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Why Kohl's Has Growth Potential

- By Robert Stephens, CFA

Improving the customer experience could boost the long-term outlook for Kohl's Corp. (KSS). The retailer is modifying its loyalty program, while utilizing greater personalization in order to improve engagement.

Its omnichannel offering is the subject of further innovation, with consumers benefitting from increased investments in its supply chain. It is also boosting the efficiency of its stores.


Although tariffs may negatively impact the stock in the near term, the company's valuation suggests it could outperform the S&P 500 in the long run after matching its 5% rise over the last year.

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Customer experience

Increasing investments in personalizing the shopping experience could enhance customer loyalty. The company's revised marketing program has increased the number of personalized impressions across media channels by 35%, with email personalization in the most recent quarter rising 65% from the previous year. Features such as product recommendations, machine learning and a variety of search options mean all website visits are personalized in some way. In addition to plans to refine its loyalty program, which has resonated with customers since being introduced, increased engagement could strengthen the retailer's competitive position.

Kohl's is also pursuing a restructuring strategy that is aimed at improving the efficiency of its stores as well as offering customers an enhanced shopping experience. Its partnerships with Aldi, Planet Fitness and Total Wine are likely the start of a continued push toward leveraging existing space. Not only could this strategy reduce costs, but may also increase footfall.

The company is also testing new store concepts though its Your Store learning lab, which includes a new service center at two of its locations that aim to address key friction points such as pickup and return. The rollout of similar ideas across its estate may enhance differentiation versus sector peers.

Omnichannel offering

Kohl's is investing in its omnichannel offering through an improved website as well as an enhanced fulfilment network. This includes the addition of its sixth distribution center as well as the increasing use of stores to fulfill online orders. Stores can now fill 40% of online orders, with them being increasingly valuable during peak seasons. An accelerated adoption among customers of buying online and picking up in store is leading to higher footfall and increased cross-selling opportunities.

The introduction of a new mobile checkout feature at 150 stores has improved checkout speed. Alongside this, Kohl's has piloted an enhanced Ship to Store offering that is more efficient in fulfilling digital orders. It will be implemented in 135 stores in 2019, providing a more consistent service during periods of peak digital demand.

Risks

The potential for tariffs to be placed on a wider range of imports from China could put pressure on Kohl's future performance, leading to higher prices for consumers. Although there was a 1.7% increase in retail sales in March, a decline of 0.2% in April means they have risen just 0.4% in the last six months. A continuation of this trend, alongside rising prices due to tariffs, could weaken the outlook for retail stocks.

In response, Kohl's is making progress with an efficiency program that has reduced costs by $250 million over the last two years. The program has allowed the company to maintain its expense leverage point of 1.5% to 2%, with action being taken last quarter that is expected to reduce annual selling, general and administrative expenses by an additional $20 million.

The company may also benefit from reduced competition. The decline of a variety of major retailers, including Bon-Ton, has meant footfall has increased in locations where there was overlap. In such areas, Kohl's will invest in opportune inventory positioning to capture a disproportionate share of sales from rival stores that have recently closed.

Outlook

Kohl's is projected to increase earnings per share by 4% in the next fiscal year. While this would represent a modest growth rate, its price-earnings ratio of 10.5 suggests it offers good value.

The company will post its most recent quarterly performance tomorrow, which could lead to a volatile near-term outlook for its stock price.

A focus on investing in the customer experience, improving its omnichannel offering and adjusting its store estate could enhance its competitive position over the long run.

Having matched the S&P 500's 5% rise over the last year, the stock is appealing.

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This article first appeared on GuruFocus.