Please ensure Javascript is enabled for purposes of website accessibility

Kohl's Could Make a Quick Comeback From COVID-19

By Adam Levine-Weinberg – Jun 16, 2020 at 8:10AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The department store chain's business was severely disrupted by COVID-19, but it is already bouncing back.

Like other department stores, Kohl's (KSS 2.92%) was hit hard by the COVID-19 pandemic last quarter. As a nonessential retailer, it was forced to close all of its stores in mid-March. And while Kohl's has a healthy, growing digital business, it isn't nearly big enough to pick up the slack during a period of zero in-store sales.

However, Kohl's reacted quickly in March and April to mitigate the sales and earnings pressure from the pandemic. The company also improved its financial flexibility by issuing new debt and increasing the size of its credit line. Furthermore, it began reopening its stores in early May and has achieved surprisingly good results since doing so.

The exterior of a Kohl's store

Image source: Kohl's.

As a result, investors can feel confident that Kohl's will be able to weather the COVID-19 crisis without permanent damage to its business. Moreover, it will have significant opportunities to gain market share during the industry shakeout that is likely over the next few years.

Q1 results: predictably bad, but not disastrous

During the first quarter, net sales fell 43.5% year over year, while total revenue (including income from the company's private-label credit card program) fell 40.6%. Furthermore, gross margin plunged to 17.3% from 36.8% a year earlier, due primarily to higher markdowns and a writedown of excess seasonal inventory. A mix shift toward the lower-margin home category and toward e-commerce (a higher-cost channel) also contributed to the margin pressure.

While Kohl's was able to reduce its operating expenses by 16.4%, that wasn't nearly enough to overcome the impact of sharp declines in sales and gross margin. As a result, the company reported an adjusted net loss of $495 million ($3.20 per share) for the quarter.

Kohl's Q1 performance was fairly similar to the preliminary results that Macy's (M 3.38%) recently reported. Macy's said net sales plunged 45.2% to $3.02 billion and gross margin fell to 17.1% from 38.2% a year earlier. Macy's was able to cut operating expenses a bit deeper than Kohl's, but on the flip side it experienced more short-term pressure on credit card revenue. As a percentage of sales, Macy's $630 million adjusted net loss was almost identical to what Kohl's reported.

The exterior of a Macy's store

Kohl's and Macy's experienced similar sales and earnings trends last quarter. Image source: Macy's.

Importantly, Kohl's exited Q1 with ample financial flexibility. Late in the quarter, it issued $600 million of unsecured debt and refinanced its previous $1 billion unsecured credit facility with a new $1.5 billion secured credit facility, of which it has drawn $1 billion. Together, these two moves increased its liquidity by over $1 billion. Kohl's ended the first quarter with more than $2 billion of cash, which it will use this quarter to pay various bills after negotiating extended payment terms a few months ago.

Kohl's also did a good job of inventory management last quarter, partly thanks to its quick rollout of a curbside pickup program in April, which helped it clear out inventory from its stores. Inventory was down 3% year over year at the end of the quarter.

A quick return of business

Kohl's actions last quarter created a solid foundation for the company to get back to business in the second quarter. The retailer began reopening stores in early May and has now reopened the vast majority of its stores.

The results have been quite good. As of mid-May, the first group of reopened stores were averaging 50% to 60% of their 2019 sales productivity. That has improved to 75% as of early June. Furthermore, digital sales growth has continued to accelerate despite the reopenings, including a 90% year-over-year gain in May. (That echoed Macy's 80% digital sales increase in the same month.) As a result, Kohl's is poised for strong sequential sales improvement this quarter. In fact, if recent trends continue, Kohl's sales in June and July could be roughly in line with 2019 levels.

Kohl's had earlier reduced its Q2 orders by more than 60% to match expected low demand. With online sales soaring and customers returning to Kohl's stores faster than anticipated, the company has decided to bring in back-to-school goods several weeks earlier than normal, which will keep its merchandise selection fresh for customers. Furthermore, it will exit the period with lean inventory, reducing its risk in the event of further sales volatility.

Abundant opportunities ahead

Management at Kohl's expects higher digital sales to be a fact of life going forward. That will continue to put pressure on margins due to the cost of fulfillment. Moreover, Kohl's will have to rethink the role of its 1,000-plus stores in this new reality.

That said, the growth opportunities for Kohl's over the next few years probably outweigh the threats to its business. For one thing, its focus on off-mall store locations insulates it from the trends hurting low- and mid-tier malls. In fact, with mall traffic likely to fall further in the near term, Kohl's is well positioned to gain market share from the numerous apparel, footwear, and accessories retailers that rely on malls for much of their business.

The bankruptcies of key competitors from COVID-19 and other headwinds -- most notably, J.C. Penney -- may provide particularly potent market-share opportunities, particularly if any of those retailers end up liquidating. Kohl's has a well-balanced business, with its largest merchandise category (women's apparel) accounting for just 28% of sales. This will allow it to capitalize on growth opportunities across multiple categories.

Of course, 2020 is almost certain to go down as an awful year for Kohl's, because of the COVID-19 pandemic. However, the company has the financial resources to survive and a solid market position that should allow it to make big market share gains as consumer spending recovers in the years ahead.

Adam Levine-Weinberg owns shares of Kohl's and Macy's. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Kohl's Corporation Stock Quote
Kohl's Corporation
$25.89 (2.92%) $0.73
Macy's, Inc. Stock Quote
Macy's, Inc.
$16.20 (3.38%) $0.53

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.