Kohl’s is fitting in with the new frugality

Kohl’s Corp. gambled big when it opened 30 new California stores last year amid one of the worst retail environments in decades.

But in just a few months, the stores have turned out promising initial results -- attracting many first-time Kohl’s customers and boosting business at the department store chain’s existing locations.

Although the new stores increased the number of Kohl’s locations in California by one-third, statewide sales have grown more than 40% year over year since the Sept. 30 grand openings, company executives said.

In the Southland, analysts say, Kohl’s is helping fill a void left by the recent collapse of Mervyns, Gottschalks and other retailers.

Situated in primarily free-standing locations, its stores are convenient for shoppers weary of fighting traffic and crowds at the mall. And with a wide selection of mid-priced apparel, home furnishings and accessories, plus regular discounts and coupons, Kohl’s fits in well with consumers’ new frugality.

“It was a very good strategic decision for Kohl’s to get those stores,” said Patrick McKeever, a retail analyst at MKM Partners. “Having the right merchandise in the right stores at the right time has been a big advantage.”

Now, despite the continued drag on retailers and the economy, Kohl’s is trying to sustain its performance.

“We’re in a nice position because we have been successful in this period, with a tremendous number of new customers,” Chief Executive Kevin Mansell said. “Now of course the challenge is we have to retain them and move them from ‘I tried Kohl’s’ to ‘I’m a Kohl’s brand lover.’ ”

Tiffany Llamas, 22, said she was initially hesitant to shop at Kohl’s because she worried that prices would be too high. Still, she went to the chain’s new Sun Valley location for the first time during the holidays and returned again this month to buy clothes, shoes and a backpack for her 5-year-old son, Adam.

“I didn’t realize how much they have on sale,” said Llamas, a San Fernando resident. “I would shop all the time at Mervyns; I was disappointed when they took it away. Now, I like Kohl’s better.”

Sales during the crucial Christmas season were strong at new and existing Kohl’s locations, Mansell said. But with the holidays over and the grand-opening hype fading, the Menomonee Falls, Wis., retailer faces some significant obstacles. Chief among them: shoppers’ reluctance to spend freely.

Mansell said Kohl’s was aware of the pressures facing its customers, and he was blunt about the company’s strategy to keep sales up.

“We know a big part of our success has to come at the expense of our competitors,” he said. “That’s how we’re approaching 2010. There are not more dollars to be had, so Kohl’s just has to take some of what belongs to others if we’re going to grow.”

But its rivals -- department stores, discounters, off-price retailers and specialty shops among them -- are primed to fight as well.

Many have retrenched during the recession by aggressively cutting costs and streamlining their business operations. So although the downturn has been brutal on retailing, industry experts say the upside is that those who are still around are emerging leaner and more efficient than before.

“This is not a situation where Kohl’s has an open playing field to open stores as they wish without facing any competition,” said Michelle Clark, a retail analyst at Morgan Stanley. “The other players in the space, coming out of this recession, are operating better than they have in a long time.”

Competitors declined to comment on Kohl’s effect on their sales, but analysts said many chains have taken actions to keep shoppers from flocking to Kohl’s.

J.C. Penney Co., for example, held a “we’ll pay the taxes” promotion for California shoppers the weekend before Kohl’s opened its new stores last year. Spokeswoman Ann Marie Bishop said the offer was a “competitive marketing move based on what our competition was doing in the market.”

Besides keeping an eye on rivals, Kohl’s executives say they still have a lot to learn about California customers and their shopping habits after entering the state just seven years ago. Mansell said the chain was working to improve its customer service and was carefully monitoring local merchandise preferences to ensure that stores were stocking the right styles in the right sizes.

Those are improvements that would make Carolee Peterson, 68, a more regular Kohl’s shopper.

“Every time I find something I like, I can’t find it in my size,” Peterson, a retired North Hollywood resident, said while looking for a purple button-down shirt at the Sun Valley store recently. “They don’t keep enough in stock.”

But Peterson and other customers said they enjoyed shopping at Kohl’s stores, which at an average of 88,000 square feet are spacious, brightly lighted and feature easily defined sections in a racetrack layout. Many said they liked that the chain’s stores were usually away from traditional shopping centers.

At malls, “you park in this giant parking lot and walk to and fro, here and there,” said Pam Holmes, 53, who was shopping at Kohl’s new Huntington Beach location recently. “I prefer free-standing stores. Now that Kohl’s is here, I really am happy to just come here pretty much.”

The openings, all in former Mervyns locations, have also been a boon to the roughly 4,200 new California workers Kohl’s hired and to neighboring businesses, such as a Panera Bread in the same shopping plaza as a Kohl’s in Westchester.

“Business was very slow when they decided to close down the Mervyns store,” Panera store supervisor Manny Trujillo said. “But when they opened up Kohl’s, that’s when we started getting a lot of people again. It helps a lot. People do their shopping and then they come here to get a meal or a sandwich.”

The early success of the stores has fueled the chain’s desire for more expansion, with Mansell saying the company would like to open dozens of new stores around the country in coming years. Kohl’s has plans to open five more California locations this year and 25 in other states.

But analysts said the glut of retail real estate available in 2008 and 2009 -- which allowed Kohl’s to snag dozens of former Mervyns locations around the country at a bargain -- has thinned, so future growth opportunities could be harder to come by.

“Real estate availability is going to be a big question,” said Liz Dunn, a retail analyst at Thomas Weisel Partners. “It remains to be seen what that environment looks like.”

Aside from its new stores, Kohl’s, with 1,059 stores in 49 states, has continued to perform well nationally.

For the quarter ended Oct. 31, Kohl’s reported profit of $193 million, a 20% increase from the same quarter a year earlier. Sales at stores open at least a year, known as same-store sales, increased 2.4%.

In December, same-store sales rose 4.7% compared with a year earlier, easily beating rivals such as J.C. Penney, Macy’s Inc. and Target Corp. In November, Kohl’s 3.3% sales increase was the best of every chain in the department-store sector that Thomson Reuters surveyed.

That’s helped make Kohl’s one of the recession’s few retail winners, analysts said.

“The biggest challenge is to keep it going,” Dunn said. “It’s a dilemma that they face only because they’ve done so well.”