By Eric Smith
Kohl’s registered a disappointing first quarter, to say the least. The retailer’s net income plummeted 17 percent to $62 million and adjusted earnings per share dropped 8 percent 61 cents, missing Wall Street’s consensus estimate of 68 cents.
Also, revenues were down 2.9 percent to $4.09 billion, ahead of analysts’ forecasts of $3.97 billion, and comparable store sales were down 3.4 percent while analysts projected a drop of 0.1 percent.
But on Tuesday’s earnings conference call, CEO Michelle Gass told analysts that while “we acknowledge that the year has started off slower than we’d like … we have adjustments underway to get us back on track.”
Those adjustments include the usual means, but Kohl’s is also banking on an expanded return program with Amazon to regain its footing. What is the program exactly, and will it be enough?
First, some additional details on the first-quarter woes.
Gass chalked up the Q1 softness to an increasingly competitive landscape as well as “volatility” in the form of unfavorable weather, “with February being particularly tough,” she said “And though the things improved in March and April, figures still fell shy of expectations and resulted in the Q1 comp decline.
“While we are disappointed in our sales performance, the team was agile and reacted appropriately by managing expenses, while continuing to invest in future growth,” Gass said. “It’s a highly competitive market and we’ve seen more aggressive pricing and promotions in categories like Home,” Gass said. “Looking ahead, we plan to be more aggressive in driving top line sales to regain our momentum and grow market share.
“We expect softness to continue into Q2 followed by a return to growth in the second half of the year, as we deliver on our strong pipeline of innovation.”
In addition to the usual adjustments such as better managing costs (including the need to now deal with higher tariffs), refining marketing efforts to bring more customers into stores and enhancing digital capabilities to grab mindshare across every channel available, Kohl’s outlined a few other ways it plans to get back on track.
One is an increased focus on areas of strength. Gass credited the company’s Active department as a bright spot in the quarter and said Kohl’s will continue building on this relative strength as a way to hedge against softness elsewhere.
“Active continues to be a key growth driver for the company, and during Q1 we achieved positive comp growth,” she said. “Active apparel was strong, growing in the mid-single digits with positive growth from Nike, Under Armour and Adidas, our three key national brands. Adidas sales, in particular, grew significantly in Q1.
“During the quarter our athletics footwear lagged and we have plans in place to address. We continue to believe Active provides an opportunity for sales growth. In 2019, we will allocate additional space to the category increasing the in-store active expansion strategy to approximately 160 of our highest-performing asset stores.”
Another is the launch of new brands, including Nine West, Scott Living at Kohl’s and a new exclusive line of soft home goods by Koolaburra by Ugg. Kohl’s is also expanding a line of Amazon-branded smart home products to more than 600 stores.
But the biggest driver that could help Kohl’s “get back on track” is the expansion of its Amazon Returns program. The retailer announced in April that all Kohl’s stores, starting in July, will accept free, unpackaged returns for Amazon customers.
Kohl’s and Amazon first worked together in 2017 to pilot the returns program, which is currently operating in 100 stores in the Los Angeles, CA, Chicago, IL, and Milwaukee, WI, markets. Kohl’s and Amazon will roll out the program to all of Kohl’s 1,150-plus locations across 48 states. Kohl’s will accept eligible Amazon items, without a box or label, and return them for customers for free, providing additional service and convenience to Amazon customers.
While the Amazon Returns program is expected to contribute to an increase of 1.5 percent to 2.5 percent of SG&A expenses for the year, reflecting the incremental store labor and reverse logistic costs to support and process the returns, the company is optimistic for a strong return on those upfront and ongoing investments.
“The nationwide rollout of the Amazon Returns program is the single biggest initiative of the year,” Gass said Tuesday. “We and Amazon together feel this is a highly complementary breakthrough program that will offer all of our customers a great experience.”
When asked to quantify the expected lift from the Amazon Returns program, CFO Bruce Besanko declined to divulge any “details on the economics,” but he did say Kohl’s expects that there will be a “good draw of traffic from the returns, and consequently, it’s our expectation that we’ll be able to translate that traffic into sales.”
But how will the stores do that, specifically? Besanko and Gass both touched on the importance of execution in terms of converting Amazon Returns customers into Kohl’s customers.
“It’s a top priority to clearly maximize the benefit for both organizations,” Gass said. “We both have a lot to gain here in terms of the customer experience for both Kohl’s customers and Amazon customers. It is about driving traffic and sales in the immediate term. And we’ve studied this for 18 months so we feel confident about that. But I think what’s really key, and what our data would suggest, is that we’re also bringing in new customers and we’re bringing in a younger customer. And so as we think about the long-term value, that is significant.”
Specifically, Gass noted, the company is using data gleaned from its pilot markets, especially LA and Chicago, to “feel really good about the results and the customer experience.”
“I feel very confident in the execution capabilities of our organization,” she added. “That’s something we’re really strong on. And in terms of what the rollout looks like we learned a lot through the test. We’ve optimized. It’s not an easy thing to do to get the whole end-to-end chain fully working and optimized on. But again, given the sophistication of the team, we’re able to do this.”
Time will tell if Amazon—the big, bad company that has put a thousand retailers out of business—will be the savior of Kohl’s. What’s known right now is that despite the company’s bullish outlook on the Amazon program, Kohl’s is still facing some headwinds and reduced its annual outlook in accordance. It now expects adjusted annual earnings per diluted share to be $5.15 to $5.45, compared to prior guidance of $5.80 to $6.15.
Wall Street on Tuesday took note of the company’s soft quarter and lowered outlook, as shares of Kohl’s fell $7.71, or 12.3 percent, to $55.20 at market close.
Photo courtesy Kohl’s