When Mervyns called it quits last year, many in the recession-battered retailing world were surprised that Kohl’s Corp. rushed to take over dozens of the failed chain’s locations.
Both department stores sold a similar mix of mid-priced apparel, accessories and home furnishings. There was a significant overlap in the customers who shopped at Mervyns and Kohl’s. The retailers’ stores were even alike in size and layout.
On Sept. 30, Kohl’s bold move will be put to the test when it opens 35 stores in former Mervyns locations, 30 of them in California.
If the chain succeeds, its gamble could pay off not only for the 5,000 workers it has hired, but for communities around the state.
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"Any time you create jobs, there is a multiplier impact," said Chapman University economist Esmael Adibi. "The person who gets that income spends it in restaurants, clothing, cars, appliances and other places. The income has to be spent somehow, so that generates by itself further economic activity."
Still, Kohl’s faces many of the challenges that led to the demise of Mervyns and other retailers. With California’s unemployment rate at 12.2 percent, people are cutting back on spending for clothing and accessories.
"The moderate-income consumer is feeling the pinch," said retail analyst Richard Jaffe of Stifel, Nicolaus & Co. "If you’re a two-income household earning $50,000 a year and now it’s a one-income household earning $25,000 a year, you’re not shopping. The money isn’t there."
One thing is certain: Kohl’s is making a big bet on California. The retailer spent about $250 million to convert the Mervyns stores, and the acquisition will bring its statewide total to 121 stores — almost as many as Mervyns had before its demise. That increases the company’s California footprint by one-third in a single day.
Kohl’s has been eyeing California for years, waiting for the right real estate to become available. The fact that it made its move while others are retrenching is no accident.
"We see this as a great opportunity to actually go the other way," Chief Executive Kevin Mansell said in an interview. "Let’s take advantage of other people’s weakness; in fact, let’s get aggressive."
The Menomonee Falls, Wis.-based retailer, with more than 1,000 stores nationwide, will face heavy competition in California from department stories J.C. Penney and Macy’s, discounters Target and Wal-Mart, and off-price retailers Ross and T.J. Maxx.
"It’s a state where they’re largely underpenetrated," said Michelle Clark, a retail analyst with Morgan Stanley. "It’s an attractive market, but there are a lot of players."
But analysts said the chain has already proved that it can weather the recession, noting that Kohl’s has managed its inventory well, slowed its rate of new store openings and offers an attractive lineup of private, national and exclusive brands at low prices.
Kohl’s has also regularly beat Wall Street’s monthly sales estimates this year, posting a 0.2 percent August sales increase at stores open at least a year, known as same-store sales and considered an important measure of a retailer’s health.
The company’s results have been even better in California, Mansell said. Over the last year, he said, the chain’s California stores have seen double-digit same-store sales increases — the best results out of all 49 states where the chain has stores.
For its most recent quarter, Kohl’s profit dipped by 3 percent, to $229 million. Still, that’s better than many of its peers in a down economy.