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Kohl’s Keys in on 5 Supply-Chain Workarounds

Kohl’s saw net sales jump nearly 70 percent year-over-year to $3.7 billion and reached a 10-year inventory turnover high as the department store continues its quest to reinvent itself as a destination for activewear and casual apparel shoppers.

The retailer raised its full-year guidance for net sales, operating margin and adjusted earnings per share.

In a Nutshell: The department store saw activewear sales nearly double year over year in the first quarter, growing to 23 percent of total sales and up 300 basis points (3 percentage points) from last year. Activewear sales increased at a “mid-teens” percentage rate relative to the first quarter of 2019.

Kohl’s goal to make activewear sales 30 percent of its total business is being driven by increased dedicated store space, an expanded product assortment and aggressively addressed white space opportunities in athleisure and inclusive sizing, CEO Michelle Gass said in an earnings call. The company reiterated its moves into casual and outdoor, with upcoming partnerships including Eddie Bauer, Tommy Hilfiger and Calvin Klein alongside existing partners like Lands’ End and Cole Haan.

Initially launched in 300 stores and online in March, the new athleisure private brand FLX will expand to 200 more stores this fall, with a broadened assortment.

“We are very encouraged by the customer reaction we’ve seen to date and initial sell through,” Gass said of FLX’s performance.

Gass noted that the company’s home business saw “low-double-digits” growth on a two-year basis.

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Kohl’s delivered a 7 percent operating margin, the department store’s highest first-quarter rate in eight years. The company aims to expand operating margin to a range between 7 percent and 8 percent by 2023.

Gross margin increased 2,173 basis points (21.7 percentage points) to 39 percent in the quarter from 17.3 percent last year, and jumped 223 basis points (2.2 percentage points from 36.8 percent in the first quarter of 2019.

“This performance was driven by continuing to execute against our strategy, including strong inventory management, our pricing and promotional initiatives and expense discipline,” Gass said. “In addition, we capitalized on a favorable industry backdrop that provided for greater full price selling.”

Total inventory at Kohl’s dipped 25 percent to $2.7 billion, a 10-year high for turnover. Inventory is down 28 percent from the same quarter of 2019.

“We’ve been on this mission for the last year really across the company, and we shared that driving clarity—brand clarity, choice clarity—is a key strategy for women’s,” Gass said. “We’ve also made great progress for men’s. I would say by this fall we will be near complete of that process. Our choice counts are down significantly across the board and that is enabling the kind of inventory reduction. The team has done a ton of work to make sure that as it relates to brands, each brand has real purpose in terms of what it stands for.”

Gass said that Kohl’s has eliminated 25 brands in total in the past year.

In the call, chief financial officer Jill Timm said Kohl’s is monitoring both the “cost headwinds related to industrywide supply chain disruptions” and “the sourcing of our private brands.”

Timm highlighted five steps Kohl’s has taken to navigate the supply chain and the remaining uncertainties throughout 2021.

Kohl’s has prioritized its purchase orders based on which are most critical, such as if they are showcased within ads or related events, so the retailer can expedite them if needed.

The retailer has hired more drivers to increase pickups from congested ports, and it is increasing the frequency of store deliveries. Additionally, the company has added more carriers to its arsenal to reduce transit time.

Finally, as Kohl’s moves containers out of Asia, it is prioritizing orders for its women’s business.

“That’s our main proprietary brand business, so we’re ensuring that we continue to prioritize that, especially as a big transition for us,” Timm said. “We expect that all the strategies—although they’re unfolding now—we’re seeing that momentum build [as we prepare] for fall. We continue to deploy a lot of strategies at this point to ensure that we’re bringing in the right POs and getting the goods in a timely manner.”

Kohl’s raised its full-year 2021 financial outlook, with net sales now expected to increase in the mid-to-high teens percentage range compared to the previous expectation of a mid-teens percentage rate increase.

Additionally, operating margin is now expected to be in the range of 5.7 percent to 6.1 percent compared to the previous expectation of 4.5 percent to 5 percent.

And the retailer now anticipates adjusted earnings per share to range between $3.80 to $4.20, excluding any non-recurring charges, well ahead of the previous estimate of $2.45 to $2.95.

Kohl’s continues to expect to spend $550 million to $600 million in 2021, driven by its Sephora partnership, store refresh activity, and new e-commerce fulfillment center. Capital expenditures were $59 million in the first quarter.

Cash and cash equivalents at the end of the first quarter totaled $1.6 billion. Operating cash flow of $278 million in the quarter. Kohl’s also reduced its long-term debt by $540 million in the in the quarter

Net sales: Net sales at Kohl’s jumped 69.5 percent year-over-year to $3.7 billion from $2.2 billion in the second quarter of 2020. Store sales more than doubled in the quarter, while digital sales increased 14 percent compared to last year, when the Covid-19 pandemic forced the retailer to shutter its stores.

Store sales in the March and April months saw combined positive growth as compared to the same period in 2019.

Net earnings: First-quarter net income was $14 million, versus the $541 million loss it incurred in the year-ago quarter. Diluted earnings per share came out to 9 cents, instead of the $3.52 per share loss.

When excluding loss on extinguishment of debt and impairments, store closings, and other costs, quarterly adjusted net income for Kohl’s was $165 million, a major turnaround from last year’s $495 million loss. Adjusted diluted earnings per share came out to $1.05, as supposed to the $3.22 adjusted per share loss in the year-ago period.

CEO’s Take: “In women’s, our bold actions during 2020 had positioned us for improved performance this fall, when all of our efforts on clarity and merchandising come together,” Gass said in the call. “From a product perspective, our women’s business was led by strong growth in active, increased demand for shorts and denim, and our intimate business that continues to show resilience. We also saw improving trends in casual dresses.”