Kohl's Corp. CEO
Tom Kingsbury opened the company’s earnings conference call Thursday with a candid, sobering statement: "Our first quarter results did not meet our expectations and are not reflective of the direction we are heading with our strategic initiatives."
The Menomonee Falls-based retailer reported a net loss of $27 million (24 cents per diluted share) for the first quarter of 2024. That's compared to net earnings of $14 million (13 cents per diluted share) for the first quarter of 2023. Net sales also took a hit, dropping 5.3% year-over-year to $3.2 billion, and comparable store sales were down 4.4%.
The disappointing results were not a complete surprise: "We knew the first quarter would be our toughest comparison of the year," said Kingsbury. And from a sales perspective, Q1 is historically a pain in the side of Kohl's and others in the seasonally driven retail industry coming off the holiday rush.
But it also points to some of the unique challenges Kohl's continues to face as it works to refine its inventory management strategy -- one of four key growth
initiatives Kingsbury set in motion upon taking the helm early last year.
To offset the impact of softening consumer demand due to inflation last year, Kohl's kicked its inventory clearance efforts into high gear. While the move contributed to a 13% year-over-year decrease in inventory assets in Q1, it also drove comparable store sales down by more than 600 basis points. The company anticipated momentum in its regular price business (sales of non-clearance items) would "offset the clearing headwind," but spending on regular priced items, specifically spring seasonal goods, slowed in late March into April.
"And that became the headwind that we couldn't overcome" in meeting guidance of flat comparable store sales, said Kohl's chief financial officer
Jill Timm.
As a result, Kohl's updated its 2024 full-year guidance. Net sales are now expected to decrease 2% to 4% from last year, compared to initial projections of a 1% increase to a 1% decrease. Comparable sales are now expected to decrease 1% to 3%, compared to initial positive projections in the 0% to 2% range. The updated guidance not only takes into account Q1 underperformance, but also the impact of economic uncertainty on consumer sentiment.
"As it relates to the consumer backdrop, our customers continue to be pressured by a number of economic factors, including high interest rates and inflation," said Kingsbury. "While spending among our high-income customers has remained steady, our middle income customer continues to be impacted."
Both Kingsbury and Timm were adamant that Kohl's inventory clearing woes are now in the rear view and its store base will "have the regular balances of clearance going forward," said Timm.
"We expect our performance will improve building on our positive regular price trends driven by our early success in new categories and continued growth in Sephora," said Kingsbury.
Those new or "underpenetrated" categories -- which Kohl's says represent a $2 billion-plus sales opportunity in the coming years -- include home, gifting and impulse as well as baby gear, which Kohl's is leaning heavily into through a new partnership with Babies “R” Us.
The company announced in March that it will add Babies “R” Us shops to approximately 200 of its store locations, with the first shops opening in August. The sectioned-off areas will range in size from 750 square feet to 2,500 square feet and will carry a variety of baby gear, including clothing, furniture, activities and products for feeding, bathing and safety.
The new Babies "R" Us shop-in-shops will open this year at five Milwaukee-area Kohl's locations, including Brookfield, Menomonee Falls, Oak Creek, Mount Pleasant and Delafield.
"Baby gear is a large category that has seen disruption in the competitive landscape in recent years," said Kingsbury. "Kohl’s new commitment to this space represents a significant growth opportunity and broadens our reach with younger customers."
The market did not respond favorably to Kohl's Q1 results. Shares of Kohl's stock were trading at $20.77 early Thursday afternoon, having plummeted from $27.33 at Wednesday's close.
