Confidence In Kohl's

In the Lehman Bros. rating terminology, "overweight" means that the stock is expected to outperform the total return of the business sector it is in over a 12-month period from the time of the rating. The report cites the consistent spread between comparable sales of newer stores versus more mature locations, along with a new marketing campaign that Kohl's has launched, including ramped-up PR efforts. In addition, the report says the team of analysts who follow Kohl's and who met with the department store's management recently, continues to believe "Kohl's real estate strategy is sound."

Kohl's stores in years two to four of operation consistently register comparable sales increases of 6% to 7% better than stores five years old or older, according to the report by a Lehman Bros. team led by analyst Robert S. Drbul, which says the new marketing efforts are "successfully attracting new and lapsed customers." Drbul's report mentions an array of statistics regarding comparable store sales, including problems in the Midwest, where the company's store continue to register comparable sales of approximately 4.% to 5.5% below those in the rest of the chain. But the crux of the statistics is explained in one of the report's conclusions. Despite what the analysts call "challenging comps over the last two years," they conclude: "We believe the fact that the disparity between comps of newer stores and more mature stores has not changed over time demonstrates that the company is making sound real estate decisions and selecting appropriate locations and continues to reinvest in older stores to prevent them from deteriorating."

Kohl's overall expansion plans, although not listed in the Lehman Bros. report, are outlined in recent SEC filings by the company, and those filings suggest that the chain will continue to expand at a steady pace. The company operated 652 stores in 40 states as of April 2, compared with 563 stores in 37 states a year ago. Kohl's expects to open approximately 95 stores for 2005, and it is continuing its expansion in California, which has been an important part of its growth strategy for several years. One part of the Lehman Bros. report is a discussion of potential for growth in California by Kohl's, which made a big splash when it brought its Midwestern department store chain to the state in 2003, entering one of the toughest retailing markets in the country with dozens of new stores at once and a 652,000-sf warehouse in San Bernardino. Since then, Kohl's has gone from zero to 62 stores in the state in two years and sees significant potential for further expansion, although California is only part of the story for the department store chain. Management believes that the Federated/May merger could yield some real estate opportunities for Kohl's, particularly in the Northeast and California, according to Drbul, who met with Kohl's management recently. Since the May chain "has been very price competitive" against Kohl's the merger with Federated and the plan to move May more upscale "could lead to additional market share opportunities for Kohl's," the Lehman Bros report suggests.

Kohl's could also make some inroads with a new store format, the report suggests. It explains that, excluding the Midwest where the company has one store per 225,000 people, Kohl's penetration is typically one store per 550,000 people.

However, Kohl's is in the testing phase with small market stores, only four of which are up and running, but management is planning to open more. Expansion plans at Kohl's include some new warehouses in the works as well, among them the opening of its eighth distribution center, in Macon, GA this year.