The recent pattern of sales declines at midprice department store Kohl's (KSS +1.12%) got even worse last quarter. Comparable-store sales fell 3.4% for the first quarter of fiscal 2014, compared to a 1.9% drop in the year-ago period.
Bad weather in the Northeast clearly contributed to Kohl's poor performance. However, Kohl's is also simply losing market share to J.C. Penney (JCP +0.00%), which is attempting a comeback and posted a 6.3% increase in sales last quarter.
Kohl's endured yet another drop in sales last quarter.
Kohl's is now approaching a crucial turning point. This fall, it will launch two key national brands in its stores: Izod (for men) and Juicy Couture (for women). Around the same time, the company plans a nationwide rollout for the new loyalty program it has been testing. Lastly, Kohl's will improve its e-commerce capabilities later this year. If a turnaround is coming at Kohl's, it will start this fall.
Fighting for the middle class
Kohl's, J.C. Penney, and other department stores targeting the middle class have had a tough time bouncing back from the Great Recession. Many middle-class families' shopping habits have changed permanently. People are being careful to spend within their means rather than indulging in credit-fueled buying sprees.
In every case, the department stores have also contributed to their own woes. J.C. Penney's move away from frequent discount events and coupons led to a rapid collapse in sales during 2012 and early 2013.
Other midprice department stores like J.C. Penney have also had a rough time in recent years.
Kohl's moves to boost sales of higher-margin private brands backfired, as customers have recently shown a preference for national brands. Kohl's has also been behind the curve in e-commerce.
Preparing a comeback
Kohl's plans to reverse its decline through a comprehensive strategy that CEO Kevin Mansell dubbed the "Greatness Agenda." This program has five components: amazing products, incredible savings, easy experience, personalized connections, and winning teams.
That all sounds a bit grandiose, especially for a retailer that has quickly gone from a long-term growth juggernaut to a recurring disappointment. However, the basic ideas are simple. Kohl's will add new brands with wide customer recognition, while improving its technology to offer a seamless experience regardless of whether customers are shopping in stores or online. Meanwhile, it will offer even more savings through its new loyalty program.
Investing in a turnaround story is always a risky proposition. My Foolish colleague Rich Duprey rightly notes that Kohl's has been on a downward trajectory for some time. However, I think he's overlooking some of the positive drivers that could lead to better results starting later this year.
Kohl's is adding key national brands like Izod.
First, the continued rollout of enhanced beauty sections, and the introduction of Izod -- a brand that has performed well at J.C. Penney -- and Juicy Couture, should create more excitement, driving higher store traffic. Unlike J.C. Penney, Kohl's is not decimating its private and exclusive brand collections to make room for these new national brands, so there is very little downside from these launches.
Second, Kohl's has been refining its loyalty program for several quarters, and sales trends have been 150 to 250 basis points better in the test markets than in the "control" markets. As this program rolls out nationwide, it should gradually drive similar improvements across the whole chain.
The loyalty program is being overseen by Chief Customer Officer Michelle Gass. Kohl's poached her from Starbucks, where she served in a variety of roles. The highly acclaimed Starbucks digital loyalty platform was one of many projects Gass had a hand in during her 16 years there. I don't expect Kohl's to be quite as successful as Starbucks, but it has the right people in place to create a successful 21st-century loyalty strategy.
Third, Kohl's is building up its technological capabilities. By the holiday season, Kohl's will be able to fulfill online orders from 800 of its retail stores, up from about 200 today. Kohl's also plans to launch significantly more powerful smartphone and tablet apps this year. Lastly, Kohl's will start testing buy-online/pick-up-in-store capabilities later this year.
Foolish wrap-up
Kohl's executives said sales improved month by month during the first quarter, suggesting that sales trends should be better in the second quarter. However, the real turnaround opportunity comes this fall, when many of the company's growth drivers will take effect.
I'm not buying Kohl's stock yet, as there is also a clear risk that the company's latest turnaround efforts fail, allowing J.C. Penney and other midprice retailers to continue gaining market share. However, Kohl's shares will definitely be worth a look if they hit a summer swoon. Otherwise, investors should keep this stock on a watchlist and wait for the fall to see if Kohl's starts making tangible progress.
