Kohl's Corporation

Ladies and gentlemen, thank you for standing by and welcome to the Q2 2020 Coles Corporation Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you need to press star one on your telephone. If you require any further assistance, please press star zero. I would now like to hand the conference over to your speaker today. Mark, please go ahead.

Thank you, and good morning. 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 most recent quarterly report on Form 10-Q, 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 Kohl's undertakes no obligation to update them. In addition, during this call, we will make reference to non-GAAP measures, including adjusted net income, adjusted EBITDA, adjusted earnings per share, and free cash flow. Information necessary to reconcile these non-GAAP measures can be found in the investor presentation, filed as an exhibit to our Form 8K with the SEC, and is available on the company's investor relations websites. 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will not be updated, so if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 Tim, our Chief Financial Officer. I will now turn the call over to Michelle.

Thank you, Mark. Good morning, and welcome to Kohl's Second Quarter Earnings Conference Call. I certainly hope you and your families continue to be safe and healthy. COVID-19 continues to present a formidable health and economic challenge for the entire world. While our business has not been immune to these challenges, I am pleased with how our organization has responded and is navigating the crisis. We are executing against our short-term priorities of protecting our associates and customers and preserving the financial position of the company while also looking to the future. Our team showed great collaboration in preparing our stores with best-in-class health and safety measures and subsequently reopening all of our stores over a 10-week period. I want to express special gratitude to all of our associates that helped us kickstart our rebuilding process over the past few months. We also further strengthened our financial position during the second quarter. We achieved positive adjusted EBITDA, generated positive free cash flow, and increased our cash balance to over $2.4 billion. A key part of running our business is how we reinforce our purpose to inspire and empower families to lead fulfilled lives and how we live our values every day. With that lens, we are motivated to take actions to advance racial equity. Kohl's is committed to making progress and fostering greater diversity and inclusivity for our associates, customers, and communities we serve. Some recent actions to deliver on that commitment include providing unconscious bias training for all associates by the end of the year, focusing on increasing and developing our diverse talent, enhancing our marketing efforts with a cross-cultural approach, increasing diversity in our supply chain, and supporting nonprofit organizations that serve and benefit people of color in our communities. Before Jill and I get into the results of the quarter, I want to first take a step back and remind you why Kohl's will be successful over the long term. We are a well-disciplined operator, leveraging our strong financial position to effectively navigate through this crisis. We have a strong foundation from which to build. solidified through years of investment in our digital and omnichannel capabilities, innovative store experiences, loyalty enhancements, and new brand introductions. And we are uniquely positioned and are evolving our strategies to capitalize on changing consumer behaviors and the significant disruption of the retail industry. So first, we are a well-disciplined operator. we transformed our store operations in a matter of weeks, reopening our entire fleet with new safety and operating procedures and training for all of our associates. This showcased our flexibility and agility in responding to new conditions and our proactive measures for associate and customer safety that have been recognized among the best of all retailers. We also have a long history of prudent capital management and cash flow generation, and we take pride in managing our business efficiently. It's part of our DNA. In the worst retail environment in our nearly 60-year history, we have delivered positive free cash flow. This is a direct reflection of our cost and cash flow focused culture in action. We will continue to manage the business with great discipline knowing that the environment is expected to remain challenging in the near term. And we will make decisions through the lens of our long-term objective of maintaining our investment-grade rating, a status we've held for more than two decades. Second, we have a strong foundation, which has been solidified through our investments in digital, omnichannel, stores, loyalty, and our brand portfolio in recent years. These efforts are paying off and continue to differentiate Kohl's. A record 65 million customers shopped us last year. They shop us because we offer relevant categories and brands for the entire family. We provide the best value through our iconic Kohl's cash, industry-leading loyalty, and Kohl's charge programs. And they appreciate the great experience we deliver through our easy and convenient stores and digital assets. And third, we are uniquely positioned and are evolving our strategies to capitalize on changing consumer behaviors and significant disruption in the retail industry. We will be a beneficiary of consumers adopting more casual lifestyles and shopping more digitally. Kohl's