Kohl's Corporation

Express Star Zero. I would now like to hand the conference over to your speaker today, Mark Roop, Vice President, Investor Relations. Thank you. Please go ahead.

Thank you, Operator. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Coles intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans, or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Cole's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in COLE's most recent annual report on Form 10-K, and as may be supplemented from time to time in COLE's other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and COLE's undertakes no obligation to update them. In addition, during this call, we will make reference to adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures can be found in our press release and investor presentation, both of which have been filed as exhibits to our Form 8K with the SEC and are available on the company's investor relations website. Please note that this call will be recorded. 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current.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. With me today are Michelle Goss, our Chief Executive Officer, and Jill Tam, our Chief Financial Officer. I will now turn the call over to Michelle.

Thank you, Mark. Good morning, and welcome to Kohl's first quarter earnings conference call. A lot has happened since our last earnings call on March 3rd. The escalation of the COVID-19 pandemic has challenged the world in ways never thought imaginable. It has affected each of us to varying degrees and has had a significant economic toll. I hope you and your families are safe and healthy during this time. As difficult as this unprecedented health crisis has been, I am comforted by the resilience and generosity that has been exhibited by so many. Our sincere gratitude goes out to all of those on the front line that have worked tirelessly to support the greater good. I'd like to thank our associates for their support and commitment as we have continued to operate portions of our business. I would also like to recognize and thank our many business partners and vendors that have been instrumental in helping us navigate through this crisis. We've had to make difficult decisions to ensure our business continuity, and I am incredibly proud of how our organization has stepped up to the challenge. We've learned a lot and will be sure to leverage these insights into the future. We expect we'll be operating differently for quite some time, but we are pleased that we have now begun the rebuilding process. We have taken our first step in this direction and have begun to reopen stores. As we continue to move forward, we will do so with the health and safety of our associates and our customers remaining our top priority. For today's call, I'm going to discuss how we are navigating the current environment, touch on our first quarter results, review our store reopening strategies, and then share with you an update on our strategic initiatives and the opportunities we have to take market share. Jill will then review the financial results and provide details on the actions we've taken to ensure our liquidity and financial flexibility to navigate this crisis and over time become a stronger company. We entered 2020 with a strong foundation and a healthy financial position. As we shared with you on last quarter's call, we had a record 65 million customers shopping at Kohl's in 2019. This is a testament to Kohl's differentiation and the value proposition we provide our customers. We also entered the year with over $700 million in cash and modest leverage. We have a long history of disciplined and prudent capital management and have reduced our debt in recent years. This has put us in a solid position to navigate this crisis and will continue to serve us well. As COVID-19 escalated, we established two short-term priorities. The first, protecting our associates and customers, and the second, preserving the financial position of the company. Consistent with these priorities, we closed all of our stores on March 20th to do our part in helping to slow the spread of the virus. We also took immediate action to reduce our cash outflow. Essentially, everything was on the table and we operated swiftly and decisively. We reduced inventory receipts, extended payment terms, and reduced expenses across the business, including marketing, technology, and operations. We also made the difficult decision to furlough 85,000 associates, most of whom work in our stores and store distribution centers. These are valued members of the Coles family and we supported them through two weeks of pay and continuing their existing health benefits. In addition to expenses, we also increased our liquidity through significantly reducing our capital spend, suspending our dividend and share repurchase program, replacing and upsizing our revolver, and issuing new debt. I will now turn to our first quarter results. As expected, our business has been materially impacted by COVID-19. While we have a fast-growing digital business, it has only replaced a small portion of the sales lost from our entire store base being closed during the second half of the first quarter. Our business was on track entering the crisis, with comparable sales trends consistent with our previous guidance at the time of our fourth quarter earnings release. However, shortly thereafter, we began to see the traffic impact to our stores, and then we closed all of our stores on March 20th. With our entire store base closed, we responded with speed and agility, leaning into our digital business as the only channel to engage with our customers. We amplified our digital marketing and updated digital site content to be relevant to what customers were interested at this time. We also leveraged our large and growing email file of more than 50 million customers to reach them in new and personalized ways. These efforts paid off. Digital sales increased 24% for the quarter and accelerated to 60% in the month of April. All of the key performance metrics were positive, including traffic, conversion, average unit retail, and units per transaction. And we were pleased to see more new customers and younger customers shopping on our digital platform. Importantly, our