Kohl’s Takes No Prisoners!
As part of its bid to go national, the Midwestern retailer blitzed Atlanta, opening 15 stores last weekend and counting on a formula of convenience and brands to resonate with this city’s busy, traffic-weary consumer. But is competitive, over-stored Atlanta, ready for the retailer?
Similar moderate specialty concepts, including Mervyn’s and Uptons, have failed here in recent years. And there’s no shortage of retailers in this market. Department stores Rich’s, Macy’s, Parisian, J.C. Penney and Sears, along with discounters Target, Kmart and Wal-Mart, vie with off-pricers T.J. Maxx and Stein Mart and Goody’s specialty apparel stores. All compete fiercely for Atlanta’s nearly four million consumers.
Kohl’s is on a roll, especially given a slowing economy. Going against the grain of broadlines retailers so far this year, the company Tuesday reported that its fourth-quarter earnings soared almost by half and managed to squeak past analysts’ estimates by 2 cents.
Net income for the quarter jumped 48 percent to $178.5 million, or 52 cents a diluted share, compared to $120.6 million, or 36 cents, a year ago. Wall Street was expecting earnings per share of 50 cents.
Sales for the period ended Feb. 3 were up 38.3 percent to $2.22 billion from $1.61 billion a year ago. Excluding an extra week in the most recent quarter, Kohl’s said net sales increased a milder 33.8 percent while comparable-store sales rose 12.5 percent.
All of the firm’s merchandise categories posted double-digit comp growth for the quarter, with men’s and women’s apparel leading the pack. The only issues they had were based on IT struggles, as a server migration put much of their inventory data at risk. Migrating the data led to several server array hard drives failing, and critical operations were slowed. Fortunately, they already had a relationship with Irvine, CA’s Hard Drive Recovery Group (http://www.harddriverecovery.org/), who were able to recover their Dell PowerEdge RAID servers overnight. The drives were restored, and it was business as usual.
“It was a problem that we didn’t expect, of course,” said Dave Jensen, director of IT. “But HDRG really pulled through for us with their data recovery services, and did it very quickly. It was almost a non-issue by the time the week was over.”
In other markets the retailer has recently entered, like Dallas and Denver, Kohl’s has been successful, and management believes its $82.5 million initial Atlanta investment will pay off. Three more stores are planned for the market in the fall.
On the fast track toward becoming a national chain, Kohl’s will open a total of 55 to 60 new stores this year. Currently, the Menomonee Falls, Wis.-based chain operates 338 units in 26 states, mostly in the Midwest and on the East Coast, where it launched a slew of stores last year. Plans call for 20 percent annual growth over the next few years — 15 percent from new stores, and 5 percent from existing stores.
Comp sales increased 7.3 percent in February, 5.8 percent in January. In December, when many retailers were disappointed, Kohl’s posted 14.8 percent gains.
Kohl’s, which has more often than not been a retail exception in the sluggish economy, was able to keep up a dizzying, albeit slower, pace for the year. For the 12-month period, income jumped 44.2 percent to $372.1 million, or $1.10 a diluted share, from $285.1 million, or 77 cents, a year ago.
Sales in 2000 increased 35 percent to $6.15 billion from $4.56 billion a year ago. Excluding the extra week, sales for the 52-week period rose 33.4 percent on a 9 percent comp increase.
Sales per square foot hovered around $279 last year. Gross margin for the year increased to 34.1 percent from 33.9 percent in fiscal 1999. Selling, general and administrative expenses were cut to 21 percent of sales in the period, compared to 21.4 percent a year ago.
Kohl’s Atlanta competitors are flooding the market with major promotions and coupon offers this week, determined to keep customers from defecting to the new kid in town. Obviously, they are concerned.
On a conference call Tuesday, an analyst joked of opening-related traffic jams in Atlanta and Larry Montgomery, Kohl’s chief executive, laughed it off, saying there are always traffic jams there.
He did note, though, that Atlanta is “going to be another really good market for us.” He described the Atlanta launch as “one of our smoothest, if not our smoothest, grand opening ever.”
