Why the Kohl’s CEO believes stores will still matter post-COVID

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The first quarter bloodbath could have been much worse for Kohl’s.

The department store chain on Tuesday reported comparable sales fell 43.5% in the three months ending May 2, largely because the pandemic idled all of its 1,100 stores for half the quarter. Picking up much of the slack was Kohl’s large e-commerce business and its ability to offer curbside pickup of online orders, something it had only been testing at a few stores pre-COVID-19.

“All this accelerated what would have taken years to happen,” Kohl’s chief executive Michelle Gass tells Fortune.

Last year, Kohl’s $4.5 billion e-commerce business represented 24% of sales. For the first quarter, digital sales were 45% of sales. That will normalize as more stores open, though Gass thinks they’ll settle at a higher percentage than last year and continue to rise. Kohl’s started to reopen in early May, and by Monday, half of them were open.

But as a greater percentage of sales comes online, that begs the question for Kohl’s: Does this change the role of its stores?

Kohl’s had already been in the process of shrinking hundreds of stores across the country—but not closing them—using stores as a distribution hub for e-commerce and a place to showcase products and stay top-of-mind for consumers.

“In places where we have a strong store base, digital sales are higher because the customer has that brand connection,” says Gass.

While the retailer has had a tough time of it in the last decade, with net annual sales stuck around the $19 billion mark without budging much, Kohl’s has fared better than Macy’s or bankrupt Sears and J.C. Penney, thanks to being an off-mall retailer with tidier stores and its racetrack layout.

Kohl’s has helped itself by focusing on keeping stores clutter free with tons of room for social distancing, something analysts say will be crucial for shoppers as stores reopen. The company has already removed racks to hold small impulse items that clogged up aisles. Gass says even smaller stores, typically 35,000 square feet versus 80,000 square feet, are also spacious enough for social distancing.

Stores are still crucial to showcase new brands and initiatives, too. Kohl’s will have mini-shops for Lands’ End later this year, though it is dropping its Jennifer Lopez collection after 10 years.

Another way stores are critical: saving a retailer on ton on e-commerce sales. Kohl’s gross margin on merchandise fell a staggering 19.5 percentage points to 17.3% of sales, largely because of markdowns to clear inventory. But 2.5 points of that was e-commerce. Using stores as pickup spots for orders is key to making the economics of digital sales work for brick-and-mortar stores.

Kohl’s quarter could have been much worse, given its emphasis on apparel. The Department of Commerce said last week apparel sales had fallen 89% in April compared to February. But Kohl’s has pushed hard into activewear in the last few years, with its own yoga lines and bringing in Under Armour, blunting the blow.

Gass thinks Kohl’s will pick up market share from J.C. Penney, which told a federal bankruptcy court this week it planned to close 242 stores.

As for its own stores, Kohl’s has never closed many stores, and Gass believes physical retail will remain central to the chain’s business, even once the pandemic has past.

“As we sit here today, we are still really committed to your stores,” she says. “There is going to be role for brick-and-mortar retail but it’s going to look different.”

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