By Anthony Riva
While Kohl’s sales continue to decline, these results are nevertheless rather encouraging. The much smaller dip in revenues indicates that the business is going in the right direction and has gained momentum since the start of the year. Meanwhile, Kohl’s ongoing work on expense reduction and more careful management of inventory continues to boost profit lines.
We are particularly encouraged to see comparable sales come in virtually flat at -0.4%. While this may not seem like much of an achievement, it is the best performance since Q4 of 2016 and brings to an end a long line of big slumps in the same-store number. It also comes against a backdrop of more muted demand and footfall, especially within the department store sector.
Kohl’s winning strategies include:
- Optimized product mix, with increased penetration of national brands tailored to location.
- BOPIS, with increased use creating additional in-store sales.
- Downsized format, with potential to penetrate urban markets.
To a large extent, Kohl’s has managed to buck the negative customer traffic trend by making its stores, and the product within them, more relevant. This is not a new program but an ongoing initiative which has seen the company gradually increase the penetration of national brands — including popular lines like Under Armour — in its stores.
One of the risks of Kohl’s strategy of having more brands was that it could have made stores cluttered and crowded with a jumble of stock. However, the company has done much work around optimizing product mix across its portfolio, including tailoring ranges according to location. The net impact is clearer store presentation, more effective allocation of inventory, and a range that is more relevant to local customers. This has elevated the shopping experience, reduced markdowns, and improved profitability.
In our view, Kohl’s provides an example of how discipline and focus in range planning can help take the edge off some of the prevailing challenges in the market without the need to resort to high levels of capital expenditure.
Another encouraging area is Kohl’s development of a solid omnichannel proposition. Here, sales bought online and collected in store continue to increase at pace. This is beneficial as it often creates further selling opportunities for the store. It also helps to offset some of the cost increases associated with higher penetration of digital sales. Admittedly, Kohl’s non-mall based locations lend themselves to a ‘collect-in-store’ model, but we applaud the company for taking advantage of this.
Looking ahead, we see some scope for modest store expansion — especially now that Kohl’s has optimized its smaller 35,000-sq.-ft. format. This reduced footplate will allow Kohl’s to penetrate some dense urban markets where it does not currently have representation. Admittedly, with only a handful of openings scheduled, this is not going to provide a significant boost to sales this year, but over the longer term, we believe it is a savvy step that will add good volume to the business.
Away from the sales side, Kohl’s is retaining its firm grip on costs. Much of this has come from better inventory management, but some have also come from organizational changes such as combining online and store buying teams. This has allowed the company to keep administrative and operational expenses virtually flat, at the same time as increasing investments in new infrastructure like IT system and an additional fulfillment center.
Overall, while we do not deny that the market will remain perilous, we believe Kohl’s has charted a sensible course through the choppy waters of department store retailing.
Anthony Riva is an analyst at GlobalData Retail.