Kohl’s, Inc. estimated that sales growth in the fourth quarter was impacted by approximately 400 basis points as a result of deteriorating supply chain disruption, but earnings topped expectations due to gross margin improvement. Kohl’s also provided upbeat revenue guidance for the current year with the benefit of Sephora in-store shop roll-outs, expected improved stock levels and continued momentum across active categories.

In the fourth quarter ended January 29, sales rose 5.8 percent to $6.5 billion, missing Wall Street’s consensus target of $6.78 billion.

“Following a strong sales start to the quarter, we experienced significant additional inventory receipt delays and were unable to fulfill all of the customer demand during this critical holiday time,” said CEO Michelle Gass on a call with analysts. “We estimate that our sales growth was impacted by approximately 400 basis points as a result of the worsening of supply chain disruption to our business. We also experienced softening in-store traffic in January due to Omicron.”

The 5.8 percent gain reflects a double-digit increase in store sales. Online sales were down 1 percent year over year but ahead 21 percent versus the same period in 2019. As a percent of sales, online made up 39 percent of overall sales in the latest quarter.

Gass said in general, the best performances were seen in categories with sufficient inventory, such as active, while the worst came from understocked categories, like women’s. She said, “This gives us confidence that as we improve our inventory position in 2022 we will be able to better capture customer demand and drive sales growth.”

Active Q4 Revenues Climb 25 Percent
Among categories, Active continued its momentum in recent years as the chain continues to invest in more brands and space in the category. Active sales grew more than 25 percent in the quarter against last year as well as on a two-year basis.

“Kohl’s continues to assert itself as a leading destination for the overall active category, including performance, athleisure and outdoor,” said Gass. “Through its differentiated portfolio of national and private brands, we saw strength across all active categories for women’s, men’s and children’s apparel, as well as in footwear.”

Kohl’s four key active national brands, Nike, Under Armour, Adidas, and Champion, “all experienced exceptional growth,” said Gass. Vans, Levi’s, Koolaburra by UGG, Hurley, Ninja, and Lego were among other national brands that outperformed. Among its private labels, strength was seen in Tek Gear, Sonoma and So.

 

Gross Margins Improve 124 Basis Points
Gross margins were 33.2 percent, up 124 basis points year over year, driven primarily by higher inventory turns and regular price selling, reduced sourcing costs, and pricing and promotion optimization strategies. These factors offset higher transportation costs as freight expense was more than a 140 basis point headwind to gross margin in Q4 and was $40 million higher than we expected.

SG&A expenses increased 5 percent to $1.7 billion, driven principally by top-line growth. As a percent of sales, SG&A gained leverage of 15 basis points due to improved store labor productivity and lower technology expenses more than offsetting increased wages at stores and fulfillment centers.

Operating income grew 42.4 percent to $450 million with an operating margin of 6.9 percent, representing an increase of 172 basis points to last year.

Net income for the quarter was $299 million, down from $343 million. The year-ago period included a $97 million, or $1.15 a share, tax benefit. EPS was $2.20 in each period due to fewer shares outstanding.

On a non-GAAP basis excluding non-recurring items, earnings reached $299 million against $346 million, representing a decline of 14 percent and reflecting the year-ago tax benefit. EPS was down 1 percent to $2.20 from $2.22 a year ago but topped Wall Street’s consensus estimate of $2.10.

Record Full-Year Results
For the year, Kohl’s, which has been fighting off activist investors seeking board seats for several months, delivered an all-time record-adjusted EPS of $7.33, eclipsing its previous high of $5.60 in 2018.

Gross margins reached 38.1 percent, exceeding its 36 percent target and reflecting efforts to improve inventory efficiencies and drive full-price sales. The earnings improvement also reflects the reduction in marketing and technology spending each by more than $100 million since 2019. Operating margins reached 8.6 percent, exceeding a goal of reaching between 7 to 8 percent two years ahead of plan.

Sales in the year climbed 21.8 percent to $19.4 billion, reflecting the successful rollout of Sephora in-store shops to half of its stores and highlighted by ongoing strength in active, which grew more than 40 percent to 2020.

Kohl’s also announced on Tuesday it plans to double its annual dividend and buy back at least $1 billion of its stock this year.

Inventory Levels Down 40 Percent Over Key Holiday Selling Periods
Inventory turnover was “very strong” in the fourth quarter, resulting in a 4.1 times turn for the year, achieving Kohl’s goal of four times or more, according to CFO Jill Tim.

The inventory balance at year-end was down 13 percent lower than 2019, marking an improvement in recent weeks.

Timm said Kohl’s entered the fourth quarter with inventory trending down 25 percent to 2019 and slightly worse on an available-for-sale basis. A strong start to holiday sales in November, coupled with unexpected receipt delays, led to significantly less inventory in stores than planned during key shopping weeks. Average available for sale inventory was down nearly 40 percent to 2019 during November and December and in-store inventory levels were lower.

“Our inventory position began improving in January, as receipts began arriving but were still down approximately 30 percent on average during the month,” said Timm. “Looking ahead, we feel good about our overall inventory composition. Although certain receipts were late, we don’t believe we have a margin liability as we will continue to work through inventory in Q1 in core merchandise items like fleece and employ pack & hold strategies on seasonal goods such as sleep sets and pajamas. And we’ve taken additional proactive steps to ensure we are better positioned.”

For the current year, Kohl’s is calling for net sales to rise 2 percent to 3 percent. Analysts had been looking for year-over-year growth of 2.2 percent.

Kohl’s sees EPS in the range of $7.00 to $7.50, excluding items, compared with analysts’ expectations of $6.55 a share.

Sales gains are expected to be stronger in the second half, reflecting the benefit from opening another 400 Sephora in-store shops, reaching more than half of Kohl’s store base, as well as inventory levels slowly normalizing

The approximately 200 stores with Sephora in-store shops currently are seeing a mid-single-digit sales lift compared with the rest of its chain. The Sephora shops are attracting younger and more diverse shoppers with about of quarter of Sephora shop customers considered new to Kohl’s. More than 50 percent of Sephora shop customers are adding at least one item from another store category to their purchases, with women’s, accessories and active seeing the most benefit.

Providing an update on its push to position itself around the active category, Gaas noted that active departments moving to the front of Kohl’s stores as part of overall store refreshes as Sephora shops are installed. Kohl’s will also be driving growth in the active category through further expansion in assortments and elevated merchandising across all of its key national brands. She said Kohl’s is also growing its outdoor business. Following the successful launch last fall, Eddie Bauer will expand from 500 stores to all stores in 2022. The chain will also increase distribution of Under Armour outdoor from 400 stores to all stores this year and “remain committed” to growing its business with Columbia and Land’s End.

Gross margins in the year are expected to contract about 100 basis points as ongoing sourcing initiatives and some pricing actions aren’t expected to offset significantly higher freight and product cost inflation in 2022. SG&A expense is expected to be elevated in the first half to support the opening of the 400 Sephora shops, as well as related store refresh costs.

Photos courtesy Kohl’s