Kohl’s grapples with quest for new golden era

Case in point: On a recent Friday at the Kohl’s in Manitowoc, Wisconsin, near Lake Michigan, a huge display just inside the entrance reminded customers they could pick up online orders in stores—a now commonplace service in retail that Kohl’s only relatively recently got around to offering.

Next to it was a sign touting the company’s new loyalty program, which allows Kohl’s to reach more shoppers via targeted promotions rather than glorified spam. And nearby was a section devoted to FitBit wearable health trackers, part of the company’s big bet on fitness and wellness products.

None of this may seem particularly revolutionary in today’s retail environment. (It’s not as if Kohl’s is preparing to launch drone delivery of mom jeans.) But for the previously unadventurous Midwestern department store chain, each of the new initiatives represents a calculated step in its quest to recapture its former magic.

“The old, core pillars of the company—brands, value and convenience—they just need to be reinvented for today’s consumers,” CEO Kevin Mansell, a 32-year company veteran, told Fortune in a recent interview in his office at Kohl’s headquarters in Menomonee Falls, Wisconsin.

If Kohl’s was for years a bit slow to innovate, that’s because it didn’t want to mess with its wildly successful formula. For most of the past two-plus decades, Kohl’s was one of Wall Street’s biggest retail stars. Since its IPO in 1992, the retailer’s stock has risen more than 3100% compared to a gain of just over 400% for the S&P 500.

That long boom was fueled by relentless expansion. Between 1994 and 2009, Kohl’s, which started life in 1962 near Milwaukee, morphed from a 90-store regional chain into a national retailer with more than 1,000 stores. Lately that pace has slowed. And over the past five years shares of Kohl’s have badly lagged the broader market.

Throughout that golden age, Kohl’s relied on a repeatable formula with defined characteristics: Smaller and neater stores of 80,000 square-feet compared with the 120,000 square-foot size of a typical Macy’s or J.C. Penney; convenient locations away from malls, and thus closer to customers’ homes; lean staffing to keep costs, and therefore prices, down; a focus on a key categories rather than trying to be all things to all people; and hassle-free returns.

The result was a convenient, no-frills retail experience that won Kohl’s tens of millions of loyal working moms. But just after the recession, cracks began to appear in Kohl’s business model.

Mansell, who became CEO in 2008, admits that the company’s “cookie cutter” way of expanding meant that Kohl’s never learned how to grow without an aggressive store opening program—an option it no longer had as its stores dotted more and more of the American map. In autopilot mode, the retailer was caught flat-footed by the rise of e-commerce and of off-price fashion chains like T.J. Maxx, along with some customers trading down to the discount stores.

Add to that some big strategic blunders. Seduced by their higher profit margins, Kohl’s ramped up its in-house brands way too much, and paid insufficient attention to the national brands that attract a broader cohort of shoppers. Meanwhile, during the Great Recession, fewer and fewer shoppers qualified for the Kohl’s store card, depriving the store of both millions of potential new customers to mitigate natural shopper attrition, and data about their shopping habits that would offer new ways to cultivate their loyalty.

“We sort of lost the ability to engage new customers,” says Mansell.

The result was a business slump of the kind Kohl’s had never experienced: little or no comparable sales growth in its past four fiscal years and a struggle to get shoppers into stores. The retailer wasn’t even able to capitalize on the sales hemorrhage going on at two close competitors, Penney and Sears.

So last fall, after months of deliberations, Kohl’s unveiled a three-year road map for getting its groove back. Grandiosely titled the “Greatness Agenda,” the strategy is being kick-started with big moves in three key areas: First, Kohl’s is moving to more fully integrate its 1,164 stores with e-commerce so both ways of shopping can feed business to each other—a crucial tactic in retail known as “omnichannel” that competitors such as Nordstrom and Macy’s have long embraced. Second, the retailer has launched its first bona fide loyalty program, called Yes2You, to incentivize the 40% to 50% of Kohl’s customers who don’t have or want a store card to shop there more. And third, most basic of all, Kohl’s is working to liven up its store presentation and merchandise mix.

