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KSS AT A GLANCE

P/E ► 19.8 AVG EV/EBITDA ► 9.38 AVG ROA ► 8.5% AVG ROE ► 12.9% AVG Debt to Equity ► 0.690 AVG Current Ratio ► 2.04 AVG Interest Coverage Ratio ► 13.5 AVG

 

 

 

 

 

 

Kohl’s (NYSE:KSS) is a U.S. retailer, operating 1,004 department stores nationwide as of November 2008.^[1] Kohl's appeals to middle-class consumers with discounted branded and private label clothing and home goods, and its $16.4 billion of sales in 2007 place it behind its national department store competitors J.C. Penney (JCP) and Macy's Inc. (M).^[2]

As the U.S. economy slipped into a recession at the end of 2007, retailers suffered from declining consumer spending, and Kohl's was no exception.^[3] Kohl's same store sales fell 0.8% in 2007^[2] and results worsened in 2008 as Kohl's reported a 6.0% decrease in same store sales for the first nine months of 2008.^[1] But Kohl's discounted pricing has allowed it to ride out the storm better than some of its higher priced department store counterparts - Kohl's reported a 1.5% increase in net sales in the first nine months of 2008 while competitor Nordstrom (JWN), for example, reported a 5.4% decline in net sales and an 11% drop in same store sales in the third quarter of FY08 alone.^[4]

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 $16.4 billion in fiscal 2007, a 5.6% increase from 2006.

• The company's revenues have grown at a CAGR of 12.4% from 2003 to 2007.^[2]
• Most of Kohl's sales growth is the result of extensive store expansion as the company nearly doubled its store base from the end of 2003 (542 stores)^[2] to November 2008 (1,004 stores),^[1] adding about 100 stores per year over that time period.
• The company added 112 new stores during FY07.^[2] This store growth will slow in 2009 as the company plans to open only 50 stores during FY09.^[1]
• Kohl's is growing its online operations, adding more of its merchandise to its e-commerce catalog. Online sales growth drastically outpaced sales growth in stores, with $241 million in online sales in FY07, 31% growth from 2006.^[5]

Kohl's stores and e-commerce site carry 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). These exclusive and private label brands accounted for 39% of net sales in FY07.^[6] Kohl's primary customers are women with children, typically in the middle-class. Consequently Kohl's bestselling merchandise segment in 2007 was Women's clothing, which represented 33% of total sales.^[5]

Business Growth

Q4 FY2008 (ended January 31, 2009)

• KSS's net income slipped 18.4% as compared with the previous-year fiscal quarter, from $412 million in Q4 2007 to $336 million in Q4 2008, due to lowered demand for discretionary consumer goods during the recession. Earnings per share for Q4 2008 was $1.10, compared to $1.31 from a year ago. KSS did not see as large a decline in profitability as some other department store retailers and exceeded analyst estimates during Q4 2008, mainly because of its price-conscious competitive strategies and market placement. ^[7]

• Net sales were $5.2 billion in Q4 2008, down 4.6% from net sales of $5.5 billion in Q4 of last year. In a challenging recessionary environment, KSS benefited from its role as a discounted department-store retailer and continued to target its customer base of price-conscious middle-class consumers. ^[7]

• Comparable store sales decreased by 9.1% during Q4 2008. ^[7]

• Operating profit for Q4 2008 was $573 million, and operating margin was 10.9% of net sales. This is a 160 bps decrease from Q4 2007, during which operating profit was $684 million, or 12.5% of net sales. Under pressure from the weak retail environment, KSS sought to maintain its merchandise margins through cutting costs and maintaining price-competitive brand images.^[8]

Trends and Forces

Kohl's Benefiting from Mid-Price Positioning in 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 department stores like Nordstrom (JWN) and Saks (SKS) have experienced worse drops in same store sales than Kohl's, at 11.1%^[4] and 11.5%^[10] 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.^[3] 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.^[11] 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.^[1] 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.^[1]

Growing Kohl's Exclusive and Private Brands

In 2007 exclusive and private label merchandise accounted for 39% of Kohl's sales,^[6], 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.^[12]

Department Store Migration to Off-Mall Locations

At the end of 2007, only 64 of Kohl's 929 stores were located in traditional malls;^[13] 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.^[14] 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.^[14][15] 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).^[16] 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.^[17] 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.^[14]

• 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.^[18] 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.^[19] 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.^[20] 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.

(*)- data not released

References

1. ↑ ^{1.0 1.1 1.2 1.3 1.4 1.5 1.6} Kohl's (KSS) Third Quarter Fiscal 2008 Press Release
2. ↑ ^{2.0 2.1 2.2 2.3 2.4 2.5 2.6} Kohl's (KSS) Annual Report 2007, Financial Summary, p. 18
3. ↑ ^{3.0 3.1} WSJ.com, "NBER Makes It Official: Recession Started in December 2007", December 1, 2008
4. ↑ ^{4.0 4.1} Nordstrom (JWN) Third Quarter Fiscal 2008 Press Release
5. ↑ ^{5.0 5.1} Kohl's (KSS) 10-K 2007, Net sales, pg. 18
6. ↑ ^{6.0 6.1}
7. ↑ ^{7.0 7.1 7.2} KSS Q4 2008 Earnings Report Press Release
8. ↑ KSS Q4 FY2008 Income Statement, Google Finance
9. ↑
10. ↑ Saks (SKS) Third Quarter Fiscal 2008 Press Release
11. ↑ WSJ.com, Retail Sales November 2008
12. ↑ Tuck Business School at Dartmouth, Faculty Opinion: Private-Label Products in the Manufacturin-Retailer Power Balance
13. ↑ Kohl's (KSS) 10-K 2007, Properties, p. 13
14. ↑ ^{14.0 14.1 14.2} JC Penney (JCP) 10-K 2007, Store Growth and Renovations p.21
15. ↑ ^{15.0 15.1} JC Penney (JCP) Third Quarter Fiscal 2008 Press Release
16. ↑ ^{16.0 16.1} JC Penney (JCP) Annual Report 2007, 2007 Financial Highlights, pg. 21
17. ↑ JC Penney (JCP) 10-K 2007, Net Sales, p.25
18. ↑ ^{18.0 18.1} Macy's (M) 10-K 2007, Selected Financial Data, p. 20
19. ↑ Macy's (M) 10-K 2007, Results of Operations, p. 23
20. ↑ ^{20.0 20.1} Sears Holdings (SHLD) Annual Report 2007, Results of Operations, p. 24
21. ↑ Macy's (M) Third Quarter Fiscal 2008 Press Release
22. ↑ Sears Holdings (SHLD) Third Quarter Fiscal 2008 Press Release