Kohl's Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 23, 2023

There are 12 speakers on the call.

Operator

Morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl's Corporation Second Quarter 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

Operator

Thank you. Mark Rupe, Senior Vice President, Investor Relations and Treasury, you may begin your conference.

Speaker 1

Call. Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives are forward looking statements. Such statements are subject to certain risks and uncertainties, call, which could cause Kohl's actual results to differ materially from those projected in such forward looking statements. Call.

Speaker 1

Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10 ks and as may be supplemented from time to time in Kohl's other filings with the SEC, call, all of which are expressly incorporated herein by reference. Forward looking statements relate to the date initially made and Kohl's undertakes no obligation to update them. In addition, during this call, call, we may make reference to non GAAP financial measures. Reconciliation of non GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8 ks filed with the SEC and is available on the company's Investor Relations website. Please note that this call will be recorded.

Speaker 1

Call. However, replays of this call will not be updated. So if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information. Call. With me this morning are Tom Kingsbury, our CEO and Jill Timm, our Chief Financial Officer.

Speaker 1

I will now turn the call over to Tom.

Speaker 2

Thank you, Mark, and good morning, everyone. I am pleased to report that we continue to make progress in our efforts to significantly improve Kohl's business over the long term. Our 2nd quarter earnings were in line with our expectations. We feel good about our performance given the persistent macroeconomic pressures on our customers and that many of our strategic efforts are just underway. In 2023, we continue to focus on 4 strategic priorities, which are enhancing the customer experience, Accelerating and simplifying our value strategies, managing inventory and expenses with discipline and further strengthening our balance sheet.

Speaker 2

We are confident that our strategies will drive sales and earnings performance. Will take some time for the full impact of our efforts to be realized. However, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond. As it relates to our outlook for 2023, we are reaffirming guidance. Let me now turn to the 2nd quarter.

Speaker 2

Net sales decreased 4.8% and comparable sales were down 5%, with store sales outperforming the total company and flat to last year. Sephora at Kohl's continues to exceed our expectations, driving a total beauty sales increase of nearly 90 percent year over year. We opened nearly 200 Sephora shops in the quarter and momentum in our existing Sephora shops continues to accelerate with greater than 20% comparable beauty sales growth in the Sephora shops opened in 2021 in 2022. In our home business, which we've highlighted as a major long term opportunity for Kohl's, showed strong relative improvement in the quarter. Beyond the top line, we are able to successfully manage Gross margin and expenses to achieve an operating margin of 4.2% and we reduced inventory 14%, Both of which were better than planned.

Speaker 2

I'll now turn to our longer term initiatives and provide more detail on our 4 overarching priorities, which I just mentioned. Enhancing the customer experience in stores and online through our product and merchandising initiatives is our top priority. Getting back to growth is essential to achieving our goals. So I want to be clear on how we are viewing the building blocks. We have an opportunity to improve the offering in our core business.

Speaker 2

However, in the coming years, we believe Sephora, gifting, impulse, home decor and longer term new stores will be the most significant contributors to our growth. Sephora at Kohl's continues to resonate with our existing customer base, while also bringing in new customers that are shopping more frequently. The performance is exceeding our expectations, and we are driving considerable beauty share gains. We are seeing solid growth in our Sephora exclusive brands, including the Sephora collection, Sol Dei, Genero and Rare Beauty as well as national brands such as Fenty and Charlotte Tilbury. We feel good about our overall assortment In this fall, we will further expand our gifting assortments, which were highly successful last year.

Speaker 2

During the Q2, we opened nearly 200 Sephora shops and this month we are opening approximately 50 shops. These openings will complete the rollout of our 850,2500 Square Foot Shops. We are also opening a smaller format 750 square foot support shop in the remainder of the chain. We opened 5 of these smaller shops earlier in the year and they continue to drive solid beauty sales, exceeding our expectations. We will open an additional 45 in the 3rd quarter, bringing us to 50 by year end.

Speaker 2

In total, Sephora will be featured in more than 900 of our stores by the end of 2023. And we will expand the small format shops to the remainder of the chain over the next couple of years. Building our home business represents another major growth opportunity. We will optimize our existing offering and capitalize on significant opportunities in areas where Kohl's historically has not had a meaningful presence. These include gifting, impulse, decor and pet.

Speaker 2

Many of these new assortments will begin to set in fall with a larger presence in holiday. During the Q2, the home category showed relative strong relative improvement as I noted. This was primarily driven by our existing offering such as housewares and cookware as well as by encouraging early reads from our new growth initiatives. We continue to leverage register removals and additional in aisle space to create a seasonal gifting destination, which supports strong sell throughs during Mother's Day, Father's Day, Memorial Day and the 4th July. Currently, we are showcasing back to school items such as backpacks and dorm products.

