Dive Brief:

• Kohl's on Tuesday reported a 5.8% year-over-year net sales increase in the fourth quarter that failed to make up for its 10.1% decline the previous year. Digital sales were 39% of net sales, rising 21% compared to Q4 2019 but falling 1% year over year, executives said on a Tuesday morning conference call.

• The retailer said it's depending on its Sephora partnership for growth this year. In the 200 stores with a Sephora shop, Kohl's saw more traffic and a mid-single digit sales lift compared to the rest of the chain, executives told analysts.

• Kohl's posted a 6.9% operating margin in the fourth quarter, driven by 124 basis points in gross margin expansion plus 15 basis points in SG&A expense ratio improvement. Net income in the period fell 13% year over year to $299 million, according to a filing with the Securities and Exchange Commission..

Dive Insight:

On Tuesday Kohl's kept its focus on the future, saying that some of its most promising brand partnerships, including with Eddie Bauer, Draper James and, of course, Sephora, are in their early stages and therefore have high potential to deliver growth throughout the year.

"2021 was an important and pivotal year for Kohl's," CEO Michelle Gass told analysts. "We accomplished a great deal. We have great confidence in the future."

Kohl's is looking ahead after a rather weak holiday sales quarter. Compared to 2019, Kohl's sales fell 4.9%, while overall retail spending rose 21.3%, according to research from GlobalData Managing Director Neil Saunders. "This represents a very serious erosion of market share and signals that all is not well with Kohl's," he said in emailed comments.

In bringing in fresh traffic to Kohl's, Sephora is playing a similar role as Amazon, which has set up returns counters in all Kohl's locations. A quarter of the customers going to a Kohl's-based Sephora are new to Kohl's, many of them younger and more diverse than the average Kohl's shopper, said Gass, who called the partnership "game-changing." Kohl's recently said it will run 600 of the shop-in-shops by the end of the year.

"This introduction will propel Kohl's into a leading beauty destination," she said. "It also is a great example of how we're investing in profitable future growth by elevating our product assortment and the overall experience. Sephora drove significant beauty sales and its first holiday season at Kohl's."

J.C. Penney was once similarly glowing about its own Sephora partnership (since dissolved), but the tie-up couldn't prevent Penney's 2020 bankruptcy. It's unlikely to adequately make up for Kohl's deficiencies either, according to Saunders.

"The ranges are not compelling enough, too many shops are dispiriting, and there isn't enough newness in assortments across home or apparel," he said. "Kohl's solution, at least for the past six or so months, is to point to the addition of Sephora in some of its shops. But this isn't enough."