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National Brands Propel Kohl’s to “Greatness” in 2014

Mid-tier U.S. department store operator Kohl’s Corporation (KSS) posted financial results for the fourth quarter and fiscal year 2014 that beat Wall Street expectations.

Kohl’s announced that for the three months ended Jan. 31, sales increased by 3.9% to $6.34 billion, slightly beating analyst estimates of $6.32 billion. The company is in the process of implementing its “Greatness Agenda” turnaround plan based on five key initiatives or pillars: amazing product, easy experience, personalized connections, incredible savings and winning teams.

Comparable store sales, which include e-commerce sales, were up by 3.7%, compared to a 2 percent decline in the prior year period, beating Wall Street estimates of a 3.5% increase. The comp reflects increases in both average transaction value and number of transactions. Average unit retail rose by 2.8%.

Children’s, footwear and men’s all reported mid to high single-digit increases. Active and fitness categories were strong in all lines (women’s, men’s, footwear and children’s). Women’s, home and accessories also generated positive comps for the quarter but underperformed the company average.

Net income was $369 million, up 10% from $334 last year. Earnings per share rose 17 percent to $1.83 from $1.56 in the prior year period, beating consensus estimates of $1.80.

For the full fiscal year, sales were flat at $19 billion, driven by flat comps (an improvement over the 1.2% same-store sales decline suffered in fiscal 2013). Net income for the year was $867 million, down 2 percent from $889 million in the prior year. On a per-share basis, earnings were $4.24, up 5 percent from $4.05 in 2013 due to stock buybacks.

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“Our fourth quarter results showed significant improvement as many of our Greatness Agenda initiatives took hold. Our 3.7% increase in comparable sales was driven by both transactions per store — a key area of focus — and average transaction value,” said chairman, president and CEO Kevin Mansell in a statement. “The sales strength was broad as all lines of business and all geographic regions reported higher sales. Our teams managed both expenses and inventories well, allowing us to exceed our previous earnings guidance.”

One of the company’s key product strategies has been to refocus on national brands, which tend to generate higher comps than private and exclusive brands, and which now represent half the merchandise mix. Among the strongest performers in the quarter were Nike (the largest national brand at Kohl’s, enjoying a 24 percent increase in sales in the fourth quarter), and Levi’s, Carter’s and Fila Sport, which each increased 10 percent.

In addition, the Kohl’s collaboration with Disney through the Jumping Beans childrenswear brand yielded a 27 percent sales increase in the fourth quarter, driven by the continued popularity of merchandise based on the hit Disney film “Frozen.” During 2014 over 50 new national brands were added to the store’s mix, including IZOD, Juicy, Fitbit, Nespresso and yoga brand Gaiam.

One area in which Mansell told analysts he feels the company needs to do better is women’s apparel.

The newest addition to the national brands stable will be prestige skincare collection Bliss. Designed to further establish Kohl’s as a go-to beauty destination, the Bliss partnership will offer signature skincare and body products beginning in March on Kohls.com and at over 500 stores and expanding to all stores by the end of 2015.

CFO Wes McDonald told analysts “It’s a great thing about being in the middle, when things are good people trade up, when things are bad people trade down. With our increased emphasis on national brands we’re providing great value, and people are reaching up a little bit.”

The company raised its quarterly dividend by 15 percent to $.45 per share. The company also announced that it would buy back $1 million of shares in the current fiscal year.

Kohl’s stock, which rose by 1.1% on Thursday to $71.69, is at a seven-year high, and ahead by 14.8% so far in 2015.

For the current fiscal year, the company expects total sales to increase by between 1.8% and 2.8%, or $19.4 billion to $19.6 billion, slightly above current analyst estimates, with a comp sales rise of between 1.5% and 2.5%. Gross margin is expected to be flat to up 20 basis points over 2014, with earnings per diluted share of $4.40 to $4.60 for fiscal 2015. Analysts were expecting $4.54 per share for the current fiscal year.

The company is planning capital expenditures of $800 in 2015, $350 million of which will be on initiatives to integrate brick-and-mortar with its online business, including an expansion of its omnichannel service “buy online, pick up in store” to all stores.

Kohl’s ended the fiscal year with 1,162 stores in 49 states. During 2014, the company opened seven stores in new locations, relocated two existing stores, and closed three stores.