The turnaround effort has so far yielded two straight quarters of comparable sales growth, including a strong 2014 holiday season. However, Mansell and his team got a blunt reminder last month that Wall Street still sees this as a show-me story: Kohl’s shares took a 13% beating the day it reported comparable sales grew only 1.4% for the first quarter.

Wall Street and industry analysts may have good reason to be on the fence: many of the pillars of Kohl’s three-year plan sound almost verbatim like those of retailers ranging from Target to CVS Health to Macy’s. Just like Kohl’s, Target and CVS are revamping their beauty sections and adding staff to them. And just like Kohl’s, Penney, Macy’s and Target are all raising their own games in health and wellness with more so-called athleisure apparel and wearable tech.

Last year, Kohl’s total sales hit $19 billion, making it the No. 9 retailer in the country (excluding grocers). And the company’s aim is to increase that by $2 billion by 2017.

So how exactly does Kohl’s plan to stand apart from the pack so it can achieve that ambitious goal?

Going deep on digital

One of the first steps Kohl’s took to kick off its turnaround was a major strategic hire.

Two years ago, Mansell landed a coup, recruiting star marketing executive Michelle Gass away from Starbucks to join Kohl’s as chief customer officer, a job that initially included e-commerce. She is essentially Mansell’s second in command, and in a prime spot to eventually succeed him as CEO.

In June, she added to her responsibilities when she was named chief merchant, arguably the most important job at any retailer, though a potential area of vulnerability given that she has never previously been in charge of selecting merchandise for a retailer offering such a wide array of products. Gass will be competing with a still unnamed Chief Operating Officer, who will take on e-commerce too, for the top job, Kohl’s said this month.

Along with Mansell, Gass is, in her own terms “co-authoring” Kohl’s next chapter. To her mind, Kohl’s already largely has the tools it needs to pull off its renaissance. It’s just a matter of using those tools better and making Kohl’s a better version of itself.

“It’s not about swinging the pendulum or not being who you are,” says Gass, sitting in her part-time office in Kohl’s New York design office in late April. But it is definitely a matter of updating its technology and merchandise assortment.

Gass made her name by helping Howard Schulz turn Starbucks around a few years ago. Holding various top strategy and marketing jobs, Gass notably oversaw the coffee chain’s industry-leading rewards program and mobile app. Helping Kohl’s create its own dynamic customer-loyalty program was a top priority upon her arrival.

Indeed, one of Gass’s first major projects at Kohl’s was to build Yes2You. Launched in October after an 18-month pilot, the loyalty program is aimed at connecting with customers who don’t want a store card, or can’t qualify for one. Those efforts are already paying off: Gass says that 30 million shoppers have already signed up for the program. Half of those were not already Kohl’s credit card holders, meaning the retailer is finally attracting new shoppers again. Mansell expects membership to reach 35 million by the key holiday season. And the benefits to Kohl’s are not abstract: Last quarter, growth in sales made to non-Kohl’s card holders outpaced business from other customers for the first time in eons.

It is also helping that, at long last, Kohl’s has gone mobile in a major way. The retailer launched a new app last fall—and was pleasantly surprised by how quickly customers embraced it. The user base rose more than eight-fold in just a few months, according to Comscore. That outpaced the growth over the same period of apps from the likes of Uber and Tinder. But it has tons of competition- there is a veritable arms race between retailers angling to have the best smart phone app, since that is driving about half of any retailer’s digital sales now, and growing.

Another area of tech where Kohl’s is doing much better is personalized marketing, a big feat for a company that for years was happy to simply use mass media to advertise and hope for the best. This year, 5 billion bits of communication with customers will be personalized. “They’ll be the first mover in personalization,” says Tiffany Hogan, an apparel analyst at Kantar Retail, a research firm.

