Kohl's plans to complete the rollout of Sephora shops throughout its entire chain with the help of a smaller version of the store-in-store beauty boutiques, looking to generate incremental revenue coming off a $273 million loss.

The Menominee Falls, Wisconsin-based chain said on Wednesday it will debut 50 of its new smaller-format Sephora shops, as well as 250 of the full-sized in-house boutiques, this year as it looks to keep attracting younger and more diverse customers and drive more foot traffic and sales.

Larger retailers have increasingly been forging partnerships in which a smaller specialty chain opens a shop-in-shop in the big company's stores. Department store retailer Macy's, for example, has Toys R Us and Claire's sites. Target is host to Ulta Beauty, a makeup and skincare chain that competes with Sephora, which is based in San Francisco, as well as in-store Disney shops.

The arrangements have potential benefits for both parties. Kohl's is betting on Sephora because it said those in-store shops have drawn new younger patrons to its namesake stores, spurred sales and made it a player in the beauty industry. Kohl's has set a $2 billion sales goal for Sephora by 2025. For specialty retailers, having an in-store shop within a large retailer such as a Kohl's or a Macy's allows them to expand without having the expense of opening their own standalone stores. And those in-store shops act as billboards for their brands.

Kohl's is in the process of installing Sephora store-in-store sites throughout its brick-and-mortar retail footprint, which includes 1,170 locations. During the company's fiscal fourth-quarter earnings call, Kohl's reported that it had opened about 600 Sephora shops to date, with 400 of those last year alone.

In 2023 with the new debuts Kohl's said it expects to have a total of 850 of its traditional Sephora shop-in-shops, which are 2,500 square feet. But in the new twist, the retailer by the end of the year intends to have 50 smaller-format Sephora shops open, with a plan to roll them out to the remainder of the chain by 2025, according to an investor presentation.

"We are making great strides in beauty through our Sephora partnership. ... It's bringing us a different consumer," Kohl's CEO Tom Kingsbury said. "However, we have lost some ground in other key categories."

Kohl's declined to comment on exactly how large, how many square feet, the smaller Sephora shops will be.

Last August Michelle Gass, who was then Kohl's CEO, said the company was working with Sephora to design a smaller-footprint concept for the beauty shops for roughly 300 Kohl's stores, to cover the retailer's entire brick-and-mortar footprint. Presumably, those smaller Sephora sites are slated for smaller Kohl's stores.

"Nearly 8 million of our customers purchase beauty products at Sephora at Kohl's last year, and this will continue to grow in the coming years as we further expand our store presence," Kingsbury said on Wednesday's earnings call. "In the fourth quarter, our total beauty sales increased 90%. We achieved high-single digits percent comparable beauty sales growth in the 200 Sephora shops that opened in 2021 and better-than-expected sales in the 400 shops opened in 2022."

Sephora proved to be a bright spot in a tough fourth quarter for Kohl's, which has new leadership after a battle with activist investors. It marked the first earnings report delivered by Kingsbury, who succeeded Gass, who left the company last year. For the period ending Jan. 28, Kohl's reported that net sales decreased 7.2% year over year, to $5.8 billion, with comparable sales down 6.6%

The retailer had a net loss of $273 million compared to net income of $299 million in the prior-year quarter.

“Kohl’s fourth-quarter results reflect meaningful proactive measures we took to better position the business for 2023, as well as sales pressure driven by the ongoing persistent inflationary environment," Kingsbury said in a statement. "Kohl’s has a solid foundation and a highly motivated team with a set of priorities to capitalize on what I see as a substantial opportunity to make a difference in the retail landscape. Our efforts to drive the business are already underway. We are refining our strategy and re-establishing merchandise disciplines with a customer-centric focus across the organization."

He told Wall Street analysts that Kohl's is managing its inventory better, including discounting it when necessary, and that it is better tailoring its merchandise mix to customer wants.

As for Kohl's turnaround, Kingsbury said, "It's not a total overhaul. ... I think there are a lot of good things already in place today."

Kohl's plans to make $600 million to $650 million in capital expenditures this year, paying for the 300 total new Sephora shops, and for store refreshes as well as seven new stores, including one relocation.

In a note to clients Wednesday, Neil Saunders, managing director of GlobalData, described the fourth-quarter results as "an extremely inauspicious start" to Kingsbury's tenure that reflect the hard work that needs to be done to rebuild Kohl's business.

"A sales decline of 7.2% represents a chronic under-performance and underlines the fact Kohl’s remains a laggard of the retail market," Saunders said. "It is understandable that Kohl’s would seek to put some of the deterioration on the challenging external environment, but we believe most of the blame should be placed firmly on the shoulders of the company. This is not least because its slowdown goes way beyond that of peers and, as such, it continues to lose a significant amount of market share."

Kohl's stores "have become increasingly shabby and undisciplined," and new management needs to address that issue, according to Saunders.

"The extent of the issues they face are revealed by the terrible three-year performance at Kohl’s," he said. "Compared to 2019, overall retail spending has grown by a whopping 28.4%. Over the same period, spending at Kohl’s has dropped by 15.4%. Profit at the chain is down 203%. So, the challenge ahead is not just to put Kohl’s on a stable footing, but to start clawing back some of the erosion. In the current market, this is a tall order."

Kohl's didn't immediately respond to an email seeking a comment on Saunders' remarks.

Kohl's earlier this week appointed Dave Alves its president and chief operating officer, reporting to Kingsbury, effective in April. Alves will be responsible for Kohl's enterprise operations including its nearly 1,200 stores, global supply chain and distribution centers, real estate portfolio, purchasing, sustainability, and risk management and compliance functions.

Alves has more than 30 years of experience in the retail industry. Most recently, Alves was president and chief retail officer for Bealls Retail Group, overseeing all Bealls Stores, Bealls Outlet Stores, Burkes Outlet Stores, and Home Centric. Prior to Bealls, Alves held leadership roles at TJX Canada and TJX Europe, Hudson's Bay and Sterling Shoes.

Saunders did laud Kingsbury as "an experienced and savvy operator" who was building a solid executive suite with hires like Alves, "who has great knowledge of department-store operations."

Saunders added, "It is only fair to give this new team some time and space to make changes."