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Kohl is still bullish on the asset

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Speaking at the 29th Annual Goldman Sachs Global Retail Conference, Jill TimChief Financial Officer of Kohl’s, remains confident that the department store’s efforts to “be a destination for active, casual lifestyle shoppers” will bear fruit over the long term despite active underperformance in the second quarter due to the constraints of the supply chain affecting athletic footwear.

Timm, pictured right, also noted that the active category is being challenged by a changing trend as more consumers dress “a little more formally” as the economy reopens. However, she does not expect the general trend towards casualization to recede. Timm said, “We know Americans are going to dress more casually and casual and active go together.”

Active’s underperformance was attributed to athletic footwear supply chain challenges and strong growth over the past year. In the second quarter of 2021, active sales jumped more than 40% year over year and more than 20% compared to the second quarter of 2019 before the pandemic.

During the conference, Timm said his supply chain challenges were in footwear. “We don’t see the novelty of the shoes coming to fruition,” Timm said. “We expect this to continue to improve over the past six months, but likely won’t return to normalization until 2023.”

The CFO noted that excluding footwear, activewear outperformed the company average, which saw a 7.7% decline in composition. Timm said the drivers of activewear performance were the “three powerful national brands”, Nike, Under Armor and Adidas, and the prominent placement at the front of its stores as the chain reshapes locations to add stores Sephora in store. Sportswear also continues to benefit from the “newness” of the big three, including the introduction of Under Armor Outdoor, Nike Golf and inclusive sizing in place for all three brands.

Another encouraging sign of the active push is that half of the customers who shop at Kohl’s new Sephora stores are buying some other item beyond a beauty purchase, and those add-ons tend to come from the active category as well as women and the house.

Kohl’s also saw strength in its exclusive athletics brand Tek Gear in the second quarter. Timm noted that one of the trends Kohl’s has seen amid inflationary pressures is that consumers are turning to the chain’s proprietary brands. She said Tek Gear has played a bigger role in complementing Kohl’s active national brand assortments. She said, “You might still want a performance shoe or sports bra, but you can top that off with a Tek Gear shirt.”

Outside of athletics, Columbia Sportswear and Eddie Bauer outperformed in the quarter, and Kohl’s exclusive FLX athletics brand launched in 2020 “performed incredibly well.”

She added: “Footwear is where we see the supply chain impact, and it’s going to take a while to get it right, but the rest of the novelty is flowing into the apparel, and we let’s see it resonate.”

Timm also highlighted the expected benefits of Kohl’s Sephora partnership with Sephora stores recently expanded to 600 doors. Timm said: “It’s working incredibly well and it’s going to establish us as a beauty destination. We think we’ll have a $2 billion beauty business.

Timm said Sephora’s rise in the beauty category not only drove traffic for Kohl’s, but attracted a more diverse and younger customer base. She added, “If we think about everything we’re going through from an inflationary perspective, it’s the only thing that has a restockable component to the discretionary clothing that we typically sell.”

The first 200 in-store Sephora stores outperformed the chain at mid-single digits when they opened in fall 2021, and now those same 200 doors are beating the chain at high single digits. The other 400 doors opened last spring outperformed the rest of the chain at mid-single digits. Timm added: “As we approach the second half of the year, we are delighted to have 600 open houses, especially for the holidays.”

Kohl’s recently extended the Sephora partnership with plans to bring the beauty brand to all Kohl’s stores.

Other growth priorities Timm cited included adding new brands to support its laid-back push, including Tommy Hilfiger, Calvin Klein, Hurley and Eddie Bauer. Kohl’s also improved its loyalty program this year, with its credit card now offering 50% more rewards points on purchases.

Kohl’s is also continuing to test 35,000 square foot store sizes, which could help it reach smaller markets. Timm said, “We believe this could represent at least a 100-store expansion over the next few years.” Digital has grown at a CAGR of 13% over the past five years and remains a growth priority.

However, upon the release of second quarter results, Kohl’s significantly lowered its guidance for the year due to expectations of lower sales and increased promotional activity.

“We saw a big shift in consumer behavior, especially in June,” Timm said. “We saw that customers fell with the uncertainty of the macro environment with inflation in gasoline and groceries. We sell discretionary items, and when you’re not selling something you need but rather something you want, that’s when the wallet gets a little tight. Value becomes incredibly important.

Timm also said Kohl’s serves the middle-income customer “who is probably the most in demand and impacted at this point.” Beyond the move to proprietary brands, Kohl’s has seen consumers buy fewer units per transaction.

In July, Kohl’s invested in promotions to achieve its best month of the quarter. Kohl’s expects to remain promotional in the second half to reduce inventory, which was up 48% at the end of the second quarter.

The higher inventory levels were partly due to increased inventory in transit, as Kohl’s introduced back-to-school and holiday products early to avoid supply chain disruptions. The increase in inventory also reflects investments to support its 400 new Sephora stores and packaged goods that arrived late last year, including sleepwear and fleeces. Excluding these items, inventories were up 27% to 2021 and down 8% to 2019 levels.

Kohl’s expects promotions and canceled receipts to lead to inventory ending the year up from 2021. Timm said Kohl’s will hopefully be able to “drive demand” if the environment turned out to be better than expected.

Timm said: “Obviously the macro environment has been tough. In the near term, our focus is on inventory management, receipt management and promotion to continue to drive consumer behavior and promote this value orientation of Kohl’s.

Photos courtesy of Kohl’s