Speaker 2

And later this fall, we will highlight harvest and holiday products. In addition, we will expand our offering of impulse products in spring of 2024, which will include beauty, wellness, toys, snacks and other items. In home decor, we are forming new vendor partnerships, building inventory with market buys on a weekly basis and enhancing our in store merchandising across areas like wall art, glassware, botanicals, storage and lighting to name a few. And in Pet, we have expanded dedicated space to the category across the chain following a successful 50 store test last fall. Our offerings in the space include things like dog beds, cat and dog apparel and pet toys.

Speaker 2

Had delivered a strong 2nd quarter sales performance driven by the additional space, and we expect to maintain momentum moving forward. We are also committed to capitalizing on new store growth opportunities over the long term. In 2023, we remain on track to open 7 new stores, including one relocation. 2 of these stores opened in the Q1 with the remaining 5 set to open this fall. Turning to our apparel and footwear offerings, we remain focused on optimizing our apparel assortment to reflect our customers' interest.

Speaker 2

Two areas that we have highlighted in recent quarters in response to customer demand are polished casual and dressy offerings, which continue to resonate with our customers across women's, men's and children's. We are leaning into these areas in women's through key brands like Lauren Conrad, 9 West and Simply Vera Vera Wang, while also expanding our dress offerings in both special occasion and casual. In men's, We have seen strong results in areas like suitings, dress shirts and dress pants, and we'll continue to amplify these areas moving forward. And in Children's, we are expanding Little and Co as well as continue to build on our core Jumping Beans and Carter's businesses. Active also remains an important piece of our business.

Speaker 2

While trends in the overall active space remain soft, We are focused on building on our recent success in outdoor and golf apparel, while also working with our national brand partners to bring in newness. In the Q2, we were pleased with the sales trends in our Eddie Bauer offering in outdoor as well as in Nike and Under Armour footwear. To summarize our top priority of enhancing the customer experience, we are focused on driving significant growth in Sephora, gifting, impulse, home decor and longer term new stores. We also see several opportunities to improve our core apparel and footwear offerings. Now let me discuss our second priority, which is accelerating and simplifying our value strategies.

Speaker 2

We have many efforts underway to simplify how we are showing up to the customers as we believe we can drive greater customer engagement and conversion. During the Q2, we continued the work we began in Q1, reducing general promotions in eliminating online only offers in favor of a more targeted offers and clearance events to clear slower selling goods on a more regular basis. And we are testing key value items, which is more competitive and consistent pricing on select merchandise within our private apparel and home brands. This is a continuation of our efforts to make our pricing more simplified. We're also evolving our marketing message with greater clarity around strong price points in our in store graphics in our digital and broadcast ads.

Speaker 2

While it remains early, we are very encouraged with the response we are seeing from customers. Our key value items are performing positively. This is a compelling opportunity for our business over the long term and based on initial results, we are now planning to thoughtfully scale it in 2024. Lastly, we will continue to leverage our industry leading loyalty program as a mechanism to deliver even more value to our customers. Kohl's has a strong loyalty foundation, which includes Kohl's Cash, Kohl's Rewards and our private label credit card.

Speaker 2

Building on this, we launched a co brand credit card with Capital One to select customers in the 2nd quarter. While we expect the Kohl brand card to have only a small benefit to this year's results, it will grow and contribute more meaningfully in the years to come as you offer to a greater number of existing and new credit customers in 2024 2025. I will now transition to our 3rd priority, which is managing inventory and expenses with discipline. During the Q2, we reduced inventory by 14% compared to last year, exceeding our goal of planning inventory down mid single digits percent. We operated with greater open to buy, which allowed us to stay agile as the demand environment evolved in the Q2.

Speaker 2

As we implement new planning and allocation processes, We're becoming more responsive to the customers' demand, operating with additional open to buy to chase trends and minimize risk, Maintaining better in stock levels in core basics and improving inventory flow from our distribution centers to the selling floor. Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline. Turning to expenses. Kohl's has a history of managing costs with discipline. We are continuing to proactively capitalize on opportunities to drive efficiency across all areas of the company.

Speaker 2

Couple of examples include our goal of lowering our marketing spend ratio to 4% and embedding more technology into our operations to improve productivity, such as self checkout kiosks in our stores and a higher level of automation to more efficiently flow goods in our newer e commerce fulfillment centers. And lastly, our 4th priority is strengthening our balance sheet. Our focus remains on returning our balance sheet to its historical strength with a long term objective of managing to a 2.5 times leverage level. During the second quarter, We generated solid cash flow, which allowed us to reduce our revolver borrowings by $205,000,000 And returning capital to shareholders remains a commitment of ours. Jill will discuss our overall capital allocation priorities, including the dividend, which continues to represent a healthy yield at the current share price.

