Kohl’s active category continued its momentum in the third quarter and officials elaborated on its recently announced goal to expand active assortments from 20 percent to “at least” 30 percent of sales.
The plans for active’s growth were revealed in an Investor Presentation Powerpoint provided on October 20.
The plan is part of Kohl’s updated vision “to be the most trusted retailer of choice for the active in casual lifestyle,” Michelle Gass, Kohl’s CEO, said on the retailer’s third-quarter conference call Tuesday morning with analysts.
“As we think about active, we think of it in the broadest sense covering multiple categories, including active apparel and footwear, accessories, athleisure and outdoor. Our insights show that more people are focusing on health & wellness, whether it’s working out or spending time outdoors. In addition, their active and athleisure wardrobe is expanding into many new occasions, and we expect this trend to continue.”
She noted that growing active had already been a “key growth driver” in recent years with the business doubling in penetration since 2013. She added, “Clearly the customer is giving us permission to play here. In Q3, active once again outperformed the company with notable positive apparel sales growth, driven by our key national brands.”
Four Growth Drivers For Active
Gass cited four drivers of active’s growth, including increasing space dedicated to active in its stores by nearly 20 percent. The retailer’s recently expanded test of enhanced square footage to 160 stores has outperformed and ”gives us confidence that as we grow space across the fleet, we will drive incremental sales and productivity,” she said.
In its investor presentation, Kohl’s highlighted a focus on expanding assortments/collaborations and increasing dedicated space to the key national athletic brands: Nike, Adidas and Under Armour. Adidas shops-in-shops has recently been launched in 175 locations.
Beyond expanding dedicated space, a second growth driver is expected to be FLX, an expansive athleisure range to launch in Spring 2021. Said Gass, “FLX fills a whitespace in our current men’s and women’s assortment featuring a modern and elevated aesthetic made with performance fabrics and sustainable materials.”
A third driver is amplifying the recent success of the Champion brand, where sales climbed 95 percent in the third quarter. Said Gass of Champion, “We see the great runway ahead, and will further expand placement in men’s, women’s and kids.”
Finally, Gass cited the opportunity to expand outdoor. She said, “Consumers have also shown a growing interest in the outdoor lifestyle. Kohl’s is uniquely positioned to serve the entire family, with great brands like Columbia and our newly introduced Lands’ End offering. Given the early success we are seeing with Land’s End, we will continue to offer their full catalog online, and we will be doubling the number of stores offering Lands’ End in 2021.” Lands’ End was introduced at 150 doors this fall.
Other growth drivers cited in the presentation included expanding inclusive sizes to build on the introduction of Under Armour and Adidas Plus earlier this year as well as Under Armour Big & Tall last fall. Inclusive sizing sales have outpaced the active category’s growth for Kohl’s and that’s expected to continue.
Active assortments will also be extended online, including adding more sizes, colors and styles, as well as maximizing the fan apparel opportunity through its Fanatics partnership. Expanding Vans and curating and introducing emerging brands are also expected to fuel growth.
Women’s, Beauty And Newness To Drive Kohl’s Top-Line Growth
Other growth drivers outside active include women’s, a traditional core category that has underperformed in recent years. A new leadership team and structure for women’s has been put in place. Eight down-trending brands were exited earlier this year and a focus has been placed on improving clarity by significantly reducing choice counts and building depth.
“While this is a long term strategy, we are beginning to see some early wins,” said Gass. “Consistent with where customer trends are going, we are leaning into categories like athleisure, lounge and sleepwear, and intimate, which performed very well in Q3. We also saw some of our causal brands like So and Nine West deliver strong growth during the quarter. Looking ahead, we feel good about our ability to show continued progress. In 2021, we will further iterate and evolve the portfolio to drive even more relevancy.”
Plans include phasing out the Apartment Nine brand in women’s to focus toward Nine West and exiting Chaps altogether.
Other growth priorities include beauty, which still accounts for a low-single-digit penetration of overall revenues and has seen steady growth of nearly 40 percent over the past five years. Elevated beauty shops were recently expanded to 62 stores.
Finally, “newness and discovery” will be a focus, exemplified by the introduction of Toms shoes and Lands’ End this year. Both are exceeding expectations. Cole Haan will be rolled out in 2021 and Kohl’s has “several more new brands in the pipeline.”
Price Investments Planned To Emphasize Value
Kohl’s also elaborated on plans to invest more in price to support its value proposition. Gass said, “One of the insights we have is that customers want to understand the end price they’re paying more quickly. While promotions will continue to be important. We are balancing this out by investing more in price.”
Simplifying its rewards program and capitalizing on omnichannel capabilities will also be a priority.
