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23 Aug

Kohl’s Sees Steep Q2 Declines But Reassures Wall Street

Kohl’s Sees Steep Q2 Declines But Reassures Wall Street

Kohl’s Corp., faced with softening consumer demand, saw steep declines in each the highest and bottom-lines in the course of the second quarter, but the outcomes fell in step with the retailer’s expectations.

Net income for the period ended July 29 was $58 million, or $0.52 per diluted share. This compares to net income of $143 million, or $1.11 per diluted share within the prior 12 months.

Operating income was $163 million in comparison with $266 million within the prior 12 months. As a percentage of total revenue, operating income was 4.2 percent, a decrease of 233 basis points year-over-year.

Net sales decreased 4.8 percent to $3.7 billion, from $3.86 billion within the year-ago period. Comparable sales were down 5 percent.

“I might think that in 2024, we could potentially get back to positives. That’s obviously our objective overall,” chairman and chief executive officer Tom Kingsbury told analysts in response to an issue during Wednesday’s conference call.

Apart from exceeding expectations, Kingsbury did spell out a battery of strategies to lift the performance of the business, which combined apparently went over reasonably well with Wall Street. Kohl’s stock rose 4.2 percent, or $1.09, to $26.82 by late afternoon.

Among the many strategies outlined by Kingsbury: “Accelerating and simplifying our worth strategies, eliminating online-only offers in favor of a more targeted offers and clearing slower selling goods on a more regular basis,” Kingsbury said.

He said the pricing was moving to an omni-channel approach that’s more simplified for the shopper. “To have two different pricing strategies just wasn’t good.”

Kohl’s has been consistently amongst essentially the most promotional of outlets offering strong values, and maintaining a one-stop-shop family appeal, though apparently the messaging got confused across channels. Firstly of the back-to-school season, Kohl’s executives told WWD the shop could be offering more ways for patrons to lower your expenses, and that it simplified its value messaging so shoppers can readily understand the deals being offered. The marketing has also been emphasizing versatility, meaning how key back-to-school fashion items might be outfitted in other ways and worn for various occasions. Strong values have been offered in T-shirts, denim, sneakers, backpacks, and utility cargo bottoms.

“The macro environment continues to be difficult for our customers,” said Kingsbury. “That’s a reason why we’re really focused on delivering as much value as possible because obviously customers have less money to spend.”

On the merchandise front, Kingsbury told analysts that the corporate is testing more key value items, and for holiday 2023 bringing in additional home decor product, and prioritizing gifts by positioning the category within the front of stores. Also for holiday, Kohl’s is putting together an expanded offering of what it characterizes as “impulse” offerings including select items in beauty, wellness, toys, snacks and other areas.

Kingsbury said that Kohl’s chief merchandising officer Nick Jones has been in Latest York “just about every week now a whole lot of brands” that might be added to the assortment. “We haven’t made any real decisions yet,” Kingsbury said. “We will have more prints, more color within the assortments…We’re the young women’s business. We actually feel that might be a chance for us.”

A fashion vignette at Kohl’s.

Over the past few years the Menomonee Falls, Wisconsin-based retailer has grown its assortment of high-profile national brands. Amongst Kohl’s top-performers last quarter were Nike, Under Armour, Hagar, Izod, Hurley and Eddie Bauer. Top-performing private brands were Apartment Nine, LC Lauren Conrad and Jumping Beans. Accessories was the perfect performing category.

Kohl’s isn’t the one big retailer confronting waning consumer demand. Key competitors to Kohl’s, including Macy’s and Goal, also reported second quarter top-line declines, though Walmart, abetted by its strong grocery offerings, posted gains.

He said that the catalyst for holiday 2023 is “really maximizing the gift business. We did a few of that last 12 months by moving the product to the front of the shop and it did thoroughly. We’re going to be doing it again this 12 months and making a significant statement. Within the front, now we have some extra square footage because we removed [certain] register bays.”

Throughout the second quarter, Kingsbury said the corporate reduced inventory by 14 percent in comparison with last 12 months “exceeding our goal of planning inventory down mid-single-digits. We operated with greater open-to-buy which allowed us to remain agile because the demand environment evolved within the second quarter. As we implement latest planning and allocation processes, we have gotten more attentive to the shopper’s demand, operating with additional open-to-buy to chase trends and minimize risk.

“Seeking to the autumn season, we be ok with our current inventory levels and in our ability to proceed to administer inventory with discipline…We’re continuing to proactively capitalize on opportunities to drive efficiency across all areas of the corporate.” That features bringing down some marketing spend while investing in technology to enhance productivity, similar to self-checkout kiosks in stores and the next level of automation to more efficiently flow goods in e-commerce achievement centers.

He also said the corporate will resume store openings, but didn’t specify what number of. “We’re really just begun the evaluation. And clearly, in later earnings calls, we’ll share more. One thing we all know we’re going to do is open smaller stores, the largest going forward being 55,000 square feet, while we’ll be adding probably so much at 35,000 square feet.”

In his prepared statement, Kingsbury said, “Our second quarter earnings were in step with our expectations. We maintained strong sales momentum in Sephora at Kohl’s, reduced inventory by 14 percent, and managed expenses tightly. Further, solid money flow generation allowed us to scale back our borrowings within the period.” Kohl’s ended the quarter with $204 million of money and money equivalents and expects to “drive strong positive money flow generation in Q3 and Q4,” Kingsbury. In recent past quarters, Kohl’s money flow was a priority which now appears to be easing.

Kingsbury said August so far sales are off to a superb start, and in his statement said, “A lot of our strategic efforts are only underway, which we expect will contribute incrementally within the back half of the 12 months, and much more so in 2024 and beyond. We’ve got enhanced the shop experience and recently opened an extra 200 Sephora at Kohl’s shops, and are taking steps to further optimize our assortment and simplify our worth strategies. Looking ahead, we’re reaffirming our 2023 guidance and remain confident in our longer-term opportunity.

Widespread through the retail industry is the growing shrink problem brought on by organized crime gangs ransacking stores or through internal issues. Kingsbury said shrink “continues to stay a headwind within the second half. But we’ve put a whole lot of efforts in place to prioritize the security of our associates and our customers, cabling products and fixtures, going to simply testers in beauty, and now we have more attendants within the fitting rooms, and more presence within the front of store. So we’re doing every little thing we will to mitigate shrinks.”

“Kohl’s reported a somewhat reassuring 2Q report in an increasingly volatile discretionary retail climate,” David Silverman, senior director, Fitch Rankings, wrote in a research report. “While revenue was down 5 percent given spending pullbacks in Kohl’s key categories and ongoing mis-execution, the corporate was in a position to rein in inventory, produce positive money flow within the quarter, and maintain its earnings guidance for the complete 12 months. Fitch expects the corporate to reveal improving profitability and money flow because the 12 months progresses despite topline headwinds, given efforts to scale back inventory and pull back discretionary expenses.”

In other financial results for the quarter at Kohl’s, inventory was $3.5 billion, a decrease of 14 percent year-over-year. Gross margin as a percentage of net sales was 39 percent, a decrease of 61 basis points.

For the 12 months, Kohl’s is projecting a 2 to 4 percent decrease in net sales, including the impact of the 53rd week which is value about 1 percent year-over-year. Operating margin is seen at about 4 percent.

Diluted earnings per share are projected within the range of $2.10 to $2.70, excluding any non-recurring charges. Capital expenditures are seen at between $600 million to $650 million, including expansion of the Sephora partnership and store refresh activity.

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