Kohl’s Corp., facing inflation weary consumers not yet responding enough to the retailer’s series of merchandise upgrades, posted top and bottom line declines for the first quarter and cut its outlook for the year.
For the quarter ended May 4, Kohl’s suffered a net loss of $27 million, or $0.24 per diluted share, compared to net income of $14 million, or $0.13 per diluted share in the prior-year period.
Operating income fell to $43 million from $98 million in the year-ago period.
Net sales decreased 5.3 percent to $3.18 billion from $3.36 billion in the year-ago period and comparable sales decreased 4.4 percent.
The company now expects net sales to decrease 2 to 4 percent, but earlier this year predicted net sales to range from a decrease of 1 percent to an increase of 1 percent. Diluted earnings per share are now projected in the range of $1.25 to $1.85, compared to the previous forecast of $2.10 to $2.70.
Investors were clearly disappointed by the results and the forecast being revised downward and pulled Kohl’s stock price down 23 percent to $20.90 in pre-market trading Thursday.
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Kohl’s has been improving its assortment, including rolling out Sephora beauty and Babies “R” Us departments, adding pet supplies, Claire’s jewelry, and recently pumping up previously underplayed presentations of wall art, botanicals, storage, frames, glass, ceramics, gifting and impulse items such as candy, sunglasses, socks, small home decor and stationery. However, it remains to be seen whether Kohl’s can achieve its stated goal of capturing $2 billion in additional sales volume over several years through the various brand additions and assortment changes. Last year Kohl’s generated $16.6 billion in sales.
“Our first quarter results did not meet our expectations and are not reflective of the direction we are heading with our strategic initiatives,” Tom Kingsbury, chief executive officer of the Menomonee Falls, Wisc.-based retail chain, said in a statement Thursday. “Regular price sales increased year-over-year, with early success in under-penetrated categories, positive trends in our women’s business, and continued strong growth in Sephora. However, lower clearance sales versus last year represented a more than 600 basis point drag on comparable sales. Importantly, we were able to deliver gross margin expansion, manage inventory down 13 percent and tightly control expenses in the quarter.” The gross margin increased 48 basis points.
“We continue to have high conviction in our strategy and believe that our key growth initiatives, including Sephora, home decor, gifting, impulse, and our upcoming partnership with Babies ‘R’ Us, will contribute more meaningfully going forward,” Kingsbury added. “That said, we recognize we have more work to do in areas of our business. We are approaching our financial outlook for the year more conservatively given the first quarter underperformance and the ongoing uncertainty in the consumer environment.”
In a conference call with retail analysts, Kingsbury said, “We knew our first quarter would be the toughest of the year, due to last year’s elevated clearance activity.” He said regular price selling was strong in the first part of the first quarter until softening in late March and into April. “The clearance headwind is now behind us,” he said.
Executives said the guidance was trimmed due to the disappointing first quarter topline and ongoing uncertainty in the consumer environment.
But according to Kingsbury, some businesses trended well, including Sephora particularly in skincare, bath and body, and fragrance; impulse; dresses; men’s suiting, dress shirts and dress pants; gifting; pet supplies; wall art and glassware.
Kingsbury said Kohl’s will end the year with Sephora in 1050 stores (Kohl’s operates 1,100 stores) and that the rollout has been attracting a younger, more diverse customer shopping more frequently. He also said the company is looking forward to launch of Babies “R” Us in 200 stores in the fall.
“We’re making progress in some areas of apparel and footwear,” Kingsbury added, citing dresses and “polished” casual where the company is “leaning” into its Lauren Conrad and Simply Vera Vera Wang private brands. Kohl’s has dress shops in 700 locations and the count will grow in Q2, the ceo noted. In addition, Kingsbury indicated that juniors is being repositioned next to Sephora to capitalize on cross shopping opportunities.
On the down side, active accounted for the majority of the overall sales decline in the first quarter. “We continue to work with brands to emphasize newness in the back half of the year,” Kingsbury said. With FLX, a private active brand, “We see a long runway of growth. It’s a very affordable athleisure brand.” Kohl’s is also bullish on Tek Gear, another active private brand.
In accessories, Kingsbury acknowledged Kohl’s did not do a good job of retaining jewelry sales, but is expanding the in-store assortment and placing it near Sephora. Certain legacy home offerings underperformed as well, including bedding, kitchen electrics and floor care.
In other forecasts for the year, Kohl’s comparable sales are now seen decreasing 1 to 3 percent in 2024, while earlier this year, Kohl’s forecast comparable sales to range from flat to up 2 percent.
Operating margin is now seen In the range of 3 to 3.5 percent, versus the earlier forecast for a range of between 3.6 percent and 4.1 percent.
