Kohl's Corporation

Good morning. My name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Coles Corporation second 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 followed by the number one on your telephone keypad. If you would like to withdraw your question, again, press the star one. Thank you. Mark Rupp, Senior Vice President, Investor Relations and Treasury. 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. 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 COLE'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 8K 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 Thim, our Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Mark, and good morning, everyone. I am pleased to report that we continue to make progress in our efforts to significantly improve Kohl's business over the long term. Our second quarter earnings were in line with our expectations. We feel good about our performance given the persistent macroeconomic pressures on our customers and that many of our strategic efforts are just underway. In 2023, we continue to focus on four strategic priorities, which are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. We are confident that our strategies will drive sales and earnings performance. It will take some time for the full impact of our efforts to be realized. However, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond. As it relates to our outlook for 2023, we are reaffirming our guidance. Let me now turn to the second quarter. Net sales decreased 4.8% and comparable sales were down 5%. with store sales outperforming the total company and flat to last year. Sephora at Kohl's continues to exceed our expectations, driving a total beauty sales increase of nearly 90% year over year. We opened nearly 200 Sephora shops in the quarter, and momentum in our existing Sephora shops continues to accelerate with greater than 20% comparable beauty sales growth in the Sephora shops opened in 2021 and 2022. And our home business, which we've highlighted as a major long-term opportunity for Kohl's, showed strong relative improvement in the quarter. Beyond the top line, we were able to successfully manage gross margin and expenses to achieve an operating margin of 4.2% and we reduced inventory 14% both of which were better than planned. I'll now turn to our longer-term initiatives and provide more detail on our four overarching priorities, which I just mentioned. Enhancing the customer experience in stores and online through our product and merchandising initiatives is our top priority. Getting back to growth is essential to achieving our goals, so I want to be clear on how we are viewing the building blocks. We have an opportunity to improve the offering in our core business. However, in the coming years, we believe Sephora, gifting, impulse, home decor, and longer-term new stores will be the most significant contributors to our growth. Sephora Edcoast continues to resonate with our existing customer base while also bringing in new customers that are shopping more frequently. The performance is exceeding our expectations, and we are driving considerable beauty share gains. We are seeing solid growth in our Sephora exclusive brands, including the Sephora Collection, Sol de Janeiro, and Rare Beauty, as well as national brands such as Fenty and Charlotte Tilbury. We feel good about our overall assortment, and this fall, we will further expand our gifting assortments, which were highly successful last year. During the second quarter, we opened nearly 200 Sephora shops, and this month, we are opening approximately 50 shops. These openings will complete the rollout of our 850 2,500 square foot shops. We are also opening a smaller format 750 square foot Sephora shop in the remainder of the chain. We opened five of these smaller shops earlier in the year, and they continue to drive solid beauty sales. exceeding our expectations. We will open an additional 45 in the third quarter, bringing us to 50 by year end. In total, Sephora will be featured in more than 900 of our stores by the end of 2023. And we will expand the small format shops to the remainder of the chain over the next couple of years. Building our home business represents another major growth opportunity. We will optimize our existing offering and capitalize on significant opportunities in areas where Kohl's historically has not had a meaningful presence. These include gifting, impulse, decor, and pet. Many of these new assortments will begin to set in fall with a larger presence in holiday. During the second quarter, the home category showed strong relative improvement, as I noted. This was primarily driven by our existing offering, such as housewares and cookware, as well as by encouraging early reads from our new growth initiatives. We continue to leverage register removals and additional in-aisle space to create a seasonal gifting destination, which supports strong sell-throughs during Mother's Day, Father's Day, Memorial Day, and the Fourth of July. Currently, we are showcasing back-to-school items such as backpacks and dorm products, and later this fall, we will highlight harvest and holiday products. In addition, we will expand our offering of impulse products in spring of 2024, which will include beauty, wellness, toys, snacks, and other items. In home decor, we are forming new vendor partnerships, building inventory with MarketBuzz, on a weekly basis and enhancing our in-store merchandising across areas like wall art, glassware, botanicals, storage, and lighting to name a few. And in pet, we have expanded dedicated space to the category across the chain following a successful 50 store test last fall. Our offerings in the space include things like dog beds, cat and dog apparel, and pet toys. PET delivered a strong second quarter sales performance driven by the additional space, and we expect to maintain a momentum moving forward. We are also committed to