Department store retail chain Kohl’s announced its first quarter earnings late in May. After multiple quarters of sinking stock prices and disappointing sales, they reported a surprise profit. Though Kohl’s is still expecting a net decline in sales, its latest earnings report has some investors hopeful the chain can slowly make a comeback.
Kohl’s has been under intense pressure from activist investors since last year. Previous CEO Michelle Gass stepped down from her role last November, transitioning to Levi Strauss, with Tom Kingsbury – previous CEO and president of Burlington – assuming her position.
Key Takeaways
- Most department store retailers have suffered since the advent of online shopping. Kohl’s is no exception, and consumer behavior changes due to inflation have further compounded worrying sales numbers.
- Discount retailers like T.J. Maxx have seen remarkable recoveries since the initial pandemic hit, but Kohl’s has not done the same.
- Kohl’s reported stronger-than-expected first-quarter sales leading the company’s stock price to jump briefly.
Kohl’s Performance in 2022
Kohl’s often gets lumped into the same category as discount retailers like T.J. Maxx. But anyone who’s ever shopped inside knows that Kohl’s isn’t quite the same.
Kohl’s has a fantastic clearance section where you can find treasures for just a few bucks. But outside of the clearance section, Kohl’s has a reputation for having clothes at a higher average price point, surrounded by messaging for huge discounts.
When you shop at Kohl’s, the most disciplined shoppers might walk out with only clearance buys, but most people will also buy items with higher price tags.
Given this context, it’s easier to see why Kohl’s hasn’t had the same pandemic recovery trajectory as stores like T.J. Maxx, where customers are likelier to go if they don’t want to spend more. As inflation has ballooned, most consumers are trying to cut spending everywhere they can.
Stock price
If we did want to compare the companies, looking at stock values over the last five years, T.J. Maxx’s chart looks like an inverted version of Kohl’s chart.
On Nov. 24, 2017, T.J. Maxx stock (TJX) stood at $35.44. It gradually doubled in value over the next couple of years, hitting a peak of $63.38 on Valentine’s Day of 2020. As with most companies, it took a nose dive as COVID shut down parts of the country, down to $37.37 on March 20, 2020.
It’s been a bumpy but upwards ride since then, with the stock rising above $75 in May 2023.
On the other hand, Kohl’s (KSS) hit a pre-pandemic peak of $81.97 on Nov. 9, 2018. It then tumbled when the pandemic hit to $11.51 on April 3, 2020. It barely rose until December 2020, when it shot up and mostly continued to climb until May 6, 2022, when it became clear the company had a disappointing first quarter, and subsequently, a potential acquisition fell through.
KSS hasn’t totally recovered since – it’s sitting at $19.67 as of May 25, 2023, even after experiencing a minuscule rise after releasing its latest earnings report.
Michelle Gass Leaves Kohl’s
Michelle Gass joined the team at Kohl’s in 2013 as its first chief customer officer. In 2015, she became the chief merchandising officer before taking over as CEO in 2018. Gass had previously spent nearly 17 years with the coffee giant Starbucks.
While Gass was instrumental in growing the partnership between Kohl’s and Sephora, she was also criticized for struggling to boost sales for the company. Before Gass stepped down in November 2022, activist investors had requested board changes at Kohl’s for about two years. Ancora and Macellum Advisors regularly pushed for a management shake-up.
Widespread inflation heavily damaged Kohl’s sales as the chain caters primarily to middle-income consumers. This undoubtedly put pressure on Gass in the months leading up to her resignation, as did her choice to end talks with Franchise Groups – owner of The Vitamin Shoppe – about a potential acquisition.
Gass stepped down in November to take a position at Levi Strauss. Tom Kingsbury, the previous CEO of Burlington, took over her role. The change in leadership led to a brief rise in stock price for Kohl’s, but the stock has trended downward in the first half of 2023.
Disappointing Holiday Sales
In March 2023, Kohl’s reported disappointing holiday sales from the fourth quarter of 2022. Net sales were down 7% in the holiday quarter, and the company shared a weak outlook for 2023, anticipating a decline in sales between 2% and 4%.