is a known destination for casual apparel, and we have a large and growing digital business supported by our stores through our expansive omnichannel capabilities. We are also actively pursuing opportunities to capture dislocated market share from competitors and store closures. Even in the midst of the pandemic, we are acquiring new customers and see great potential looking forward. We are leveraging our past strategies and increasing our marketing investment in locations where competitors are closing stores. I will now provide an update on how our business is recovering. As we are all familiar with, COVID's impact on retail has been immense. The crisis forced chain-wide store closures and has disrupted consumer spending behavior, both of which have directly impacted our business. As you saw in this morning's release, our second quarter results reflected COVID's impact. During the quarter, our stores operated with approximately 25% fewer days than last year and with limited hours since our stores reopened. May was the most challenging period in the quarter as a majority of our stores were closed for most of the month. We saw a strong rebound in June with the vast majority of our stores reopened and digital's momentum remaining. However, in July, we did experience some sales deceleration from June's strength as COVID concerns heightened in areas of the country where cases have been escalating. We also saw a softer start to the back-to-school selling season, given increased uncertainty around kids returning to school. So all in for the quarter, store productivity for reopened stores was approximately 75%. We are pleased that digital sales remain strong in the quarter, increasing at 58%. We continue to leverage our omnichannel capabilities to support the overall business. our customers are embracing the conveniences we are providing at an accelerating rate, and our investments have proven to be timely and valuable. During the second quarter, stores were instrumental in fulfilling nearly 50% of digital sales. Customers picking up in the store accounted for 15% of digital demand, with store drive-up accounting for half of this. Now let me touch on how we are approaching the rest of 2020. It's important to remember that we are still operating in the midst of a pandemic. Consumer behavior has been profoundly altered given safety and spending concerns, and we don't expect this to change in the near term. Hence, we continue to plan our business conservatively for the balance of the year. As I just mentioned, the back-to-school season has been impacted by the crisis as families navigate how their kids will return to school this year. Fortunately, a lot of our assortment for back to school is core product, such as basics, active, and denim, and can sell year round. Looking ahead to holiday, it will be a holiday season like no other. COVID is changing all aspects of customer expectations, and we are adapting our plans in response. To start out with, we've made the decision to not be open on Thanksgiving Day, allowing more of our associates to be home with their families. In addition, we expect many customers to get ahead of their holiday shopping and increasingly leverage our digital and omnichannel capabilities. We are making adjustments to drive and capture anticipated early holiday demand beginning in October across all of our channels. We have a compelling holiday assortment that speaks to how our customers are living today. We will emphasize cozy and comfort, our home category, and kids' toys. we feel really good about the content and relevance of our key holiday items, as well as our ability to chase demand. So based on the continued COVID uncertainty, it remains prudent to plan the business conservatively and chase any upside as it unfolds. So now let me transition and discuss how we are positioning our business to capture market share in the short term and drive growth over the long term. COVID has accelerated important movements that have been underway for some time. Customers are adopting more active and casual lifestyles, and they are shopping more digitally. COVID has also changed the competitive landscape, creating significant industry disruption. Let me talk about the actions we are taking, starting with product. Colts has always been known as a casual destination, and we will take full advantage of growing customer trends living their life more casually. Today, more consumers are working from home, adopting flexible work schedules, and are dressing more comfortably and casually. We believe these trends will carry on beyond COVID. As a result, we are optimizing and evolving our assortment to reflect these trends, and we will build our strength as a casual destination by providing more options to drive even greater relevancy. We remain focused on driving our active business through our key national brand partners and will lean further into athleisure through both our existing brands as well as the expansion of the Champion brand. We will also dedicate more space to active and we are introducing new casual brands like Land's End and Tom's Shoes. In addition, we are using this period to make bold moves to improve clarity in our assortment. we are significantly reducing our choice counts offered across women's and men's to increase depth and meet our customers' expectations. For example, in the fourth quarter, women's choice counts will be down over 40% with depth up 50%. This was in part driven by the previously announced exit of eight underperforming women's private brands. Further, We remain committed to growing our beauty business, which rebounded