Margin Talks: What Kohl's Numbers Tell Other DTC Brands

Intro: EBITDA calculations are important but could be misleading. Top-line revenue walks, but margins talk. Welcome to the first edition of Margin Talks, Finaloop's new series, where we dive deep into the financial metrics that matter most for DTC brands. In each installment, we'll analyze a prominent company's margins to extract valuable insights for founders and operators.

For this analysis, we're examining Kohl’s—the retail giant with 1,178 locations (in all US states other than Hawaii), 29% digital penetration, and 20M+ active app users. From the management (or mismanagement) of inventory to the mix of online and brick-and-mortar sales and more, Kohl’s financials and recent woes offer crucial lessons for DTC founders.

Today, we're digging into Kohl’s margins, based on their recent Q3 numbers, to see what's working, what's not, and what small brands can learn from their story.

But why focus on margins? While many DTC founders chase top-line growth or concentrate on vanity metrics, understanding and optimizing various margin metrics is crucial for building sustainable businesses. Whether it's a lack of real-time data access, financial expertise, or simply being caught up in the growth narrative, too many founders overlook these critical indicators of business health.

Margins generally refer to the amount by which one thing is different from another. When running through a P&L, we will see quite a few margins, such as the gross margin, operating margin, and net margin; with a bit of work - we will see the EBITDA. Understanding these margins is crucial to understanding your brands' profitability, unit economics, and trends. 

In this report card, we'll break down four key margins from Kohl’s latest financials. Each metric tells its own story - some impressive, others cautionary - and offers practical takeaways for DTC brands at any stage.

Let's dive right in.

The DTC Margins Report Card

1) Gross Margin

Grade: B-

Definition:

Revenue minus the cost of goods sold (COGS), expressed as a percentage of revenue. Indicates how efficiently the company produces and prices its products.

Kohl's Numbers:

Per Kohl’s Q3 numbers, their gross margin is just about 39.1% (which means that their COGS are approximately 60.9%). This is slightly higher than Q3 2023 (38.9% gross margin).

Quick Analysis:

Kohl’s has not reported great numbers, showing a net sales decrease of 8.8% year over year, with comparable sales down 9.3%. Following the COVID-19 consumer swings, Kohl’s was overstocked on inventory in the past, which caused a backlash, pushing them to decrease inventory levels significantly. They currently do not have enough support for their private brands (increased inventory in transit at the end of Q3) and are attempting the chase demand strategy for market brands. This, along with reintroducing jewelry, can definitely help their gross margin.

Amongst other factors, lower freight costs drove down COGS (and the gross margin up).

Takeaway for DTCs:

An increase in Sephora (fragrance, hair care, etc) and fine jewelry sales may drive up gross margins, while better inventory management can increase sales. Inventory management is key, both for cash flow planning and stockouts. Managing your inventory too tightly can also be an issue, leading to potential stockouts and decreased sales. Also, keep on top of your best-selling lines/SKUs and make sure to prioritize them. 

2) Operating Margin

Grade: B

Definition:

Operating income as a percentage of revenue. Reflects how efficiently the company manages its operating expenses like marketing, rent, and salaries.

Kohl's Numbers:

Operating margin of 2.7% vs 3.88% comparable.

Quick Analysis:

While total SG&A costs decreased compared to Q3 2023 (1.291B vs 1.36B), the percentage actually increased, from 33.5% to 34.8%—which obviously follows the decrease in sales.

Operating income was $98M in Q3 (vs. $157M in the prior year) and 2.7% of total revenue (after taking depreciation and amortization into account). Kohl’s main issue is on the sales side, which is driving their margins down. As noted, the actual operating expenses decreased compared to last year, but the decrease in operating costs didn’t make up for the decrease in sales, and hence, the margins are worse than last year.

Takeaway for DTCs:

When sales are falling, it is nice to be on top of your operating expenses, but sometimes it is necessary to make painful cuts in order to improve the bottom line. Just like Kohl’s may consider closing losing stores (freeing up Opex), go through your operating costs to see what’s relevant and what’s not, and consider cutting operating costs that relate to unprofitable SKUs. 

3) Net Margin

Grade: B-

Definition:

Net income as a percentage of revenue. Reflects profitability after all expenses, taxes, and interest.

Kohl’s Numbers:

Net Q3 income of $22M (vs. $59M in the prior year- 0.5% vs. 1.5%)

Quick Analysis:

As we noted above, decrease in sales, with a smaller decrease of operating costs (with similar percentage of interest costs) ends up meaning less bottom line net margin.

Takeaway for DTCs:

Profitability (along with first-order profitability) should be your top priority. As noted, better inventory management and focus on profitable SKUs can help push you towards this goal.

4) EBITDA Margin

Grade: B

Definition:

Earnings before interest, taxes, depreciation, and amortization as a percentage of revenue. Often used to measure core operational profitability.

Kohl's Numbers:

EBITDA margin of approximately 7.6% of total revenue (vs. 8.5% of total revenue comparable)

Quick Analysis:

It is worth keeping in mind that the EBITDA is mainly due to the adjustment of depreciation and amortization—which is a real, big expense for Kohl’s with its 1,178 locations. Therefore, this kind of adjustment and measure should be taken with a grain of salt.

Takeaway for DTCs:

EBITDA really is the market gold standard for comparing companies. You should strive for EBITDA margins above 10-15%. However, EBITDA adjusts for CAPEX and Financing, which should be taken in stride when companies are so heavily CAPEX invested.

Kohl's Overall Grade: B-

While Kohl’s overall numbers are OK, their margins are not trending well. Perhaps the new management will manage to breathe fresh air into their sales, and they will improve inventory management and top-line item sales, but they still have their work cut out for them.

Key Takeaways:

• Inventory management is key - but make sure not to drive inventory levels too low.
• Keep on top of the lines of your business that are actually profitable. 
• Consider cutting Opex costs when they support not-profitable SKUs.

Summing it up

Kohl’s story shows that even retailers that have been around for decades face significant challenges. But with a closer look at your own margins, you can set your brand up for sustainable growth—without the big brand headaches.

Want to know your own margins and where to improve? Finaloop makes it easy for DTC founders to track profitability and plan for growth.