Kohl's (KSS)

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See all Bulls Reasons Bulls: Reasons To Buy Small market share 100% agree Small market share Kohl’s has a small market share and has potential to expand by entering new markets. View or Edit Reason 1 votes 100% agree KSS offering larger discounts to attract shoppers 0% agree KSS offering larger discounts to attract shoppers Pressured by the economic downturn and the weak retail environment, KSS has announced that it would offer large price cuts to attract bargain shoppers the day after Thanksgiving and during the holiday season. Larger price cuts would allow KSS to compete more with large discount... read more View or Edit Reason 0 votes 0% agree Recovery from past mishap 0% agree Recovery from past mishap Kohl’s recovery from the 2003 inventory mishap conveys its ability to tackle challenges as margins have imporved since. View or Edit Reason 0 votes 0% agree See all Bears Reasons Bears: Reasons To Sell High gas prices and interest rates could cut spending habits 100% agree High gas prices and interest rates could cut spending habits High gas prices and interest rates could cut moderate consumer’s spending habits. View or Edit Reason 1 votes 100% agree Weak retail environment has led to a drop in consumer demand 0% agree Weak retail environment has led to a drop in consumer demand A mid-priced retailer of apparel and housewares, KSS does not have the discount-price advantage that stores such as Dollar Tree or Wal-Mart has during the recession. As consumers look more to cutting costs through shopping at discount-price retailers, KSS will face more rigorous... read more View or Edit Reason 0 votes 0% agree JCP opening off mall stores 0% agree JCP opening off mall stores Mall based stores such as J.C. Penney (JCP) are beginning to open off-mall stores. View or Edit Reason 0 votes 0% agree Send the authors a comment or suggestion Be the first to make a suggestion See All Suggestions

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The 23rd-largest US retailer, specialty department store Kohl’s (NYSE:KSS) sold $15.5 billion's worth of apparel, home goods and other items to moderate-income families in FY2006, and the company operates 834 stores across nearly every U.S. state in addition to an online channel, Kohls.com. Despite stronger performance relative to the industry earlier this year (from 2005 to 2006, Kohl's generated an industry-leading same stores growth rate of 5.9%), Kohl's is finally succumbing to the same flagging comps experienced by other retailers. Unseasonably warm weather this fall, high oil prices, and slowing housing and credit markets all contributed to Kohl's all-around earnings declines: 3Q07 saw a 14% drop in quarterly profits as well as a $30 million decrease in net income. (The company also lowered its earnings guidance for the coming fourth quarter, with comps relative to last year now expected to be flat to minus 2%.) A spot of hope seemed to lie in a 5% rise of quarterly sales, but even these were fueled primarily by new stores: sales at stores opened for a year or more (same-store sales) actually dropped more than 2%. However, quarterly gross margin (31.7%) did manage to rise 10 basis points from the 3Q06.

Traditionally, Kohl’s has driven growth by focusing on building retail locations away from malls ("off-mall") and by offering exclusive brands--including designers such as Vera Wang and celebrities such as Rachel Ray--at low prices. While this strategy puts the company at the mercy of fashion trends, the company has also demonstrated an ability to recover from past mishaps. For instance, margins declined in 2003 as increased inventory led to substantial discounts. Yet despite these miscalculations, Kohl’s margins have experienced steady growth since, growing by about 30% annually. In the 3Q07 call, Chairman and CEO Larry Montgomery re-emphasized the company's emphasis on "a time horizon longer than one month or one quarter," and cited the company's recent promotional flexibility as an example. Part of this focus on long-term growth will appear as an aggressive expansion plan aiming to open 566 new stores over the next five years. So far, Kohl's seems to be on-plan, reaching the 929-store benchmark just before quarterly results were announced in November.

The company operates in a highly competitive space against other department stores such as J.C. Penney and superstores such as Sears (SHLD), Wal-Mart Stores (WMT) and Target. J.C. Penney in particular has moved towards migrating to off-mall locations and targets a similar moderate-income demographic as Kohl's. Finally, the company faces potential declines in consumer spending habits due to rising energy prices and interest rates, to which its core customer base is particularly sensitive.

[edit] History

Kohl’s was established in Milwaukee, Wisconsin in 1962, by the Kohl family. The company became wholly owned by a subsidiary of British-American Tobacco Company called the Batus Retail Group. During Batus' ownership, the company expanded to 39 stores. In 1986, the company was bought by a group of investors. Today, Kohl’s is a Fortune 500 company that continues to grow and open more stores.

[edit] Kohl’s Business

Kohl’s is a moderate specialty department store and has two parts to its business: Retail Stores and Credit.

