Kohl’s Q4 Net Dips, but Gains for Year and Momentum Seen
Kohl’s Corp. saw its fourth-quarter net income slip, but swung into the black for all of 2021, doubled its dividend, and sees Sephora as the key driver of sales gains this year.
Net income — impacted by inventory shortages, slowed traffic due to Omicron and some tax implications — declined 13 percent to $299 million for the quarter ended Jan. 29, from $343 million in the year-ago period.
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For the year, however, the net reached $938 million, compared to a loss of $163 million in 2020, which was more heavily impacted by the pandemic.
“I am really proud of the efforts we have made to how we fundamentally restructured our business to be more profitable. That will be sustained,” Michelle Gass, chief executive officer of Kohl’s, told WWD in an interview. “It’s really important that we delivered record earnings per share of $7.33 in 2021, which far surpassed our previous high of $5.60 in 2018. Our business is healthy. We doubled our dividend [to $2, or $0.50 per quarter].”
“We are spending $3 billion on a share repurchasing program, and we expect sales to be up 2 to 3 percent this year. We are feeling very confident there. The biggest driver there will be Sephora and that’s been proved based on having Sephora open in 200 doors today,” she continued.
With the $3 billion share repurchase authorization, the company plans to repurchase at least $1 billion in shares in 2022, including $500 million through open market transactions or an accelerated share repurchase program during the second quarter. As of 2 p.m. Tuesday, Kohl’s share price was up about a point, or 56 cents to $56.18.
On the revenue side, there was a 5.8 percent gain to $6.5 billion in the fourth quarter, which was behind Wall Street expectations of $6.6 billion to $6.8 billion. Revenues were $6.14 billion in the year-ago quarter.
Sales were led by the active category, specifically Nike, Under Armour, Adidas and Champion, and all across women’s, men’s, kids’ apparel and footwear. Women’s apparel, conversely, was weaker.
Kohl’s restructuring efforts have centered around becoming more of a destination for active and casual merchandise and special sizes, while reducing the dependence on women’s fashion brands.
For the year, revenues were $19.43 billion, below the $19.97 billion generated in 2019, and ahead of the $15.96 billion generated in 2020. Operating margin of 8.6 percent in 2021 exceeded the retailer’s goal of 7 percent to 8 percent two years ahead of plan.
The retail industry faces big questions about consumer demand holding up in 2022, to which Gass said, “It is difficult to get a good read on it. We are dealing with a lot of macro factors, on the global stage, inflationary pressures and the supply chain. But we have taken a number of actions to mitigate the pressures. We are agile. We can operate successfully in an uncertain environment.”
Gass said the company’s inherent flexibility in pricing stemming from its promotional posture, couponing and incentives, and ability to keep prices down by consolidating its supplier base to cut costs, will help against inflation. Sixty percent of the Kohl’s business is with national brands with broad distribution at many retailers. The big brands control their pricing thereby keeping Kohl’s in check with competitors.
Also, Kohl’s has a spectrum of prices, from Levi’s jeans on the higher side to Sonoma private brand jeans on the lower, offering shoppers alternatives if they feel the need cut their budgets due to inflation.
Supply chain issues were bigger in the fourth quarter than expected and are seen persisting in the year ahead, though in a conference call with analysts, Gass said, “We sit here today feeling much better about our inventory position going forward. For spring, we were more aggressive in our buy. We are planning the year up. Those receipts are flowing as we speak.”
Orders were taken earlier, giving Kohl’s more time to receive goods in a timely manner. “We have a very tight visibility between supply chain and the merchants to track merchandise more closely. Customers are responding to fresh receipts,” Gass said during the call.
Gass told WWD that the 200 Kohl’s stores with Sephora saw mid-single-digit sales lifts last year, coming primarily from beauty, compared to Kohl’s stores where Sephora does not yet operate. Twenty-five percent of those shopping Sephora at Kohl’s are new to Kohl’s, Gass said, and half of the Sephora shoppers are also buying other products in the store.
Gass said bestselling cosmetic brands at Sephora inside Kohl’s include Fenty, the Sephora Collection Charlotte Tilbury, Urban Decay, Nars and Too Faced. Bestselling fragrances include Giorgio Armani, Yves Saint Laurent and Gucci.
Kohl’s expects to open another 400 Sephora shops this year, and 250 more in 2023.
Gass said in the fourth quarter, inventory shortages were seen across all categories with the exception of active. Shortages in women’s were most pronounced, with inventory down 45 percent due to supply chain issues, though some of the decline was intentional.