capitalizing on new store growth opportunities over the long term. In 2023, we remain on track to open seven new stores, including one relocation. Two of these stores opened in the first quarter, with the remaining five set to open this fall. Turning to our apparel and footwear offerings, we remain focused on optimizing our apparel assortment to reflect our customers' interests. Two areas that we have highlighted in recent quarters in response to customer demand are polished casual and dressy offerings, which continue to resonate with our customers across women's, men's, and children's. We are leaning into these areas in women's through key brands like Lauren Conrad, Nine West, and Simply Vera, Vera Wang, while also expanding our dress offerings in both special occasion and casual. In men's, we have seen strong results in areas like suitings, dress shirts, and dress pants, and will continue to amplify these areas moving forward. And in children's, we are expanding Little & Co., as well as continue to build on our core Jumping Beans and Carter's businesses. Active also remains an important piece of our business. While trends in the overall active space remain soft, we are focused on building on our recent success in outdoor and golf apparel, while also working with our national brand partners to bring in newness. In the second quarter, we were pleased with the sales trends in our Eddie Bauer offering in outdoor, as well as in Nike and Under Armour footwear. To summarize, our top priority of enhancing the customer experience, we are focused on driving significant growth in Sephora, gifting, impulse, home decor, and longer-term new stores. We also see several opportunities to improve our core apparel and footwear offerings. Now let me discuss our second priority, which is accelerating and simplifying our value strategies. We have many efforts underway to simplify how we are showing up to the customers as we believe we can drive greater customer engagement and conversion. During the second quarter, we continued the work we began in Q1, reducing general promotions and eliminating online only offers in favor of a more targeted offers and clearance events to clear slower selling goods on a more regular basis. And we are testing key value items, which is more competitive and consistent pricing on select merchandise within our private apparel and home brands. This is a continuation of our efforts to make our pricing more simplified. We're also evolving our marketing message with greater clarity around strong price points in our in-store graphics and in our digital and broadcast ads. While it remains early, We are very encouraged with the response we are seeing from customers. Our key value items are performing positively. This is a compelling opportunity for our business over the long term, and based on initial results, we are now planning to thoughtfully scale it in 2024. Lastly, we will continue to leverage our industry-leading loyalty program as a mechanism to deliver even more value to our customers. Kohl's has a strong loyalty foundation, which includes Kohl's cash, Kohl's rewards, and our private label credit card. Building on this, we launched a co-brand credit card with Capital One to select customers in the second quarter. While we expect the co-brand card to have only a small benefit to this year's results, it will grow and contribute more meaningfully in the years to come as you offer it to a greater number of existing and new credit customers in 2024 and 2025. I will now transition to our third priority, which is managing inventory and expenses with discipline. During the second quarter, we reduced inventory by 14% compared to last year. exceeding our goal of planning inventory down mid-single digits percent. We operated with greater open-to-buy, which allowed us to stay agile as the demand environment evolved in the second quarter. As we implement new planning and allocation processes, we are becoming more responsive to the customer's demand, operating with additional open-to-buy to chase trends and minimize risk, maintaining better in-stock levels and core basics, and improving inventory flow from our distribution centers to the selling floor. Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline. Turning to expenses, Kohl's has a history of managing costs with discipline. We are continuing to proactively capitalize on opportunities to drive efficiency across all areas of the company. A couple of examples include our goal of lowering our marketing spend ratio to 4% and embedding more technology into our operations to improve productivity, such as self-checkout kiosks in our stores and a higher level of automation to more efficiently flow goods in our newer e-commerce fulfillment centers. 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. During the second quarter, we generated solid cash flow, which allowed us to reduce our revolver borrowings by $205 million. And returning capital to shareholders remains a commitment of ours. Jill will discuss our overall capital allocation priorities, including the dividend, which continues to represent a healthy yield at the current share price. In closing, I am pleased with our second quarter earnings. I am confident that the work we have underway is positioning Kohl's for long-term success. Our organization is operating with strong disciplines and efficiency, and many of our growth driving initiatives are just beginning to take shape. As it relates to our more recent trends, our August to date sales are off to a good start driven by back to school and our fall seasonal items. I want to thank the entire Kohl's team and especially our store associates for their hard work and adaptability to position us for improved future performance. I hope you'll get a chance to visit our stores to see all the good work underway. I will now turn over the call to Jill to discuss our second quarter results in 2023 outlook.