Kohl’s Lack of a Competitive Edge Is Exposed in These Challenging Times

No-moat Kohl’s rebounded from the COVID-19 crisis with greatly improved results in 2021. However, we think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to competitive threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce of more than $5 billion (from about $700 million in 2010 to $5.9 billion in 2021). We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.