Department store chain Kohl's (KSS 3.20%) reported significant challenges in its third-quarter earnings released on Tuesday, Nov 26. The reported diluted earnings per share (EPS) of $0.20 fell short of analyst expectations of $0.28, marking a decline of 28.6%. Net sales decreased by 8.8% year over year and also missed analyst consensus estimates.
Overall, the quarter marked challenges in core segments and a need for strategic reevaluation as the company lowers its full-year forecast. The company also reiterated a previous day's announcement that CEO Tom Kingsbury will step down from his post on Jan. 15, 2025. He will stay on in an advisory role to the new CEO and retain his position on Kohl's board of directors through his retirement in May 2025. The board appointed retail veteran Ashley Buchanan as CEO and board member, effective Jan. 15, 2025. Buchanan is CEO of The Michaels Companies.
| Metric | Q3 2024 | Q3 Estimate | Q3 2023 | Change (YOY) |
|---|---|---|---|---|
| EPS (diluted) | $0.20 | $0.28 | $0.53 | (62.3%) |
| Net sales | $3.5 billion | $3.64 billion | $3.84 billion | (8.8%) |
| Gross margin | 39.1% | N/A | 38.9% | 20 bps |
| Operating income | $98 million | N/A | $157 million | (37.6%) |
Source: Kohl's. Note: Analyst consensus estimates for the quarter provided by FactSet. YOY = Year over year.
Understanding Kohl's Business
Kohl's operates a chain of department stores across the United States offering a mix of national and private brand apparel, accessories, and home products. Its private brands, like Croft & Barrow, typically offer higher profit margins due to lower selling prices compared to national brands. A focus on enhancing its merchandise strategy through partnerships, like the one with LVMH-owned Sephora, remains crucial for Kohl's success.
Recently, the company has been working on integrating its digital capabilities with physical stores, a vital move to capture a larger online sales share. Challenges in core categories and heightened competition in the retail space have put pressure on its market positioning. To combat these, Kohl's has focused on strategic diversification and improving customer experience.
Quarter Insights
The quarter saw Kohl's grappling with underperformance in its core apparel and footwear segments, which dragged down overall sales. A reported 9.3% year-over-year decline in comparable sales significantly contributed to this lackluster performance. Despite such challenges, gross margins slightly improved to 39.1%, attributed to the strategic focus on higher-margin areas like its private brands.
Operational expenses dropped by 5.1%, even though they comprised a larger percentage of revenue, reflecting inefficiencies due to lower sales volumes. Moreover, operating income decreased sharply from $157 million in the previous year to $98 million, driven largely by the sales downturn.
Despite the softness in sales, Kohl's strategic initiatives, such as its partnership with Sephora and launching Babies "R" Us shops, showed potential. However, these positives could not offset broader declines.
A one-time event worth noting was the leadership transition. With Buchanan slated to take over as CEO, this shift in leadership could influence future strategy and decision-making, but it comes with immediate challenges, such as addressing the current sales decline and enhancing competitive positioning. Buchanan is a digitally-focused veteran of big-box retail chain Walmart and craft-supplies store Michaels.
Looking Ahead
Moving forward, Kohl's management lowered its full-year guidance, projecting net sales to drop by 7% to 8% and comparable sales by 6% to 7%. The EPS forecast was lowered to a range of $1.20 to $1.50. The capital expenditure budget of approximately $500 million reflects investments in store improvements and partnership expansions, particularly with Sephora.
Investors should watch closely for performance improvements in core segments and potential strategic shifts from the new CEO. The focus will also be on further omnichannel enhancements and customer engagement strategies to possibly reverse current trends. Kohl's leadership must act quickly to navigate these challenging times and align with evolving consumer preferences.