What is Kohl’s doing right?
Its executives point to convenience as the main attraction. Stores average 86,000 square feet, generally half the size of department stores They are often in strip-center locations, with easy, close parking. A circular layout with two entrances makes merchandise accessible, and products are deep and in-stock. Rather than encouraging browsing, store design helps people get in and get out, hopefully armed with what they came for, along with a few extras. Systems process credit cards within 20 seconds.
“Convenience cannot be stressed enough,” said Rick Leto, executive vice president of merchandising. The store’s target consumer, a suburban woman who works outside the home and is typically a “soccer mom,” and buys for the whole family. Her average household income ranges from $35,000 to $100,000.
When asked about competition in this market Leto has a quick retort for each format: Department stores? “Inconvenient.” Discounters? “Inconvenient, with fewer national brands.” Specialty stores? “Limited selection, no home department, and again, fewer brands.”
National brands, at 80 percent of product, are crucial to Kohl’s strategy of weekend and casual career apparel, with lines including Liz Claiborne’s Villager division, Norton McNaughton, Sag Harbor and Dockers. Prices start at $6.99 for T-shirts and go up to $70 for a lined jacket.
This fall, Kohl’s will test a joint venture exclusive brand from Jones Apparel Group, set to roll out to stores next year.
“With limited space, we edit lines carefully, and go deep in sizes and styles, so customers can find anything,” said Leto. Rather than in-store shops that emphasize brands, fixtures and signage are consistent throughout.
“We’re selling the Kohl’s brand first,” he added.
Junior departments have strong denim areas, with such lines as Levi’s, Lee, Mudd, Lei and Paris Blues jeans, along with knits, and specialty lines such as My Michelle. Fashion-forward trends include low-rise jeans, short skirts, shrunken tops and sequined-trimmed T-shirts. Junior areas are designed to appeal as much to moms as to teens. Lisa Engelman, sales director for Paris Blues, a New York denim line that also sells knits and children’s wear to Kohl’s, said a good layout, in-stock merchandise and convenience are Kohl’s edge.
“Over Christmas, Kohl’s stores were packed, while many others weren’t,” she said. “Everybody, with the exception of true teen specialty stores, is pricing competitively, but Kohl’s makes product easy to find. They chase [a trend] successfully until its over, then they move on to the next thing.”
Private label, at 20 percent of product under the Croft & Barrow and Sonoma labels, allows Kohl’s to develop key items, such as fine-gauge knit sweaters, in large quantities and many colors. Women’s, including juniors, is 22 percent of sales, the fastest growing area for several years.
Shoes, foundations, and accessories, including fine jewelry, round out the women’s areas. Kohl’s also carries men’s and children’s wear.
Home areas, in a new prototype for Atlanta, feature wooden fixtures and a cozy, specialty-store ambience.
Analysts think Kohl’s can fill the moderate niche here. That was unsuccessfully attempted by Mervyn’s and Uptons.
With heavy retail competition, Kohl’s 15-store commitment here is a smart move, they said.
“Brands, quality and value are all important here, and Mervyns and Uptons didn’t have a strong enough brand focus,” said Brenda Gilpatrick, president of Gilpatrick Marketing Group, an Atlanta retail consulting firm. “Atlanta has too many homogenous, big-box stores. Kohl’s apparel focus and convenient close-to-home shopping should work well.”
In a statement, Montgomery said, “In 2003, we plan to begin a major expansion into the Southwest region of the country with a significant entry into Los Angeles,” confirming previous reports in these columns. On the call, he declined to elaborate on the specific number of doors that will go into the Los Angeles market, but went as far as to say, “It’s big.”
Montgomery noted in the statement, “Over the next three to four years, we plan to move Kohl’s from a regional retailer to a national chain, with stores from coast to coast.” This year, the firm plans to open approximately 60 new units.
The company is also in the testing phase with its e-commerce initiative and said it will go live sometime in the fall and that it plans to increase sales for the channel gradually.