By Håkon Helgesen
Today’s results from Kohl’s are a tale of two halves. The negative half relates to sales, which are down again on both total and comparable levels. However, the more positive half comes from the profit numbers which are up strongly on an operating and net income basis.
In a bid to differentiate itself from rivals, Kohl’s has put a lot more effort into its own brands. The Jumping Bean kidswear collection — which features a range of reasonably priced, nicely designed clothing for boys and girls — is a good example of this, and has helped Kohl’s to build some interest in a category where it was previously struggling.
The better bottom line performance is mostly a function of more careful inventory management and a focus on cost reduction. These are both things that Kohl’s has been implementing for some time, and it is encouraging to see them pay dividends.
Kohl’s entered the spring period in a much better inventory position that it has for some time. There was far less surplus fall and winter stock, which helped the margin rate as less discounting was required to shift old merchandise. A helpful knock-on effect was that Kohl’s stores looked much clearer and were easier to shop. We believe that this allowed the company to showcase its own private label collections, and the new national brands it has added, far more effectively than last year.
Regarding the wider assortment, we are encouraged by some of the steps that Kohl’s has been taking. Although we would not claim that the product mix is perfectly optimized, it is clear to us that Kohl’s is moving in the right direction. In a bid to differentiate itself from rivals, Kohl’s has put a lot more effort into its own brands. The Jumping Bean kidswear collection — which features a range of reasonably priced, nicely designed clothing for boys and girls — is a good example of this, and has helped Kohl’s to build some interest in a category where it was previously struggling.
As important as private labels are, Kohl’s has long recognized the pulling power of national brands. These now represent well over half of the sales mix, and the proportion is still increasing. The addition of Under Armour earlier in this quarter is the latest step in creating a more compelling branded offer. Unfortunately for Kohl’s this introduction coincided with both a period of weaker demand for athleisure and heightened discounting in the sports sector thanks to a rash of store closures. We have no doubt that Under Armour has been helpful to Kohl’s over this quarter, but we do not believe it lived up to its full potential.
Despite all the solid product and brand activity, we think Kohl’s has a lot more work to do in creating a more compelling shopping experience in its stores. Even with lower levels of inventory, many stores still look cluttered, and good products are often lost in a sea of merchandise. The range localization strategy that Kohl’s has been employing should help address this, but we do not believe that the full benefits of this are, yet, coming through.
For all the changes and positive actions, Kohl’s has still failed to grow its top line, and worryingly the pace of decline is accelerating. Some of this is down to store closures; some is down to lower footfall in locations where Kohl’s operates; and, some is down to Kohl’s itself.
The improvement in profits buys Kohl’s time to remedy these issues. They also position the company to cope with a lower demand environment. However, the do not absolve the necessity of swinging the top line back into growth over the course of this year.
Håkon Helgesen is an analyst at GlobalData Retail.