Kohl's Corporation

thank you all for standing by and welcome to the coles corporation's q1 2022 earnings conference call please note that all lines will be in listen-only mode until the question and answer session of today's conference to ask a question over the phone by that time you may press the star key followed by the number one i'll now turn the call over to your host mark rupe vice president of investor relations sir you may now begin 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 and 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 non-GAAP financial measures. 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 So, if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 Temm, our Chief Financial Officer. I will now turn the call over to Michelle.

Michelle Goss, Chief Financial Officer, Thank you, Mark. Good morning, and welcome to Cole's first quarter earnings conference call. Before we share details on Q1 results and long-term strategy, I want to acknowledge the much broader context of this past quarter. Over the past three months, Kohl's has been at the center of an unusual amount of attention and speculation. At our annual meeting last week, we were very pleased that our shareholders voted to retain all 13 of our directors. This board is committed to overseeing the successful transformation of the company and fulfilling its fiduciary responsibility to maximize shareholder value. Through this process, we had the opportunity to engage frequently and openly with our shareholders. I want to thank each of them for sharing important feedback to our board and management team, which we take seriously. On that note, shareholders want to ensure that the board will continue to run the sale process with shareholders' best interest in mind. We continue to engage with multiple interested parties. As we've described, they are working to prepare fully financed finding proposals. At this point, we have formally communicated to the multiple parties in our process the specific procedures for the submission of actionable bids due in the coming weeks. We continue with our detailed diligence phase and are pleased with the number of parties who recognize the value of our business and plan. We'll update the market when it's appropriate to do so. While these circumstances have put some stress on our teams, I'm incredibly proud of the resilience and perspective that our associates and leaders have demonstrated during this time. Throughout all of this, we have stayed focused, we are financially healthy, and we have the right strategies in place. With that perspective, let me turn to our comments on the quarter and remainder of the year. Our first quarter results were below our expectations. While the quarter started off strong with positive low single digits comp growth through late March, In April, demand considerably weakened as we lapped last year's stimulus and as consumers started to experience inflationary pressures. Importantly, we have seen trends notably improve in May as we moved past key stimulus weeks from last year and as the weather turned favorable, which has accelerated demand for our spring seasonal classifications. In total, sales declined 5% for the first quarter. driven by our home and children's businesses both being down double digits percent to last year. There were also some key positives in the quarter, including the 200 stores with Sephora delivering positive low single digits comp store sales growth, as well as the continued success of our recent brand introductions. Let me share a little more color on our Q1 results, starting with home. As you're aware, the home category benefited during the pandemic. The overall industry was up against very difficult year-over-year comparisons in the first quarter, including our home business up more than 30% last year. Our home sales declined 17% in the quarter and accounted for 15% of our sales. While we expect category demand to remain weak, we are adjusting to the new normal and continuing to pursue incremental areas such as outdoor furniture, expanded decor, kids' bedroom furnishings, and the pet category. We will also leverage our pricing elasticity model, ensuring we stay competitive in value while taking price where it's appropriate. As I turn to our apparel and footwear performance, It's important to call out that our spring seasonal business was pressured in Q1 due to unseasonably cooler weather, especially in our northern markets. We saw an 800 basis point difference in sales performance between our northern and southern markets in Q1. Our children's business, which is heavily influenced by weather, saw a 12% decrease in sales, with spring seasonal sales accounting for more than half the decline. The remainder was due primarily to those categories that benefited from the pandemic, including active, sleep, and toys. Looking ahead, we're expecting that our children's business will improve through the remainder of the year. Spring seasonal performance has improved significantly so far in May. In addition, we are rebalancing the assortments to include more fashion, And we're launching new in-store licensed entertainment product zones in 400 stores this month to capitalize on the strong pipeline of upcoming entertainment releases. We're also positioned for a strong back-to-school season with a focus on timely key category availability, value, and seasonal relevance by climate. Now let me turn to the positives in the quarter, starting with our 200 updated stores with Sephora. The transformation underway in our stores, with our partnership with Sephora as a cornerstone, is driving impressive results. The first 200 stores with Sephora at Kohl's comped positively overall in Q1, up low single digits, driven by both Sephora sales as well as incremental basket growth with categories such as women, accessories, and actives. From a product perspective, we saw strength across all categories, including skincare, makeup, and fragrance. Top-selling brands have been the Sephora Collection, NARS, Senti Beauty, Charlotte Tilbury, Olaplex, and Too Faced. And we continue to attract new, younger, more diverse customers to Kohl's, as well as see Sephora customers shopping across the broader Kohl's store. And they are shopping more frequently. with Sephora customers shopping nearly twice as often as our average customer. We've said all along that the true incremental benefit from Sephora will occur over multiple periods as awareness and replenishment traffic