Kohl’s Corp said it continued to see strong momentum across its Active categories in the fourth quarter. The retailer also said that its test of expanded Active areas will be extended to 160 stores and Nike plus-size offerings will arrive this spring.

On a conference call with analysts, Michelle Gass, CEO, said the department store believes it’s continuing to gain share in Active categories as it saw mid-single digit growth in Active in Q4. She said, “Our Active business which penetrates now nearly 20 percent of our total business has accelerated every year since we launched the Greatness Agenda in 2014 and we see even more potential ahead.”

In Q4, success in Active was seen across all apparel and footwear classifications. Added Gass, “Our key Active national brands, Nike, Under Armour and Adidas, all reported positive growth. It’s also worth noting that fitness trackers, particularly Fitbit, continue to perform really well.”

She added that with the continued success Active, Kohl’s will be extending its in-store Active expansion strategy to approximately 160 of its highest-performing Active stores in 2019. Kohl’s launched its “active expansion test” in 30 stores last August. In the sections, square footage dedicated to Active expanded by 40 percent.

Said Gass, “I’m very excited about how our pilot went, the 30 store test proving out that we can further extend in this really important category. I think importantly as we do, customer surveys and the like, customers are giving us credit for being a real player in Active. I mean, there really has been a shift since 2014 when we began this journey. So there’s lots of good examples across — really across all lines of business and levels and innovation. I’d call out on the men’s side, as an example, getting into the golf business with their active brands has been a huge hit.”

Beyond national brands such as Nike, Under Armour and Adidas, the Active push is being supported by the chain’s private label brands, like Tek Gear. The company’s active assortment has also expanded with category additions and relevant product offerings, including men’s golf and big & tall apparel, in 2018.

Further linking the chain to fitness, Kohl’s on Tuesday announced a development partnership with Planet Fitness, the franchisor and operator of fitness centers. Initially, the plan calls for up to 10 Planet Fitness stores to open adjacent to select Kohl’s stores across the country in 2019 with the opportunity for additional locations in the future.

Said Gass in the Q&A session, “We see the Planet Fitness partnership as a real win-win. And in fact, the teams are working to take advantage of the co-location in these first 10 stores to figure out how we can co-market to these customers. So very excited about it. I think like everything, we have to build a few, we’ll learn and we’ll take it from there, but all our indications are this is going to be a great fit for us and for our customers.”

Gass also noted the retailer recently announced a new strategic collaboration with WW, the new Weight Watchers global wellness company. Said Gass, “I’m excited to see where this partnership will take us on our journey to be the destination for active and wellness for the family.”

Companywide, Kohl’s Inc. reported earnings and revenue in the fourth quarter that topped analyst’s targets and gave an upbeat outlook for 2019.

In the fourth quarter ended February 2:

  • Earnings on an adjusted basis rose 17.3 percent to $366 million, or $2.24 a share, from $312.0, or $1.87. Results beat Wall Street’s consensus estimate of $2.18.
  • Net sales were down 3.3 percent to $6.82 billion but topped the consensus target of $6.58 billion.
  • Comps were ahead 1.0 percent against a 6.3 percent gain last year and topped the consensus expectation of 0.3 percent growth.

Net income fell to $272 million, or $1.67, from $468 million, or $2.81, a year ago. Both periods included non-recurring items related to impairments, store closures, a loss on the extinguishment of debt and the impact of tax reform.

The comp gains were driven by the 1.2 percent increase for the combined November-December holiday period announced in January.

The sales performance was driven by positive transactions and a double-digit increase in digital sales, which was on top of the 26 percent increase in the fourth quarter of last year. Geographically, strength across the country, except for slight softness in the Northeast. The Midwest region was the strongest.

Bruce Besanko, CFO, said Kohl’s believes Q4 results were positively impacted by competitor store closures, particularly in the Midwest with the exit of Bon-Ton Stores. Said Besanko, “Competitor closures will remain a unique opportunity to capture market share. We’ll continue to invest incremental marketing dollars and position inventory to ensure we capture a disproportionate share of sales and customers from these competitor store closings.”

From a line of business perspective, children’s and men’s outperformed the company’s comp average. The core women’s business, which excludes juniors, was flat, driven by strength in modern, casual and Active categories.

Gass said children’s saw strength across all categories. The introduction of LEGO and FAO Schwarz, along with enhanced in-store and digital toy experiences, drove a “significant increase” in toys in the quarter. In apparel, strength was seen in Active categories, national brands such as Carter’s, and its proprietary Jumping Beans brand.

