Dive Brief:

• Kohl’s on Tuesday reported that total third quarter revenue fell 0.1% year over year to $4.6 billion, a result that some analysts said bodes ill for department stores.

• The retailer’s 0.4% growth in comparable sales came on top of the prior-year quarter’s 2.5% increase, but missed Credit Suisse analyst expectations for 1% growth in that metric. Gross margin declined 67 basis points to 36.3% of sales, according to a company press release.

• Net income in the period fell 24% to $123 million. The department store lowered its earnings guidance for the year to between $4.75 and $4.95 per share, down from its previous expectation for $5.15 to $5.45 per share. The company also expects comps to decline 1% for the year, CFO Jill Timm said on a call with analysts.

Dive Insight:

Kohl's results kick off a week of earnings reports for several retailers and cast a shadow over the department store segment in the process.

In a statement Tuesday, Kohl's CEO Michelle Gass noted that store comps returned to growth from the second quarter's decline. But Credit Suisse analyst Michael Binetti called it a "big miss" in light of the retailer's new initiatives in apparel and cold weather in the Midwest and said his team was "disappointed by the magnitude of the 2019 [earnings] guide cut." The report also represents a "negative read-thru" to upcoming department store earnings this week from the likes of Macy's and Nordstrom, according to a Credit Suisse client note emailed to Retail Dive. 

On a call with analysts Tuesday, Timm noted that underperformance in women's apparel hurt in the quarter and that warm weather outside of the Midwest, along with stiff price competition, took a toll. The company expects markdown pressure to continue into the fourth quarter, she said. Activewear, men's, teen apparel, jewelry and home were all areas of strength, Gass said, although some of that was supported by promotions. Women's was the only non-performing area, but she said that recent merchandise changes position the company well in the short term, in light of digital sales strength even in that category.

Gass has long touted the company's agreement to take Amazon's returns, a service now available in all its stores nationwide, as a boon to store traffic, and on did so again on Tuesday, telling analysts that the option is driving incremental traffic to stores, and bringing in younger customers than the retailer usually sees.

The company's stores may not be in the best shape to take advantage of the retailer's Amazon partnership, however. In fact, Kohl's customer experience is better online, according to analysts at Jane Hali & Associates. "In-store experience is not good," they wrote in a client note emailed to Retail Dive, adding that they believe "the stores need an update that could lift the experience. On-line and on their shopping app, [Kohl's] has a great shopping experience. In Q3, we have seen significant improvements across their digital channel. Merchandising has greatly improved."

Those improvements, hailed by other analysts as well, include several tie-ups with popular and emerging brands, including Nike, Adidas, Nine West, Scott Living home lifestyle collection, and Elizabeth and James, plus a holiday capsule by fashion designer Jason Wu, along with a revolving new "Curated by Kohl's" collection. But those also have required investments that hit profits, particularly in the short term, warned GlobalData Retail Managing Director Neil Saunders. 

"Ultimately, we believe this squeezing of the bottom line is the price Kohl’s must pay to keep itself relevant; as such it is a prudent investment," he said in emailed comments.

But the retailer, along with rivals, faces broader challenges that have forced markdowns, especially on apparel, analysts noted. That points to concerns about the consumer economy. "This remains solid but we expect conditions to deteriorate as we move into 2020," Saunders said. "This does not necessarily mean a recession, but it likely means consumers will be more careful and discerning in their purchases."

Kohl’s may be particularly vulnerable to that because its customers are more likely to be affected by any downturn, he also said, and that "means the company will need to double down on attracting them and persuading them to spend."