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. The company's 2009 net sales of $17.2 billion 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 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. 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.
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.
Kohl's reports its sales in six different business segments:
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).
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% 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%
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. 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. 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.
In 2009 exclusive and private label merchandise accounted for 44.3% 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. 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. The company has reached an agreement with Elle as it will feature their jewelry and cosmetics starting in spring 2012.
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.
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.
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. 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, but, JCP is trying to catch up to Kohl's as 16 of their 17 new stores in 2009 were off-mall. 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.
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.