Kohl’s Faces Timely Housewares Upside in Resetting as a Gift Destination

Kohl’s is taking a new path under recently appointed CEO Tom Kingsbury. Where it may lead still isn’t fully clear, but home goods are part of the prospects that could be an advantage for the retailer in the immediate future.

With Bed Bath & Beyond slipping from its position as a key destination for better goods, the opportunities that Kohl’s has with home merchandise may be greater than they seemed a few weeks ago.

In the company’s fourth-quarter conference call, Kingsbury was frank about what he sees in Kohl’s operation and careful in discussing where he might lead it.

“Candidly, I know we can do better,” he said. “To reach our full potential, we will refine our strategy and reestablish merchandise disciplines with a customer-centered focus across the organization. This will sharpen our positioning with customers, allow us to capitalize on new opportunities and drive greater efficiency. Our efforts have already begun.”

Kingsbury identified a need to broaden Kohl’s approach to the consumer, and the retailer already has moved certain home and gift merchandise up front on the sales floor. Kingsbury also cited outdoor as an area that Kohl’s could grow and, as regards seasonal, Kohl’s sees more opportunity with proper positioning, noting that the Valentine’s Day assortment tied into gifts and shared its up-front positioning, with the result being strong sales. He noted that Mother’s Day is when Kohl’s will boast its gifting assortment to drive revenue for the occasion.

As such, Kingsbury signaled a departure from the heavy reliance on activewear, which was central to former CEO Michelle Gass’ strategy, one that was itself a departure from earlier approaches that emphasized developing collections, often under proprietary labels, meant to address various emerging trends and often linked to celebrities with whom customers might identity including Lauren Conrad, Daisy Fuentes and, on the home side, Bobby Flay. However, with the exception of Conrad, those celebrities are out of the Kohl’s spotlight these days. On the home side, Sonoma is a private label effectively established and continues to enjoy success even if not as heavily emphasized recently as once was the case. In the conference call, Jill Timm, Kohl’s chief financial officer, called Sonoma one of the company’s best-performing brands during the fourth quarter.

Brand Considerations

Kingsbury said that private labels will continue to be important at Kohl’s but he expressed a belief that the company had not put enough emphasis on national brands in 2022, something he said it would rectify.

Mara Devit, senior partner at consultancy McMillan Doolittle, said the effort would require a major commitment. Despite all the own brands it has launched over the years, she said Kohl’s never had the money or creativity invested to build strong private labels or make the operation a “meaningful destination” for them.

Kingsbury emphasized that he doesn’t believe Kohl’s requires an overhaul because it has strengths that can be built on immediately. At several points in the conference call, Kingsbury provided a degree of guidance to how he wants to realign the retailer’s operations and offered an initial assessment of Kohl’s operations.

“We have a substantial opportunity to make a difference in the retail landscape,” he said. “ As we have a solid foundation and a highly motivated team, with a set of priorities to drive Kohl’s sales and earnings growth. During the past three months, I have had the opportunity to assess our go-to-market strategies, our operational capabilities and processes in our organizational structure. I have also visited a number of our stores across the country and engaged with many of our brand partners. It is clear to me that Kohl’s fills an important need in the market, offering highly relevant products at a great value to millions of customers in conveniently located stores across the U.S. and online. We are making great strides in beauty through our Sephora partnership. However, we have lost some ground in other key categories.”

Kohl’s made clearing inventory a priority in the fourth quarter and will maintain discipline in that department while also working to enhance efficiency, with merchandising and marketing department recalibrated in January to that end. Kingsbury asserted that Kohl’s has to emphasize value and clarity when making an appeal to consumers however attempted. In part, the idea is to reduce marketing spend by making messaging more concise and to provide customers with an expectation as the company makes its complex, discount-dependent pricing a barrier to onboarding new customers. In terms of stores themselves, Kingsbury said, the company is working on establishing better sight lines with reduced graphics and signage to give sales floors a more modern feel.

On the question, Pulse Ratings analyst Dennis Cantalupo agrees that the value proposition is critical to Kohl’s prospects, particularly at this juncture of the economy.

