What Kohl's Management Doesn't Want Shareholders to Focus On

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When Kohl's Corporation (NYSE: KSS) delivered results for the first quarter of 2017, CEO Kevin Mansell talked about "the significant improvement in sales and traffic for the March and April period, after a weak February to start the quarter." He also said that "continued strong inventory management led to a major improvement in gross margin, and our teams managed expenses exceptionally well."

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These are encouraging points. Given traffic's vital role in retail -- generally, sales can only be made if a customer walks into a company's store or visits its website -- improvements in these areas are good to see. It's also impressive that Kohl's delivered an increase in its gross margin, which was 36.4% of net sales for the first quarter of 2017, up 0.83 percentage points over the prior-year quarter.

Yet investors shouldn't overlook the fact that Kohl's comparable-store sales were down 2.7%. Its total revenues were also down 3.2% from the prior-year quarter. Though Kohl's was able to show an improvement in net income by reducing selling, general, and administrative expenses, this approach to bottom-line growth typically isn't sustainable since companies can only reduce so many expenses. 

The plight of clothing and department stores 

The truth is, Kohl's can't escape its position in the rapidly changing, yet slowly growing, retail world. A July 2017 U.S. Census report estimates total department store June revenues were down 3.9% compared to last year and May sales were down 2.9%. Clothing and clothing accessories stores are also showing lackluster performance, with May and June sales projected to have been flat. So it's no surprise that Kohl's -- a department store with most of its merchandise being apparel -- has reported negative same-store sales in recent months.

Yet all segments of retail are not in a funk. Exclusively online retailers are estimated to have delivered June revenues up 9.2% compared to last year. And not only are these online retailers growing, their sheer volume is huge, estimated at $51.6 billion in sales in June. Department and clothing stores, on the other hand, are projected at a combined $34 billion. In essence, their market share is shrinking as online retailers grab an ever-increasing portion from consumers' wallets.

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Some investors might wonder: What's the problem? Kohl's has a website. That's true, and Kohl's management understands the importance of leveraging it. On the first-quarter conference call in May, Senior Vice President of Finance Jill Timm said "digital is our No. 1 marketing investment. We see that as very critical to continue to grow." She also said Kohl's would make a $350 million investment in technology that supports services such as Buy Online, Pick Up In Store. Over time, such customer-oriented services could help Kohl's increase its online sales.  

Cutthroat competition in the online world 

The trouble with online selling is that it has fundamentally changed the retail game -- and made it exponentially harder. Even if Kohl's has dedicated shoppers who regularly visit Kohls.com, these customers may log onto their computers only to receive emails driving them to competitors' websites. In the margins of their browsers, they might notice targeted ads from companies that offer merchandise similar to Kohl's. The online environment presents a carnival of information and choices that can divert even a loyal Kohl's customer to a competitor's website. And today, any company with an online presence either is, or could become, a competitor.

A world without Kohl's? 

Not so fast, Sparky. In spite of the challenges of competing in the online world, Kohl's is still a healthy company. Its 1,154 Kohl's stores still produce significant retail sales volume and management is investing in technology that will support services such as Buy Online, Pick Up In Store. 

However, investors should remember that Kohl's still didn't deliver positive same-store sales in the first quarter, and its investments in technology probably won't produce strong same-store sales overnight. It seems likely that Kohl's -- and other department stores -- will continue to see limited growth in sales and profitability during the bumpy transition to an online-based retail world.

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Lennay Chapman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.