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Morningstar | Promotional Concerns Weigh on Kohl's Holiday Outlook, Lack of Pricing Power Supports No-Moat Rating

Like many of its competitors, Kohl's has struggled with increased competition from off-price and online companies and as it moved away from its national branded offering (with less than 50% of products falling in this category in 2013, down from 58% in 2008). As a result, the company reported flat average annual comp sales over the past three years, below the 1% growth in U.S. clothing and accessories retail sales.That said, we believe Kohl's has passed its inflection point, marking its fifth consecutive quarter of positive comp performance as inventory optimization efforts have begun to pay off. Efforts in recent years to increase the national brand portfolio have helped, with penetration increasing to 62% of total sales with growth at 11% at the end of 2017 (ahead of consolidated performance). Online demand continues to rise, with penetration reaching 25% of sales in 2017. Finally, the company has embarked on innovative ways to utilize its footprint, including test programs with Amazon (return service and hosting a new Amazon "smart home" experience) in order to draw foot traffic into stores and to expand reach to new customers, and standard to small initiatives to improve the productivity of its square footage.Even with an improved top-line trajectory underway, we are still concerned about the competitive environment. We think the growth of off-price retailers has eroded Kohl’s brand positioning as the lowest-cost provider. Additionally, the growth in e-commerce makes us concerned that Kohl’s is overstored with 1,158 stores at the end of 2017. In the long run, we see mix shifts to e-commerce and national branded products, deleveraging, and investments in technology further pressuring adjusted operating margin, resulting in a decline from 7.4% in 2017 to close to 6.2% over the next five years.