builds. The Sephora performance during the first quarter indicates that this in fact is taking hold, and it gives us great confidence as we roll out another 400 Sephora at Kohl's shops by early August. We opened 48 Sephora shops during the last week of April, and while they've been only open for a few weeks, they are exceeding our plan. It's again important to note that while the build-out of the Sephora shop and shops is at the core of these store remodels, these 200 stores, soon to be 600 by the end of summer, are the representation of the future of Kohl's. we've taken the opportunity to update, refresh, and reflow the stores to deliver against our strategy of leading in the active and casual lifestyle. We've brought our iconic active brands to the front of the store with new and elevated merchandising. We're leveraging the placement of the Sephora shop to showcase brands like Calvin Klein and a newly updated premium sunglass presentation with Luxottica. We're also deliberately placing areas of discovery throughout the store to bring excitement to our customers. And we'll continue to be agile and involved as we learn. Importantly, these new, transformed stores are working. They are positively comping, and as we hit critical mass later this summer, the 600 doors will have a material impact in enabling us to deliver a positive comp in the back half of the year. Now let me tell you about how some of our other categories are performing in the quarter. Our men's business had a very strong quarter. Sales increased 3%, driven in part by the successful introduction of several new brands over the past six months, including Tommy Hilfiger, Calvin Klein, and Hurley. We also saw significant growth in our tailored and dress business. Additionally, outdoor apparel, a key strategic area of ours, continue to drive outsized sales growth. This gives us confidence as we expand our partnerships with brands like Eddie Bauer and Under Armour Outdoor, which we're rolling out to more stores later this year. In women's, sales outpaced the company with growth in areas like outerwear, denim, inclusive sizing, and dresses, including Draper James, which exceeded our plans. Offsetting such gains was underperformance in spring seasonal categories like swim, tanks, shorts, and tees, which were down double digits but have shown a strong positive trend in May with warmer weather. Our juniors' business was especially impacted due to the seasonal nature of this category, and to a lesser extent, the temporary disruption related to store refreshes where juniors was repositioned within the store. And as it relates to active, overall it performed in line with the company. We saw growth in men's and women's apparel, offset by softness in active footwear and children's apparel. Of note, active was up against extremely strong growth from last year when sales increased more than 90%. From a profitability perspective, as Jill will discuss in more detail, the lower earnings relative to last year is primarily driven by a significant step up in investments in our strategic growth initiative of Sephora store openings and store refreshes, lower sales, increased freight expense and heightened wage costs. And in addition, we also incurred expenses related to the recently contested proxy situation and ongoing sale process. Let me now turn to how we're approaching the balance of the year and why we are expecting that our results will improve. Despite the difficult start to 2022, we expect sequential improvement in Q2 based on quarter-to-date results followed by positive growth in the second half as our key initiatives take hold. Let me share a few key reasons why we're confident in this outlook. First, as I touched on a moment ago, we expect our business to benefit from the 400 additional Sephora store openings. We opened 48 the last week of April, and we'll open nearly 300 more in Q2, with all 400 to be open by early August. Second, earlier this month we significantly enhanced our Kohl's Rewards earn rate by increasing it 50%, from 5% to 7.5% for those customers that also have a Kohl's credit card. We piloted it in over 100 stores over the past year and found it to be successful in driving approximately a 1% sales list. And third, we'll adapt our plans going forward as we navigate more volatile and challenging conditions. We're focused on driving value during the current environment, leaning into our value-oriented private brand portfolio, which outperformed this quarter, and further leveraging our pricing and promotion optimization strategies. Before I turn it over to Jill, let me address our 8 filing from yesterday afternoon. As you may have seen, Doug Howe and Greg Revell are leaving Kohl's to pursue other opportunities. Both have made meaningful contributions to Kohl's during their time here, and we wish them well in their future endeavors. As we continue to drive our strategy forward, we will use this opportunity to identify new talented leaders to enhance our capabilities and accelerate our transformation. Search firms are already engaged, and the search process is underway. In the meantime, we have strong interim plans in place to ensure a seamless transition. Effective immediately, Ron Murray, a long-tenured cold and retail merchandising executive, will now serve as interim chief merchandising officer. Ron has led many strategic initiatives at the company, including active and digital merchandising, and is currently driving the transformation in women's. Also effective immediately, Christy Raymond, currently Marketing Executive Vice President of Customer Engagement, Media, and Analytics, will serve as our Interim Chief Marketing Officer. Christy, with both her cold and Disney experience, brings a deep understanding of the customer and continues to play a key leadership role in our marketing evolution. Both Christy and Ron are strong leaders with proven track records. We are confident that they will do a great job leading our highly capable teams and driving our strategy forward. In summary, while the year has started out below our expectations, trends are improving, we are making changes, and the benefits of our key strategic initiatives are still in front of us. I want to thank our talented and committed associates across the country once again for their ongoing dedication to Kohl's and our customers through what has been a challenging few months. With that, let me turn it over to Jill, who will give you more details on our financial results.