Has Kohl's caught the consumer trade-down bug?

The department store chain could be suffering from the same worrying trend as JC Penney: shoppers downgrading to discount retailers.

By Minyanville Jun 21, 2012 4:31PM
JC Penney (JCP) has lost sales in its changeover to an everyday low-pricing strategy, but those customers haven't moved disproportionately to Kohl's (KSS), its most direct competitor.

I was surprised since, as a rule, dissatisfied department store customers generally switch to another department store. Instead, JC Penney customers have dropped out of the category altogether and traded down to discount stores.

Having looked more closely at Kohl's, I believe the retailer is suffering from the same extreme consumer trade-down as J.C. Penney.

Kohl's reported flat comparable-store sales in its recent quarter. Average transaction value was up 1.6%, with pricing up 4.9%, and units per transaction were down 3.3%. Traffic decreased 1.4%. So Penney's sales shortfall in the past quarter did not help Kohl's but seems to have gone disproportionately to discounters Wal-Mart (WMT), Target (TGT) and Costco (COST), in that order. Total inventory was up 7% on a 2% sales increase.

Management had projected gross margin to be down 160 basis points but dropped 220. This was against a backdrop of private and exclusive brands being up 50% to 53% last year to this year and a continuing launch of higher-priced exclusive brands rather than less expensive private-label offerings. Management attributed the additional gross-margin decline to the depth of promotional markdowns.

Part of the reason given for the poor total unit sales number was that the company needed more inventory at opening price points, which are heavily private-label offerings. Executives said they were seeing a lot of price elasticity on some items.

Remodelings were cut by 50%. Gross-margin guidance was for 200-250 bps of decline in the second quarter.

All of the above leads me to believe that Kohl's is going to continue to suffer from more economically strapped consumers. I can only believe consumers are shifting purchases out of Kohl's to Wal-Mart, Target and Costco, only at a slower rate than than seen at Penney, where the exodus was hastened by a disastrous pricing strategy that failed upon roll-out, costing the president his job.

Gross margin has reached a historical high of around 38%, up 200 bps over the past few years, with the addition of many exclusive brands. The pace of these roll-outs can probably not be sustained, as consumers look to be moving more to less expensive private labels. Though management is guiding to only a 70-basis-point decline in gross margin for the year, the declines seen in the past two quarters (and the bearish pricing comments made by management) point to questions about the company's ability to maintain a department store's typical high operating margin in the 11% range.

So while the stock looks cheap at $45, discounting essentially no earnings-per-share growth at all, the stock market does not believe returns will hold. I do not believe they will hold either. 

A 2% decline in operating margin means that the stock discounts a 3% growth rate for per-share earnings over five years. A 3% decline in operating margins implies a 6% growth rate for EPS over the same period to justify $45. My guess is that the average department store over the next five years will have a 4% to 5% growth rate. So the stock looks to be fairly valued, if you believe the profitability hits of this magnitude.

More from Minyanville
46Comments
Jun 22, 2012 10:48AM
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I like Kohl's, especially for activewear, sneakers, etc.  But I've noticed lately that their private label brands -- like Vera Wang and Jennifer Lopez -- are catering to a demographic that is much younger than the average Kohl's shopper.  The 18-year-old who's carrying a Coach bag isn't shopping at Kohl's!  The management of these stores all make the same mistake: they think they have to be hip and trendy but they do so at the expense of their core customers.  Every analyst is blaming the economy for the retail slowdown, but I'm convinced the truth is that at least 50% of the problem is due to poor or no selection of merchandise for shoppers over 30. 
Jun 21, 2012 9:42PM
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I can understand how Kohl's would have a major problem trying to keep customers. I shop there frequently but when they put things on sale, such as a good polo shirt and it has a price tag of $45.00 that's a ridiculous price. So they put it on sale and knock 30% off the price for the shirt and it's still higher than it should be. I for one liked the pricing of JCPenney's because they put the actual price it should sell for and it was still lower than Kohl's for the same shirt that Kohl's had on sale. It seems like Kohl's puts their own price tags on and the price is jacked up approx. 50%.
Jun 22, 2012 11:57AM
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I like Kohls store...

But our family no longer has the money to spend  in stores  like that..

All our money is going to pay for the basics....food, gas for car, utilites, rent...

Could afford those type things before being laid off and now working

part time jobs for half the pay....

Jun 22, 2012 11:24AM
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Walmart's clothes are crap.  At least for men.  I don't know who would want to buy them there.  I'll gladly pay a little more for something from a more decent store.
Jun 22, 2012 1:27PM
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It all boils down to this.... Most corporations, all politicians, & all bankers get all kinds of bailouts, the extremely poor gets all kinds of pity and extensions on benefits, etc. There is absolutely NOTHING for people who live within their means, trying to do the RIGHT thing, and they are being to squeezed to NONEXISTANCE by oil companies, utility companies, local governments, etc. Figure it out...... once you've run all over customers/clients out of business, what have you really gained? Hope the bankers, politicians, government employees, and corporations enjoyed what they've robbed their neighbors out of. What goes around, comes around, and their day is coming, rest assured. Most honest, working folks don't trust these groups any farther than they pick them up and throw them. And this distrust was well earned. It will take decades and many paybacks/ retributions to establish any future trust. Look over the history of the 1920's & 30's..... same deal, different dates, faces & places. 
Jun 22, 2012 10:03AM
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Kohl's stores are junky format....you cannot find things the racks are so full. I find they have similar clothes to JC Penneys.....junk from other parts of the world that when you wash it falls apart or fades. I agree with a previous poster....they up prices then put on sale and the prices are still too high. The Kohls near me has very little traffic in it these days.
Jun 22, 2012 11:41AM
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headline should be 'everything in trouble nobody has any money anymore due to success of corpo gov'
Jun 22, 2012 12:21PM
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When you charge 30 bucks for a 4 pack of boxers, what do you expect, full stores?
Jun 22, 2012 1:41PM
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Kohl's used to have great prices especially when used with their percent off coupons. But that was when Mervyn's was around. Once Kohl's brought Mervyn's down to it's knees and out of business they waited about a year and then jacked up their prices to where they are not a bargain anymore...not even with the percent off coupons. I wrote this same paragraph on Kohl's website and they would not post it.

