Kohl’s is Implementing Necessary Upgrades in Stores and Merchandise, but Lacks a Competitive Edge

We assign a no-moat rating to Kohl's, which has lower sales now than it did 10 years ago despite expanding its store base. We think its competitors, such as wide-moat Amazon and other online sellers, 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 indoor malls. We think, however, that its store visitation is declining. Sales per square foot have declined since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to around $5 billion at present. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.