Kohl’s Inc. reported sales of active accelerated in the third quarter to propel the department store chain to record earnings.
“Our investments in active continue to pay off,” said Michelle Gass, Kohl’s CEO, on a conference call with analysts. “This is most evident in the broad strength we see across our differentiated portfolio of national and private brands.”
She said active sales “significantly outpaced” its overall sales gains, growing more than 25 percent last year and more than 20 percent on a two-year basis. Strength is also seen “across the board” in men’s, women’s and children’s apparel and footwear.
“Of note, within active apparel, we are especially pleased with the traction we are gaining in athleisure and inclusive sizing,” said Gass. “From a brand perspective, our key national brands—-Nike, Under Armour, Adidas, and Champion—–all delivered exceptional growth. In addition, our more value-oriented active private brands also continue to perform very well. Tech Gear achieved solid double-digit growth, and we continue to be pleased with the customer response and sales of our new athleisure brand, FLX, which we expanded to more stores late in the third quarter.”
Active is now one of the largest areas of Kohl’s business, representing 26 percent of third-quarter sales. Gass said Kohl’s continues to experiment with new merchandising to elevate the active category experience in stores.
“We remain confident in our ability to maintain our growth momentum,” she said. “Looking ahead, we expect active will continue to benefit from increased in-store space and its front of store positioning and locations with Sephora at Kohl’s shops.”
Record Third-Quarter Earnings
Companywide, Kohl’s delivered another quarter of record earnings with sales and margins exceeding expectations. The retailer also raised its full-year 2021 guidance and is positioned to surpass most of its 2023 goals two years ahead of plan and achieve a record EPS in 2021.
In the quarter ended October 30, net earnings reached $243 million, or $1.65, against a loss of $12 million, or 8 cents, a year ago and well above Wall Street’s consensus estimate of 64 cents. The year-ago period was impacted by in-store restrictions from the early stages of the pandemic. In the year-ago period, adjusted earnings were $2 million, or 1 cent a share.
Net sales increased 15.5 percent to $4.6 billion, exceeding Wall Street’s consensus target of $4.27 billion.
Comparable sales jumped 14.7 percent against a year-ago decline of 13.3 percent.
Gross margins improved 408 basis points to 39.9 percent. The improvement was driven by inventory management efforts and pricing and promotion optimization strategies that offset incremental transportation costs related to the constrained global supply chain.
SG&A expenses increased 6 percent overall due to the double-digit top-line growth. As a percent of revenue, SG&A expenses are leveraged by 273 basis points year-over-year. Efforts to drive marketing and technology efficiency and improve store labor productivity more than offset increased wage pressure across stores and distribution centers.
Operating Margin Reaches Nine-Year High
The strong margin and SGMA performance translated into an 8.4 percent operating margin, a nine-year high for the third quarter and an increase of 734 basis points to last year and 403 basis points to 2019.
Gass said the 16 percent sales increase was the result of strong performance across both stores and digital. Gass said, “Stores sales increased double digits and continue to be the principal channel for new customer acquisition. And we’re very excited by the significant growth we are seeing in omnichannel customers, which are the most productive customer.”
Digital sales remained strong in the quarter, growing 6 percent to last year and increasing 33 percent on a two-year basis. As a percentage of total sales digital was 29 percent in the quarter.
Among categories beyond active, other highlights include men’s sales increasing more than 30 percent to last year and footwear and accessories both expanding more than 20 percent. Children’s was up low double digits, driven in part by strong demand for toys.
Many of its key private brands and national brands across all categories saw strong growth on both a one and two-year basis. Among private labels, strong sellers included Sonoma, So, Apartment Nine, and Jumping Bean. Notable performances beyond active in its national brands included Levi’s, Vans, Hagger, Ninja, Shark, Koolaburra by Ugg, and Hurley.
Sephora at Kohl’s Shops Off To Strong Start
Discussing key strategies, Gass said the retailer is “thrilled with the early response” to the rollout of 200 Sephora at Kohl’s in-store shops. The partnership is expected to better position Kohl’s as a “youthful upscale and modern retailer.”
Gass said Sephora is driving “extraordinary growth” in Kohl’s beauty business, supporting a mid-single-digit sales lift to overall sales in stores where in-store shops were introduced and attracting new customers. “More than 25 percent of the Sephora at Kohl’s shoppers are new to Kohl’s. They are younger and more diverse, and we are successfully driving loyalty signups,” she continued.
