Last week, Kohl's (NYSE:KSS) reported third-quarter adjusted earnings per share of $0.01 on revenue of $3.98 billion, above consensus expectations of a loss of $0.43 per share on revenue of $3.9 billion. Net sales declined 13.3% during the third quarter, up from a decrease of 22.9% in the second quarter.

Like many large retailers, Kohl's saw a partial recovery in its revenue in the third quarter following a very challenging second quarter due to COVID-19. The consumer discretionary company is also seeing improvements sequentially. August's performance was hurt by weaker back-to-school sales due to COVID-19, but September and October saw improvements, driven by better sales in the home and toy segments.

So that's a rundown of the top-tier details from Q3's earnings. Let's go a bit deeper into the details released and develop three takeaways from Kohl's latest earnings report.

Shoppers looking at clothing

Image source: Getty Images.

1. Digital and omnichannel are helping boost Kohl's revenue

Digital has been key to Kohl's revenue growth over the recent quarters. In the third quarter, digital revenue expanded by 25%, reaching 32% of total revenue, up from 22% a year ago. Kohl's home business had digital growth of over 50%.

The retailer continues to make improvements to its digital business, including a new loyalty program and omnichannel capabilities. Kohl's launched its new rewards program in September and is seeing increased sign-ups and engagement. Kohl's Rewards is more integrated now with the company's omnichannel and digital capabilities and that's leading to more usage.

"You'll see us amplify our pickup options and really leverage the store footprint," said CEO Michelle Gass on the third-quarter earnings call. "Again, we're pleased with the customer adoption of Buy Online, Pick Up In Store and then curbside, which now represents a third of all the pickups that we are seeing from customers." 

2. Kohl's early holiday strength is encouraging

The company is preparing for what looks to be an out-of-the-ordinary holiday season. Digital and omnichannel will be key as consumers increasingly embrace the flexible shopping methods. In addition to monitoring the supply chain, Kohl's is "more than doubling the number of stores carrying incremental inventory to fulfill digital orders during peak," Gass said on the call.

To boost foot traffic in stores, Kohl's is taking measures to ensure customers feel safe and comfortable. The company put in extra precautions on top of existing health and safety measures to make Kohl's stores cleaner and more supportive of social distancing.

Kohl's is also confident that its product assortment will be relevant to what shoppers want. "We are emphasizing active, home, cozy and comfort and toys," Gass said. "These areas become even more important in the fourth quarter, which positions us well. We also expect to see more practical gifting and a continued focus on value this holiday, which Kohl's is known for."

3. Longer-term strategy includes a focus on active lifestyle and wellness products

Beyond this year, Kohl's vision is "to be the most trusted retailer of choice for the active and casual lifestyle." Part of this strategy includes being a go-to destination for active and outdoor clothing and accessories for women. Having a strong beauty segment will also be important.

In order to reach the goal of increasing the active segment from 20% to over 30% of Kohl's business, the company has outlined strategic steps, including becoming a go-to retailer of athleisure, outdoor gear, athletic footwear, and accessories. Active has been instrumental to driving growth at the retailer, doubling in penetration since 2013. The U.S. athleisure category as a whole is projected to have impressive growth, increasing from $155.2 billion in 2018 to $257.1 billion by 2026 (based on data from Allied Market Research). This suggests a compound annual growth rate of 6.7% between 2019 and 2026.

"We'll look to further accelerate our active sales in 2021 through the following initiatives: First, we'll be increasing our space dedicated to active in our stores by nearly 20%," Gass said. "The outperformance of our existing 160 active expansion stores gives us confidence that as we grow space across the fleet, we will drive incremental sales and productivity. Next, we are introducing FLX, our new athleisure private brand in March 2021."

The takeaway

Overall, Kohl's had a strong third quarter and appears well-positioned for the important holiday season. While retailers are facing continued uncertainty around rising cases of COVID-19 and the potential for increased restrictions related to the disease, Kohl's digital and omnichannel infrastructure will help support its continued recovery making it a stock worth keeping an eye on.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.