Focus on margins
With continued pressure on sales, several department stores like Kohl’s (KSS) are trying to mitigate the impact of weak top-line figures through increased productivity. However, despite much effort, margins of department stores continue to be under pressure due to a heavy promotional environment and growth investments.
Kohl’s gross margin expanded in fiscal 1Q17 but then contracted in fiscal 2Q17 as well as 3Q17. The company’s operating margin rose in the first two quarters of fiscal 2017 but contracted in fiscal 3Q17.
What impacted 3Q margins
Kohl’s gross margin contracted 30 basis points on a year-over-year basis to 36.8% in fiscal 3Q17. The favorable impact of lower clearance markdown levels was more than offset by higher shipping costs associated with a rise in online sales. Also, the fiscal 3Q17 gross margin was adversely impacted by higher reserves including loyalty rewards and sales return adjustments, which according to the company resulted from the strong sales in late October.
The company’s operating margin contracted to 5.9% in fiscal 3Q17 from about 7.0% in fiscal 3Q16. This decline was a result of the deleverage in selling, general, and administrative (or SG&A) expenses as a percent of sales. Kohl’s SG&A expenses as a percentage of sales rose 33 basis points due to higher technology expenses and distribution costs in the third quarter. Kohl’s incurred higher technology expenses as the company continues to invest in its digital capabilities. The company’s higher distribution costs are associated with the opening of its fifth e-commerce fulfillment center.
Analysts expect the company’s gross margin to come in at about 33.3% in fiscal 4Q17, which ends on February 3, 2018. This compares to gross margin of 33.4% in fiscal 4Q16. Higher expenses associated with the growing online business are expected to be a drag on the company’s gross margin.
The company is taking several initiatives to improve its productivity and enhance its margins. The company aims to generate $250 million in expense savings over the next three years.
We’ll assess Kohl’s earnings in the next part of this series.