Gass further said customers have purchased across a wide range of beauty categories and price points and tended to shop across the store. Roughly half of all its customers buy Sephora and are making purchases in at least one other category. An additional 400 Sephora shops will open by late spring 2022 and 250 in 2023.
As the Sephora build-outs are completed, Kohl’s said it would invest in its store environment to reflow categories in support of its stronger positioning as an active and casual destination for consumers. Space is also being better used for mannequins and branding. Leveraging flexible space behind the Sephora shops, a rotating assortment of emerging brands are being featured, including Yummy sweaters this holiday season. This spring, an exclusive Draper James capsule collection, a brand founded by actress Reese Witherspoon, will be shown.
Eddie Bauer Sees Promising Launch
Among other new brand additions, Kohl’s introduced Calvin Klein basics and loungewear in 600 stores in mid-September, Tommy Hilfiger men’s sportswear in 600 stores in early October and Eddie Bauer in 500 stores in late October.
“While it’s early, we are extremely pleased with the initial results of these new brands,” said Gass. “Collectively, they exceed expectations, and customers are delighted to be able to get these iconic brands at Kohl’s.”
She said the Eddie Bauer addition expands Kohl’s presence in the outdoor category and builds on investments and momentum with Columbia and Land’s End.
In the women’s category, the revamp of offerings over the last two years is making progress.
“Customers are responding very well to our go-forward key brands, and metrics such as sell-through, inventory, turn, and margin are at multi-year highs,” said Gass. “However, receipt delays have impacted the women’s business disproportionately, hindering our ability to drive overall growth to our expectations. We continue to work aggressively to address the situation but acknowledge that supply chain challenges will likely continue to present a headwind.”
Inventories Below Plan Due To Supply Chain Challenges
Regarding the supply chain constraints, she said Kohl’s, like other retailers, has been impacted by extended transit times resulting in inventory receipt delays and significantly higher transportation costs.
At the end of the quarter, inventories were one percent higher than the prior-year but down 25 percent to 2019. The available for sale inventory was down even more on a two-year stack given higher end-transit inventory, with the women category disproportionately impacted.
Kohl’s had planned inventory to be down this year as compared to 2019, aligned with a strategy to drive margins and turnover, but overall levels remain below plan. On the plus side, inventory turnover in the third quarter marked a 10-year high.
“We have aggressively implemented several measures throughout the supply chain to mitigate and minimize production and transit delays,” said Gass. “We also made sure that we protected new brand receipts and inventory tied to key promotional events. While it will take time for our inventory to rebuild, I’m confident that the team is doing everything they can to mitigate the supply chain challenges as effectively as possible.”
In the near term, she added that Kohl’s is “well-positioned for the holiday season with fresh receipts continuing to flow to support anticipated customer demand.”
She added on holiday plans, “This year, from a product perspective, we are focused on amplifying key areas where we already have momentum. Active and cozy for the entire family, home, toys, and discovering and gifting are already in high customer demand.”
In the Q&A session, Gass added that active inventories “are in great shape. It’s one of the categories that are actually in the best position.”
She added on active vendors, “Given it’s such a strategic priority for us, they’ve been terrific to helping us navigate and again, you see that reflected both in the inventory numbers but more importantly in the sales in active, and we’re working closely with them.”
Among other categories, women’s is seeing the “most dramatic impact” in inventory shortfalls, but she said Kohl’s buying team continues to plan for 2022 aggressively. Said Gass, “We do expect to improve sometime over the course of the next year. We have front-loaded orders. We have moved production around. We’re expediting delivery. We’re doing everything we can to where we have pockets where we’re just too lean to get back into stock.”
Kohl’s updated 2021 guidance includes:
- Net sales are now expected to increase in the mid-twenties percentage range compared to the previous expectation of low-20s percentage range increase;
- Operating margin is now expected to be in the range of 8.4 percent to 8.5 percent compared to the previous expectation of 7.4 percent to 7.6 percent;
- Adjusted earnings per share are now expected to be in the range of $7.10 to $7.30, excluding any non-recurring charges, compared to the previous expectation of $5.80 to $6.10.
At the midpoint of full-year 2021 guidance, fourth-quarter sales are projected to increase in the low double-digits relative to 2020. Fourth-quarter operating margins are expected to reach approximately 6.6 percent, an increase of 140 basis points compared to 5.2 percent last year. Embedded in fourth-quarter guidance is incremental headwinds totaling more than 350 basis points as compared to the same period in q4 2019, including higher digital penetration rates, freight and holiday surcharges, and higher wages and incentives.
Photo courtesy Kohl’s/FLX Private Label