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Kohl’s Keeps Laser Focus on Active as Stores Fuel Digital Commerce

Despite an overall net loss, Kohl’s Corp.’s sales and earnings exceeded expectations in a significantly improved third quarter, the retailing giant reported Tuesday.

In a Nutshell: Like many other retailers, Kohl’s e-commerce sales—up 25 percent over last year and representing 32 percent of its total sales in Q3—continued to play a major role in lifting the company in the period.

Physical stores supported much of this growth, fulfilling nearly 40 percent of digital sales. Looking ahead to the holiday season, the retailer said it is more than doubling the number of stores carrying incremental inventory to fulfill orders originating online.

Kohl’s active category—with sales nearly doubled since 2013 to 20 percent of its business—also continued to perform well in the third quarter.

Since 2013, sales in Kohl’s active category have nearly doubled to 20 percent of its business. Speaking with investors Tuesday, CEO Michelle Gass indicated the company has no plans to stop there, saying it plans to grow the category to at least 30 percent of its business in the future.

“Our insights show that more people are focusing on health and wellness, whether it’s working out or spending time outdoors,” Gass said. “In addition, their active and athleisure wardrobe is expanding into many new occasions and we expect this trend to continue.”

To further ramp up the category, Gass said the company plans to increase the retail store space dedicated to active goods by nearly 20 percent. “The outperformance of our existing 160 active expansion stores gives us confidence that as we grow space across the fleet, we will drive incremental sales and productivity,” she noted.

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In addition to launching its own athleisure private brand FLX, Gass said Kohl’s is looking to expand its offerings from brands like Champion—which grew 95 percent in the third quarter, she said—and Columbia. It’s also looking to shift its planograms to highlight athleisure assortments, “increasing our space dedicated to Active in our stores by nearly 20 percent,” Gass said. “The outperformance of our existing 160 active expansion stores gives us confidence that as we grow space across the fleet, we will drive incremental sales and productivity.”

Active isn’t Kohl’s only apparel opportunity, however. “Consistent with where customer trends are going, we are leaning into categories like athleisure, lounge and sleepwear and intimates, which performed very well in Q3,” said Gass, noting that Nine West also showed “strong growth” in the quarter.

The retailer continues to seek new ways to serve shoppers. Not only is it expanding the Curated by Kohl’s platform to 300 stores this holiday, Gass said, but it’s also piloting 50 Wellness Market concepts in stores and online.

According to Kohl’s chief financial officer Jill Timm, the retailer ended the quarter with more than $1.9 billion of cash and cash equivalents, a $1.4 billion increase from last year. Year-to-date, she said it has generated positive operating cash flow of $910 million, including $606 million in the third quarter, driven by its actions to reduce both inventory—down 26 percent from last year—and expenses.

Net Sales: For the quarter ended Oct. 31, Kohl’s total revenue fell 14 percent from $4.6 billion to $4.0 billion. While a decrease from last year, it marked a significant sequential improvement from the second quarter, the company said. Looking at the first nine months of 2020, total revenue at Kohl’s dropped 25.3 percent compared to the same period last year from $13.1 billion to $9.8 billion.

Net sales in the third quarter declined 13 percent, from $4.4 billion at the close of Q3 last year to $3.8 billion for the three months ended Oct. 31.

Kohl’s gross margin came in at 35.8 percent, just 48 basis points below last year’s 36.3 percent. For the first nine months of the year, by comparison, the retailer’s gross margin is down 680 basis points to 30.5 percent, compared to 37.3 percent during the same period last year.

Earnings: Compared to a net income of $123 million in the third quarter of 2019, Kohl’s reported a net loss of $12 million. The loss still represents an improvement over what the company saw earlier this year. Looking at 2020’s first nine months all together, the retailer has experienced a net loss of $506 million, compared to a net income of $426 million over the same period in 2019.

Per share, Kohl’s posted a $0.08 loss in Q3, compared to $0.79 earnings per share in Q3 2019. Adjusted diluted EPS fell 99 percent from $0.74 to $0.01.

Kohl’s adjusted earnings before interest, taxes, depreciation and amortization stood at $253 million in Q3.

CEO’s Take: “The ongoing disruption in the retail industry presents significant market share opportunities and we are aggressively taking advantage of that,” Gass said. “We began to redeploy our competitive store closure strategies during Q3 and we are pleased with the initial traction we are seeing. We’ve said this before, but it’s worth saying again, Kohl’s is a well-disciplined operator with a strong foundation. We have a new strategic framework in place that will enable an even more compelling customer proposition and we are working hard to create significant long-term shareholder value.”