Speaker 2

In closing, I am pleased with our 2nd quarter earnings. I am confident that the work we have underway is positioning Kohl's for long term success. Our organization is operating with strong disciplines and efficiency and many of our growth driving initiatives are just beginning to take shape. As it relates to our more recent trends, our August to date sales are off to a good start, driven by back to school and our fall seasonal items. I want to thank the entire Kohl's team and especially our store associates for their hard work and adaptability to position us for improved future performance.

Speaker 2

I hope you'll get a chance to visit our stores to see all the good work underway. I will now turn over the call to Jill to discuss our Q2 results and 2023 outlook.

Speaker 3

Thanks, Tom, and thank you, everyone, for joining. For today's call, I will review our 2nd quarter results and provide details on our fiscal year 2023 guidance. As Tom shared, we made additional progress against our strategic priorities and delivered earnings in line with our expectations. Turning to our results. Net sales declined 4.8% in the 2nd quarter and are down 4.1% year to date.

Speaker 3

Store sales were flat to last year in Q2, driven primarily by strong Sephora sales growth with sales in home showing the most improvement versus Q1. Digital sales remained pressure in Q2, down 17% to last year and penetrated at 25%. So both are up versus pre pandemic levels. We are seeing customers shift back towards stores and sales were impacted as expected by the elimination of online only promotions as we work to simplify our value strategies. From a product perspective, national brands outperformed private brands in the quarter.

Speaker 3

Our top performing national brands included Nike, Under Armour, Hager, Izod, Hurley and Eddie Bauer. Well, our top performing private brands were Apartment 9, LC Lauren Conrad and Jumping Beans. Accessories was our best performing category, up 25% to last year, driven by Sephora at Kohl's. The increase in beauty sales was partially offset by displaced sales in jewelry. As it relates to some of our other categories, call.

Speaker 3

As previously noted, home showed the strongest improvement in trend from Q1 with encouraging early reads in our new growth categories. Footwear also showed trend improvement driven in part by increased Nike and Under Armour sales in the category. Other revenue, which is primarily our credit business, declined 3% in the second quarter, an improvement in trend versus Q1. Moving down the P and L. Q2 gross margin was 39%, a decline of 61 basis points to last year, driven by product cost inflation and higher shrink, offset partially by lower freight expense and digital related cost of shipping.

Speaker 3

Increase to $1,300,000,000 The increase was primarily due to higher store expenses driven by Sephora openings, wage pressure and store experience investments. This was partially offset by lower marketing and distribution costs. Year to date SG and A expenses have decreased 1.3% compared to last year. Depreciation expense of $186,000,000 was $20,000,000 lower than last year due to reduced technology capital spend. Year to date, as compared to last year, Depreciation expense decreased $32,000,000 to $374,000,000 Interest expense of $89,000,000 was $12,000,000 higher than last year due primarily to increased revolver borrowings.

Speaker 3

Year to date, interest expense increased $28,000,000 to to $173,000,000 Net income for the quarter was $58,000,000 and earnings per diluted share

Speaker 4

was $0.52

Speaker 3

Year to date, net income was $72,000,000 and earnings per diluted share was $0.65 Turning to the balance sheet and cash flow. We ended the quarter with $204,000,000 of cash and cash equivalents. Inventory at quarter end was down 14% compared to last year, exceeding our commitment of a mid single digits decline. As Tom shared, we feel good about how we managed inventory in the quarter and how we are positioned entering the fall season. Operating cash flow was $430,000,000 in the 2nd quarter and free cash flow was $176,000,000 We continue to expect inventory to be a source of cash during the remainder of the year, which will drive strong positive cash flow generation in Q3 and Q4.

Speaker 3

Capital expenditures for the quarter were $244,000,000 We are still planning for approximately $600,000,000 to $650,000,000 of capital expenditures in 2023. Now let me provide an update on our capital structure and capital allocation priorities. Strengthening our balance sheet is one of our top priorities in 2023. It is important that we continue to rebuild our cash position and it remains our longer term goal to manage this business at a leverage target of 2.5 times. In the second quarter, call.

Speaker 3

As planned, we reduced our revolver borrowings by $205,000,000 Looking ahead, we will continue to utilize the revolver in Q3 for seasonal working capital build related to holiday receipts. However, we continue to plan to be out of the revolver by year end, inclusive of retiring $111,000,000 of bonds in December of 2023. As it relates to returning capital to shareholders, We will continue to prioritize our current dividend, which represents a healthy yield for our shareholders. During the Q2, we paid $55,000,000 or $0.50 per share in dividends to shareholders. In addition, as previously disclosed on August 8, The Board declared a quarterly cash dividend of $0.50 per share payable to shareholders on September 20.

Speaker 3

Now let me provide details on our outlook for 2023. As you've heard today, we are pleased with the progress we are making against our priorities. Our 2nd quarter earnings were in line with our expectations. And as Tom indicated, August sales to date are off to a good start. Call.

