Kohl's Corporation

Hello and thank you for standing by. My name is Regina and I will be your conference operator today. At this time, I would like to welcome everyone to the Coles Corporation first quarter 2023 earnings conference call. 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 would like to ask a question during this time, simply press star then the number one on your telephone keypad. To withdraw your question, press star 1 again. I'd now like to turn the conference over to Mark Rupp, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause questions 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 ANAL REPORT ON FORM 10 , 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 may make reference to non-GAAP financial measures. Reconciliation of 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will not be updated, so if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 this morning are Tom Kingsbury, our CEO, and Jill Tim, our Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Mark. And thank you all for joining us this morning. As we shared on our last earnings call in March, we have a significant opportunity to improve Kohl's business over the long term. More specifically, we share the priorities and actions we had underway to drive sales and earnings performance. I am pleased to report that the first quarter was a first step in the right direction. Our overall first quarter results were in line with our expectations, and we made progress against each of our key priorities for 2023, despite continuing to operate in a challenging macroeconomic backdrop. We are refining our strategy, continuing to enhance our merchandising processes, and elevate our focus on the customer. While it will take time for the full impact, of our efforts to be realized, I am happy with how the entire COLS team is driving against these priorities with a clear focus and strong determination. Our objective is to show incremental improvement as we move through 2023, and we set ourselves up to accomplish this with our first quarter performance. As it relates to our outlook for the balance of the year, It is unchanged from our prior view. We are affirming our full year guidance. As I said, our first quarter results were in line with our expectation, and as Jill will discuss in more detail, our view on the second quarter is consistent with our plans entering the year. Our work in 2023 will position us to achieve our longer term goals. And while we have more work to do, I remain confident in our ability to change the trajectory of our business as we move forward. Turning to the highlights of the first quarter, net sales decreased 3.3% and comparable sales were down 4.3%. February was the strongest performance. March was below our expectations, but April was in line. Our stores business, which is a key focus of ours, achieved productivity gains in the quarter, delivering positive low single digits comparable sales growth. An increase in store traffic and higher units per transaction more than offset a lower average ticket driven by our clearance actions. Sephora and Kohl's continue to outperform our expectations, driving a total beauty sales increase of 150% year over year. We achieved mid-teens comparable beauty sales growth in the 204 shops opened in 2021, and the sales trends in the 400 shops opened in 2022 continue to exceed our plan. Interactive business was healthier in the period, outperforming the company average with a positive growth in apparel and continued success in outdoor. Conversely, we continue to see softness in the home category, an area we are highly focused on and one that remains of substantial long-term opportunity. Beyond the top line, we're able to drive margin expansion and manage inventory down 6% in the quarter. I would now like to provide an update on the four overarching priorities we are focused on in 2023. They are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and strengthening the balance sheet. We made progress against each of these priorities in the first quarter, and I am pleased with the initial traction we are seeing. Let me share some details, starting first with how we are enhancing the customer experience in stores and online through our product and merchandising initiatives. Our long-term strategic partnership with Sephora is delivering a prestige beauty experience at Kohl's. It is a great example of how we are enhancing the customer experience. Sephora at Kohl's meets the needs of our customers with a great assortment of brands and products they are looking for. The partnership is delivering on what we set out to achieve over the long term, that is, capitalizing on a significant growth opportunity in the beauty industry by leveraging each company's strengths to grow our collective customer bases. As I highlighted a moment ago, our total beauty sales were up 150% in the first quarter and we continue to gain market share. We are bringing in new customers and they are shopping at more than twice the frequency of our average customer. Our investments to support this partnership are yielding the outcomes we intended. We are in the process of further expanding the Sephora at Kohl's footprint, reaching more than 900 of our stores by the end of 2023. This is quite an impressive accomplishment, and it's a testament to how well the Sephora and Kohl's teams work together. In 2023, we will open 250 2,500 square foot Sephora shops, of which 200 will open in the second quarter, with the remaining 50 in early Q3. This concentrated opening schedule will lead to elevated investments in Q2 as Jill will discuss. In addition, we have developed a 750 square foot Sephora shop. We opened five of these smaller shops a few months ago, and they have driven solid beauty sales exceeding our expectations. We'll open another 45 later this fall, reaching 50 by the end of 2023. and will be rolled out to the remainder of the chain by 2025. It is worth noting that from an expense and capital perspective, the smaller Sephora shops will add some incremental capital spend and expense in Q3 relative to last year, both of which are embedded in our guidance. To summarize, we will end the year with a Sephora presence in more than 900 of our stores, including more than 850 of the 2,500 square foot shops and 50 of the 750 square foot shops. Moving beyond beauty, let me now touch on the efforts and progress we have underway in our product and merchandising. As it relates to our product assortment, we are focused on optimizing our existing offering with greater balance while also capitalizing on opportunities in under-penetrated categories. One of our biggest opportunities is the home category. While we were disappointed with our Q1 performance, home did enter the year with leaner inventories and therefore had less benefit from our clearance activity. However, we are highly focused on improving results by rebuilding our core business as well as growing underrepresented categories such as gifting, decor, pet, impulse, and outdoor. You will see these initiatives come to life in how we merchandise our stores in the coming months, with gifting and home decor showcased near the front of the store to inspire customers as they enter. Some of this work is already underway. Our repositioning of gifting to the front of the store during the holiday season proved highly successful, and this positive trend continued across Valentine's Day, Easter, and more recently, Mother's Day. When you visit our stores now, you will see Americana-themed gifting products focused around the Memorial Day and the Fourth of July holidays. We are also expanding our home