Kohl'S Corporation Business Information, Profile, and History

Company Perspectives

Kohl's mission is to be the leading family-focused, value-oriented, specialty department store offering quality exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting.

History of Kohl'S Corporation

Kohl's Corporation is one of the largest discount department store chains in the United States, with more than 730 outlets located in 41 states. Targeting middle-income shoppers buying for their families and homes, the chain maintains low retail prices through a low cost structure, limited staffing, and progressive management information systems, as well as the economical application of centralized buying, distribution, and advertising. This "Kohl's concept" has proven successful in both small and large markets, and in strip shopping centers, regional malls, and freestanding venues. The company's stores, which average 86,500 square feet in size, are designed for convenience in their location, layout, centralized checkouts, and deeply stocked merchandise. Kohl's also offers online shopping through its kohls.com web site.

1962-86: From Grocery Offshoot to BATUS Subsidiary to Independent, Private Firm

The first Kohl's department store opened in Brookfield, Wisconsin, in 1962 as an offshoot of the Kohl's grocery chain, which had been founded in Milwaukee in the late 1920s by Max Kohl. In the mid-1960s the store positioned itself in a niche between higher-end department stores and discounters, the niche that later propelled Kohl's into a major nationwide chain. This positioning effort was led by William Kellogg, a twentysomething, who was hired after gaining experience in budget retailing from a stint at Milwaukee's Boston Store. By 1972 there were five Kohl's department stores.

That year, the chain's association with BATUS Inc., the U.S. division of BAT Industries plc, began. The parent was formed when James Buchanan Duke, founder of the American Tobacco Co., expanded his U.S. tobacco empire to Great Britain. His encroachment on the British market sparked a trade war, provoking several British tobacco companies to join forces as the Imperial Tobacco Group plc. Imperial succeeded in squelching Duke's British effort, then moved to invade the U.S. market. Taking the threat seriously, Duke negotiated a pact with Imperial Tobacco that formed the British-American Tobacco Co. Ltd. (BAT) in 1902 to manufacture and market the two companies' blends and brand names. When the U.S. Supreme Court found that BAT was a monopoly, it compelled American Tobacco to annul its territorial agreement with Imperial and divest its interest in BAT. Imperial kept its 33 percent interest in the company until 1972.

Following a tobacco industry trend, BAT began to diversify in the 1960s, purchasing several famous perfume houses. In the 1970s, the company formed a U.S. subsidiary, BATUS Inc., and began to acquire retail department stores. Wisconsin-based Kohl's Food and Department Stores was the British conglomerate's first acquisition in this arena; BATUS bought an 80 percent stake in the two-chain company in 1972 and took full control in 1978. By the early 1980s, BATUS had the 19th largest retail holdings in the United States, including Gimbels, Saks Fifth Avenue, and Marshall Field & Co. BATUS invested expansion capital into two of its acquisitions, Saks and Kohl's department stores.

By the mid-1980s, BATUS had more than doubled the number of Kohl's department stores to 34, but the chain was an anomaly in the upscale retail group with its "value-oriented," "bargain-basement" positioning. BATUS sold the food segment of Kohl's to the Great Atlantic & Pacific Tea Company, Inc. (A&P) in 1983, and began divesting its retail businesses. (A&P closed its remaining Kohl's grocery stores in September 2003.) In 1986 a management-led group of investors took the Kohl's department store chain's 40 stores in Wisconsin and Indiana private. Management spent the following three years refining the "Kohl's concept": moderately priced, quality apparel for middle-income families.

The "Kohl's Concept"

The concept incorporated several factors. To set itself apart from mass merchandisers and discounters and become a specialty department store, over 80 percent of Kohl's merchandise carried national brand names recognized for quality. Kohl's also prided itself on stocking "narrow, but deep merchandise assortments," especially where advertised specials were concerned. At the same time, Kohl's eschewed the high-end and designer merchandise that characterized upscale department stores. The chain dropped low-volume, low-margin departments such as candy, sewing notions, and hard sporting goods in favor of higher margin goods such as linens and jewelry.

Kohl's was able to price its merchandise more competitively by maintaining a low cost structure. The company kept consumer prices low and margins relatively high through lean staffing, state-of-the-art management information systems, and operating efficiencies that resulted from centralized buying, advertising, and distribution. Promotional and marketing partnerships with vendors also helped hold down overhead. For example, many of Kohl's 200 vendors used electronic data exchange (EDI) to submit advance shipment notices electronically, which made ordering more efficient. The chain used aggressive marketing and promotional events to position Kohl's as the "destination store." Once customers arrived, management hoped the stores' convenient layouts, clear signage, and centralized checkouts would encourage high store productivity.