Speaker 3

Based on this, we are reaffirming our full year financial guidance. For the full year, we currently expect net sales to decrease 2% to 4% versus 2022 and includes the 53rd week, which is worth approximately 1 percentage point of growth Operating margin to be approximately 4% and diluted earnings per share to be in the range of $2.10 to $2.70 excluding any non recurring charges. Lastly, I want to highlight a couple of items about how we are thinking about the 3rd quarter. We continue to expect our full year gross margin in a 36% to 36.5% range. For Q3, We expect it will be approximately 38%.

Speaker 3

Our full year SG and A expense outlook is also unchanged with slight deleverage expected. For Q3, we are planning SG and A expense to increase approximately 3% as compared to last year, driven by additional store related investments and 45 Sephora Small Shop openings. With that, Tom and I are happy to take your questions at this time.

Operator

Call. And your first question comes from the line of Bob Drbul from Guggenheim Securities. Your line is open.

Speaker 5

Hi, good morning. Good morning. Good. Couple of questions. First, Tom, for you.

Speaker 5

When you think about the progress that you're making, Can you just talk a little bit more around the learnings, the opportunity that you see now that you're sort of into it a few quarters in terms of the business and where you're taking it. And the second question, Jill, can you give us some insight on credit Just in terms of the relationship, the bad debt, the delinquency rate and I think the launch of the new program that you're doing this year, just sort of how we should be thinking about trends in credit right now and as you look to the back half of the year? Thanks.

Speaker 2

So Bob, to talk about what's going on with the strategy, we feel pretty good about what that have been going on here. We really look at the business, when we look at the stores business, we have a positive trend in stores that just really represents a lot of the work that we've been doing overall. Most of our decrease came from digital and that was somewhat self inflicted because we have reduced the amount of online only general public offerings. We obviously moving more to omni, having this more simplified pricing strategy, They have 2 different pricing strategies just wasn't good. So we're encouraged by The August business as well, but one of the things we've learned, the Sephora business has been incredibly good.

Speaker 2

We have a 20% comp in the stores in 2021 In 2022, it's pretty remarkable. It's bringing in a younger, more diverse consumer as well. So, but it's been really a driver and we're moving right along and Over the next couple of years, it will be in all stores. We're really moving on bringing in more home product in the home decor category. And we've been working with the marketplace to secure goods in real time.

Speaker 2

And we really feel that that's going to pay dividends in the long run as More and more product comes into the company in those categories. The Impulse business is good. It's going to get even better as we get closer to holiday. So that's very good. And the other thing that We're going to look at down the road is obviously new stores.

Speaker 2

We have not a whole lot this year, but maybe going forward, we'll be looking at expanding That effort, but that work is still underway. But we just we're just really So good about we see the product coming into the company, the stuff that we're under penetrated with and it's working well. And We feel that if we can continue to grow the Sephora business, if we can continue to make progress in home, I think we'll be in a pretty good position.

Speaker 3

And then in terms of credit, Bob, credit has obviously been core component of our value equation over a long period of time and we have a very stable portfolio in our credit. We have a partnership with Cap One. What I would say is Other revenue is a good proxy for what you saw with credit. We said it was going to be in line with sales. We still continue to expect that as we look to the, out of the year.

Speaker 3

We did see payment rates drop as we expected. Those payment levels are still actually above 2019 levels. And then we did see more of a normalization of our credit losses. So those Credit losses did increase over what was obviously a really low year last year, but as anticipated.

Speaker 4

I think we spoke to

Speaker 3

the fact that we did take early as we did anticipate the macroeconomic environment to worsen and people to have less cash in their bank account. So As we looked and worked with our partner, at the risk, we did take back some of those risk sales to not continue to offer that. So I think we're very proactive as we approach this. So I would say it is performing as we anticipated with payment rates down, losses up, but really, we feel good with that portfolio and it's coming in just expected and we continue to expect it to really go with sales. In terms of co brand, we're excited to be able to offer a new vehicle to customers who maybe didn't want a private label credit card.

Speaker 3

So this really affords us the opportunity to spread that value equation to customers that we think are younger, more diverse, really hitting on that customer that we're driving in for Sephora to say, could we bring them into a credit card, but not necessarily as they're open to a PLCC card. So We brought in about 700,000 of our credit card customers and migrated them over to the co brand card. And we'll just kind of watch that and learn from that migration before we extend that out, but then we'll be expanding that out in 2024 based on those results.

Speaker 5

Thank you.

Operator

And your next question comes from the line of Oliver Chen from TD Cowen. Your line is open.

Speaker 6

Hi, Tom and Jill. As we look ahead, what are some of the major catalysts for Holiday in terms of your plans and inventory planning as well as flow, just highlights We would love there. Also as we think about the online business, the comparisons will get easier. What should be the path ahead for resumption of growth there? And finally, on the stores and traffic, would love your thoughts on traffic and transactions and Have you seen a lot of volatility and what your forecast assumes for how traffic may move?