decor, outdoor, and pet offerings within home. Areas of opportunity include a greater selection of wall art, seasonal, patio furniture, camping and outdoor gear, and tabletop. In PET, we are allocating more space in stores following a successful test last fall. To make room for additional productive selling space, we are consolidating to one checkout area in most of our stores with a greater selection of impulse items. We'll be adding self-checkout kiosks in 250 stores to support this transition. We are confident in our ability to maintain our high standards of customer service with this more efficient model. Turning to our apparel offerings. We are optimizing our assortments to reflect customers' interests. This includes offering a greater selection of polished casual and dress clothing in women's and more suiting and dress shirts in men's. During Q1, this focus areas outperformed the business. In women's, we are building a much stronger presentation in dresses and polished casual, as I said. Dresses significantly outperformed during the quarter. In concert, we are building depth in core and everyday essentials to provide trip assurance. We are optimistic that our actions will lead to a better future performance. In men's, we are seeing good results across several areas, including active, outdoor, suiting and dress shirts in big and tall. We remain committed to the active business while investing in our outdoor presence with an enhanced in-store experience in elevated merchandise. We also believe that the suiting and dress shirt business will continue to outperform driven by a broader assortment. Children's outperformed the company average in Q1 with positive growth in active and dress clothing, similar to women's and men's, We are diversifying our offerings with greater selection in areas such as girls' dresses and boys' dress clothing. Let me now highlight some additional items, starting with our stores. As we discussed, our stores are incredibly important to our business, and increasing their productivity is vital to our future success. I am pleased with our improved performance in the past two quarters and remain confident that we can build on our early momentum. In addition to the actions I have already discussed, we are simplifying our signage and graphics, making adjustments to how we are merchandising assortments and empowering our stores to capitalize on opportunities to improve the customer experience and drive sales in their local markets. In doing so, we are creating a more modern experience for our customers. We're also committed to capitalizing on new store opportunities over the long term. As part of our 2023 real estate plans, we opened two new stores in Q1, one of which was a relocation. During the balance of the year, we'll open five additional new stores for a total of seven in 2023. Turning to our digital business, we experienced softer demand in Q1. Our customers continued to shift back towards stores, and we reduced online-only promotions as we worked to simplify our value strategies. Digital penetration was 26% in the quarter. While down to last year, this is still up meaningfully versus pre-pandemic levels. Looking ahead, we have various digital initiatives underway, including enhancing the site experience, curating our product assortment, and continuing to simplify our value strategies, as well as further refining our Kohl's marketplace and Kohl's media network. Now let me discuss the progress we are making against our second priority, which is accelerating and simplifying our value strategies. On our last call, we highlighted an opportunity to improve Kohl's competitiveness by simplifying our pricing and promotional strategies with a goal of driving greater customer engagement and conversion. During the first quarter, we began to replace general promotion and online-only offers with targeted offers and clearance events to clear slower selling goods on a more regular basis. We will continue this approach moving forward at the appropriate pace. Additionally, we will test key value items within our private apparel and home brands, which are aligned with our simplified pricing efforts. Customers will begin to see a small percentage of our assortment move to this approach during the back to school season, which we will integrate into our marketing messaging. We are approaching this initiative with great measure and flexibility and will determine next steps following our assessment this fall. If successful, we will scale and grow it in subsequent years. Lastly, we will continue to leverage our industry-leading loyalty program as a mechanism to deliver even more value to our customers. We will begin the rollout of our co-brand card with Capital One to select customers in the second quarter. Over time, we expect to benefit from our dual offering of our existing strong private label credit card and a co-brand card that offers more flexibility to reach younger customers. I will now transition to the progress we are making against our third priority, which is managing inventory and expenses with discipline. During Q1, we enhanced our inventory control processes and managed inventory down 6% to last year. This is in line with our goal of planning inventory down mid single digits percent. We also commenced our regular inventory clearance actions during the quarter, which will clear slower selling items sooner to create greater liquidity to chase receipts and drive turnover. Looking ahead, I continue to remain optimistic that through our enhanced inventory control processes, we'll be able to increase our sales productivity and overall inventory turnover. We feel good about our Q2 inventory levels and are well positioned from a liquidity perspective with plenty of room to chase. This is a positive given the persistent macroeconomic headwinds. Now let me turn to our focus on expense management. In Q1, our SG&A expense declined 4% to last year and leveraged as a percent of revenue. We are proactively capitalizing on opportunities to drive efficiency across all areas of the company. However, as Joe will discuss in more detail, our SG&A spending pattern in 2023 will be unique given the timing and concentration of the support and store-related investments I just discussed. To be clear, though, our SG&A expense outlook for the year has not changed. And lastly, our fourth priority is strengthening our balance sheet. Our focus remains on returning our balance sheet to its historical strength with a long-term objective of managing to a 2.5 times leverage level. In Q1, we retired $164 million of bond maturities. This, along with funding working capital in the quarter, led to utilizing Revolver as planned. Jill will discuss our other capital allocation priorities, including our commitment to the dividend, which represents a healthy yield at the current share price. So to summarize, the first quarter was a first step in our journey to drive sales and earnings performance over the long term. I am pleased, but not surprised, that the entire Kohl's team was extremely focused in executing against our priorities. It was a great team effort. As we looked to the balance of the year, we continued to approach our outlook with prudence. However, it remains our objective to show incremental improvement against our priorities and actions as we move through the year. We set ourselves up to accomplish this with our first quarter performance. In closing, I want to thank our loyal associates for their contributions to our business and for serving our customers every day. I will now turn over the call to Jill to discuss our first quarter results in our 2023 outlook. Jill?