With a middle-income customer base and broad exposure to apparel, Kohl’s says it has been “disproportionately impacted” by inflation and dampened consumer spending and will need to be more aggressive in its promotions to clear out bulging shelves and warehouses.
The problem is, virtually all of its peers and rivals are in the exact same spot, a reality that has set the stage for a second-half clearance sale deathmatch that will pit retailer against retailer in a race to the bottom to reduce prices.
“Our second quarter results reflect a middle-income customer that has become more cost conscious and is feeling greater pressure on their budget,” Kohl’s CEO Michelle Gass told investors Thursday (Aug. 18) on the company’s Q2 earnings call, point to fewer shopping trips, reduced spending per transaction and shift toward value-oriented private brands.
“It’s clear that there has been a significant shift with the consumer over the past few months and we expect this to persist for the foreseeable future,” Gass said, cognizant of the fact that the difficult economic environment and industry wide response was going to make the path forward even more challenging, and likely less rewarding too.
“We acknowledge that many others are taking similar actions which will likely make for a more promotional environment in the near term,” she said, noting that Kohl’s reduced guidance reflects lower sales, slimmer margins and a more competitive landscape.
So Now What?
Even before the latest quarter of inflation-fueled headwinds, Kohl’s has spent the better part of a year marshaling its transformation plan and independence in the face of repeated forrays to break up the chain of 1,100 stores or take the company private.
While that buyout speculation kept a floor under the retailer’s stock price, which now stands at about $4.2 billion, it also served as a distraction to the underlying work of making the 34-year-old Wisconsin-based brand relevant with consumers.
While the Q2 results saw revenue decline 8.5% and in-store sales drop 10%, Gass said the company’s digital business, by comparison, was flat versus a year ago due to higher conversion rates and a lower free shipping threshold.
In addition, she said increased use of the Kohl’s app now accounted for 40% of digital sales, which themselves accounted for 28% of total sales.
Gass attributed the drop in store sales to less traffic and smaller basket size as a result of the overriding macro pressures facing middle-income consumers.
To reverse that, Kohl’s said its system-wide store refresh and partnership with cosmetics giant Sephora would continue beyond the 600 locations that have already been revamped, with the two companies currently designing a smaller format Sephora for the final 300 stores.
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