Kohl’s Tight Inventory Management Bolsters Earnings

Retailer reported a 7.7% increase in profit of $140 million during Q2 FY16

k1Specialty department store Kohl’s Corp. (NYSE: KSS) announced its Q2 FY16 financial results on August 11th, 2016. The Menomonee Falls, Wisconsin-based Company is a leading specialty department store with more than 1,100 stores in 49 states. Kohl’s sells private label, exclusive and national brand apparel, footwear, accessories, beauty and home products. Its website includes merchandise, which is available in its stores, as well as merchandise, which is available only online. The Company’s private brands include Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life. Its exclusive brands include Food Network, Jennifer Lopez, Marc Anthony, Rock & Republic, and Simply Vera Vera Wang. Read more about Kohl’s financial results below.

Q2 FY16 financial highlights

In Q2 FY16, Kohl’s overall revenue fell 2% to $4.18 billion, but surpassed analysts’ expectations of $4.17 billion. Comp sales declined by 1.8% during the reporting quarter compared to a 0.1% increase a year before, as a result of lower traffic. The lone bright spot was Kohl’s encouraging performance in juniors and young men’s departments amid back-to-school shopping, which bolstered its gross margin from 38.9% to 39.5%, in part through effective inventory management initiatives. As a result, Kohl’s ending inventory per store was down significantly from the year-ago quarter.

Source: Kohl's
Source: Kohl’s

Kohl’s, which mostly caters to the middle-income consumer base, is particularly vulnerable to rising competition from off-price retailers such as The TJX Companies Inc. (NYSE: TJX). However, Kohl’s expects to benefit from its loyalty program, upgraded beauty departments, and new marketing and merchandise efforts. Kohl’s also plans to test a smaller-format Kohl’s store, on the same lines as other retailers have earlier tried and tasted success.

Even as rival Macy’s announced that it would shut an additional 100 locations, Kohl’s has no plans to close additional stores. Rather, the Company feels that having a broad network of brick and mortar locations is a big advantage that can help drive online sales and serve as shipping locations. Kohl’s 21% of online sales in Q2 FY16 came from customers who ordered online and picked up at a physical store. Kohl’s closed about 18 stores in Q2 FY16.

Adapting to changing consumer preferences

Kohl’s is also realigning its operations to adapt to the changing consumer landscape. Kohl’s, like other retailers, has been struggling with muted sales, dwindling store traffic, competition from discount retailers, and thrifty consumer spending.

Source: Kohl's
Source: Kohl’s

Last year, it unveiled a multi-year plan that included stocking more national brands, offering compelling savings, tailoring merchandise to local tastes, and better targeting promotions, even as the Company was considering going private or breaking up, as reported by The Wall Street Journal in January 2016.

Kohl’s is increasingly localizing the merchandise selection and shortening the cycle from initial product design through production, and ultimately to store shelves. The retailer has already achieved success with this game plan with its SO line of juniors clothing, which saw double-digit sales increases this spring compared with last year, despite smaller inventories. Encouraged by the outcome, Kohl’s wants to speed up the process for its house brands as a whole by 25%, and for private-label women’s apparel, a critical business for the Company, by 40%. That could drive more traffic into stores as shoppers see fresher selections of merchandise, and could help the retailer better ride trends.

Source: Kohl's
Source: Kohl’s

Overall, Kohl’s reported a 7.7% increase in profit of $140 million, or $0.77 a share, compared with $130 million, or $0.66 cents a share, a year earlier. Excluding certain items, earnings rose to $1.22 a share from $1.07 a year ago.

Store update

Kohl’s ended Q2 FY16 with 1,150 Kohl’s stores, 12 FILA Outlet stores, and three Off/Aisle clearance centers in 49 states, compared with 1,164 Kohl’s stores at the same time last year.

In the coming months, Kohl’s will open six smaller-format stores that, at 35,000 square feet, are less than half the size of a typical Kohl’s location. Cheaper to operate, such stores are expected to be opened in places that either have too little population to support a full-size Kohl’s or for dense urban areas where real estate is pricey. In either case, they can do double duty as traditional stores and as distribution centers for online merchandise.

Other highlights

On August 10th, 2016, Kohl’s announced that Adrianne Shapira has been elected as a new board member, effective immediately. She has been elected to a term expiring at Kohl’s 2017 annual shareholders meeting and will be eligible for re-election by Kohl’s shareholders at that time. She will initially serve on the Board of Directors’ Governance and Nominating Committee. Shapira currently serves as a director of The Hain Celestial Group, Inc., a leading global organic and natural products company.

Kohl’s also announced that Dale Jones resigned as a member of the Board of Directors of the company, effective August 9th, 2016.

Dividend

On August 9th, 2016, Kohl’s Board of Directors declared a quarterly cash dividend on the Company’s common stock of $0.50 per share. The dividend is payable September 21st, 2016, to shareholders of record at the close of business on September 7th, 2016.

Guidance for full year FY16

Kohl’s expects its FY16 diluted EPS to be in the range of $3.12 to $3.32. Excluding impairments, store closing and other costs, FY16 diluted EPS is expected to be $3.80 to $4.00, compared to the Company’s prior guidance of $4.05 to $4.25.

Stock Performance

k5Kohl’s stock ended the day at $46.01, gaining 2.38%, at the close on Monday, August 15th, 2016, having vacillated between an intraday high of $46.34 and a low of $45.03 during the session. The stock’s trading volume was at 5,370,263 for the day. The Company’s market cap was at $8.31 billion as of Monday’s close.

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