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Morningstar | No-Moat Kohl's Is Stuck in the Middle With Competition on All Sides

We believe no-moat Kohl’s will struggle to generate growth as e-commerce, discount, and specialty stores siphon apparel sales from department stores. Kohl’s, which suffered sales declines in 2013, 2014, and 2016, has responded to threats with increased e-commerce and promotion. These efforts have degraded operating margins by more than 400 basis points since 2011, to just 7%. Kohl’s has some strengths, including its reputation for reasonable prices and more than 25 million proprietary credit cardholders. Also, Kohl’s, unlike no-moat Macy’s and J.C. Penney, does not have large numbers of stores in lower-tier malls (93% of its stores are freestanding or in strip centers). We think, however, that Kohl’s store visitation is declining. Its annual revenue has increased by only $2 billion since 2010 despite operating 70 more stores and increasing e-commerce by more than $3 billion (from about $700 million in 2010 to about $4 billion). We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.We think Kohl’s Greatness Agenda has had mixed results. Largely created by Michelle Gass, who was named CEO in 2018, the Greatness Agenda is an effort to attract new customers and improve operations. While the plan has resulted in successes, such as improved digital capabilities and a loyalty program of more than 30 million members, we believe Kohl’s continues to lose share. Moreover, there has been no improvement in margins as customers have become accustomed to discounts and Kohl’s Cash coupons. Kohl’s is downsizing its stores to improve efficiency, but we do not expect this will drive sales or improve margins. We forecast minimal sales growth and no improvement in operating margins from the current 7% over the next decade.We think it is too early to know if Kohl’s new partnerships will work. Kohl’s has recently introduced wide-moat Amazon-branded products in some stores and announced a plan to use unneeded store space for Aldi grocery stores and Planet Fitness gyms. While we view these efforts as positive, we do not think they are enough for Kohl’s to reverse its years-long trend of losing more customers than it gains.