Kohl's brings Aldi to some stores as it makes 'sharp leap' in sales

Dive Brief:

Kohl's CEO Kevin Mansell said in a conference call Thursday that the discount department store was bringing discount grocer Aldi to five to 10 of its stores as a pilot, in an effort to rightsize its footprint and increase store productivity.
Kohl's on Thursday reported fourth quarter sales of $6.78 billion, a 9.2% increase over the year-ago period, according to a company release. Comparable store sales rose 6.3% in Q4, a marked reversal from the previous year's 2.2% decrease in comps. The discount department store retailer also nudged its gross margin up, to 33.8% from 33.4%.
Excluding a benefit from last year's tax bill, Q4 earnings were $1.99 per share, up 38% from last year. Kohl's shares were up more than 5% in premarket trading as the retailer's earnings outpaced the FactSet consensus of $1.77 per share (post-tax benefit), according to MarketWatch. The retailer's sales beat the FactSet estimate by $40 million. For the full year, Kohl's said it made $19.1 billion in sales, a 2.2% increase from the previous year. Comps increased 1.5% for the year, up from the 2.4% decrease it posted for 2016.

Dive Insight:

Kohl's Q4 performance went a long way toward solidifying its place among the department store leaders.

The quarterly numbers got a boost from an extra week of trading, but even without those, the retailer's performance in Q4 was impressive. As Neil Saunders, managing director of GlobalData Retail, pointed out in emailed comments, sales increased 6.5% and net income was up 79.8% with that week stripped from the numbers.

"Although Kohl's has been on a good trajectory for some time, these numbers go well beyond the steady improvement seen over the rest of the fiscal," Saunders said. "They represent a sharp leap in performance."

The biggest boost to the retailer, according to Saunders, has come from "improvements in the in-store offer, with the thinning out of the range and the incorporation of more branded products, both helping to boost footfall and conversion rates over the holidays." He added that GlobalData's research found that Kohl's "attracted more gift buyers both online and in-stores," as well as those buying partywear and home furnishings.

Moody's Vice President Christina Boni also highlighted the retailer's efforts in its stores, as well as in its omnichannel offerings, saying in emailed comments that "the initiatives ... to compete more effectively appear to be taking hold." Boni added that Kohl's, like Macy's, has benefited from "disciplined inventory management" and noted that the retailer's inventory declined and merchandise margins improved.

Also giving Kohl's a limited boost was its partnership with Amazon, which added dedicated space for Amazon products in some Kohl's stores. While some observers see the deal as an ultimate threat to the brick-and-mortar retailer, Saunders said he thought the move "shows that Kohl's understands the need to give customers reasons to visit stores and is not afraid to experiment to achieve this."

Along those same lines, the partnership with Aldi could promise a similar bump in traffic to stores. "From a Kohl's perspective, groceries are one of the few things that most people buy routinely, which is why Amazon, Walmart and Target have been making big moves in this space," Stephanie Waters, global retail industry principal at e-commerce software maker SAP Hybris, said in comments emailed to Retail Dive.

She added that Aldi stores "can easily fit within a Kohl's store," and that "Kohl's get[s] the foot traffic without the risk."

So far, Kohl's is projecting moderate growth for the year ahead. The company said in its earnings release that it expects comps to be somewhere between flat and positive 2%, and for total sales to range from a 1% decrease to a 1% increase. The retailer also expects its sales and administrative expenses to increase by as much as 2%.

While pointing to, among other things, Kohl's ability to control its expenses, limit markdowns and control its inventory, Saunders also suggested the Q4 increase was, to some degree, exceptional. "As positive as the results are, the question now is whether this type of performance can be maintained," he said.

"That said, we believe that Kohl's will be able to post credible numbers on both the top and bottom lines," he added. "The profit outcome should be a bit punchier, not least because expense savings and less discounting will continue. Overall, 2018 will be a reasonable year for Kohl's."