Kohl’s pulls guidance as it buckles up for discount-heavy holiday season

Dive Brief:

Comparable sales at Kohl’s fell 6.9% in the third quarter while revenue fell 7% to $4.3 billion.
Net income fell by 60% to $97 million, with gross margin shrinking by 263 basis points to 37.3%, according to a press release.
As sales decelerated in October and into November, and with an ongoing CEO transition, the retailer withdrew its 2022 guidance, declining to provide performance estimates for the year.

Dive Insight:

Last year at this time, supply chain struggles were the theme of the season. Consumers purchased early — and at higher prices — as they worried about inventory scarcity. That led to higher margins and once-in-a-decade inventory turn rates at Kohl’s in Q3 last year. But now, with pressure from inflation, spending has slowed in October and going into November.

“Value is definitely going to win this holiday season, and we need to lean into that,” Kohl’s Chief Financial Officer Jill Timm told analysts on a conference call Thursday.

That has given a boost to Kohl’s private label brands, Timm noted. The discount department store chain has emphasized its traditional value proposition in its holiday marketing.

The focus on “value” also likely means a heavy promotional season and a stark downshift in profits, with the declines Kohl’s experienced in Q3 and past periods continuing through the holiday period.

Asked by an analyst about the guidance withdrawal, Peter Boneparth, Kohl’s board chair, said in part that “it was very important to give Tom [i.e., incoming interim CEO Tom Kingsbury] and the team the latitude in the fourth quarter to execute on our basic strategy, which is to drive value and sales during a very promotional environment.”

Market-wide volatility is also a factor, as the retail industry waits to see just how consumers will shift spending as the holiday season unfolds. “Visibility for the fourth quarter is as difficult as any period I can remember,” Boneparth said.

Analysts with Telsey Advisory Group said in a research note Thursday that the guidance withdrawal speaks to “continued uncertainty in the current macro-operating environment heading into and through the holiday season as a more competitive promotional environment weighs on margins and demand trends remain volatile.”

The CEO transition itself was also the reason cited for pulling fiscal guidance. With Michelle Gass’ unexpected departure for Levi's, Kohl’s has started a search for a permanent CEO.

“We're not looking for a CEO who's coming in to change the strategy that we've embarked on,” Boneparth said. He added that the board is searching for a “very strong operator” to drive sales and execute on the retailer’s current underlying strategy.

While the market is volatile for everybody, not every retailer’s performance has been equally affected. And Kohl’s may have bigger problems than inflation’s impact on consumers.

Neil Saunders, managing director with GlobalData, said in emailed comments that “our data shows Kohl’s core customers have expanded their spending — it’s just that they are spending less of their money at Kohl’s and more at retailers like Target and off-price.”

Saunders went on to argue that one reason for this is that Kohl’s “[r]anges have become very muddled, there is far too much inventory which frustrates shoppers, prices aren’t optimized, and the shop floor is a mess.”

One bright spot for the retailer is its burgeoning partnership with Sephora, with 600 Sephora shop-in-shops now at Kohl’s stores and another 250 to come next year. Timm said that those stores with a Sephora have had a sales lift in high single digits relative to the chain as a whole.

In the past, Kohl’s has turned to such partnerships, including with Amazon, to help drive traffic. But Kohl’s still has to convert those visits into more sales of its own merchandise to fully capitalize on them.

“Sephora will draw people to Kohl’s stores; however, it will not make them shop at Kohl’s or buy Kohl’s products unless the offer and experience is good,” Saunders said. “At present it isn’t — Sephora is a shiny box amid a sea of uncompelling blandness that is the rest of Kohl’s.”