Kohl’s cautiously ups its outlook with Delta variant, labor and supply chain challenges

Kohl’s headquarters
Kohl’s headquarters in Menomonee Falls.

Menomonee Falls-based Kohl’s Corp. is increasing its guidance for the rest of 2021, even amidst continuing rising supply chain challenges and the continued spread of the COVID-19 Delta variant.

The increase comes after the retailer reported net sales of $7.88 billion for the first half of its fiscal year, up from $5.37 billion in the first half of 2020. Net sales were down from $7.99 billion in the same period of 2019.

But Kohl’s is seeing improved profitability. For example, its second quarter gross margin was 42.5%, dramatically up from 33.1% in 2020 and also up from 38.8% in 2019. Selling, general and administrative expenses were down from $1.27 billion in 2019’s second quarter to $1.24 billion in the just completed quarter.

Company executives attributed the improvements to more tightly managed inventories, scaling of pricing and promotion optimization, a favorable industry backdrop that allowed for more full price selling, lower technology spend and improved store labor productivity.

Michelle Gass, chief executive officer of Kohl’s, said sales and margins in the quarter materially exceeded expectations.

“As pleased as we are with our ongoing strategic progress, much of our opportunity is still ahead of us. We are on the eve of launching several transformational partnerships that will drive sustainable growth for years to come,” Gass said.

The retailer now expects its net sales to increase in the low-20s percentage range, up from a previous expectation of mid-to-high teens. The company also projected a higher operating margin, increasing the midpoint of its guidance from 5.9% to 7.5%. Adjusted earnings per share are also projected to be higher with the midpoint of that guidance increased from $4 per share to $5.95 per share.

Kohl’s also increased its expected capital expenditures by $50 million to $600 million to $650 million and increased its planned share repurchase by $300 million to $400 million.

The increase in capital spending comes as Kohl’s begins the launch of its new partnership with Sephora that puts the beauty retailer’s stores inside of Kohl’s stores. Gass said the investment goes beyond just adding the Sephora store into the footprint.

“We’re rethinking the entire store,” Gass said, adding that Kohl’s would be making investments to refresh stores and repositioning where categories are located with Active moving to the front of the store. Kohl’s will also be investing in more mannequins and storytelling within stores, Gass said.

Like many businesses, Kohl’s is also facing supply chain challenges brought on by temporary factory shutdowns and port congestion. Gass said those issues primarily impact the company’s private label brands, an issue that hits harder in its women’s category. Efforts to address those issues include shifting production where possible, prioritizing important items for seasonal and event promotions, picking up from ports more often and making more deliveries to stores.

While Kohl’s did increase its guidance, the updated figures suggest the company’s sales growth will slow down in the second half of the year. Net sales growth in the low-20s would suggest growth of 5% to 10% in the second half, a stark difference from the 47% growth in the first half.

In the first half of this year, net sales were down 1.3% from 2019. The guidance would suggest a 2.6% to 6% decrease from 2019 in the second half of the year.

“When we approached our guidance, we definitely wanted to be thoughtful, but also to give you prudent guidance given the heightened uncertainty,” said Jill Timm, chief financial officer of Kohl’s. “You know, you have Delta variant happening, you have the supply chain disruption that we’ve mentioned, you have a tight labor market where we’re going to have to pay more for wages as we bring people in.”

Arthur covers banking and finance and the economy at BizTimes while also leading special projects as an associate editor. He also spent five years covering manufacturing at BizTimes. He previously was managing editor at The Waukesha Freeman. He is a graduate of Carroll University and did graduate coursework at Marquette. A native of southeastern Wisconsin, he is also a nationally certified gymnastics judge and enjoys golf on the weekends.

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