Kohl’s Poised for Burst of Expansion Into the Southland

Kohl’s Corp., a Wisconsin-based chain of moderately priced department stores that garners praise from both Wall Street and shoppers, is quietly scouting dozens of California locations.

Company executives declined to comment on expansion plans for the 350-store chain, adding that Kohl’s has made no specific announcements about California. At this point, the chain’s westernmost store is in Denver.

But city officials in Anaheim, Corona, Temecula and Ventura say Kohl’s representatives are considering sites in their cities. Lancaster and Riverside civic leaders say representatives of Kohl’s have recently reviewed sites there but no longer appear interested.

In Ventura, executives with Pacific Theatres Realty Corp. say Kohl’s is close to signing a lease for an 87,000-square-foot anchor store in a proposed 26-acre mall. Construction could begin this spring, said John Manavian, Pacific’s director of real estate development. Kohl’s is also in discussion for a spot in Pacific’s Anaheim shopping center project, Manavian said.

Nancy Martin, Corona’s economic development coordinator, said Kohl’s representatives and its site consultant, Santa Monica-based Epsteen & Associates, have told her Kohl’s is interested in opening two stores in Corona and as many as 35 stores in the region in spring 2003.

“That’s what they’ve repeated out here,” she said. “That they’re looking to make a big impression in the Southern California market and they want to do it reasonably together. They don’t want to trickle in.”

That kind of expansion would be consistent with Kohl’s previous forays into new areas. The company typically lines up a number of stores in a new market and then hits the competition with a massive media blitz, said Bill Dreher, a retailing industry analyst at FleetBoston Robertson Stephens in New York.

In March and April the chain added 32 stores to the New York, Connecticut and New Jersey region, as part of its 2000 addition of 60 stores nationwide, a Kohl’s spokeswoman said.

Kohl’s has said it will open 15 stores next year in the Atlanta region, its debut in Georgia, as part of a plan to open 55 to 60 new stores nationwide.

Each time Kohl’s has entered a market, the company’s stylish stores have meant good news for budget shoppers and new worries for competitors, analysts say. In 1999, Kohl’s reported its fourth consecutive year of more than 30% earnings growth.

Kohl’s success seems to disprove the claims of laggards J.C. Penney Co. stores and Target Corp.’s Mervyn’s California.

Those chains and others in the moderate range, such as the soon-to-close Montgomery Ward, have said falling sales stem from the stores’ difficult niche between expensive department or specialty stores and discount mass merchants.

But Kohl’s has thrived in that middle spot, bringing trendy brand-name goods and low prices with an innovative store design that blends mass with class.

“Someone who is not familiar with Kohl’s will think they’re giving away the store,” FleetBoston’s Dreher said. “But this is how they operate.”

In a Nov. 14 conference call with investors, Kohl’s President Kevin Mansell said the chain intends to be a coast-to-coast retailer. Mansell said Kohl’s is exploring options in new markets and expects to announce future moves in the Southwest and further into the Northeast.

George Strachan, a Goldman, Sachs & Co. retail industry analyst who covers Kohl’s, said he would be surprised if Kohl’s begins building in California before 2002.

With an excellent track record for almost immediately pulling new stores to the top of the market, Strachan said, a Kohl’s store base here would almost certainly be combined with a Western distribution center, making a California push anything but an overnight endeavor.

Month after month, Strachan has lauded Kohl’s better-than-expected performances.

“Most department store execution is based upon mega-brands, with the house labels tucked away in the back,” Strachan said. “The advantage Kohl’s has is that they’ve got moderate right up front, that’s what they’re about and they create excitement around it.”

Kohl’s also chooses to build smaller stores than much of its competition, concentrating on strip malls or stand-alone sites in heavily shopped areas.

So far, the strategy has worked. Kohl’s 1999 sales rose 7.9% in stores open at least a year. Highflying Target stores during that period had sales gains of 5.1%, Federated Department stores reported a 4.4% sales gain and J.C. Penney stores’ sales declined by 1.1%.

In November, Kohl’s Chief Executive Larry Montgomery said same-store sales were up 11.2% from the same time last year.

Kohl’s was founded as a grocery store in the 1920s by Max Kohl of Milwaukee. One of Kohl’s sons is three-term Democratic Sen. Herbert Kohl, who also owns the Milwaukee Bucks basketball team.

The chain branched into department stores in 1962 and grew into a hybrid between upscale and discount stores, siphoning shoppers from both ends.

In 1978 the company was bought by BATUS Retail Group, a subsidiary of British-American Tobacco Co., and expanded from 10 to 39 stores in the upper Midwest. In 1986, a group of Kohl’s managers and investors bought the chain from BATUS and continued expanding. It went public in 1992 and joined the S&P; 500 in 1998.

Mark Sellers, a stock analyst with Morningstar.com, estimates Kohl’s can triple its store count to 900 before it saturates its market.

“So since California is its biggest market, that’s a very important part of its strategy,” Sellers said.

On Friday Kohl’s stock (ticker symbol: KSS) closed up 50 cents to $61 on the New York Stock Exchange. It started off the year at $33 a share and its 52-week high was $64.69, hit in July.