nicely as stores reopened. As I've indicated in the past, beauty is an area of growth for the company and our customers have been responding well to new innovations and brands that we've introduced them to. Next, let me talk about how we are elevating the experience. As we discussed on last quarter's call, when we think about the experience, We think broadly on every touchpoint and interaction we have with our customers across all channels. And COVID has presented us with many opportunities to accelerate how we are elevating the experience. As it relates to our stores, we are pleased with how our stores are operating. Feedback from our customers has been positive, with strong marks around safety and cleanliness. We've made several moves in the store to facilitate enhanced safety measures, such as installing plexiglass at checkout, requiring masks for both our associates and our customers, sanitizing carts and POS terminals, closing fitting rooms, and adding a greeter to welcome customers entering the store. We've also widened aisles and removed fixtures. In doing so, we have created a better customer experience. And based on these learnings, we are taking the opportunity to do more low-cost moves to improve the experience. And you'll see these enhancements beginning this fall. Driving newness and discovery with our customers continues to be important all the time, and especially during the holidays. As such, we will be expanding our Curated by Kohl's platform to 300 stores, featuring exciting and interesting brands like Paper Source, Candy Club, UB, and Corksicle. In addition to our merchandising efforts, we see our stores as an important asset that we can leverage in many other ways. This is especially relevant given the consumer behavior shifts we are seeing as customers embrace digital and our omnichannel offerings. Our stores are increasingly supporting our digital business, serving as a critical fulfillment hub for ship from store and customer pickup. As 80% of Americans live within 15 miles of an easy to access Kohl's store, we are well positioned to be a leading retail and digital destination for the family. Our launch of Store Drive Up has been particularly successful and will be an important capability this holiday season. We are also leveraging our stores to deliver innovative services like Amazon Returns, where our customers continue to appreciate the ease and convenience we provide. As we reopened stores, we moved the Amazon Returns area to its own outpost in the back of the store to allow for greater social distancing and to enhance safety. We have seen traffic build and remain pleased with the overall performance of the program. Turning to our digital experience, our broad investments in site functionality, personalization, and shopability have been important enhancements and were crucial in our ability to capitalize on growth in the current environment. In addition, our digital marketing efforts have been a key enabler of growth, yielding a greater impact in a more efficient way. Last fall, we brought digital search in-house, and we are using machine learning to drive improved search results and media buying. Loyalty is another important piece of our strategy. We've spoken frequently about our incredibly strong loyalty program. It has been recognized as an industry leader many times and has 30 million members. It's a critical piece of the value equation we provide our customers, and as you know, we have been working on a new foundational program. I am happy to share that next month we will be launching our new, more integrated rewards program nationwide. bringing together all of our loyalty assets in a simplified structure with rewards earned in our iconic Kohl's cash. We saw positive results in our pilot and are confident that this new program will further enhance our position as a leader in the industry. And lastly, let me touch on our efforts around operating with excellence. We are planning the business conservatively and will continue to seek out efficiencies. Based on the trend we are seeing in digital acceleration, we are putting even greater focus and resources on our supply chain to ensure that we are positioned to drive overall productivity and manage cost of shipping as effectively as possible. While our work on this front has always been important, its priority has been elevated. Before I hand it off to Jill, let me summarize my comments today. We continue to effectively navigate through a period of extraordinary change and uncertainty. We made progress during the second quarter, reopening our entire fleet, accelerating digital growth, and generating positive free cash flow to further strengthen our financial position. While we are planning for the crisis to continue to present headwinds in the near term, we are very confident that we will not only weather the storm, but also take full advantage of the opportunities that emerge from it. We are a well-disciplined operator. We have a strong foundation, and we are evolving our strategies, which together uniquely positions us to capitalize on the changing consumer behaviors and the significant disruption of the retail industry. In closing, I want to thank all of our associates around the country and across our business. It's times like these when the value of an organization's culture becomes visible and tangible. I am incredibly proud of how our Coles associates and our culture has shined through and proven extremely valuable during this crisis. With that, I'll now turn the call over to Jill, who will provide details on our second quarter results and financial position.