Is Kohl's About to Repeat Penney's Mistakes?

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Sound familiar? An aging department store retailer suffers from anemic sales, falling profits, and an inability to attract national name brands to fill its racks, so it brings in an industry outsider to flip its marketing script and add touches of technology -- all of which is presaged by analysts claiming a renaissance in the company is on the horizon.

You'll be forgiven if you immediately thought of J.C. Penney upon reading this, but it certainly seems mid-tier retailer Kohl's is following its rival's playbook a little too consciously. There are slight differences in the details, but overall it looks like it could be another case of Wall Street wearing rose-colored glasses instead of its green eyeshades.

A story in Barron's last week highlighted how Kohl's has been struggling with a slowdown in sales. While revenues rose 2.7% to $19.3 billion as same-store sales barely moved 0.3% higher, gross profit margins contracted 8% because it was forced to engage in highly promotional activity to lower inventory levels after misjudging consumer tastes and demand.

To spark up its message, the department store chain brought in a high-level Starbucks alum to convey "a broader message" that stresses value while implementing increased use of in-store ordering kiosks and electronic signage to update pricing more quickly. Like the glowing Barron's story, Wall Street analysts are supportive of the changes, believing its share repurchases and willingness to reach outside the retail industry will change things up.

Tell me that doesn't sound just like Penney's own attempt at reformation: declining sales and profits; an industry outsider in a former Apple exec to lead the change; a mixed marketing message; random injections of tech to make the company more hip; and supportive murmurings from analysts. That it all ended up going horribly awry should give Kohl's investors little comfort that the retailer is marching down the same path.

It's matching its rivals failed efforts in other ways, too, such as heaping more attention on national name brands at the expense of its exclusive brands, such as those promoted by Bobby Flay, Dana Buchman, and Jennifer Lopez. Penney did that, too, abandoning favored names like St. John's Bay in favor of giving larger "boutique" space to Levi's and others.

Penney's also did away with cash registers and had associates checking out customers on the floor using tablet PCs, similar to Kohl's introducing kiosks to facilitate online ordering while soon launching a new ship-to-store policy that retailers from Wal-Mart to Target have embraced.

Although everyone seemingly has nothing but good things to say about Kohl's transformation, I can't help but think that just as we've seen this play out before with similar high hopes, we're about to see a similar ugly outcome.

While Kohl's doesn't seem poised to turn off its customers quite as dramatically as J.C. Penney did -- doing away with doorbuster sales, for example, in favor of everyday low pricing -- going from a savings mind-set as the retailer proposes to one emphasizing individual items and categories is a big enough change that Kohl's customers may just find themselves shopping at Penney's to get the discounts they desire.

The retailers that will leave Kohl's, Penney's, and even Wal-Mart in the dust
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Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Starbucks. The Motley Fool owns shares of Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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