Earlier this year, we discussed how Kohl’s flushed out its excess inventory in January and early February to “clean the sheet” for incoming CEO Thomas Kingsbury. Not only did they get a clean sheet, but they surprisingly have been able to sustain outperformance compared to the industry every week since (below).
Should its momentum continue, Kohl’s will see an improvement in comparable-store sales trends versus 2019 as shown in the table below. Moreover, overall store comps were +4%, reflecting an improvement in conversion rate. (The difference between store comps of +4% and overall comps of -4% was a -20% decline in e-commerce sales.)
One of the more notable observations from the quarter was that “Sephora at Kohl's continued to outperform our expectations, driving the total beauty sales increase of 150% year-over-year." According to the company, they "achieved mid-teens comparable beauty sales growth in the 204 shops opened in 2021.” (Recall that we have called out beauty as an outperforming category for 2023.) Kingsbury continued, “[The Sephora locations are] bringing in new customers, and they are shopping at more than twice the frequency of our average customer...In 2023, we will open 250 2,500 square-foot Sephora shops, of which 200 will open in the second quarter with the remaining 50 in early Q3…and will be rolled out to the remainder of the chain by 2025.”
Other call-outs from the quarter included:
- Management noted a very weak home business (despite market share gains from Bed Bath & Beyond). Kingsbury noted that the chain is “also expanding [its] home decor, outdoor and pet offerings within home. Areas of opportunity include a greater selection of wall art, seasonal, patio furniture, camping and outdoor gear and tabletop. In pet, [the company is] allocating more space in stores following a successful test last fall.” For apparel, Kohl's is "optimizing its assortments to reflect customers' interests. This includes offering a greater selection of polished casual and dress clothing in women's and more suiting and dress shirts in men's. During Q1 2023, this focus areas outperformed the business.”
- In terms of margin rate, higher theft/shrink, continued clearance activity, and lower initial mark-ups pressured gross margin.
- On its initiative to simplify Kohl’s pricing and promotional strategies while clarifying its value for consumers, Kingsbury said, “On our last call, we highlighted an opportunity to improve Kohl's competitiveness by simplifying our pricing and promotional strategies with the goal of driving greater customer engagement and conversion. During the first quarter, we began to replace general promotion and online-only offers with targeted offers and clearance events to clear slower-selling goods on a more regular basis. We will continue this approach moving forward at the appropriate pace. Additionally, we will test key value items within our private apparel and home brands, which are aligned with our simplified pricing efforts. Customers will begin to see a small percentage of our assortment moved to this approach during the back-to-school season, which we will integrate into our marketing messaging…Lastly, we will continue to leverage our industry-leading loyalty program as a mechanism to deliver even more value to our customers. We will begin the rollout of our co-branded card with Capital One to select customers in the second quarter. Over time, we expect to benefit from our dual offering of our existing strong private label credit card and a co-brand card that offers more flexibility to reach younger customers.” (See how Sephora fits in here.) The pricing simplification and a reduction in online shipping resulted in a solid year-over-year gross margin gains, and at a rate (38%) well above pre-pandemic averages (36%).