Kohl's most impressive growth spurt began in 1988, when management and The Morgan Stanley Leveraged Equity Fund II, L.P. formed Kohl's Corporation and acquired Kohl's Department Stores. That same year, Kohl's purchased 26 MainStreet department stores from Federated Department Stores, which expanded the chain geographically into the Detroit, Minneapolis/St. Paul, Chicago, and Grand Rapids, Michigan, metropolitan areas and brought the chain's unit total to 66. The chain continued to grow internally as well, posting 8 to 10 percent store-for-store gains in 1989, 1990, and 1991 despite a recessed retail environment. From 1988 to 1992, sales increased from $388 million to $1 billion.

1990s: Going Public, Expanding to More Than 250 Stores

Kohl's did not stop there. In 1992 the corporation prepared for further growth by expanding and upgrading its distribution facilities, automating merchandise handling, and making a public stock offering to finance projected openings of 14 to 16 additional stores annually. Kohl's enlisted the help of consultant group SDI Industries of Pacoima, California, to manage the automation and expansion of the chain's ten-year-old distribution center. The center, which supplied Kohl's stores with 98 percent of their merchandise, was expanded to 500,000 square feet, enough capacity to service 120 stores. Automation was achieved at a cost of $9.7 million. Completed in 1993, it encouraged higher productivity and lower turnaround time, and allowed vendors to send advance ship notices electronically and to pre-ticket merchandise. Construction on a second 650,000-square-foot distribution center was underway in Findley, Ohio, in 1993; completed in August 1994, this facility served stores in central Illinois, Ohio, Michigan, Indiana, Kentucky, Tennessee, and West Virginia.

Kohl's advanced toward the 120-store mark with the opening of eight new stores in 1992, expanding its geographical reach to Ohio. The chain added Iowa and South Dakota to its roster in 1993 and opened 11 new stores. Continuing its expansion, Kohl's opened 18 new stores in 1994, and 22 each in the following two years. Kohl's also continued to tinker with its store format, completing its phaseout of electronics in 1995.

To support a planned expansion eastward into the Mid-Atlantic region, the company built a third distribution center in Winchester, Virginia, which opened in the summer of 1997 with an initial capacity of 350,000 square feet (which was later expanded to 400,000). The Winchester center served Kohl's stores in New York, North Carolina, Pennsylvania, Virginia, Maryland, Delaware, and New Jersey. By 1998 Kohl's had stores in 22 states and the District of Columbia.

During 1999 the expansion emphasis was on the West, particularly Missouri and two new states, Colorado and Texas. To support its westward expansion, Kohl's in 1999 was building a fourth distribution center, a 542,000-square-foot facility in Blue Springs, Missouri, to handle 80 to 100 stores and to service units in Colorado, Texas, Kansas, Missouri, Nebraska, and central Iowa; this center opened in 2000. On the management front, William Kellogg, who had served as chairman and CEO since 1979, relinquished the CEO position to Larry Montgomery in February 1999. Montgomery also continued as vice-chairman, a position he assumed in March 1996; previously he served as executive vice-president of stores from February 1993 through February 1996. Also in early 1999 came the purchase of 33 stores previously operated by bankrupt Caldor Corporation. All but one of the stores was in the New York metro area, with the other in the Baltimore area. Kohl's converted the Caldor units to the Kohl's format during 2000. The purchase was funded through the issuance of 2.8 million shares of stock. From its emergence as a public company in 1992 to 1999, Kohl's more than tripled its number of stores, while its revenues quadrupled, from $1.1 billion to $4.56 billion.

Early 2000s: Coast to Coast

In the face of the more uncertain economic climate of the early 2000s, Kohl's nevertheless forged ahead with its aggressive program of expansion. In 2000 the company opened 60 more stores and entered several new markets, particularly in the Northeast, including Connecticut, New Jersey, the New York metropolitan area, and Oklahoma. To support its move into e-commerce, Kohl's opened a 500,000-square-foot fulfillment center in Monroe, Ohio. For the year, the company posted a remarkable same-store sales increase of 9 percent as revenues jumped 35 percent to reach $6.15 billion and net income increased from $255 million to $367 million.

Of the 62 stores opened in 2001, more than a dozen blanketed the new market of Atlanta while other new markets included Oklahoma City, Austin, Fayetteville, and El Paso. To facilitate this drive into the south central United States, Kohl's opened a fifth distribution center, this one built in Corsicana, Texas. Around this time, Kohl's made an effort to upgrade its brand offerings, commissioning special lines from Jones Apparel Group, Inc. (the Nine & Co. brand) and Liz Claiborne, Inc. (Villager) and once again offering children's apparel from OshKosh B'Gosh, Inc.

