Menomonee Falls, Wis. – Beauty and home were the big winners at Kohl’s during the 3rd quarter, as the company pushes forward with its strategy to rebuild sales and profitability.
Total store comp fell 1%. However, home outpaced that performance, getting a boost from expanded home décor categories and more prominent merchandising across the selling floor. Expanded categories include wall art, glassware, ceramics, barware and lighting.
“We will drive significant growth in home over the coming years,” CEO Tom Kingsbury told analysts during a recent quarterly earnings call.
Sephora in Kohl’s shop-in-shops delivered an explosive 70% year-over-year gain – on top of a 30% increase in the year-ago quarter. The shops have now been seeded in more than 900 of Kohl’s 1,170 stores. The company expects sales from the Sephora shop to reach $2 billion in 2025.
Total comp sales fell 5.5%, primarily dragged down by a 16% drop-off in digital sales. Earlier this year, Kohl’s ditched online-only sales events and promotions to align pricing between stores and online. Despite the short-term hit to the top line, Kingsbury backed the play as a sound strategy for the longer term.
Key takeaways from the call:
Home and beauty to offset seasonal sales fluctuations in apparel. As Kohl’s reworks its apparel and footwear offerings, it is looking to the home and beauty categories to carry more weight. Both are an essential part of its strategy to “de-weatherize” its assortment. Gifting and impulse items will also play a role in that initiative.
Impulse items will get more attention. The retailer is amping up its impulse item offering, which currently runs to roughly 80 skus in the check-out queue area. In 2024, that assortment will expand “considerably,” Kingsbury said.
Value messaging steps up. Kohl’s has been simplifying its value messaging in targeted offers and merchandise call-outs. It is also offering value pricing on select private label apparel and home items. In part, the shift is designed to lure Sephora shoppers – 30% of whom are new to Kohl’s – into other areas of the store. The company plans to accelerate that initiative in 2024.
Leaner inventories lead to better open-to-buy. Q3 inventory was down 13% year-over-year – outstripping the initial target of bringing inventory down in the mid-single-digit level. The change has loosened up open-to-buy, which also allows the company to pull back buys in categories showing signs of softness.
Stores are the backbone of the business. This year, Kohl’s opened 6 new stores (5 of them were small format), relocated one unit and closed another. That formula will probably be repeated next year. However, over the longer term, Kohl’s sees “a significant opportunity” to grow its store base, per Kingsbury. At the same time, the retailer is working to revamp and improve its online operation.
During the quarter ended Oct. 28, gross margin as a percentage of net sales increased 56 basis points to 39.0%. Operating cash flow was $389 million. The company ended the quarter with $190 million in cash and cash equivalents, roughly on par with last year’s $194 million.
Kohl’s today updated its guidance for the full-year sales. It now expects sales to decline 2.8% to 4.0% compared to a previous forecast of a decline in the 2.0% to 4.0% range.