Kohl’s Makes Necessary Store and Product Improvements, But Lacks Competitive Edge

We assign a “no-moat” rating to Kohl’s, which has lower sales today than it did 10 years ago despite expanding its store base. We believe that competitors like wide-moat Amazon and other online retailers, discounters and specialty stores will continue to suck apparel sales out of it and other department stores. So while Kohl’s has responded to the threats with e-commerce growth, improved merchandise offerings and an improved loyalty program, its operating margins have fallen from the low double digits over the past 10 years and we don’t expect them to rise above the mid-single digits over the next 10 years. Kohl’s has strengths, including a reputation for reasonable prices and more than 30 million loyalty members. And unlike some competitors, it doesn’t have a large number of stores in struggling malls. However, we do believe that footfall in its stores is declining. Sales per square foot have declined since 2010, despite annual e-commerce growth from about $700 million in 2010 to about $5 billion today. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.