Business Strategy and Outlook| David Swartz |
We assign a no-moat rating to Kohl's, which, unlike many competitors, has lower sales now than it did 10 years ago. 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 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 from about $700 million in 2010 to $5.5 billion in 2022. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.