Quarterly earnings reports are generally opportunities to compare with the past and look to the future, but the third quarter conference call for troubled Wisconsin-based retailer Kohl’s was anything but that.
With last week’s departure of CEO Michelle Gass and interim CEO Tom Kingsbury not present, board chair Peter Boneparth said at the outset: “Given the recent volatility in our business and consumer behavior, the significant macroeconomic headwinds, along with the unexpected CEO transition, we will not be giving guidance for the fourth quarter and are withdrawing our prior outlook for the year.”
“I would say that the visibility for the fourth quarter has been as difficult as any period I could remember,” Boneparth added.
In a Nutshell: Between Gass’ decision to leave for Levi’s and the ongoing attempted takeover by activist investors that contributed to her departure and Kingsbury’s appointment, it’s putting it mildly to say the 60-year-old company is sailing into stormy seas. However, there were some bright spots, led by the cosmetic banner Sephora, which was promised to be in place at 600 Kohl’s stores by the end of 2022 and delivered encouraging growth.
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Sephora’s performance in the mid-teens led the way for accessories to be the company’s best line of business in the third quarter.
Inventory in Q3 was 34 percent higher than 2021 with 5 percentage points of that attributed to additional Sephora product.
“We feel good about the progress we are making to reduce inventory and continue to expect further improvement by year-end, remaining agile and responsive to the demand environment,” chief financial officer Jill Timm said.
Kohl’s has laid the groundwork for the critical peak season, according to Timm, who said the retailer has invested in a “lot of newness across the store, including smart home, pet, [and] leaning into successful areas like outdoor and dress.”
“We know value is definitely going to win this holiday season, and we need to lean into that,” she added.
Net Sales: Personnel turmoil aside, Kohl’s reported total revenue of $4.27 million, sales down 7 percent, an operating margin of 4.7 percent and a diluted EPS of $0.82, down 50 percent from $1.65 this time last year.
Timm said persistent inflation was largely to blame for the down numbers.
“During the quarter, we saw our middle-income customers continue to purchase fewer items per trip and trade down to our value-oriented private brands,” she said, pointing to top-performing owned labels including Sonoma, Croft & Barrow, Jumping Beans, Nine West, Tek Gear and Lauren Conrad.
Sephora led the way for in-store shopping, which outperformed digital sales, which was down 8 percent compared to 2021, accounting for 29 percent of all sales.
“Our partnership with Sephora remains extremely strong, and we are both incredibly focused on building support at Kohl’s to $2 billion in sales,” Timm said. “In 2023, we’ll open 250 additional Sephora at Kohl’s shops, bringing the total to 850 as well as make progress on developing a smaller footprint concept for our remaining 300 stores.”
Perhaps thanks to Sephora perhaps as a magnet, the women’s core business outperformed the company average, though intimates—along with juniors apparel—’experienced weakness.’
Net Earnings: Kohl’s finished the third quarter with a 37.3 percent gross margin, down from 39.9 percent in 2021.
Timms said that 263 basis point drop was largely the result of increases in freight costs.
Adding Sephora’s at so many locations naturally came with a weighty price tag, and in Q4 that contributed to $185 million in capital expenditures.
CEO’s Take: Much of what attracts activist investors and others to want to purchase Kohl’s is its significant real estate holdings, even as retail sales continue to dwindle.
Addressing that issue at the Q3 conference call, Timm said the company has “assess[ed] potential asset monetization opportunities for our owned real estate,” but at this time has decided to “stay the course and continue with our existing process of regularly evaluating our real estate to maximize asset value, drive long-term profitability and optimize the portfolio.”
That ‘stay-the-course’ theme prevailed when executives discussed the CEO recruitment process.
“So, we’re not looking for a CEO who’s coming in to change the strategy that we’ve embarked on,” Boneparth said. “What we are looking for is a very strong operator, as I said, somebody who can drive sales, somebody who can drive earnings per share and somebody who understands the basic tenets behind the Kohl’s value proposition and the brand strategy.”