Why Kohl’s Is Putting Its Stores on a Diet

February 23, 2017, 7:13 PM UTC
Kohl's Corp. signage is seen on the facade of a store in Concord, California, U.S., on Tuesday, Feb. 24, 2015. Kohl's Corp. is expected to release earnings figures on Feb. 26. Photographer: David Paul Morris/Bloomberg
Kohl's Corp. signage is seen on the facade of a store in Concord, California, U.S., on Tuesday, Feb. 24, 2015. Kohl's Corp. is expected to release earnings figures on Feb. 26. Photographer: David Paul Morris/Bloomberg
Photograph by David Paul Morris — Bloomberg via Getty Images

Kohl’s (KSS) is betting that less will be more when it comes to the size of its stores.

The department store chain’s top executives, coming off another year of disappointing sales, told investors on Thursday that Kohl’s will shrink hundreds of stores as it looks to protect profits against chronic sales declines. More notably, that downsizing won’t mean store closings, or at least not in great numbers. Rather, the chain is looking to get more bang out of its current fleet.

The retailer, beloved by suburban parents for years for its low-priced, high quality merchandise and easy-to-navigate stores, said comparable sales fell 2.2% during the holiday quarter, capping off another tough year for Kohl’s. The company has not seen comparable sales rise more than 1% since 2010. Like other department stores, Kohl’s more recently has faced the rise of nimbler rivals from T.J. Maxx to Ulta Beauty (ULTA) and the loss of interest among many shoppers in its stores and way of selling wares.

In 2016, Kohl’s closed 19 stores but found shuttering those locations was not much of a solution. Indeed, longtime CEO Kevin Mansell told Wall Street analysts on a conference call that only about one-third of sales at the closed stores shifted to nearby Kohl’s locations, and hung onto to only 90% of online sales in those areas, less than he hoped for on both counts. Those results echo comments from his counterparts at Macy’s (M) and J.C. Penney (JCP) on the value of physical stores, suggesting that bulk store closings are not a panacea to their problems. (Still, Macy’s is in the process of shedding 100 stores.)

Instead, leaner stores are the way to go, Mansell explained, all the more given that last year, the shopper exodus from Kohl’s stores continued, with traffic falling some 6%.

The average Kohl’s is 80,000 square feet in size. Of the chains’s roughly 1,150 stores, some 300 are already small, between 35,000 and 55,000 square feet, but able to meet customers’ needs with tweaks to inventory levels and merchandise. But Mansell said Kohl’s would shrink another 200 of its standard-sized Kohl’s with reduced fixtures and inventory since tests in a few such stores have shown the retail can do this profitably. Store closings would only happen in cases where a downsizing hasn’t helped.

“We believe stores are very important and a critical component of our future success,” the CEO said on the call. And speaking of the business Kohl’s lost for good at the closed stores, he added: “That just sort of reinforces the need to have a great footprint but they’ll be smaller.”

Even though stores themselves are behind fewer sales directly, they are core to supporting large retailers’ booming e-commerce business. Kohl’s thinks comparable sales could fall as much as 2% this year, or at best, be unchanged, but forecast online sales will grow more than 10%. And with one third of online orders being either shipped from a store (Mansell said last year Kohl’s shaved a half day off its average delivery time) or picked up in a store, the CEO is loath to sabotage that by closing stores.

As for some of that extra space, Kohl’s may take a page out of rival department store chain Sears’ (SHLD)playbook for reducing its stores size by renting out some of that square footage to other retailers. Kohl’s owns outright or has a ground lease on some 650 of its stores, and only 10% of its locations are in malls, two factors that give it more flexibility in reconfiguring its stores.

Other initiatives the company is betting on to improve sales include the upcoming roll-out of its Under Armour (UAA) shops (Mansell said they could add as much as one percentage point to Kohl’s 2017 comparable sales); merchandise more adapted to a local stores’ needs; and speeding up production on its house brands so it can more quickly jump on fast fashion trends.

In the fourth quarter, Kohl’s net income fell 15% to $252 million, or $1.44 per share, above the $1.33 analysts expected, according to Thomson Reuters I/B/E/S, helped by lower inventory levels that reduced the need for clearance markdowns. Net sales were down 2.8% to $6.21 billion.

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