It's 2017, and by now Kohl's Corporation (NYSE:KSS) and most other brick-and-mortar retailers have accepted that having an e-commerce website is a must. As more and more consumers are buying products online -- hence the rise of Amazon.com and phenomena such as Cyber Monday -- companies without e-commerce websites risk losing market share. So traditionally brick-and-mortar retailers such as Kohl's are now focused on building a successful omnichannel business model.
Wait, what exactly is omnichannel?
Omnichannel means allowing customers to shop through multiple channels, which could include stores, a website, or even by phone. The advantage of offering multiple channels is that it maximizes convenience for consumers, giving them more than one way to make purchases. Yet "going omnichannel" means something different for every company and there's no easy-to-follow road map to success. Some online retailers are taking the plunge into bricks and mortar, while traditionally brick-and-mortar retailers are attempting to capture online sales.
Kohl's management talked during their most recent conference call with analysts about the chain's commitment to becoming "best-in-class as an omnichannel retailer." Let's take a closer look at how things are going for the company in transition.
Which is the "best" channel?
There are advantages to both brick-and-mortar and e-commerce channels.
E-commerce rules when it comes to convenience. Websites can be accessed anywhere, anytime and finding a range of items and placing your order can be quite simple.
When it comes to actually getting the items to customers, brick-and-mortar stores have an advantage: The customer transports the item home with them. Online retailers must either pay for shipping, or pass the charge along to consumers. And that latter option is getting harder as the free delivery included in Amazon's $99-a-year Prime program has gotten customers used to not paying for shipping with each order.
But the instant gratification of shopping in a brick-and-mortar store isn't enough to keep that brand of shopping thriving. Traditional retailers are going omnichannel to maintain market share, and as they move into the online world, the cost of shipping is one of the biggest risks they face.
Kohl's CEO Kevin Mansell said in the recent quarterly conference call that "gross margin modestly declined, driven by the impact of the growth in our digital business penetration." He later added, "the main factor there is that there are shipping and fulfillment costs that come into play that are [a] headwind for us." That is to say, shipping and fulfillment costs are impacting gross margin, which could hurt the company's bottom line. However, it's worth noting Kohl's is working to offset some of those shipping costs by investing in technology to help customers buy online and pick up in a store.
Kohl's isn't the only retailer facing headwinds from fulfillment costs or aiming to offset that by using physical stores. J.C. Penney in its 2016 annual report noted "increased margin pressure relative to our expectations from ... the continued growth in both our online and major appliance businesses." The report also talked about how "with rising fulfillment costs plaguing the entire industry, we are pleased that our brick and mortar locations enable us to offset the last-mile delivery cost."
What investors should look for
When evaluating Kohl's in the future, investors should keep a close eye on gross margin. Over time, the gross margin should stabilize or even begin to improve as Kohl's develops new strategies to offset the gross margin decreases associated with the transition to omnichannel.
Investors should also consider total revenue, because if omnichannel retailing drives revenue growth, investors should be encouraged -- even if the company is posting a lower gross margin. However, if Kohl's continues to report both declining revenues and declining gross margin rates, shareholders will be justified in questioning the sustainability of the company's omnichannel business model.