stores fulfilled a higher percentage of digital orders, which aided our efforts to reduce in-store inventory. more than 40% of digital orders were fulfilled by ship-from-store and customer pickup during the first quarter. And this percentage was much higher in April, following the successful launch of Store Drive-Up, where we've seen great customer uptake. In fact, in the over 900 stores where it is offered, the percentage of digital demand fulfilled by Store Drive-Up was 15%, exceeding that of buy-on-line pickup-in-store before the crisis began. While we had been testing this capability in a couple of stores, it was still very new to us. As the health crisis unfolded, our team swiftly put a strategy together and launched it at scale very quickly. This is a great example of the responsiveness and agility of our organization. From a line of business perspective, we achieved positive digital sales growth in all of our categories. Home was the strongest, with digital sales increasing more than 50% for the quarter. The home category has historically penetrated higher digitally for us and was influenced by stay-at-home mandates. We saw a particularly strong demand for kitchen electrics, vacuums, electronics, and gaming. We also saw continued digital strength in areas like active, toys, and beauty. And we saw growth in areas like basics, intimates, and sleepwear. However, apparel and footwear lagged overall digital growth. Now I'd like to discuss our reopening strategy. Stores are the lifeblood of Kohl's, and more than 90% of our customers have historically stocked them. While the current crisis has had a significant impact to our store business, we continue to see our store portfolio as one of the core assets of our strategy going forward. A key reason for this is that our stores are financially healthy. 99% of them generated positive four-wall cash flow in 2019. Another reason is that they are located off-mall, in suburban neighborhoods where our customers live and work. We see this as an advantage as the majority of our stores are located next to high-traffic areas where our customers are already shopping. We also believe the size of our store provides us a unique advantage to facilitate social distancing as customers begin to journey away from home. Our goal is to operate the cleanest and safest environment in retail, where our associates feel comfortable providing excellent customer service, and where our customers feel confident to shop. And we are investing to ensure this happens. Since the day we closed all of our stores, our team has been working on a thoughtful and comprehensive plan to adopt the latest health and safety measures as we reopen our stores. These include operating with limited store hours, social distancing signage, elevated cleaning procedures, a new returns process, among many others. We will continue to offer store drive-ups as a convenient offering for our customers. We will also resume our Amazon returns program as stores reopen, and we expect to see traffic build as customers return items purchased over the last several months. We are implementing health and safety best practices for our store associates as they return to work. Associates will undergo training on the new procedures, as well as take part in mandatory wellness and temperature checks before each shift. We'll also provide many of the things, like masks and gloves, that are becoming standard in this new environment. And we are adjusting workspaces to enable social distancing. We believe that all of these elements create the right environment for our associates and customers as they are welcomed back to stores. Since May 4th, we have reopened about 50% of our stores across the country. We have followed a set of criteria, including state guidelines, health data, store readiness, and field insights, to help us determine the timing of store reopenings. We have been reopening stores on a state-by-state basis. However, we will continue to be agile in our approach as conditions are still evolving. As you can appreciate, as we reopen stores, there is a great sense of pride for the entire organization. It's been a difficult road over the past two months, but we've made the right decisions and strategic moves to put us in a position to begin rebuilding. We are very excited to commence this process, knowing that we can build a stronger Coles in the future. That said, we will remain present to the situation and be prudent in our planning, recognizing that COVID-19 will present challenges for some time. Let me now discuss how we're thinking about the rebuilding process. As we look forward, we are planning our business based on the assumptions that sales will rebuild gradually during the remainder of the year as people get more comfortable living in this new normal. Based on this, we are planning the business conservatively. Our company has a long history of operating with great discipline, and we believe prudence dictates caution in the near term. To be clear, though, the decisions we are making in the short term related to COVID-19 will not alter our conviction about growing this business over the long term. To that end, our primary focus continues to be navigating the current crisis, though we are beginning to look towards the future, ensuring that Kohl's is as relevant, if not more so, based on expected changes in the competitive and consumer landscape. We were looking forward to presenting a thorough strategic update at an investor day in March. Given that we were unable to do so, I thought it would be helpful to share the overarching themes that remain relevant post-COVID-19, though we will continue to take advantage of new insights presented during this dynamic time. Let me remind you that Kohl's is a leading omnichannel retailer with a strong foundation and a loyal base of 65 million customers. Over the last five years, we have enhanced our very healthy store portfolio by with a thriving and growing digital business. We view these two channels as not distinct but highly connected to present a unified experience to the customer. In addition, we've also been able to leverage the operations of both our stores and digital platform to deliver easy and seamless experiences. Kohl's has a differentiated position