Kohl's Corporation

Good day and thank you for standing by. Welcome to the Q2 2021 Coles Corporation's earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star 1 on your telephone. Please be advised today's conference is being recorded. If you require any further assistance, please press star 0. I'll now hand the conference over to Mark Rook from Coles Corporation.

Thank you. 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 Kohl's undertakes no obligation to update them. In addition, during this call, we will make reference to non-GAAP financial measures, including free cash flow. Information necessary to reconcile these non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC and is 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 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. Our performance during the second quarter marked another important step in our pursuit of becoming the retailer of choice for the active and casual lifestyle. During today's call, I want to leave you with three things. One, we achieved record Q2 earnings. Two, we are raising our sales and earnings expectations for the full year and for the second half of the year. and we are also guiding full-year EPS to an all-time record level. And three, the confidence we have in the business is reflected in our accelerated share repurchase activity during the quarter and our updated expectations for the year. Let me expand on these. We delivered record Q2 earnings of $2.48 per diluted share as both sales and margins materially exceeded our expectations. Sales increased 31 percent to last year, surpassing Q2 2019. And through significant gross margin expansion and disciplined expense management, we achieved an operating margin of 12.8 percent, which is a 10-year high. Equally important, we further strengthened our financial position and accelerated the return of capital to shareholders. we repurchased more than $250 million of shares in the quarter and now expect to repurchase $500 to $700 million for the year. This underscores our confidence in the future and commitment to creating shareholder value. And we still ended in a very strong cash position of $2.6 billion. As pleased as we are with our ongoing strategic progress, much of our opportunity is still ahead of us. We are on the eve of launching several transformational partnerships that will drive sustainable growth for years to come and further establish Kohl's as the leading destination for the active and casual lifestyle. Since launching our strategy last October, our organization is executing a clear plan to build sales momentum with an intense focus on improving our profitability. we have transformed our business to be more relevant to our customers and more efficient in how we operate. As evident in our results, we are already seeing the benefits of our strategic efforts, which have positioned us to achieve many of our 2023 goals this year, well ahead of plan. As we will discuss later in the call, based on our strong second quarter results, we are raising our full year 2021 guidance. For today's call, I'll provide a high level overview of our second quarter performance, share some initial thoughts on the back to school season, and then talk about the progress we are making against our strategy and our confidence in driving sustainable and profitable long-term growth. Jill will then discuss our Q2 results in more detail and updated 2021 financial outlook. Let me start by touching on our Q2 results. Our record Q2 earnings were driven by strong sales growth, significant gross margin expansion, and disciplined expense management exceeded our expectations. Our strategy is working, and the favorable industry environment has only amplified our performance. Sales increased 31 percent to last year and were up to the same period in 2019. From a channel perspective in Q2, Improvement in our store sales drove the majority of the total sales upside in the quarter. We've spoken a lot about the importance in our continued commitment to our stores, both in terms of the customer shopping experience and the foundational role they play in our omnichannel model. We continue to be encouraged by the traffic we are seeing in customers returning to stores. And again this quarter, stores fulfilled nearly 40% of digital sales through ship from store and customer pickup. Digital sales remained strong and increased 35% compared to the same period in 2019. And as expected, we're down to last year's heightened level that benefited from store closures. As a percentage of total sales, digital was 26%, down from last year's 41%, but up from 20% in 2019. From a category perspective, we saw the greatest growth in men's accessories and women's relative to last year. And men's home and footwear were the strongest on a two-year basis. Active continued to be the strongest area of customer demand with growth across both apparel and footwear. From a profitability perspective, we achieved the highest operating margin in a decade as we maintained our intense focus on inventory management, further optimized our pricing and promotional strategies, and managed expenses with discipline. So in summary, we had a great second quarter. We grew the business versus 2019 levels, delivered record Q2 earnings, and further strengthened our balance sheet. We also accelerated our return of capital to shareholders, underscoring the confidence we have in the future of our business. Now let me share some initial thoughts on the back to school season. Back to school is an important season and a time when customers look to Kohl's for their outfitting needs, whether it be the latest in active, denim, sneakers, or backpacks. Our differentiated offering of the most relevant national brands like Nike, Levi's, and Vans, and highly valued private brands like Sonoma, Sew, and Jumping Beans, uniquely positions us as a key destination for back to school. And our leading omnichannel platform provides an easy and seamless shopping experience for our customers. Several areas of our business benefit from kids returning to school and students going back to college. And it's especially important to our children's business, which has been one of our leading categories over the past year. We are optimistic about this year's season, given that last year was severely impacted by the pandemic. we're seeing initial strength in key back-to-school areas like active, denim, and backpacks and expect demand to continue to build as we approach Labor Day. I will now transition to our long-term strategy and provide an update on the progress we are making against it. We debuted our strategy last October in the midst of the pandemic, recognizing a significant opportunity to transform the business and drive more sustainable and profitable growth well into the future. We made an even greater pivot towards the active and casual lifestyle to drive top-line growth and implemented meaningful margin-enhancing and expense-saving initiatives to support overall operating margin expansion, with a 2023 goal of achieving 7 to 8 percent. Everything that we envisioned with this new strategy is playing out as planned, and in many cases, sooner than we expected. We are now at an important milestone in our strategic journey. Our customer base is growing to record levels, and we have significantly strengthened our brand portfolio. We are investing in our stores, enhancing our loyalty program, and have rolled out new Omni and digital capabilities to further our best-in-class positioning. In the coming