“We believe that Kingsbury should try to emphasize Kohl’s value proposition to the consumer, who is growing increasingly more frugal in the face of rising inflation and general macroeconomic headwinds,” he said.

Devitt said Kingsbury has got his work cut out for him, and only in part because of the inventory issues the company has confronted and the major clearance efforts it has recently undertaken, which, she said, lagged its competition’s efforts to shed excess merchandise. At the same time, on the fashion and value scale, immediate competitors such as Walmart, TJX and Ross are still beating Kohl’s consistently. Then the stores themselves are dowdy, which may be one reason why shoppers seem to be older than average for its competitive set.

Once won over, many consumers have stayed Kohl’s customers, but, given the store presentations and the complex discounting proposition – reliant on a system of coupons and special pricing that seems difficult for potential customers to grasp and requires signing up for the company’s credit card or at least its membership program to effectively access – customer acquisition has become a drag on Kohl’s ability to grow.

“The customer experience is 1999,” Devitt said.

Consumers who enter Kohl’s see something more consistent with department stores when it had been a value alternative to department stores when it was expanding across the country a couple of decades ago.

From the Pulse Ratings perspective, Cantaloupe said, “The traditional department store category had been losing market share to discounters such as TJX, Ross, and yes, Mr. Kingsbury’s old company, Burlington Stores. We feel that Mr. Kingsbury needs to re-establish Kohl’s identity.”

In terms of structure, Kohl’s has consolidated the number of general merchandise managers to four from seven, as was the case before the pandemic. As part of the effort, the company transitioned planning and allocation so that they report directly to Kingsbury. The company also added two key executives, Kingsbury pointed out, including Dave Alves the company’s new president and chief operating officer, who is tasked with leading Kohl’s enterprise operations, including the company’s 1,200 stores, real estate portfolio and global supply chain and distribution. The company appointed Nick Jones as the new chief merchandising and digital officer, and Kingsbury pointed to his experience across key Kohl’s categories including home and gifting as well as apparel. Alves had been president and chief retail officer for Bealls Retail Group, overseeing Bealls Stores, Bealls Outlet Stores, Burkes Outlet Stores and Home Centric, after holding leadership roles at TJX Canada and TJX Europe, Hudson’s Bay and Sterling Shoes. Jones was CEO of Joules Group, a premium British lifestyle operation based in the United Kingdom that sells online and, on a wholesale basis, retailers including Nordstrom and Dillard’s. Prior to that, Jones managed the George brand for ASDA/Walmart in the United Kingdom.

Year Ahead

To drive sales and profitability, Kingsbury said, Kohl’s is focused on four goals for the year: enhancing the customer experience, accelerating and simplifying value strategies, managing inventory and expenses with discipline, and strengthening the balance sheet.

The last is important in part because the company has drawn criticism from observers about the size of its share buyback program. In the conference call, Timm said Kohl’s is not planning any additional repurchase activity until it strengthens the company’s balance sheet.

Cantalupo noted, “From a credit perspective, we feel that roughly $2 billion in share repurchases over the past two years was fairly aggressive given the volatile retail environment. These activities, which were likely aimed at appeasing disgruntled shareholders, left a mark on the balance sheet as they were funded with cash and additional debt.”

As to customer experience, Kohl’s will work to ensure shoppers find the product assortment they seek presented in the way they shop. Kingsbury characterized Sephora as a part of the Kohl’s retail environment that has enhanced the customer experience. Yet, observers have questioned how successfully the company can link its operation with that of its partner such that Kohl’s maximizes the opportunity created. Kingsbury noted that almost eight million of Kohl’s customers purchased beauty products at Sephora in 2022, and he expects the numbers to grow in the years ahead as Sephora shops roll out to more Kohl’s stores. Plans for 2023 call for adding 250 more full-sized 2,500-square-foot Sephora shops in Kohl’s stores to bring the total operating up to 850. Kohl’s also expects to add 50 smaller format Sephora shops by year’s end. By 2025, the company expects it will have Sephora shops open in all its stores. Kingsbury added that, in the fourth quarter, Kohl’s total beauty sales increased by 90%. The 200 Sephora shops at Kohl’s open since 2021 enjoyed high single digits percent comparable beauty sales and the 400 shops opened in 2022 enjoyed better-than-expected sales. In addition, Sephora brings in younger and more diverse customers to Kohl’s, and Kingsbury pointed out that the company is working now on ancillary products in its assortment that will be of greater appeal to Sephora shoppers in its stores.

