Kohl's carves out serious square footage in Southwest

DSN Retailing Today, March 24, 2003 by Emily Scardino

MENOMONEE FALLS, WIS.--Kohl's may have wowed the Southern California retail landscape with its 28-store grand opening frenzy--the largest simultaneous launch in company history--but its entry into the greater Orange County market is only one piece of a much larger corporate strategy. For this highly envied, rapidly growing mid-tier merchant, entry into California--including the recent construction of its eighth distribution center in San Bernardino, Calif.--represents step one of a plan to span the Southwest en route to building a coast-to-coast casual apparel empire.

In addition to contributing to Kohl's overall topline growth, the California market will play a pivotal role in helping the retailer maintain its stellar same-store sales success. By opening approximately 100 stores over the next five years in and around Southern California--a stated goal of Kohl's management--the company can boost its overall same-store sales average and counterbalance slower growth in many of its older, less productive markets. Only by adding square footage at such a rapid rate can Kohl's maintain its practice of producing the stellar topline and bottom line increases that have earned it a reputation as a wunderkind of Wall Street.

For the fiscal year ended Feb. 1, Kohl's performed incredibly well. Net sales, driven by apparel, rose 2 1.8%, from $7.49 million to $9.12 million, while net income climbed an exceptional 29.8%, from $495.7 million to $643.4 million. However, comparable store sales increased only 5.3% in the fiscal year ended Feb. 1, 2003, significantly lower than the 8.4% average comp sales increase Kohl's maintained from 1995 to 2001.

STAYING AHEAD OF THE COWS CURVE

Kohl's comp-store sales average has been dropping, despite close to half of its base being at its prime earnings potential.

"For stores five years old or more, comp-store sales increases range between 2% to 3% on the year," according to Patti Johnson, Kohl's cfo. "For stores younger than that, in that 2- to 4-year range, we see anywhere from 6% to 11% comp increases," This recent 2% to-3% estimate for mature stores dropped from the estimate she gave in 2001 of approximately 6%, indicating a further slowing in mature stores' output.

With 20% average annual square footage expansion over the past decade, numerous stores across the country will soon exit the peak sales period. The 40% of Kohl's 485 stores in this window would pass out of it within the next two years without the addition of the Sunbelt.

"Kohl's expansion will definitely prevent the deceleration of its comp-stores growth," agreed Christine Augustine, managing director and retail analyst, Bear Stearns. She stressed that Kohl's still has the entire Pacific Northwest and Florida as potential new markets. Resultantly, Kohl's expansion technique should continue working for at least the next decade.

The company is rolling out a minimum of 100 stores in this region of the United States, "leveraging regional management and infrastructure which is now all in place," stated Larry Montgomery, Kohl's chairman and ceo. "Infrastructure" alludes to Kohl's new 575,000-square foot distribution center in San Bernardino, Calif. Already, it is being credited with improving SG&A expenditures. In 2003, Kohl's will enter new markets, including Phoenix with 10 stores and Las Vegas with three, with 80 stores opening nationally.

In 2004, Kohl's plans to open 95 to 100 stores, including a mix of new markets, such as San Diego, as well as fill-ins.

Kohl's original Midwestern store base, in a radius around its headquarters in Menomonee Falls, Wis., is already past its prime earnings potential. Kohl's is attempting to reinvigorate consumer interest in these mature stores by investing in remodels in Indianapolis, Chicago, Minneapolis and Columbus, Ohio. Overall, corporate is "pretty pleased with what this does for according to Montgomery. However, comps still average below those gleaned during that 2- to 4-year age period.

CALIFORNIA PROSPECTS LOOK GOOD

It's never a certainty that Kohl's will be embraced in any of its new markets, but you'd be hard pressed to find an analyst bearish on its prospects, in California. In all likelihood, Kohl's proven 86,500-squarefoot format will be able to cull double-digit comps. "[California] could rival Tri-State (New York/New Jersey/Connecticut) store openings in terms of productivity," according to a USB Warburg report.

In terms of the established retailers already in place, Kohl's arrival in California will certainly ratchet up the market's competitive spirit.

"Mervyn's should be very concerned about Kohl's rollout in Southern California," said Deborah Weinswig, director of retailing/broadlines at Salomon Smith Barney.

Target Stores' Mervyn's division, the closest direct competitor to Kohl's in terms of assortment and pricing, is only planning on opening three new doors in 2003, due to a year-on-year comp sales slide of 5.3%. Its Target chain is a competitor only in that it sells apparel and home goods; the brands the chains carry make them incomparable. Weinswig believes, "Mervyn's, Macy's West and Robinsons-May will be most impacted," as they also focus heavily on national brands.