weeks, we will launch several transformational brand partnerships that will drive sustainable growth for years to come and further establish Kohl's as the leading active and casual destination. Let me share an update with you on several of these key initiatives that underlie our strategy, starting first with our focus on driving top-line growth. In summary, we are making significant progress across all fronts. We have a goal to expand active and outdoor to 30 percent of our business. We continue to drive strong active sales growth, and in Q2, it represented 24 percent of our sales, up from 20 percent in 2019. I'll come back and talk more about this in a moment. We're focused on reigniting growth in women's. We are evolving our women's business through a series of bold moves, including a major portfolio consolidation. We are pleased with the progress we are seeing in our go-forward brands, which are showing strong growth, and we remain optimistic in the outlook for the category. That said, we have experienced a disproportionate share of inventory receipt delays in our women's business that we are aggressively working to address. We are building a sizable beauty business. We just launched our game-changing partnership with Sephora that will transform Kohl's into a leading beauty destination. I'll come back and talk more about this exciting initiative. We're driving category productivity and inventory turn. Productivity is improving and inventory turn is approaching our goal of four times or greater sooner than we planned. Our men's business is a great example. In Q2, men's sales increased 60% and nicely exceeded 2019 levels. And this was achieved despite significantly less in-store dedicated square footage. We're targeting market share gains from the retail industry disruption. We continue to see major market share gain opportunities across many casual categories. In addition to beauty, we see iconic casual brands like Levi's, Tommy Hilfiger, and Calvin Klein, and our value-oriented private brands like Sonoma and So as key unlocks for us in capturing share. We continue to heighten our leadership with loyalty and value. We are pleased with the customer response and engagement we are seeing with our evolved Kohl's Rewards loyalty program, as evidenced by higher enrollment and redemption rates. And our ongoing efforts to simplify our pricing and promotion equation is working, as seen in both customer response and our gross margin performance. And lastly, we are deeply committed to maintaining our differentiated omnichannel experience. We have stepped up our investment in stores continued to grow our digital business, and have enhanced our omnichannel capabilities. And this fall, we will pilot self-returns and self-pickup in select stores. So as you can see, we are making great progress against our new strategy. And the benefits are clear based on our year-to-date performance. As pleased as we are with our current momentum, we know much of our long-term opportunity remains in front of us. As we continue to execute against our key initiatives, such as ACTIV and Beauty, we believe our momentum will further accelerate. Let me add some color to these two important growth initiatives, starting first with ACTIV. ACTIV has quickly become one of our largest areas of the business and has clearly benefited from our increased investments. Active sales increased more than 40% to last year in Q2 and grew over 20% compared to the same period in 2019. We are seeing broad-based growth in apparel and footwear across men's, women's, and children's. Customer demand and sales remain high for our key national active brands of Nike, Under Armour, Adidas, and Champion. We are also encouraged by the traction we are gaining in the outdoor category. We expanded our Columbia assortment to include more sportswear, are exceeding our sales plan with Land's End, and will be introducing Eddie Bauer this fall. All of these moves will further position us as a clear outdoor destination. Now let me provide an update on Sephora at Kohl's. Since announcing our game-changing partnership with Sephora last December, we have collaborated to execute an aggressive store rollout plan as well as a comprehensive launch of Sephora at Kohl's online. I am pleased to share that we had a very successful launch of the Sephora at Kohl's digital experience earlier this month. The customer response has been overwhelmingly positive, and we are gaining great insight into how customers are shopping and what they're purchasing. We're now in the process of opening the first of our 200 stores planned for 2021. We opened a few earlier this month and have major waves of openings that start tomorrow and continue through October. We will then open 400 next year and reach at least 850 by 2023. Both organizations are very proud of the launch, and I encourage you to visit one of these Sephora stores. They are absolutely beautiful and truly showcase the power of the Kohl's transformation. I want to thank both our team and the Sephora team for their relentless efforts over the past eight months. We believe that this collaboration will quickly become one of the industry's most differentiated and largest partnerships. Before wrapping up, in addition to our commitment to growth, I want to reiterate our confidence in sustaining improved profitability. As you've heard today, our new strategy is completely transforming our business model. from the categories and brands we offer, how we are merchandising stores, how we are pricing and promoting, and how we are investing in our business and people. I also want to underscore the focus we have on making this business more profitable. As demonstrated with the progressive improvement in our operating margin, this quarter being the strongest we've seen in a decade, this is a fundamental restructure of our business. We are intensely focused on both growth and driving more efficiency in everything we do. We look forward to showcasing our ability to sustain this improved performance for years to come. We will drive these results leveraging our committed and collaborative culture and our focus on ESG. The strength of our workforce was validated once again this year with industry-leading associate engagement scores. In addition, we published a very comprehensive ESG report earlier this year and have continued to make progress. We also recently appointed a new chief diversity and inclusion officer to our executive team, a newly created leadership role to further our dedication to improving our overall diversity and inclusion efforts. Before I hand it off to Joe, let me summarize my comments today. Q2 was a great quarter for the company. We raised our outlook for the year in the second half and we accelerated our share repurchases supporting the confidence we have in the future of our business. Our business is building momentum and we are now at a key milestone in our strategic journey on the eve of several transformational brand partnerships. We are confident that through our strategic efforts, we will drive sustainable future growth for years to come. and further establish Kohl's as the leading retailer for the active and casual lifestyle. In closing, I want to thank each and every one of our associates for your contributions to this record quarter. Your hard work, passion, and commitment to driving Kohl's success was instrumental to our performance. With that, I'll now turn the call over to Jill, who will provide more details on our financial results and updated guidance.