Kohl’s issues better-than-expected outlook as margins withstand supply chain strain

Kohl’s on Tuesday reported fiscal fourth-quarter sales that came in below analysts’ estimates for the key holiday quarter, but investors lifted shares as the company issued an upbeat revenue outlook for 2022 despite ongoing supply chain obstacles that roiled retailers and shrunk inventories.

Kohl’s per-share earnings also beat estimates, thanks to the company’s strategy to bring in new customers and sell more goods at full price points. Despite lingering supply chain headwinds and other pressures from inflation and labor costs, CEO Michelle Gass said Kohl’s achieved an operating margin of 8.6% — two years ahead of schedule.

For fiscal 2022, Kohl’s is calling for net sales to rise 2% to 3%. Analysts had been looking for year-over-year growth of 2.2%, according to Refinitiv.

This year the company “will build on our momentum,” Gass said in a statement. She noted Kohl’s plans to lean into its recent partnership with makeup retailer Sephora, in which it plans to open Sephora shop-in-shops at hundreds of Kohl’s stores.

The report comes as Kohl’s faces amplified pressure from activists to consider a sale, while one group is looking to take control of the retailer’s board. Last month, Kohl’s rejected the takeover offers on the table, which it said undervalued the business.

Regarding this, Gass told CNBC that Kohl’s is currently going through a robust process with bankers and other financial advisors to work through any unsolicited bids for the retailer as well as make some proactive outreach.

“We feel very good about the strategic and financial plan ahead of us,” she said in a phone interview.

Here’s how Kohl’s did in its fourth quarter compared with what Wall Street was anticipating, according to a survey of analysts by Refinitiv:

• Earnings per share: $2.20 adjusted vs. $2.12 expected
• Revenue: $6.22 billion vs. $6.54 billion expected

Kohl’s net income for the three-month period ended Jan. 29 fell to $299 million, or $2.20 a share, compared with $343 million, or $2.20 per share, a year earlier. Earnings beat analysts’ estimates of $2.12 a share, according to Refinitiv.

Net sales grew to $6.22 billion from $5.88 billion a year earlier. That was light of estimates for $6.54 billion.

Gass told analysts on an earnings conference call that after a stronger start to the quarter, the company experience delayed shipments of inventory due to global supply chain snafus, which hurt Kohl’s ability to meet demand.

She said Kohl’s also saw softer shopper visits to brick-and-mortar stores during January as the Covid omicron variant spread.

Kohl’s cited particular strength in its activewear business, which it said grew more than 40% in 2021. The retailer sells goods from top brands including Nike and Under Armour, alongside its own private labels for items such as leggings, sports bras and hoodies.

Activewear has been a growing category within the broader apparel space, fueled by more consumers looking for comfort during the pandemic and investing in their workout routines. Kohl’s said it’s in the process of moving its active merchandise to more prominent real estate at the front of all of its stores.

Beauty, meantime, saw a significant boost as shopper visits picked up over the holidays. Roughly 200 stores house Sephora shop-in-shops already, according to Gass. Kohl’s reported a mid-single-digit sales lift at those locations compared with the rest of its chain, she said.

Sephora at Kohl’s is bringing in younger and more diverse shoppers, Gass said, and more than 50% of those customers are adding at least one item from another store category to their purchases. Twenty-five percent of people coming in to see the Sephora shops are totally new to Kohl’s, she added.

GlobalData Retail managing director Neil Saunders applauded Kohl’s partnership with Sephora, which is making the retailer a more credible beauty destination. However, he said, “it cannot save the rest of the business unless effort is made to create a better all-round experience for shoppers.”

Saunders wrote in a note to clients that he still hopes to see more newness at Kohl’s in the women’s apparel and home categories. Kohl’s must compete with other off-mall retailers including Target or T.J. Maxx, he said.

For fiscal 2022, on top of its sales targets, Kohl’s sees earnings per share in the range of $7.00 to $7.50, excluding items, compared with analysts’ expectations of $6.55 a share.

Kohl’s also announced Tuesday it plans to double its annual dividend and buy back at least $1 billion of its stock this year.

CFO Jill Timm told analysts that the retailer’s outlook assumes the company will strengthen in the coming months, in spite of remaining macro challenges and uncertainties.

Sephora will be a key driver of growth in 2022, Timm said, adding that the back half of the year will be stronger than the first half. Margins will contract slightly at the same time, as Kohl’s faces higher freight costs along with inflation, she said.

The company is set to hold an investor meeting on Monday, where it will offer more guidance around its longer-term financial targets.

As of Tuesday’s open, Kohl’s shares are up about 15% year to date, bringing the company’s market cap to above $7.7 billion.

Find the full earnings press release from Kohl’s here.