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====Business Segments==== ====Business Segments====
-Kohl's reports its sales in four different business segments:<ref name=2009segments>['s_(KSS)/Filing/10-K/2010/F47088125 KSS 2009 10-K "Business" pg. 3]</ref>+Kohl's reports its sales in six different business segments:<ref name=2009segments>['s_(KSS)/Filing/10-K/2010/F47088125 KSS 2009 10-K "Business" pg. 3]</ref>
*'''Women's''' (32% of net sales) *'''Women's''' (32% of net sales)
*'''Men's''' (19% of net sales) *'''Men's''' (19% of net sales)
*'''Home''' (18% of net sales) *'''Home''' (18% of net sales)
*'''Children's''' (13% of net sales) *'''Children's''' (13% of net sales)
- +*'''Accessories''' (10% of net sales)
 +*'''Footwear''' (8% of net sales)
Kohl's stores and e-commerce site carries a variety of clothing, accessories and home goods. The company's merchandise offerings include products from branded manufacturers, such as [[Nike]], in addition to exclusive and [[private label trends|private label]] brands that Kohl's wholly owns or co-owns with outside partners, such as designer Vera Wang and the Chaps brand that Kohl's offers exclusively from [[Polo Ralph Lauren (RL)]]. Kohl's stores and e-commerce site carries a variety of clothing, accessories and home goods. The company's merchandise offerings include products from branded manufacturers, such as [[Nike]], in addition to exclusive and [[private label trends|private label]] brands that Kohl's wholly owns or co-owns with outside partners, such as designer Vera Wang and the Chaps brand that Kohl's offers exclusively from [[Polo Ralph Lauren (RL)]].

Revision as of 11:30, April 24, 2011

Kohl’s (NYSE: KSS) is a U.S. department store chain that sells a mix of items including men's and women's apparel, home decor, and accessories. The department store appeals to middle-class consumers by selling discounted branded and private label clothing and home goods.[1] The company's 2009 net sales of $17.2 billion[2] puts it in the same category of national department store competitors such as J.C. Penney (JCP) and Macy's Inc. (M).

At the end of 2009, Kohl's operated 1,058 department stores[3] all of which were in the US, with the greatest number of stores in the Midwest region. In 2009, the company opened 54 net new stores.

Kohl's is vulnerable to a weak U.S. economy and declining consumer spending because the company has no stores outside of the US and does not have an international presence to serve as a buffer to fluctuations in the US economy. As a result of the economic slowdown, Kohl's same store sales and number of transactions fell 6.9% and 5.9% respectively in 2008.[4] However, Kohl's discounted pricing has allowed it to ride out the storm better than some of its department store counterparts -- Kohl's reported a 4.8% increase in net sales and 0.4% increase in comparable store sales in 2009 while competitor Macy's Inc. (M) , for example, reported a 5.6% decline in net sales for the year.[2][5]

Company Overview

Business Financials

Kohl’s operates specialty department stores and an e-commerce site in the United States that sell moderately-priced branded and private label merchandise. The company's total revenues topped $17.2 billion in 2009, a 4.8% increase from the previous year.

Business Segments

Kohl's reports its sales in six different business segments:[6]

  • Women's (32% of net sales)
  • Men's (19% of net sales)
  • Home (18% of net sales)
  • Children's (13% of net sales)
  • Accessories (10% of net sales)
  • Footwear (8% of net sales)

Kohl's stores and e-commerce site carries a variety of clothing, accessories and home goods. The company's merchandise offerings include products from branded manufacturers, such as Nike, in addition to exclusive and private label brands that Kohl's wholly owns or co-owns with outside partners, such as designer Vera Wang and the Chaps brand that Kohl's offers exclusively from Polo Ralph Lauren (RL).