Speaker 6

Thank you.

Speaker 2

Well, the big catalyst for holiday is really maximizing the gift business. We did some of that last year by moving the gifting product to the front of the store And it did very well. We're going to be doing it again this year and making a major statement in the front. We do have some extra square footage because we removed some register base for gifting as well. But I really feel That by making a strong gifting statement, we're going to have a good holiday season.

Speaker 2

Digital as far as digital goes, we see it improving as we progress through this year. And then obviously, we anticipate back to growth in 2024 Once we anniversary all these online only promotions that we had.

Speaker 3

And then from a stores perspective, obviously, really excited that we're actually positive on the year, a flat performance in Q2. And a lot of the efforts that Tom had talked about are really happening in our stores as we speak. It's the increased Presence of home where we released got rid of the registers. It's having stronger presence of gifting. We saw great sell throughs through Mother's Day, Father's Day, 4th July.

Speaker 3

So we're excited as we move into back to school and especially the all important holiday period there. And then of course, clearly, Sephora continues to work for us as we open another 200 doors. We have 50 more doors going in August and 45 small in October. So I think from a stores perspective, we're excited to continue to see That business do well and being an outperformance, which you haven't heard from us in some time. And just to reiterate on digital, I think we're seeing similar performances out of categories.

Speaker 3

Is that the promotions is having an out weighted impact there. And so we know we have to get through that, but it's really the right thing to do. As Tom said just to reiterate, we want to have an omni channel experience. So having specific offers online was counter to that. So We think this is the right thing to do from a long term perspective, which is why we believe we'll get back to growth in 2024.

Speaker 6

Okay, great. Tom, and a follow-up On the merchandise and brands around Sephora, what are the leading strategies to synergize and get the pickup from the tremendous growth you're seeing at Sephora. Related to that, women's and younger women's clothing and apparel, Would love your thoughts on rebalancing and the brands and the strategy there about what will it take to get sustainable growth with that younger customer?

Speaker 2

As far as brands go, we've been looking at a lot of different brands that would complement the Sephora offering. We've been going Nick Jones, the Chief Merchant, and I have been going to New York pretty much every week now, looking for this. And we haven't made any real decisions yet, but There is opportunities out there to bring other things in. But we think we can get some of the Sephora business with the brands we currently have. And we can change the offering.

Speaker 2

We can have more prints, more color In the assortments, we don't have to radically change the vendor mix to capture this. But We are looking at the young women's business. We really feel that that could be an opportunity for us as well as you just mentioned. So there's plenty of things that we can work with in our current brand portfolio. And then we're going to we're looking for other brands that add over time.

Speaker 2

I think the other thing that could be very good For the support customer is our expansion of home decor and gifting. We really think that's in line with that customer as well.

Speaker 6

Thank you. Best regards.

Operator

And your next question comes from the line of Mark Altschwager from Baird. Your line is open.

Speaker 7

Good morning. Thanks for taking the question. Tom, any change to your views on the macro consumer backdrop versus a few months ago? You're reiterating the guide. The environment is obviously pretty dynamic and the guide allows for a range of outcomes.

Speaker 7

So just curious if you can share any additional thoughts there. And then Jill, gross margin, I noticed you didn't call out the clearance shift as a factor impacting gross margin this quarter. That was a little bit surprising. Just I guess any color you have there would be helpful as well. Thank you.

Speaker 2

Well, I think the macro environment continues to be challenging for our customers, as I mentioned in the prepared remarks. That's the reason Why? We're really focused on delivering as much value as possible, because obviously that customer Has less money to spend. We brought we're doing the key value items, Bringing goods in at competitive high volume pricing to deliver more value to the selling floor as well. But we're going to just Really work hard on making sure that we have as much value as we can have.

Speaker 2

We've already started that and it will just continue through the 3rd Q4. And but it's critical that we deliver the value for them.

Speaker 3

And then in terms of gross margin, I think we did actually take all the clearance marks that we anticipated. I think A couple of things that helped us with that. One is, as we talked about, we are able to take out the promotions, the ones that were really the Stackable ones, the ones that we didn't see have a lot of impact to our top line. So we were able to benefit from less promotions that helped us offset some of the clearance. And I think the bigger factor is our inventory was down 14%.

Speaker 3

So as we look at the content and the currency of the inventory, we feel very well positioned as we move into the back half of the year. And so we were able to clean up what we needed to, but I think a lot of the efforts and disciplines that Tom has instilled in the merchant organization really took hold quicker than we anticipated. And the discipline around inventory management, receipt management and just the agility to chase really benefited us more than we anticipated into Q2 and we expect that to continue to benefit us the rest of the year, which is why we're expecting our margin to grow both in Q3 and Q4.

