Kohl’s Stock Meltdown Shows It Can’t Escape Discounting Trap

The discount department store chain eked out modest sales growth but it had to discount like mad to get there.

Deals, deals, deals—that’s all customers want in today’s retail environment.

Kohl’s got a harsh reminder of that in the third quarter when its shares fell the most in nearly three years on Tuesday after it lowered its annual profit forecast, citing a hyper competitive retail environment in the recently ended third fiscal period.

The department store managed to snap a two-quarter losing streak by reporting a modest 0.4% increase in comparable sales, the key gauge Wall Street looks at that includes e-commerce and business at its established stores. Analysts had been expecting them to rise 0.8%, according to Consensus Metrix.

But that bump came at the high cost of having to slash prices, especially after a warm September prompted customers to delay or pass on purchases of colder-weather clothing. That led to lower gross margins and a reduced full-year profit forecast that brought Kohl’s shares down 18% in mid-day trading, its biggest drop since 2017.

“It got more intense than any of us would have expected,” Kohl’s CEO Michelle Gass tells Fortune. She told Wall Street analysts she doesn’t see that pressure letting up during the holiday season that’s about to go into overdrive.

After a slow start to the year, Kohl’s had been under pressure from Wall Street to show it can return to sales growth. One initiative Kohl’s has touted as key to achieving that goal is equipping its stores to handle Amazon returns across its fleet, something it completed this summer. The idea is to drum up store visits and win new shoppers.

Kohl’s has also recently launched new brands such as merchandise from the Olsen twins’ Elizabeth and James apparel and accessories line, a limited capsule collection by designer Jason Wu, and a home goods line called Scott Living by television’s Scott brothers, twins Drew and Jonathan Scott.

Gass says that being price competitive has been essential to making sure shoppers continue to visit Kohl’s as they head into the holiday season, especially at a moment when many are stepping into the store for the first time because of the Amazon returns program. She said business was strong in October, setting the stage for a better holiday season.

“It’s a really unique time given all the initiatives and the Amazon returns program to make sure we’re delivering the value to capture these new customers,” Gass says.

She earlier on Tuesday told Wall Street analysts that it was essential Kohl’s be seen as offering good prices. “We’re really known for delivering outstanding value, so we must maintain this position,” Gass said on a conference call.

Still, longer term, Gass acknowledged that Kohl’s needs to diversify its offering and be less reliant on the casual clothing that is a commodity in today’s retail environment. (T.J. Maxx and Marshalls parent TJX reported strong third quarter sales on Tuesday, showing how apparel sales continue to shift away from department stores.) Kohl’s gets slightly more than half of its revenue from clothing. “We’re still highly apparel dependent,” Gass says, even as Kohl’s has taken steps to reduce that dependence.

For one thing, Kohl’s now gets 20% of its revenue from active products, including athleisure clothing, a category that is less sensitive to weather than say sweaters, and Gass sees that rising to a higher percentage. Kohl’s has increased the square footage it gives the category by 25% at 160 of its 1,160 or so stores.

Kohl’s is also pinning big hopes on becoming a much bigger player in the beauty world, where it is a very late entrant as it goes head to head with heavy-hitters like Target and J.C. Penney. And it has overhauled its home goods business to good results: The category returned to growth in the third quarter.

But no one should expect Kohl’s to emerge from its malaise anytime soon, or for the remedies to come cheap. “Many of the steps Kohl’s is undertaking come with costs attached and these, at least in the short term, will weigh on the bottom line,” Neil Saunders, managing director of GlobalData Retail, wrote in a research note.

There is no doubt that the challenging quarter in the rest of Kohl’s business has taken a toll: Kohl’s now expects profit excluding some items to be $4.75 to $4.95 per share for the full fiscal year, compared to an earlier range of $5.15 to $5.45. For a chain like Kohl’s, the holiday season quarter is by far the most important, and Gass says it is doing what it needs to for sales to stay on the right track.

Says Gass, “You’ve got to start with growth and the rest follows.”