Kohl's (KSS) Omni-Channel Strength Aids, High Costs Stay
Strength in omni-channel capabilities and prudent partnerships are favoring Kohl’s Corporation KSS. The leading omni-channel retailer’s focus on strategic efforts is yielding. Encouragingly, shares of Kohl’s have rallied 18% in the past three months compared with the industry’s growth of 4.5%.
That being said, the company has been battling higher costs and supply chain hiccups. Let’s delve deeper.
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Omni-Channel Strength
Kohl’s is expanding its store portfolio and accelerating digital business growth. Management has been speeding up its digital marketing and enhancing its website to cater to customers’ needs. Its solid endeavors to boost mobile traffic have augmented the adoption of the Kohl app. To improve online offerings, Kohl’s has been expanding its e-commerce fulfillment centers alongside strengthening in-store pickups. During the fourth quarter of fiscal 2021, digital sales increased 21% compared with the 2019 levels. As a percentage of total sales, digital sales were 39% in the quarter. We note that over 40% of the company’s digital sales were fulfilled by stores.
The company recently unveiled plans of opening over 100 new smaller format Kohl’s stores in the coming four years. Management expects to expand its digital business to $8 billion on enhanced discovery and shopability on Kohls.com. It is launching self-serve buy online, pick up in store to every store in 2022. Also, it is on track to test self-serve returns and check-out. Apart from this, the company is expanding Kohl's Media Network to leverage its solid omni-channel capability. KSS is utilizing data science to improve personalization and localization across all its stores during the next two years.
Partnerships Boost Performance
The company has been benefiting from the rollout of Amazon’s AMZN Amazon returns program nationwide. Per this program, Kohl’s stores accept free, unpackaged and easy returns for customers of Amazon. The company is impressed with the performance of AMZN’s Amazon returns program. One of the prime objectives of this program is to convert more customers into loyal Kohl’s shoppers.
The company's solid partnership with Sephora to create a new era of elevated Beauty at Kohl's, is noteworthy. In its last earnings call, management highlighted that Sephora drove major beauty sales during the holiday season at Kohl's. Management expects Sephora to be a key growth driver in 2022 by opening 400 new shops. During 2023, the company will open another 250 Sephora shops at Kohl’s. This is likely to enhance customers’ experiences at Kohl’s stores.
What Else is Working Well?
The Zacks Rank #3 (Hold) company intends to become the most trusted retailer of choice for the active and casual lifestyle. It is expanding outdoor business via prudent alliances like Eddie Bauer’s launch in every store during 2022. Management is also on track to grow its business with Columbia and Lands' End. The company’s active category continues to be an important driver, with sales rising more than 25% year over year and on a two-year basis in the fourth quarter of fiscal 2021.
The company expects to reignite growth in the women’s business and build a significant size beauty business. This is likely to be aided by the alliance with Sephora. Kohl’s is reigniting the women’s category via growing the dress business, expanding the outdoor and swim categories and strengthening the inclusivity offering. Kohl's is striving to elevate and modernize customer experience, refresh stores and lunch innovation zones.
Will Hurdles be Countered?
Kohl’s is battling supply-chain headwinds. On its last earnings call, management stated that it encountered inventory receipt delays and softness in-store traffic during January, led by the spread of omicron. Such supply chain-related challenges hurt the company’s quarterly sales by roughly 400 basis points.
Kohl’s SG&A expenses rose year over year for the last few quarters now. During the fourth quarter of fiscal 2021, Kohl’s SG&A expenses increased 5.2% to $1,687 million. In its last earnings call, management highlighted that it expects SG&A expenses to increase in the first and the second quarter of fiscal 2022, thanks to the opening of 400 Sephora stores along with related store refresh costs. Apart from this, Kohl’s is expecting significantly higher freight and product cost inflation in 2022. Although the company anticipates the ongoing sourcing initiatives and pricing actions to offer some respite, it does not expect such efforts to fully offset the headwinds.
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