Department store chain Kohl’s announced its first-quarter results at the end of May. After several quarters of falling share prices and disappointing sales, they reported a surprise profit. While Kohl’s still expects net sales to decline, its latest earnings report has left some investors hopeful that the chain can slowly make a comeback.
Kohl’s has been under intense pressure from activist investors since last year. Former CEO Michelle Gass stepped down from her role last November and transitioned to Levi Strauss, with Tom Kingsbury – former CEO and president of Burlington – assuming her position.
Key learning points
- Most department store retailers have suffered since the advent of online shopping. Kohl’s is no exception, and changes in consumer behavior due to inflation have exacerbated the worrying sales numbers.
- Discount stores like TJ Maxx have made a remarkable recovery since the first pandemic, but Kohl’s hasn’t done the same.
- Kohl’s reported stronger-than-expected sales in the first quarter, briefly boosting the company’s share price.
Kohl’s performance in 2022
Kohl’s is often lumped in with discount stores like TJ Maxx. But anyone who’s ever shopped inside knows that Kohl’s isn’t quite the same.
Kohl’s has a fantastic clearance section where you can find treasures for just a few dollars. But outside of the clearance section, Kohl’s has a reputation for having clothing at a higher average price surrounded by messages for massive discounts.
When you shop at Kohl’s, the most disciplined shoppers may walk away with only sale purchasesbut most people will also buy items with higher price tags.
Given this context, it’s easier to understand why Kohl’s hasn’t gone through the same pandemic recovery trajectory as stores like TJ Maxx, where customers are more likely to go when they don’t want to spend more. With inflation soaring, most consumers are trying to economize wherever they can.
If we were to compare the companies, looking at stock values over the past five years, TJ Maxx’s chart looks like an inverted version of Kohl’s chart.
On November 24, 2017, TJ Maxx (TJX) stock was trading at $35.44. It gradually doubled in value over the next few years, reaching a high of $63.38 on Valentine’s Day of 2020. As with most businesses, it took a nosedive as COVID shut down parts of the country, reaching $37.37 on March 20, 2020 .
It’s been a bumpy but upward ride ever since, with the stock rising above $75 May 2023.
On the other hand, Kohl’s (KSS) reached a pre-pandemic peak of $81.97 on November 9, 2018. It then tumbled when the pandemic hit to $11.51 on April 3, 2020. It barely rose until December 2020, when it skyrocketed and mostly continued to rise until May 6, 2022, when it became clear that the company had a disappointing first quarter and then a potential acquisition fell through.
KSS has not fully recovered since then – it stands at $19.67 on May 25, 2023, even after experiencing a miniscule increase after publishing its latest earnings report.
Michelle Gass leaves Kohl’s
Michelle Gass joined Kohl’s team in 2013 as its first Chief Customer Officer. In 2015, she became the chief merchandising officer before becoming CEO in 2018. Gass had previously worked at the coffee giant Starbucks for nearly 17 years.
While Gass was instrumental in growing the partnership between Kohl’s and Sephora, she was also criticized for struggling to drive sales for the company. Before Gass stepped down in November 2022, activist investors had been calling for board changes at Kohl’s for about two years. Ancora and Macellum Advisors regularly pushed for a management shake-up.
Widespread inflation has badly damaged Kohl’s sales as the chain capitalizes on it in the first place consumers with a middle income. This no doubt put pressure on Gass in the months leading up to her resignation, as did her choice to end talks with Franchise Groups – owner of The Vitamin Shoppe – about a potential takeover.
Gass stepped down in November to take up a position with Levi Strauss. Tom Kingsbury, Burlington’s previous CEO, took over her role. The change in leadership led to a brief increase in share price for Kohl’s, but the stock is on a downward trend in the first half of 2023.
Disappointing holiday sales
In March 2023, Kohl’s reported disappointing holiday sales as of the fourth quarter of 2022. Net sales fell 7% in the holiday quarter and the company shared a weak outlook for 2023, with sales expected to fall between 2% and 4%.
