KOHL’S UNCLUTTERED FORMULA KEEPS IT AHEAD OF THE CROWD
Byline: Thomas J. Ryan
NEW YORK — September marked yet another month when Kohl’s outclassed the competition, leaving Wall Street and Seventh Avenue marveling at the juggernaut and wondering how long it can last.
Kohl’s, which hit the Northeast running this year with a slew of openings, had 9.8 percent same-store gains in the month compared with increases of 0.7 percent at May Co., 2.9 percent at Federated Department Stores and 3 percent at Sears. Comps declined 6 percent at Dillard’s and 4 percent at J.C. Penney.
Analysts said the gains, driven by double-digit increases in the women’s and shoe categories and high single-digit gains in men’s, were impressive because most chains were still heavily promoting summer goods.
Kohl’s success remains a puzzle to many because the formula seems so similar to that of other department stores. But many said the simple strategy of focusing on a limited selection of moderately priced national brands and an easy shopping format of uncluttered racks, shopping carts and one-stop checkout is clicking with today’s time-strapped consumer.
“Kohl’s unique combination of prime real estate locations, conveniently centralized check-out and basic commodity apparel at sharp prices helps Kohl’s drive sales even in difficult retail environments,” said Shari Schwartzman Eberts, an analyst at J.P. Morgan.
“Women today do not want to go through the effort of shopping,” said Peter Boneparth, president and chief executive at Norton McNaughton.
Some said Kohl’s winning streak underscores the strength of the moderate market, with the Menomonee Falls, Wis.-based department store taking advantage of the lower tier, while other department stores are shifting to better-priced merchandise.
“Right now, that’s where the action seems to be,” said Dick Gilbert, president of Mudd Inc. “The moderate brands seem to have as much appeal as better at a much better price.”
Analysts agreed that it was clear that moderate firms have been outperforming better vendors, especially status brands, this year, and this has helped business at Kohl’s.
“Consumers are becoming more price conscious, to Kohl’s advantage,” said John Rouleau at Gruntal & Co. “Part of the reason why this is happening is that retailers like Kohl’s and vendors like McNaughton are offering a lot more value at moderate prices.”
Kim Roy, group vice president for Liz Claiborne Casual and Special Markets, noted that chains such as Wal-Mart and Kohl’s benefited from fashion upgrades.
“Those retailers have really done an unbelievable job of increasing the quality and fashion component of their apparel assortments,” Roy said.
But Roy also said that Kohl’s success is linked to the advent of cross-shopping consumers increasingly shopping several channels to fill their needs.
Embracing brands is also one of the key components to Kohl’s success. Unlike many competitors who are emphasizing private labels, Kohl’s private label business is only about 20 percent of product make-up. Sears and J.C. Penney have a 40 to 50 percent private label mix.
“We’re in a brand era and people are embracing the brands,” said Jack Gross, president at Gloria Vanderbilt.
But it’s the combination of this brand push with an emphasis on display that is critical, observers said.
“I believe Kohl’s success is based on visually attractive, well-merchandised stores,” said Hal Upbin, chairman and chief executive officer of Kellwood Co. “The product is edited so that if the consumer wants twill pants, Kohl’s will have twill pants in a wide range of sizes and colors. But they will not have 10 different brands of twill pants. The consumer today wants to get in and out of the stores, she doesn’t want to sort through multiple brands of the same product type.”
Many believe Kohl’s smaller store format — an average of 80,000 square feet versus up to 240,000 at traditional department stores — and slimmer assortment is working with customers.
“They are very focused on their product mix and know who their customer is,” said Holly Arneson, sales manager at Teddi Apparel Group. “They do not want to be everything to everybody.”
Alex Garfield, president of sales at Sunnex, which owns the Anna & Frank label, also believes that maintaining a believable low-pricing strategy creates “price integrity” with customers who distrust coupons and one-day sales.
Kohl’s is able to keep its prices low through its low-cost structure, which is achieved through lean staffing, sophisticated management information systems and operating efficiencies realized from centralized buying, advertising and distribution, said Bruce Missett, at Morgan Stanley Dean Witter.
Putting itself in locations such as big box shopping centers and strip malls has been a big plus for Kohl’s. The store’s format melds well with other shopping center destinations such as Home Depot and supermarket chains.
Although Target, for instance, may carry some competing items in the home area, Kohl’s tries to share mall locations with its competitor — with which it has enough product differentiation not to overlap too much — in order to benefit from increased traffic. This neighboring also seems to work well with Old Navy, which tends to have lower price points and caters to a younger customer.
For vendors, the benefits of working with Kohl’s are two-fold — from refilling orders from strong sales and from stocking the roughly 30 new stores Kohl’s adds each season.
Claiborne began working with Kohl’s with the launch of its Villager brand about four years ago.
“It has been one of the most rewarding retail partnerships that I’ve ever experienced,” said Roy. “I feel very strongly that Kohl’s is an organization which really has a vision of the consumer they want to serve and that mission is executed with tremendous clarity at every level of the organization. Their strategy is executed internally from the president to the sales person on the floor. Everybody understands where they fit in that strategy.”
Kellwood has been doing business with Kohl’s for over 10 years with its Sag Harbor brand, as well as in private label. Kohl’s is one of Kellwood’s top-10 accounts and sees the relationship continuing to expand, Upbin said.
“It’s been very fruitful,” said Vanderbilt’s Gross. “Growth has been very good there since we started doing business in 1992. Kohl’s has always been a very, very good partner. They’ve been very supportive to our brand when many others were not.”
Teddi has been working with Kohl’s for over a decade and, “it’s been great,” said Arneson of the partnership. “They’ll work with you even when things aren’t performing.”
McNaughton, which began shipping Kohl’s in late 1998, has told analysts the chain will account for 10 percent of sales this year, and could be its largest within three years. Penney’s is currently its largest account, making up roughly 20 percent of sales.
“What we’re seeing with Kohl’s is that if you’re performing as we are, there are opportunities to do a lot more sales,” said Norton McNaughton’s Boneparth.
Wall Street expects Kohl’s to expand its square footage by 20 percent per year, expanding in one major market each year.
This year’s opening of 33 former Caldor stores in the New York metropolitan region was a smash. Kohl’s noted that the Tri-State stores’ unit revenue volumes should approach $19.5 million at mature levels, 33 percent higher than the initially planned volume of $13.7 million to $15.6 million.
Kohl’s will next open 15 stores in Atlanta, a region store management has told analysts offers a more compelling demographic profile than any existing market it is in. Kohl’s has yet to penetrate California, Florida, Arizona or the Pacific Northwest.
“The company’s ability to generate above-average revenue growth and profitability affords Kohl’s the flexibility to access capital markets to finance new store development and potential acquisitions,” said Joseph Grillo, at Deutsche Banc Alex. Brown. “We believe the company can more than triple its current store base, expanding to 1,000 stores in North America.”
Many department stores seem to be viewing Kohl’s as an example by offering edited assortments and reemphasizing more moderate price points. Sears has even experimented with shopping carts.
“I think Kohl’s is making many rethink their strategies,” said Vanderbilt’s Gross. “In many ways, they’re looking to compete strongly with Kohl’s rather than run away from them. Kohl’s is making other retailers smarter.”