Kohl’s Sees $2 Billion Volume Opportunity, Turns Profitable in Q4 Despite Sales Decline
Updated March 12 at 4:56 p.m.
Kohl’s Corp. expects to climb out of its sales hole this year and possibly into positive territory as it eyes a $2 billion opportunity for greater volume over the next several years.
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The ongoing rollout of Sephora inside Kohl’s; investments in the underplayed home, gifts and impulse categories, and the introduction of Babies “R” Us shops in 200 Kohl’s locations this fall are seen fueling the much-needed sales turnaround.
Apparently, Wall Street was not sufficiently impressed with the outlook or progress in Kohl’s turnaround efforts. The stock price on Tuesday closed down 6.8 percent, or $1.84, to $25.35.
On Tuesday, Kohl’s reported a disappointing 4.3 percent decline in fourth-quarter comparable sales. Comparable sales is a critical measure of a retailer’s performance. The comps were brought down by the e-commerce business, while the stores showed improvement. Net sales decreased 1.1 percent year-over-year, to $5.7 billion. The fourth quarter included net sales of about $164 million from the 14th week.
Despite the sales decline, Kohl’s in the fourth quarter moved into the black, indicating that it’s successfully managing inventories and expenses, while also increasing its cash flow and reducing debt.
Net income for the fourth quarter ended Feb. 3 was $186 million, or $1.67 a diluted share, compared to a net loss of $273 million, or $2.49 a share, in the prior year.
Operating income was $299 million compared to a $302 million loss in the prior year. As a percentage of total revenue, operating income was 5 percent, an increase of 1,005 basis points year-over-year.
Addressing the comp sales issue, Kohl’s chief executive officer Tom Kingsbury told investors Tuesday during a conference call, “I feel very confident we’ll hit a range of zero to plus two for 2024.” In part, the confidence is based on expectations that Kohl’s e-commerce turns positive this year and also versus the weaker numbers in 2023.
The CEO also said, “We’re looking at $2 billion over several years” in additional sales through a series of brand additions and assortment changes in the works.
Explaining where much of the anticipated sales improvement will come from, Kingsbury said Sephora, currently in 910 stores, “will keep on giving us some plus sales. In our home business, we’re investing in a lot of categories. We weren’t really in home decor, wall art, lighting and pet [supplies]. You’ll see elevated inventory in those categories.”
He said that by moving gifts to the front of the store last year, the category did well during the holiday season and for Valentine’s Day. “We want to be known as a gift headquarters.”
With Impulse, those last-minute items shoppers tend to pick up while waiting on the checkout line, Kingsbury said, “We expect significant growth,” though he acknowledged, “We’ve been a little bit behind the eight ball in terms of building the impulse business.”
The partnership with Babies “R,” which is owned by WHP Global, is “part of our campaign to get younger customers into our stores,” Kingsbury said.
He said Kohl’s is adding dress shops to hundreds of stores and “working hard on bringing in more market brands in juniors. That’s another part of our initiative to bring in younger consumers.”
In menswear, Kohl’s is shifting its assortment to offer a greater percentage of “polished casual” sportswear, suiting and dress shirts, areas that he said have recently sold well. “[In kids,] it’s the same deal with a lot more polished casual, and girls dresses,” Kingsbury said.
“We working hard on our footwear business,” the CEO added. “Over time, we really reduced our product offering in dress and casual so we are primarily athletic.”
“We have a lot of things that are working and that we want to continue to go after aggressively.”
Although plenty of new merchandise is being blended into the assortment, “We don’t see a lot of displacement of product. We’re making way for more choices,” Kingsbury said.
He projected that Kohl’s online business will return to growth in 2024.
“There is a big opportunity in the core if we continue to go after ladies dresses, juniors and the polished casual businesses. The same with men’s,” Kingsbury said. “We have to serve a lot of customers and we want to give them lot of choices. We got too narrow in our assortment in terms of too much active and casual. People are going out more and obviously wanting that kind of clothing as part of their wardrobe.”
To help turn around the sales performance and attract younger families, Kohl’s revealed on Tuesday its rollout of Babies “R” Us shops beginning in August through a partnership with WHP Global, the owner of the Babies “R” Us brand. The plan is to open Babies “R” Us shops in about 200 Kohl’s stores this fall selling baby gear, furniture and other products. Babies “R” Us products will also be on kohls.com and the Kohl’s registry.
Kingsbury, in his prepared statement, characterized 2023 as “an important year for Kohl’s. We enhanced our store experience, expanded our partnership with Sephora and invested in under-penetrated categories. We also simplified our value strategies and implemented new inventory management processes. The early success of our strategies is evident. Our store business had its best comparable sales performance since 2010, Sephora at Kohl’s continued to drive meaningful beauty sales growth and we managed inventory down 10 percent at year end. I want to thank the broader Kohl’s team for driving significant change to reposition the company for future growth.
“Looking ahead, we are incredibly focused on delivering comparable sales growth in 2024,” Kingsbury added. “Our strategic initiatives are positioned to build momentum and contribute more meaningfully, and we will partner with Babies ‘R’ Us to meaningfully expand our presence in the baby gear category, which represents a compelling white space opportunity for Kohl’s. Through our collective efforts Kohl’s is becoming more relevant to customers, which strengthens our conviction in our longer-term opportunity.”
For 2024, the company forecasts:
Net sales ranging from a decrease of 1 percent to an increase of 1 percent.
Comparable sales ranging from flat to an increase of 2 percent.
Operating margin ranging from 3.6 percent to 4.1 percent.
Diluted earnings per share of $2.10 to $2.70, excluding any non-recurring charges.
The Babies “R” Us shops inside Kohl’s will range from 750 to 2,500 square feet and sell baby gear, activity, bath, furniture, feeding and safety products. The space will be adjacent to Kohl’s existing assortment of baby apparel, which includes Graco, Chicco, Boppy, Skip Hop, Delta Children, Fisher-Price and Carter’s.
Aside from Babies “R” Us, WHP owns Toys “R” Us, Anne Klein, Joseph Abboud, Joe’s Jeans, Bonobos, Isaac Mizrahi, G-Star Raw and Lotto. Last month WHP signed a definitive agreement in partnership with Guess Inc. to acquire Rag & Bone. WHP also has a majority interest in Express, which has been losing money, seeking government support, and has attempted to quell speculation of a potential bankruptcy.
For all of 2023, Kohl’s reported that net income was $317 million, or $2.85 per diluted share. This compares to net loss of $19 million, or $0.15 per diluted share in the prior year.
Operating income was $717 million compared to $246 million in the prior year. As a percentage of total revenue, operating income was 4.1 percent, an increase of 274 basis points year-over-year.
Net sales decreased 3.4 percent year-over-year, to $16.6 billion. The full year included net sales of about $164 million from the 53rd week. Comparable sales decreased 4.7 percent.
Gross margin as a percentage of net sales was 36.7 percent, an increase of 347 basis points.
Selling, general and administrative, or SG&A, expenses decreased 1.3 percent year-over-year, to $5.5 billion. As a percentage of total revenue, SG&A expenses were 31.5 percent, an increase of 67 basis points year-over-year.
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