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Sephora’s the Sweet Spot for Kohl’s

Kohl’s missed out on some second-quarter juniors’ apparel sales because it had “too much fashion” and “not enough of the basics,” CEO Michelle Gass told Wall Street analysts Thursday, noting the evolution of the retailer’s “game-changer” partnership with Sephora.

In a Nutshell: Gass said Kohl’s fumbled the ball on its juniors’ assortment in the quarter. “Some of the fashion choices were a little too young, I would say. That’s been course-corrected,” she said on the quarterly earnings call. “I’d say one of the things that has hurt us is with all supply chain disruption that’s happened, we were not able to get in and out of some of those items.”

Problems in the juniors’ section, which also suffered from the retailer physically moving the department to a different spot in the store, “accounted for a majority of the women’s decline,” Gass added.

Meanwhile, the Menomonee Falls, Wisc.-based company is seeing the fruits of its labor from it much-ballyhooed deal with Sephora and leaning even harder into the shop-in-shop concept.

With “nearly 400” Kohl’s stores updated with the Sephora presence this year, another 250 are on deck for the upgrade next year for a total of 800 stores. And given the results Kohl’s has seen so far—a high single-digit percent lift for last year’s wave of openings and a mid-single-digit percent sales lift for this year’s—the collaborators are cooking up a “smaller footprint concept” to drop into the remaining 300 that weren’t slated to get version 1.0 of the shop-in-shop experience, Gass said.

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The CEO went on to say that they’re also working to further integrate the Kohl’s-Sephora experience and build on the roughly 1 million new customers it’s drawn so far. Some of the projects underway include testing out a way to let shoppers pick up purchases made through Sephora’s digital presence at Kohl’s physical stores, “creating an incredibly seamless and convenient experience for our customers,” Gass said.

And starting in September, shoppers can use their Sephora gift card at Kohl’s regardless of where they bought it, she added.

However, Kohl’s, like Target and Walmart, is seeing middle-income shoppers getting cautious with their spending.

“Low and high appear to be holding up better than the middle,” Stephanie Wissink, retail analyst at Jefferies, said.

And while Kohl’s missed adjusted diluted earnings per share by one cent, it beat consensus sales estimates by $140 million.

“We continue to see competitive advantages for Kohl’s within the department store group through its value-oriented, full-family offering in a convenient off-mall footprint with expanded brand and category offerings that lean into consumer preferences for active and casual wear,” said Dana Telsey, chief investment officer at Telsey Advisory Group, even though customers are making fewer shopping trips, spending less per transaction, and focusing on value-oriented private brands.

Gass outlined how Kohl’s is adapting to economic uncertainty. “We have responded to this dynamic environment, taking action to adjust our plan and adapt to a softer demand outlook,” she told analysts. “We’ve increased promotions, we are being aggressive on clearing excess inventory. We’re pulling back on receipts and we are managing expenses diligently.”

She went on to say that “private brands outperformed national brands for the second consecutive quarter, with sales growth achieved in many of our key brands.”

Athleisure and outdoor product did well in the quarter, although strong active sales were undermined by supply chain delays that hit athletic footwear hard. Sales in the women’s business, exclusive of the problems with juniors, did slightly better than expected, with continued momentum in dresses, helped by elevated casual offerings. Men’s also outperformed the retailer’s expectations, with sales driven by new brand introductions that include Tommy Hilfiger, Hurley and Calvin Klein. “We also saw solid results in young men’s, tailored dress and Big and Tall,” she said.

The two underperformers were children’s and home, although Gass said Kohl’s is working on bringing newness to home. For children’s, she said the category was up against tough year-ago comparisons in toys and sleepwear.

Promotional events and more targeted offers are supporting back-to-school sales. “Overall back-to-school trends are in line with our expectations,” she said.

Chief financial officer Jill Timm said pack-and-held products including sleepwear and fleece added $8 million of inventory.

Timm said the company is still moving forward on its plan for 100 smaller concept doors over the next several years, learning from a Tacoma, Wash. pilot store opening in November.

Net Sales: For the three months ended July 30, total revenue fell 8.5 percent to $4.09 billion from $4.45 billion a year ago, which included a net sales decline of 9 percent to $3.86 billion from $4.22. The balance of revenue was primarily from the Kohl’s credit card.

“June was the most challenging month in the quarter. In July, we took actions to drive demand, which improved the trend,” Gass said.

She said that digital sales were flat to last year, helped by higher conversion rates, driven largely by implementation of a lower free-shipping threshold.

For the six months, total revenue fell 6 percent to $7.80 billion from $8.33 billion a year ago, which included a net sales decrease of 7 percent to $7.33 billion from $7.89 billion.

Earnings: Net income for the quarter dropped 63 percent to $143 million, or $1.11 a diluted share, from $382 million, or $2.248, in the year-ago period.

Wall Street was expecting diluted earnings per share (EPS) of $1.12 on revenue of $3.95 billion.

The company updated its full year 2022 guidance and now expects EPS in the range of $2.80 to $3.20, with net sales expected to decline by 5 percent to 6 percent from the prior year’s results. The prior EPS forecast in May when Kohl’s posted first quarter results was in the range of $6.45 to $6.85.

For the six months, net income fell 60 percent to $157 million, or $1.22 a diluted share, from $396 million, or $2.55, in the year-ago period.

CEO’s Take: Gass offered additional color on Sephora. “Our baskets are attaching close to about 50 percent. And so [customers are] putting women’s, they’re putting accessories and active into the basket, and we think that will only grow,” she said, noting that Sephora customers, a diverse and younger crowd, also shop more frequently than Kohl’s average shopper.

“I think it’s important to set the expectations in terms of the results,” she added. “The majority of the stores are just opening. So the opportunity is all ahead of us. While we’re at a year anniversary of the partnership, truly in terms of the business impact, we’re in the very, very early days. And like I said, the upside is ahead of us.”