Kohl's (KSS)

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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.

At the end of 2007, the U.S. economy slipped into a recession, during which retailers suffered from declining consumer spending, and Kohl's was no exception.^[4] Kohl's has no stores outside of the US which means that it is particularly vulnerable to US economic fluctuations because it does not have an international presence to serve as a buffer to such changes. As a result of the slowdown, Kohl's same store sales and number of transactions fell 6.9% and 5.9% respectively in 2008.^[5] 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]^[6]

1 Company Overview
- 1.1 Business Financials
  - 1.1.1 Business Segments
2 Business Growth
- 2.1 FY2009 (ended January 30, 2010)[2]
3 Trends and Forces
4 Competition
5 References

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:^[7]

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.

Trends and Forces

Kohl's Benefiting from Mid-Price Positioning in Recession

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 same store sales in 2009, at -4.2% and 11.5%^[8]^[9] in Q3 FY08, 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.

In December 2008 the National Bureau of Economic Research reported that the U.S. economy had been in a recession since December 2007.^[4] The recession was spurred by the 2008 Financial Crisis and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S., a poor sign heading into the holiday shopping season.^[10] Kohl's business has dipped in 2008 as a result of the economic conditions, with same store sales falling 6% in the first nine months of 2008 and 6.7% in the third quarter of FY08 alone. However, Kohl's has been able to fuel net sales growth of 1.5% in the first nine months of 2008 by adding 81 stores during the same time period.

Growing Kohl's Exclusive and Private Brands

In 2007 exclusive and private label merchandise accounted for 39% of Kohl's sales, a figure Kohl's plans on increasing in 2008 by adding new exclusive brands by collaborating with the Food Network, including celebrity host Rachel Ray, and European sportswear brand FILA Luxembourg.

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.^[11]

Department Store Migration to Off-Mall Locations

At the end of 2007, only 64 of Kohl's 929 stores were located in traditional malls;^[12] this is basically the inverse of Kohl's competitor J.C. Penney (JCP) which operated 1,067 stores at the end of FY07, only 88 of which were off-mall.^[13] However, J.C. Penney (JCP) is trying to catch up to Kohl's in regards to the off-mall trend, as 42 of their 50 new stores in 2007 were off-mall and over 90% of their new stores in 2008 are off-mall.^[13]^[14] 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. 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.

Competition

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 2008 recession while its competitors have lost more sales than Kohl's as shoppers trade down and visit malls less frequently.

Department stores:

J.C. Penney (JCP) is Kohl's closest competitor in terms of size, with slightly more 2007 sales and stores than Kohl's ($19.8 billion; 1,067).^[15] 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 with a deep penetration of its own exclusive and private label products which represented 49% of total sales in 2007.^[16] 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.^[13]

Macy's Inc. (M) is larger than Kohl's in terms of sales ($26.3 billion in FY07), but operates fewer stores (853 at end of FY07) than Kohl's.^[17] 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 FY07 were from private label merchandise.^[18] 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 $50.7 billion in net sales in 2007, ending the year with 3,847 store locations in the U.S. and Canada.^[19] SHLD's stores focus more heavily on home goods and appliances than clothing, a major point of differentiation between Kohl'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.

References

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 ==Trends and Forces==
 ====Kohl's Benefiting from Mid-Price Positioning in [[U.S. Economic Cycles|Recession]]====
-Kohl's performance in FY08 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 Consumption|luxury]] [[department stores]] like [[Nordstrom (JWN)]] and [[Saks (SKS)]] have experienced worse drops in same store sales than Kohl's, at 11.1% and 11.5%<ref name=Saks>[http://phx.corporate-ir.net/phoenix.zhtml?c=110111&p=irol-newsArticle_print&ID=1227713&highlight=| Saks (SKS) Third Quarter Fiscal 2008 Press Release]</ref> in Q3 FY08, 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.
+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 Consumption|luxury]] [[department stores]] like [[Nordstrom (JWN)]] and [[Saks (SKS)]] had negative same same store sales in 2009, at -4.2% and 11.5%<ref name=2009JWN>[http://www.wikinvest.com/stock/Nordstrom_(JWN)/Filing/10-K/2010/F46734434 JWN 2009 10-K "Selected Quarterly Data" pg. 58]</ref><ref name=2009SKS>[http://phx.corporate-ir.net/phoenix.zhtml?c=110111&p=irol-newsArticle_print&ID=1227713&highlight=| Saks (SKS) Third Quarter Fiscal 2008 Press Release]</ref> in Q3 FY08, 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.
 In December 2008 the National Bureau of Economic Research reported that the [[U.S. Economic Cycles|U.S. economy]] had been in a recession since December 2007.<ref name=Recession/> The recession was spurred by the [[2008 Financial Crisis]] and has resulted in a significant decline in consumer spending, which has hurt retail sales. In November 2008, total retail sales fell 5.5% in the U.S., a poor sign heading into the [[Holiday Season|holiday shopping season]].<ref name=RetailSales>[http://online.wsj.com/article/SB122896566329297317.html| WSJ.com, Retail Sales November 2008]</ref> Kohl's business has dipped in 2008 as a result of the economic conditions, with [[same store sales]] falling 6% in the first nine months of 2008 and 6.7% in the third quarter of FY08 alone. However, Kohl's has been able to fuel net sales growth of 1.5% in the first nine months of 2008 by adding 81 stores during the same time period.