Kohl's to Launch Smaller Shops in Response to Activist Pressure, Aims to Expand Sephora to $2 Billion

• Kohl's announced new long-term financial goals, including a plan to increase sales by a low single-digit percentage each year.
• The retailer, under pressure from activist investors, revealed its goal to expand its Sephora business to over $2 billion in yearly sales.
• Kohl's plans to open 100 smaller-format stores in the next four years, in addition to its existing stores.

The company, under pressure from activists to consider a sale, wants to showcase its own progress in updating its brick-and-mortar stores and attracting new, younger customers.

Michelle Gass, Chief Executive, stated during a virtual investor meeting on Monday morning that the transformation they were undergoing was a complete overhaul of their business model and brand.

Kohl's released new long-term financial goals prior to the Monday meeting, which included increasing sales by a low-single-digit percentage each year.

Kohl's shares plummeted by nearly 13% on Monday due to investors' disappointment with the company's long-term outlook. Some had hoped for a more concrete discussion about a potential sale process.

Don Bilson, a Gordon Haskett analyst, stated that Kohl's updated financial targets did not appear to be a significant improvement, as the margin guide was consistent with previous guidance.

Kohl's aims to increase its Sephora sales to over $2 billion annually. The company currently has around 200 Sephora shop-in-shops in its brick-and-mortar locations and plans to have 850 by next year. Previously, Kohl's did not disclose its Sephora revenue in its earnings reports.

Kohl's plans to open over 100 smaller-format shops in the next four years to attract new customers. These stores are approximately 35,000 square feet on average, with one being tested in Seattle. In contrast, the typical Kohl's store is around 80,000 square feet.

We have a significant year ahead of us," she stated over the phone. "Our investor framework is a comprehensive guide for us.

Kohl's announced its long-term revenue goal, along with its annual operating margin target of between 7% and 8%, mid-to-high single-digit per-share earnings growth, and operating cash flow of over $5.5 billion, with roughly $2.5 billion of free cash flow between 2022 to 2024.

The key to Kohl's transformation is to shift customers' perception of the company from a mall-based department store offering women's apparel and home goods to a top destination for athletic clothing, including sneakers, hoodies, and leggings from brands such as Nike, Adidas, Champion, and its own FLX label.

Gass stated during the investor meeting that our position is shifting from a department store to a more specialized lifestyle concept, emphasizing the active and casual lifestyle. This differentiation allows us to claim ownership of the space.

Activists push for change

The retailer's Monday meeting with investors and analysts is under increased scrutiny due to heightened pressure from activist groups, one of which aims to seize control of the board.

Kohl's recently announced that it has been working with financial advisors to consider unsolicited bids and make proactive outreach to potential buyers, after rejecting takeover offers last month that it deemed undervalued its business.

Macellum Advisors and Engine Capital have contended that Kohl's has underperformed other off-mall retailers such as Ulta Beauty and some department store chains including Macy's. Despite this, Kohl's shares have only increased by approximately 6% over the past 12 months, compared to Macy's stock, which has risen by about 65%. The firms have also advised Kohl's to consider selling some of its real estate and leasing it back in order to unlock capital.

Kohl's recently released disappointing fiscal fourth-quarter results, which led Macellum to express skepticism about the retailer's future due to the current board of directors and management configuration.

What set Macellum Managing Partner Jonathan Duskin apart from his retailer peers was the unique impact of supply chain issues on sales.

Despite ongoing supply chain obstacles, Kohl's reported revenue of $6.22 billion for the three-month period ended Jan. 29, which was slightly below analysts' estimates. However, the retailer issued a more optimistic revenue outlook for 2022 and announced plans to double its annual dividend and buy back at least $1 billion of its stock this year.

All-in on active

Kohl's highlighted its plans to expand its selection of activewear, which contributed to 24% of its total revenue in 2021, up from 14% in 2016.

The trend of dressing comfortably among consumers, which was accelerated by the Covid-19 pandemic, is likely to persist even as people return to social settings.

The CEO stated during the investor meeting that while individuals may dress up more for a call from home, they may still prefer sneakers over dress shoes when entering the office. This presents a significant opportunity for Kohl's.

Kohl's aims to expand its women's dress business, outdoor and swim wear, and inclusive sizes.

Last year, supply chain obstacles disproportionately affected Kohl's women's assortment. This year, the company aims to boost interest in dresses and other non-activewear apparel for women by testing "dress destinations" in select stores.

Kohl's is introducing a self-service buy online, pick up in store option to all locations this year, in addition to testing self-service returns and check-out offerings, to enhance the in-store check-out experience for customers.

Kohl's aims to generate $8 billion in annual revenue from its digital business in the long run, thanks to its efforts to simplify online shopping for customers. In fiscal 2021, Kohl's reported a revenue of $19.4 billion, an increase of $3.4 billion from the previous year.

Gass stated that we have a robust growth plan with lasting advantages, which boosts our confidence.

Find the full press release from Kohl’s here.