Kohl’s said on a conference call with analysts that third quarter earnings reflect strong gross margin and expense management as well as additional progress against the company’s strategic priorities. Company CEO Tom Kingsbury said they achieved this despite a softer-than-expected demand environment driven by less-than-ideal weather and persistent macroeconomic pressures on their customer. Still, analysts see management commentary reflecting concerns the company could face further uneven top-line results in the near term.
The fact the retailer announced that its recently-hired president and COO was exiting the company after only nine months on the job didn’t help either (read SGB Media’s coverage here).
KSS shares were down nearly 9 percent to close at $22.73 on Tuesday.
“Throughout 2023, we have focused on our four strategic priorities, which are: enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. Our actions against these priorities are working and resonating with our customers,” Kingsbury outlined in his prepared remarks on the call.
Net sales reportedly decreased 5.2 percent year-over-year, to $3.8 billion in the fiscal third quarter ended October 28, with comparable sales down 5.5 percent. Store comparable sales were down approximately 1 percent to last year, with “continued strong performance from Sephora at Kohl’s.”
Kingsbury said they had a solid back-to-school season, and through the first eight weeks, sales were tracking above expectations, but warmer weather during the latter part of September and into October had a clear impact on demand for fall seasonal goods, especially in store.
“While I don’t like blaming weather for performance, the fall transition period has historically proven to be when Kohl’s apparel-intensive business is most sensitive to weather fluctuations,” the CEO said.
He said Kohl’s experienced a fairly significant divergence in performance on a regional basis.
“Store sales in our Midwest, Mid-Atlantic and the Northeast regions, where the weather impact was most apparent, were down low- to mid-single digits in Q3, while all other regions increased low-single digits,” Kingsbury detailed. “We have various initiatives underway to de-weather our business as we focus on growing sales in less weather-sensitive categories like beauty, home, gifting and impulse.”
Kingsbury said that 2023 was expected to be a rebuilding year.
“I’ve said all along that 2023 is really rebuilding the company, repositioning the company,” he said. “As you know, it can’t be done overnight. But we have a lot of really good things in place right now. And what I always go back to is the fact that we do have a positive comp for the year in our stores, and our stores really reflect a lot of the new strategies. I mean, our home business is doing well in stores right now. Obviously, the beauty business is doing very well in stores right now. So, I think that’s evidence that in 2024, potentially, we can have a positive comp.”
He offered that the digital business is what is really bringing Kohl’s down. “We had some things we were doing online that was really not reflective of what an omni-company would be doing; a lot of online-only promotions, etc…, online pricing. But again, a lot of the actions we’ve taken will be behind us as we go into 2024. So again, I’m confident, about the fact that we are doing well in stores. And I think it’s going to be a good setup for 2024.”
Digital sales declined 16.5 percent in Q3, with digital penetration at 26 percent of net sales. Digital reportedly continues to be impacted by efforts to simplify the retailer’s value strategies. Kingsbury said digital sales continue to be impacted in part by the decision to eliminate online-only promotions in favor of omni-channel pricing across the enterprise.
“While this has pressured our digital performance in 2023, it remains the right long-term strategy for our business. Store comparable sales were down approximately 1 percent in Q3,” he said.
Other revenue, which is primarily the credit business, reportedly declined 6 percent in Q3, which was relatively in-line with company expectations.
“As we discussed on last quarter’s call, we are seeing payment trends decline and loss rates increase as expected,” said company CFO Jill Timm. “For Q4, we expect other revenue to perform in-line to slightly better than net sales as we start to benefit from our co-brand card. I will touch more on our credit business in a moment.”
Gross margin was 38.9 percent of net sales for the quarter, an increase of 158 basis points versus the corresponding period last year. The year-over-year increase was said to be driven by lower freight costs, reduced digital-related cost of shipping, and further progress against simplifying the company’s value strategies. This was partially offset by product cost inflation.
“Although shrink remains elevated, it was in-line with our expectations during the quarter. Year-to-date gross margin was 39 percent, up 56 basis points to last year,” Timm shared.
Selling, general & administrative (SG&A) expenses increased 1.9 percent year-over-year, to $1.4 billion, which Time said was better that expected. As a percentage of total revenue, SG&A expenses were 33.5 percent, an increase of 235 basis points year-over-year.
“The increase to last year was driven by continued investments in Sephora shop openings, wages, and other store-related expenses,” the CFO added. “Partially offsetting these were efficiencies in marketing and distribution costs. Year-to-date, SG&A expenses have decreased 0.2 percent compared to last year.”
Operating income was $157 million compared to $200 million in the prior-year period. As a percentage of total revenue, operating income was 3.9 percent, a decrease of 82 basis points year-over-year.
Depreciation expense of $188 million was $14 million lower than last year due to “reduced technology capital spend.” Year-to-date depreciation expense decreased $46 million to $562 million.
Interest expense of $89 million was $8 million higher than last year due to “primarily increased revolver borrowings.” Year-to-date interest expense increased $36 million to $262 million.
Net income was $59 million, or 53 cents per diluted share, in fiscal Q3, compared to net income of $97 million, or 82 cents per diluted share in the prior-year period.
The third quarter tax rate was 13 percent in Q3.
Inventory was $4.2 billion at quarter-end, a decrease of 13 percent year-over-year, a decline Timm said exceeded their commitment for a mid-single-digit decline. She said they feel good about the level and composition of our inventory for the holiday season.
Kohl’s ended the quarter with $190 million in cash and cash equivalents.
Operating cash flow was $151 million in the third quarter and $379 million for the nine-month year-to-date period.
“In Q4, we expect to drive strong operating cash flow as we move through inventory during the holiday season,” Time suggested.
Capital expenditures for the quarter were $157 million. This reportedly included investments for five new stores, which opened earlier this month, and nearly 100 Sephora openings.
“Based on our year-to-date spending and outlook for the remainder of the year, we now expect full year capital expenditures to be towards the lower end of our $600 million to $650 million guidance range,” the CFO detailed. “Looking ahead to 2024, our initial view is that capital spending will be lower than 2023 levels given that much of the Sephora buildout is now behind us.”
Looking ahead, the work we have done this year will continue to build momentum and set us up to be successful in 2024,” added Kingsbury. “As we’ve said before though, it will take some time for the full impact of our efforts to be realized.”
“Our strategies to reposition Kohl’s for improved sales and earnings performance remain in the early stages.” Zooming out, we think this was a mixed quarter with some positives and some negatives.
For the full year 2023, the company updated its financial outlook and currently expects the following:
- Net sales: A decrease of 2.8 percent to 4 percent, including the impact of the 53rd week which is worth approximately 1 percent year-over-year. This compares to the company’s prior guidance of a decrease of 2 percent to 4 percent.
- Operating margin: Approximately 4.0 percent, which is consistent with the company’s prior guidance.
- Diluted earnings per share: In the range of $2.30 to $2.70 a share, excluding any non-recurring charges. This compares to the company’s prior guidance range of $2.10 to $2.70.
- Capital Expenditures: Towards the lower end of $600 million to $650 million, including expansion of its Sephora partnership and store refresh activity.
- Dividend: On November 7, 2023, Kohl’s Board of Directors declared a quarterly cash dividend on the company’s common stock of 50 cents per share. The dividend is payable on December 20, 2023 to shareholders of record at the close of business on December 6, 2023.