Back in February, Kohl's (KSS 2.83%) announced that it was laying off 250 corporate employees in an effort to streamline its management, speed up decision making, and cut costs. Those moves were designed to bolster the retailer's efficiency and improve its competitiveness following a disappointing 2019.
Of course, the COVID-19 pandemic and related disruption to store traffic for discretionary retailers like Kohl's has made maximizing efficiency more important than ever. As a result, Kohl's recently decided to reduce its corporate workforce even more aggressively.
Kohl's is struggling but outperforming rivals
Last quarter, Kohl's sales fell 23% year over year. Furthermore, its gross margin declined by 5.7 percentage points, causing the company to report an adjusted net loss of $0.25 per share, compared to adjusted earnings per share of $1.55 a year earlier.
These results marked a big improvement over the first quarter, when net sales plunged by more than 43% and gross margin plummeted by more than half, leading to a massive adjusted net loss of $3.20 per share. They were also a good deal better than what other national department store chains managed last quarter, primarily because most Kohl's stores aren't located in malls.
Image source: Kohl's.
Still, Kohl's needs further improvement just to reach breakeven, and it is far from returning to its pre-pandemic level of profitability. On average, analysts expect EPS of $1.75 next year, which would be down 64% from the retailer's fiscal 2019 earnings -- and down 69% compared to its fiscal 2018 earnings peak.
More cost cuts go into effect
At an investor conference earlier this month, Kohl's CFO Jill Timm mentioned that the company was looking for ways to automate tasks and unlock other efficiency gains. Less than a week later, the retailer announced major staffing reductions at the corporate level.
Last Tuesday, Kohl's cut its corporate positions by approximately 15%, including both layoffs and the elimination of vacant roles. This impacted employees at the company's headquarters in Wisconsin, as well as smaller corporate offices in New York and California. Kohl's expects to incur pre-tax charges of $23 million to cover severance and other one-time expenses, most of which will be booked in the third quarter.
The latest restructuring was larger than the February program, and Kohl's expects that it will deliver annual savings of approximately $65 million. On a combined basis, the two rounds of corporate job cuts will reduce costs by more than $100 million per year.
Creating the foundation for a recovery
It's certainly possible that Kohl's and other retailers that have announced similar job reductions are cutting too far and will need to restore some positions as demand recovers. That said, most of the cost reductions are probably sustainable. The current crisis has forced Kohl's and its peers to experiment with new ways of doing business, and they are identifying new savings opportunities as a result.
With a leaner cost structure, Kohl's will be well positioned for a rapid earnings recovery if the company can rebuild its sales base over the next couple of years. Despite the elevated unemployment rate and secular headwinds facing department stores, there's a good chance that this sales recovery will materialize.
For one thing, Kohl's is likely to benefit from a slew of pandemic-related competitor store closures in 2020 and 2021. The company's new loyalty program should also help it gain wallet share among its tens of millions of customers. Lastly, Kohl's continues to improve its merchandise assortment to drive better sales performance. For example, it is eliminating eight underperforming brands this year and reallocating that space to support new brand launches, including Lands' End and new private-label athleisure lines.
Obviously, investors shouldn't assume that a full recovery at Kohl's is a sure thing. Nevertheless, between the company's cost-cutting moves and its strategies to drive sales growth, Kohl's has a good chance of defying the skeptics and returning to health over the next two or three years. With Kohl's stock down more than 50% year to date, that would unlock huge upside for shareholders.
