, towels, cards and some outdoor furniture. The chain also carries accessories and shoes.
“Kohl’s brings almost an Old Navy sort of feel, as opposed to Wal-Mart, which has just never done particularly well in fashion,” Lagnado added. “The challenge for Kohl’s is obtaining critical mass.”
While Kohl’s has been “carefully managed through aggressive growth,” Lagnado said, “the company is dwarfed by Wal-Mart and Kmart. You really do need something approaching a $10 billion sales base in order to continue to compete effectively in that industry; you just need that kind of scale. Kohl’s has been able to grow at a rate of 20 to 25 percent, both in revenue and profit, almost 30 percent on a five-year basis, but you cannot keep up that kind of growth rate without an expanded base.”
Despite its smaller size, Kohl’s has been able to buy most of the brands it wants, and has deep presentations in Sag Harbor, Lee, Levi’s, Dockers, Nike, Champion, Carter’s, Bugle Boy, Haggar, Jockey, Villager, Maidenform and Norton McNaughton. For spring, the store added Columbia Sportswear and Arrow.
So how does a mid-size company land a lot of the labels that other chains covet? “It’s a simple equation,” replied Mansell. “From the perspective of a manufacturer, it’s very important that you go with the department stores that are growing.”

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