Speaker 7

That's helpful color. And then just a quick follow-up, August to date off to a good start. Should we read that as tracking ahead of the down 5% Q2 comp rate?

Speaker 3

I would say we're pleased. Obviously, if you look at the quarters, we had talked Q2 and May, and we use the word slightly below. You can see that June July obviously were better than that. And I would say we feel good with the start we have in August. So yes, I would say we're definitely trending above that.

Speaker 7

Great. Thanks again.

Operator

Your next question comes from the line of Matthew Boss from JPMorgan. Your line is open.

Speaker 8

Great. Thanks. So Tom, maybe given progress that you've made with inventory and the balance sheet, How best to think about category opportunities or the timeline you see from here to reach an optimal assortment? Or maybe said differently, do you see the opportunity to return to top line growth in 2024 as you just consider the macro versus all of these micro initiatives that you're putting in place?

Speaker 2

I would think that in 2024, We could potentially get back to positive. That's obviously our objective overall. And the categories I've really touched on a lot of the categories before, but the one thing about it which makes it exciting is the fact that There's some there's categories we're just underdeveloped in. And if we can just capture those opportunities, It should help position us for growth in the future. Again, home decor, At gifting, impulse, all that things that we've been talking about will really help us get there.

Speaker 2

If every business was in the right penetration, It'd be a lot harder, but we just have these really low hanging, prudent terms of business that we can Capitalize on and really help us move it forward quicker.

Speaker 8

Great. And then maybe a follow-up for Jill. So with first half of the year gross margin, I think more than 100 basis points above 2019, I guess, how best to think about gross margin structurally from here if we think relative to 2019 levels or maybe ask differently. Is there a ceiling to the 36% to 37% gross margin target longer term?

Speaker 3

I think right now, we just feel very comfortable working within the 36% to 37 1% range. Obviously, depending on where we see assortment moving in and out, obviously, Sephora is a gross margin driver. We think home decor and impulse can definitely be benefits as well from an assortment perspective. So there's definitely a mix component to it As well as then the digital growth, we've been getting some tailwinds as digital has softened, but if we can continue to grow that business, you'll see cost of shipping come out. So I think we feel great that we're Right within the 36% to 37%.

Speaker 3

That was really the long term plan that we outlined. And I think that's really where we feel most comfortable that we're able to still deliver the value that our customer is used to getting from Kohl's, in that margin range. And then also bringing in some of these new white space opportunities that Tom has outlined To get the top line growing. So I think our model works from a long term operating margin with a small amount of top line growth, that's really the big focus. I think we feel great with the margin that we're putting out this year.

Speaker 3

Our SG and A disciplines are there and we'll Gain great leverage off of just a small amount of top line growth. So that's really the focus I think from a long term perspective.

Speaker 8

Great. Best of luck.

Speaker 3

Thank you.

Operator

And your next question comes from the line of Dana Telsey from Telsey Group. Your line is

Speaker 5

open.

Speaker 4

Hi, good morning, everyone. As you think about the what's happening with shrink out there, What are you seeing in your stores and is there what investments are you making to deter shrink? And then Tom, you mentioned about potential new stores. What are you thinking about new stores, whether it's size, location? And how are you thinking about that in a store opening or closing program.

Speaker 4

And lastly, you talked about the home category and that opportunity. How do you see that opportunity with branded versus private label and the impact on margins? Thank you.

Speaker 3

Okay. I'll start with shrink. I mean, I think, Dana, you know shrink is definitely a retail industry problem and it's definitely something that we've called out in the last two quarters has weighed in on our margins. We expect it to continue to remain a headwind in the second half, but we have put a lot of efforts in fixtures. We're going to just testers within beauty.

Speaker 3

We have more attendance in the fitting room. We have more presence in the front of store. So we're doing everything we can to mitigate strength, but really prioritizing the safety of our associates and customers. But I think until it's really just it's going to be a retail problem until we see a bigger step up, I think legislatively. So it's something we've planned for and have put in our expectations.

Speaker 2

I'll talk about the stores. We're looking at it very, very thoughtfully in terms of how we should expand. We're really just begun the analysis. And obviously, in later earnings calls, we'll share more. But one thing we know we're going to do is we're going to open smaller stores.

Speaker 2

The biggest store we'll open going forward is 55,000 square feet. We'll be adding probably a lot of 35,000 square feet. And we're but we're still developing the seed points where we can have additional stores. Again, that analysis is being done now. But mostly, we We're really looking at the size of the stores and we're looking at the cost of the stores and we're looking at how we effectively can and add some additional stores.

