Weakened Demand, Inflationary Pressures Hit Kohl’s First Quarter Earnings

Kohl’s saw lower than expected results in the first quarter of 2022 as the retailer saw a weakened demand and inflationary pressures.

First quarter net sales decreased 5.2% to $3.72 billion compared to $3.9 billion in the same period last year, driven by a double digit decline in the Menomonee Falls, Wis.-based retailer’s home and children’s businesses. Net income came in flat compared to the same period last year at $14 million in the first quarter of 2022.

On the company’s first quarter 2022 earnings call on Thursday, Kohl’s CEO Michelle Gass said, “While the quarter started off strong with positive low single-digit comp growth through late March, in April, demand considerably weakened as we lapped last year’s stimulus and as consumers started to experience inflationary pressures.”

By category, Gass said the company’s men’s business had a “very strong quarter,” with sales increasing 3%, driven in part by the introduction of several new brands over the past six months including Tommy Hilfiger, Calvin Klein, and Hurley. Gass also noted that there has been “significant growth” in its tailored and dress business and has continued to see sales increases in its outdoor apparel category. “This gives us confidence as we expand our partnership with brands like Eddie Bauer and Under Armour Outdoor, which we’re rolling out to more stores later this year,” Gass said.

As for women’s, sales outpaced the company with growth in areas like outerwear, denim, inclusive sizing, and dresses. Offsetting such gains was underperformance in spring seasonal categories like swim, tanks, shorts, and tees, which were down double digits, but have shown a strong positive trend in May with warmer weather.

And as it relates to active, overall, it performed in line with the company. Gass said the category saw growth in men’s and women’s apparel, offset by softness in active footwear and children’s apparel.

As for positive news in the quarter, Gass said that the company has seen improved trends in May, with strength in its spring seasonal categories driven mostly by the 200 stores with Sephora shop-in-shops, which Gass added are delivering positive low single-digit comp store sales growth. “The transformation underway in our stores, with our partnership with Sephora as a cornerstone, is driving impressive results,” Gass added. “The first 200 stores with Sephora at Kohl’s comped positively overall in Q1, up low single digits, driven by both Sephora sales as well as incremental basket growth with categories such as women’s, accessories and active.”

Gass also noted that by the end of the summer, there will be an additional 400 stores, for a total of 600 locations by early August, that will have a Sephora shop-in-shop and an updated design. “We’ve taken the opportunity to update, refresh and reflow the stores to deliver against our strategy of leading in the active and casual lifestyle,” the CEO said.

Looking ahead, due to its first quarter results, the company has updated its full year 2022 outlook. It now expects net sales to be in the range of 0% to 1% compared to the prior year.

These earnings follow the announcement on Wednesday that two executives are leaving the retailer to pursue other opportunities. Kohl’s chief merchandising officer Doug Howe has left the company, effective immediately, and Greg Revelle, chief marketing officer, is expected to depart June 1. “Both have made meaningful contributions, and we wish them well in their future endeavors,” Gass said on Thursday’s call.

While a search is underway, Gass said in the meantime, Ron Murray, a long tenured Kohl’s and retail merchandising executive will now serve as interim chief merchandising officer. Also, effective immediately, Christie Raymond will serve as interim chief marketing officer. “Both Christie and Ron are strong leaders with proven track records,” Gass added. “We are confident that they will do a great job leading our highly capable teams and driving our strategy forward.”

These departures come at a time when Kohl’s is weighing offers from multiple parties that are interested in purchasing the company. The department store chain said in a March press release that it has hired Goldman Sachs to engage with potential bidders and discuss alternatives for the business. Kohl’s said in a separate letter to shareholders that it has engaged with over 20 parties. These proposals, Kohl’s said, are non-binding and without financial commitment.

Among the speculated bidders included the owners of JCPenney. According to an April report in the New York Post, the proposed deal comes from Simon Property and Brookfield Asset Management, the two entities that bought JCPenney out of bankruptcy in 2020 for $1.75 billion. The deal values Kohl’s at more than $8.6 billion, or $68 per share.

Hudson’s Bay Co., which owns Hudson’s Bay and Saks, is also reportedly interested in making a play for Kohl’s.

On Thursday’s call, Gass commented on the proposed sale of the business, stating that the company is “continuing to engage with multiple interested parties as they work to prepare fully-financed binding proposals.”

Gass added that Kohl’s is continuing its “detailed due diligence phase” and is “pleased with the number of parties who recognize the value of our business and plan.”

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