Kohl's 12-quarter inventory reduction streak ends

Dive Brief:

Softer spring sales and larger back-to-school buys have ended a 12-quarter inventory reduction streak for Kohl's — though not for good, according to CFO Bruce Besanko.
Total inventory for the retailer was up 2% year-over-year in terms of dollars and 1% in terms of units in the second quarter. Besanko told analysts the company expects to end the year flat in terms of inventory dollars.
"I would say that there is nothing unusual about Q3 or Q4 in regards to the inventory, but I would just tell you, I feel good that we’re not at the end of the road yet, there's still more room to go here and that's reflected, I think, in the outlook right now, which says essentially flat," said Besanko on the company's Tuesday earnings call.

Dive Insight:

"It’s important to note that the balance of our inventory remains healthy and our aged inventory continues to decline year-on-year," said Besanko. But margins were depressed for the retailer as well, partially due to increased promotions and markdowns, suggesting price reductions were necessary, at least in some capacity, to move enough product to reach the inventory levels it reported Tuesday. Increased shipping costs due to digital sales growth also put pressure on margins.

Besanko said the four key elements that drove the streak of inventory reduction — smaller stores, less consumer choice, faster lead times and localized assortments — are still in place. But the growth in e-commerce that he mentioned on the call, along with continuing tumult related to tariffs, have challenged the previously growing trend of inventory reduction across retail categories.

As new tariffs encourage inventory pull-forward, and faster fulfillment commitments for e-commerce orders require the precise placement of inventory near population centers, retailers have had to rethink what healthy inventory levels look like.

Much of Kohl's merchandise, especially its private-label shoes and apparel, is affected by the list four tariffs taking effect in September and December. Besanko said these tariffs are already embedded in the company's financial guidance through the end of the year. He did not specify whether Kohl's has pulled forward inventory in anticipation of the tariffs.