The Kohl’s logo is displayed on the facade of a Kohl’s store on January 24, 2022 in San Rafael, California.
Justin Sullivan | Getty Images
Kohl’s, facing pressure from activists to consider selling, wants investors to recognize the progress it’s making on its own terms to upgrade its brick-and-mortar stores and find ways to bring new and younger customers into the business.
“Make no mistake, this is transformation,” CEO Michelle Gass said as she opened the virtual investor meeting on Monday morning. “This is a complete reimagining of our business model and our brand.”
Ahead of Monday’s meeting, Kohl’s released new long-term financial targets, including a small single-digit percentage yearly growth in sales.
Shares of Kohl’s shed nearly 6% in Monday morning trading.
Kohl’s also announced that it intends to increase Sephora’s annual sales to over $2 billion. So far, Kohl’s has opened about 200 Sephora stores in its brick-and-mortar stores, and will reach 850 by next year. The company has not previously disclosed Sephora’s revenue in its income statement.
Meanwhile, Kohl’s is set to open more than 100 smaller stores over the next four years as it seeks to attract new customers. Gass said in an interview that smaller stores average around 35,000 square feet, with one of the first being tested in the Seattle area. By comparison, a typical Kohl’s store is about 80,000 square feet.
“This is a big year for us,” she said over the phone. “The framework that we have developed for investors… is a very thoughtful guide for us.”
In addition to a longer-term revenue target, Kohl’s said it would target operating margins of 7% to 8% per annum; average to high percentage growth in earnings per share; and operating cash flow of over $5.5 billion, with free cash flow of approximately $2.5 billion between 2022 and 2024.
The key to Kohl’s transformation is teaching customers to think about the company, as opposed to department stores in malls that are chock-full of women’s clothing and homewares. Instead, the company said it wants to be known as the premier supplier of sportswear like sneakers, sweatshirts and leggings from brands like Nike, Adidas, Champion and its own FLX label.
“We are evolving our position from a department store to a more focused lifestyle concept focused on the active and laid-back lifestyle,” Gass said during an investor meeting. “It’s unique and we can own this space.”
Activists push for change
Monday’s meeting with investors and analysts is in the spotlight as the retailer faces increased pressure from activist groups, one of which seeks to take control of the retailer’s advice.
Last month, Kohl’s rejected takeover bids that were on the table, saying they underestimated its business. However, in recent weeks, Kohl’s has said it is working with bankers and other financial advisers to review unsolicited bids, and is actively outreaching potential buyers.
Macellum Advisors and Engine Capital activists argue that Kohl’s is losing ground to other non-mall retailers like Target and TJ Maxx, and even some department store chains, including Macy’s. Kohl’s shares are up just 6% over the past 12 months compared to Macy’s, which is up about 65%. The firms also urged Kohl’s to consider selling and leasing out some of its properties to unlock capital.
On Friday, Macellum called Kohl’s recently released fourth-quarter financial results disappointing, saying it remains skeptical about the retailer’s future given its current board and management structure.
“Why were sales uniquely hampered by supply chain issues compared to many other retailers?” asked Macellum managing partner Jonathan Duskin.
For the three-month period ending Jan. 29, Kohl reported $6.22 billion in revenue, slightly below analysts’ estimates, but it posted a more optimistic 2022 revenue guidance despite continued supply chain hurdles. The retailer also said it plans to double its annual dividend and buy back at least $1 billion worth of its shares this year.
All-in on the active
On Monday, Kohl’s highlighted its plans to further expand its range of active products, which it said accounted for about 24% of total revenue in 2021, up from 14% in 2016.
The Covid-19 pandemic has made consumers want to dress more comfortably, Gass said, and even as people return to offices and other public spaces, the trend continues.
“I think we can all take it personally…although you might want to dress a little more than when you were taking Call Zoom from your home office, you can still wear sneakers in the office instead of dress shoes,” the CEO said during an investor meeting. “This creates a big opportunity for Kohl.”
However, Kohl’s said it also hopes to significantly expand its womenswear business by expanding its range of activewear and swimwear, as well as expanding its range of available sizes.
Merchandising director Doug Howe explained that the company’s womenswear range was disproportionate due to supply chain bottlenecks last year. This year, to generate interest in dresses and other items of clothing for women that are not sportswear, he said Kohl’s will be testing “clothing lines” in some stores.
To make the in-store checkout process more convenient for customers, Kohl’s also said it will roll out a self-service feature for online shopping and in-store pickup at all locations this year, while it continues to test self-service returns and check-out offers.
In the long term, Kohl’s predicts its digital business will generate $8 billion in annual revenue, thanks in part to ongoing efforts to make it easier for visitors to find brands and shop on its website. Kohl’s total revenue in fiscal 2021 was $19.4 billion, up from $16 billion a year earlier.
“We have shown that we have a very strong program of growth drivers that will have a long tailwind ahead of us, so that gives us confidence,” Gass said.
Find the full press release from Kohl’s here.
This story is evolving. Please stay tuned for updates.