Kohl's strikes gold in California

When Kohl's opens 30 stores in California this weekend, it will represent a victory of sorts over a competitor it once copied, and then surpassed.

The stores opening Sunday are in buildings once occupied by Mervyns department stores, the defunct chain that was based in Hayward, Calif.

Kohl's bought the real estate and leases after Mervyns filed for bankruptcy in 2008 and closed the last of its locations this year. The Mervyns chain was owned by Target Corp. until 2004, when Cerberus Capital Management, a private equity firm, acquired the struggling business and tried to revive it. There were once nine Mervyns stores in the Twin Cities before the chain was sold.

"It says we have a really sound business strategy," Kohl's Chief Executive Officer Kevin Mansell said of his company's latest expansion. "It's allowed us to step forward when others are stepping back."

With 121 Kohl's stores, California is home to the largest concentration in the country for the chain based in Menomonee Falls, Wis. Golden State locations will account for more than 10 percent of the retailer's locations. Kohl's No. 2 state is Illinois, where it had 62 stores at the end of its most recent fiscal year.

"It is significant and it is positive," said Erika Maschmeyer, an analyst for Robert W. Baird in Chicago.

This is the largest number of stores that Kohl's has opened in one area in a single day, she said.

Learning from Mervyns helped Kohls grow to more than 1,000 stores today.

In the 1980s, former Kohl's executives William Kellogg and Jay Baker studied Mervyns' business model, which focused on selling brand-name merchandise in a discount store format. "We used to say we were the Mervyns of the Midwest," Baker said in a 1999 interview.

"We've looked at Mervyns over the last 25 years, as a business model, at the retail stores, and at the real estate," Mansell said. "What was always attractive was they were similarly positioned."

Mansell declined to portray Kohl's as the conqueror in California. He says Kohl's thrived while Mervyns failed because the Wisconsin-based chain evolved.

Kohl's invests in its stores, updating them on a regular basis, invests in its staff and constantly introduces new and exclusive brands, he said.

Growth at Mervyns' expense

Kohl's first entered California with a big splash in Los Angeles in March 2003, opening 23 stores on the same day. At the time, industry experts speculated about the effect Kohl's arrival would have on Mervyns. One analyst said each Mervyns location typically lost 5 to 10 percent of its sales when a Kohl's store opened nearby.

Now Kohl's is benefiting from the Mervyns shutdown.

In the second quarter, Kohl's estimated that former Mervyns customers who now shop at Kohl's added 1.8 percent to Kohl's same-store sales, and about 1.3 percent to same-store sales for the first half of the year.

For the first six months of the fiscal year, Kohl's same-store sales decreased by 3.2 percent. In the past two months, however, Kohl's has achieved gains of less than 1 percent in same-store sales. The gains have been driven by strong sales in the Southwest, the company said.

The company is particularly focused on radio advertising, because Californians spend a lot of time commuting, and also is using direct mail to convert former Mervyns customers to Kohl's shoppers.

Kohl's has a good chance of winning them over, Maschmeyer said.

"Kohl's executes much better than Mervyns, and has a better value proposition," she said.

Mansell said the company might be interested in acquiring additional Mervyns locations that Kohl's initially passed up.