The department store chain Kohl’s announced its first quarter results at the end of May. After several quarters of falling stock prices and disappointing sales, they announced a surprise profit. Although Kohl’s still expects a sharp decline in sales, its latest earnings report has some investors hoping the chain can slowly make a comeback.
Kohl’s has been under intense pressure from activist investors since last year. Former CEO Michelle Gass stepped down from her role last November, moving to Levi Strauss, with Tom Kingsbury – former CEO and Chairman of Burlington – assuming her position.
Key points to remember
- Most department store retailers have suffered since the advent of online shopping. Kohl’s is no exception, and changes in consumer behavior due to inflation have further compounded the worrying sales numbers.
- Discount retailers like TJ Maxx have had remarkable recoveries since the first hit of the pandemic, but Kohl’s has not followed suit.
- Kohl’s reported stronger-than-expected first-quarter sales, which caused the company’s stock price to jump briefly.
Kohl’s performance in 2022
Kohl’s is often lumped into the same category as discount retailers like TJ 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 dollars. But outside of the clearance section, Kohl’s has a reputation for having clothes at a higher average price, surrounded by messages for huge discounts.
When you shop at Kohl’s, more disciplined buyers may walk away with only liquidation purchasesbut most people will also buy higher priced items.
Against this backdrop, it’s easier to see why Kohl’s hasn’t had the same pandemic recovery trajectory as stores like TJ Maxx, where customers are more likely to go if they don’t want to spend more. As inflation has skyrocketed, most consumers are trying to cut spending wherever they can.
If we wanted to compare companies, looking at stock values over the past five years, the TJ Maxx chart looks like an inverted version of the Kohl chart.
On November 24, 2017, TJ Maxx (TJX) stock was trading at $35.44. It gradually doubled in value over the next two years, hitting a high of $63.38 on Valentine’s Day 2020. Like most businesses, it nosedived as COVID shut down parts of the country , falling to $37.37 on March 20, 2020.
It’s been a bumpy but uphill ride since then, with the stock crossing above $75 in May 2023.
On the other hand, Kohl’s (KSS) reached a pre-pandemic high of $81.97 on November 9, 2018. It then fell when the pandemic hit $11.51 on April 3, 2020. It barely rose until in December 2020, when it skyrocketed. and mostly continued to climb until May 6, 2022, when it became clear that the company had had a disappointing first quarter, and subsequently a potential acquisition fell through.
KSS hasn’t fully recovered since – it stood at $19.67 as of May 25, 2023, even after seeing a tiny rise following the release of its last earnings report.
Michelle Gass leaves Kohl’s
Michelle Gass joined the Kohl’s team in 2013 as its first Chief Customer Officer. In 2015, she became director of merchandising before taking over as general manager in 2018. Gass had previously spent nearly 17 years at coffee giant Starbucks.
While Gass has been instrumental in growing the partnership between Kohl’s and Sephora, she has also been criticized for struggling to grow the company’s sales. Before Gass stepped down in November 2022, activist investors had been demanding changes to Kohl’s board for about two years. Ancora and Macellum Advisors have regularly pushed for a management reshuffle.
Widespread inflation has had a major impact on Kohl’s sales, as the chain caters primarily to middle-income consumers. This undoubtedly put pressure on Gass in the months leading up to his resignation, as did his choice to end talks with Franchise Groups – owner of The Vitamin Shoppe – over a possible acquisition.
Gass resigned in November to take up a position at Levi Strauss. Tom Kingsbury, the former CEO of Burlington, reprized his role. The management change caused a brief rise in the share price for Kohl’s, but the stock trended lower in the first half of 2023.
Disappointing holiday sales
In March 2023, Kohl’s reported disappointing holiday sales starting in the fourth quarter of 2022. Net sales were down 7% in the holiday quarter, and the company shared a weak outlook for 2023, anticipating lower sales between 2% and 4%.
