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Kohl's to close 18 underperforming stores; locations not yet announced

Rick Romell

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Feb. 25 2016

Wisconsin-based Kohl's Corp. will close 18 stores this year as the company seeks to cut costs and find the proper balance between its extensive brick-and-mortar presence and its increasingly important online business.

The as-yet-undisclosed stores to be shuttered represent a small slice of Kohl's nationwide portfolio, but the move is an unusual step for a retailer that throughout the 2000s pursued aggressive expansion.

Closing the underperforming locations, however, will free cash that can be invested in more-promising initiatives.

"We need to really place our bets on the things that are working and acknowledge where we have assets or resources in things that are not working as well," CEO Kevin Mansell said in an interview.

He said the stores that will be closed account for less than 1% of the company's sales.

Kohl's announced the plans Thursday as it formally released its fourth-quarter financial results. The chain includes a location in Duluth.

The company earlier this month had already reported that its full-year earnings per share would be less than expected, and that it would post only modestly higher same-store sales for the quarter and the year.

Thursday, the firm said revenue for the three months that ended Jan. 30 totaled $6.39 billion, up 0.8 percent from a year ago. Net income was $296 million, down 20 percent.

Earnings per share for the quarter came in at $1.58, down from $1.83 a year ago, but two cents better than analysts' average estimate.

Like many retailers, Kohl's is wrestling with the growing shift of shopping to online outlets. Its digital business has been growing rapidly too, but not rapidly enough to lift its sales from the lackluster level of the last few years. Since 2011, Kohl's annual revenue has grown just 2.1 percent.

The company has launched a sweeping series of initiatives — the "Greatness Agenda" — intended to lift its performance. While the effort has notched some successes, it has fallen well short of the pace needed to achieve Kohl's stated goal of raising revenue by $2 billion, to $21 billion, in 2017.

Investors, meanwhile, have punished the firm. After Kohl's signaled earlier this month that its earnings would be less than expected, its share price dropped nearly 19 percent in one day.

Thursday, Mansell acknowledged that the company probably won't hit its 2017 revenue target.

"Though I do believe we'll achieve that goal within a short time after," he said.

Kohl's is far from the only legacy retailer searching for a path in the digital age, and not the only one closing stores.

J.C. Penney closed 40 last year, and will shutter seven more in 2016. Macy's said in January that it will close 40. Sears, easily the most troubled department-store chain, said this month that it will accelerate previously announced closings of 50 Sears and Kmart locations.

Kohl's will announce by the end of March which of its stores will close, and will close them by the end of June. All employees at those locations will be offered jobs in nearby Kohl's stores "without exception," Mansell said.

Eighty to 100 people work at an average store. Kohl's has 1,164 stores in 49 states.

The company added an average of about 75 stores a year over the last decade, but dialed back amid the recession and slowing sales. Even then, however, closings were the great exception — typically one or two a year.

"Usually they were stores that we literally were relocating either due to a lease expiration or a better location," Mansell said.

Last August, Kohl's chief financial officer Wes McDonald told analysts the firm would close "a couple of stores" in 2016.

But Mansell said this week that Kohl's is feeling the mounting impact of online shopping and the mix of digital and brick-and-mortar commerce that retailers call "omnichannel."

With the increase in online shopping, the company may be able to reach the same number of customers in a given market with fewer stores, he said.

At the same time Kohl's is closing stores, it will boost capital spending this year by 20 percent, to $825 million.

"This is not a company that's pulling back," Mansell said.

The great majority of the spending increase, however, comes from a shift in the timing of information-technology purchases.

Among other areas of investment will be construction of a fifth e-commerce fulfillment center, a $200 million project.

The company also plans to open seven new stores that, at 35,000 square feet will be about 40 percent the size of a typical Kohl's. The smaller stores — they'll be a bit bigger than a T.J. Maxx or Marshalls — will give Kohl's options in areas where the market isn't big enough or real estate costs too much for a full-sized store.

In addition to the small-format stores, Kohl's will open 12 Fila apparel and footwear stores in outlet malls — the first time Kohl's has ventured into outlets. The company also will continue experimenting with its Off-Aisle discount venture, adding two stores under the brand in Wisconsin.

The closings of the full-sized stores, which have much higher expenses relative to sales than an average Kohl's location, are part of a drive to cut costs. A recent reorganization that saw three upper-level executive positions cut is also part of that effort.

The goal, Mansell said, is to identify ways to run the business more efficiently, "but most importantly, create more speed and be more agile more nimble."

Kohl's estimates the store closings will generate annual savings of about $45 million in cash and $10 million in depreciation.

First, though, the company expects to incur $150 million to $170 million in one-time costs stemming from the closings and the corporate reorganization. Kohl's will book the expenses in the first two quarters of 2016.