By Neil Saunders
While a comparable sales rise of 0.1% may be meager, the fact that it brings to an end an extended period of decline is significant. Unfortunately for Kohl’s, the uplift was not reflected on the bottom line where operating income fell by 14.6% and net income by 19.9%.
The recent addition of an Amazon Smart Home Experience in 10 stores … gives shoppers more reasons to visit and allows Kohl’s to put excess space to productive use.
This new-found sales stability comes largely from Kohl’s efforts to increase customer traffic at its stores, something it has achieved by improving the mix of products. The decision to focus on health and wellness, for example, has paid dividends, with brands like Under Armour proving to be a popular addition among both existing and new customers.
We are encouraged that improvements to Kohl’s offer are continuing and that the company is innovating with both new products and services. The recent addition of an Amazon Smart Home Experience in 10 stores is an example of this. Although the move is not revolutionary, it gives shoppers more reasons to visit and allows Kohl’s to put excess space to productive use.
The move to accept returns of Amazon products bought online at 82 branches is another example of making stores relevant. Admittedly the move was criticized in some quarters for giving aid to a rival, but in our view, it is a creative solution to the problem of Amazon’s continued growth. In any case, we have seen no evidence that this service has resulted in Amazon stealing more share or customers from Kohl’s than it was already doing.
In some ways, the Amazon service is an extension of Kohl’s work to build a solid omnichannel business. Over recent quarters this has also helped to bolster footfall in stores as the proportion of online purchased picked up in shops has increased. This move also helps to offset some of the cost increases associated with the higher penetration of digital sales.
Despite all of these significant strides, the fact remains that a 0.1% uplift in comparable sales is very modest. Indeed, there is a sense that Kohl’s is having to run faster just to stand still. Given that the tides of consumer behavior and the growing importance of digital are both firmly against Kohl’s, this is hardly surprising. However, such a position necessitates more radical thinking than just adding new products and services.
The opening of new, smaller format Kohl’s stores provides a more revolutionary solution to many of the shifts happening in Kohl’s marketplace. In October, the company unveiled four more of these compact outlets, which have 60% less space and 25% less inventory than a standard Kohl’s store. To date, the format has worked well and is proving popular with customers. Positively, it allows Kohl’s to tap dense urban markets, which provides a lucrative future growth opportunity. The concept is also more profitable which, over time, should help the bottom line.
Looking ahead to the all-important holiday season, we are encouraged by both the momentum Kohl’s has built to date and by some of its plans to drive trade. That said, a significant element of those plans appears to be discount and deal focused. As much as this is a necessary evil, we believe that it could have a negative impact on an already weakening bottom line. This is something Kohl’s will need to remedy if it is to reap the rewards of improved customer numbers.
Neil Saunders is managing director of GlobalData Retail.