By Thomas J. Ryan
Kohl’s Corp. reported a dismal first quarter as sales were “materially impacted” by COVID-19. However, the department store operator expects to gain market share amid the crisis and introduced several initiatives to accelerate growth in the future.
Many of the strategies were set to be unveiled at a March analyst meeting that was canceled due to the pandemic.
On its first-quarter conference call with analysts, Michelle Gass, Kohl’s CEO, said the retailer’s differentiated position in the marketplace is anchored by three characteristics:
- An unmatched brand portfolio at the best value;
- Easy and inspiring experiences; and
- An industry-leading loyalty program.
Kohl’s plans to build on its strengths by investing in four focus areas:
- Strengthening its product leadership;
- Elevating the experience;
- Leading the next generation of loyalty; and
- Operating with excellence.
On product leadership, women’s, active, beauty and newness are four key priorities.
Kohl’s has stated previously that it’s committed to modernizing women’s offerings and it’s now moving to exit eight down-trending women’s private brands: Dana Buchman, Jennifer Lopez, Mudd, Candie’s, Rock & Republic, Pop Sugar, Elle, and Juicy Couture. Their removal, according to Gass, “will create space to introduce a more current and compelling offering to our customers, while improving the overall clarity to reduce choice counts.”
Second, Kohl’s remains committed to growing the active category. The growth has been marked by strong gains from Nike and Adidas as well as the introduction of Under Armour in 2017. Said Gass, “We’ve nearly doubled our active sales since 2013, and we see continued momentum in this category as customers focus on staying healthy.”
Kohl’s remains committed to building a “large beauty business” with several new brands added last year. An elevated beauty experience was rolled out to 12 stores in 2019, and the upgraded beauty layout will reach 50 more stores in 2020.
Finally, emphasizing “newness” will continue. In mid-March, Kohl’s announced that beginning in fall 2020 it would bring Lands’ End merchandise to 150 stores as well as online. Gass describes Lands’ End as an “iconic brand and a market leader in the classic casual lifestyle.” Kohl’s will also introduce Toms and Gass expects the canvas slip-on footwear brand “will resonate with our millennial target.”
Refreshing the existing store experience, driving localization and accelerating digital growth are three priorities towards elevating the experience. Said Gass, “A few examples include investing to create more compelling merchandising, leveraging in-store technology to drive better customer experiences and efficiencies, and implementing a more tailored approach to local markets. In addition, we will continue to invest in supporting the growth of our digital business, which has more than doubled in sales since 2014.”
Regarding loyalty, Gass said the department store has 30 million rewards members that connect to the retailer in three ways: Kohl’s Cash, Kohl’s rewards program, and the Kohl’s charge private label card. Said Gass, ‘We know that as we move customers up the loyalty ladder, sales productivity significantly increases. To enhance our efforts on this front, we are integrating our loyalty assets and leveraging personalization.”
Finally, Gass said “operating with excellence and enhancing our profitability has been one of our strategic priorities for several years and it is deeply ingrained in every corner of our organization. It’s also a concept that underpins all of our initiatives and has been particularly useful as we’ve navigated through the COVID-19 crisis.”
Gass said the retailer plans to “continue to take advantage of new insights presented during this dynamic time” as it takes initial steps to revive sales amid the pandemic.
In the first quarter ended May 2, sales tumbled 43 percent to $2.43 billion as the company’s entire store base was closed for half the quarter. Gass said the business was tracking in line with expectations prior to the onset of the crisis.
Digital sales were a bright spot, increasing 24 percent in the quarter and accelerating to 60 percent growth in the month of April. Digital marketing was amplified and site content updated to support the growth. More than 40 percent of digital orders were fulfilled by ship-from-store and customer pickup during the quarter.
All categories saw online growth in the quarter. Home was the strongest with digital sales increasing more than 50 percent on strong demand for kitchen electrics, vacuums, electronics, and gaming. Continued digital strength is seen in areas like active, toys and beauty. Basics, intimates and sleepwear all saw better-than-average growth while apparel and footwear lagged digital growth.
The net loss in the quarter came to $541 million, or $3.50 a share, against net earnings of $62 million, or 38 cents, a year ago.
On a non-GAAP basis, the net loss was $495 million, or $3.20 a share, against earnings of $98 million, or 61 cents, a year ago. Non-GAAP results exclude impairments, store closing and other costs. Non-GAAP results were well below Wall Street’s consensus estimates calling for a loss of $1.67.
The operating loss came to $718 million against operating profits of $118 million a year ago.
Gross margins eroded to 17.3 percent from 36.8 percent a year ago primarily due to aggressive markdowns to clear inventories. SG&A expenses were reduced 16.4 percent to $1.07 billion from $1.28 billion a year ago but expanded to 43.9 percent of sales from 31.2 percent a year ago.
Gass said moves to manage cash outflow and increase liquidity have positioned the retailer to navigate the crisis. Among the steps taken:
- Managed inventory receipts meaningfully lower,
- Significantly reduced expenses across the business inclusive of marketing, technology, operations and payroll,
- Decreased planned capital expenditures by approximately $500 million,
- Suspended share repurchase program,
- Suspended regular quarterly cash dividend beginning in the second quarter of 2020,
- Replaced and upsized revolver to $1.5 billion secured facility, and
- Issued $600 million notes due 2025.
Kohl’s has begun the rebuilding process, recently reopening about 50 percent of its stores across the country. Gass said the company expects “sales will rebuild gradually during the remainder of the year as people get more comfortable living in this new normal.” As a result, Kohl’s will be planning the business conservatively in the near term. Gass said, “Our company has a long history of operating with great discipline, and we believe prudence dictates caution in the near term.”
As part of that, Kohl’s pulled back March and April orders to reduce first-quarter receipts by over 30 percent and manage inventory down 3 percent to last year. Further reductions in inventory are expected in the second quarter as receipts were lowered by more than 60 percent. The retailer also partnered with vendors to extend payment terms to as much as 100 days to support enhanced financial flexibility.
Said Gass. “As we look ahead, we know this experience will have a lasting impact to customer behavior and the retail landscape, and we are evolving our strategies to ensure our relevance and to capture market share.”
Photo courtesy Kohl’s