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Kohl's: Sephora Continues to Shine

Thomas Paulson
Aug 19, 2022
Kohl's: Sephora Continues to Shine

Key Kohl's Metrics

As was expected, Kohl's sales declined (including a -7.7% decline in comparable-store sales) due to the shift in consumer spending from cozy/comfy apparel and home to in-person experiences, as well as more non-discretionary food and fuel. This impacted traffic and ticket, as did the unusually strong period last year. Adverse weather was also a likely factor. In addition (and as expected), higher clearance promotions and freight costs, as well as deleverage on fixed costs sent profitability down. Inventory levels remain high and lowering them will require more promotions that will weigh on 2H profitability. Like Walmart and Target, June was challenging, and July and back-to-school have improved upon June’s trend (below).

Kohl’s has been a battleground company over the past two years with activists and agitators attempting to assert influence. For the moment, CEO Michelle Gass continues to have the support of the board as a lot of what the company is dealing with are macro conditions. As such, we would expect that support to last throughout the current inflationary storm. At the point where the headwinds calm, it will be Gass’ and her strategy’s time to shine.

  • 292 locations were upgraded to Sephora at Kohl’s putting the initiative on track for 600 locations by year-end 2022 and 850 by year-end 2023. A new initiative has begun to bring a smaller store-within-store concept to the remaining 300 Kohl’s locations. Gass shared, “the 400 stores opened this year, we are seeing a mid-single-digit percent sales lift, which is consistent with the initial performance in the first 200 stores. [And] we have acquired more than 1 million new customers since launching last August...The new customers are younger and more diverse and shop more frequently than our average customer." The first 200 doors are comping high-single-digits better than the control group, meaning that they are building upon their initial trend.
  • Active apparel and its updated women’s apparel business (i.e., dresses) also outperformed other categories in the quarter, which is key as getting the Sephora shopper to cross-shop these categories is a key part of the Sephora at Kohl's strategy. Kohl’s reported conversion rate is close to 50% (down from 50%).
  • Kohl's kids category sales decreased at mid-teens clip, which isn’t great given that it should have picked up with back-to-school. Gass said, “We have not yet seen the pickup in our business in areas like denim, kids uniforms, or those older kids sizes." She also flagged that the sluggishness, or the pull-back, is primarily from Kohl’s middle-income customers.
  • Trailing-twelve-month (TTM) sales per square foot declined $4 QoQ $211 and 8% compared to 2019. shows visits down nearly 20% compared to 2019. TTM sales is likely to be down low-single-digits over the next year.
  • TTM EBITDA and free cash flow deteriorated to $2.0B and -$929M, respectively. At this point next year, TTM EBITDA is likely to be down mid-single-digits, but FCF should be around 50% of EBITDA.

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Thomas Paulson

Director of Research and Business Development,

Thomas Paulson spent 20 years as a Wall Street analyst and a member of asset management teams at AllianceBernstein and Cornerstone Capital, representing top-50 ownership positions including Target, Home Depot, Nike, Amazon, Google, and many more. He brings consumer related expertise and knowledge of enterprises in retail, CPG, financial services, telecom, and entertainment.

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