Kohl’s Q2 2024 Earnings Highlights: Declining Sales, Beauty Remains a Hot Spot

Top Takeaways

1. Q2 sales declined 4.2% year-over-year, but earnings increased 13% due to gross margin expansion and expense management.
2. Sephora partnership continues to drive strong growth, with total beauty sales up 45% and comparable beauty sales up low-teens.
3. New initiatives like Babies “R” Us partnership and expansion of impulse queuing lines expected to drive incremental sales in second half.
4. Core apparel and footwear business remains challenged, with management taking actions to improve product assortment and marketing.
5. Full year guidance lowered on sales but raised on earnings per share, reflecting ongoing macro challenges and operational discipline.

Kohl’s Q2 Results Show Earnings Growth Despite Sales Decline

Kohl’s reported mixed Q2 2024 results, with sales declining but earnings growing due to margin expansion and cost control. Net sales decreased 4.2% year-over-year to $3.7 billion, while earnings per share increased 13% to $0.59.

“Although we are disappointed with our second quarter sales, we continue to execute well operationally, enabling us to deliver a 13% increase in earnings, driven by gross margin expansion and strong inventory and expense management.” – Tom Kingsbury, CEO

Main Themes

• Guidance: Full year net sales outlook lowered to -4% to -6% vs. prior -2% to -4%; EPS guidance raised to $1.75-$2.25 from $1.25-$1.85
• Economy: Middle-income consumers remain pressured by inflation and high interest rates
• New Initiatives: Babies “R” Us partnership launched, expansion of impulse queuing lines
• Product Performance: Strong growth in Sephora, home decor, gifting; weakness in core apparel/footwear
• Operational Discipline: Inventory down 9% YoY, SG&A expenses down 4.2%

Key Insights

• Sephora at Kohl’s continues to be a key growth driver, with total beauty sales up 45% YoY and comparable beauty sales growing low-teens
• 40% of Sephora at Kohl’s customers are new to Kohl’s, representing significant customer acquisition
• Approximately 35% of Sephora baskets include other Kohl’s products, primarily women’s, juniors, impulse and accessories
• New initiatives like Babies “R” Us and expanded impulse queuing lines expected to drive incremental sales in second half

Market Opportunity

Kohl’s is working to broaden its reach with young families through the Babies “R” Us partnership. The company is opening 200 baby shops featuring thousands of products across baby gear, furniture and accessories. This expands Kohl’s addressable market in the baby category and complements its existing children’s business.

Customer Behaviors

Kohl’s noted that middle-income consumers are exhibiting more discretion in spending, leading to smaller average basket sizes. However, the company saw an increase in overall transactions and improved conversion rates in Q2, indicating its product newness is resonating with customers.

“We attracted more new customers to Kohl’s and experienced an increase in overall transactions, both of which are positive developments. At the same time however, our customers exhibited more discretion in their spending, which pressured overall sales.” – Tom Kingsbury, CEO

Capital Expenditures

• Year-to-date capital expenditures: $239 million, down significantly from $338 million last year
• Full year 2024 CapEx planned at approximately $500 million
• Key investments: 350 impulse queuing lines, 140 Sephora small shop openings, 200 Babies “R” Us shops, 6 new store openings

Economy Insights

Management highlighted ongoing macroeconomic challenges impacting consumer spending:

“Inflation and high interest rates continue to pressure spending, especially among our middle-income consumers. We are seeing the clearest evidence of this in the performance of our core apparel and footwear offering, which experienced broad softness in the quarter.” – Tom Kingsbury, CEO

Industry Insights

Kohl’s results and commentary suggest ongoing challenges for mid-tier department stores and apparel retailers targeting middle-income consumers. The success of Sephora shops indicates beauty remains a bright spot in retail. The expansion into baby products through Babies “R” Us could present opportunities for other retailers to diversify their offerings and attract young families.

Key Metrics

Financial Metrics

• Net sales: $3.7 billion, down 4.2% YoY
• Comparable sales: -5.1%
• Gross margin: 39.6%, up 59 basis points YoY
• SG&A expenses: $1.2 billion, down 4.2% YoY
• Operating margin: 3.4% to 3.8% (full year guidance)
• EPS: $0.59, up 13% YoY

KPIs

• Inventory: Down 9% YoY
• Digital sales: Outperformed store sales, but both declined YoY
• New customer acquisition: 40% of Sephora customers new to Kohl’s
• Sephora total beauty sales: Up 45% YoY
• Sephora comparable sales: Up low-teens %

Competitive Differentiators

1. Sephora partnership driving strong beauty sales growth and new customer acquisition
2. Expanded presence in baby category through Babies “R” Us partnership
3. Growing home decor, gifting, and impulse businesses
4. Operational discipline in inventory and expense management
5. Omnichannel capabilities with digital sales outperforming store sales

Key Risks

1. Ongoing weakness in core apparel and footwear business
2. Pressure on middle-income consumers from inflation and high interest rates
3. Highly promotional retail environment, particularly expected for holiday season
4. Potential impact of CFPB late fee rule on credit business revenue (currently excluded from guidance)
5. Execution risk in turning around underperforming categories like jewelry and legacy home

Analyst Q&A Focus

Analysts focused on:

1. Performance of Sephora shops and cross-shopping behavior
2. Early reads on Babies “R” Us partnership
3. Outlook for promotional environment in second half
4. Opportunities to improve core apparel and footwear business
5. Drivers of increased margin leverage in guidance despite lower sales

Kohl’s Summary:

Kohl’s Q2 results reflect the ongoing challenges facing mid-tier retailers in the current economic environment. While the company’s partnership with Sephora continues to drive growth and new customer acquisition, weakness in core apparel and footwear is offsetting these gains. Management is focused on improving product assortment, amplifying value messaging, and capitalizing on new initiatives like Babies “R” Us to drive sales in the back half of the year. The company’s operational discipline and focus on inventory management are supporting profitability despite top-line pressures. Investors should watch for signs of improvement in core categories and the performance of new initiatives as indicators of Kohl’s ability to return to sustainable growth.