The most recent earnings report from department store operator Kohl's (KSS +3.88%) showed significant improvement compared to the past few quarters. Earnings per share grew in the high single digits, besting analyst estimates, and while comparable-store sales continued to decline, the rate of decline slowed. Going beyond the numbers, CEO Kevin Mansell made five key points during the company's conference call that investors should consider.
Source: Flickr/Mike Mozart.
Comparable-store sales are improving
[O]ur second quarter comps decreased 1.3%, which was consistent with the expectations included in our annual guidance. More importantly, we saw strong improvement throughout the quarter. Results were especially strong in July as we reported a positive comp for the first time in several months.
Kohl's has been suffering from declining comparable-store sales for the past few quarters, with a 2% decline during the holiday season and a 3.4% decline during the first quarter, so a 1.3% decline is a meaningful improvement. Results improved throughout the quarter, and comparable-store sales were up 2% during the month of July, with the end of the month being the strongest.
This improvement bodes well for Kohl's going into the back-to-school period, a critical period for many retailers. If the trends from July continue, Kohl's could see positive comparable-store sales during the third quarter.
Adding more national brands
As you know, national brands are a key component of our greatness agenda and one of the many areas that we are focused on to increase traffic and grow sales. National brand comps were higher than private and exclusive comps for the fourth consecutive quarter and were positive for the first time in many quarters. Year-to-date, national brand penetration has increased 90 basis points to 46% of sales.
One reason for Kohl's recent weakness was a shift away from national brands over the past few years. While private-label merchandise tends to carry higher gross margins, a lack of well-known national brands could drive customers to the competition. Kohl's has now started to reverse this shift, and national brands are now posting positive comparable-store sales.
Kohl's is launching two new national brands in September, IZOD and Juicy Couture, and the company also plans to expand its offerings in activewear next year with the Puma and Gaiam yoga brands. These new launches should help national brands become a larger part of total sales.
Expanding the loyalty program
Our loyalty program is currently available to customers in approximately one-third of our stores. The response to that program has been incredibly positive. We will be rolling out the program to the remainder of the chain in October just in time for holiday shopping.
Loyalty programs create an incentive for customers to return to stores, rewarding customers for purchases in an attempt to encourage further purchases down the road. Kohl's launched a pilot of its new loyalty program in late 2012 and expanded it in 2013 after promising results. CFO Wes McDonald stated in response to an analyst's question that the loyalty program provides a boost in sales performance of about 150 basis points.
Kohl's has now made the decision to expand the loyalty program to all of its stores, and if the results remain consistent, the holiday quarter could be a very successful one for Kohl's.
New online initiatives
We will be piloting buy online, pick up in store at approximately 100 stores this fall. Once successful, the pilot will be rolled out to all stores nationwide. Buy online, pick up in store provides our customers with another option to shop when they want and where they want.
One key benefit that large brick-and-mortar retailers have over online-only competitors is a physical location near a significant percentage of the population. Kohl's has 1,160 stores in total, and this presents an opportunity to give customers purchasing options that online-only retailers can't offer. Kohl's buy online, pick up in store initiative will allow customers to save time by shopping online without the need to wait days for the products to arrive at their doorstep, differentiating Kohl's from much of its competition.
Turning stores into distribution centers
[B]y the end of the third quarter, approximately 800 of our stores will be equipped to fulfill online orders. We think this will improve shipping times and provide additional e-fulfillment capacity during the peak holiday season.
Much like consumer electronics retailer Best Buy has done, Kohl's will begin fulfilling online orders from its stores beginning later this year. This effectively gives Kohl's 800 mini-distribution centers spread across the country, allowing for both greater availability of product online as well as faster shipping times.
The results for Best Buy after implementing its ship-from-store program bode well for Kohl's efforts. Best Buy was able to achieve faster average shipping times than Amazon.com after fully implementing its program, and its online sales have surged, up nearly 30% during the most recently reported quarter. If Kohl's can replicate Best Buy's success, it could provide the company with additional ammunition to battle the threat of online-only rivals.
Final thoughts
Kohl's had a much-improved second quarter, but the real story is all of the initiatives that management laid out during the company's conference call. With an expanding loyalty program, new national brands, and a renewed focus on the e-commerce channel, Kohl's appears to be on its way to returning to growth, possibly later this year.
