Kohl's paring costs as sales decline

With shopper traffic down and sales continuing to slide, Kohl’s Corp. is reducing inventory levels in hundreds of its stores, and in some cases is looking to bring in other retailers to occupy space being freed.

The initiative reduces operating costs — important at a time when top-line growth proves elusive — but maintains the large brick-and-mortar presence Kohl’s sees as an asset supporting its online sales.

By this time next year, more than 300 full-size Kohl’s stores — about a third of the total — will be operating with reduced inventories and fewer fixtures.

The company has been testing the initiative but hasn’t spoken publicly about it much until now.

Like other department-store chains, Kohl’s has struggled amid growing competition from online and discount retailers. On Thursday, the Menomonee Falls-based company reported declining sales and earnings in the important fourth quarter and predicted tepid results for 2017.

Kohl’s has long been vigilant about managing costs, but with shrinking revenue, paring expenses has become even more important.

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At the same time, while retailers such as Macy’s have announced major store closings, Kohl’s is taking a less-drastic tack. The firm shuttered 19 locations in 2016, but that was a small slice of its roughly 1,150 stores.

Speaking with industry analysts on a post-earnings conference call Thursday, CEO Kevin Mansell said he doesn’t necessarily envision a future decline in the number of stores, but that more of them will be smaller.

“We do think that having a big footprint is really important,” he said.

Kohl’s believes a physical presence helps online sales, and a growing share of those sales — a third of them in the fourth quarter — get fulfilled through a brick-and-mortar store.

A standard Kohl’s store covers about 80,000 square feet. But Kohl’s has been transitioning to smaller spaces, and now has about 185 stores — 16% of the total — that are less than that, typically 55,000 or 35,000 square feet.

In addition, the company has reduced inventory and fixtures in another 115 standard-sized locations, in effect running them as smaller stores. Among them is the Sussex store, at Highway 164 and Silver Spring Road.

“We’re going to expand that effort dramatically this year,” Mansell said in an interview. Another 200 stores are to get the treatment this year.

He said the downsizing “has had essentially no impact on sales’’ but has reduced expenses. And it has improved the customer experience by giving shoppers more space and reducing clutter, Mansell said.

On average, the affected stores have had their inventory and fixtures reduced by a “mid-teens percentage,” Jen Johnson, Kohl’s vice president for corporate communications, said in an email.

In at least two cases, Kohl’s has carved out physical space that was subsequently leased to other merchants. The Kohl's store in Framingham, Mass., cut 20,000 square feet that the landlord has leased to a Pier One. Another Kohl's store, in the Boston suburb of Medford, cut 30,000 square feet that a Wegmans supermarket will occupy later this year.

Kohl’s now is looking for further opportunities to bring in other retailers to space vacated by downsized stores, chief financial officer Wes McDonald told analysts.

That promises to attract more shoppers to developments that include Kohl’s stores — an important potential benefit, as traffic across the chain dropped 5% to 6% last year.

The reduced traffic figured in the results Kohl’s announced Thursday — sales off 2.8% in the three months ended Jan. 28, compared with a year ago, and profit off by 15%.

Sales in stores open at least a year fell 2.2%. It was the fourth straight quarter of year-over-year declines in the key measure of retail performance.

The company had signaled the downbeat quarterly results in an announcement last month that sent its stock tumbling 19%.

The hard times besetting Kohl’s and other department-store chains aren’t disappearing yet. Kohl’s said it expects 2017 sales to decline as much as 1.3% from last year’s level. The most optimistic projection is a gain of 0.7%. Total sales last year were off 2.7% from 2015.

Comparable-store sales in 2017 are expected to be flat to down 2%, the company said.

Kohl’s said it expects $3.50 to $3.80 in earnings per share this year. The retailer earned $3.76 a share in 2016.

One bright note: The Kohl’s board this week raised the quarterly dividend on its stock by a nickel, to 55 cents a share.

Rick Romell , Milwaukee Journal SentinelPublished 7:54 a.m. CT Feb. 23, 2017