“We like some of the things Kohls has done such as the Amazon relationship and also luring Sephora from JCPenney,” Cantalupo said. “It must continue to think of creative ways to drive foot traffic, and more importantly, once the shopper is in the store, Kohls must be able to leverage that visit with attachment sales.”

In an interesting twist, during January and February when the company was in clearance mode, Placer.ai observed that Kohl’s traffic was up year over year even as Macy’s, Dillard’s and Nordstrom were seeing fewer store visits.

Assortment Pivots

Under Gass, Kohl’s focused increasingly on activewear styles and the athletic and casual apparel that suits them, which proved to be of some benefit during the pandemic, when people were spending work and leisure time at home. However, as many consumers returned back to work, Kohl’s wasn’t necessarily positioned to help them update their professional and evening-out wardrobes. Kingsbury said Kohl’s will partially rebalance its assortment in response to more normal customer purchasing behavior, adding more casual and career wear, even as he is revisiting categories outside of recently deemphasized apparel. And he did so while avoiding any criticism of his predecessor, and author of the policies he’s changing. Gass is now president of Levis Strauss & Co., an important Kohl’s partner vendor.

It isn’t all about apparel, however. He said Kohl’s is under-assorted in some areas where it has opportunity.

“I believe Kohl’s can increase its penetration in areas like home decor and become a destination for gifting,” Kingsbury said.

All told, he said, Kohl’s wants to do a better job of driving in-store productivity. Stores represent almost 70% of the company’s annual sales and are critical to customer engagement. The company has been evaluating the Kohl’s stores portfolio and remains comfortable that stores are in a healthy condition.

Home is a department where Kohl’s has suffered evident deterioration, Devitt said.

“They had a lovely product presentation in small appliances, cookware and accessories and now it’s all boring colors without any storytelling or romance,” she said. “In the past, you could depend on Kohl’s for Sonoma and gifting. Now, with seasonal and home categories, they have to get back to where they once were so people are reminded of why they would want to get there instead of the other options they have.”

Even with national brands, Devitt said, Kohl’s needs to reconsider the offer in-store to establish an up-to-date proposition to consumers, especially younger shoppers looking ahead at greater purchasing power as they move through their carriers, who enter its stores to bring back Amazon merchandise or visit Sephora. For all the changes, she says, the stores she has lately seen still have activewear too prominently placed. Besides that, key brands such as Nike and Adidas are underrepresented from a consumer acquisition perspective because shoes are separated from the apparel offering in the back of the store, Devitt observed. So brands that might attract Sephora customers are not sufficiently represented where they might have an impact, particularly for those who only intend to shop beauty on a given visit.

“Sephora customers can go in and out. They don’t have to go around the store,” she says, adding that Kohl’s has to consider how it can take brands such as “Levis and Nike and do better without becoming overdependent.”

In the effort to turn Sephora and Amazon returns visitors into Kohl’s customers, the retailer has to work on improving spotty in-store execution and put together an enticing merchandising package including home, gift, concisely organized national brands and better-backed private labels in a presentation that has a unique appeal.

“They have to focus on the question: How can we differentiate?” Devitt says.

Kingsbury said he wants to be realistic in setting expectations as changes being instituted will require time to generate results, adding that the macroeconomic environment also will affect the degree and timing of improvement at Kohl’s.

“However, I am confident that successful execution against our priorities will produce the intended improvement in sales and earnings growth over the long term. While 2023 may be viewed as a transitional year, it is our objective to show progressive improvement against our priorities and actions as we move through the year,” Kingsbury said.