Kohl's Gains From e-Commerce, Declining Comps a Concern

Kohl's CorporationKSS has been grappling with increasing competition and a general slowdown in consumer spending since the past quarters. Amid such a scenario, the company's efforts to boost sales through e-Commerce development and its focus on outside brands proved to be a boon to investors and were well reflected in the impressive second quarter of fiscal 2017 results.

We note that shares of the company have been gaining momentum since the past three months. Kohl's shares have increased 12.2% compared with the industry 's gain of 3.5%.

Let's now delve deeper into the factors that have been impacting the company's performance.

Initiatives to Improve Store Sales & Growing e-Commerce

In an effort to boost store sales Kohl's has been focusing on offering more outside famous brands, which are popular, and cutting down on the number of in-house clothing brands. The addition of Under Armour workout tights, sneakers and other gears in March 2017 was a great success and well received by customers. The company is also focusing on sales growth with both Nike and Adidas. In respect to its own private-label brands, it plans to continue with its best sellers such as Sonoma, Croft & Barrow and Apt. 9.

Additionally, the company also remained on track with its store expansion. It plans to launch four small format stores in October 2017, adding to its existing fleet of eight small format stores that were opened in 2016.

Kohl's e-Commerce platform witnessed sturdy growth over the last few years. Its e-Commerce sales have almost doubled since 2011 at a compound annual growth rate of almost 40% in the last five years. In the second quarter of fiscal 2017, digital conversion improved at a double-digit rate on the back of better customer experiences on smartphone and smartphone applications. In fact, technology improvements in both the application as well as device and the omnichannel efforts are expected to have a significant positive impact on the customer experience. In order to better support online growth, the company has also been opening fulfillment centers.

Strong Inventory Management & Innovation

The company's inventory reduction initiatives have been positively impacting merchandise margins and thereby its gross profit levels. During the second quarter of fiscal 2017, inventory per store decreased 2%. Kohl's continues to expect inventory to be down low to mid-single digits for fiscal 2017.

Kohl's store development plans also incorporate optimizing and rightsizing store space to better serve customers and operate efficiently. The company has plans to lessen operations in half of its stores by the end of 2017. This would require the stores to balance its inventory and adjust fixtures.

Kohl's regularly introduces new brands in order to keep the inventory assortment fresh and drive customer traffic to its stores and website. Popular launches like Fit Bed under its active and wellness business, the Jumping Beans collection featuring Disney characters, IZOD branded menswear and the Juicy Couture brand for women and girls have been well received by consumers. Such efforts have also aided in strengthening the company's brand portfolio.

Headwinds Lurking in the Industry

Although Kohl's is focusing on improving its e-Commerce businesses to tap in the growing popularity of online shopping, its online business share is much lower than AMZN , which dominates the e-Commerce market space. The growing online business has also dented company's store traffic as well as comps.

In fact, the company's comps have been declining since past few quarters. Lower consumer spending on apparel and accessories and competition from discount retailers has also impacted comps negatively. This signals that its turnaround initiative named "Greatness Agenda" is failing to deliver results.

Greatness Agenda, which began in the first quarter of 2014, was designed to increase transactions per store and sales. Though the plan has helped the company to deliver positive comps in all the four quarters of fiscal 2015, the quarterly growth rates moderated gradually, thus posing a concern. Moreover, comps have declined consecutively in the last six quarters, including the second-quarter fiscal 2017 results.

Bottom Line

Despite such industry headwinds, we expect that Kohl's store expansion strategies, in-store inventory management initiatives and e-Commerce development efforts would continue yielding results.

Kohl's currently carries a Zacks Rank #3 (Hold).

Looking for More? Check These Trending Retail Stocks

Investors may also consider better-ranked stocks such as Burlington Stores, Inc. BURL and The Children's Place, Inc. PLCE , both carrying a Zacks Rank #2 (Buy). You can see the complete list of today's Zacks Rank #1 (Strong Buy) stocks here .

Burlington Stores delivered an average positive earnings surprise of 17.7% in the trailing four quarters. It has a long-term earnings growth rate of 16.2%.

The Children's Place delivered an average positive earnings surprise of 16.3% in the trailing four quarters. It has a long-term earnings growth rate of 9%.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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