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It can’t be denied that the retail sector has taken a huge hit during the COVID-19 national lockdowns and suffered from a fall in consider confidence as the realities of the economic downturn take hold. That being said, some are faring better than others – most notably the ones that invested in their supply chains, omni-channel capabilities and digital services prior to the pandemic.

The same can’t really be said for Kohl’s, unfortunately. The US department store chain has long held a view that it ‘loves the store’ and that these physical assets will play a key component in its omni-channel strategy. As my colleague Stuart Lauchlan has noted, this is all well and good, but it needs to be coupled with long-term investment in the digital half of the balance.

The company’s second quarter results have highlighted once again the work that Kohl’s needs to do to adjust to the new retail reality. Whilst the 23% fall in revenue wasn’t as bad as analysts expected, shares still fell more than 13% on the conservative outlook for 2020.

During a call to discuss the latest results, Kohl’s CEO Michelle Gass said that whilst the company will be successful over the long-term, the COVID-19 crisis will continue to impact the business in the coming months.

Interestingly, Kohl’s did see a jump in online sales – rising 58% during the quarter. The online business made up 41% of total sales during this period, compared with 20% one year earlier. However, according to the leadership team, gross profit margins are facing a squeeze as it looks to ramp up its online orders and shipping, and the store still sits front and centre of the Kohl’s omni-channel strategy.

CEO Gass sought to build confidence off the back of the latest numbers, which saw revenue from $4.17 billion last year to $3.21 billion this quarter. She said:

We are a well-disciplined operator, leveraging our strong financial position to effectively navigate through this crisis. We have a strong foundation from which to build, solidified through years of investment in our digital and omni-channel capabilities, innovative store experiences, loyalty enhancements and new brand introductions.

And we are uniquely positioned and are evolving our strategies to capitalize on changing consumer behaviors, and the significant disruption of the retail industry.

So, what’s the plan?

As noted above, Kohl’s suffered from a nationwide lockdown and like many other retailers was forced to close all its stores. The chain’s stores operated approximately 25% fewer days than last year and now has limited hours in place since reopening. And whilst June saw a strong rebound, Kohl’s has seen sales deceleration during July.

All in for the quarter, store productivity for reopened stores was approximately 75% and as already highlighted, digital sales increased by 58%.

However, Gass highlighted that it’s the stores that will be the key to future success across Kohl’s. She said:

We continue to leverage our omni-channel capabilities to support the overall business. Our customers are embracing the conveniences we are providing at an accelerating rate, and our investments have proven to be timely and valuable. During the second quarter, stores were instrumental in fulfilling nearly 50% of digital sales. Customers picking-up in the store accounted for 15% of digital demand, with store drive up accounting for half of this.

We see our stores as an important asset that we can leverage in many other ways. This is especially relevant given the consumer behavior shifts we are seeing as customers embrace digital and our omni-channel offerings.

Our stores are increasingly supporting our digital business, serving as a critical fulfillment hub for ship from store and customer pickup. As 80% of Americans live within 15 miles of an easy to access Kohl’s store, we are well-positioned to be a leading retail and digital destination for the family. Our launch of Store Drive Up has been particularly successful, and will be an important capability this holiday season.

Kohl’s is also using its stores to offer services such as Amazon Returns and Gass said that it is “actively pursuing” opportunities to capture market share from competitors that are seeing store closures.

On the digital side of the equation, Gass said:

Turning to our digital experience, our broad investments in site functionality, personalization and shopability have been important enhancements, and were crucial in our ability to capitalize on growth in the current environment.

In addition, our digital marketing efforts have been a key enabler of growth, yielding a greater impact in a more efficient way. Last fall, we brought digital search in-house, and we are using machine learning to drive improved search results and media buying.

Kohl’s is also planning to launch a “more integrated” rewards program next month, nationwide, bringing together all of its assets into a more simplified structure, Gass said. Kohl’s has a strong loyalty program, with 30 million members.

Focus on the supply chain

As many retailers have found, the pandemic has highlighted a number of vulnerabilities in company supply chains, leading to increased costs and operational complexity as services shifted to online. Gass said:

Let me touch on our efforts around operating with excellence. We are planning the business conservatively and will continue to seek out efficiencies. Based on the trend we are seeing in digital acceleration, we are putting even greater focus and resources on our supply chain to ensure that we are positioned to drive overall productivity, and manage cost of shipping as effectively as possible.

Chief Financial Officer Jill Timm provided some greater clarity on this point, where she said that Kohl’s expects the cost of shipping to continue to be a headwind as digital sales continue to rise throughout the year.

Kohl’s is facing surcharges from vendors as a result of these increased digital sales. Timm said that it is “working through” these with the company’s vendors to get a better understanding of what demand will look like, how Kohl’s can better forecast and “work through some of those overages”.

The company has also instituted other carriers throughout the year and will continue to push the pick-up in store options, in order to avoid shipping costs. Timm said:

Last year we were vocal about it, but I think you’re going to hear a much more heightened message through our marketing channels to have a pickup option. And with the drive up initiative out there, it gives them a safe way to do that as well.

I think the biggest focus for us and we’ve talked about this through our operational excellence lens is really we’re working on an end-to-end supply chain to really help and mitigate these future cost to shipping pressures. So we look at a very flexible, integrated supply chain that’s going to enable a very often inventory deployment, which will really drive down the split shipments, which is the biggest component of driving up cost to shipping

My take

The sense you get from Kohl’s leadership at this time is that the company is very much taking a reactive approach to the changes being forced by COVID-19, rather than speeding up plans that were already in place prior to the pandemic. In other words, the long-term investment wasn’t there in order to take advantage of the omni-channel opportunities and it is now playing catch up. We will have a better sense this time next year whether or not it has been able to react at the pace that is necessary.