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The week began with a “retail health report” by Morgan Stanley, indicating an upgrade on Target, saying it sees improving margins and a more, “balanced,” risk/reward for the retail giant. They called Target a “retail survivor,” likening it to Walmart, Amazon and Costco. Not sure we were ever questioning Amazon's viability. Target’s 2019's first quarterly report, which broke mid-week, more than ratified Morgan's upgrade and confidence for their brilliant performance, on and offline.
Penney's and Billions Lost
In stark contrast, things were not as cheery for Kohl's or J.C. Penney. Penney's posted losses of $154 million in the first quarter, with net sales decreasing 5.6% and same-store sales down 5.5%. Jill Soltau, who took over Penney’s reins a year ago, has her hands full in both stopping the bleed as well as attempting to put the retailer on a path toward sustainability. To compound matters, one of her first major tactics was pulling the plug on appliances; a Marvin Ellison addition that was providing them with both a top-line and bottom-line boost. The loss of the major appliances and in-store furniture had a combined negative impact of 20 basis points on Q-1 numbers. Ouch!
Ms. Soltau said all the right things in a prepared statement, talking about inventory rationalization efforts, and improving the customer experience. All tactical stuff. However, I'm not alone in questioning exactly what J.C. Penney is trying to become, and I'm afraid their life-line is dwindling. They’ve lost $3.5 billion since 2010 and were unable to capitalize on either a strong economy or the implosion of Sears. The combined headwinds of too many moribund mall locations, outdated stores, an aging core customer, and too much debt, are all conspiring against them. One executive was recently quoted saying the company was “focused on re-establishing the fundamentals of retail." Meanwhile, the likes of Target, Walmart and TJX are so far beyond “fundamentals” it would take a magnifying glass to see Penney's in their collective rear-view-mirrors.
Kohl's and Its Lifeline
Kohl’s, often referenced in the same breath as Penney’s, had less than stellar first quarter, themselves. After six straight quarters of year-over-year sales growth, Kohl’s reported a 3.4% year-over-year sales drop, and trimmed its guidance for the year. CEO Michelle Gass attempted to reassure analysts that it was a “speed bump”, rather than a massive sink hole, and that their clothing business which accounts for about half its annual sales has remained strong. I believe, in contrast with what’s going on at JCP, the strategic initiatives that Ms. Gass can point to suggest improved prospects going forward.
Their recent announcement of a nationwide program that accepts Amazon returns, now looks even smarter than it did when recently announced. This has the capacity to lift footfall into their stores, more significantly than perpetual price-paring. Michelle Gass also knows that millennial moms are key to growing market-share, and while Amazon has a slightly greater share of under-35 shoppers than Kohl’s, that could change with the new initiatives. For Amazon it’s not unimaginable for them to add private-label groceries and apparel to the electronics they already sell at Kohl’s, as has been reported recently.
Besides the audacious Amazon initiative, Kohl’s has many other moving parts to its survival strategy. It’s shrinking its store footprint by bringing in complementary co-tenants like Aldi and Planet Fitness. Kohl’s also just signed a long-term deal with Fanatics to sell licensed sports items online this fall. I’d like to see them leverage this new relationship by introducing seasonal in-store pop-ups of Fanatics offerings, which would pair well with the online product push. Their major commitment to Under Armour, as a result of Sports Authority’s demise has proven to be very successful, along with continued strong relationships with Adidas and Nike. And in a move looking very much like one-upping Target’s Hearth & Hand Magnolia brand, the property of TV’s Chip and Joanna Gaines; Kohl’s has announced an exclusive home-goods line from Property Brothers’ stars Drew and Jonathan Scott. They can only hope it will create a similar level of Buzz and sales, as Magnolia has done for Target.
Most importantly, the issues facing Kohl's and Penney's are no longer comparable; one has a sprained ankle, and the other is on life-support. Kohl’s has been able to build a strong digital foundation for unified commerce, which is essential for sustainability as the ever fluid “path to purchase” continues to churn and evolve. Additionally, they have a younger, more loyal customer, and are not hampered by “moribund-mall syndrome” as is the case with J.C. Penney. All and all, while it may not be all smooth sailing for Kohl’s, I believe their long-term survival prospects look far better than that of JCP. I also believe that the cozying-up between Amazon and Kohl’s may very likely turn into a strategic “coming together.” This would be yet another manifestation of Jeff Bezos' continuing fascination with the benefits of offline retail.