Kingsbury tried to highlight the growth of Sephora locations in Kohl’s stores on the earnings call, but also admitted he thought the company could do better. A positive sign for the company was the easing of inflationary pressures. With the latest Consumer Price Index figures coming in below 5%, consumers are more likely to spend money on discretionary items like clothing that Kohl’s supplies.
Another persistent problem for Kohl’s is related to inventory. Many retailers struggled with overstocking in the post-pandemic, leading to discounts on items to remove them from stores. Its fourth-quarter earnings report reported that Kohl’s stock was up 4% year-over-year.
First quarter earnings surprise
In late May 2023, Kohl’s released its fiscal first quarter earnings report. The company posted a surprise profit in the quarter, bringing in $3.36 billion in revenue, slightly better than expected. Earnings per share would be 13 cents per share, significantly better than the 42 cents per share loss Wall Street had expected.
Net turnover in the first quarter fell by more than 3% compared to the same period last year. The company’s outlook also remained pessimistic, with Kingsbury reiterating that the company expects net sales to fall 2-4% this year. These figures have led some investors to fear that the company has lost its brand power and consumer appeal (especially in this inflationary environment).
However, there were several other positive signs from the first quarter earnings report. Store traffic increased during the quarter and Kohl’s had several sales to try to sell its inventory.
At the end of the quarter, inventory was $3.5 billion, down 6% from the prior year period. Inventory increased between the fourth quarter of 2022 and the first quarter, compared to $3.2 billion in the fourth quarter.
Sephora has been a big traffic engine for Kohl’s, and the fact that they’re still planning to expand their presence in Kohl’s stores is a positive sign. Kingsbury said the chain plans to expand its pet and home accessories sales, hoping to attract new customers and revive sales.
Also, while the fourth-quarter earnings report showed gross margin contracted by 1,016 basis points — accounting for knockdowns from markdowns — gross margin in the first quarter saw an increase of 67 basis points.
Investors and inflation
It can be tempting to buy a stock if you think it’s a bargain – trade for less than what you think it’s worth or will be worth in the near future. Those buying Kohl’s now could in theory see significant returns if the company finds a way to turn itself around in an environment of strong headwinds.
But as it stands, Kohl’s is in transition with semi-optimistic plans for the future. It’s hard to judge whether their strategy will be successful if we’re still not 100% what it is.
Department store retailers are still struggling in an environment of increasing direct-to-buyer offerings, and whether or not Kohl’s is able to overcome that can’t really be judged until we see their future earnings.
Perhaps the most significant headwind facing Kohl is continued high inflation. The high price of food means that middle-income consumers are less enthusiastic about buying clothes and other luxury items.
What is Inflation?
Inflation is the devaluation of currency usually caused by a mismatch between supply and demand. Inflationary pressures in 2022 were mainly driven by supply chains taking time to get going again after the pandemic, higher consumer spending encouraged by stimulus measures and Russia’s unprovoked war against Ukraine.
The war between Russia and Ukraine caused the price of gas to rise worldwide. Similarly, the largest bird flu outbreak caused the price of eggs to skyrocket.
Some inflation is typical of a healthy economy – the Federal Reserve has done that a target annual inflation of 2% – but when prices rise unsustainably, it can have far-reaching and devastating consequences for consumers.
The Fed has used monetary policy to control inflation, raising the federal funds rate 10 consecutive times since last March. When the Fed raises the Fed Funds rate, it affects the rate at which banks borrow and lend money to each other from their reserves. Banks must meet specific reserve requirements, so higher Fed Funds rates encourage banks to increase short-term borrowing costs and yields on savings products.
You may have noticed that your credit card interest rates are rising or that interest rates on 30-year mortgages are shockingly high right now. These are all by-products of the Fed’s attempts to control inflation.
It comes down to
Kohl’s has faced significant headwinds as sales have declined amid high inflation and activist investors pushing for better business strategies. After former CEO Michelle Gass stepped down last November, Kohl’s struggled during the holiday season, with worse-than-expected sales and an ongoing inventory problem.
However, in its highest revenue report, Kohl’s showed more optimistic signals as sales were higher than expected and inventory was 6% lower than the year before.
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