Business Growth

FY2009 (ended January 30, 2010)[2]

  • Kohl's net income increased 12% in FY2009 to $991 million from $885 million in 2008, despite facing tough conditions during the economic downturn. The increase was mainly due to higher same store sales and improvement in inventory management, which were offset by higher SG&A expenses.
  • Net sales were $17 billion in 2009, up 4.8% from net sales of $16.4 billion in 2008. In a challenging recessionary environment, Kohl's benefited from its role as a discounted department-store retailer and continued to target its customer base of price-conscious middle-class consumers. The company's "Only at Kohl's" brands has continued to sell well and generate more revenue. Higher sales was primarily a result of a 0.4% increase in same store sales for year.
  • Comparable store sales increased by 0.4% during 2009, a 730 basis point increase from the 6.9% decline in 2008. Growth in comparable store sales was particularly strong in the Southwest region as a result of the closure of Mervyn's department stores, a former competitor of Kohl's.
  • Operating profit for 2009 was $1.7 billion, and operating margin was 10% of net sales. This is a 60 bps increase from levels in 2008, during which operating profit was $1.5 billion, or 9.4% of net sales. Under pressure from the weak retail environment, Kohl's sought to maintain its merchandise margins through cutting costs and maintaining price-competitive brand images. Operating profit still managed to rise despite a 5.3% increase in SG&A expenses.
  • Kohl's opened 56 stores and closed two stores in 2009, ending the year with a total of 1,058 stores, 54 more stores than it had at the end of 2008. In 2010, the company plans to open approximately 30 new stores.

Q1 2010 (ended May 1, 2010)[7]

  • First quarter net income increased 45% from $137 million in Q1 2009 to $199 million. The company attributes the increase in earnings to stronger sales as a result of increasing consumer confidence, better inventory management, and private/exclusive brand selling strategies.
  • Kohl's net sales increased by 10.9% to $4.04 billion and comparable store sales increased 7.4% for the quarter.
  • Gross margin was 38.1% of net sales or $1.5 billion, compared to $1.37 billion or 37.6% of net sales in the previous year's quarter.
  • In the first quarter, Kohl's opened 9 new stores increasing its total to 1,067 stores. At the end of the first quarter last year, Kohl's operated 1.022

Q2 2010 (ended July 31, 2010)[8]

  • Kohl's second quarter net income increased 14% to $260 million.
  • Net sales increased 8% to $4.1 billion and same-store sales grew 5.9%. The company's e-commerce division had a 50% increase in revenue.
  • Private label brands accounted for 49% of net sales, a 3% increase from the previous year.

Q3 2010 (ended October 30, 2010)[9]

  • Kohl's third quarter net income remained flat at $194 million. Despite higher revenues, higher costs kept the company's net income from rising. SG&A expenses increased by 100 basis points in Q3 2010.
  • Kohl's net revenue for the quarter was $4.22 billion, a 4.2% increase from the prior year quarter. Comparable store sales for the period increased by 1.8%.
  • At the end of the quarter, Kohl's operated 1,089 stores.

Q4 2010 (ended January 29, 2011)[10]

  • Kohl's fourth quarter Net income increased 14% to $493 million. The company attributes the gain to higher revenues and strength in the shoes and men's clothing department.
  • Fourth quarter net sales increased 6% to $6.04 billion. Comparable store sales, or sales that have been open for at least a year, increased by 4.3%. Kohl's attributes the increase to higher customer traffic, which increased 5.4%. However, sales per customer fell by 1.1%.

Trends and Forces

Can Kohl's Benefiting from Mid-Price Positioning in Recessionary Environment Continue in Recovery?

Kohl's performance in FY 2009 during the recession has been superior to several other department stores; in particular, stores with higher-priced goods that target upper-class customers and aspirational middle-class shoppers have been struggling as shoppers cut back on their spending by trading down to lower-priced merchandise. For example, luxury department stores like Nordstrom (JWN) and Saks (SKS) had negative same-store sales in 2009, at -4.2% and -14.7%[11][12] respectively. Kohl's has been able to protect itself from experience such drastic declines by luring cost-conscious customers into its stores with its moderate prices. That is why in 2009, Kohl's comparable store sales increased by 0.4%[2]