Digital sales represented 32 percent of total sales in the third quarter, increasing 25 percent. Stores supported much of this growth, fulfilling nearly 40 percent of digital sales. Gass noted that omnichannel customers are six times more productive than a digital-only customer and four times more productive than store-only customers.
She added, “We will continue to invest in our omnichannel capabilities as this truly leverages our advantageous off-mall presence. We are focused on driving further adoption of our pickup offerings, and especially store drive-up. And we continue to be pleased with Amazon returns, both from a customer experience and economic standpoint.”
Goal Set To Increase Operating Margins To 8 Percent
Jill Timm, CFO, discussed Kohl’s new goal to expand its operating margin from 7 to 8 percent.
Gross margins are expected to continue to benefit from a focus on inventory management that includes a focus on narrower choices and greater depth. Margins are also expected to benefit from adding more productive categories like active while streamlining less productive ones, like dress apparel in men’s and women’s and fine jewelry. The moves to optimizing promotions and pricing are also expected to help limit markdowns.
On the expense side, operating with fewer store hours with just one entrance open has helped reduce payroll costs. Both self-checkout and self-return are being tested with an expense benefit. A shift toward digital media overprint is also being found to be more cost-efficient.
In September, Kohl’s reduced its corporate workforce by approximately 15 percent to align its cost base in response to the business impact resulting from the pandemic. Timm said the retailer’s corporate restructuring actions in 2020 are expected to deliver expense savings of more than $100 million on an annualized basis.
Gass noted that Kohl’s was able to deliver a margin rate of 8 percent in 2017 and 2018 with a modest level of growth. The CEO said, “With our transformational margin initiatives already underway and our continued focus on operational excellence, we are confident that we can return to this level.”
Kohl’s Q3 EPS Handily Tops Wall Street Targets
The update on its growth plans came as Kohl’s reported third-quarter results that were significantly down due to the pandemic but far ahead of Wall Street’s consensus targets.
In the quarter ended October 31, the reported loss came to $12 million, or 8 cents a share, against earnings of $123 million, or 78 cents, a year ago. On a non-GAAP basis, earnings were $2 million, or 1 cent, down from $116 million, or 78 cents, a year earlier. Wall Street’s consensus estimate had been a 43 cents loss.
Revenues fell 14.0 percent to $3.98 billion, ahead of Wall Street’s consensus estimate of $3.88 billion. Comparable sales slumped 13.3 percent.
Gass said the pandemic’s impact on back-to-school sales weighed heavily on Kohl’s sales performance in August, but sales “nicely rebounded” in September and October. Sequential sales showed significant improvement compared to the second quarter when many stores were shut down.
“We were particularly pleased with the continued strong positive growth in our home and toys businesses, as well as our performance in active and beauty,” said Gass. “We are encouraged by these trends, given that these categories grow in importance over the holiday season. And they are a key part of our strategy going forward.”
Dress apparel and footwear were softer categories tied to stay-at-home trends.
Active’s growth benefited from positive apparel sales growth, driven by both key national and private brands. Expansion in inclusive sizes also propped up active’s gains.
Among other categories, home sales were up 10 percent overall with solid demand for cookware, food preparation and kitchen electrics, as well as floor care and bedding. Children’s outperformed the company with double-digit growth in toys.
Gross margins eroded 48 basis points to 35.8 percent from 36.3 percent but showed significant sequential improvement from Q2. Pressures from increased shipping costs due to an increase in digital sales penetration were partly offset by inventory management and pricing and promotion optimization.
SG&A expenses were reduced 8.2 percent to $1.3 million but increased as a percent of sales to 32.7 percent from 30.7 percent. The net decline was due to lower store payroll, marketing and credit expenses. Excluding expenses related to COVID-19, SG&A expenses fell 10 percent.
Inventories Reduced 26 Percent
Inventory levels were down 26 percent year over year with turn increased to a five-year high. Said Timm, “We also improved the health of our inventory, with aged inventory down significantly in the second quarter. We will continue to manage inventory tightly with the opportunity to chase this demand in Q4 and beyond.”
The retailer fully repaid its revolving credit facility and ended the quarter with $1.9 billion in cash.
Given ongoing uncertainty and in line with its peers, Kohl’s did not provide a holiday sales update. Gass said Kohl’s will be emphasizing its omnichannel capabilities, including store pick-up, and believes the categories the chain has seen momentum in this year will continue to resonate this holiday.
Said Gass. “We are emphasizing active, home, cozy & comfort, and toys. These areas become even more important in the fourth quarter, which positions as well. We also expect to see more practical gifting and a continued focus on value, this holiday, which Kohl’s is known for. This holiday period is going to be unique, and we are prepared and confident that we will deliver the great experience that our customers, always expect from Kohl’s.”
Photo courtesy Kohl’s
