Dive Brief:
- Kohl’s reported Wednesday that Q2 net sales fell 4.2% to $3.5 billion from a year ago. Comparable sales declined 5.1%. Gross margin rose 59 basis points to 39.6%.
- Operating income was $166 million, up 1.8% from $163 million the prior year. Net income for the quarter was $66 million, a 13.8% year-over-year increase from $58 million.
- The company updated its full-year guidance. Kohl’s expects higher earnings per share, but a net sales decrease of 4% to 6%, versus its previous forecast for a 2% to 4% decrease. Comps are now expected to decline 3% to 5% versus the prior outlook of a 1% to 3% decrease.
Dive Insight:
Kohl’s attracted new customers and saw an increase in overall transactions in the second quarter. But customers remained restrained with their spending, which pressured sales and overshadowed strong performance in key growth areas, like Sephora beauty, home decor, gifting and impulse buys, CEO Tom Kingsbury said during an earnings call.
“While we recognize efforts of this scale take time, we were hopeful that a return to top-line growth would materialize more quickly,” Kingsbury said. “Although we are disappointed with our second quarter sales, we continue to execute well operationally, enabling us to deliver a 13% increase in earnings, driven by gross margin expansion and strong inventory and expense management.”
Additionally, Kingsbury said total beauty sales rose about 45%, while comparable beauty sales grew in the low teens percent, with consistent performance across shops open in 2021 and 2022. Sephora shops opened in the past year are also performing better than expected, the CEO said. The beauty brand is now present in about 1,050 of the company’s approximately 1,100 stores.
And Sephora shoppers are adding products from the rest of the store as well, according to Kingsbury. About 35% of Sephora at Kohl’s shoppers have another product in their basket, mostly women’s, juniors or accessories items. As a result, the company is repositioning the juniors department to the front of the store to capitalize on foot traffic and reintroducing fine jewelry to 200 stores, which it lost sales in when it made space for Sephora.
Kingsbury also confirmed the recent launch of Babies R Us shop-in-shops. The company plans to open 200 Babies R Us shops overall by the end of next month and plans to introduce a Babies R Us registry in Q3. In addition, Kohl’s is launching maternity brand Motherhood with the Babies R Us launch.
While second-quarter comps missed expectations, Kohl’s did successfully and “aggressively” control costs during the quarter, Evercore analysts led by Michael Binetti said in a note. The retailer also beat Evercore’s and Wall Street’s earnings per share expectations due to good control of selling, general and administrative expenses, Binetti said.
Despite the challenges, Kohl’s is advancing with a successful operational strategy, Kingsbury said. Still, Neil Saunders, managing director of GlobalData, said Kohl’s value proposition has weakened as consumers have become more discriminating. “Stores used to have a bit of finesse and flair, but they are now, for the most part, an uninspiring jumble of product that is neither compelling nor interesting,” Saunders said in emailed comments.
Saunders said Kohl’s move to add third-party brands and offers to bolster sales is a good move, but it won’t improve the core of the business. “Unfortunately, the outlook for the balance of the year calls for more of the same,” Saunders said. “Kohl’s has started this year on a weak note, and it will end the year in much the same fashion. There has been some progress on stabilizing the bottom line, which is to be welcomed, but Kohl’s will remain a company in overall decline.”
Inflation and high interest rates continue to negatively affect consumer spending, especially among middle-income consumers. Kingsbury said Kohl’s is seeing this in the performance of the company’s core apparel and footwear offering, which was soft in Q2. Kingsbury acknowledged that the retailer has “work to do” to improve its core apparel and footwear business sales trends, “which frankly have been disappointing.” The company is working to add newness in petites and sportswear, where it has recently lost traction, and said its dress category — which Kohl’s recently expanded — is performing well.