Men’s also saw “another very strong quarter,” outperforming the company average and marking its fifth consecutive year of positive sales. Gass said men’s continues to benefit by having “a great balance of national and proprietary brands, fabric innovations, pursuing opportunities such as Active, Golf, and Big and Tall, and smart inventory management. We expect the strength in the men’s business to continue.”

Footwear ran in line with the company average with another quarter of positive comps, driven by strength in Active brands, fashion boots and casual national brands such as Vans, Koolaburra by Ugg and Clarks.

Home also ran positive, coming off of an “exceptionally strong” Q417. Drivers included key holiday items in electronics, in kitchen electric, such as the instant pot, and in core categories including bedding and luggage. Accessories was essentially flat as strength in beauty and fashion accessories were matched by underperformance in handbags and jewelry.

The core women’s business “continues to be a key priority” for Kohl’s and strength was seen in modern apparel, Active, intimates and sleepwear. Juniors and women’s classics underperformed.

Gross margin increased 1 basis point to 33.5 percent and was in line with internal expectations. Fourth quarter margin reflects increased mix headwinds from strengths in categories such as electronics and toys, a higher penetration of digital sales during the holiday period, and a continued shift to national brands.

SG&A decreased 1.9 percent to $1.7 billion for the quarter although still increasing as a percent of sales to 24.8 percent from 24.4 percent. Expense savings from its Operational Excellence program was able to offset wage pressures. IT expenses increased due to continued investments in the cloud and other technology initiatives and marketing expenses were also slightly higher as its spend shifted from earlier to later in the year to capitalize on competitor store closures.

Inventory per store decreased 2 percent, slightly less than expected due in large part to West Coast port delays, which impacted the timeliness of seasonal receipts. Kohl’s achieved its 12th consecutive quarter of lower inventory levels and a 15 basis point increase in fourth quarter inventory turn.

For 2019, EPS is expected to range between $5.80 to $6.15, which was above Wall Street’s consensus target of $5.77. The guidance assumes a comparable sales change of 0 percent to 2.0 percent and a gross margins increase up to 10 basis points over 2018. SG&A dollars are projected to increase 1 percent to 2 percent over 2018. Excluding the impact of lease accounting, SG&A dollars are expected to increase 0.5 percent to 1.5 percent

Gass said driving traffic continues to be Kohl’s number one priority with one focus being a shift to digital marketing. About half of its marketing spend was digital in the fourth quarter, “allowing us to be more agile throughout the season and to deliver more personalized marketing messages direct to our customers,” said Gass.

Kohl’s is also placing a greater focus on key events in the holiday season, expanding its next generation loyalty program, Kohl’s Rewards, and further investing in personalization efforts.

In omnichannel, the online growth reflected investments in the mobile app, Your Price, Personalized Search, Smart Cart and fulfillment options such as BOPIS. Mobile again represented the majority of traffic growth in the fourth quarter, at over 70 percent of digital traffic and more than half of digital sales. Stores are now able to fulfill as much as 40 percent of digital orders with in-store pickup. Mobile checkout functionality was introduced to 150 stores. Ship-from-store capabilities will expand to 135 stores this year.

For 2019, one focus in merchandising is the plus-size women’s category. With 67 percent of women being size 14 or larger, Gass said Kohl’s has a “significant opportunity” in the women’s plus business. Later this month, EVRI, a new women’s private label plus brand that offers a broad assortment of modern wardrobe essentials and relevant fashion, will be introduced. She added, “We’ll also expand our plus size offerings in Nike this spring, further positioning ourselves as an active and wellness destination for the entire family.”

Other merchandising plans in 2019 include the launch of Nine West in shoes, handbags and apparel, as well as Scott Living in home.

In marketing, Kohl’s is significantly investing in customer analytics and machine learning to automate customer engagement at scale. Said Gass, “While we will always focus on connecting in meaningful ways with our existing customers, we know we have a particular opportunity to gain share among millennial, especially millennial moms.”

Kohl’s will also continue to explore ways to better engage millennials. As an example, Kohl’s will be testing an outfit bar concept in approximately 50 stores in Chicago and Philadelphia. Said Gass, “The bars will include a curated assortment of millennial-loved brands such as LC Lauren Conrad, Levi’s, POPSUGAR, Nike and Adidas, which is updated every 30 days. The in-store experience will be mirrored on our digital landing page and it will be fully supported with digital and social media.”

Image courtesy Kohl’s