Hot on Kohl's

In 1986, Kohl's Department Stores had 39 Midwestern locations, a sales volume of $288 million and red ink on the bottom line. It seemed a dreary scenario, but a small group of experienced retailers and investors speculated that strong management and a sound strategy could turn things around. Their leveraged buyout ignited a 20-year explosion that has become one of the great success stories in American retailing history. The partners paid off their initial debt in two years and went public four years later. By the end of 2006, Kohl's had 817 stores in 45 states, a sales volume of more than $15 billion, and is expanding at the rate of 100 stores a year.

This past November, Kohl's entered the Southwest Florida market with a store in Cape Coral. And others are coming, according to Jay Baker, Kohl's retired president and one of the original partners in the buyout.

Now 73, Baker began his retailing career as a $75-a-week trainee with Macy's, and quickly worked his way up through the ranks of various department stores. In 1986, he was with British American Tobacco of the U.S. (BATUS), which owned several department-store chains, including Saks, Marshall Field's, Kohl's and Gimbel's. At the time, Baker was president of a specialty-store division as well as chairman of the corporate buying office.

When BATUS decided to divest itself of most of the department-store holdings, Baker joined two long-time associates, Bill Kellogg and John Herma, in the Kohl's buyout. The store had once done well, but had failed in trying to chase Target's lower-priced discount-store business. They believed Kohl's could be successful again by focusing on its core business of popular-priced apparel.

Baker remains on the board and has retained a substantial amount of stock ownership. We recently caught up with him in his Naples penthouse, where he talked about Kohl's future plans in the area and the story behind the company's growth.

GB: When does Naples get a Kohl's?

Baker: We'll be there in the spring of '08, somewhere down near Davis Boulevard, and I think we also have a site for Estero. We opened a year ago in Florida, and we're up to 13 stores right now. It's all about getting the right sites.

GB: Did the seasonal aspect of Florida delay Kohl's entry into the state?

Baker: We try to [move into] contiguous states, so we did Georgia first, and then we just kept moving down. Yes, we were a little nervous about coming to Florida, because there definitely are peak seasons, but we still look at it as a year-round market. There are so many Midwesterners here in the Naples area, and they've been asking me, "When is Kohl's coming?"

So far, our business in other locations in Florida has been phenomenal, and we've kidded ourselves about it: "We should have come to Florida sooner."

GB: How tough was it for you and your partners in the beginning?

Baker: We got some breaks along the way, but nothing was easy. The three of us had to convince people that we knew what we were doing. We were fortunate that we did well right off the bat. Everybody asks, "Isn't there more pressure being public?" The answer is that there's more pressure in a leveraged buyout because a bank can cut you off in a day and you won't have a company anymore. The public won't close you down right away.

GB: Kohl's has always referred to itself as a "value department store," placing itself somewhere between a discounter like Target on the one end and a traditional department store like Macy's on the other. What competition did you have in the middle, besides from J.C. Penney and Sears?

Baker: At the time we bought Kohl's, the only major value department store was Mervyn's, which started on the West Coast. We became very fortunate when Target bought Mervyn's. Target is a phenomenal company, but it didn't put much effort into Mervyn's, and eventually they sold it.

GB: People always say they'd rather be lucky than good, but you guys were good, too, weren't you?

Baker: We certainly can't claim that we invented the value department store, but I do think we took it to another level. Three things took us there: One, we gave great branded merchandise at great prices; two, we had a much lower cost structure than department stores; and three, we built stores in convenient locations. We were in centers outside of malls, so people could shop our store quickly.

GB: How did you go about filling key management positions?

Baker: We got some good people when Mervyn's went out of business. Then Marshall Field's got bought by Dayton Hudson and we picked up a lot of good people [from them], and Gimbel's closed, and a lot of their people didn't want to leave Milwaukee, where we were based. It normally would have taken five to 10 years to get that many good people, and we got them in a couple of years. You can have the greatest concept in the world, but you've got to have the people to execute it.

GB: Kohl's will be filling a niche here in the moderate-price point, but are the upscale retailers meeting the needs of the local population?

Baker: When we first came here a dozen or so years ago, upscale retailing left a lot to be desired. You had a nice Saks, which was small, and Jacobson's, which is now out of business. That wasn't nearly enough, but now the malls are all opening with some upscale stores, and Waterside Shops has been redone in a beautiful way. There is a terrific need for that.

GB: One of the mainstays of shopping centers and malls are specialty stores like the Gap or Chico's. Do they tend to have more ups and downs than department stores like Kohl's?

Baker: They've all had periods when they were hot-the Gap, the Limited. Chico's was on fire. Stores like that are very focused, very easy to shop, and business can be phenomenal. But what do you do when you lose that focus? With us, if we have a lousy missy department one season, we still may have great departments in other areas. But if your whole thing isn't working, which can happen in a specialty store, the customer isn't married to you and it's tough to get her back.

Another problem for both specialty and department stores is that retailers tend to overreact. You have a hot item and you say, "Oh, next year we're going to sell 18 million of them." And the next year you end up selling two, but you still own 18 million. I know, because I've done it.

GB: How important is the Internet to Kohl's overall strategy?

Baker: We were late getting into it, so it's still a small business for us, but I think we finally have our hands around it.

People are constrained by time, and if they can shop from their home, they will; and we can make certain things available on the Internet without having to carry them in stores. But people still love to shop in a store, and they can easily return goods to the store.

One of the advantages of Kohl's is that everything we do is together in one place-one women's sportswear department, for example-as opposed to traditional department stores, where you might find women's sportswear on two different floors in six different locations. We make shopping very easy, just as the Internet does, so it's a very good combination for us.

GB: And any retailer who denies the importance of the Internet .

Baker: . is in deep trouble. You talk about the graveyard of retailers? They'll be there.