Kohl’s Posts ‘Great’ First Quarter, but Tempers Optimism

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Kohl’s Corp. has “never been as well positioned for back-to-school and holiday,” as it is now, according to Michelle Gass, chief executive officer.

“We’re set up for a great holiday,” said Gass on Thursday, after the retailer reported a swing into profitability for the first quarter and “across the board” gains.

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Along with the solid first-quarter results, optimism inside Kohl’s for the year ahead is largely based on the rollout of Sephora on kohls.com beginning in August and in September to 200 stores; initiatives strengthening Kohl’s as a destination for active and casual merchandise such as from Nike, Adidas and Lands’ End; “de-densifying” the stores for enhanced and easier shopping experiences including reducing space in men’s and jewelry; a perceived resurgence in denim demand, and Kohl’s “convenient off-mall presence continuing as a competitive advantage.”

“All the trends to living a more active and casual lifestyle, I don’t see that letting up,” Gass said, during a conference call with retail analysts.

Still, while exceeding expectations on both the top and bottom lines — which did prompt Kohl’s to raise its outlook for the year — executives at the Menomonee Falls, Wisc.-based retailer expressed concerns about possible headwinds, specifically ongoing supply chain disruptions which Kohl’s is working to offset by adding more drivers to pick up goods at ports and by “leaning into every opportunity to chase demand,” Gass said. They seemed more cautious, or less bullish, than comments from other retailers reporting first-quarter results this week.

The CEO also cited concerns about inflating wages and the labor market, rising fulfillment costs stemming from growing digital sales, and diminishing “tailwinds” from stimulus checks, the rollout of COVID-19 vaccinations and easing of restrictions around the country. There’s been some pent-up demand by consumers seeking to shop and go out again, after being cooped up at home for over a year.

Those concerns apparently spooked Wall Street, which sent Kohl’s shares tumbling 10 percent, or just over $6, to close at $54.12 at the end of trading Thursday.

“The U.S. consumer is in a strong position,” said Gass. As more people return to work, resume travel and attend events and gatherings, that “fits squarely” into the categories Kohl’s has intensified.

But she also cited “a lot of uncertainties as we look to the balance of the year.”

Echoing those sentiments, Jill Timm, Kohl’s chief financial officer, cautioned that “Q1 is the smallest quarter of the year,” suggesting that the company should maintain a prudent outlook. “As the year progresses, some tailwinds could ease,” she said.

Timm also cited supply chain disruptions, and said that as “digital becomes a bigger portion of the business, that adds costs to the business.”

“Some full-price selling will ease in the back half of the year,” Timm said, particularly where there are no longer shortages through supply chain disruptions, reducing the need for markdowns.

Net income for the quarter ended May 1 was $14 million, or 9 cents a share, compared to a loss of $541 million, or $3.52 a share, in the year-ago period.

Adjusted net income was $165 million, or $1.05 per share, compared to a loss of $495 million, or $3.22 a share, in the 2020 period.

Total revenues rose 60.1 percent to $3.89 billion from $2.43 billion in the year-ago period.

“We are very pleased with our strong start to 2021 with both sales and earnings materially exceeding expectations. Along with a favorable consumer spending backdrop, we continue to see our key strategic initiatives gain traction and resonate with customers,” Gass said in a statement earlier in the day.

“We saw momentum build through the quarter, especially in our stores where we continue to elevate the experience,” added Gass. “We are eagerly preparing for the upcoming launch of our Sephora partnership as well as the introduction of several new exciting brands this fall.”

“We are positioned to capitalize on growth opportunities during the balance of 2021 and remain firmly on track to achieving our 2023 strategic goals,” which targets 7 to 8 percent operating profit rate.

Other retailers this week have also reported strong first-quarter results, fueled by the government stimulus, the rollout of COVID-19 vaccines and some pent-up demand. Target saw big gains in sales and profits during the quarter, with particularly strong store traffic. Macy’s first quarter was marked by better-than-expected top- and bottom-line results and a swing to profitability, and Walmart’s results were buoyed by strong consumer demand for essentials, including groceries and categories spurred by pandemic-related shopping habits.

Raising its guidance, Kohl’s net sales this year are now expected to increase in the mid-to-high teens percentage range compared to the previous expectation of a mid-teens percentage rate increase.

Operating margin is now expected to be in the range of 5.7 to 6.1 percent compared to the previous expectation of 4.5 to 5 percent. And adjusted earnings per share are now expected to be in the range of $3.80 to $4.20, excluding any non-recurring charges, compared to the previous expectation of $2.45 to $2.95.

Earlier this month, Kohl’s entered into an agreement with activist investors whereby two independent directors nominated by the activist group — Margaret Jenkins and Thomas Kingsbury — joined the board. An additional independent director identified by Kohl’s and agreed to by the investor group, Christine Day, also joined the board.

In recapping what was “a great first quarter with clear business momentum as we look ahead,” Gass also said during the conference call that Nike, Under Armour and Adidas continue to perform very well; that she was pleased by the expanded presentation of Champion and very encouraged by customer reaction to the private Flex active brand which will grow its distribution to 500 stores while the Lands’ End distribution will grow to 300 doors.

Gass also said denim is undergoing a “clear resurgence” and she called out Levi’s, cited increased demand for shorts and intimates, and that there has been a strong customer response to key private brands, including Sonoma and So in women’s.

Sephora is expected to drive incremental sales and help Kohl’s attract new customers. Sephora is launching at Kohl’s with more than 125 prestige beauty brands, beginning Aug. 1 online and later in stores. Gass said it’s a six-week construction process to build a Sephora shop inside a Kohl’s store. Along with Sephora, “the most relevant brands and categories” are being positioned at the front of the stores. For example, an “outsized Calvin Klein shop is being created adjacent to Sephora.”

Like other retailers, store traffic was tough at Kohl’s during February, impacted by weather conditions, but accelerated in the months ahead and has continued in May so far, Gass said.

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