In its quarter one earnings report Thursday morning, Menomonee Falls-based Kohl’s Corp. was quick to point out that 2022 is off to a disappointing start.
The retailer recorded net sales of $3.5 billion for the first quarter of fiscal 2022, down 5.2% from $3.7 billion in the first quarter of 2021. Total revenue for the quarter dropped 4.4% to $3.7 billion, while adjusted net earnings fell 92% to $14 million, or 11 cents diluted earnings per share.
“The year has started out below our expectations. Following a strong start to the quarter with positive low-single digits comps through late March, sales considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment,” said Michelle Gass, chief executive officer, in a news release.
Compared to pre-pandemic 2019, net sales for Q1 of 2022 were down 7.9% and adjusted net earnings were down 85.7%.
The company attributed the overall sales decrease to its home and children’s businesses, which were both down double digits percent compared to last year. However, the home segment is likely experiencing somewhat of a pendulum swing from last year’s high demand amid the COVID-19 pandemic. Last year at this time, sales for the category were up more that 30%. Going forward, Kohl’s expects demand for the category to remain weak but sees opportunity in areas including outdoor furniture, expanded decor, kids bedroom furnishings and the pet category.
Unseasonably cool temperatures, especially in the company’s northern markets, also had an impact on seasonal demand for spring apparel, specifically in the children’s category, said Gass during Kohl’s earnings conference call.
On the other hand, Kohl’s saw positive growth in its partnership with beauty retail giant Sephora, which deputed in 200 stores and online last fall. Those 200 stores saw low single-digit sales increases in Q1, driven by Sephora sales as well as related categories including women’s, accessories and active. Sephora’s shop-in-shops are drawing new, younger and more diverse customers to Kohl’s, and those customers are shopping nearly twice as often as the average Kohl’s customer, said Gass.
But with Sephora opening in 400 more stores by August – for a total of 850 stores by 2023 – Kohl’s selling, general, and administrative expenses were up 10.5% in Q1. The build-out of Sephora shops has prompted Kohl’s to reformat its stores, placing active apparel and big-name brands front and center.
Gass said the newly transformed stores are “working” and are expected to be the driver of positive growth in the back half of this year.
In light of its Q1 performance, Kohl’s updated its outlook for the full year. Net sales are now expected to be in the range of 0% to 1% as compared to the prior year; Operating margin is expected to be in the range of 7.0% to 7.2%; and earnings per share are now expected to be in the range of $6.45 to $6.85.
The Sephora partnership is the centerpiece of the retailer’s current turnaround strategy, one it has had to defend in recent months against activist investor Macellum Capital Management, which ran a slate of 10 director candidates against Kohl’s 13 incumbent board directors in an effort to take control of the company and likely pursue a full sale. At Kohl’s recent annual meeting, shareholders voted to re-elect all 13 directors.
While the retailer survived the battle, it lost two executives in the process. On Wednesday, a securities filing revealed that Greg Revelle, chief marketing officer, and Doug Howe, chief merchandising officer, will both be leaving Kohl’s. Howe’s departure is effective immediately while Revelle will leave on June 1. Asked to shed more light on the leadership departures, Gass confirmed that a search for replacements is underway. She noted that Ron Murray, executive vice president of digital merchandising, and Christie Raymond, executive vice president of customer insights, analytics and engagement, will lead those departments in the interim.
“Both Doug and Greg made a lot of contributions to the company over several years, but we’re going to use this opportunity to identify new talent, enhance our capabilities and really help us drive the next phase of our growth with some fresh thinking,” Gass said.
In the midst of its proxy fight with Macellum, Kohl’s has been vetting potential suitors for a possible sale, having retained Goldman Sachs to engage with bidders, totaling 25 to date.
Gass briefly addressed the situation at the top of the conference call.
“Over the past three months Kohl’s has been at the center of an unusual amount of attention and speculation. … This board is committed to overseeing the successful transformation of the company and fulfilling its fiduciary responsibility to maximize shareholder value. … Shareholders want to ensure that the board will continue to run a sale process with shareholders’ best interest in mind. We continue to engage with multiple interested parties. they are working to prepare fully financed, binding proposals,” she said.
More specifics were laid in out in the news release: “Multiple bidders have been invited to a data room containing more than 550,000 pages across more than 55,000 documents, as well as meetings with management. While preliminary, non-binding proposals have been received, further diligence is ongoing and the board has requested fully-financed final bids to be submitted in the coming weeks.”
