Investors like Kohl’s turnaround plan despite risk that cuts will hurt sales in the long run

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Phil Wahba is a senior

Good morning. I’ve covered retail for more than 15 years now, so if there’s one thing I’m familiar with, it’s a once-beloved retailer trying for the umpteenth time to mount a turnaround. It can be done—see Walmart in the last decade and Target in the second half of the 2010s. But as I’ve been seeing at Kohl’s (No. 261 on the Fortune 500)—it’s extremely difficult. 

Investors were practically giddy yesterday when Kohl’s surfaced some glimmers of good news in its second-quarter earnings call. The stock is up 21% over the last few days. Interim CEO Michael Bender, a Kohl’s director who took the reins in May after the previous CEO’s surprise ouster, laid out his plans to get “back to growth.” But there are still many reasons to be cautious—and three big reasons these types of turnarounds are so challenging. 

Cost-cutting takes a toll: The cost cuts and tight inventory, which protect margins, is giving Kohl’s financial breathing room to take another stab at turning itself around. But some of the moves Kohl’s has made to protect profits can in fact hurt sales. Lower inventory helps margins

The competition is fierce: Turnarounds don’t happen in a vacuum. When one player is struggling, rivals capitalize on that weakness to grab market share. Last year, Kohl’s saw sales in every category it sells, except for the Sephora shops, fall

Management is walking on a financial tightrope: Earlier this year, Kohl’s cut its dividend 75% to conserve money and this week, Bloomberg reported Kohl’s was asking for more time to pay some vendors—so it’s an open question on how much Kohl’s can spend on its turnaround. “It’s not that management lacks the will to improve or the desire for change. The challenge lies in an inability to execute at an operational level,” says GlobalData managing director Neil Saunders.

There were some reasons for optimism in Kohl’s report on Wednesday. Comparable sales were unchanged in July, and as CEO Bender struck many of the right notes that investors and employees alike want to hear. And while investors were no doubt relieved to see any good news at all, they must keep in mind that like all turnarounds, the saga at Kohl’s remains a show-me story.—Phil WahbaContact CEO Daily via Diane Brady at diane.brady.com

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