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Is Kohl's at Risk of Derailing Its Recovery?

Kohl's put in one of the strongest performances of any department store chain over the holidays, posting some of the best comparable-store sales numbers around. That's an encouraging development for a chain that looked like it might follow Macy's and J.C. Penney toward the abyss.

Although those retailers are still struggling to keep their heads above water, Kohl's established a healthy trajectory before Christmas came along and is now reaping the benefits of the action plan it put in place. While it's made some smart decisions so far, its latest plans may derail the progress it's made.


Holiday Comparable-Sales Growth

Kohl's (NYSE: KSS)


J.C. Penney (NYSE: JCP)


Macy's (NYSE: M)






Target (NYSE: TGT)




Data source: Company press releases. Holiday time span includes November and December.

Bringing the customers in

What makes Kohl's performance even more notable simply beyond outpacing all the competition is that it's brick-and-mortar stores saw growth, too.

Reported comparable-sales numbers these days are a blend of online and offline sales, because it's not so clear-cut where a sale originated. For example, a sale made online but picked up in store is often credited as an in-store sale.

None of the retailers broke out the difference between their online and store channels, but with J.C. Penney saying it was "encouraged" by how all its components performed and Macy's saying it saw "improved sales trends" from its brick-and-mortar operations, it suggests the weight of the gain was carried by the digital channel.

Kohl's also didn't give a percentage comparison for each channel, but it did say its stores' comps were positive, as they also benefited from strong customer traffic (Target's results were more in line with Kohl's, while Nordstrom's seemed to match those of J.C. Penney and Macy's).

Given the strong performance, it would be a shame if Kohl's derailed its turnaround by implementing strategies that take it off on a tangent.

Two women shopping for clothes
Two women shopping for clothes

Image source: Getty Images.

Divide and conquer

Recently the department store chain said it wanted to divvy up the floor space in the 300 stores it had downsized and rent out the area to different merchants, particularly grocers and convenience store operators. No longer content to just sell clothes and home goods, it now also wants to sell produce and other groceries, a strategy similar to the one being pursued by supermarket chain Kroger (NYSE: KR), but only in the opposite direction.

While the U.S.' largest grocery store operator is looking to sell clothes and hardware among the bananas and canned goods it already offers, Kohl's strategy is a little different. It would wall off its retail space from the supermarket chain it rents to and give it its own entrance, essentially creating a mini-strip mall to attract customers.

Many retailers are reducing their footprint, opening smaller stores, and having a more curated selection of goods to offer, but only a few seem to be carving out unused square footage and leasing it out to others. Sears is doing it with a few of its stores, as is the real estate investment trust that owns hundreds of Sears properties, Seritage Growth Properties. It's just not certain that it's a strategy that will work for Kohl's because, like Kroger, it risks muddying its brand perception among consumers.

A retailer or a landlord?

The theory is it will drive more customers to the stores, and the supermarkets will be able to take advantage of Kohl's available parking, which unlike many of its competitors, has many stand-alone stores, not only ones found in shopping malls.

On the downside, it's an inconvenience to need to make two separate trips, meaning you'll have to stand in line for checkout twice, and it's not proven that what grocery stores actually need is more locations. It also puts Kohl's in the position of being a landlord, diverting management's attention from doing what it does best, which is being an apparel retailer.

While there's certainly a chance the plan works as intended, it's not as straightforward of a path to success as it's made out to be. It certainly hasn't helped Sears in the least, and the gains Kohl's has worked hard to achieve could quickly unravel. For all the strides the retailer has made, it remains vulnerable, and going off on a tangent like this may cause it to stumble once again.

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Rich Duprey has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.