[edit] Retail Stores

The company makes revenue from its 817 stores and Kohls.com (the company also plans to have its entire store online in 2007). From 2001 to 2006, Kohl's grew its revenue by 16% CAGR (compound annual ground rate), culminating in $15.5 billion in 2006 net sales.

Kohl’s has three store prototypes:

1. The smallest prototype is about 68,000 square feet with selling square footage of about 54,000, and generates $10-$12 million first year of operations.
2. The suburban prototype is about 88,000 square feet, has about 74,000 selling square feet, and generates $14-$16 million in annual sales.
3. The urban prototype, at 133,000 square feet, with about 98,000 selling square feet, and generates $20-$25 million in annual sales.

Kohl’s new 5-year growth plan outlines a model that will add more than 500 stores to the existing 834 by the end 2012, with an emphasis on locations like Detroit, Minneapolis, Boston, and New York. The majority of Kohl’s future stores will be modeled after the suburban prototype and about one-fifth to one-fourth of these stores will be modeled after the small prototype type.

[edit] Customers & Products

Kohl’s targets moderate spenders with affordably priced goods. Its primary customers are women with children in between the ages of 25 to 44 years old. These families tend to be moderate earning households and, in total, spend about $20-$35 billion annually in stores such as Kohl’s.

Kohl’s sells apparel (for women, men, and children) home goods, accessories, and footwear. In 2006, Women’s apparel was the largest of Kohl’s product mix, generating one-third of all sales. Kohl’s home division was also particularly strong, growing at a double digit rate in 2006 despite an overall declining industry trend.

Kohl’s plans to expand its exclusive and private brand offerings, which accounted for approximately 35% of its total sales in 2006. It will offer exclusive brands such as Simply Very Vera Wang by Vera Wang, Elle, and Food Network.

[edit] Divestment of Credit Card Business

Kohl’s issues a private credit card, which can only be used at Kohl’s. The company sold its private credit card business to J P Morgan Chase (JPM) for about $1.6 billion in 2006. The sale of this unit allows Kohl’s to continue serving its customers with the private credit card while utilizing Chase's operational and marketing capabilities.

[edit] Business Growth

[edit] Trends and Forces

[edit] Specialty Department Stores

Specialty department stores are based outside of malls (or are "off-mall"), and consumers have shifted in recent years from shopping in traditional mall-based department stores to specialty ones. The off-mall stores cost less to run than traditional mall-based department stores and offer consumers convenience with a one stop shop. These specialty department stores typically have fewer employees and rent expanses and retailers such as Kohl’s can produce double digit operating margins.

Same store sales growth--a key retail metric--has been in slow decline for mall-based department store retailers such as J.C. Penney (JCP), Sears Holdings (SHLD), and Federated Department Stores (FD). In 2006, Kohl’s produced same store sales comps at 5.9% compared to J.C. Penney’s 3.7%, Sears’ (-6.1%), and Federated’s 2.6%. It should be noted that J.C. Penney has moved towards this trend and plans have to have 90% of its store be off-mall standalone outlets.

[edit] Retail Consolidations

Retail consolidations affect the tenor of the overall industry. One such significant merger between The May Department Stores and Federated Department Stores resulted in the closing of 83 May department stores. The result of this particular event resulted in a two-fold benefit for Kohl's. First, it opened up the opportunity for Kohl's to expand in geographic areas previously served by the closed May department stores. Second, as May stores are being converted into higher-end Macy's department stores, Kohl's has an opportunity to pick up some of the estimated $4 billion in lost sales from May's customers.

[edit] Fashion Trends

Like most retailers Kohl’s is prone to fashion risk. The retail industry is highly competitive and a shift in fashion trend can affect consumer demand. The company must be able to predict fashion trends and fulfill consumer demand to maintain foot traffic within its stores.

[edit] Exclusive and Private Brands

Department stores are increasingly seeking to distinguish themselves 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. Private label brands are produced by wholesalers, but sold under the brand name of the retailer. In recent years there has been a increase in demand for private, which are typically higher margin, and exclusive products. About one-third of Kohl’s sales are from its private and exclusive brands, and this ratio is increasing as the company continues to expand its portfolio by offering exclusive brands such as Very Vera by Vera Wang, Simply Vera by Vera Wang, Chaps, Rachel Ray, and Food Network. Most recently, Kohl's announced a deal with popular sportswear label Fila Luxembourg to be the brand's exclusive retailer in the US, bolstering Kohl's already strong offerings in footwear and sportswear.