Kingsbury tried to highlight the growth of Sephora locations in Kohl stores during the earnings call, but also admitted he thought the company could do better. A positive sign for the company has been the easing of inflationary pressures. With the latest Consumer Price Index figures below 5%, consumers are more likely to spend money on discretionary items like clothing provided by Kohl’s.
Another persistent problem for Kohl’s is related to inventory. Many retailers have faced a glut of inventory post-pandemic, leading to markdowns on items to take them out of stores. In the fourth quarter earnings report, Kohl’s inventory reportedly increased 4% year-over-year.
First quarter results surprise
In late May 2023, Kohl’s announced its fiscal first quarter earnings report. The company posted a surprise profit in the quarter, generating $3.36 billion in revenue, slightly beating expectations. Earnings per share would have been 13 cents per share, much better than the 42 cents per share loss expected by Wall Street.
Net sales still fell more than 3% in the first quarter compared to the same period a year earlier. The company’s outlook also remained pessimistic, with Kingsbury reiterating that the company expects a 2-4% decline in net sales this year. Those numbers have raised fears among some investors that the company has lost brand power and consumer appeal (especially in this inflationary environment).
However, there were several other positive signs in the first quarter earnings report. Store footfall increased during the quarter and Kohl’s held several liquidation sales in an attempt to sell its inventory.
Inventories were reported at $3.5 billion at the end of the quarter, down 6% from the same period a year earlier. Inventories increased between the fourth quarter of 2022 and the first quarter, compared to $3.2 billion in the fourth quarter.
Sephora has been a major traffic driver for Kohl’s, and the fact that they are still planning to expand its presence in Kohl’s stores is a positive sign. Kingsbury said the chain plans to expand sales into pet and home décor, hoping to attract new customers and revitalize sales.
Additionally, while the fourth quarter earnings report showed gross margin decreased by 1,016 basis points – due to clearance cuts – the first quarter saw gross margin increase by 67 basis points. .
Investors and inflation
It can be tempting to buy a stock when you think it’s a bargain – trading at a lower price than 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 recover in an environment of strong headwinds.
But as things stand, Kohl’s is in a state of transition with semi-optimistic plans for the future. It’s hard to judge if their strategy will succeed when we’re not 100% what it is yet.
Department store retailers have continued to struggle in an increasingly direct-to-shopper environment, and whether or not Kohl’s is able to overcome this can only truly be judged when we see their future earnings.
Perhaps the most significant headwind Kohl faces is continued high inflation. High food prices are making middle-income consumers less enthusiastic about buying clothing and other discretionary items.
What is Inflation?
Inflation is the devaluation of currency usually caused by a mismatch of supply and demand. Inflationary pressures in 2022 were primarily caused by supply chains being slow to recover from the pandemic, increased consumer spending encouraged by stimulus checks and Russia’s unprovoked war against Ukraine.
The Russian-Ukrainian war drove up the price of gas around the world. In the same way, the biggest 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 rise unsustainably, it can have far-reaching and devastating effects on consumers.
The Fed used monetary policy to manage inflation, raising the federal funds rate ten consecutive times since March of last year. When the Fed raises the federal funds rate, it influences the rate at which banks borrow and lend money from their reserves. Banks must meet specific reserve requirements, so a higher federal funds rate encourages banks to raise the cost of short-term borrowing and the returns on savings products.
You may have noticed that your credit card interest rates are rising or interest rates on 30-year mortgages are at outrageously high rates right now. These are all by-products of the Fed’s attempts to manage inflation.
Kohl’s has faced significant headwinds as sales have fallen amid high inflation and activist investors push for better business strategies. After former CEO Michelle Gass resigned last November, Kohl’s struggled over the holiday season, reporting worse-than-expected sales and a lingering inventory problem.
However, in its most earnings report, Kohl’s showed more optimistic signs as revenue was higher than expected and inventory was down 6% from a year earlier.
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