Kohl’s wants to transform from a department store into ‘a focused lifestyle concept’

Sixty years ago, Kohl’s pivoted from the grocery business to becoming a department store, at a time when department stores were already in decline. Now, facing macroeconomic headwinds and pressure from activists and even inviting bids to sell themselves, the retailer says it’s leaving behind that model too.

In a presentation to investors on Monday, Kohl’s said it is now “pivoting from a department store to a focused lifestyle concept.”

As outlined by executives during the company’s investors day, its new growth strategy includes:

  • Expanding the Sephora footprint from 200 to 850 by next year to achieve what executives expect will be $2 billion in sales;
  • Remodels of existing stores when a Sephora shop-in-shop is introduced;
  • Opening 100 smaller stores or stores in smaller markets in the next four years, to gain over $500 million in sales;
  • Merchandising those smaller locations using data about local demand;
  • Expanding active and athleisure assortments to become a destination for an “active and casual lifestyle;”
  • Expanding omnichannel services, as well as self-checkout and self-return;
  • Leveraging data science and the “explosion of third party data to provide an even better, more relevant and more scientific experience that allows us to drive even greater growth, while remaining very operationally efficient;”
  • Revamping its loyalty program;
  • And, reviving its women’s business.

“Importantly, most of our opportunity is still ahead of us,” CEO Michelle Gass said. “These are new distinctive, big initiatives that Kohl’s has never had.”

What Kohl’s is up against

As it embarks on this ambitious turnaround, Kohl’s is facing macroeconomic headwinds that lead some analysts to doubt its ability to regain the momentum it lost during the pandemic.

The retailer forfeited 17% of its market share in the past decade, mostly to off-price retailers, Amazon and brands’ direct sales, according to a March 7 research note from UBS analysts led by Jay Sole. Now, rising inflation and the absence of the pandemic-era stimulus will slow its sales growth and compress margins, they said.

Activist investors at Macellum Capital Management, who are looking to provoke the retailer into taking bolder actions — including possible buyout offers already on the table — weren’t all that impressed with the analyst day. According to an emailed transcript of a late Monday interview with Yahoo Finance, Macellum CEO Jonathan Duskin called Kohl’s proposal “a risky plan that relies on something that hasn’t happened at Kohl’s for a decade. And if they miss their sales line, there’s no margin for error. The results will be a lot worse than we’re anticipating.”

What Kohl’s didn’t talk about

During a different call with analysts, during the retailer’s fourth quarter earnings call last week, Gass had choice words for Duskin and the investors who continue to agitate for another board shakeup. They’re also calling for a major operational maneuver to unlock share value — including a real estate sell-off, e-commerce spin-off or sale of the company itself.

“I want to address some of the uninformed and inaccurate commentary regarding the board’s openness to maximizing value,” she said on March 1, noting that the company has retained Goldman Sachs “to engage with interested parties” and promising more information during its annual meeting later this year. “So contrary to what others might say, the board’s approach is robust and intentional.”

On Monday Kohl’s filed a preliminary proxy statement with the Securities and Exchange Commission noting that Goldman Sachs had spoken with more than 20 parties regarding potential strategic initiatives. Some have been privy to company data under confidentiality agreements and have been invited to submit proposals to the company, per the filing.

But during their meeting with analysts the same day, executives remained silent on these topics, keeping the focus on their plans for longer term growth. But their own expectations seem muted, according to a March 7 research note from Credit Suisse analyst Michael Binetti.

“It was helpful to get an update on the initiatives Kohl’s is most excited about,” Benetti said. “The combination of initiatives sets the stage for a solid top line outlook, but formal guidance … is either very conservative or implied some level of deterioration in the core business.”

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