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Activewear Is Putting in Work at Kohl’s

Kohl’s is raising its full-year outlook again after the department store saw third-quarter net sales increase 15.5 percent to $4.3 billion on net income of $243 million, or diluted earnings of $1.65 per share, an all-time high. Stock jumped more than 9 percent on news, as both total revenue and earnings per share beat estimates from analysts polled by Refinitiv.

In a Nutshell: Activewear sales “significantly” outpaced overall sales at the business, growing more than 25 percent over last year and more than 20 percent on a two-year basis, said Kohl’s CEO Michelle Gass told Wall Street analysts on an earnings call Thursday.

Activewear represented 26 percent of Kohl’s business in the third quarter, bringing the department store closer to its goal to take the category to 30 percent of total sales. Gass said the assortment’s athleisure options and inclusive sizing seemed to resonate with consumers.

Men’s sales climbed more than 30 percent over last year, while footwear and accessories jumped more than 20 percent. The children’s category is up by low double digits, driven in part by strong demand for toys.

The one business Kohl’s is looking to reignite—women’s, which has undergone a complete brand portfolio reinvention—was most affected by supply chain delays.

“Customers are responding very well to our go-forward key brands and metrics such as sell-through, inventory turn and margin are at multi-year highs,” Gass said. “However, receipt delays have impacted the women’s business, disproportionately hindering our ability to drive overall growth to our expectations. We continue to work aggressively to address the situation but acknowledge that supply chain challenges will likely continue to present a headwind.”

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Gass referred to extended transit times resulting in inventory receipt delays, alongside skyrocketing transportation costs, as the challenges Kohl’s has faced.

Inventory ticked up just 1 percent to $3.64 billion, from $3.61 billion in the year-ago period, but is down 25 percent from 2019. Chief financial officer Jill Timm said that women’s inventory is “notably” down more than this figure, also due to the more than 10 brand exits the company made before the supply chain disruptions worsened.

Overall, Gass said the two-year inventory cut was planned, but that levels remain below the initial estimates, and that Kohl’s was going to be heavily chasing to ensure that the business is keeping in line with top apparel trends. Despite inventory bottlenecks, Gass said the retailer was “well positioned for the holiday season, with fresh receipts continuing to flow to support anticipated customer demand.”

In-transit inventory was “up quite substantially relative to what we had seen historically…in multiples of where we have seen it,” Timm said. She also indicated that Kohl’s is also packing and holding select non-seasonal apparel to help protect margins.

Gross margin was 39.9 percent, up 408 basis points from last year’s 35.8 percent, driven by Kohl’s inventory management efforts, pricing and promotion optimization strategies, and partially offset by incremental transportation costs related to the constraint, global supply chain.

Operating margin reached a nine-year high of 8.4 percent, Gass said. This comes as Kohl’s aims to expand operating margins to 7 percent or 8 percent by 2023.

The initial rollout of Sephora destinations in 200 stores drove a mid-single-digit lift in sales. Kohl’s plans to expand the beauty brand to 400 stores in 2022, and reach at least 850 stores by 2023. More than 25 percent of Sephora shoppers are new to Kohl’s.

Recently, Kohl’s also said it would launch an exclusive collection with Draper James, the fashion and lifestyle company founded by actress Reese Witherspoon.

Gass indicated that the retailer is positioned to exceed most of its 2023 goals this year, and as such, Kohl’s will share an updated financial framework at its investor day on March 7, 2022.

For the full-year, Kohl’s now expects net sales to increase in the mid-twenties percentage range instead of the low-twenties percentage. Operating margin is now expected to be in the range of 8.4 percent to 8.5 percent compared to the prior projection of 7.4 percent to 7.6 percent. Adjusted earnings per share is now expected to be in the range of $7.10 to $7.30, excluding any non-recurring charges, compared to formerly anticipated $5.80 to $6.10 range.

Cash and cash equivalents at the end of period totaled $1.87 billion. Year-to-date, operating cash flow totaled $1.77 billion, alongside free cash flow of $1.3 billion. Capital expenditures for $426 million year to date.

Net Sales: Third quarter net sales increased 15.5 percent to $4.36 billion over last year’s $3.78 billion, with total revenues reaching $4.6 billion. Comparable sales in the period also increased 14.7 percent.

Net Earnings: Net income totaled $243 million, or a record diluted earnings of $1.65 per share, and a complete turnaround from the year-ago loss of $12 million, a loss of eight cents per share. Operating income was $387 million, compared to just $22 million in the year-earlier period.

CEO’s Take:  “There’s a lot of newness,” Gass said of the current mix of private label brands and partnerships in the department store’s ability to drive sales. “We’re in still the early days of some of our most recent, but powerful newness that we’re offering the customer. Tommy Hilfiger just settled in, Eddie Bauer just settled in, so that’s all in front of us, along with the core private brands like Sonoma. We have a great, tight assortment and now also worth mentioning is Levi’s. Levi’s was a terrific brand and business for us across all categories, and especially for men.”