Over the past decade, shares of department store operator Kohl's (KSS -2.45%) haven't done much, despite a near doubling in per-share earnings during that time. Kohl's stock has risen recently after the company beat analyst estimates, and there are a few compelling reasons to believe that the stock could continue to rise in the long term, breaking the decade-long trend.
Increasing customer loyalty
Kohl's launched its new Yes2You customer loyalty program in late 2012, and since then it's been expanded to include about one-third of the company's stores. The program is an attempt to keep customers coming back to the stores, offering $5 in rewards for every $100 spent, along with various offers throughout the year and other perks.
During Kohl's most recent conference call, CEO Kevin Mansell announced that this loyalty program would be expanded to the rest of the company's stores by October. The stores that already have the loyalty program have been outperforming other stores by about 150 basis points in sales performance, and if those results remain consistent, the loyalty program could bring Kohl's comparable-store sales back to positive territory.
Most of Kohl's competitors, including J.C. Penney and Macy's, also have loyalty programs, and Mansell made clear during the conference call that simply offering savings wasn't going to be enough. Kohl's is aiming to create a unique loyalty program that allows it to build relationships with its customers, and at least so far it seems to be working. If Kohl's loyalty program is successful nationwide, it would give a meaningful boost to comparable-store sales, and the stock could rise as a result.
Growing online sales
While e-commerce represents just 6.4% of total retail sales in the United States, this number is far higher for the apparel industry. In 2013, 14% of men's apparel sales and 15% of women's apparel sales were online purchases, with online sales growing far faster than in-store sales in both cases.
Kohl's e-commerce business represents a smaller portion of the company's total revenue than those percentages. Based on Kohl's annual filing from 2013, e-commerce sales last year were roughly $1.7 billion, about 11.2% of total revenue. Online sales have been growing rapidly, rising by 20.4% in 2013, and the company managed 30% growth during July.
As an increasing number of consumers shop online, it's critical for Kohl's to have a strong online presence, and a couple of key initiatives should help online sales continue to rise going forward. By the end of the third quarter, about 800 of Kohl's stores will be able to ship online orders directly. This is similar to what other retailers such as Best Buy have been doing, and it should lead to both greater selection online and faster shipping times. In addition, Kohl's will be piloting a program this fall to buy online and pick up in the store at 100 of its locations, with a plan to eventually roll it out to all stores nationwide.
Kohl's needs to continue to grow online sales to make up for weakness in its stores, as well as to combat online-only retailers, and if these double-digit growth rates can be maintained, the top line and the stock price could eventually start growing again.
Expanding the beauty department
Kohl's has been revamping its in-store beauty department over the past year, adding many national brands to its stable of exclusive brands. During July, Kohl's added the new beauty section to 47 additional stores, and plans to do the same in 178 more stores by the end of September. By the end of next year, Kohl's plans to have the new beauty section installed in about 900 stores, nearly its entire store base.
The cosmetics market in the United States totaled about $56 billion in 2013, and Kohl's expansion of its beauty department is an attempt to capture a larger portion of that market. So far, the results have been encouraging. Stores with the new beauty department have achieved a higher level of transactions per store, and high-volume stores, which make up about 60% of Kohl's store base, with the new beauty department installed have been outperforming other stores by around 2%.
Increasing store traffic and transactions per store are critical for Kohl's to return to positive comparable-store sales growth, and the new beauty department is so far helping the cause. If the trend continues as the initiative is rolled out to Kohl's remaining stores, sales growth could be just around the corner.
Final thoughts
Kohl's is facing some serious challenges, and declining revenue is certainly not a good thing, but given the three reasons cited here, there's a lot to like about Kohl's in the long term.