Gass sees a continuing buildup with the core active and athleisure brands already carried, as well as some introductions with capsule collections, smaller brands and digitally native brands, for a greater sense of discovery at the store. “We are having conversations,” Gass said.
“People are getting back to normalized daily life and returning to the office, but they still want comfort,” Gass said. “We have done a lot of research around this.”
They also want dresses. “We have a very big dress plan going forward,” Gass told WWD. “You will see a lot more dresses from Kohl’s across all of our brands.”
Gass added that Kohl’s is elevating its overall store environment, and moving active to the front and expanding the footprint of key national brands.
Kohl’s is also growing its outdoor business, in particular, with Eddie Bauer, which this year will be in all Kohl’s stores, up from 500 currently. Plus-size and big and tall businesses are also being increased. In men’s, additional space is being allocated to Tommy Hilfiger, Hurley and Calvin Klein.
In a statement issued earlier in the day, Gass said, “We continue to see a lot of value in our company. We are reinforcing our commitment to driving shareholder value by doubling our dividend and planning on repurchasing at least $1 billion in shares in 2022. We look forward to sharing more details on our strategy and key initiatives, as well as our financial and capital allocation plans at our investor day event on March 7, 2022.”
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For 2022, Kohl’s expects net sales to increase 2 percent to 3 percent; operating margin in the range of 7.2 percent to 7.5 percent, and EPS in the range of $7 to $7.50, excluding any non-recurring charges.
Kohl’s has set a capital expenditures budget of approximately $850 million, including expansion of its Sephora partnership involving rolling out Sephora shops inside Kohl’s stores, and store refresh activity.
Last month, the Kohl’s board rejected hostile takeover bids, determining that they undervalued the company. In addition, Kohl’s set up a poison pill, called a limited-duration shareholder rights plan.
Acacia Research Corp., which is controlled by activist hedge fund Starboard Value LP, offered to acquire 100 percent of the outstanding shares of Kohl’s for $64 a share in cash, which values the company at $9 billion. Acacia confirmed the offer in a Securities and Exchange Commission filing.
It is also believed that Sycamore Partners, a private equity firm that has Belk, Loft, Express, Hot Topic, Ann Taylor and other retailers in its portfolio, also bid for Kohl’s, possibly in the $64 to $65 range.
Higher bids could surface.
Goldman Sachs, on behalf of Kohl’s, continues to engage with the unsolicited bidders. “The board’s approach is robust and intentional,” Gass said.
During the conference call, Gass had three key messages: that the company “fundamentally restructured our business to be more profitable; that the strategy is building momentum,” particularly with the ongoing Sephora rollout, and that the company is returning a significant amount of capital to shareholders. “The assortment has higher margin profile and an expense structure that is more efficient,” Gass said.
The CEO characterized 2021 as a pivotal year for Kohl’s. “We accomplished a great deal strategically and financially. We have great confidence in the future.”
Kohl’s has been under pressure from certain activist investors, including Macellum Advisors and Engine Capital, to raise its shareholder value and improve its financial performance, and consider selling the company or reengineering it into separate dot-com and brick-and-mortar stores companies, which Kohl’s has rejected. Macellum is seeking to take over the Kohl’s board and has proposed a slate of 10 new directors.
Jonathan Duskin, CEO of Macellum, said that after an initial review, Kohl’s results were disappointing and “validate why Kohl’s should engage with us to meaningfully refresh the board and evaluate credible sale offers. The revenue miss, in particular, underscores that the company’s latest ’strategy’ is not working. Kohl’s will be one of the few retailers that failed to grow sales versus 2019 pre-pandemic levels, while peers like Macy’s and Dillard’s are experiencing significant sales growth versus 2019.”
Duskin also said Kohl’s should “focus on the core issues related to its assortment and value proposition,” rather than increase capital expenditures approximately 40 percent.
But Cowen Equity Research characterized Kohl’s fourth quarter as “solid” citing better margins and higher guidance. “Kohl’s reported fourth quarter EPS of $2.20, ahead of the [Wall] Street’s $2.12. While net sales were lower than expected at $6.2 billion versus the Street’s $6.6 billion, Kohl’s drove 124 basis points of gross margin improvement on pricing and promotion optimization. Management raised 2022 outlook to $7 to $7.50 from the Street’s $6.55 on higher sales and share repurchases, as well as increasing the dividend 100 percent.”
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