However, Kohl's faces challenges as the economy shows sign of recovery in 2010. A strengthening economy means higher consumer confidence and a greater willingness to pay for discretionary and higher priced items. Because Koh'ls is a discount retailer, it stands to lose the price conscious customers it attracted during the recession. If Kohl's cannot stop these customers from shopping at higher priced retailers as the economy grows, the company's bottom line will be adversely affected. In Q2 2010, despite having 8% higher sales, the company trimmed its yearly earnings guidance to between $3.57 and $3.70 per share, compared to the $3.75 per share upper bound it had previously announced.[13] This decrease in guidance could however reflect increasing costs as the company pursues rapid expansion in the fall of 2010 -- the company plans to open 21 new stores and a customer service center during this period, which will create 4,000 new jobs.[14] Additionally, Kohl's is preparing to open 40 new stores in FY 2011, ten more than the 30 that it had projected at the start of the year.[15]

Growing Kohl's Exclusive and Private Brands

In 2009 exclusive and private label merchandise accounted for 44.3%[16] of Kohl's sales, a figure Kohl's has increased in 2010 by adding new exclusive brands like Helix, Mudd, Dana Buchman, and Hang Ten. In Q2 2010, exclusive brands accounted for nearly half (49.1%) of the company's total sales.[13] Additionally, the the summer of 2010, Kohl's announced a partnership with Aldo which will produce an exclusive line of shoes for Kohl's that will be available in spring 2011.Kohl's is also looking to add a new modern, contemporary brand in the better to best price point range in 2011.[17] The company has reached an agreement with Elle as it will feature their jewelry and cosmetics starting in spring 2012.[18]

Read more: Kohl's expands Elle partnership | The Business Journal

Department stores are increasingly seeking to distinguish themselves and earn higher profit margins by offering exclusive brands and private label brands. Exclusive brands are brands marketed under the wholesaler's name that are sold only in a particular chain; one exclusive brand at Kohl's is the Chaps line by Polo Ralph Lauren (RL). Private label brands are produced by wholesalers, but sold under the brand name of the retailer. Exclusive brands such as Simply Vera by fashion designer Vera Wang, can help draw customers into Kohl's stores, as the products can only be found at Kohl's. Kohl's own private label products are typically priced lower than branded merchandise, but have a higher profit margin for Kohl's as the retailer is able to receive the good at a lower cost by avoiding branded manufacturers.[19]

Higher Raw Materials Costs May Force An Increase In Clothing Prices

In 2010, the price of cotton doubled, hitting a near 15-year high -- prices reached 90 cents per pound, compared to the 40 or 50 cent average. What caused the price increase? First, China, the world's largest cotton producer and consumer, experience a drought which damaged crops and caused the country to increase imports to make-up for the shortage. Second, India, the world's second largest producer, restricted its exports to protect domestic supplies and prices. Third, Pakistan, another large cotton-producing country, experienced massive floods which destroyed many crops. As a result of the increase in cotton prices, clothes makers will be forced to spend more money per unit of clothing, and as a result, will pass on these higher costs to consumers in order to maintain profit margins.

In a recovering economy, the last thing that consumers want is higher prices, especially on necessities like clothing. Many in the fashion industry are expecting price increases of as much as $2 for a t-shirt. As consumers ease back into discretionary spending, higher clothing prices delay the recovery as they discourage spending. Companies like Kohl's rely on consumers spending money on clothes, and if higher prices discourage consumer spending, the company's bottom line will suffer.[20]

Department Store Migration to Off-Mall Locations

At the end of 2009, only 73 of its 1058 stores were located in traditional malls; the remaining operating 985 were located off-mall locations.[21] This aspect of Kohl's business strategy differs greatly than that of any of its closest competitors. For example, J.C. Penney (JCP) operated 1,108 stores at the end of FY09, only 92 of which were off-mall,[22] but, JCP is trying to catch up to Kohl's as 16 of their 17 new stores in 2009 were off-mall.[23] As Kohl's is ahead of the curve in this trend, it is positioned to take away market share from its competitors and capitalize on consumer's preference for off-mall stores.

Since the 2000's began, consumers have shifted their shopping habits to strip-malls and shopping centers rather than traditional malls.[24] Department stores are traditionally attached to malls, but have begun moving out into shopping centers and other "off-mall" locations to follow the changing customer's shopping patterns. Off-mall stores are cheaper to operate than traditional mall-based department stores, due to smaller real estate costs and less in-store employees, and offer consumers convenience by serving as a one stop shop. Kohl's is well positioned to gain from this trend as almost all of their stores are in off-mall locations.