Kingsbury tried to stress the growth of Sephora locations in Kohl’s stores during the earnings call but also admitted that he thought the company could do better. A positive sign for the company was the waning of inflationary pressures. With the latest Consumer Price Index numbers coming in under 5%, consumers are more likely to spend money on discretionary items like clothing that Kohl’s provides.
Another persistent problem for Kohl’s is related to inventory. Many retailers struggled with a glut in inventory after the pandemic, leading to markdowns on items to move them out of stores. In the fourth-quarter earnings report, Kohl’s inventory was reported to be 4% higher year-over-year.
First Quarter Earnings Surprise
In late May 2023, Kohl’s announced its fiscal first-quarter earnings report. The company saw a surprise profit in the quarter, bringing in $3.36 billion in revenue, slightly beating expectations. Earnings per share were reported to be 13 cents per share, considerably better than the 42-cent loss per share that Wall Street expected.
Net sales still fell over 3% in the first quarter compared to the same period from the previous year. The company’s outlook, too, remained pessimistic, with Kingsbury reiterating the company expects to see a 2-4% drop in net sales this year. These numbers have made some investors worried the company has lost its brand power and appeal to consumers (particularly in this inflationary environment).
However, there were several other positive signs from the first-quarter earnings report. Store traffic increased during the quarter, and Kohl’s had several clearance sales to try to sell off its inventory.
Inventory was reported at $3.5 billion at the end of the quarter, 6% less than the same period from the year before. Inventory increased between the fourth quarter of 2022 and the first quarter, up from $3.2 billion in the fourth quarter.
Sephora has been a big traffic driver for Kohl’s, and the fact they’re still planning to expand its presence in Kohl’s stores is a positive sign. Kingsbury mentioned that the chain plans to expand its sales in pet and home decor areas, hoping to bring in new customers and revitalize sales.
Also, while the fourth-quarter earnings report showed the gross margin decreased by 1,016 basis points – taking hits from clearance markdowns – the first quarter saw the gross margin increase by 67 bps.
Investors and Inflation
It can be tempting to buy a stock when you think it’s a bargain – trading at less than what you think it’s worth or will be worth in the near future. Those who buy Kohl’s now could theoretically see significant returns if the company finds a way to turn itself around in an environment of powerful headwinds.
But as it stands, Kohl’s is in a state of transition with semi-optimistic plans for the future. It’s hard to judge if their strategy will be successful when we’re still not 100% what it is.
Department store retailers have continued to struggle in an increasingly direct-to-buyer environment, and whether or not Kohl’s is positioned to overcome that can only really be judged when we see their future earnings.
Perhaps the most significant headwind Kohl’s faces is continued high inflation. The high price of food makes middle-income consumers less enthusiastic about buying clothing and other discretionary items.
What is inflation?
Inflation is the devaluation of currency typically caused by a mismatch of supply and demand. Inflationary pressures in 2022 were mainly caused by supply chains taking time to ramp back up after the pandemic, increased consumer spending encouraged by stimulus checks, and Russia’s unprovoked war against Ukraine.
The Russia-Ukraine war led to the price of gas increasing worldwide. In the same way, the largest outbreak of avian flu caused the price of eggs to skyrocket.
Some inflation is typical of a healthy economy – the Federal Reserve has a target annual inflation rate of 2% – but when prices increase unsustainably, it can have far-reaching and devastating effects on consumers.
The Fed has used monetary policy to manage inflation, increasing the federal funds rate ten consecutive times since March last year. When the Fed increases the Fed funds rate, it influences the rate at which banks borrow and lend money to each other from their reserves. Banks must meet specific reserve requirements, so a higher fed funds rate encourages banks to raise the cost of short-term borrowing and yields on savings products.
You may have noticed your credit card interest rates increase or that interest rates on 30-year mortgages are at shockingly high rates at the moment. These are all by-products of the Fed’s attempts to manage inflation.
The Bottom Line
Kohl’s has been facing significant headwinds as sales have dwindled amid high inflation and activist investors push for better business strategies. After previous-CEO Michelle Gass stepped down last November, Kohl’s struggled in the holiday season, reporting worse-than-expected sales and a persistent inventory problem.
However, in its most earnings report, Kohl’s showed more optimistic signs as revenue was higher than anticipated, and inventory was down 6% from the year before.
