Contrary to popular belief, Amazon hasn’t steamrolled the entire retail industry.

Although many brick-and-mortar retailers have suffered serious declines in sales and profitability in the digital age, the Kohl’s store chain is more than holding its own.

Kohl’s operates more than 1,100 stores across 49 states, generating approximately $19 billion in annual sales. Especially in recent months, the company has been giving its stakeholders reason to believe its future looks bright. In January, Kohl’s disclosed that its stores had delivered strong results during the all-important holiday season, easily beating analysts’ expectations. At the time, CEO Kevin Mansell noted that Kohl’s had enjoyed an especially strong Thanksgiving weekend, both online and offline.

So as Kohl’s prepared to announce full-year revenues March 1, investors had high hopes. And Kohl’s delivered. The company announced fourth-quarter earnings and revenue that exceeded analysts’ expectations. As reported in CBNC, Kohl’s reported:

  • Earnings per share: $1.99, adjusted, vs. $1.77 estimated by analysts
  • Revenue: $6.78 billion vs. $6.74 billion estimated
  • Same-store sales: growth of 6.3 percent vs. an increase of 5.7 percent expected

So, what is the Kohl’s formula for success in the age of Amazon?

Mastering Mobile

On an investor call, Mansell noted that online sales grew 26 percent for the fourth quarter, driven by more traffic and improved conversion. In addition, foot traffic to physical stores increased.

Although he was clearly pleased with the online growth, he noted that integrating digital and mobile with the in-store experience is the primary focus for Kohl’s. To that end, Mansell noted that using data and analytics to improve the mobile experience has been a contributing factor to increases in sales.

For example, a Your Price feature shows customers how much they’ll save based on offers they’ve stored in their mobile wallets. Although Your Price is available on the Kohl’s website, its availability via the mobile wallet makes it easier for shoppers to purchase merchandise in the store when customers are obviously in shopping mode. Mansell noted that the use of analytics has made it possible for Kohl’s to offer more personalized pricing information based on customers’ preferences.

More than 21 million customers have downloaded the mobile app so far, according to the Kohl’s website.

Data-Driven Everything

Data and analytics have also helped Kohl’s anticipate spikes in demand and adjust inventory levels accordingly in-store, which contributed to exceptional sales for national brands such as such as Levi’s, Nike, Skechers, and Under Armour. At the same time, Kohl’s has used analytics to streamline its offerings of proprietary brands to stock only its highest performing brands.

Mansell said in a statement published in the company’s 8-K SEC filing, “We improved our merchandise margins through strong inventory management and improved promotional and permanent markdowns. All areas effectively managed their expenses. And, we ended the year with 7% less inventory.” On the investor call, Mansell predicted continued improvements in in inventory stocking processes throughout 2018.

Location, Location, Location

It’s easy to see why the in-store experience will continue to be an important focus for Kohl’s. As analysts and journalists have pointed out, Kohl’s stores are typically located apart from shopping malls. Consequently, Kohl’s stores have not been stung by the overall drop in foot traffic in shopping malls, unlike other department stores connected to malls.

As a result, Kohl’s has been putting more focus on maximizing the value of its brick-and-mortar locations. To that end, Kohl’s recently launched a pilot program, Your Store, which is a learning lab environment to test and improve concepts to develop great customer experiences and be more efficient. Examples of Your Store initiatives include next-generation checkout and use of predictive analytics to make quick adjustments in inventory. Kohl’s piloted Your Store at eight stores in 2017 and will roll out 58 in 2018.

Experimenting with a Frenemy Ecosystem

In addition, Kohl’s has been testing a relationship with Amazon whereby customers can return Amazon products in Kohl’s locations. All customers need to do is bring their product to Kohl’s, and Kohl’s will manage the packing and shipping at no cost. The idea behind the return centers is to draw more foot traffic. Mansell said it is too early to measure the impact of the return centers, but Kohl’s will provide a report at some point in 2018.

What’s Next

Going forward, Kohl’s will:

  • Create a strong customer loyalty platform. Kohl’s will consolidate features such as Kohl’s Cash (credits redeemable at Kohl’s) and Smart Cart, which offers extra Kohl’s Cash for picking up online purchases in a store. Currently, Kohl’s offers a variety of loyalty programs, but they’re not all available on a single platform. Kohl’s will make it easier for customers to redeem points through its various incentive programs via mobile or desktop formats through an integrated system.
  • Get more efficient with technology. Both Mansell and CFO Bruce Besanko noted that Kohl’s will transition more and more of its operations to a cloud-based environment, resulting in improved efficiencies. Although Kohl’s did not provide detail beyond a few passing remarks about the cloud, it has been reported elsewhere that cloud computing is providing the backbone for the Kohl’s loyalty and shopping app. And as we have reported on our blog, retailers such as Walmart are increasingly relying on cloud computing to improve how they operate. And in an on-demand world, every improvement counts.
  • Stores as Living Labs. As noted, Kohl’s plans to roll out its Your Store initiatives. In fact, by 2019, Kohl’s believes all its stores will become “learning labs” for continuous experimentation. The goal is to make all Kohl’s stores more nimble and responsive by using real-time to respond to shifts in customer demand. The proof of Your Store’s effectiveness will likely be seen in better management of inventory and adaptable pricing, perhaps similar to how Amazon uses dynamic pricing in its physical bookstores.

Kohl’s indicated that it will report its next quarterly performance in May. The coming weeks will be crucial. Kohl’s has set high expectations. As Walmart recently demonstrated when its stock dropped after a quarterly earnings announcement, there is a heavy price to pay when expectations are not met. It’s no longer enough to counter Amazon. Retailers need to show their own strategies will pay off long term.

Saul Delage

Saul Delage

VP Growth