Here at The Motley Fool, we believe individual investors should have the same access to information that Wall Street has. In that spirit, we've listened in on some investment bank conferences with major companies and are giving you the rundown. We call this feature "Fool on the Street."
The core of retail
What makes a successful retail company? Well, we hear lots of strategies. But at its core, retail success is built on finding a position in a crowded marketplace that resonates with the customer. That position is always a specific combination of merchandise assortment, price, and quality shopping experience that creates a superior value.
There is no one "best" combination. Wal-Mart
From time to time, retailers "open their kimono" with the analysts and describe where they're headed, and why they expect it to work. Let's take a look at what Kohl's
Kohl's knows its customer
Kohl's has built an enormously successful retail model around privately controlled brands -- merchandise that competes on the quality scale with department store and specialty store brands, but costs a lot less. That's not to say you won't find Nike
Kohl's spends lots of time getting to know its customers' likes and dislikes. This goes far beyond the typical fill-out-the-form surveys. Kohl's does full in-store shopper interviews. The company also invests heavily in focus groups where it can spend quality time with customers learning what resonates. This customer-centric approach drives brand development strategy.
Last year, the company introduced several private brands to augment its well-established brands like Sonoma and Union Bay. The biggest launch was Chaps in women's, men's and children's apparel as a classic lifestyle brand at the best price point. Based on success to date they are expanding the brand into accessories, plus sizes, and bedding and bath.
New brands launches for 2007 include ELLE in contemporary women's apparel, Vera Wang in accessories/bed/bath, and Food Network in the kitchen area. Innovation is a key component of Kohl's brand strategy, to keep the customer coming back.
Another area where the company uses customer intelligence to grow the business is getting into the nuts and bolts of how people shop the store. Kohl's has six key merchandise departments: women's, men's, accessories, children's, home, and footwear. It knows that on 60% of shopping trips, customers buy from only one department, with an average ticket of $50.
When the customer buys from multiple departments, the transaction more than doubles. The company is attacking the opportunity in two ways. The first is broadening the reach of the most popular brands by expanding them to other merchandise departments. The second approach is targeting marketing to core customers to encourage them to buy in departments they haven't tried yet. Success stories so far include jewelry and the home department. The next push is into footwear and accessories through direct mail, some tweaks to the broadcast message, and improved signing in the store.
Efficiency through inventory management
Investors tend to focus on metrics like sales, earnings, and return on investment. While these are important, retailers know that after the customer, success comes from inventory management. The one rule in retail is you must sell everything you buy.
Kohl's is improving inventory management through two specific initiatives. Size optimization is critical in apparel. It doesn't do any good to have the right brands and styles if they're all in small and extra large sizes. At the beginning of a season all stores have an appropriate mix of sizes. But what happens if your particular store sells out more quickly in the most common sizes, what retailers call broken assortments? The company is investing heavily in replenishment technology to fill in broken assortments quickly.
The second inventory management initiative is markdown optimization. As a season winds down, retailers must take markdowns to clear assortments, making room for the next set of goods. For highly seasonal retailers, profitability is often determined by how successful they are at executing markdown strategies.
Kohl's is not as far along the curve in this area as one might expect. It currently has all stores on a basic markdown optimization platform, but decisions are made by geographic markets. This fall the company will enter phase two, bringing markdown optimization technology to the individual store level. Best in class retailers like Wal-Mart and Target
Summary
There is a tendency among investors to believe large retailers like Kohl's (at $15 billion in sales and more than 800 stores) have their best days behind them. That is somewhat true from a sales growth perspective. Kohl's days of 20% store growth are a thing of the past.
But Kohl's expects about 10% new store growth this year, and can maintain upper single-digit store growth for several years to come. Combine this with mid-single-digit comparable store sales growth and margin improvement from brand strategy and markdown optimization, and you can easily project double-digit earnings growth for the foreseeable future.
Analysts are estimating about 18% EPS growth for the next five years. That puts the current stock price of $70 at a very attractive 15 times one-year forward earnings and a PEG ratio of 0.87. Strikes me as a pretty attractive combination of both growth and value.
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Fool contributor Timothy M. Otte surveys the retail scene from Dallas, and owns shares in Wal-Mart, but none of the other companies mentioned in this article. He hates shopping, but knows value when he sees it, and welcomes comments on his articles. The Fool has a disclosure policy.
