Half of the Announced Closures for Kohl's Are In California.  Why?

Earlier this year on the heels of reporting its 2015 results, Kohl’s announced its intent to close 18 store locations in 2016 and press forward on opening a smaller store format in addition to its clearance and outlet centers.

While time will tell with respect to its new growth vehicle(s) we believe the factors contributing to Kohl’ s store closing decisions are not unique to Kohl’s, but it's important to understand the factors driving managements' decision.

Retail expansion over the last couple of decades represented a form of “land grab” intended to preemptively defend markets by building out rapidly and consolidating market share even if the result was to cannibalize sales of its own stores. For a variety of reasons, including but not limited to muted consumer spending and a shift to online, we are now seeing how this strategy was flawed and the economic damage is becoming more evident.

 

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We examined each of the 9 announced closings in California, compared them on various relevant trade area (10 miles) attributes relative to Kohl’s and adjusted these attributes for Kohl’s primary competitors. Our analysis indicates that Kohl’s may have gone too far with respect to its store concentration in some areas and, as a result, cannibalization may be high.

This is likely manifesting itself in deteriorating store economics and capital returns. We provide a couple of examples below.

In all 9 closings there is a common thread for which our DISCERN retail platform provides the analytics. On some relevant demographic attributes, such as aggregate income per competitor, each store was mostly in the mid-to-lower tier of the trade area (see illustrations). One store (Mira Mesa) ranked among the highest in the state on trade area household income.  This suggests a different problem may have contributed to the store closing decision. It may have been that, due to its higher income profile, Kohl’s just didn’t appeal to the Mira Mesa consumer. This implies Kohl’s may have stretched its store site selection criteria in this instance.

 
 

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Some Data

·      California represents approximately 10% of Kohl’s total stores (before closings).

·      The 9 California closings represent over 7% of the California market.

·      Over 27% of the California store base are located in trade areas under California’s median average store based on the aggregate income attribute.

·      Every Kohl’s store slated for closure had at least 1 other Kohl’s within its defined trade area and an average of over 3 per trade area.

·      At the beginning of 2012 Kohl’s aggregate income per competitive store was $1,325M. At the beginning of 2015 this same metric was $1,393M, owing to openings and closings which proved to be accretive to the overall chain. More recently this metric has remained steady. However, we note that as Kohl’s continues to prune underperforming stores we would expect to see further improvement.

·      Same-store-sales were positive mid-single digits in 2010 and have been mostly negative since. While 2015 full-year comps were up 0.7%, first-quarter comps declined 3.9%.

·      Return on Invested Capital (ROIC) has steadily declined from over 11% in 2011 to under 7% ending 2015. A strong indication of poor capital decisions on the part of management, in addition to secular factors driving investment, namely omnichannel. Decisions involving opening stores and store locations have long tails but over time the quality of those decisions begins to form a clearer shape.

Illustration 1.  California Store Profile, DISCERN Platform

Illustration 1.  California Store Profile, DISCERN Platform

Death By A Thousand Closings

·      Store closures for most retailers will come when situations allow which usually means when leases expire. Thus, the rationalization of physical retail will be a slow process, but the process is underway.

·      Kohl’s California example is iconic of the broader retail “land grab” expansion strategy noted earlier which we view as a leading indicator of further closings across all of retail in the future.

·      ROIC has been and remains under pressure across most of the physical retail landscape.

·      Ultimately, closing and/or re-purposing underperforming stores will lead to improving asset and capital returns for retailers over time. This is true for Kohl’s as well. However, having the analytical tools necessary to help frame this turn is critical for managers.

·      Strategy: Identify retailers with a high discretionary merchandise mix and also significant internal trade area store overlap.

DISCERN has the data and the analytic power to identify retailers with similar characteristics and vulnerabilities.

Illustration 2.  Attribute Data for California, DISCERN Platform

Illustration 2.  Attribute Data for California, DISCERN Platform

Illustration 3. Attribute Data By Zip Code, DISCERN Platform

Illustration 3. Attribute Data By Zip Code, DISCERN Platform

Illustration 4.  Rancho Cordova Store, DISCERN Platform

Illustration 4.  Rancho Cordova Store, DISCERN Platform

Illustration 5. Cypress Store, DISCERN Platform

Illustration 5. Cypress Store, DISCERN Platform

Kohl’s Store Closings

·       Arcadia, CA – 7279 N. Rosemead Blvd., San Gabriel, California

·       Cypress, CA – 10201 Valley View St., Cypress, California

·       Ladera Ranch, CA – 27426 Antonio Parkway, Ladera Ranch, California

·       Mira Mesa, CA – 8140 Mira Mesa Blvd., San Diego, California

·       Rancho Cordova, CA – 11051 Olson Drive, Rancho Cordova,California

·       Santa Ana, CA – 1351 W. 17th St., Santa Ana, California

·       San Jose East, CA – 2323 McKee Road, San Jose, California

·       Upland South, CA – 233 S. Mountain Ave., Upland, California

·       West Hills, CA – 6651 N. Fallbrook Ave., West Hills, California

·       Hialeah, FL – 700 W. 49th St., Hialeah, Florida

·       Tallahassee, FL – 6785 Thomasville Road, Tallahassee, Florida

·       Holcomb Bridge, GA – 2342 Holcomb Bridge Road, Roswell, Georgia

·       Lithonia, GA – 2929 Turner Hill Road, Lithonia, Georgia – Note: The Lithonia, Ga. store will close November 1, 2016.

·       Northlake Mall, GA – 4820 Briarcliff Road, Atlanta, Georgia

·       Saint Charles, IL – 3840 E. Main St., Saint Charles, Illinois

·       Pineville, NC – 9579 S. Blvd., Charlotte, North Carolina

·       Princeton, NJ – 200 Nassau Park Blvd., Princeton, New Jersey

·       Brown Deer, WI – 9060 N. Green Bay Road, Brown Deer, Wisconsin