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GROWING AMBITIONS

As competitors consolidate, Kohl’s gets serious about gaining market share

By Kimberly Pfaff

Kohl’s is fighting its way out of the doldrums. After several periods of sluggish sales and negative comps, the $11 billion-revenue chain has a plan for becoming bigger — and, it surely hopes, better — than ever.

Menomonee Falls, Wis.-based Kohl’s is entering Florida and the Pacific Northwest for the first time as well as targeting additional sites in the Southeast. The chain currently operates 670 stores in 40 states, but it plans to open about 500 more within five years, it says, by both building new structures and acquiring existing ones.

Executives declined to elaborate for this article, but according to company press releases, Kohl’s expects to be operating about 1,200 stores by 2010. The company aims to double its annual sales to $24 billion and its income to $1.9 billion.

At press time Kohl’s was set to open 10 stores in northern Florida’s Orlando and Jacksonville, and six more in the central part of the state. The company has given no word of expansion into south Florida, but industry sources there say it seems likely. Other Southeast destinations include Macon, Ga. and Asheville, N.C. Openings are slated for Oregon and Washington next year and the year after that.

Kohl’s plans to use retail industry consolidation to its advantage by scooping up vacant May Co. and Federated Department Stores units, and perhaps some JCPenney, Mervyns and Sears stores too, as they become available.

Good moves, analysts say. “With mall costs coming down, and with everybody begging for anchors, Kohl’s is in a very good position to support this growth, because they’re a good deal maker,” said Howard Davidowitz, chairman of Davidowitz & Associates, a New York City-based retail consulting and investment firm.

Kohl’s stormed onto the national retail scene in 2000 with a major push from its Midwestern base into the Northeast and some cities in other regions. In the process, the company virtually reinvented the mid-level department store category, with its one-story, racetrack layout, central checkouts and value-priced, branded home and apparel products. Kohl’s efficient cost structure and high sales numbers quickly became the envy of the industry.

But nothing is forever. Kohl’s, never a fashion leader, in recent years made some missteps in women’s apparel that had decidedly negative effects. After years of consistent double-digit growth, the company found itself struggling with lackluster sales and bloated inventory that required significant markdowns, all of which led to negative same-store sales.

Though Kohl’s made its name primarily as an off-mall retailer, it does have a mall presence. Currently, regional malls constitute about 8 percent of the retailer’s base, while open-air centers account for 72 percent, and freestanding locations make up the rest.

Developers have found the signature Kohl’s formula a great addition to their centers. “The key for us is that they bring that everyday low pricing concept on branded goods,” said Alan Smith, executive vice president of development at Farmington, Conn.-based Konover Development Corp. “If you don’t have a full-line department store [in your center], Kohl’s certainly fills in on apparel, tabletop, jewelry and other concepts.”

But the Kohl’s model has worked equally well in a variety of locations, says Stephanie Hoff, a senior retail analyst at Edward Jones, an investment banking firm based in St. Louis. “If they can get into a dense, attractive market, they could certainly make the economics work, even if it’s a multistory location.” Kohl’s flexibility, combined with its distinctiveness, will ease its entry into new markets, observes say.

“Kohl’s is such a unique retailer, and there’s really nothing like them in the Pacific Northwest,” said Thomas K. McGowan, COO and executive vice president of development of Kite Realty Group Trust, an Indianapolis-based REIT. Kite has teamed up with White-Leasure Development Co., Boise, Idaho, to develop the Gateway Shopping Center in the Seattle suburb of Marysville. The center, slated to open in 2007, will have one of the first Kohl’s stores in the state.

“A lot of people are excited that they will inject some new blood out there,” said McGowan. “I don’t think consumers up there really know what a great retailer they’re getting.”

Similar sentiments are being expressed in Florida. “It always energizes an area when you have an anchor of that size coming in — at 88,000 square feet, they can create shopping centers all by themselves,” said Craig Sher, CEO of The Sembler Co., St. Petersburg, Fla. Indeed, Sembler is naming a center it is building in Clermont, Fla., after the retailer: Kohl’s at Spring Valley. At press time the center was scheduled for an October opening.

For all its strengths, Kohl’s faces a more competitive environment than it did five years ago. Back then, it was expanding just as JCPenney, Mervyns and Sears were faltering. Though Sears and Mervyns remain no threat, JCPenney has been busily — and successfully — revamping its approach. Now, in direct competition with Kohl’s, Penney has started opening off-mall stores and says it expects to have about 100 such units in the next few years.

“JCPenney is a real competitor now,” affirmed Davidowitz. “They’ve narrowed their focus and sharpened their prices.”

Meanwhile, Target, which several years ago would not have been considered a competitor, has become a major fashion presence.

“Kohl’s became a victim of their own success,” said Hoff. “It happens to all good retailers at some point.”

Still, what matters is not so much whether a retailer falters, but how it recovers, some say. “Stumbling is good, if you learn from it — it makes you sharper,” said Candace Corlett, a partner at WSL Strategic Retail, a New York City-based retail consulting firm.

Kohl’s seems to believe it. In any case, it has been aggressively reshaping its image. Having targeted families forever, the chain is introducing exclusive apparel to appeal to younger, more-fashion-conscious customers, including Candies and Quiksilver’s Tony Hawk line for young men.

This fall the chain is expanding its successful Ralph Lauren Chaps apparel line from menswear into women’s and boys’ apparel, and its Nine & Company brand into home goods. In the spring Kohl’s will launch Stamp 10 for men and women, a contemporary brand developed in partnership with Liz Claiborne.

Already, the company’s numbers are on an upswing. Kohl’s reported a 4.6 percent gain in same-store sales for August, well ahead of the 3.9 percent gain anticipated by analysts. Total sales for the month rose about 14 percent year on year, to $1.01 billion. So far this fiscal year, Kohl’s same-store sales are up 4.3 percent, while total sales are up 15.3 percent to $6.64 billion.

In addition, the company’s main prototype is receiving a face-lift, with updated colors and finishes, raised ceilings and improved lighting. New stores will also feature more glass on the exterior to allow passersby to see inside.

Kohl’s has two additional prototypes: a 133,000-square-foot model geared to larger urban markets, and a 68,000-square-foot layout for rural areas.

And though the expansion plans are ambitious, analysts note that the projections actually mark a slowdown in square-footage growth. Kohl’s had previously been growing at a consistent rate of 20 percent annually, but growth for next year is pegged to be 15 percent, dropping gradually to 10 percent over subsequent years. “It’s a very reasonable growth rate, for a company that still has a relatively small base of stores,” said Hoff.

Observers say they remain hopeful that the company is on the right track. “I give them a better than even chance to pull this off, because the underlying company is so strong,” said Davidowitz. “This is the most efficient department store in the history of the U.S. — and that is significant.”

Kohl’s says it is counting on customers who will remain faithful to the store’s core premise of quality goods at reasonable prices. And in the fickle world of retail, that kind of customer devotion goes a long, long way, some say.

“The truth is, if you have shopper passion, you’ll do fine,” said Corlett. “Your customers will be patient; they’ll give you another chance. They’re rooting for you.”

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