Speaker 2

But we're going to do it with a lot of analysis behind it. As far as the home goes, I think there's opportunities both in brands and in private label, maybe a little bit more in brands because of the fact We want to chase product and we've already do we're already doing that and going into the market and Buying the product in real time. As far as margin goes, I think it could be home decor is higher margin business. So the more we go after that, I think it could be a positive to the gross margin overall. But Again, it's a lot of chase is going to happen in this business because we want to be able to react in real time.

Speaker 4

Thank you.

Operator

And your next question comes from the line of Blake Anderson from Jefferies. Your line is open.

Speaker 9

Hi, good morning. Wanted to dig in a bit on Sephora. You had an impressive result there. Can you talk about the acceleration in the comp up to greater than 20%? What's driving that in terms of new customers versus transactions or basket?

Speaker 9

And then for the newer stores, are they still performing on a similar trajectory? And lastly, any beauty categories to call out that were stronger? Thank you.

Speaker 3

So I think obviously Sephora has been a great performance for us. We continue to see it accelerating. I think it's just the fact that we're now getting those customers to come back repeatedly in terms of their replenishment. So we continue to see an acceleration in that. I would say newer stores are performing actually better.

Speaker 3

We're smarter, I think, on the assortment as we open these stores. So when we opened our first two hundred, we learned what our customer wanted maybe relative to what Sephora had opened their stores with. So now we're getting smarter on how we're actually bringing those forward and really being able to be smarter on opening, but then even with replenishment we're getting better in terms of how we're replenishing. So I think we feel great with how the new stores are opening and the existing stores are performing. So you can see they continue to accelerate on that.

Speaker 3

We do continue to bring new customers in. They're younger. They're more diverse. So I think that's a big opportunity that we talked about in terms of getting them to Cross shop through the store. I think a lot of the areas that we indicated were white space for us, particularly impulse gifting and home decor.

Speaker 3

It's a quick add into the basket. So as we're able to have a stronger presence of that in our store, we can take advantage of that new store and those extra steps coming in, in terms of that. Top selling brands, we talked about it for Sol De Janeiro as well as the Sephora Collection, which is an opening price point, but then Charlotte Tilbury, which is a really high price point. So we're seeing that customer shop across all of the areas. And then I'd be remiss to not talk about we have men's brands, which is something you don't see in a Sephora store and we're seeing Clinique for men, Jack Slack performing incredibly well there as well.

Speaker 3

So I just think we continue to learn, we continue to bring in new customers and we just have an opportunity to convert those customers into our loyalty program and getting them to shop. We are seeing those customers shop 2 times more often than our existing customer. So really we're going to have an opportunity to build on that as we build the assortment that Tom has indicated throughout this call.

Speaker 2

Yes. And I think the other thing that's pretty exciting about it is the smaller format store, which we brought in 5 or we set up 5 and they've done very well. So it gives us the confidence that we can have Sephora in all of our stores.

Speaker 9

That's super helpful. And Joe, could you remind us how much expense is in each of the quarters this year for the new Sephora stores? I was just trying to figure out the impact to quarterly SG and A.

Speaker 3

Yes. I think really the biggest thing in Q3, the increase is going to be we have 50 stores, opening in August that are full size shops and 45 small shops that are opening in October. The Q2 numbers are up against Q2 numbers last year, so there wasn't a huge amount of increase from that perspective. So I would just say the step up in Q3 will be mainly those investments. We're also putting in our self checkout in Q3, which has expense related to it in about 2 50 stores.

Speaker 3

We continue to see wage pressure, which you've just seen throughout the year, which is a build And then I think we benefited in Q2, more than we had expected with the inventory reduction. So inventory being down 14%. We had said we were going to work in the mid single digit range. So obviously that benefit our SG and A because we had less store payroll and less logistics costs to move those units. I would tell you that in the rest of the year, we're still planning to be managing inventory in that mid single digit range.

Speaker 3

In fact, we want to make sure we're protecting ourselves and holiday. So I would say mid single digits, maybe a little bit better than that. Obviously, we're going to react and chase appropriately given the demand that we're seeing.

Speaker 9

Thank you. Best of luck with the second half.

Speaker 3

Thank you.

Operator

Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.

Speaker 10

Hey, thanks. Good morning. Can you just talk about the success you're having in Sephora getting those shoppers to cross shop into other parts of the store. And I guess over the past couple of years how that's evolved?

Speaker 3

Sure. I think we talked about I think around 40 ish percent of our customers to 50% are shopping around the store. So we continue to see that that's an opportunity. I think like I mentioned, The big opportunity is going to be around these white space pieces. It's home decor, it's impulse, it's gifting.

Speaker 3

Those are easy adds to the basket, Particularly in home decor, you're going to see that in a much better opening price point. And so it's going to be easier for them to put into the basket. And then I think the bigger opportunity and Tom had spent some time talking about that is really getting the woman to shop into the women's pad. And I think we know we have some opportunities there In terms of brands and fashion, we're working through that. So I think we feel great that we're in that 40% to 50% cross shop rate, but we think we We can do more with that given the white space opportunities we've outlined as well as women's and moving that into the right direction and getting her to shop across that pad.

