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Kohl’s CEO on Q2: ‘Men’s, Home and Footwear Were Strongest on a 2-Year Basis’

Kohl’s is focusing on key categories like active, athleisure and women’s to maintain sales and income momentum from the second quarter.

In a Nutshell: After Kohl’s Corp. reported second-quarter net sales and earnings on Thursday that exceeded expectations, the department store retailer said it was raising its full year 2021 financial outlook.

Kohl’s reported record second quarter diluted earnings per share of $2.48 and raised full year 2021 guidance to $5.80 to $6.10, compared to the previous expectation of $3.80 to $4.20. Operating margin is now expected to be in the range of 7.4 percent to 7.6 percent compared to the previous expectation of 5.7 percent to 6.1 percent.

The company’s full year financial outlook sees net sales increasing in the low-20s percentage range compared to the previous expectation of a mid-to-high teens percentage range increase. CEO Michelle Gass told analysts on a conference call that Kohl’s plans to grow activewear to 30 percent of sales. This will be fueled by growth with key national brands Nike, Under Armour and Adidas, and expanding active space by at least 20 percent in 2021.

In addition, Kohl’s aims to drive athleisure through the launch of the FLX new private brand, Calvin Klein basics and loungewear, and expanding the assortment of Champion, while growing outdoor through expansion of Lands’ End and the launch of Eddie Bauer.

Gaas said the retailer also plans to “ignite” growth in women’s wear with a new organization structure and leadership to drive improved performance. This includes a “significant portfolio reinvention,” she said, with the exit of 10 “down-trending” brands and a “refresh” and “a more focused portfolio of private brands” such as Sonoma, So and LC Lauren Conrad.

Kohl’s strategy to transform the role of the store includes modernizing the store experience through a refresh program and category reflow to highlight outsized growth businesses. It will focus on a simplified and edited shopping experience through fixture de-densification, and inspired solutions and product storytelling through continued investments in merchandising. The retailer will also evolve existing omnichannel experiences including buy online/pickup in store, drive up and Amazon returns, and continue to pursue innovation and discovery such as Curated by Kohl’s and emerging brands.

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Gaas said several areas of the business benefit from children going back to schools and students returning to college.

“We’re seeing initial strength in key back-to-school areas like active, denim and backpacks, and expect business to continue to excel as we build toward Labor Day,” she said.

Kohl’s said it strengthened its financial position during the quarter, ending with $2.6 billion in cash. The company repurchased $255 million of shares in the quarter and now plans to repurchase $500 million to $700 million of shares in 2021.

Jill Timm, chief financial officer, said while margins have improved, “we are monitoring industrywide supply chain uncertainties and cost inflation.”

She described problems in the supply chain, such as port backlogs, high freight costs and Covid-related factory disruption as “a fluid and evolving situation.”

“While we have experienced inventory receipt delays in many areas of the business due to temporary factory closures and port congestion, our women’s business has a disproportionate exposure given its high penetration of private label brands,” Timm said. “We are managing the situation aggressively, leveraging our diversified global supply chain to ship production when and where appropriate to expedite orders and maintaining a high frequency of pick up at the ports and delivery to our stores.”

Sales: In the second quarter ended July 31, net sales increased 31.4 percent to $4.44 billion. Growth in the quarter was driven by higher store sales as customer traffic further improved, Kohl’s said in its presentation to analysts.

“We continue to be encouraged by the traffic we’re seeing and our customers returning to stores,” Gass said. “From a category perspective, we saw the greatest growth in men’s, accessories and women’s relative to last year. And men’s, home and footwear were the strongest on a two-year basis. Active continued to be the strongest area of customer demand, with growth across both apparel and footwear.”

Earnings: Net income in the period was $382 million compared to $47 million in the second quarter ended Aug. 1, 2020.

Gross margin in the quarter improved to 42.5 percent, or 942 basis points, compared to last year, driven primarily through tightly managing inventories and further scaling pricing and promotion optimization strategies, Kohl’s said.

Operating income was $570 million this quarter compared to $118 million in the year-earlier period.

CEO’s Take: Gass said: “Our performance in the second quarter marked another important step in further establishing Kohl’s as the leading destination for the active and casual lifestyle. We delivered record second quarter earnings with sales and margins materially exceeding expectations. As pleased as we are with our ongoing strategic progress, much of our opportunity is still ahead of us. We are on the eve of launching several transformational partnerships that will drive sustainable growth for years to come.”

“Based on our results, we are raising our full year 2021 guidance, which positions us to achieve many of our 2023 strategic goals this year, well ahead of our plan,” Gass added. “In addition, we have accelerated our share repurchase activity, underscoring our confidence in the business and our commitment to creating shareholder value.”