Kohl’s willingness to experiment puts it in good position

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Kohl’s willingness to experiment puts it in good position

By Neil Saunders, managing director of GlobalData Retail - 11/19/2019
Kohl’s exterior

Kohl’s has produced a mixed bag of numbers. The positive news is that after declining for a couple of quarters, comparable sales have returned to positive territory. Admittedly the uplift of 0.4% is anemic, but growth is growth and Kohl’s has delivered it off the back of a solid prior year comparative. The negative news comes from the bottom line where operating income is down by almost 21% and net income by just over 23%.
 
There is no doubt that Kohl’s delivered its results against a more challenging backdrop. Across the retail economy, the third quarter was reasonable. However, apparel was a very weak category with consumer demand down and retailers pushing up discounting to try and stimulate sales. Like others, Kohl’s felt the cold wind of this and struggled to generate growth. It also had to respond to increased promotional activity in the market which helped to erode margins and profits.
 
Ultimately, the outcome could have, and likely would have, been worse if it wasn’t for the various initiatives that Kohl’s has undertaken. These include the Amazon returns program which is helping to drive footfall into stores, investments in omnichannel, and new product and brand development. Taken together, these things have helped to generate momentum – including attracting and converting some younger consumer demographics which Kohl’s has not traditionally served. Most of these strategies are far from mature so we expect the benefits from them to accrue over the remainder of this year and into 2020.
 
The fact that Kohl’s is trying, and continues to try, new ideas is one of the things we like about the company. Unlike some other retailers in its segment, it has not been afraid to experiment, nor has it been unwilling to commit to things that help make it relevant and meaningful to consumers. This puts the company in a good position, even if it is in a difficult part of the market.
 
Looking ahead we believe that further initiatives, like Curated by Kohl’s assortments – which create newness and interest in stores and online – the enhancement of the loyalty program, the refresh of the website, and the continued introduction of new brands and assortments will all help to lift results. Taken alone, none of these things will push Kohl’s sales numbers into the stratosphere but taken together they put some wind beneath the company’s wings. Moreover, they show that management has a clear vision of the future and what Kohl’s needs to do in order to be successful.
 
Despite the hard work, it will not be plain sailing in 2020. Many of the steps Kohl’s is undertaking come with costs attached and these, at least in the short term, will weigh on the bottom line. The drive to develop multichannel, for example, has boosted sales but it has eroded margins as the cost to serve customers has risen. Ultimately, we believe this squeezing of the bottom line is the price Kohl’s must pay to keep itself relevant; as such it is a prudent investment. In any case, over time the initiatives will swig into profit.
 
The other forward concern is the consumer economy. This remains solid but we expect conditions to deteriorate as we move into 2020. This does not necessarily mean a recession, but it likely means consumers will be more careful and discerning in their purchases. Generally, Kohl’s shoppers are a bit more exposed to economic swings than average and this means the company will need to double down on attracting them and persuading them to spend. Fortunately, next year comparatives become much easier to beat which will help provide buoyancy to growth even in a more difficult environment.

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