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Dive short:

• Kohl’s third-quarter net sales fell 8.7% year over year to $3.5 billion, with comps down 9.3%, financial filings showed Tuesday. On Monday, the department store announced that it had appointed Michaels CEO Ashley Buchanan to replace Tom Kingsbury as CEO, effective January 15.

• The gross margin in the third quarter grew by 20 basis points to 39.1%. The stock fell 3%. Operating income fell 2.7% or 120 basis points to $98 million, while net income fell 62.7% to $22 million.

• The retailer lowered its expectations for the second time this year. From an initial estimate of a 2% to 4% decline in net sales and an August estimate of a 4% to 6% decline, Kohl’s now expects full-year net sales to decline 7% to 8% % will decrease. Share prices are expected to fall 6% to 7%, compared to August’s estimate for a decline of 3% to 5%.

Diving insight:

Customers are hearing from Kohl’s as the retailer tries to lure them back into its stores after a series of missteps drove some away.

Transactions fell about 3% in the third quarter after a 2% increase in the second quarter, which directly led to a quarter-over-quarter decline in revenue, Kingsbury told analysts Tuesday morning. August was particularly weak, although school holiday sales, especially of children’s clothing, were generally weak.

“We are very focused on driving traffic in response to the softer trends in the third quarter,” he said. “We are increasing our touchpoints with our most engaged customers through more targeted offers and direct mail.”

Kohl’s is also reversing course in a number of areas. For example, after dismantling the beautiful jewelry displays to make room for the Sephora partnership, the department store is bringing them back to 200 stores, along with an extensive placement of bridge jewelry in all stores during the holiday season. Additionally, in its zeal to reduce inventory that had spiraled out of control in 2022, the retailer has reduced its small inventory, a move Kingsbury called “a short-sighted decision that we would like to resolve.”

And finally, the company’s move late last year to emphasize brand names over private labels also appears to have backfired. Over the past 18 months, when inventories have been under tight control, investments in Sephora, name brands, home furnishings, gift and impulse purchases have displaced receipts from Kohl’s private clothing brands, Kingsbury said. Inventory of private clothing brands in transit is now up 40% and “hitting the sales floor in time for the holidays,” he said.

“We simply did not have enough private label inventory given our investments in market brands and our key growth categories,” he also said. “However, I want to be clear: we continue to believe that our market brand strategy and investments in key growth categories are the right long-term strategic steps. We simply need to better balance these initiatives while managing core activities.”

This task – and Kohl’s turnaround more broadly – ​​will soon fall to Buchanan, and it will be a difficult job, according to Emarketer analyst Rachel Wolff. With consumers still focused on value, Kohl’s faces stiff competition from low-priced, online and big-box retailers, Wolff said in an emailed comment Tuesday.

“Kohl’s poor quarter and forecast downgrade are a worrying sign for the retailer’s holiday prospects,” Wolff said. “As the company tries to revitalize its business by revamping its inventory mix and focusing on categories like beauty and gifts, and partnering with bigger names like Sephora and Amazon to woo shoppers, those efforts are missing in a highly competitive retail environment.”

Kingsbury on Tuesday described a pullback in some turnaround tactics, but David Silverman, senior managing director at Fitch Ratings, said analysts there are looking for a change in strategy to restart sales, especially in women’s apparel, which is “key to long-term success for Kohl’s.”

“We will look for strategic shifts from incoming CEO Ashley Buchanan to assess the company’s potential operating trajectory from here,” Silverman said in an emailed comment.