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2001 BW 50

SPRING 2002

ONLINE INTERVIEW

Q&A with Kohl's R. Lawrence Montgomery
The CEO talks about how the retailer has thrived despite the drubbing so many rivals have been taking


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While the slowing economy coupled with the aftershocks of September 11 caused havoc for most retailers' sales and earnings, Kohl's (KSS ) flourished. Store sales rose 6.8% for the fiscal year ended Feb. 2, and net income surged 33.2%, marking one of the best performances in retailing (see BW50 Street Wise, 3/26/02, "Kohl's: Too Pricey for a Discounter?").

The success formula for the 382-store chain, headquartered in Menomonee Falls, Wis., is deceptively simple: national-brand casual apparel and home furnishings at discount prices in stores that are easy to reach and cleanly laid out.

Kohl's usually places its stores in strip shopping centers rather than regional malls, where its department-store rivals are based. It was one of the first apparel retailers to offer shopping carts -- a tack that has since been adopted by Sears (S ) and Federated Department Stores (FD ) in some stores. Those two are also among the retailers that have sought to replicate Kohl's enviable, lower-cost operating structure. Last year, Federated opened a smaller prototype store in Montana that's laid out much like a Kohl's.

In a recent interview with BusinessWeek Correspondent Robert Berner, Kohl's CEO R. Lawrence Montgomery discussed why consumers have been drawn to the store, what was behind its successful Christmas season -- it posted sales gains of 10.1% at stores open at least a year -- and its expansion plans. Edited excerpts of their conversation follow:

Q: What does Kohl's brand stand for?
A:
Brands, value, and convenience -- and not one at the risk of any other. It's having the best prices, being in stock, having clean restrooms and stores, having well-lit parking lots, and having easy access in and out of the store.

Q: Your target customer?
A:
A two-income family with kids at home. They don't have a lot of time, and they are looking for value.

Q: Who would you define as your competition?
A:
It's all the people that sell national-brand apparel. You are talking about the department store chains -- May Co., Federated, Dillards (DDS ), and Marshall Field's, as well as J.C. Penney (JCP ) and Sears.

Q: Do you consider Wal-Mart (WMT ) and Target (TGT ) competitors?
A:
We don't. At some of our best locations, there is a Target. They are a wonderful retailer. We like to be with them. A Target and a Kohl's draw a similar kind of customer, but they are shopping for different things. At Kohl's we're 80% national brands. At Target, there are hardly any national brands. We're probably 80% soft lines, and they're probably 65% to 70% hard lines. We complement each other very well.

Q: You avoid malls. Is there a shift by consumers away from regional malls?
A:
Yes -- it's about the convenience and the time savings. It's very difficult for the customer to come in today and fight all the traffic, park in a parking deck, and shop in stores that are more difficult to [navigate] than what we offer. It's very tough to compete with [our stores]. You can drive to them in your own neighborhood, park in front of the store, go in, and find what you are looking for.

Q: What other advantages does Kohl's have over the competition?
A:
Our in-stock position is always in the 90% range, and we always have a great price. It satisfies all the needs of our target customer. And because we are selling national brands, our target customer is the exact same customer as at the traditional department stores.

Q: Still, department stores have slightly higher-end brands than Kohl's. Are you adding some higher-level brands?
A:
Yes, Columbia [outerwear], OshKosh B'Gosh [children's clothes], Nine & Co. [women's shoes]. We look for names that will add quality and credibility to our assortments. Mom has been shopping for the kids and dad and for the home at Kohl's for a number of years. Now, she's buying a lot more for herself while she's there.

Q: You see many retailers, such as department stores, that are increasing the percentage of private-label apparel they sell vs. national brands in order to differentiate themselves. Are you increasing your percentage of private-label clothing?
A:
Our private label is never going to be more than 20% to 25% of any given classification because our customers are telling us they want the national brands. Brands are always going to have a clear edge. Everybody knows, for example, what size they take in Levi 550 jeans. The brands we carry have huge credibility with the customer.

Q: The economy slowed substantially last year. What did you do strategically to use the downturn to your advantage?
A:
If you listened to the other retailers that sell national brands, the economy had been tough for them for 18 months. Then you had what happened on September 11. Almost all of our competition cut their inventory, making a decision to wait it out. It was a self-fulfilling prophecy.

We said, "What an opportunity! Let's load up the inventory on basic items. Let's load up the inventory on those key fashion and gift items." We got very aggressive in delivering brands, value, and convenience to customers who maybe didn't want to go to a mall because of everything that was going on. It played right into our niche. We took huge market share as a result.

Q: How much did you increase inventories?
A:
In terms of sales growth [at existing stores], we ran pretty close to high-single digits to low-double digits in all departments during the fourth quarter. We increased inventories a little more than our increase in sales. We have never been shy about building inventories. You can't sell what you don't have.

Q: Analysts have noted your strategy during the holiday season of placing merchandise on stands in the center of store aisles. They say it helped drive sales. Can you explain the program?
A:
We call that our "table and tower" program. We started it a couple of seasons ago. It met with such great success so we expanded it. It gives a holiday-gift flavor to the store. It's impulse kind of items, everything from [boxed] picture frames to panties. It's gold earrings. It's games. Next year, we will have packaged terrycloth robes. All you have to do is buy it, put some gift wrap on it, and you have a ready-made gift.

Q: You didn't increase advertising as a percent of sales last year, but you changed the mix, doing more electronic advertising. Why did you make the change?
A:
Our No. 1 vehicle for driving business is a Sunday [newspaper] insert. About 20 million go out every Sunday in the trade areas around stores. Having said that, newspaper circulation isn't going up. So if you can get a penetration of households in a trade area of 50% to 55%, you are doing pretty good. But we are in a lot of areas where we are missing a huge chunk of the population.

Where there is big growth, we are missing an even bigger chunk of the population. The only way to reach those people is the electronic media -- radio during that drive time to work and television in a meaningful way, with both branding messages as well as event-driven advertising.

Q: What's Kohl's biggest challenge going forward?
A:
We can nail the event for this weekend, we can make the month, and we can deliver an exceptional quarter and an exceptional year. But while we're doing that, we're spending a lot of time on 2003, 2004, and 2005 to make sure that we have the infrastructure between the management talent and the systems.


APRIL 2, 2002



Edited By Patricia O'Connell

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