Kohls has given great insight into plans for its Greatness Agenda

Kohl's has given great insight into plans for its 'Greatness Agenda'

US department store retailer Kohl's Corporation last week held its first investor day for seven years, setting out detailed plans for future growth. Building on an agenda announced earlier this year, analysts say the new initiatives are necessary and overdue.

During its investor day last week, Kohl's management offered further insight into the future growth of the organisation, and more detail on its 'Greatness Agenda' - which focuses on giving customers what they want, when they want it, and however they want it.

The meeting followed a trading update in which Kohl's revealed it expects comparable sales to decrease 1.4% in the third quarter following a softening of sales in October.

Lower sales are likely in accessories, footwear and men's, it said, while home and women's will underperform the company average. The retailer added that it expects 2014 diluted earnings per share to be at the low end of its prior guidance, which was US$4.05 - $4.45.

Weak performance
Stifel analyst Richard Jaffe believes the weakness at Kohl's over the last few years was, in part, attributable to the recession.

"Kohl's target customer (moderate income families) began to shift their shopping behaviour as they had less discretionary income to spend in stores. They spent less in categories where the company had significant market share [such as apparel] and more in categories where the company had less market share [footwear and handbags]. In addition, there was shift to more dollars being spent on technology, which was not sold in Kohl's stores at the time."

He also pointed to mis-steps such as a weighting towards private and exclusive brands in its assortments, the group's "complicated" promotional efforts, and its slow move into e-commerce.

The 'Great Brands + Great Prices + Convenience' proposition that used to work for Kohl's in the past has become less compelling over the last few years, Jaffe believes.

The company has certainly recognised it needs to evolve quickly to become more relevant in a rapidly changing marketplace - which is where the new strategic initiative designed to generate sales growth comes in.

A focus on growth
The multi-year 'Greatness Agenda' is built on five pillars: amazing product, incredible savings, easy experience, personalised connections, and winning teams.

"Kohl's has a renewed focus on national brands in efforts to drive traffic and sales," Jaffe notes, adding: "The consumer finds greater quality and value in the nationally recognised brands Kohl's has to offer." Currently, national brands represent around half of sales and they have comped higher than exclusive and private brands over the last four quarters, Jaffe explains.

In an effort to build on its product assortment, the retailer will continue to add more brands and category offerings, with management indicating that active and wellness represents "a significant opportunity", according to Jaffe.

Additional product offerings will include wearables, outdoor recreational and an expanded wellness assortment. The company is also developing an apparel line with yoga brand Gaiam, he says.

There is also has a new approach to "being more locally relevant and tailoring products to every customer across every channel," he adds. This has involved reorganising the planning and allocation team, and there are now over 1,000 assortments versus seven regional assortments in stores.

Easy experience
With customers demanding an earlier and more seamless shopping experience, Kohl's is turning its attention to investment in technology.

The company this year updated its mobile and app platforms to provide unified navigation, better browsing, value transparency and a mobile wallet. Tablet conversion has increased 9% since it has been updated and is expected to be in-line with desktop conversion in the future.

Kohl's is now planning additional investment in in-store technology, including ship from store, which has been rolled out to 800 locations. "This has effectively taken an entire day off shipping times while utilising inventory more efficiently," Jaffe says.

'Buy online, pick-up in store' has been piloted in 100 stores, and Jaffe says early results have been strong as most customers who choose this option tend to buy an additional item. It is expected to be rolled out to all stores by next year. "We believe these initiatives will provide customers with a better shopping experience and will drive traffic and incremental sales longer term," Jaffe says.

Further opportunities
Personalised connections have also become key for Kohl's through the use of data such as targeted marketing, personal letters, product recommendations based on past purchase history, and item suggestions in stores based on online browsing history.

"During the last holiday selling season, the company did not utilise any personalisation but this holiday it will have 90m personalised pieces," Jaffe says.

He also points to Kohl's efforts in providing greater savings for its customers, including its charge card savings, and the new loyalty programme Yes2You rewards. "We believe loyalty represents a significant opportunity for the company because approximately 50% of customers are non-cardholders," Jaffe adds.

The retailer is also working on building teams of "engaged, empowered and results oriented" associates.

"We are impressed with senior management's efforts to reinvent Kohl's with new and highly experienced leaders and an aggressive agenda for change," Jaffe says. "It is necessary, by our estimation, and overdue. Our hope is that this talented group of merchandising, marketing and technology experts can come together to form a strong and unified team, lifting Kohl's results by regaining market share and improving profitability."

Financial ambitions
The company is forecasting $21bn in sales by 2017, a 12% increase from sales of $19bn in 2013. In addition, management has guided to an operating margin of around 9% assuming modest gross margin expansion and leverage on a 2% comp.

However, while Jaffe believes these results are achievable, given the numerous initiatives being put in place to help drive traffic and lift sales, UBS analyst Michael Binetti offers a different view.

While he describes the initiatives put in place by Kohl's as "solid" with an improved focus, the targets are "a bit too aggressive".

"In our view, Kohl's target for +3% same-store sales through 2017 is overly optimistic based on our outlook for 1) slower industry growth trends (we expect 1-2% growth for department stores industry) and 2) intensifying competition (off-price, fast-fashion, native e-tailers). We view our forecasts for +1-1.5% same-store sales growth/year to already be a reasonable bull scenario if Kohl's can leverage the new initiatives demonstrated at its Analyst Day in '15-'17."

Despite this, Binetti believes Kohl's new rewards programme represents its biggest opportunity to revitalise years of sluggish same-store sales.

"We especially liked customers earning reward points for product reviews or social media posts (to take Kohl's value message viral). We were encouraged to hear Loyalty already has ~15m members and that 58% of members are non-credit card customers.

"Importantly, we believe Kohl's finally has tools to leverage its robust consumer credit card database to drive better consumer engagement and conversion. Kohl's will also be able to reduce inefficient ad spend by 30-40% to deploy impactful targeted ad spend and implement a localisation strategy (similar to My Macy's) to create a more personalised shopping occasion."