3 Reasons Kohl’s Stumbled in Q3 — and How It’s Improving Its Business

A disappointing third quarter and lowered full-year outlook hung over Kohl’s Corp.’s stock yesterday.

For the period ended Nov. 2, the Menomonee Falls, Wis.-based retailer logged adjusted diluted earnings per share of 74 cents, well below Wall Street’s forecast of 86 cents. Profits dropped to $123 million, compared with $161 million the previous year. Same-store sales, which grew 2.5% in the same quarter last year, increased slightly by 0.4% this Q3, versus expected growth of 0.8%.

Kohl’s also slashed its full-year guidance and now expects adjusted annual earnings per diluted share to be $4.75 to $4.95, compared with the previous range of $5.15 to $5.45.

But CEO Michelle Gass remained optimistic on the business for the crucial holiday shopping period. Although revenues shed 0.1% to $4.63, they topped analysts’ expectations of $4.4 billion. The company also continues to work on strategies to lure millennial and Generation Z shoppers.

As it tackles the final months of the year, here’s what went wrong at Kohl’s and where it’s improving.

Challenges

Promotional Environment

The firm said it saw a heightened promotional environment in the third quarter coupled with unseasonably warm weather in September. Kohl’s expects this period to continue through the year as the holiday shopping season takes shape, forecasting comps in the range of flat to up 1% for the fourth quarter.

“It’s really important that we capitalize on this moment and drive market share and customer acquisition,” Gass explained. “We’re going to lean in and make the short-term investment in pricing and promotion as we need to — to make sure that we can capture these customers and, importantly, get them on our loyalty ladder for the long term.”

Higher Costs Due to Brand Launches

Store expenses at Kohl’s increased 3.2% to $1.4 billion due to factors including costs related to a significant number of brand launches as well as early holiday hiring and the Amazon Returns program, the company said.

In September, the chain added Koolaburra by Ugg Home and Nine West’s line of footwear, apparel and accessories. The following month, it welcomed Scott Living, its collaboration with the Property Brothers. Kohl’s also recently launched its partnership with Mary-Kate and Ashley Olsen, becoming the exclusive retailer for Elizabeth and James apparel, handbags and accessories.

“We view each of these brand launches as an investment in driving future growth while modernizing the Kohl’s brand and attracting younger customers,” said Gass.

Decline in Women’s Business

During the third quarter, all lines of Kohl’s business were positive except one: The women’s category declined 1%, compared with strength in the men’s, footwear and accessories business. While women’s “made progressive improvement relative to the first half of the year,” said Gass, it was “our only negative performing category.” She added that women’s “underperformed” in stores, but it did experience growth in digital channels in tandem with other Kohl’s categories.

Although women’s active and intimates departments showed solid performances, the firm has taken steps to address the slowdown in others: It has added Nine West and Elizabeth and James to its roster of brands and it exited the Dana Buchman label.

“With these introductions, we reflowed the layout of the women’s area in our stores so the brand agencies would better align with customer shopping preferences,” Gass said. “While this had some disruption in the short term, it positions us well for the long term.”

Highlights

Acceleration in the Active Category

Activewear continues to be a major growth driver for Kohl’s, with revenues in the category increasing 7% in the quarter. While brands like Nike, Adidas and Under Armour pushed active apparel sales up at a high single-digit rate, footwear returned to positive revenues following a slow start to the year — aided by Adidas, Under Armour, Vans and Asics.

During the period, the firm also built on its in-store active expansion strategy. It increased the active square footage by 25% in roughly 160 high-performing stores as well as adding 100 Adidas shop-in-shops.

Digital on the Rise

Digital sales increased at a mid-teens rate in the third quarter. Mobile served as the primary source of gains, with a particularly solid performance from the Kohl’s app, which nearly doubled and tripled in traffic and sales growth, respectively.

The retailer also pointed out improvements on speed, with 95% of buy online, pick up in store orders available within a single hour. It will also expand the number of stores — from 10 to 135 — that carry incremental inventory to support the peak volume period of its digital services during the holidays.

Amazon Boosting Brick-and-Mortar

Late in the second quarter, Kohl’s completed the nationwide rollout of its partnership with Amazon, which allows customers who shopped on Amazon.com to make returns to Kohl’s brick-and-mortar locations with no additional fees. “The program is driving incremental traffic into our stores,” observed Gass, “and we are particularly encouraged by the disproportionate amount of new customers, which on average are also younger than the typical Kohl’s customer.”

Additionally, the retailer is considering expanding the pilot of its Outfit Bar, a merchandising concept launched in May that is currently in 50 of its nearly 1,200 stores. Curated by Kohl’s, a platform that showcases emerging digitally native brands, has also proven lucrative for the firm. It debuted last month in about 50 stores with the help of Facebook and Instagram’s social media marketing efforts.

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