Kohls NNN Smaller Footprint Strategy paying off means good news for investors

During a WWD Apparel and Retail CEO Summit, Kohl’s Chairman and CEO decided that the department store chain will be aggressively pursuing new distribution channels. This would include implementing smaller store formats, outlet stores and expansion of Off Aisle, an exclusive pilot concept that will be stocked with returned merchandise. This is good news for net lease investors seeking Kohl’s NNN investments.

The new initiative which is part of a “Greatness Agenda” which was started last year as a plan to reinvigorate the company of last years flattened growth of sales and market share. This plan is target middle markets of middle income customers, attempting to bring up a 2 percent sales and traffic deficit. Initially believed that some of the decline was due to a decrease in consumers having less discretionary income along with consumers spending less on categories where Kohl’s hold a large share of which are apparel, among others. Change was evident as Mansell said the consumer mindset regarding price expectations changed. “It created a whole new set of consumer expectations that were very different than the consumer expectations that existed in the past,” Mansell said. “Consumers moved from a simple proposition in our case of visiting stores that were easy to shop to a dynamic environment where low prices and off-price was a much bigger factor—and virtual options existed in addition to the brick-and-mortar options.”

Kohls Store

With the new Greatness Agenda, Kohl’s has now achieved four consecutive positive quarters and forecasts $21 billion in sales by the end of 2017 which they expect the brick and mortar presence will play a major role. “We became $19 billion by creating an easier experience in a physical place, in a brick and mortar store,” Mansell explained during the Apparel & Retail CEO Summit.“Our brick-and-mortar business and our physical presence is a dramatic competitive advantage versus both virtual retailers and some of our brick-and-mortar competition.”

More Opportunity in the Net Lease Market: Kohls NNN becomes more attractive

Kohl’s have around 1,200 stores nationwide, which averages approximately 104,000 square feet in space. The smaller foot print model will target new 35,000 square feet prototypes and will provide opportunities in urban market areas that do not have the economics or availability of real estate to support a larger store format. Mensell admits that this process will be a challenge as they have to meet the expectations of the larger prototypes. Some of the larger formats have actually been downsized to the smaller model that have not met volume expectations. This will be more likely happen in select markets where it makes sense. Wesley McDonalds, CFO says the downsizing strategy would likely be limited to the Northeast and Mid-Atlantic, where real estate is at a premium. In the Boston location for example, Kohl’s downsized two stores, giving the space back to the landlord. “I don’t know necessarily that we see fewer stores,” Mansell said. “They’ll probably look a little different and they’ll probably be smaller than they are now, but I actually think this strategy, effectively executed, will give us more presence, not less presence than we have today.” says McDonald.

According to a CNBC report not only Kohl’s are switching their large format stores to small ones but also companies including Target, Walmart and Saks Fifth Avenue. This is an increasing trend as time constraint shoppers that do not have the time to navigate large department and discount stores.

Kohl’s traditional format is popular with retail owners and landlords not only because of the chain’s strong credit, but also because of the type of customer it attracts and the traffic it generates. Timko says Off-Aisle could end up being just as attractive, depending on how Kohl’s positions the stores.

Kohls Logo

“If it creates an attractive selling environment with quality merchandising it could be appealing to landlords with large vacant spaces,” she says. “There are plenty of markets with discount brands adjacent to premium ones. I think the real risk to landlords is the unknown of whether the concept is sustainable.”

About Kohl’s NNN Leases

Kohl’s NNN Lease stores are a chain of department stores that operates in 1,162 stores in 49 states. It is the second largest department store in the United States of America by retail sales statistics. Kohl’s specializes in the sale of variety goods, apparel, shoes, accessories, home products, electronics, bedding and kitchen goods.

This leases are guaranteed by Kohl’s Corporation, which is rated by S&P as “BBB/Stable” investment grade credit. Total 2014 Revenue was $19 billion, Net Income was $867 million, and Net Worth was $6 billion.

Kohl’s began as a chain of supermarkets in Southeast Wisconsin and became the largest supermarket chain in the Milwaukee area. The first Kohl’s department store opened in 1962, with a business model that positioned the store as an alternative between higher end department stores and discount stores. Most of the Kohl’s Corporation expansion occurred in the 2000’s and there are now over 1,162 stores in 49 states.

Kohl’s Corporation (KSS) has a stable credit rating, with Moody’s giving them a Baa1 and S&P BBB+. These credit ratings reflect Kohl’s Corporation stable financial status and operating performance. Kohl’s is projected to maintain their moderate fiscal policies and reduce their debt leverage in the coming year.

Most Kohl’s NNN are Ground Leases where the tenant is responsible for the roof and structure, HVAC, Insurance, Utilities and Property Taxes. A brand new lease is typically 20 years in length and have 10% rental increase at each option period which are usually 6 (five) year renewal options.

Typical locations are larger markets to serve middle income consumers. A recent deal example of a Kohl’s located in an affluent Orlando location:

The Kohl’s property is on a near perfect site, adjacent to one of Orlando’s premier and affluent executive offices and residential communities, along Central Florida’s powerful I-4 growth corridor en route to the beaches, as well as on the soon to be built Central Florida Beltway.

The sub-market has all the key elements to continue to drive high quality growth, including arterial connectivity, executive employment, some of Florida’s best schools, proximity to lakes, rivers, intracoastal waterways and Atlantic beaches.

The existing affluent residential base to the immediate west and south is among the wealthiest in the entire region.

There are four designer golf course country clubs and housing prices reaching $4-$5 million dollars.

As far as share performance Kohl’s jumped up 7 (seven) percent recently after a low price department store topped Wall Street’s earnings and sales forcasts. Helping this surge Kohl’s ravamped it’s loyalty program that counts 34 million of its members. Part of this program is to encourage the members to sign up for its credit program by presecreening them to let them know if they qualify. This member number is double from what it was last year.

Kohl’s is also increaing its investments in holiday marketing by about 14 (fourteen) percent which it said it is probably te largest increase it had in a long time. The plan is to make its stores a destination because they tend to not be a part of any malls and drive a lot of traffic to its stores for the holdays.

The retailer, which said it achieved it’s first $100 million dollar sales day recently with the efforts of it’s marketing campaign. “Kohl’s results are surprisingly good, especially considering Macy’s miss yesterday,” Citi analyst Paul Lejuez told investors. “Still, as we look to [the fourth quarter], the competitive environment appears more challenging than usual, and we expect it to be tough for Kohl’s to outperform.” according to an CNBC report.

About the Author

Dwaine L. Clarke is the Founder and President of GCT Net Lease. GCT Net Lease is an investment real estate services firm exclusively focusing on Single and Mult-Tenant Net Lease Properties. The firm provides a full range of brokerage and advisory services nationwide to High Net worth Investors, Developers, REITs and Institutional Investment Funds. GCT Net Lease is headquartered in Windsor Connecticut. Dwaine is also a nationally recognized speaker and consultant. He is also the author of three best selling commercial real estate investing books. Mr. Clarke’s experience branches through close to over a decade of working with and for some of the nation’s top investors to purchase, underwrite, develop and manage millions of dollars in commercial investment real estate. For his case, he has not only assisted these investors, but also became a student of theirs. Through careful analysis he started to understand what these investment experts were doing, using top strategies to buy, manage and sell their investment properties for maximum profit. He especially took note of how these investors were leveraging their time and how they made their decisions without interfering with their personal or business lives. Mr. Clarke is also active in investing and creating real estate partnerships, providing a vehicle for high net-worth individuals to own income producing real estate.

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