Q1 inventory levels dropped to $3.5 billion! Kohl's continues regular inventory clearance program!

Kohl's has made progress on its goal of reducing inventory, with inventory levels falling 6% year-over-year to $3.5 billion in the first quarter.

Chief Executive Officer Tom Kingsbury told analysts last week that the decline was in line with the retailer's planned job cuts, adding that Kohl's has begun regular inventory liquidation programs to discard slow-moving inventory, free up cash and increase sales.

“We feel good about our inventory levels heading into the second quarter and are well-positioned from a liquidity perspective with plenty of room to chase,” Kingsbury said. “That’s a positive given the ongoing macroeconomic headwinds.”

Kohl's has taken steps to reduce inventory levels and catch up with some department store rivals that outperformed it in inventory management last year after operating profit fell 85% in 2022. Kohl's goal is to avoid painful markdowns and give retailers room to chase inventory.

Kohl's achieved that goal in the first quarter. Chief Financial Officer Jill Timm said "we feel good about our inventory levels heading into the second quarter" and that the retailer remains "focused on driving top line." Kingsbury added that management is "pleased with the progress we've made from the end of January to now" and that Kohl's can make even more progress in the second quarter.

Doing that requires "constantly keeping an eye on inventory levels and making sure we're delivering what we said we were going to deliver," Kingsbury said.

In the short term, the clearance will be a drag on the company's earnings. Although gross margins in the first quarter were slightly higher than last year - partly due to lower freight costs - gross margins in the second quarter will be lower than in 2022 due to the focus on clearing inventory.

Keeping lighter inventories and faster turnover gives Kohl's the budget, cash and space to chase inventory rather than plan ahead. "One thing I learned about discounting is that if you're willing to spend the money, there's a lot of upside," Kingsbury noted on the call.

Dan Plas, Kohl's senior vice president of enterprise digital and e-commerce, said at an industry conference earlier this year that the retailer's goal is to be able to "understand where the consumer is and respond, and then quickly work with our supply partners" to meet in-demand products.

It is learned that TD Cowen analysts led by Oliver Chen pointed out in a research report that Kohl's stores' "significant progress in improving operations" is "closely related to merchandise and inventory planning." The analysts said, "We believe that store traffic is driven by new goods and faster inventory turnover, which may lead to higher productivity."

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