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Analysis: Kohl’s remains on the right track

This is a fairly mixed set of results from Kohl’s which requires some unpicking due to a number of dynamics. However, the overall results are reasonable and suggest the company continues to make progress as it reinvents its offer and revitalizes its operations.

On the sales side, the overall decline of 3.3% looks poor. However, this is a function of a shorter trading period compared to last year. The comparable sales growth of 1% provides a better reflection of performance. Admittedly, this also looks soft but when placed in a wider context we believe that the result is solid – not least because Kohl’s posted stellar comparable sales growth of 6.3% last year. That the company still posted positive same-store numbers against this tough comparative is a victory of sorts.

Turning to the bottom line, the declines at both operating and net income level look poor. Again, the impact of one less week of trading has taken its toll. However, so too have a number of exceptional charges related to store closures, operational restructuring, and the extinguishment of debt. While all of these factors have caused some short term pain, they will pay longer term dividends over the next few years.

Looking in more detail at trading over the key holiday period, we believe that Kohl's executed well. Assortments were strong over Thanksgiving and Black Friday, with plenty of solid offers to entice shoppers. The same is true of the Christmas period, where our tracking shows that Kohl's benefitted from increased shopper numbers for both gifting and self-gifting, especially on apparel and athleisure.

The company's omnichannel services were also beneficial, with the convenience of buying online and collecting in stores proving a major growth area. While we believe investment in omnichannel and the growth of digital may have impacted margins, Kohl's has made up for this with lower discounting and efficiencies elsewhere.

Looking ahead, we remain broadly positive about Kohl’s and believe that a number of initiatives will help to secure reasonable growth over the coming years.

Among these is the development of own-brand. We believe that this is important for two reasons. First, it will help to differentiate Kohl's from other players in the market. As Target and others have shown, having a strong own-label offering is a critical defense mechanism against rivals, especially those that play online. Second, we believe that well developed private labels will help Kohl's to bolster margins over the medium term.

The push into smaller store formats is also critical as it allows Kohl’s to improve productivity, especially as it shuts some of its underperforming older stores. The ongoing streamlining of the fleet is important in keeping the bottom line healthy at a time when more sales are migrating to digital.

Although they remain small-scale in the scheme of things, we are also encouraged by Kohl's willingness to experiment with initiatives such as accepting Amazon returns in a handful of stores and its potential partnership with Aldi. Although these might not be obvious moves, they are logical inasmuch as they help drive footfall to stores, and help given an edge to sales growth.

Overall, we believe that Kohl’s remains on the right track. Sales gains may be slimmer in the year ahead, but the company is in a good position to deliver at least some growth.
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