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Kohl’s Is Holding Less Merchandise in Stores and It’s Paying Off

Less is turning out to be more in the world of retail.

Kohl’s (KSS), on Tuesday reported higher second-quarter comparable sales, and crucially, higher profits, helped by its move in the last two years to hold less merchandise in stores and instead deploy items to stores where they are running low or sell them online.

The retailer said comparable sales rose 3.1%, above Wall Street forecasts for a 2.6% jump. Its gross merchandise margin increased by 0.4 of a percentage point, as this lower inventory strategy meant fewer items had to be sold at clearance. It was Kohl’s fourth straight quarter of sales gains and another outperformance of rivals like J.C. Penney (JCP) and Macy’s. (M)

Kohl’s CEO Michelle Gass, who took the reins in May, told analysts on a conference call that in-store merchandise levels were 8% lower than a year earlier, their 10th straight quarter of decline. What that means is merchandise flows more quickly through stores. If an item gets hot, Kohl’s can add more of it in stores. It also means that by centralizing merchandise at distribution facilities, Kohl’s can send items anywhere where it will sell, including online, and reduce the risk of it sitting on a shelf. Other major retailers, notably Target and Walmart, have been implementing the same strategy.

Much of Kohl’s strong quarter came from its emphasis on activewear by Nike (NKE), Under Armour, (UAA) and Adidas. Sales of Under Armour, introduced at Kohl’s last year as a key initiative by Gass, are accelerating, she said. At some stores, Kohl’s is testing an expanded area for activewear, offering as much as 50% more selection.

Perhaps just as crucially, Kohl’s own house brands perked up, posting their best quarter in five years, Gass said. Such brands make up almost half of its sales and by Kohl’s own admission, some of them were in need of rejuvenation. Kohl’s also announced that in 2019, it would begin selling Nine West shoes and handbags as it looks to expand its offering of more fashion oriented wares.

Gass declined to give much detail on Kohl’s partnership with Amazon, which entails handling returns for the online giant at about 80 of its 1,150 stores, with the test center in the Los Angeles and Chicago areas.

In the second quarter ended August 4, Kohl’s net income rose to $292 million, or $1.76 per share, from $208 million, or $1.24 per share, a year earlier, a 40.4% increases. Total sales were up 4% to $4.57 billion. Aalysts on average had expected revenue of $4.26 billion, according to Thomson Reuters I/B/E/S. Kohl’s shares slid 3%, on some profit taking as the stock had risen 45% so far in 2018.