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FINANCE

Analysis: Kohl’s going through ‘soft’ periods, but still has a lot going for it

Given that this is now the third consecutive quarter in which revenues have fallen and the second in which comparable sales have dipped, there can be no doubt that Kohl’s has been blown off course. The days of heady growth have long since gone and the company is going through a softer period. On the bottom line, both operating and net income fell to a similar degree; although unlike some rivals, Kohl’s remains profitable.

The key question is: Why has Kohl’s performance deteriorated?

First, Kohl’s is lapping tough prior year comparatives when both total and comparable sales grew by around 4%. In large part this was down to a very robust consumer economy where shoppers were spending the proceeds of tax cuts and bonuses. From our data, Kohl’s was a beneficiary of this. Not only did this trend not repeat itself this year, but the consumer economy has softened as confidence has dropped. Notably, confidence has dropped more among Kohl’s shoppers than it has on average.

Second, the weather was not entirely helpful over the second quarter – especially at the start of the period. This resulted in an overall softening of demand for apparel which affected Kohl’s as it did other retailers. As the quarter progressed, weather normalized and so did sales.

Third, in response to the softness in demand Kohl’s had to promote to sell through product. This compressed margins, albeit marginally. Unfortunately, the success of the discounting activity was somewhat dampened by the fact that many other retailers were also reducing prices over the period. Indeed, the second quarter was extremely promotional which generated a bit more shopping around – something that was unhelpful for Kohl’s.

Although these factors coincided to produce a disappointing outcome, we see them more as temporary bumps in the road than a signal that Kohl’s is in trouble. In our view, Kohl’s does not share the desperation of other department stores and has several things working in its favor.

Foremost among these are the steps the company is taking to drive footfall. This includes the rollout of the Amazon Returns program which was completed during the second quarter – so was not fully beneficial to the period. The initiative is now well advertised in stores and we believe it will help pull in customers over the next year. Admittedly, it is not a revolutionary program nor is it a cure-all for the issues Kohl’s faces, but it is a relatively straightforward step that is quick to execute and will bring positive benefits to the business. This includes drawing in younger consumers.

Getting customers into store is half the battle, but the other half is ensuring that they engage and buy once they are there. On that front, Kohl’s has a lot of new brand launches – both national and own-label – which should deliver over the next half of the year. These include the introduction of Nine West in fall and a capsule collection by designer Jason Wu over the holidays. In our view, Kohl’s is clearly taking steps to keep its offer fresh and this will make a significant difference.

From a performance point of view, these things will be aided by softer comparatives in the second half, which should help Kohl’s deliver better numbers. Indeed, comparables strengthened over the second quarter, which bodes well for the outlook.

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