Kohl's Takes the Retail Crown After a Busy Holiday Season

MarketsMotley Fool

Comparable sales trends were sluggish for most of fiscal 2017 at department stores like Kohl's (NYSE: KSS), Macy's (NYSE: M), J.C. Penney (NYSE: JCP), and Nordstrom (NYSE: JWN). Even Target (NYSE: TGT) suffered, with flat comps for the first nine months of the fiscal year. However, that was until November and December came to the rescue for the sector.

In this episode of Industry Focus: Consumer Goods, the cast talks about how off-mall retailers and their mall-based peers fared over the holidays. Even Macy's is poised to snap its 11-quarter streak of comparable sales declines in the fourth quarter -- but its 1.1% comp sales growth during the holiday season paled in comparison to the stellar gain of 6.9% at Kohl's.

Continue Reading Below

A full transcript follows the video.

10 stocks we like better than J.C. PenneyWhen investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now… and J.C. Penney wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of January 2, 2018

This video was recorded on Jan. 16, 2018.

Vincent Shen: I wanted to bring you onto Industry Focus today because back in late November, we discussed the outlook for department stores for the 2017 holiday season, and across the industry, we talked about how it would be really important for retailers to keep up the positive momentum they'd built up on the Black Friday weekend. Well, at this point in the new year, quite a few major retailers and some of the big box stores have reported preliminary results from the end of the year. The tone of the industry seems more upbeat than it has been in quite some time. Let's go, top to bottom, from best to worst performers for the holiday period. Which companies ended up leading the pack?

Adam Levine-Weinberg: What we saw over the holiday season was the off-mall retailers did the best among brick-and-mortar retail. Kohl's actually had the very best results of the companies that have reported so far. It said the comp sales were up 6.9% during the holiday season, and that's its best result in over a decade. If you look on a full-year basis, for the past five years now, Kohl's has basically been flat. Comp sales basically the same as they were all the way back in 2011. So this is really quite a dramatic change in the trend at Kohl's and really quite impressive, and it sent the stock flying higher, not surprisingly.

Shen: The big thing I saw from their press release to note is, they call it strong traffic, which is always something we're looking for, especially with these retailers with a physical store presence like this. They also called out the online channel, with growth for that channel accelerating during the two-month holiday period. Definitely interesting to see.

Levine-Weinberg: Yeah, it's definitely good to see a company that's generating very strong online growth, but also seeing growth in its stores. Kohl's is definitely benefiting here from the fact that its stores are in more convenient locations, generally speaking, in strip malls or stand-alone locations, where people are dropping by frequently, whereas a lot of the other department stores that they're competing against are very much tied to malls. As you know, mall traffic has been declining for years and years, and that trend doesn't seem likely to end anytime soon.

We also have Target. Similar in terms of the locations to Kohl's, so not surprisingly, it also did well over the holiday season, with comp sales up 3.4%. That allowed Target to raise its guidance for the year. That's actually the third time now in the past year that Target has raised its guidance -- 2017 went from, at the outset, it seemed like a very downbeat year for Target, to being actually fairly good in light of the competitive pressure that it's seen from some of its rivals.

Shen: Yeah. It's very encouraging with the turnaround plan that they've mentioned, that management has pointed to as their roadmap. Again, similar to Kohl's, they cited strong traffic, so there's that first good sign. Then, also, strong results in the digital sales. Their digital channel enjoyed growth of 25% in full-year 2017. We talked about trends recently for retail in 2018. Omnichannel is leaving its footprints here as well. Stores fulfilled 70% of Target's digital sales volume in November and December. That's something that we'll see with some of the other companies we'll talk about today as well.

Levine-Weinberg: The one thing I would mention about Target is, compared to the department stores, it gets much, much lower percentage of its revenue online, even now. It's been posting very good growth but from such a small base. I think online is still about 3% to 4% of its revenue, whereas with some of the other companies we'll talk about like Macy's and Nordstrom, that's like 20% to 25%.

Shen: Yeah, about one quarter, so definitely a long way for them to go. Starting from that smaller scale is good, but seeing that growth, you definitely want that. Wal-Mart has enjoyed really strong growth rates in that space as well. They've made investments there. Both companies definitely racing in that space. You mentioned the off-mall retailers leading the pack. The middle pack, the traditional department stores that you and I cover all the time, these are companies that we've looked at for years now, and they also had surprisingly strong numbers, too. We'll go over some of those.

Levine-Weinberg: JCPenney was definitely the best among the traditional mall-based retailers. Up until a couple of years ago, it was showing a pretty strong sales comeback. That trend changed over the past year or two. Most of 2017 was pretty bad for JCPenney. But actually, they had 3.4% comp sales growth during the holiday season. That's definitely encouraging, showing that they might be back onto a better trend, which could help them looking into 2018.

Going a little further down the list, Macy's and Nordstrom both posted comp sales gains of a little over 1%. That's definitely solid, especially for Macy's, which had posted a comp sales decline for 11 straight quarters coming into the holiday season in 2017. So it's pretty encouraging to see comp sales growth, even if it's a still a pretty low number at these companies, because, especially Macy's, has really struggled to get traffic in the doors, mainly because of that mall focus that we talked about a little bit earlier.

Shen: Both of these companies you just mentioned, JCPenney and Macy's, they're trying to highlight their digital growth, the things that they're doing on that side. JCPenney, they mentioned that 100% of their store locations assisted in e-commerce fulfillment. How much that is in terms of each store and the ultimate impact, it's hard to say. But obviously, that's something that the management team seemed focused on. For Macy's, we point to digital growth, too, how it's a bigger base for them. On the flip side, the company is still reducing its store fleet. I think they closed 125 locations since 2015, so that's about 15% of their footprint. Obviously, that's one company that you and I have spoken about several times, Adam, where they're still trying to right-size their physical footprint and monetize their real estate assets where it makes the most sense to do so. One more company here that I want to cover is Nordstrom. How did they do?

Levine-Weinberg: Nordstrom had about a 1% comp sales increase in its full line stores, and a 2.9% increase in its off-price business, which is Nordstrom Rack. Those are definitely solid numbers, especially in the full line. To be honest, I would like to see the off-price number be even higher, because right now, Nordstrom has been rapidly expanding its online, off-price business. Up until a few years ago, there was no Nordstromrack.com e-commerce business. It's definitely a high-growth business in terms of revenue, but it's actually not profitable. So what you've been seeing recently is actually top sales declines in the Nordstrom Rack physical stores, whereas other off-price retailers have been posting pretty good growth, whereas all the growth has been in this unprofitable e-commerce business. So that's not really helpful in terms of overall company profitability. I'm hoping to see further acceleration in that trend next year. You'd like to see more mid-single digit comp sales growth in Nordstrom Rack and Nordstrom's other off-price business.

Shen: And correct me if I'm wrong, but Nordstrom Rack is the sole part of the business where they've still been trying to expand their footprint, add new stores each year. With the effort, the investments they're putting into that, you definitely want to see strong numbers coming out of there, so it's understandable, in terms of those expectations.

Adam Levine-Weinberg owns shares of J.C. Penney, Kohl's, Macy's, and Nordstrom. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool recommends Nordstrom. The Motley Fool has a disclosure policy.

Continue Reading Below