Store sales declined 10%, resulting from less traffic and smaller basket sizes. Stores also fulfilled 37% of digital sales in the quarter.

Kohl’s Inc. reported digital sales were flat in its fiscal second quarter ended July 30, 2022, compared with the same quarter last year.

Despite being flat, digital sales benefited from higher conversion rates. CEO Michelle Gass said that’s thanks to the retailer lowering its free-shipping threshold to be more competitive. The Kohl’s app accounted for 40% of digital sales in the second quarter. In total, she said, digital sales accounted for 28% of net sales. That’s up from 26% in Q2 2021. 

Kohl’s ranks No. 21 in the Top 1000, Digital Commerce 360’s database of North American e-retailers by web sales.

Kohl’s sales, net revenues and other Q2 losses

Store sales declined 10%, resulting from less traffic and smaller basket sizes. Stores also fulfilled 37% of digital sales in the quarter. The retailer’s net sales — for online and offline sales combined — dropped 8.5% compared with the same quarter last year.

In its fiscal second quarter, Kohl’s reported $4.09 billion in net revenues. That’s down 8.1% from last year’s $4.45 billion in Q2 net revenues. For the six months ended July 30, 2022, Kohl’s reported $7.80 billion in net revenues. That’s down 6.4% from its fiscal first half of 2021, when it reported $8.33 billion in net revenues.

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CEO Michelle Gass told investors that three critical issues are disproportionately affecting Kohl’s. She said, according to a Seeking Alpha transcript, that a weakening macro environment, high inflation and dampened consumer spending are affecting sales, much as they are across the retail industry.

“Our second quarter results reflect a middle-income customer that has become more cost-conscious and is feeling greater pressure on their budgets,” Gass said. “Therefore, we are seeing customers make fewer shopping trips, spend less per transaction and shift towards our value-oriented private brands.”

Two additional approaches Gass gave to recuperate from the sales drop: clearing inventory and leveraging its partnership with cosmetics brand Sephora. She said that Kohl’s would leverage its omnichannel capabilities in both cases.

Gass added that the retailer has increased promotions and is “being aggressive” at clearing excess inventory.

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Kohl’s and Sephora partnership

Kohl’s has opened nearly 600 Sephora shops within its retail locations in the past year. Of those, 400 opened in 2022. Among stores with Sephora shops, Gass said, Kohl’s has seen a mid-single-digit percent sales lift, which is consistent with the initial performance in the first 200 stores. 

Gass said the Kohl’s stores with Sephora shops have shown “outsized performance” compared to the stores that don’t have it. She added that Kohl’s plans to reach 850 Sephora at Kohl’s shops in 2023. The retailer plans to open the remaining 250 Sephora store-within-a-store locations in 2023. That would take its total to 850 2,500-square-foot shops. 

“To drive productivity and improve the overall customer experience even further, we’re currently testing cross-company BOPIS where purchases made on Sephora’s website, sephora.com, can be picked up at Kohl’s stores, creating an incredibly seamless and convenient experience for our customers,” Gass said. 

She said that Kohl’s would begin to accept any Sephora gift card in September, regardless of where customers bought it.

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“We’ll have a Sephora presence across our entire store base and digital,” Gass said. “And that is very powerful because we’ll be able to say at any Kohl’s, you can come in and have a Sephora experience.”

Inventory reduction

Chief Financial Officer Jill Tim said Q2 gross margin was 39.6%. That’s down 2.9 percentage points compared with the previous year’s second quarter. She attributed that to elevated freight expenses, product-cost inflation and increased promotional activity. 

Lower-than-expected sales for this year’s second quarter led to inventory at quarter end increasing 48% compared to Q2 2021, she said.

She added that “three unique factors” played into the excess inventory:

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  1. Elevated in-transit inventory as the retailer built additional order lead times to meet customer demand.
  2. Investment in beauty inventory to support the 400 Sephora shops it opened this year.
  3. Leveraging pack-and-hold for late holiday receipts, such as sleepwear and fleece.

“Excluding these three unique factors, our inventory would have increased 27% to 2021 and decreased 8% to 2019 levels,” she said. 

Target Corp. also reported Q2 earnings the same week, and its costs of excess inventory reduction outweighed the effect of a rise in sales for the quarter. Similar to Kohl’s, Target announced in June that it would slash prices to dramatically reduce inventory after supply-chain woes across the retail industry led to a surge in unsold items. Target ranks No. 5 in the Top 1000.

For the quarter ended July 30, 2022, Kohl’s reported:

  • $4.09 billion in net revenues. That’s down 8.1% from last year’s $4.45 billion in Q2 net revenues. 
  • Digital sales accounted for 28% of net sales. That’s up from 26% in Q2 2021. The Kohl’s app accounted for 40% of digital sales in Q2 2022.
  • Digital sales were flat despite the retailer lowering its free-shipping threshold. 
  • Store sales declined 10%. Stores also fulfilled 37% of digital sales in the quarter. 
  • The retailer’s net sales — for online and offline sales combined — dropped 8.5% compared with the same quarter last year.

For the six months ended July 30, 2022, Kohl’s reported:

  • $7.80 billion in net revenues. That’s down 6.4% from its fiscal first half of 2021, when it reported $8.33 billion in net revenues.

Percentage changes may not align exactly with dollar figures due to rounding.

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