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Monday, March 18, 2024
March 18, 2024

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Kohl’s backs big-name brands to boost shares faster than Macy’s

The Columbian
Published:

NEW YORK — In the battle of department stores, Kohl’s has gained an edge on its more upscale rival Macy’s.

The stock has outpaced Macy’s this year, bolstered by stronger holiday season sales. And investors are betting that the chain will maintain that advantage, with the shares trading at their highest premium to Macy’s in more than four years.

Kohl’s, the third-largest U.S. department-store chain, has succeeded by promoting outside brands such as Levi’s and Nike — departing from a longheld retail-industry strategy of focusing more on in-house and exclusive products unavailable elsewhere. That emphasis on familiar, national names has been reeling in shoppers, and a new rewards program has kept them coming back.

“Kohl’s had a big hiccup, and they had to figure their way out of it,” Poonam Goyal, a retail analyst at Bloomberg Intelligence, said in an interview. The retailer’s increased focus on national brands has boosted traffic, and the loyalty program is “working really well for them.”

Macy’s, by contrast, is struggling to find new avenues of growth and meet investors’ expectations that it raised over the past five years, when its performance was the envy of its department-store rivals. The company can no longer rely on the tried-and-true approach of using exclusive products and private labels that helped fend off online merchants and attract shoppers during the choppy economic recovery.

While Kohl’s still gets about half of its revenue from in-house brands like Croft & Barrow and Sonoma — along with exclusive versions of national brands such as Food Network and Simply Vera Vera Wang — the company last year instituted a plan to re-emphasize national brands and add goods by Izod, Fitbit and Nespresso.

The shift is paying off. Comparable-store sales of national labels outpaced only-at-Kohl’s merchandise in the year ended Jan. 31, helped by a 24 percent gain in sales of Nike Inc. products in the fourth quarter. Total holiday-quarter same-store sales rose 3.7 percent, the biggest gain since 2010 and almost twice the 2 percent increase at Macy’s in the same period.

“That focus continues to pay dividends,” Kevin Mansell, chief executive officer of Menomonee Falls, Wis.-based Kohl’s, said on a Feb. 26 conference call.

Kohl’s stock has gained 23 percent this year. Macy’s is down 3.2 percent so far, giving Kohl’s a premium of 23.7 percent.

Macy’s disappointing holiday season is fueling speculation that growth will be difficult to reignite. Same-store sales gains have slowed for three straight years after peaking at 5.3 percent in the year ended January 2012. The Cincinnati-based company said same-store sales will increase 2 percent in the current fiscal year.

“It’s not like they’re bad right now, but they’re not increasing at the same pace as they used to be,” Goyal said.

Jim Sluzewski, a Macy’s spokesman, noted in an e-mail that the retailer has boosted same-store sales for five years and earnings per share for six. Even with the strong fourth quarter, Kohl’s same-store sales still were down 0.3 percent last year and haven’t gained on an annual basis since the year ended in February 2013. Kohl’s increase in earnings per share last year was its first in three years.

Over the longer term, Macy’s stock has outperformed Kohl’s as well. Macy’s total shareholder return in its past six fiscal years was almost 700 percent, compared with about 80 percent for Kohl’s.

Between well-established brands like Inc., Martha Stewart and Style & Co. as well as exclusive items from national brands, about 40 percent of all merchandise sold at Macy’s is available only at the retailer or in very limited distribution.

Macy’s will focus on accelerating sales growth while maintaining a high level of profitability, Sluzewski said. The retailer is considering options such as opening outlet stores and expanding its international presence, CEO Terry Lundgren said in a Feb. 4 interview with Bloomberg Television. Last month, the company agreed to purchase beauty and spa chain Bluemercury to appeal to new customers and expand its selection.

While Macy’s has been cutting operating expenses, it plans to boost capital spending 12 percent to $1.2 billion this year, with much of the money going toward improving online operations.

“It’s a meaningful increase, and it doesn’t seem like this year is a hump year and then it would decline,” Laurent Vasilescu, an analyst at Macquarie Capital in New York, said in an interview. “They need to continue to invest to drive omnichannel growth.”

Vasilescu has the equivalent of a buy rating on the shares.

Kohl’s also has been working to improve its online operations and in October introduced its Yes2You Rewards loyalty program, which now has more than 25 million members, Jen Johnson, a spokeswoman, said in an e-mail. Kohl’s has added more than 30 new beauty brands in the past two years as well, she said, buoying results in that category.

The Yes2You program is attracting new customers and driving repeat visits among Kohl’s core of middle- and lower-income shoppers because the rewards don’t require use of a store credit card, Goyal said.

Those consumers, benefiting from gas prices that have averaged less than $3 per gallon since October, may be willing spend more on discretionary items, Vasilescu said.

“People got bullish on the low-end customer because of the gas prices,” he said.

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