Slashing its guidance for full year sales and margins, Kohl’s on Thursday said Q2 total revenue fell 8.1% year over year to $4.1 billion, with net sales down 8.5% and comps down 7.7%. Net income tumbled 62.6% and operating income fell 53.3%, per a company press release. Gross margin contracted 290 basis points to 39.6%.
Leaning heavily on its Sephora tie-up, the department store now aims to bring those shop-in-shops to all 1,100-plus stores, per a separate press release Thursday. Sephora openings largely drove the quarter’s 3.4% SG&A expense increase, with Kohl’s store refreshes and Sephora build-outs totaling $36 million.
The retailer now expects its 2022 net sales to fall 5% to 6% year over year, with operating margin of 4.2% to 4.5%. In May, it had expected net sales to be flat or rise 1%, with operating margin of 7% to 7.2%; that was down from its March guidance for a net sales rise of 2% to 3% and operating margin of 7.2% to 7.5%.
Kohl’s Sephora shops bring younger, more diverse customers and drive traffic and incremental sales to the department store, and those with a Sephora perform better than those without, CEO Michelle Gass told analysts Thursday, noting that the 200 that opened last year have maintained a high single-digit percent lift compared to the rest of the chain.
With 400 opening this year and 250 in 2023, Sephora is in 600 Kohl’s locations and will be in 850 some time next year. The retailer said it projects that Sephora at Kohl’s will achieve $2 billion in annual sales by 2025.
“Our game-changing partnership with Sephora continues to deliver on its promise of transforming Kohl's into a leading beauty destination,” Gass said, calling the effort a “cornerstone” of its turnaround.
That may be overstating the partnership’s potential and threatens to be a distraction, much as it was for J.C. Penney, according to GlobalData Managing Director Neil Saunders.
“This is not a bad initiative, and it does give people a reason to visit. However, the contrast between a bright and orderly Sephora and the dismal disarray of the rest of Kohl’s is like going from The Shire into Mordor,” he said, a reference to the bucolic land of the Hobbits in “Lord of the Rings” versus the dreary, volcanic lair of evil. “And very few people want to venture into Mordor. In our view, relying on Sephora to revitalize the wider business is folly. It is a part of the solution, not the solution itself – as J.C. Penney, which used the same approach, found out to its cost.”
Like Walmart, Target and others, Kohl’s is having to work through excess inventory — up 48% year over year — via markdowns and promotions, which are weighing on margins. Meanwhile its middle-class customer, clearly under pressure, is shopping less often and spending less, according to Gass.
Also on Thursday, the retailer said it has entered into an accelerated share repurchase agreement to repurchase about $500 million of its common stock, a move that Saunders said threatens to siphon resources and attention away from much-needed upgrades.
“We firmly believe that this should be invested in the business to revitalize stores and improve things like lighting and flooring. However, we also recognize that management is in an incredibly weak position and is almost compelled to throw a few crumbs to investors,” he said. “Overall, there is a lot of work to do at Kohl’s and that work needs to start now — otherwise Kohl’s will enter a rapid downward spiral from which it cannot escape.”