Since starting The Anchor in 2021, we’ve looked at Sephora at Kohl’s initiative and how it was driving meaningful growth for Kohl’s. The company's Q4 2023 was a continuation of these trends, with Sephora at Kohl's sales growth of over 70%, including comparable-store sales growth of 25% for the 2021 and 2022 store cohorts. Additionally, Kohl's CEO Thomas Kingsbury noted that they now expect Sephora to exceed the $2B planned for 2025. Management has touted that Sephora is drawing in a younger generation and that they are having success connecting with that new shopper with its other business lines. Placer chain demographic data shows that the visitor trends for those under 35-years of age have outperformed those 35-years and up.
With the beauty category working through the Sephora partnership and the home category improving (which we attribute to housewares), Kingsbury and Kohl's new leadership team is turning the focus on baby, impulse, pet, gifting, and apparel. For 2024 they are projecting top-line growth and +1% comparable-store sales growth. However, we would observe that Sephora’s growth in 2024 (7-8 new brands are to be added) will likely give them 3x the company-wide guided growth, implying that management expects declines in accessories and apparel this year (For Q4 2023, accessories and apparel were down double-digits on a comp basis). Below are Kingsbury’s comments on the new category initiatives:
"We've recognized that for us to grow sustainably over the long term, we need to increase our store sales productivity. In 2023, we reestablished stores as a key focal point of our strategy, which consisted of leadership's time and attention, meaningful investments in new operational processes. We expanded and repositioned our gifting assortment to the front of the store, simplified our in-store signage and graphics, consolidated the customer checkout area, enhanced our overall merchandising offering and empowered our stores to capitalize on opportunities to drive sales in their local markets. These actions are beginning to resonate with our customers. Store comparable sales were flat in 2023, our best performance since 2010. In 2024, we will build on our momentum with a variety of store-focused initiatives. These will include new merchandising strategies and the rollout of queuing lines to more than one-third of our stores. The initial sales benefit from our partnership with Babies "R" Us (200 to start), through which we will meaningfully expand our presence in the baby gear category; the scaling of our key value initiative, which is high-volume pricing across our private brands, building off the success of our tests last fall; and improved performance across our apparel and footwear assortment as our efforts to increase relevance come to life in our existing brands as well as new brands.
Rebuilding our Home business also represents a meaningful opportunity. We have invested a great deal of time and energy rethinking our Home business strategy, leveraging our team's history of success in the category. In 2023, we focused on building our assortment across wall art, glassware and ceramics, botanicals, storage, lighting, seasonal decor and pet. As we move through the fall season, our in-store assortment began to reflect all of this work, and we are pleased that this has led to an increase in home sales in stores. In 2024, we expect Home sales to increase as more customers become aware of our expanded assortment. This month, we are launching a new marketing campaign to increase awareness of our new home collection for every room, every style and every budget. We will continue to invest in merchandising and marketing to support our efforts throughout the year.”
Kingsbury’s strategy for “repositioning and growth” differs from Macy’s, which we believe stems from having an off-mall real estate position and far more locations at (1,170) compared to Macy's (350 go-forward stores, as we discussed a few weeks ago). While Kohl’s will have nearly 3x the number of stores, the two businesses are comparable in size at $17B in revenue. However, Macy’s generates far more revenue per location and per visit as shown in the table below. Macy’s visits / locations are double. A couple of weeks back, we wrote about Macy’s Go-Forward strategy and stated that its potential for success was higher than conventionally perceived.
A big part of Macy’s strategy is focus and improved merchandise sets and service levels--in other words, becoming more like a specialty retailer like Anthropologie. The adage in retail is “retail is detail.” While the Macy’s go-forward stores are large locations, the number of locations and markets at 350 is far easier to execute on the details than Kohl's 1,170 locations and trade areas. Kohl’s didn’t speak to service improvements, but to automation and operational simplification. Macy’s strategy for merchandise is more localization, while Kohl’s is to put more value behind its private brands (i.e., more specialization for Macy's versus more mass for Kohl's). Moreover, Kohl’s new retail positioning appears to be more about taking the place of failed retailers by expanding categories like home, baby, and dresses (700 in-store dress shops); Macy’s is more about curtailing and editing. Lastly, the higher revenue per visit and broader customer set (moderate- to high-income) makes Macy’s a more likely partner for its digital marketplace, something that Kohl’s doesn’t appear to be considering (Macy’s e-commerce business represents $8B in revenue versus $5B for Kohl’s). A broad set of vendors on its marketplace will provide Macy’s a faster read on consumer trends (both locally and in aggregate, allowing for agility), high inventory turns, and open-to-buy are necessary prerequisites to execute on trend changes.
Macy’s is a gifting destination and Kohl’s is striving to become one. For the seven-day period heading into Valentine’s Day 2024, Macy’s outperformed Kohl’s visits by 200 basis points on a year-over-year basis. We’d expect Macy’s to strongly defend its gifting destination status. As well as merchandise, one way that Macy’s can defend is through having more inspired service and advice. Dress-up is another category endemic to Macy’s that Kohl’s is going after and so that is one to watch as well. Lastly, when describing the sales challenges, Kohl’s management cited store traffic as the primary one, despite the traffic lift that they are enjoying from Sephora. The statement offers a clue that marketing, particularly social media, could be hindering results. We have frequently observed that outsiders often underestimate the power of social media in driving consideration and traffic. How is Kohl’s doing via social media versus Macy’s, T.J. Maxx, and others. We’ve noted in the past that part of T.J. Maxx’s special sauce for outperformance has been its deft use of social media and influencer marketing. This was also a topic of our recent article on Target and how omnichannel retail was changing. We also discuss this below as an issue with Petco and PetSmart, and point to it as being part of Abercrombie & Fitch's turnaround.
