Kohl's cuts inventory after profit drops 86% in 2022

• Kohl's is revamping the way it manages inventory after net sales fell more than 7% in fiscal 2022 and profit margins shrank by nearly five percentage points.

• The discount department store chain pledged to reduce its inventory plans by a mid-single-digit percentage after the company's 2022 purchases "got out of control," Chief Executive Officer Tom Kingsbury told analysts .

• Kohl's will seek additional inventory as needed to meet customer demand.

Kohl's financials illustrate why the company is changing its product flow across the business. Sales fell more than 7% in both the fourth quarter and full year 2022, and operating profit fell more than 85% year-over-year.

“I’ve spent a lot of time over the past three months focusing on merchandising, including building a stronger inventory control process,” said Kingsbury, who took over as Kohl’s CEO in December. “We are focused on new orders and driving sales.”

Kingsbury said Kohl's was "struggling with inventory" last year and that in addition to plans to reduce inventory this year, the company will "adjust the way it marks merchandise to get rid of excess inventory or slow-moving merchandise with a more even flow throughout the year."

Kohl's has begun clearing inventory more aggressively. The retailer's gross margin fell 750 basis points in the fourth quarter due to clearance markdowns. Although inventory at the end of the fourth quarter was up 4% year-over-year, it was down 10% compared with 2019, which Chief Financial Officer Jill Timm said was in line with the company's sales decline during the same period.

Telsey Advisorygroup analysts noted that Kohl's lower inventory levels at the end of the fourth quarter were an improvement from growth rates of more than 30% and even more than 40% in recent quarters. The analysts described the new management as "aggressively" clearing inventory and "close to righting the balance scale."

Jefferies analysts called Kohl's inventory position "much improved" at year-end, saying "tighter inventory conditions now position the company well to avoid incremental markdowns" and improve margins.

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