Kohl's Corporation

Good day. My name is Chantelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Coles Corporation Q2 2022 earnings conference call. As a reminder, today's conference call is being recorded and all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press star one again. Thank you. Mark Rowe, you may begin your conference.

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 and Tim's 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 Form 10-Q for the first quarter of fiscal 2022, 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. 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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. Since our last earnings call in May, as all of you know, a weakening macro environment, high inflation, and dampened consumer spending are having broad implications across much of retail, especially in discretionary categories like apparel. Given our penetration in these categories, this is disproportionately impacting Kohl's. Our second quarter results reflect a middle income customer that has become more cost conscious and is feeling greater pressure on their budgets. Therefore, we are seeing customers make fewer shopping trips, spend less per transaction, and shift towards our value-oriented private brands. We have responded to this dynamic environment, taking action to adjust our plans and adapt to a softer demand outlook. We've increased promotions, we are being aggressive on clearing excess inventory, we are pulling back on receipts, and we are managing expenses diligently. We acknowledge that many others are taking similar actions, which will likely make for a more promotional environment in the near term. Our updated four-year guidance contemplates lower sales and margin pressure from a more difficult economic backdrop and a more competitive landscape. We have navigated difficult retail environments in the past, and I am confident that we will successfully manage through the current uncertainty. We have the right long-term strategy and initiatives, and a formidable foundation featuring a differentiated brand portfolio, strong value position, and a convenient and broad-reaching omnichannel platform. We are also continuing to make progress in our strategic transformation, and now have nearly 600 of our stores recently refreshed and reflecting our forward vision as the leading destination for the active and casual lifestyle, with Sephora as a key cornerstone. We are seeing outsized performance in these stores relative to the balance of the chain, and we are looking forward to continuing the rollout to reach 850 Sephora at Kohl's shops in 2023. Kohl's is a financially strong company with a proven history of prudent balance sheet management and significant cash flow generation. Our $500 million accelerated share repurchase underscores our steadfast confidence in Kohl's future and focus on creating shareholder value, especially given the current valuation of our company. As Jill will discuss in more detail, we remain firmly committed to the health of our balance sheet, and we will plan our capital allocation decisions going forward to continue to reflect this priority. With that perspective, let me turn to our comments on the quarter. Second quarter comparable sales declined 7.7%. We saw a benefit early in the quarter from spring seasonal selling, though as we progressed through May and into June, it became increasingly clear that inflationary pressures were beginning to impact our customers' spending, especially our middle-income customers. June was the most challenging month in the quarter. In July, we took actions to drive demand, which improved the trend. From a channel perspective, digital sales were flat to last year, benefiting from higher conversion rates driven largely by our implementation of a lower free shipping threshold to be more competitive. The Kohl's app accounted for 40% of digital sales in the second quarter, doubling in penetration in recent years. In total, digital sales accounted for 28% of net sales, up from 26% last year. Store sales declined 10%, resulting from less traffic and smaller basket sizes, primarily driven by the overall macro pressures I mentioned earlier. stores fulfilled 37% of digital sales in Q2. Our private brands outperformed national brands for the second consecutive quarter with sales growth achieved in many of our key brands. This is another indication of our ability to fulfill the needs of our customers looking for greater value during this time. It's clear that there has been a significant shift with the consumer over the past few months And we expect this to persist for the foreseeable future. As an organization, we are focused on ensuring we can navigate this period successfully. This includes our inventory management efforts, clearing out excess goods, while also pulling back on receipts and being expense disciplined. And while we do this, it's important that we continue to execute on our transformation strategy. Even amidst a very challenging backdrop, our transformed stores with Sephora are outperforming the balance of the chain. So now let me give you a little more color on Sephora. Our game-changing partnership with Sephora continues to deliver on its promise of transforming Kohl's into a leading beauty destination. We have successfully opened nearly 600 Sephora shops during the past year, including 400 in 2022. In the 200 stores opened last year, we have maintained a high single digit percent lift relative to the balance of the chain. And in the nearly 400 stores opened this year, we are seeing a mid single digit percent sales lift, which is consistent with the initial performance in the first 200 stores. As these Sephora openings follow the curve of last year's openings, we would expect sales to accelerate in the months to come. From a product perspective in Q2, we saw strength across all beauty categories, including skincare, makeup, and fragrance. Top selling brands have been the Sephora Collection, Fenty, Charlotte Tilbury, NARS, and Too Faced. We have acquired more than one million new customers since launching last August, which is encouraging given that this occurred in less than half of our fleet, many of which have just been opened for a very short period of time. The new customers are younger and more diverse, and shop