[edit] Consumer Spending

Kohl's core consumers are moderate income earning families. The rise in interest rates and high energy prices can lead to a decline in their spending habits. As energy prices increase and interest rates increases consumers' loan payments, low income families tend to cut back on spending allowances for the type of goods found at Kohl's.

The effects of downwards trends in consumer spending can be seen in Kohl's performance in this past quarter, where spending patterns have suffered from record highs in oil prices and a weak credit and housing market. With a coming holiday season that may be the worst in years, discounts and promotions will probably continue to depress spending in a quarter which ought to be one of the highest-profit in the year.

[edit] Cycle Time

Cycle time is the time that it takes to move a product from production to the store for sales. Kohl’s has begun to shorten its cycle time to remain competitive in the retail market. For example, the company plans to have a cycle time of 90-120 days for its Elle products launch and decrease the allotted time gradually. The company plans to focus cycle time reduction on women’s apparel--its largest product category by sales.

[edit] Competition

Kohl’s operates in a very competitive retail market against both specialty and mall-based department store retailers. In addition, Kohl’s faces stiff competition from general discount retailers Target (TGT) and Wal-Mart Stores (WMT), both of which have been expanding its respective apparel businesses. Also, J.C. Penney (JCP) in particular has utilized similar strategies to Kohl’s by focusing on decreasing inventory cycle time and opening off-mall located stores.

 Kohl's

	Select All  |  Select None Metrics Merchandise Revenue Credit Card Revenue Inventory Long Term Debt Number of Discount Stores Cost of Sales Operating Income Comparable Sales Growth Number of Stores Sales per Store Net Income Cancel

	Select All  |  Select None Companies Macy's Inc. (M) Sears Holdings (SHLD) J.C. Penney (JCP) Bon-Ton Stores (BONT) Cost Plus (CPWM) Gottschalks (GOT) Saks (SKS) TJX Companies (TJX) Kohl's (KSS) Dillard's (DDS) Cancel

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Company	Data From	Net Income	Number of Stores	Sales per Store	Comparable Sales Growth
J.C. Penney (JCP)	2007	$1.11B[1]	1.07K[2]	$18.6[3]	0%[2]
Kohl's (KSS)	2007	$1.11B[4]	817[4]	$19M[4]	5.9%[4]
Macy's Inc. (M)	2007	$893M[5]	853[6]	$30.8[5]	Add
Sears Holdings (SHLD)	2006	$1.49B[7]	3.79K[7]	$14M[8]	(3.7%)[7]
TJX Companies (TJX)	2007	$738M[9]	2.47K[10]	$7.06M[9]	4%[10]

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[edit] Operating Metrics

Kohl’s has produced tremendous growth despite these challenges. Net sales increased by 16% in 2006, totaling $15 billion. And while Kohl's has a disproportionately lower share of sales compared to customers, (4% of U.S market sales and 10% of customers in 2006), the company has a chance to expand its market share as it grows. In 2006, Kohl's continued to soak up market share from the declining apparel business of Sears (SHLD). Also, unlike many competitors suffering from industry trends of declining home department sales, it is one of Kohl’s strong categories.

The company has more inventory turnover than its main competitor, J.C. Penney. Inventory turnover is the cost of goods sold divided by the average inventory, and the higher the inventory turnover, the more an investment is working for you. Kohl's has been able to compete both efficiently and effectively as it continues to grow.

[edit] Same Store Sales Trend and Store Expansion

Comparable store sales or same store sales measures the sales of stores open for a year and longer. Kohl’s same store sales have seen tremendous growth since 2003, exceeding that of other department stores.

Kohl’s increase in free cash flow from the sale of its credit card business as well as expanding margins provided it with sufficient financing to drive stores growth. Kohl’s opened 85 stores in 2006 and plans to reach 1,200 stores by 2010 (it has 817 as of the end of 2006).

[edit] References

1. ↑ Google Finance
2. ↑ ^{2.0 2.1} Sec.gov
3. ↑ JCP 2007 10-K
4. ↑ ^{4.0 4.1 4.2 4.3} KSS,2007,10-K,Item-6,Page-13
5. ↑ ^{5.0 5.1} M 2007 10-K
6. ↑ M,2007,10-K,Item-2,Page-10
7. ↑ ^{7.0 7.1 7.2} SHLD,2006,10-K,Item-6,Page-18
8. ↑ SHLD,2006,10-K,Item-8,Page-55
9. ↑ ^{9.0 9.1} TJX,2007,10-K,Item-6,Page-24
10. ↑ ^{10.0 10.1} TJX,2007,10-K,Item-7,Page-24