Kohl’s, facing activist pressure, plans to open smaller shops and aims to make Sephora a $2 billion business
The Kohl’s logo is displayed on the exterior of a Kohl’s store on January 24, 2022 in San Rafael, California.
Justin Sullivan | Getty Images
Kohl’s, facing activist pressure to consider a sale, wants investors to realize the progress it is making on its own terms to refresh its brick-and-mortar stores and to find ways to lure new and younger shoppers to the business.
“Make no mistake, this is a transformation,” Chief Executive Michelle Gass said as she kicked off a virtual investor meeting on Monday morning. “It is a complete reinvention of our business model and our brand.”
Ahead of the Monday meeting, Kohl’s issued fresh long-term financial targets, including growing sales by a low-single-digit percentage annually.
Shares of Kohl’s slipped nearly 6% in Monday morning trading.
Kohl’s also announced that it aims to grow its Sephora business to more than $2 billion in annual sales. Kohl’s has opened about 200 of the Sephora shop-in-shops inside its brick-and-mortar locations, so far, and is on track to hit 850 by next year. The company hasn’t previously broken out Sephora revenue on its earnings reports.
Meantime, Kohl’s is on pace to open more than 100 smaller-format shops over the next four years, in a bid to attract new customers. Gass said in an interview that the smaller stores are about 35,000 square feet, on average, with one of the first being tested in the Seattle area. For comparison, the typical Kohl’s store can span around 80,000 square feet.
“This year is a big year for us,” she said over the phone. “The framework that we’ve put out there for investors … it’s a very thoughtful guide for us.”
In addition to the longer-term revenue goal, Kohl’s said it will be targeting operating margins of between 7% and 8% annually; per-share earnings growth of a mid-to-high single-digit percentage; and operating cash flow of over $5.5 billion, with roughly $2.5 billion of free cash flow between 2022 to 2024.
Key to Kohl’s transformation is training customers to think of the company unlike mall-based department stores that are chock-full of women’s apparel and home goods. Instead, the company said it wants to be known as a top destination for athletic clothing, such as sneakers, hoodies and leggings, from brands such as Nike, Adidas, Champion and its own FLX label.
“We’re evolving our position from a department store to a more focused lifestyle concept, centered around the active and casual lifestyle,” Gass said during the investor meeting. “This is unique and we can own this space.”
Activists push for change
Monday’s meeting with investors and analysts is under a bigger spotlight as the retailer faces amplified pressure from activist groups, one of which is seeking to take control of the retailer’s board.
Last month, Kohl’s rejected the takeover offers that were on the table, which it said undervalued its business. In recent weeks, though, Kohl’s said it has been working with bankers and other financial advisors to consider unsolicited bids and also to make some proactive outreach to potential buyers.
Activists Macellum Advisors and Engine Capital have argued that Kohl’s has underperformed other off-mall retailers such as Target and TJ Maxx, and even some department store chains including Macy’s. Kohl’s shares are only up about 6% over the past 12 months, compared with Macy’s stock, which is up about 65%. The firms also have urged Kohl’s to consider selling some of its real estate and leasing it back, in order to unlock capital.
On Friday, Macellum called Kohl’s recently released fiscal fourth-quarter results disappointing, saying it remained skeptical of the retailer’s future given the current board of directors and management configuration.
“Why were sales uniquely hampered by supply chain issues compared to many other retailer peers?” asked Macellum Managing Partner Jonathan Duskin.
For the three-month period ended Jan. 29, Kohl’s reported revenue of $6.22 billion, which was slightly short of analysts’ estimates, but it issued a more upbeat revenue outlook for 2022 despite ongoing supply chain obstacles. The retailer also said it planned to double its annual dividend and buy back at least $1 billion of its stock this year.
All-in on active
On Monday, Kohl’s emphasized its plans to keep growing its assortment of active merchandise, which it said accounted for about 24% of total revenue in 2021 compared with 14% in 2016.
According to Gass, the Covid-19 pandemic spurred a desire among consumers to dress more comfortably, and even as people return to offices and other social settings the trend is here to stay.
“I think we can all personally relate to this … while you may dress up a bit more than you were when you were taking a Zoom call from your home office, you may still want to wear sneakers into the office versus dress shoes,” the CEO said during the investor meeting. “This creates big opportunities for Kohl’s.”
Still, Kohl’s said it also hopes to significantly grow its women’s dress business, while expanding outdoor and swim wear, and broadening its selection of inclusive sizes.
Chief Merchandising Officer Doug Howe explained that the company’s women’s assortment was disproportionality impacted by supply chain obstacles last year. This year, in a bid to drum up interest in dresses and other apparel items for women that aren’t activewear, he said Kohl’s will be testing “dress destinations” in some stores.
To make the in-store check-out experience smoother for customers, Kohl’s also said it will be rolling out a self-service buy online, pick up in store option to all locations this year, while it continues to test self-service returns and check-out offerings.
Over the long term, Kohl’s is projecting its digital business to bring in $8 billion in annual revenue, in part thanks to its ongoing efforts to make it easier for visitors to find brands and shop on its website. Kohl’s total revenue in fiscal 2021 amounted to $19.4 billion, up from $16 billion a year earlier.
“We’ve demonstrated that we have a very strong agenda of growth drivers that are going to have a long tailwind ahead of us, so that gives us confidence,” Gass said.
Find the full press release from Kohl’s here.
This story is developing. Please check back for updates.
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