Lowered Kohl's rating by Cowen due to reduced spending on clothing by middle-income shoppers
Rebutting Risky Turnaround, Kohl's Strategy to Enhance Financial Performance
Amidst escalating inflation and declining apparel demand, Kohl's faces a potential setback in its turnaround, warn analysts at Cowen & Co, who have subsequently downgraded the retailer's stock. Analysts point out that Kohl's is not immune to the weak apparel market, which has already affected profits at major competitors like Target and Walmart.
In a recent research report, Cowen's team, led by Oliver Chen, indicated that 66% of households earning between $50,000 and $100,000 per annum anticipate a slowdown in their spending due to inflation. This income range encompasses a considerable portion of Kohl's core customer demographic, between $80,000 and $110,000.
Chen's team cited concerns including excessive inventory levels, reduced guidance, lower traffic, promotions, and women's and kids' product execution. However, they also highlighted potential positive aspects such as Kohl's Sephora partnership, loyalty program, omnichannel capabilities, $650 million of liquidity, and free cash flow as positive factors.
Despite their concerns, Cowen's team remains relatively optimistic about Kohl's future prospects. "We remain confident in the long term and believe management is controlling the controllable factors," they said.
One key strategy being considered by Kohl's to improve its financial standings is the monetization of its real estate. This could involve a sale-leaseback program, wherein the retailer would sell properties and then pay rent. Cowen estimates that the company could add over $4 billion in debt while still abiding by its contractual obligations.
However, Cowen is not wholly convinced that a sale-leaseback arrangement is advantageous for the long-term due to the increased lease and debt expenses associated with the stores. Retail consultant Brian Kelly adds that the current consumer backdrop — marked by sales declines, rising inventory, markdowns, and losses — is driving cost-cutting, particularly in areas such as payroll and advertising.
Kelly suggests that retailers like Kohl's, Macy's, and J.C. Penney, which cater to the middle-income consumer, may be headed for leaner times as they face increasing competition from Walmart, Target, and off-price stores like TJX. Departments stores, in general, might lose market share under these circumstances.
As Kohl's navigates these challenges, it could consider repurposing underutilized spaces, leasing excess space, selling underperforming assets, enhancing its omnichannel experience, forming partnerships, improving customer experience, managing debt, and divesting non-core assets to maintain its financial stability.
- The potential setback in Kohl's turnaround, due to inflation and declining apparel demand, could be a concern for the personal-finance sector if the retail giant experiences significant financial losses.
- Analysts have pointed out that the weakness in the apparel market, affecting businesses like Target and Walmart, could also impact Kohl's AI-driven research on customer demographics and spending habits.
- The health of the retail industry might be affected by Kohl's decision to monetize its real estate, as potential increased lease and debt expenses could lead to higher costs for the AI technology used in business operations.
- Amidst the retail industry's financial struggles, aspects such as Kohl's Sephora partnership, loyalty program, and omnichannel capabilities could play a crucial role in maintaining the company's financial performance and personal-finance stability.
- In an era of inflation and escalating competition from big-box stores like Walmart and Target, the financial health of businesses like Kohl's, catering to the middle-income consumer, could critically depend on cost-cutting measures in areas such as payroll and advertising, and strategies like repurposing underutilized spaces and enhancing the customer experience.
