Kohl’s reported in-line results, with comparable-store sales down -5% but also significantly bolstered by beauty and Sephora. Sales at comparable Sephora store-in-stores (locations that were opened in 2021 and 2022) were up more than +20%, while another 200 store-in-store locations were opened in the quarter. This brought the total Sephora at Kohl's base to 800 locations, with 100 more planned by year-end. The Sephora comps plus the 200 new openings led to a +90% increase in beauty sales for the quarter, while the remaining categories comped down high-single-digits.
Prior to Sephora, Kohl’s beauty business was non-prestige and only represented 3%-4% of revenue (roughly $600-$800M annually). By way of comparison, Dillard’s beauty business is 15% of revenue and $1B in size, or $3.7M per location. Ulta does about $5.5M of skin, cosmetics, and fragrance per location. Kohl’s goal is to take the Sephora business to $2B over its 900 locations. If Kohl’s can get to 50% of Ulta’s per location productivity, that would be a $2.5B business, or roughly 13% of revenue.
Over the past two years, we have been surprised at LVMH’s (the owner of Sephora) enthusiasm for the Sephora at Kohl’s program and the support from its other prestige brands--L’Oréal and Estée Lauder. Based on the strong results that Kohl’s shared, we decided to take a look under the covers (in Placer’s unique way) at two large markets--Dallas and Los Angeles. Kohl’s visits were down in each market by -9% year-over-year compared with a nationwide decline -11%. (For comparison, Dillard's and Macy’s saw visits decline about -20%.) A significant portion of the outperformance from Kohl’s came from the Sephora at Kohl’s program; we estimate that non-beauty comp-transactions at the stores were down -9%-10%, or slightly better than Macy’s. Despite this increased distribution, the Sephora locations in these markets experienced traffic gains of nearly +50%. By Favorite Chains, the gain for Sephora by the Kohl’s shopper increased by over +100%. Those gains are likely the result of legacy Sephora shoppers now visiting a Sephora at Kohl’s location, out of convenience. The gains are also likely due to legacy Kohl’s shoppers now visiting a standalone Sephora location, out of convenience or to access a broader selection of beauty merchandise. The gain by Sephora’s competitors of the Kohl’s shopper was only mid-single-digits. For the first half of 2023, Sephora’s U.S. business was up high-twenties; within that time, only 38 net new locations were added (roughly a +6% increase to its existing store footprint). The high-twenties growth came from these new locations, comp-store sales increases, and revenue from Kohl’s. The Kohl’s revenue piece is likely only a license-type payment for the sales and contribution margin at Sephora at Kohl’s. That payment is almost 100% pure profit, as such, the profit growth to Sephora and LVMH from the high-twenties revenue figure will be far more significant. To conclude, the partnership has been a massive success to both Kohl’s and Sephora, and that’s why it is being rolled out to all Kohl’s locations. As such, we wouldn't be surprised to see more store-and-store partnerships announced in the years ahead, especially as retailers look to maximize returns on their physical store assets.
Kohl’s relatively new CEO Thomas Kingsbury’s priorities remain for Kohl’s to enhance the customer experience and simplify its value/pricing strategies, while also exercising discipline in expense, inventory, and the balance sheet. (Recall that Kohl’s has bought back a lot of stock over the past two years under the prior CEO, $2B worth versus its current market cap of $2.9B). CFO Jill Timm shared, “Store sales were flat to last year in Q2 2023, driven primarily by strong Sephora sales growth, with sales at home showing the most improvement versus Q1.” (A potential ripple effect from Bed Bath & Beyond closures?). Timm also noted, “Digital sales remained pressured in Q2 2023, down -17% to last year...We are seeing customers shift back towards stores, and sales were impacted as expected by the elimination of online-only promotions as we work to simplify our value strategies. (This is consistent with comments above on specialty apparel brick & mortar versus digitally native brands.) Timm also noted that "August sales to date are off to a good start."
Kohl’s had success on all several key KPIs, as inventory turns improved slightly to 2.6x from 2.4x, average unit retail (AUR) improved on category mix, and conversion rate improved meaningfully. While traffic was down sharply at -11%, that is partly a macro dynamic, and Kohl’s traffic decline was nearly half that of Macy’s and Dillard’s. On the consumer and Kohl’s offering, Kingsbury said, “We're really focused on delivering as much value as possible because obviously customers have less money to spend. We're doing value items, bringing goods in at competitive high bottom pricing to deliver more value to the selling floor as well. But we're going to just really work hard on making sure that we have as much value as we can have. We've already started that, and it will just continue through the third and fourth quarter.” And on what they are doing for the holiday season, in addition to more in home, Kingsbury offered, “is really maximizing the gift business. We did some of that last year by moving the gifting product to the front of the store, and it did very well. We're going to be doing it again this year in making a major statement. In the front, we do have some extra square footage, because we removed some registered base for gifting as well. But I really feel that by making a strong gifting statement, we're going to have a good holiday season.”