Kohl’s Needs to Find an Identity Beyond Sephora — and Soon

Aug 01, 2023

To understand the challenges facing struggling department store company Kohl’s Corp. look no further than its latest quarterly earnings report. Investors cheered as a key measure of profits exceeded forecasts, suggesting the company’s two-year-old strategy of giving luxury beauty retailer Sephora space in its stores as a way of attracting shoppers is paying dividends. But comparable sales fell 5%, marking the sixth consecutive quarterly decline in this a key measure of growth for retailers and a sign that Sephora is more band-aid than long-term solution to what ails Kohl’s.

Kohl’s nabbing a “long-term strategic partnership” with Sephora in 2020 was much like the high school nerd winning a date with the popular girl in a high school rom-com. It came out of nowhere, made little sense and was seen as benefitting Kohl’s more than the unit of chic LVMH Moët Hennessy Louis Vuitton. After Sephora opened its first shop inside a Kohl’s in 2021, the drab department store saw its accessories business grow by mid-single digits in 2022 and its beauty sales surge 90% in the last quarter, new Kohl’s Chief Executive Office Thomas Kingsbury told investors on an earnings call Wednesday. Sephora itself saw a 20% increase in sales last quarter and appears well on its way to becoming a $2 billion beauty business at Kohl’s by 2025, just as Kingsbury estimated in June.

And yet, it’s hard not to conclude that Kohl’s has so far fumbled the opportunity. With Sephora attracting a younger customer, it would be natural to see those same Charlotte Tillbury-wearing, Tom Ford fragrance splashing fans browsing the juniors section for a crop top or oversized sweatshirt. But they haven’t. The Kohl’s juniors department has been among the weakest categories at the company. Kingsbury told investors that young women’s “can be an opportunity” by adding “more prints more more color in the assortments.” That would be a good starting point, as the store’s young women’s clothing offerings are basic and sometimes drab. For the price, there are more stylish options with fast fashion companies such as Industria de Diseño Textil, S.A.’s Zara or even mass merchant store Target Corp.

Kohl’s has made some changes to its stores to benefit from the increase in traffic driven by Sephora. It placed more products that shoppers are likely to buy on impulse near checkout, moved giftable items toward the front of stores along with home goods. It’s expanding its outdoor merchandise, pet offerings and tabletop decor categories. To make room for more selling space, it’s consolidating to one checkout area. But its dependency on Sephora shows no signs of easing. Kohl’s said in May it plans to end the year with a Sephora presence in more than 900 stores. (Kohl’s had 1,171 stores at the end of last year.)

Although a nice juice to revenue now, such rapid growth only brings Kohl’s closer to the point to when sales growth plateaus — and it always does for retailers in such situations. Then there’s the cost of opening these Sephora shops inside Kohl’s. Much of the $600 million to $650 million set aside for capital expenditures this year is pegged for Sephora buildouts when the company’s own stores could do with a facelift and merchandise overhaul. Some shoppers have described the experience of walking into a Kohl’s store as so quiet that they could hear their Crocs squeaking throughout the store. Not quite the feeling that inspires a shopping spree.

To be sure, Kohl’s is showing signs that it’s on better footing. Although the shares are down 68% from the recent peak in September 2018, they are up 47% from the low this year at the start of June. Last year, it fought off an activist investor take over when it signed a cooperation agreement with Macellum Advisors in which the firm agreed to multi-year standstill, voting and other provisions. Inventory is no longer bloated, falling 14% in the second quarter from a year earlier following a 6% decline in the first quarter. Also, it reduced its revolving debt by $205 million and ended the second quarter with $176 million in free cash flow.

The 2021 deal with Sephora has given Kohl’s some financial breathing room. But can Kingsbury, who took over the reins in February after joining from Burlington Stores Inc., be able to carve an identity for Kohl’s beyond Sephora? The clock is ticking.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Leticia Miranda is a Bloomberg Opinion columnist covering consumer goods and the retail industry. She was previously a business reporter at NBC News and a retail reporter at BuzzFeed News.

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