Kohl’s Inc. reported second-quarter sales in its active department rose 40 percent year-over-year and gained over 20 percent compared to the same period in 2019.

On a conference call with analysts, Michelle Gass, Kohl’s CEO, shown above, said the category continues to benefit from a transformation strategy that debuted last October, calling for a more significant pivot towards the active and casual lifestyle to drive top-line growth. At the time, Kohl’s set a goal to expand active and outdoor to 30 percent of its business. The category reached 24 percent of sales in the latest quarter, up from 20 percent in the second quarter of 2019.

“We see broad-based growth in apparel and footwear across men’s, women’s and children’s,” said Gass of the active category. “Customer demand and sales remain high for our key national active brands of Nike, Under Armour, Adidas, and Champion.”

Gass also said Kohl’s is encouraged by the traction it gained in the outdoor category. She said, “We expanded our Columbia assortment to include more sportswear, are exceeding our sales plan for Lands’ End, and will introduce Eddie Bauer this fall. All of these moves will further position us as a clear outdoor destination.”

Gass updated the investment community on its active push and transformation efforts while reporting earnings and sales that far exceeded Wall Street targets in the second quarter. Kohl’s also raised its guidance for the year.

Q2 Sales Jump 30.5 percent
In the quarter ended July 31, sales jumped 30.5 percent to $4.45 billion from $3.41 billion and showed gains against sales of $4.4 billion in the second quarter of 2019. Wall Street’s consensus estimate had been $3.96 billion. The 2020 quarter was impacted by massive stores closures that led to a year-ago sales decline of 23.1 percent.

Net earnings in the quarter vaulted to $382 million, or $2.48 a share, from $47 million, or 30 cents, a year ago. On an adjusted basis, Pro-forma earnings reached $382 million, or $2.48, against a loss of $39 million, or 25 cents, a year ago. Wall Street’s consensus estimate had been $1.26.

Gass said Kohl’s delivered record second-quarter EPS as sales and margins “materially exceeded” plan. Operating margins of 12.8 percent marked a ten-year high and increased more than 400 basis points versus the same period in 2019. She said, “Our performance during the second quarter marked another important step in our pursuit of becoming the retailer of choice for the active and casual lifestyle.”

From a channel perspective, the improvement in store sales drove most of the total sales upside in the quarter.

“We’ve spoken a lot about the importance in our continued commitment to our stores both in terms of the customer shopping experience and the foundational role they play in our omnichannel model,” said Gass. “We continue to be encouraged by the traffic we see and customers returning to stores. And, again this quarter, stores fulfilled nearly 40 percent of digital sales through ship-from-store and customer pickup.”

Digital sales remained strong, increasing 35 percent compared to the same period in 2019. As expected, online sales were down to last year, off 14 percent, as the year-ago period saw elevated online sales due to store closures. As a percent of total sales, digital was 26 percent, down from 41 percent last year but up from 20 percent in 2019.

From a category perspective, the strongest growth was in men’s, accessories and women’s relative to last year. On a two-year stack basis, the strongest gains were in men’s, home and footwear.

Highest Operating Margin In A Decade 
In a decade, the highest operating margin was helped by gross margins expanding to 42.5 percent from 33.1 percent a year ago and improving 373 basis points from the second quarter of 2019. Margin expansion continued to benefit from tightly managing inventory focused on the turn and further scaling of pricing and promotion optimization strategies. Reduced promotional activities across the industry also supported a greater percentage of full-price selling.

SG&A expenses increased 18.2 percent to $1.24 billion from $1.05 billion. SG&A declined to 27.9 percent from 30.8 percent as a percent of sales and also levered versus the 2019 second quarter.

Kohl’s raised its full-year 2021 financial outlook to include the following:

  • Net sales are now expected to increase in the low-20s percentage range compared to the previous expectation of mid-to-high teens percentage range increase;
  • Operating margin is now expected to be in the range of 7.4 percent to 7.6 percent compared to the previous expectation of 5.7 percent to 6.1 percent; and
  • Adjusted earnings per share are now expected to be in the range of $5.80 to $6.10, excluding non-recurring charges, compared to the previous expectation of $3.80 to $4.20.

Inventory at quarter-end was one percent higher than the prior year and down 25 percent to the same period in 2019, marking another ten-year high in turnover. Inventory ended the quarter lower than expected due to strong sales during the period and the industry-wide supply chain challenges. 

Supply Chain Bottlenecks Cloud Outlook
On the call, Jill Timm, CFO, said that Kohl’s is monitoring industry-wide supply chain uncertainties and cost inflation as it relates to the supply chain.

“It is a fluid and evolving situation,” said Timm. “We have experienced inventory receipt delays in many areas of the business due to temporary factory closures and port congestion.”

She said Kohl’s women’s business has a disproportionate exposure given its high penetration of private brands. Timm said, “We are managing the situation aggressively, leveraging our diversified global supply chain to ship production when and where appropriate and to prioritize and expedite orders while also maintaining a high frequency of pick-ups at the port and deliveries to our stores. Given the fluidity of the situation, we will remain agile and responsive with a focus on minimizing the disruption.”

On the cost side, Timm said wage inflation is expected to remain a headwind due to the tight labor market. Kohl’s also recently announced a retention incentive for employees working in stores and distribution centers. Added Timm, “We continue to monitor our positioning in the market to ensure that we remain competitive. We will look to mitigate the higher costs through increased productivity and efficiency across all other areas of the business.”

Regarding back-to-school selling, Gass said the retailer sees initial strength in key back-to-school categories including active, denim and backpacks and expects demand to continue to build as Labor Day approaches. 

Transformation Strategy Showing Progress 
Gass provided an update on its transformation strategy that goes beyond a pivot toward active and casual lifestyles, including implementing “meaningful margin enhancing and expense saving initiatives” to support a 2023 goal of expanding operating margin to a range of 7 percent to 8 percent.

A major element is the launch of Sephora in-store shops to elevate its beauty offerings. The program was introduced last October, and the first 200 in-store Sephora shops planned for 2021 are being introduced. Gass said,” The customer response has been overwhelmingly positive.”

An additional 400 shops are planned for 2022, with a goal to reach at least 850 by 2023. The shops are prominently displayed inside the store, adjacent to active departments that see better positioning as part of the transformation push. Said Gass, “We’re moving our active departments right to the front of the store. So as the customer walks in, what they experience is not only looking in front of them seeing this beautiful Sephora shop, but they’re seeing Nike and Under Armour and Adidas and Champion.”

In addition to market share opportunities in beauty and active, Kohl’s continues to see major market share gain opportunities across casual categories. Said Gass, “We see iconic casual brands like Levi’s, Tommy Hilfiger and Calvin Klein and our value-oriented private brands like Sonoma and So as key unlocks for us in capturing share. We continue to heighten our leadership with loyalty and value.”

Other signs of progress with its transformation efforts include higher enrollment and redemption rates under the enhanced Kohl’s rewards loyalty program and strong customer response and margin benefit from its more simplified pricing and promotion equation. A focus on driving category productivity has helped improve its inventory turn close to a goal of four times sooner than planned. This Fall, Kohl’s will pilot self-returns and self-pickup in select stores as it continues to expand its omnichannel offerings.

Gass said, “We are making great progress against our new strategy. The benefits are clear based on our year-to-date performance. As pleased as we are with our current momentum, we know much of our long-term opportunity remains in front of us. As we continue to execute against our key initiatives, such as active and beauty, we believe our momentum will further accelerate.”

Photo courtesy Kohl’s/Michelle Gass