A Little Glitz, Some Designer Labels, And Kohl's Grows Its Profits

"Back to basics" can sound like a good slogan. But too much of the basics means boredom, especially in retail.

So Kohl's KSS, the fast-growing department store chain, is looking for some pizzazz.

It's made deals with Ralph Lauren, Vera Wang and others to offer their exclusive brands. The Midwest-based chain is opening a New York office. It wants to be closer to the fashion industry.

"They're trying to reach out to a broader audience with more contemporary products," said David Cumberland, an analyst at Robert W. Baird & Co.

Kohl's is also adding some glamour to its 817 stores. New stores are better lit, with higher ceilings and a nicer decor to show off products. "It's a very impressive format," Cumberland said. More stores are being renovated, too.

Robert W. Baird seeks investment banking with Kohl's.

Learning From Mistakes

Kohl's seems to have learned from past problems. Its rapid profit growth stalled in 2003 and 2004. But earnings per share were $2.04 in 2005, $2.43 in 2006 and $3.31 in fiscal year 2007, which ended in February. Thomson Financial says analysts expect earnings of $3.85 in 2008 and $4.53 in 2009.

The chain brags that it has the highest operating margins among department stores.

In part this is because "they're cheap," said Edward Weller, an analyst at Think Equity Partners. Kohl's is very efficient, with low expenses.

Also, it's a sign of the success of Kohl's original concept. Cumberland describes it as "brands, value and convenience."

There are fewer products in Kohl's stores. So the clothes, accessories, shoes and home products are carefully chosen. It makes the store more convenient for quick trips.

"It's easier to shop," Weller said. "They remain focused on the best-sellers."

It also provides less-personal service than most department stores. Salespeople can be harder to find. Checkout counters are at the front of the store. That helps keep costs down.

Despite its success, Kohl's sees room for improvement. The chain is designing and remodeling stores for even easier shopping.

One goal: Get shoppers to visit more often and buy a wider range of products. The company laments that typical customers only buy 10% of their "Kohl's-like merchandise" at Kohl's. Most also buy products in only one product line.

"We're very focused on how we change that behavior," President Kevin Mansell said at a recent conference. To do that, the company does a lot of consumer research, he says. Kohl's declined interview requests.

The company would like to "explode customers across the store," he said.

One way to do that is to design stores better. It must "design it how she intuitively shops," Mansell said.

To help customers find their way around, new signs are being added to all stores this year.

It new store design is a success, the company says. "Clearly the customer is noticing the differences," Tom Kingsbury, a vice president, told analysts recently.

Another way to get customers to shop more is to offer better products.

"Historically Kohl's product focus was on the basics," Cumberland said. Kohl's still sells socks, underwear and other basics. But it's also pushing for more fashionable and up-to-date products.

National exclusive brands are key to this strategy.

Kohl's biggest exclusive brand is Chaps by Ralph Lauren. It plans a big marketing push later this year to launch new brands from celebrity fashion designer Vera Wang and home products from the Food Network.

Last year, Mansell said at the conference, exclusive brands were 7% of sales, up from zero three years before.

Exclusive brands help differentiate Kohl's from its competitors, Cumberland says. And because the branded products are only offered at Kohl's, there's less competition on price. That helps profit margins.

Not all the changes at Kohl's are on the surface. The chain is revamping things behind the scenes. Software and inventory systems are getting more sophisticated. Suppliers, most in Asia, are packaging products differently.

For example, Kohl's is trying to get new products to store racks more quickly. The goal is to jump on emerging fashion trends.

Also, it's improving the way it marks down prices on clearance items. A new system helps individual stores determine exactly when and how much to discount products.

Other new systems make sure each store gets products of the right mix of size and colors.

There are significant differences in how Americans are shaped from one store's market to another. One store's customers might skew large, while another store might always be running out of small-size shirts.

It's about "how to get the right sizes in the right stores," Weller says.

Diversity

That's important as Kohl's expands nationwide. In places like California and Texas, Kohl's is finding more diverse customers than it did in its Midwestern home base.

Kohl's plans to add 110 to 115 stores this year. It's also doubling its store renovations, to about 60.

To serve smaller markets, Kohl's has started building smaller stores. It expect to build 29 small stores this year.

The retail space has seen a lot of mergers and acquisitions lately. Don't expect Kohl's to buy its competitors, analysts say. It does keep cash on hand to buy up other chains' real estate.

One risk for Kohl's is the ups and downs of consumer spending habits.

Another risk is its success, Weller says.

A decade ago, other stores ignored Kohl's. Now, many have copied Kohl's better strategies.

"It gets more difficult for them to be unique," Weller said.

Copyright 2007 Investor's Business Daily, Inc.