Home, active and beauty led the way in the fourth quarter at Kohl’s, which has been roiled by activist investors, as the retailer continued to gain momentum following the challenges of the early pandemic period, the company reported Tuesday.
In a call with Wall Street analysts Tuesday, CEO Michelle Gass said Kohl’s exceeded its expectations across all key metrics in the fourth quarter, with sales improving over the course of the period. Over the past year, she added, the department store retailer made progress transforming its product portfolio, store experience and digital capabilities, with “much of the transformational work beginning to come to life in 2021.”
In a Nutshell: According to Gass, Kohl’s home business led the way once again, delivering positive sales growth. Chief financial officer Jill Timm said the retailer saw continued interest in kitchen items like cookware, food preparation tools and countertop electrics, as well as living spaces, where demand was strong for bedding, bath and floor care.
Active continued to perform well as Kohl’s remained focused on its goal of growing the category to 30 percent of its business from 20 percent currently. To further this goal, Gass said the company will increase space dedicated to the segment by at least 20 percent this year.
The CEO said Kohl’s plans to add products from three key national brands, including Nike Shine in women’s and Under Armour ColdGear, as well as increase offerings in girls’ and special sizes. The company is also expanding its assortment in leisure and outdoor, including by launching the new athleisure private brand FLX and introducing partnerships with Columbia, Land’s End and, later this year, Eddie Bauer.
Additionally, Gass announced Kohl’s is introducing Calvin Klein underwear, intimates and loungewear at more than 600 stores and online this fall. “Calvin Klein is one of the world’s most recognizable brands and is another example of how we are elevating our brand portfolio to increase our relevancy with our customers,” she added.
“We are confident that our moves in the active category in 2021 will further differentiate and strengthen Kohl’s positioning and drive increased customer engagement,” Gass said.
Gass highlighted the role Kohl’s new Sephora partnership will play moving forward, not just in transforming the retailer’s beauty offerings, but also in creating a “halo effect across the entire store.” Importantly, she noted, minimal store and customer overlap opens up the opportunity for “significant acquisition of new, younger customers.”
“Sephora at Kohl’s” is scheduled to launch on the chain’s website Aug. 1. The in-store rollout will also begin that same month, with plans to open 200 this year. The 2,500-square-foot shop will be prominently positioned at the front of the store, Gass said, with Kohl’s and Sephora branding placed on the exterior entrances to maximize awareness. The company currently plans to launch the Sephora shops in at least 850 stores by 2023, including 400 in 2022.
Kohl’s began accepting Amazon returns at all its stores in July 2019. A year and a half later, Gass said the partnership continues to be a “key contributor” in driving traffic and bringing in new customers—particularly during the post-holiday period in January. Last year, she said Kohl’s could attribute at least 2 million new, unique customers to the Amazon returns program, one-third of whom were millennials. And though she did not disclose exact details of the partnership, Gass said it is accretive in both sales and profits.
Given its strong liquidity position and “significant” cash-flow generation—Kohl’s ended the year with $2.3 billion in cash—Timm said the company is resuming its capital allocation strategy this year. This includes increasing capital expenditures, reinstating dividends, resuming share purchases and employing liability management strategies to improve its leverage ratio, including debt repurchases. From an investment perspective, she said Kohl’s is planning capital expenditures of $550 million to $600 million, which will be largely driven by the launch of its Sephora partnership, the opening of a sixth e-commerce fulfillment center and store-refresh activity.
Net Revenue: Digital sales growth continued in the fourth quarter, with the category growing 22 percent year-over-year and accounting for 42 percent of net sales, compared to 31 percent in the prior-year period. Kohl’s stores “played a critical role” in supporting this heightened demand, fulfilling nearly 45 percent of digital sales, up from 35 percent last year, Gass said.
For the quarter ended Jan. 30, Kohl’s total revenue fell 10.1 percent from $6.83 billion to $6.14. Though a year-on-year decline, the comparison represented an improvement on the past several quarters. In fact, the percentage drop the retailer saw in the fourth quarter came it at roughly half of what it saw for the year as a whole. In its 2020 fiscal year, total revenue totaled $15.96 billion, down 20.1 percent from 2019’s $19.97 billion.
Gross margin in the quarter dropped just 73 basis points from 32.7 percent in the fourth quarter of 2019 to 32 percent this past quarter. Kohl’s experienced a much steeper gross margin drop during the year as a whole, falling 464 basis points from 35.7 percent in 2019 to 31.1 percent last year.
Net Earnings: According to Timm, depreciation decreased $14 million in the fourth quarter compared to last year due to reduced capital spending; interest expense increased $20 million compared to 2019 due to higher outstanding debt; and Kohl’s tax rate benefited from tax-planning strategies.
Reported fourth-quarter net income totaled $343 million dollars and earnings per share were $2.20, up from $265 million and $1.72 a year earlier. Excluding non-recurring items, adjusted net income stood at $346 million and adjusted earnings per share were $2.22, a 12 percent gain from the prior-year period’s $308 million net income and $1.99 adjusted earnings per share.
Kohl’s posted a $163 million net loss for the 2020 fiscal year overall, down from a net income of $691 million in 2019. On a non-GAAP basis, the retailer experienced a net loss of $186 million in 2020, or an adjusted diluted loss of $1.21 per share. In 2019, the company recorded an adjusted net income of $769 million, or adjusted diluted earnings of $4.86 per share.
This year, Timm said Kohl’s anticipates net sales to increase in the mid-teen percentage range, operating margins to be in the range of 4.5 percent to 5 percent and earnings per share to land in the range of $2.45 to $2.95.
CEO’s Take: “We are making significant progress to be the leading destination for the active and casual lifestyle,” Gass said. “We are completely transforming the customer experience through the products and categories we offer, as well as the environments we deliver them in. Our business is building momentum and we have a clear strategic plan to accelerate the top line with an intense focus on improving profitability.”