Speaker 10

Okay. And is there any way to like Think about how that 40% to 50% has evolved over the past couple of years. Has it continued to improve? Or has it been that way and just been stable?

Speaker 3

I think it's been pretty stable in that range for since we've opened up the stores. I'd say in some of the more mature stores, The customers coming in maybe more for a replenishment trip, so we don't get as much in that basket. In the newer stores, they are excited just to see what Kohl's has to because there are new customer, but I would say that has been a pretty stable range in totality overall, but maybe the more aged stores, I I think hopefully when we introduce some of this newness, we'll gain that excitement back.

Speaker 10

Okay. Great. And then another one for you, Joe, just on the cadence and phasing of the back half of the year. Is there any way you can hold our hands on both the comp as well as the credit line? The comp on a 1 year basis is pretty similar last year, the cycle in 3Q and 4Q, but on a multi year, it's a little bit more choppy.

Speaker 10

So If you can maybe help us on that would be helpful.

Speaker 3

Yes. I think overall, let's not talk about the 53rd week. So obviously, you get A 53rd week benefit in Q4. I think if you look at it on a I did the 2 year stack for you, Chuck, because I know how much you like stacks. I think you're going to see a pretty consistent 2 year stack is what we're really outlining ex the 53rd week.

Speaker 3

You saw if we looked at it, The 2 year stack would have fallen a little bit in Q2 from Q1, but we did see that stack improve as the quarter went on. So I would say The exit rate was actually better than the 2 year stack in Q1 and I'd expect to be around that level in Q3 and Q4 ex the 53rd week, if that helps you.

Speaker 10

It does. Great. Thanks, Jill. Appreciate it.

Speaker 3

Yes, of course.

Operator

And your last question for today comes from the line of Paul Lejuez from Citi. Your line is open.

Speaker 11

Thanks. It's Tracy filling in for Paul. I had two questions. The first is I was wondering What your AUR and traffic looked like in the second quarter and what you're expecting for AUR in the second half? And then I

Speaker 3

was wondering if you could

Speaker 11

tell us what the overall comps were in stores that had Sephora locations opened in 2021 2022. Thanks.

Speaker 3

Yes. I would tell you, Tracey, the components AUR has been a driver for us for some time. I think we've talked a lot about We've seen AUR growth and that's really going to be a function of the fact of the brands that we're bringing in. Obviously, Sephora has a higher ticket, which you would expect, which is driving our AUR up. But then on top of that, you think of Tommy Hilfiger, Eddie Bauer, we're seeing our Nike and Under Armour businesses do well.

Speaker 3

So that all drives ticket. And I would say that's been pretty consistent over the last probably 4 or 5 years that we've seen Our AUR is moving up. And I would say, we're going to expect that increase to continue, but I think more moderately now that we're comping some of these brand introduction and obviously continuing to be focused more on value. So we talked a little bit about our key value items, Really focusing on driving the best, most competitive out the door price and focusing those in our private label, which we think could be really important to a customer in this uncertain and strained macroeconomic environment. So that's really where I would say we continue to look and see.

Speaker 3

And in terms of Sephora, I think we're We just feel good. It's up 20%. As you can imagine, it's definitely driving a benefit. Our stores were flat on the quarter. We're up 1 on the season in our stores.

Speaker 3

So It is driving much more productivity out of the box, which we're very, very pleased with.

Speaker 4

Thank you.

Speaker 3

Thanks.

Speaker 2

Thank you to everyone listening on the call today.

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Key Takeaways

  • Q2 net sales declined 4.8% (comps down 5%) but Kohl’s delivered a 4.2% operating margin, reduced inventory by 14%, and is reaffirming full-year guidance of –2% to –4% sales growth and $2.10–$2.70 EPS.
  • Sephora at Kohl’s continues to outperform, with nearly 200 shops opened in Q2, beauty sales up ~90% YoY, >20% comp growth in 2021/2022 shops, and plans to feature Sephora in over 900 stores by year end.
  • The home business showed notable improvement and Kohl’s is expanding in gifting, impulse, home décor and pet categories by reallocating floor space, forming new vendor partnerships, and launching seasonal destinations.
  • Kohl’s is simplifying its value strategy by reducing general promotions, eliminating online-only offers, piloting “key value items” with competitive pricing, and refining marketing to boost customer engagement, with plans to scale in 2024.
  • With disciplined expense management, Kohl’s generated $430 million in Q2 operating cash flow, cut revolver borrowings by $205 million, and is targeting a 2.5x leverage ratio while maintaining its dividend.
A.I. generated. May contain errors.
Earnings Conference Call
Kohl's Q2 2024
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