Kohl’s Corp. closed the books on another disappointing quarter, with earnings down 60% year-over-year.
For the third quarter of fiscal 2022, the Menomonee Falls-based retailer reported net sales of $4.1 billion – down 7.2% from $4.4 billion in the same period last year – while total revenue fell 7% to $4.2 billion. With the substantial drop in earnings for the quarter, to $97 million from $243 million in 2021, diluted earnings per share totaled 82 cents, compared to $1.65 last year.
Thursday’s earnings report comes amid heightened uncertainty as the company faces ongoing macroeconomic headwinds – inflation being chief among them – and a leadership transition. Last week, Kohl’s announced chief executive officer Michelle Gass will step down Dec. 2 to assume the role of president at San Fransisco-based Levi Strauss & Co.
For those reasons, the company did not provide guidance for the fourth quarter and withdrew its outlook for the full year, which was twice adjusted and ultimately forecasted a net sales decrease of 5% to 6% year-over-year and operating margin to be in the range of 4.2% to 4.5%. Operating margin for the third quarter was 4.7%.
Performance challenges
The company said its Q3 performance for was “relatively in line with (its) expectations,” considering today’s challenging macroeconomic environment. High inflation continues to impact consumer spending, especially among Kohl’s middle-income customer segment, which continues to purchase fewer items per trip and trade down to value-oriented private brands, like Jumping Bean, Sonoma and Lauren Conrad.
Discretionary categories like apparel and home goods – two of the retailer’s mainstay categories – have bore the brunt of dampened consumer spending due to inflationary pressure this year.
At least one bright spot for the quarter, selling, general and administrative expenses fell (for the first time in nearly two years) by 3.3%, thanks to a lack of holiday-based employee retention incentives this year and a leveling out of expenditures associated with the roll out of Sephora shop-in-shops, now open in 600 Kohl’s locations.
Sephora added 5% to a 34% jump in inventory compared to last year. That was despite the company’s push to reduce inventory in the second half of the year, in an effort to offset the impact of softening consumer demand and wage headwinds. Merchandise inventory assets totaled $4.9 billion in Q3, compared to $3.6 billion last year. However, the company did make a slight improvement in decreasing inventory since last quarter, which saw inventory up 48% over Q2 of 2021; compared to Q3 of 2019, inventory was flat.
Leadership transition
Gass was not present on the company’s 38-minute Q3 earnings conference call Thursday morning, but board chair Peter Boneparth and chief financial officer Jill Timm both thanked their outgoing leader and acknowledged her impact on the company over the past nine years.
“Her efforts to strategically transform kohl’s through brand introductions and partnerships like Sephora and her focus on building an inclusive and collaborative culture will benefit the company for years to come,” said Boneparth. “Michelle is an outstanding leader and we look forward to continuing to work closely with her in the future.”
With Gass’ departure, Kohl’s board of directors named board member Tom Kingsbury as interim CEO. He will serve in that role until a permanent successor is named; a timeline for the search is currently undetermined. The board has also formed a CEO search committee, led by Michael Bender and including Christine Day, Margaret Jenkins, Boneparth and Kingsbury.
“I personally have always had a great amount of respect for (Tom’s) professionalism, retail acumen and integrity,” Boneparth added.
In a new CEO, the board is seeking candidates who have brand-building experience, understand the company’s go-to-market value proposition and have experience with an omni-channel sales strategy.
“The Kohl’s board is focused on supporting the management team during this CEO transition period, as well as the board’s search committee in its pursuit of finding the next CEO to lead Kohl’s. We look forward to partnering with interim CEO Tom Kingsbury and the entire leadership team to execute at the highest level this holiday season, while also capitalizing on opportunities to strengthen the business,” said Boneparth.