more frequently than our average customer. I am especially proud of the strength of our partnership with Sephora. Our collective teams work very closely together with the common goal of driving the business for both the short and long term. What we have achieved together in less than one year is remarkable, and we're just getting started. We see a long runway of growth ahead. As planned, we will open another 250 shops in 2023, taking our total to 850 2,500 square feet shops. Given the success of the partnership we are seeing to date, we are working with Sephora to design a smaller footprint concept for our remaining 300 stores, creating a Sephora presence across our entire store base. We are in the early stages of this concept, and we'll keep you posted on this exciting development. We are also innovating and experimenting together to drive productivity and improve the overall customer experience even further. We're currently testing cross-company BOPIS, where purchases made on Sephora's website, sephora.com, can be picked up at Kohl's stores, creating an incredibly seamless and convenient experience for our customers. And next month, Kohl's will begin to accept any Sephora gift card regardless of where customers bought it. Later this year, we will significantly expand our holiday gifting assortment and increase our marketing investment, setting us up well in the 600 stores and digitally for a big traffic driver during holiday. We are excited about all that is ahead for Sephora and the impact this partnership will have on our business. And as a reminder, we are just completing the build out of this year's 400 stores, so the vast majority of Sephora's business impact is still in front of us. Let me now provide some more color on how other categories performed in the quarter, starting with active. Active is an important category for Kohl's, and it is a key component of our overall active and casual lifestyle vision. In recent years, we have invested significantly in strengthening our product offering, elevating our merchandising, and expanding dedicated space to active in our stores. These efforts drove strong growth in active sales, including more than 40% growth in 2021 and increasing it to 24% of our total sales, up from just 14% five years ago. During the second quarter, While active apparel performed better than the company with strong growth in our athleisure and outdoor offerings, total active sales underperformed the company due in part to supply chain related challenges in athletic footwear and the strong growth achieved last year. Turning to our women's business, sales slightly outpaced the company with underlying strength in areas where we invested over the past 18 months. We saw continued momentum in dresses, driven by a greater emphasis both in-store and digitally, as well as in our more elevated casual offerings such as Where to Work, with growth in our key private brands of Nine West, Simply Vera, Vera Wang, Lauren Conrad, and Sonoma. Offsetting the strength was weakness in our juniors business, which accounted for a majority of the women's decline in Q2. we attribute the junior's underperformance to a portion of our junior's fashion assortment not resonating with our customer, which we have course corrected, and to the temporary disruption in the nearly 400 stores refreshed in 2022, where juniors were repositioned within the store. On this latter point, we are expecting the impact to improve as customers get more comfortable with the new layout, as well as enhanced navigation signage we are adding to these stores. Turning to men's, It also slightly outperformed the company in Q2, driven by the successful new brand introductions over the past year, including Tommy Hilfiger, Curly, and Calvin Klein. We also saw solid results in Young Men's, Tailored Dress, and Big & Tall. Outdoor continues to be a strong growth contributor in men's with momentum in our key national brands, Eddie Bauer and Columbia. Given the success, We are expanding our outdoor brands to more stores this fall, including Eddie Bauer, Under Armour Outdoor, and Columbia's PSG Collection. And lastly, our home and children's business underperformed. The home category continues to normalize following strong demand during the pandemic. And our children's business experience declines in the tweens, boys, and girls departments due to softness in seasonal classifications and basics. as well as in toys and sleepwear, which were up against strong growth comparisons. From a profitability perspective, as Jill will discuss in more detail, the lower earnings relative to last year were primarily driven by the decline in sales and gross margin, and the significant step up in investments in our strategic growth initiatives of Sephora store openings and store refreshes. As it relates to the back to school season, We are focused on delivering compelling value across key categories, and we are supporting this with promotional events and more targeted offers. To date, overall back to school trends are in line with our expectations. Before I turn it over to Joe, let me touch on the actions we are taking to drive shareholder value. As announced this morning, we entered into a $500 million accelerated share repurchase agreement. This underscores our confidence in Cole's future and our focus on creating shareholder value. In addition, we remain firmly committed to our current dividend. With that, I want to close by saying that 2022 has turned out to be very different than we anticipated. The weakening economic backdrop and inflationary pressures have created headwinds for our customers, our industry, and our business. We are leveraging our agility and responding with the customer at the center of our focus. Colt has navigated many difficult periods in the past, and I'm confident we will successfully manage through this dynamic period as well. I want to thank our incredible associates around the country for all you do. We have been challenged in many ways over the past couple of years, and this team continues to step up to meet every challenge with tremendous agility and commitment. I can't thank you enough for your dedication to Kohl's and for providing excellent service to our customers every day. With that, let me turn it over to Jill, who will give you more details on our financial results.