I can see why JC Penny's customers are not going over to Kohl's. The quality is just not there anymore either.

Jun 22, 2012 12:51PM
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They failed to mention that the quality of clothes at Walmart and target is less than that of Penny's. If one wants their clothes to last, they should consider quality in the long run!! I do not buy clothes at Walmart maybe children's, but if people are worried about spending too much they should buy at a little more costly to last longer.

 

 

Jun 22, 2012 11:57AM
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I like Kohl's yes the prices are high but i only buy when things are on sale. I would like to see them drop there prices it wouldn't hurt them. It would be better then closing there stores.
Jun 22, 2012 11:43AM
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I love Kohl's,  I shop when they have the Kohl's cash and the 30% coupons. I buy cloths and housewares there consistenly. I would much rather buy at Kohl's then JCP. The stores always seem to be busy with customers.
Jun 22, 2012 12:56PM
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People can't be that dumb. They wont shop at a store that dosne't have sales or discounts? Do they understand the prices are marked down from inflated prices. You (as smart as you think you are) are not saving anything.
Jun 22, 2012 1:09PM
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Do you realize all this merchandise is mostly the same chinese, indonesian, foreign stuff at walmart just as Kohls?    You still have to sort through this sh%#.  We keep supporting china by buying this sh%%.  I shop at thrift stores etc buy older american products etc that people throw out. Got to be a hunter.  As far as cookware stuff like that I buy american or german or japan products online or overseas.  Why do you think theres no manufacturing in this country anymore?  I dont want pricey junk or cheap junk.   I mean really folks come on?  Kohls cant survive!  For example, Carters kids wear they sell it at Kohls and Walmart>>>>>>>>>>>>>>? Why would you pay more for the same JUNK FROM CHINA. People are sheeple?
Jun 22, 2012 3:16PM
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I am confused? Is the economy really bad or am I just poorer then I thought. The highways are still crowded with cars, gas is flowing at higu prices, and the resturants are packed. people are buying new cars and still going on summer vactions. Planes are full with stand by reservation only available.  Obama says the private sector is doing fine. Either he is lying or out of touch. Perhaps the working class are lying and hiding their stashes of currency to eat out, drive up and down the highways. The bars are full on the weekend. The weekend starts on Thursday night in my city and contiues until Monday morning just in time to brush ones teeth, maybe and get to work. Try getting in to IHop on the weekend. Good luck with that one.  I am confuse, I think America is doing just fine because my president says so. It must be true  He certainly wold lie. I must be the  only one living pay check to pay check. Oh, where did I go wrong?
Jun 22, 2012 1:12PM
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Is Kohl's the next JCP? Not necessarily. The aisles at Sears smell of death by stagnation. Some of the retail stick-on tags are permanent- having been there too long. Some of the security pins are rusted to the ink cartridges. Penney's? We went from the original home store to the pimp store. The racks of silk-screened tattoo-design tee shirts and "modern fit" imported wear are digging your grave. GOOD pricing (loser with someone else's credit card) BETTER (impulse buyer) BEST price (when it will cost more to dust it than to price it below wholesale). Kohl's has done a good job of keeping customers buying fashion and a few bargains. The street fully knows how to wait for it to bottom out, but at least Kohl's starts fair and tends to coordinate displays well enough for shopping instead of bin and rack browsing.

Nope... Kohl's has promise. For now.

Jun 22, 2012 12:21PM
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When you charge 30 bucks for a 4 pack of boxers, what do you expect, full stores?
Jun 22, 2012 3:26PM
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It's the same old story!!! The rich are getting richer, while the poor get poorer. Prices are going up, but salaries are not. How much more can we take?? How much are we supposed to squeeze out of that dollar?? People are cutting back, can't afford to shop the way they did before the recession. In my opinion nothing has gotten better since the recession. We are being squeezed soooo tight it hurts!!!

Jun 22, 2012 4:46PM
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It's like I have said all along. In order for our economy to prosper, we need a whole lot of people spending money than they have  on things they don't need, but these days even with both people  working and credit  tightened, most can only afford the basics, and the stores are experiencing that fact. I don't care what you want to call it, and I don't care what way you lean, if we don't find a way to get more of the money into the hands of people who will spend it, we will be in ever increasing trouble on all levels of our economy. 
Jun 22, 2012 3:18PM
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Who has money to shop at kholes or anywhere else?
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