Kohl’s Corp. has announced a plan to invest in smaller store formats ahead of many lease expirations on its existing stores, which could drive dozens of store closures, according to credit rating business DBRS Morningstar.
Morningstar has identified 10 stores where leases will expire before year end 2023, and says the highest concentration of lease rollover in the next decade will be in 2024 when 23 leases will expire. Add to this a 5.2% comparable sales decline in the first quarter and Kohl’s could shutter some locations.
had 1,165 locations at the end of fiscal 2021.
“Unlike Macy’s and Nordstrom, which have been closing hundreds of underperforming stores over the past few years, Kohl’s large fleet of stores has remained relatively stable because the majority of its locations, roughly 95%, are outside of malls. Kohl’s closed 18 stores in 2016. Since then, it has opened more stores than it has closed (excluding outlets),” wrote Morningstar analysts led by Steven Jellinek.
“But that might change.”
Last week, Kohl’s announced that it would invest in customer experience at its stores over the next three years, with about 100 smaller format stores coming in the next four years.
“Our strong and productive off-mall store base can continuously evolve with our customer’s expectations and demand, and we see substantial opportunities to leverage our real estate in producing long-term growth,” said Mark Griepentrog, Kohl’s chief property officer, in a statement.
The May 25 real estate announcement touted the largely cash flow positive nature of its fleet, and the modernization that has happened at its stores including the addition of Amazon
returns, store pickup options and self-checkout testing.
The department store retailer has piloted 20 smaller format locations averaging about 35,000 square feet compared with the average 80,000 square feet for a Kohl’s store. The smaller stores allow the retailer to establish a presence in new markets, Kohl’s says, with a new location in Bonney Lake, Wash., coming this month, and four other locations in West Virginia, Texas, Washington state and Massachusetts coming in the fall. Kohl’s says the new stores represent $500 million in sales opportunity.
Though Morningstar doesn’t expect a ton of store closures, analysts say the company could let some of its leases expire and “selectively exit underperforming stores.”
In addition to the new smaller stores, the company says it will have 850 Sephora shops in its stores by 2023.
“Kohl’s sits at a unique position to serve customers at both the premium and value ends simultaneously as the company serves 60 million active customers across the U.S.,” wrote Cowen in a note following the group’s Future of the Consumer conference. Kohl’s was a participant.
“[W]e believe potential bids are imminent; although, they do face significantly more risks given a shifting investor appetite in the equity markets, increasing interest rates, and heightened financing scrutiny,” Cowen wrote.
Media reports anticipate that bidders will slash their offers after the volatility in recent weeks.
Meanwhile, Kohl’s is still facing criticism from activist investors Macellum Advisors.
“The dismal results produced by Kohl’s in recent quarters cannot be blamed on economic headwinds, supply chain issues and sweeping deterioration of the industry,” wrote Jonathan Duskin, Macellum’s managing partner.
“In our view, it is crystal clear that Kohl’s continues to lag peers and underperform because of its ineffective Board, weak management team and illogical three-year plan, which the market has already reacted extremely poorly to.”
Kohl’s stock is down 18.5% for the year to date while the S&P 500 index
has fallen 13.6%.