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Kohl's Savvy Inventory Management May Save the Company

By James Brumley – Aug 19, 2020 at 7:49AM

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Other department store chains find themselves flooded with too many unmarketable goods, limiting their procurement options.

It wasn't "good" by any stretch of the imagination. The coronavirus pandemic has arguably crimped retailers more than any other industry. But, department store chain Kohl's (KSS -2.34%) handily topped its second-quarter estimates, sales, and earnings. It was a much-needed glimmer of hope that the company and a few of its peers may just survive the COVID-19 contagion.

Among most of its rivals, however, Kohl's is doing one thing as well as -- if not better than -- most. It's keeping unneeded inventory out of its stores, where it can be damaged, stolen, and marked down. That in turn keeps the store chain more financially flexible than some of its competition as we move into the final months of 2020.

Clothing store wall shelves with neatly arranged and organized apparel

Image source: Getty Images.

A nimbler response

During Kohl's conference call covering the quarter ending in April, CFO Jill Timm commented, "We immediately pulled back in March and April orders, which allowed us to reduce first-quarter receipts by over 30% and helped us manage inventory down 3% to last year. We expect to further reduce inventory in the second quarter as we lowered our receipts by more than 60%."

The first quarter reduction in inventory seemed incredible, but the second quarter's planned reduction in receipts seemed impossible. Goods are sometimes ordered months in advance, and not all of it is cancellable.

Timm doesn't appear to have been overstating the retailer's flexibility, though. Last quarter's merchandise revenue fell from $4.17 billion a year earlier to $3.21 billion this time around. Inventory levels fell from $3.65 billion to $2.70 billion for the three-month stretch ending on Aug. 1. The top line's tumble of 23% was more than matched by a 26% reduction in inventory.

Kohl's (KSS) has successfully minimized unmarketable inventory during the COVID-19 pandemic

Data sources: Kohl's and Thomson Reuters Refinitiv. Chart by author.

Not all of its rivals were able to mirror that sweeping scaleback. Dillard's (DDS -2.36%), for instance, reported a 35% decline in sales for the same three-month period, but was only able to lower merchandise-on-hand value by 20%.

Department store chain Dillard's is struggling with excessive inventory

Data sources: Dillard's and Thomson Reuters Refinitiv. Chart by author.

J.C. Penney (JCPN.Q), currently entertaining acquisition offers to take it out of bankruptcy, saw a 55% dip in sales for the quarter ending in early May. Inventory levels were only pared back by a scant 10% for the quarter in question, however, perhaps pointing to difficulty in selling goods that goes beyond the obvious coronavirus headwind.

J.C. Penney's inventory levels barely budged a quarter ago despite a sharp drop in sales

Data sources: J.C. Penney and Thomson Reuters Refinitiv. Chart by author.

Macy's (M -0.44%) won't report results for its quarter until early next month, but its inventory levels barely budged during its first quarter ending in early May. They fell about 10% year over year, versus the retailer's sales plunge of 45%. Those measures don't bode well for the struggling department store chain heading into the recently ended quarter's report.

Macy's inventory levels were dangerously high coming out of the first quarter impacted by COVID-19

Data sources: Macy's and Thomson Reuters Refinitiv. Chart by author.

Perhaps more than any other detail though, notice that compared to its rivals, Kohl's has habitually kept inventory levels low relative to its top line. It entered the pandemic with its edge.

Inventory is a liability as much as it is an asset

It matters.

Retailing is generally a low-margin business, meaning retailers must make the most effective use of capital they can. Merchandise that sits unsold on a shelf represents a lost opportunity to carry something that might sell faster. The speed at which merchandise is sold after it's put on a store's shelves or racks can also impact profits -- even low-margin items can be lucrative if those goods are sold more often.

Plus, the right assortment means inventory is sold earlier rather than later, reducing the degree of markdowns that must be taken before merchandise is moved out of the way. Never even mind the fact that the longer an item lingers in a store, the more likely it is to get lost, stolen, or broken.

To the extent it reasonably can (given the backdrop of the coronavirus pandemic), Kohl's is steering clear of those challenges. That's a key part of the reason it ended the quarter with $2.4 billion worth of cash or cash equivalents.

Granted, it had to borrow from a $1.5 billion credit facility in April and suspend the dividend to get to that figure. Of the $1.5 billion borrowed though, $1 billion of it was earmarked for refinancing existing debt obligations. The remaining $500 million helped, but only a little. A year ago, Kohl's was only sitting on $625 million in liquidity. A couple quarters ago, the retailer only held $723 million in cash and cash equivalents.

Savvy inventory management has been instrumental to preserving the department store chain's present liquidity, which gives Kohl's a tremendous level of flexibility to navigate the rest of this year.

Bottom line

Don't jump to an immutable conclusion about Kohl's future. As for most retailers, the months ahead could be tough. We're seeing green shoots of recovered consumerism, but the U.S. economy is hardly at full strength yet.

This is a company, however, that delivered on the promise it made a quarter earlier to reduce second-quarter inventory receipts by 60%. More impressive than the fact that it did is the fact that it could, leaving the store chain without loads of inventory that would be difficult, if not impossible, to sell into this year's holiday season.

This leaves Kohl's with lots of options as to what and when it sources fresh merchandise in the future, which isn't something all of its competitors can say. It may end up being a big difference-maker if things remain rough for the industry.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Kohl's Corporation Stock Quote
Kohl's Corporation
$26.30 (-2.34%) $0.63
J. C. Penney Company, Inc. Stock Quote
J. C. Penney Company, Inc.
Macy's, Inc. Stock Quote
Macy's, Inc.
$15.72 (-0.44%) $0.07
Dillard's, Inc. Stock Quote
Dillard's, Inc.
$280.00 (-2.36%) $-6.76

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