But most of its competitors also offer loyalty programs. Where the Yes2You program is innovative is what it lets people do with the points they collect. Whereas rewards are typically tied to one card, Yes2You lets a customer share points with friends and also win points for pinning an item of interest on Pinterest, giving Kohl’s an entrée with new shoppers.

Photograph by Phil Wahba

Freshening up the merch

The long overdue investment in technology is important, but only part of the solution. Kohl’s is also looking to offer items people actually want to buy in a pleasing environment. “They should be energizing the physical, in-store experience,” says retail industry veteran Robin Lewis, who is nonetheless bullish on Kohl’s prospects.

Kohl’s has gotten the message. And that has led it in the last year to overhaul its merchandise assortment and give it, in Mansell’s words, a more “inspired” presentation in stores.

One example is beauty products. Even though its core customers are moms, Kohl’s had never made selling makeup a big priority. That has changed. Kohl’s new beauty sections, launched last year and now in about 900 stores, are adding much needed sales in a traffic generating category the chain had all but ceded to Penney and Macy’s for years.

The retailer is also betting big on fitness by doubling down on big-name national brands. Kohl’s, which sells $600 million a year worth of Nike merchandise, saw comparable sales of that brand jump 20% during the holiday quarter after creating super-sized Nike areas. That success reinforces a company strength: Kohl’s is the No. 2 seller of activewear and footwear in the U.S. after Walmart, accounting for 5% of industry sales.

Kohl’s got aggressive in adding FitBit to its lineup. Gass says that the hot maker of fitness trackers would only agree to sell its products at Kohl’s if the retailer guaranteed a prominent, enticing presentation in stores. Kohl’s delivered, and sales in the first year were four times higher than expected, and the store is on pace to be among FitBit’s five top brick-and-mortar retailers this year.

The renewed focus on national brands corrects a mistake that Kohl’s made for years. Mansell has admitted that Kohl’s went too far in emphasizing its in-house brands, which generated 52% of sales last year, compared to about 30% in 2005. He is bringing that back down to 48%, by focusing on relatively fewer brands but really homing in on them more than other department stores.

Private brands have a lot of appeal to retailers. They give customers a reason to choose one department store over another, and offer the retailer more pricing power over those goods, and control where they are sold (i.e. not on Amazon.com.) They are also more profitable.

But all that hinges on people actually wanting to buy those labels. And the hard truth is that some of Kohl’s top in-house brands, like Croft & Borrow, Apt. 9, and the billion-dollar Sonoma brand, need a refresh. This is crucial at a time Penney’s brands St. John’s Bay and Arizona, among others, are selling well again and Macy’s I.N.C. is hugely popular.

It’s not that Kohl’s, the No. 157 company on the Fortune 500, is turning its back on its private brand operations or exclusive lines. Kohl’s is working with a New York boutique branding firm to “re-energize” Sonoma’s soul, Gass says. And it recently started selling an only-at-Kohl’s yoga wear line with Gaiam. It has also quadrupled the size of its New York Design Center to attract top New York fashion talent and keep its finger on the pulse of the industry. The center is led by head of product development Arthur Lewis, a big name in retail who made his name by helping build Gap Inc’s Old Navy brand.

Courtesy of Kohl’s

And speaking of top talent, Kohl’s recently opened both a wellness center and an innovation center on its sprawling corporate campus. (The innovation center was so new when Mansell gave Fortune a tour in May that it still smelt of paint.) Designed with Silicon Valley-esque amenities and meeting space, the facilities were built to help attract and retain talent—essential for Kohl’s as it pours $1 billion over the next three years into beefing up its tech to support its comeback.

“The core business we’re in, selling apparel and accessories, is a very low-growth to no-growth business,” Mansell says. “And unless you have a really great plan, you can be really vulnerable to being pulled down to the lowest common denominator, which is price.” He adds: “I don’t think anyone is thinking Kohl’s can grow at 10% again.”

The golden age might not be coming back for Kohl’s, but it could yet have a renaissance.