in the market anchored in three important characteristics. An unmatched brand portfolio at the best value. easy and inspiring experiences, and an industry-leading loyalty program. As we look forward, we will leverage our strong foundation and differentiation against the following focus areas, strengthening our product leadership, elevating the experience, leading the next generation of loyalty, and operating with excellence. Let me share a little on each of these. First, as it relates to strengthening our product leadership, We are focused on modernizing our women's business, continuing to lead and active for the family, building a much larger beauty business, and enhancing our position in our other core categories. As we discussed on last quarter's call, improving our women's performance is a top priority. While the current environment will pose challenges, we are moving forward with several bold moves. We will exit eight downtrending women's private brands. These include Dana Buckman, Jennifer Lopez, Mudd, Candies, Rockin' Republic, PopSugar, Elle, and Juicy Couture. This will create space to introduce a more compelling and current offering to our customers while improving the overall clarity through reduced choice counts. We are also committed to growing the active category. We've nearly doubled our active sales since 2013, and we see continued momentum in this category as customers focus on staying healthy. and we continue to be very committed to building a large beauty business and are investing to make that happen. Last year, we added many new brands and expanded our elevated beauty experience to 12 stores. This year, we will add 50 more stores with the elevated experience. Lastly, we will continue to bring new relevant brands to Kohl's, as we know that constant newness and discovery is absolutely key to engaging our existing customers as well as to attract new, younger customers. In 2020, we will introduce several new brands, including Land's End and Tom's. Land's End is an iconic brand and a market leader in the classic casual lifestyle. Beginning this fall, we will offer the full Land's End assortment on cold.com, as well as feature a shop-and-shop experience in 150 of our stores. And we expect Tom's will resonate with our millennial target. Our team here is continuing to seek out other relevant brands to offer to our cold customers. We look forward to sharing more in the future. Next, let me talk about how we are elevating the experience. When we think about experience, we think broadly on every touchpoint and interaction we have with our customers across all channels. We see many areas of opportunity to elevate the experience, including refreshing the existing store experience, driving localization, and accelerating our digital growth. A few examples include investing to create more compelling merchandising, leveraging in-store technology to drive better customer experience and efficiency, and implementing a more tailored approach to local markets. In addition, we will continue to invest in supporting the growth of our digital business, which has more than doubled in sales since 2014. Our next priority is leading the next generation of loyalty. We have an incredibly strong foundation in loyalty with 30 million members, and we don't take this for granted. we have three key differentiating elements of our loyalty program, our iconic Kohl's cash, our rewards program, and the Kohl's Charge private label card. We know that as we move customers up the loyalty ladder, sales productivity significantly increases. To enhance our efforts on this front, we are integrating our loyalty assets and leveraging personalization. We look forward to sharing more details on our progress in the future. And lastly, let me talk about operating with excellence. Operating with excellence and enhancing our profitability has been one of our strategic priorities for several years, and it is deeply ingrained in every corner of our organization. It's also a concept that underpins all of our initiatives and has been particularly useful as we've navigated through the COVID-19 crisis. Before I hand it off to Jill, let me summarize my comments today. Our financial performance, like many other retailers, will be materially impacted by COVID-19 in 2020. Our focus will remain on striking a balance between the short-term and the long-term, recognizing the decisions we make today can influence our long-term opportunity. We are confident that our strong fundamentals and financial discipline will enable us to not only navigate the short-term uncertainty but also position us to take advantage of unique market and customer opportunities in a post-COVID environment. Much of what has made Kohl's the vibrant and resilient retailer it is today will make Kohl's a stronger company in the future. We will maintain a clear and unwavering focus on providing families an unmatched brand portfolio at a great value and an easy and convenient experience. And we will leverage our strong foundation that has been built through significant and consistent capital investments in omni-channel technology in our stores. In closing, I want to thank our associates for their incredible commitment and resilience for stepping up in the face of this unprecedented challenge. Each of you has given me great inspiration. I said on last quarter's call that the strength of our company is rooted in our people and our innovative culture. and that has certainly proven to be the case at this time. I also want to express gratitude to our business partners and vendors that have provided tremendous support in helping us enhance our short-term financial flexibility. We look forward to rebuilding our business with you in the months and years ahead. This has been an extraordinary period of time, and we've learned a great deal through this process about our business, our team, our agility, and our perseverance. While we still face challenges ahead, we are a strong company and well positioned financially to emerge from this. To everyone listening on the call, we wish you and your families health and safety as we begin to resume some level of normalcy in our lives. I'll now turn the call over to Jo, who will provide details on our first quarter results and financial position.