Once again taking a blanket approach to new markets, Kohl's entered Boston with 13 stores and Houston with 12 stores in 2002. The company also opened its first stores in New Hampshire and Rhode Island, as well as Nashville, Tennessee. Overall, 75 stores were opened that year, bringing the chain total to 457. Sales passed the $9 billion mark, while net income totaled $635 million and same-store sales increased a still strong 5.3 percent. Late in the year Kohl's opened a 575,000-square-foot distribution center in San Bernardino, California, in advance of a West Coast expansion. In March 2003, shortly after Montgomery succeeded Kellogg as chairman, Kohl's stormed into California, opening no fewer than 28 stores in the Los Angeles area and making Kohl's a coast-to-coast retail chain. Later in the year, Kohl's expanded into Sacramento, San Diego, and Fresno, California, as well as San Antonio, and also entered both Nevada and Arizona with stores in Las Vegas, Phoenix, Tucson, and Flagstaff. The store total reached 542 with the opening of 85 more outlets.

Not all was well at Kohl's, however. Competition heated up as department stores, particularly J.C. Penney Corporation, Inc., and specialty apparel stores improved their performances; Kohl's also faced fierce competition in California in the form of entrenched players Mervyn's and Macy's West. Some analysts contended the big push into the Golden State had distracted management, and indeed the company suffered from excess inventory during the year, forcing it to discount heavily, which dented profits. Some shoppers turned to rival retailers when they encountered less-well-kept stores and longer checkout lines than usual. The resulting numbers were certainly disappointing: while revenues were up a still respectable 12.7 percent, surpassing $10 billion for the first time, net income fell for the first time in ten years, dropping 8.5 percent to $581 million, and same-store sales fell 1.6 percent.

During 2004 Kohl's concentrated on turning its performance around. The company reduced inventory levels, improved its in-store operations, and made some minor adjustments to the store design to make it easier for customers to navigate and to highlight various brands. On the merchandise side, Kohl's began introducing new merchandise into its store more frequently and perhaps most importantly moved aggressively to secure exclusive brands that could help differentiate the chain from its growing array of competitors. Seven new exclusive, private or national brands were added in 2004. In home products, exclusive Laura Ashley Lifestyles and Gloria Vanderbilt lines debuted, as did a new apparel line from celebrity Daisy Fuentes. Kohl's also added a new category to its stores, cosmetics, via a partnership with Estée Lauder Companies Inc. This effort continued in 2005, and in the fall of that year Kohl's became the exclusive U.S. vendor of Candie's apparel as the retailer attempted to lure in young, fashion-conscious female consumers. The turnaround efforts began to pay off in 2004 as same-store sales were up 0.3 percent, and net income was a record $730 million on $11.7 billion in revenues. Kohl's opened 95 new stores during the year, entering several new markets in California along with Salt Lake City, Utah; Memphis, Tennessee; and Rochester, New York. The chain now extended to 637 stores in 40 states.

In 2005 Kohl's opened another 95 stores, most significantly entering the Florida market for the first time late in the year. To support this new southeastern push, the company opened its eighth distribution center, located in Macon, Georgia. Future plans were no less ambitious. Kohl's aimed to open approximately 500 stores between 2006 and 2010, seeking to create a chain of more than 1,200 outlets by the latter year. Plans for 2006 and 2007 included a push into the Northwest through store openings in Portland, Oregon, and Seattle, Washington. Kohl's also aimed to continue pursuing new exclusive merchandise offerings and was working on a new store design it planned to introduce in the fall of 2006.

Principal Subsidiaries

Kohl's Department Stores, Inc.; Kohl's Investment Corporation; Kohl's Illinois, Inc.; Kohl's Pennsylvania, Inc.; Kohl's New York DC, Inc.; Kohl's Texas, L.L.C.; Kohl's Texas Limited Partner, L.L.C.; Kohl's Texas, L.P.; Kohl's Indiana, Inc.; Kohl's Indiana, L.P.; Kohl's Michigan, L.P.

Principal Competitors

Wal-Mart Stores, Inc.; Target Corporation; J.C. Penney Corporation, Inc.; Sears Holding Corporation; Mervyn's, LLC; The TJX Companies, Inc.; Ross Stores, Inc.; Federated Department Stores, Inc.

Chronology

• Key Dates
• 1962 Kohl's grocery chain opens the first Kohl's department store in Brookfield, Wisconsin.
• 1972 BATUS Inc., the U.S. division of BAT Industries plc, buys 80 percent stake in Kohl's.
• 1978 BATUS gains full control of Kohl's.
• 1986 A management-led group of investors takes Kohl's private.
• 1988 Company is reorganized as Kohl's Corporation; 26 MainStreet stores are acquired and melded into the now 66-unit chain.
• 1992 Company goes public.
• 1997 Kohl's opens a distribution center in Winchester, Virginia, to support an expansion into the Mid-Atlantic region.
• 1998 To support a westward push, Kohl's opens a distribution center in Blue Springs, Missouri.
• 2000 Kohl's begins offering online shopping at kohls.com.
• 2001 Backing expansion into the South Central United States is a new distribution center in Corsicana, Texas.
• 2002 In anticipation of West Coast store openings, Kohl's builds a distribution center in San Bernardino, California.
• 2003 With entry into California, Kohl's becomes a coast-to-coast chain.
• 2005 Kohl's moves into the Florida market for the first time.