Kohls’ Q3 2023 results were solid in the stores, with comparable-store sales down only -1% as Sephora at Kohl’s provided a meaningful lift to sales. By contrast, e-commerce sales were down -16.5%. Inventory levels also improved, as did sell-throughs and the conversion rate. CEO Tom Kingsbury said, “In Q3 2023, comparable beauty sales in the shops opened in 2021 and 2022 increased more than 30% to last year. This is an acceleration from greater than 20% growth in Q2 and mid-teens growth in Q1. We attribute the improving trend to the increased awareness and shopping frequency. Total beauty sales increased more than +70% in the quarter, driving additional beauty share gains. We saw strong demand across the entire assortment, including skincare, makeup, and fragrance. During the third quarter, nearly 100 more of our stores received Sephora shops. There is now a Sephora presence in over 900 of our stores, with more than 850 large format and 50 smaller shops.”
Previously we did a report on Sephora at Kohl's and 70% growth would increase Kohl’s beauty business to a $1.2B run-rate business on a net basis, and nearly a $1.5B business on a gross basis, including Sephora’s commission. If Kohl’s can get to 50% of Ulta’s per location productivity, that would be a $2.5B business, Kingsbury said they are well on the way to hitting that target.
30% of the customers that shop Sephora at Kohl's are new to Kohl’s. The initiative is bringing new customers to Kohl’s and introducing Kohl’s customers to Sephora, where they also shop the Sephora standalone locations for their enhanced merchandise selection. Below we show how the program is working in California (other large markets are similar). Versus 2019, visitors to Kohl’s are down -11%, or -1.4M, which is only two-thirds the rate of decline of its peers. In terms of cross-shopping, the step-up in cross-shopping Sephora in 2023 (0.4% to 1.4%) is striking. The step-up was half this level at Macy’s, but more muted than Nordstrom. (Nordstrom is losing a lot of visits/visitors to Ulta and Sephora; one can see this in their reported results as Beauty was up only low-single-digits in a category that is growing double-digits.)
On the repositioning of the Kohl’s stores and brand, Kingsbury said, “In 2023, we have re-established our stores as a key focal point of our strategy. This has come in the form of leadership's time and attention, meaningful investments and new operational processes. Our actions have included expanding our gifting assortment and repositioning it to the front of store, simplifying our in-store signage and graphics, consolidating the customer checkout area, improving our overall merchandising while adding new categories...The response from customers has been favorable, and this has yielded a return to brick-and-mortar sales growth year-to-date...The digital business is really what's bringing us down, and as I've mentioned before, we had some things we were doing online that was really not reflective of what an omni-company would be doing, a lot of online-only promotions, et cetera, online pricing...I'm confident about the fact that we are doing well in stores, and I think it's going to be a good setup for 2024...Now let me provide you with a quick update on the longer-term opportunity to expand our footprint with new stores. We remain committed to capitalizing on opportunities to open new smaller format Kohl's stores. We recently opened 5 new stores, completing our new store activities for the year. In total, in 2023, we opened 6 new stores...In the near term, we will follow a similar cadence for new store openings, so continue to see a significantly larger opportunity longer term.” (We would remind readers that Kohl’s brick & mortar business will likely grow low-single-digits this year and produce sales densities of $145 per square foot.)
