Will Kohl's Corporation Find Its Way?

Kohl's Corporation (NYSE: KSS  ) has fallen far short of its potential recently. Despite the well-publicized struggles of J.C. Penney (NYSE: JCP  ) -- one of its key competitors -- Kohl's failed to gain market share and earnings have declined in each of the last two years.

Management has outlined a variety of initiatives to reenergize sales momentum. However, this has not translated to strong guidance for 2014. Currently, the company expects a modest 0% to 2% increase in comparable-store sales this year. Meanwhile, EPS is expected to grow about 4% at the midpoint of the guidance range, driven entirely by share buybacks rather than organic earnings growth.

Kohl's is forecasting another year of weak earnings.

It's possible that management is taking an extremely conservative view on guidance this year after enduring two disappointing years. On the other hand, it's possible that Kohl's has simply lost its luster in the eyes of consumers. Until it shows that it can grow net income again, investors are probably better off putting their money elsewhere.

Another sluggish quarter
As conveyed in an investor update from earlier in February, Kohl's comparable-store sales declined 2% last quarter. On the earnings call, Kohl's CFO Wes McDonald noted that the comparable-store sales decline would have been just 0.4% excluding a shift in the retail calendar.

CEO Kevin Mansell also added that sales for the combined November-December period were "well above plan," before weather and lower clearance inventory hurt sales in January. Kohl's previously reported that comparable-store sales rose 0.8% in the combined November-December period.

Considering that this came against the backdrop of weak holiday period sales in 2012, it's hard to avoid the conclusion that Kohl's executives are becoming complacent about slow sales. For the past four years, Macy's (NYSE: M  ) has consistently grown same-store sales in the low-to-mid-single-digit range, adding $4.4 billion in annual sales despite keeping its store count roughly flat. A 0.8% gain during the holiday period is simply not good enough for Kohl's.

To some extent, relative weakness at Kohl's can be explained by the lower income of a typical Kohl's customer compared to a typical Macy's customer. The core Kohl's shopper has suffered more from the weak economic environment than most Macy's customers. However, poor strategic decisions have also played a big part in Kohl's recent troubles.

Catching up in omnichannel?
Macy's has distanced itself from other department stores, including Kohl's, primarily through its aggressive adoption of an "omnichannel" retail strategy. This entails maintaining a unified inventory across stores and the Macy's website. This helps it provide better customer service, and it also has several operational benefits.

Macy's has implemented a very successful "omnichannel" retail strategy.

For example, every Macy's store is now equipped to fulfill and ship online orders. This allows it to more fully utilize its real estate and store labor while reducing shipping times. As of this spring, every Macy's store will also offer customers the opportunity to buy items online and pick them up at the store.

Kohl's is finally trying to catch up to Macy's on the omnichannel front. By the end of this year, the company hopes to have about half of its stores equipped to fulfill online orders. Kohl's is also starting to test a "buy online, pick up in store" capability, but it could be a couple of years before that's available across the whole chain.

Kohl's also did some major IT upgrades last year related to its website, and the company hopes to revamp its mobile apps this year. These initiatives should help reinvigorate online sales growth, which slowed during 2013. However, Kohl's still has lots of room for improvement to catch up with best-in-class omnichannel retailers like Macy's and Nordstom.

Foolish conclusion
After two years of weak sales, Kohl's is not forecasting much improvement in 2014. On the other hand, the company is finally making the right moves to implement an omnichannel retail strategy. If successful, this could revitalize sales, both in stores and online.

If Kohl's growth initiatives start to take hold during 2014, it should be able to reach or exceed the top end of its initial guidance. However, given the company's struggles over the past two years, investors are probably better off waiting for Kohl's to confirm its progress through better results and/or improved guidance.

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