Kohl's Could Be Playing in Larger Sandbox
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Stock watchers like Adam Levine-Weinberg and Christopher Williams talk about Kohl’s (NYSE: KSS) competition primarily in terms of Penney, Sears, and Wal-Mart. But Kohl’s could wind up playing in a much larger sandbox. Shoppers at upscale stores could trade down because of Kohl’s aggressive discounting, including in its ecommerce. Those at the low end could trade up as the economy improves. A driver in that could be word of mouth from its many loyal customers. Not a cult brand like Apple, it does have a growing number of fans.
Levine-Weinberg and Williams are among those enthusiastic about this stock which is currently at about 50. The bulls predict it could go to 60 or even 70 this year. Located in shopping centers, not malls, its fixed costs are lower than some of its competition. Therefore its operating margins are at 11.5% making it an industry leader. Also it has developed its ecommerce to contain the excitement and savings of almost a daily deals site. In 2011, those online sales totaled $1 billion. Bring those coupons from the website and cash-back arrangement from previous purchases into the store itself and, like Motley Fool blogger Matthew DiLallo, purchase brandnames for seeming peanuts. Although about half its merchandise is proprietary labels, it is expanding brandnames, such as Vera Wang, and adding those like Jennifer Lopez and Rock & Republic. The store itself is, at least as I experience it, almost retro. It's an old-time department store with no attempt to be cool. That creates its unique charm. As with cult brand in the eastern part of the U.S. - Bob’s Discount Furniture - Kohl's shoppers are made to be feel totally welcome in their pursuit of the best price. They don’t have to be image conscious in any way.
In the competitive arena, the usual suspects are at a current disadvantage. It’s predictable, for example, that Penney’s attempt to detox America of its addiction to bargains could drive its traditional shoppers to a Kohl’s and prevent new ones from checking it out. Despite being in-place for a while, chief executive officer Ron Johnson has not created a distinct online strategy. The website is lackluster. Also, Penney is an anchor store in malls, keeping its fixed costs high.
Sears has no turnaround plan. Yes, it’s acquiring funding from selling valuable real estate assets but that doesn't seem to be invested yet in new directions. I walked into a Sears and that lack of direction seemed to manifest itself in a pall which hung over it. Once Main Street's Big Store, it seemed to have no clear identity.
Wal-Mart has been vulnerable on two fronts. One is its absence of a comprehensive online presence. That’s despite the popularity of that of its major competitor Target (NYSE: TGT). A major Target ecommerce media story happened when its server went down because of so many orders for its Missoni fashions. The other weakness is its dreary big box identity. In its New Haven, Connecticut store, the layout and lighting seem like from the 1950s propaganda movies about Russian stores. It usually takes me three or four tries before I find a shopping cart which works. Clerks seem listless. Just up the road Aldi, which has cheaper prices for items ranging from fresh produce to sliced chicken, has no signs of all that. Also, as is the current retail trend, Aldi is a small store. Had it longer hours, I would never go into Wal-Mart again.
However, Kohl’s could also emerge as a competitive threat to other retailers. Those a bit more upscale like general department store Macy’s or specialty retailer Bed Bath & Beyond could find that Kohl’s continual promotional events and word of mouth make their usual shoppers curious. The first step would likely be to visit Kohl’s website. Actually that could be the only step that needs to be taken to lose customers since it provides a total shopping experience, along with free shipping without any minimum purchase. If they do come to the brick and mortar they might find it refreshing to just relax in a store that has no pretensions about being trendy but isn’t a no-frills big box. Shopping in an environment so determined to be stylish can be exhausting.
On the low end, reports Bloomberg, “frugality fatigue” is taking hold. Consumers feeling more confident about the economy are trading up. The first to feel that could be consignment stores, the retail branches of Goodwill and the Salvation Army, and specialty outlets like Universal Hotel Liquidators, based in New Haven, Connecticut. The next could be discounters like Target, the dollar stores, and specialty retailers like Home Depot. With their smartphones shoppers can scan items and find them the same price or cheaper at Kohl's. Online there could be a migration from discount sites such as Overstock.com to Kohl’s more middle class one. The motivation could be a giddy need to break away from familiar frugal patterns of shopping. This dynamic is already happening in the eating out segment. Time reports that sales at full service restaurants are up 8.7% and are 4% higher than those at fast food outlets.
Can Kohl's become a cult presence in retail? Its uncool could make it cool, just as that phenomenon happened with Bob's Discount Furniture. A decade ago, when Bob's only represented a few stores in New England, people used to laugh at his non-stop unslick radio promotions. Now the stores blanket the northeast. Other businesses should study the model.
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