Kohl’s is one of the smallest national department store retailers. It competes primarily against other department stores, but also is facing increasing competition from discounters and mass merchandisers like Target (TGT) and Wal-Mart (WMT) as these companies grow their clothing and home goods categories.

Kohl's primary competitors are moderate-priced department stores, J.C. Penney (JCP), Macy's Inc. (M) and Sears Holdings (SHLD). Kohl's main points of differentiation from these other companies is Kohl's usage of the off-mall store model and low prices. These factors have played key roles in Kohl's ability to cope with recessionary environment while its competitors have lost more sales than Kohl's as shoppers trade down and visit malls less frequently.

  • J.C. Penney (JCP) is Kohl's closest competitor in terms of size, with roughly the same amount of sales and stores ($17.6 billion; 1,108).[25] J.C. Penney's prices are slightly higher than Kohl's and the company carries more prominent brand name merchandise, although the company counteracts this by having its own exclusive and private label products a significant portion of its merchandise; private label products represented 44.3% of total sales in 2009[26] Almost all of J.C. Penney's stores are located in malls, but the company is moving to an off-mall model with over 90% of new stores being opened in off-mall locations.
  • Macy's Inc. (M) is larger than Kohl's in terms of sales ($23.5 billion in FY09) and number of stores (850 at end of FY09).[27] Macy's carries a much larger variety of branded merchandise than Kohl's, with extensive offerings from Polo Ralph Lauren (RL), Calvin Klein, Kenneth Cole Productions (KCP) and other fashion brands. Consequently, only 19% of Macy's sales in FY09 were from private label merchandise[28] Macy's is a mall-based department store chain, with no announced plans to engage in the off-mall trend.
  • Sears Holdings (SHLD) is the largest department store company in North America, operating both Sears and Kmart stores. SHLD received over $44 billion in net sales in 2009, ending the year with 3,931 store locations in the U.S. and Canada.[29] SHLD's stores focus more heavily on home goods and appliances than clothing, a major point of differentiation between Dillard's and SHLD. SHLD's stores are traditionally mall-based, but the company has been opening off-mall locations to investigate the off-mall trend.


  1. KSS 2009 10-K "Business" pg. 3
  2. 2.0 2.1 2.2 2.3 KSS 2009 10-K "Selected Consolidated Financial Data" pg. 20
  3. KSS 2009 10-K "Stores" pg. 11-16
  4. KSS 2008 10-K pg. 18
  5. M 2009 10-K
  6. KSS 2009 10-K "Business" pg. 3
  7. KSS Q1 2010 Report
  8. KSS Q2 2010 Report
  9. KSS Q3 2010 Report
  10. KSS Q4 2010 Report
  11. JWN 2009 10-K "Selected Financial Data" pg. 15
  12. SKS 2009 10-K, pg. 23
  13. 13.0 13.1 Yahoo Finance "Kohl's 2Q Net Income Rises, But Outlook Less Rosy" 12 August 2010
  14. Reuters "Kohl's to open 21 US stores, service center" 29 September 2010
  15. Reuters "Kohl's Store Openings to Accelerate" 11 November 2010
  16. KSS 2009 10-K "Strategic Committees and Initiatives" pg. 3-4
  17. The Street "Kohl's to Launch New Brand" 14 September 2010
  18. The Business Journal "Kohl's expands Elle partnership" 14 December 2010
  19. Tuck Business School at Dartmouth, Faculty Opinion: Private-Label Products in the Manufacturin-Retailer Power Balance
  20. CNN Money "Cotton shortage = Pricey T-shirts and jeans" 9 September 2010
  21. KSS 2009 10-K, pg. 15
  22. JCP 2009 10-K, pg. 12
  23. JCP 2009 10-K, pg. 32
  24. USA Today "Shopping shifts to 'off-mall' stores" 25 April 2004
  25. JCP 2009 10-K, pg. 11
  26. JCP 2009 10-K, pg. 20
  27. M 2009 10-K, pg 15
  28. M 2009 10-K, pg. 18
  29. SHLD 2009 10-K, pg. 19
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