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How Kohl's Can Survive the Retail Apocalypse

If soon-to-be CEO Michelle Gass needed any reminder of what a tough job she is stepping into at Kohl's Corp., the department-store chain's latest earnings report surely provided one.

Kohl's said Thursday its same-store sales rose a meager 0.1 percent compared to a year earlier. The company said its traffic trends continued to improve -- but just because footfall is better doesn't mean it's fully healthy.

There is perhaps no place where you can more clearly see signs of a retail apocalypse than in the department-store segment. Just look at how badly investors have slammed the sector in the past year:

But does Gass have a reasonable chance of steering Kohl's away from the cliff of retail doom? I think so.

She'll have to figure out how to make the most of some promising new initiatives. In particular, Kohl's recently began a partnership with Amazon.com Inc. that includes adding dedicated areas for Amazon gadgets and smart-home devices in certain Kohl's locations. Even more importantly, Kohl's has begun accepting returns of certain Amazon purchases at some of its stores.

Only a limited number of stores have these Amazon offerings to date. But you could imagine them being powerful traffic drivers if deployed more widely in the future. And that's perhaps what Kohl's needs more than anything else: bodies in its stores.

The Amazon returns, in particular, could prove to be a clever tool for attracting new faces to Kohl's. It could also help bring in existing Kohl's shoppers more often, as people tend to prefer returning online purchases in stores.

If return service lives up to its promise in early tests, then Gass ought to roll it out widely in 2018 and consider plunking down big marketing dollars to make consumers aware it exists.

Gass could also build on the early success Kohl's has had adding Under Armour Inc. activewear to its stores. Given that Under Armour's sales are faltering and its stock price is plummeting, you might wonder why I see potential here for the department-store chain.

First, whatever Under Armour's troubles in the broader marketplace, the brand is a hit with Kohl's shoppers. In the latest quarter, sales in Kohl's activewear division were up a robust 20 percent compared to a year earlier -- growth executives said was driven partly by Under Armour.

But the early success of the Under Armour partnership is also important because of what it suggests Kohl's can do next. Chuck Grom, an analyst with Gordon Haskett Research Advisors, notes Under Armour items come with a relatively high average unit retail, or AUR, and Kohl's shoppers are shelling out for them. This should motivate the retailer to go after more big brands offering similarly favorable pricing opportunities -- or to go back to existing suppliers and get their higher-priced goods.

And Kohl's is only in the early innings of re-imagining what its store portfolio should look like. It's testing smaller-format locations of about 35,000 feet, a set-up that could help keep inventory and labor costs down and thus shore up profitability. Gass should ramp up these efforts and seriously consider something her predecessor hasn't: closing a substantial number of stores.

It's true Kohl's stores aren't as likely to be in the troubled, enclosed malls where you tend to find Macy's Inc. and JC Penney Corp. Inc. stores. But Kohl's fleet of more than 1,100 stores nevertheless feels unsustainable given the shift toward online shopping.

Gass has plenty of opportunities to get Kohl's on more-solid footing. Now she just has to take advantage of them.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.


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