Kohl's Corporation

Good morning and welcome to the Coles Corporation first quarter 2024 earnings conference call. Please note that today's conference is being recorded. All participants are in a listen only mode. After the speaker's remarks, we will have a question and answer session. To ask a question, please press star followed by the number one on your telephone keypad. It is now my pleasure to turn today's call over to Mark Rupp, SVP of IR and Treasury. 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 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 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 So if you're listening to a replay of this call, it's possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 good morning, everyone. Our first quarter results did not meet our expectations and are not reflective of the direction we are heading with our strategic initiatives. We knew the first quarter would be our toughest comparison of the year. This was predominantly due to last year's elevated clearance activity, which was more than 600 basis points of drag on comp sales in Q1. That said, we expected our regular price business to offset this headwind. Regular price sales were strong through the first eight weeks of the quarter, though softened in late March and into April, especially for our spring seasonal product. And while regular price sales did increase low single digits in the first quarter, their best quarterly comp performance since 2018, they were below our expectations. With a clearance headwind now behind us, we expect our performance will improve, building on our positive regular price trends driven by our early success in new categories and continued growth in Sephora. We are also effectively managing inventory and controlling our expenses, which resulted in gross margin expansion and an SG&A decline in the quarter. However, there are areas of opportunity that we are actively addressing, including our active and jewelry businesses. We continue to have high conviction in our strategy. Supported by the traction we are gaining in our key growth areas, as well as the increase we are seeing in the number of new customers. That said, as Jill will discuss in more detail, our updated fiscal year guidance reflects the first quarter underperformance in a more conservative outlook given the ongoing uncertainty in the consumer environment. As it relates to the consumer backdrop, Our customers continue to be pressured by a number of economic factors, including high interest rates and inflation. While spending among our high-income customers has remained steady, our middle-income customer continues to be impacted. In this environment, we are working hard to deliver even more value, recognizing that the discretionary spend of our customers is pressured. Part of this is having a strong private brand portfolio which positions us well as the consumer is looking for value. While navigating what remains a challenging consumer backdrop, we remain focused on executing against our four strategic priorities, which are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory expenses with discipline, and further strengthening our balance sheet. Over the past year, We have implemented a significant amount of change across the organization to reposition our business. Efforts of this scale take time. As I look at our progress against these priorities, we are executing well against two, managing inventory and expenses tightly and strengthening our balance sheet by reducing our long-term debt. When it comes to enhancing the customer experience and simplifying our value strategies, we are making progress, but continue to have opportunities in front of us. Taking a step back, let me start with what's working. Sephora ad calls continues to deliver exceptional results. In Q1, Sephora sales increased 60%, including greater than 20% comparable beauty sales growth and better than expected contribution from shops opened in the past year. We saw especially strong growth in our skincare, bath and body, and fragrance offering, driven in part by the continued success of brands such as Sol de Janeiro and Sephora Collection. In 2024, we will open 140 Sephora shops, of which the majority will open in Q2. and we will end the year with Sephora in approximately 1,050 stores. Sephora continues to be an important driver of our new customer acquisition. We are also continuing to attract a younger, more diverse customer who shops more frequently as we have expanded Sephora across our store base. In addition to Sephora, we are also making progress in building our presence in under-penetrated categories, including home, gifting, and impulse, and look forward to the launch of Babies R Us. We outline these collectively as a $2 billion plus sales opportunity for us in the coming years. We continue to have confidence in our ability to achieve this target. In-home, while the category underperformed the company average, we did deliver incremental sales from our growth initiatives in decor and pet. In home decor, we are seeing the initial benefits from our expanded assortment and marketing investments, with sales of seasonal and everyday decor up more than 30% in Q1. New areas like wall art, lighting, and glass art have been well received. And in pet, sales increased more than 100% in the quarter, benefiting from last year's assortment expansion. In gifting, Sales increased more than 30% with strong performances across Valentine's Day and Easter, and more recently, we were pleased with the performance of our Mother's Day gifting presentation. In an impulse, sales grew more than 60% as we introduced queuing lines in nearly 100 stores during Q1. We expect continued growth in gifting and impulse going forward. We have invested in more receipts around key gifting events such as Father's Day as well as Americana merchandise to celebrate the Memorial Day and July 4th holidays. In addition, we will add dedicated queuing lines to 250 more stores to reach more than one-third of our store base by year-end. We also continue to be excited about our upcoming partnership with Babies R Us. in a more complete way during an important period of their lives by creating a meaningful presence in the baby gear category. Baby gear is a large category that has seen disruption in the competitive landscape in recent years. Kohl's new commitment to this space represents a significant growth opportunity and broadens our reach with younger customers. We will open Baby's R Us shops in approximately 200 Kohl's stores in Q3. which will coincide with the launch of our online presence. It's also important to mention that we are making progress in some areas of our apparel and footwear business. We have seen the most progress in our efforts to build our polished casual and dresswear offering across categories. This is most evident in the positive underlying trends we are seeing in our women's business. In Q1, regular price sales were up 3% in women's, which indicates that the newness we are introducing is resonating with our customers. One example of this is our dress business, where the customer response has been very favorable. Dresses is an area we identified as a large opportunity for Kohl's, and for those that have visited our stores recently, you'll likely notice a much greater dress presence. We launched a dedicated in-store dress shop in 700 of our stores and will expand the offering in Q2, supporting continued sales momentum. In our efforts to amplify polished casual more broadly are working, we have leaned into Lauren Conrad and Simply Vera Vera Wang and have seen solid reception with both brands delivering positive growth in the quarter. We are also seeing positive regular price sales in our juniors business. This is an area where a lot of change is happening, and we've introduced market brands to better react to fashion trends. To build our efforts, we are repositioning the Junior's offering next to Sephora in stores to better capitalize on cross-shopping opportunities. Overall, we are pleased with the direction of our women's business as it is instrumental in driving business across other categories. In addition to women's, we have seen solid demand for men's suiting, dress shirts, and dress pants, as well as kids' dresses and suitings. We've also seen casual and dress footwear perform well in both of these areas. Moving beyond product, let me share some of our other initiatives that are working. First, our efforts to simplify our value strategies have shown early signs of success. We are seeing positive signals through our customers' insight work, with more customers agreeing that Kohl's is delivering great value. In February, we scaled high-volume pricing across our private brand offering, which has been received positively by customers. Also during Q1, we increased the number of targeted offers to our loyalty customers and continue to leverage Kohl's cash as a key differentiator. and we amplified the messaging around rewards for our loyalty program and Kohl's credit card to drive greater enrollment. Collectively, these actions helped us drive an increase in new customer acquisition in the first quarter and higher enrollment and reduction rates in our loyalty program, all of which are positive indicators of future engagement. With that said, we know our most loyal customers are most sensitive to our promotions and therefore we will ensure that we continue to bring value to these customers with targeted promotions and personalized offers while we continue forward with our strategy to simplify value. Second, we are successfully managing inventory and expenses with discipline. Inventory in Q1 was down 13% as we continue to benefit from our disciplines where we operate with greater flexibility and open to buy. This led to an increase in the inventory turn despite the lower sales. We will continue to target inventory declines in the mid-single digits percent range with a focus on driving inventory turns. And we controlled expenses tightly across the organization, resulting in a slight decline as compared to last year, even as we invested in marketing and our new growth initiatives, including new support shops and input queuing lines. In third, we are further strengthening the balance sheet. In Q1, our revolver borrowings of $355 million were down significantly from $765 million in the prior year. This level was in line with our expectation, despite lower than anticipated sales, as strong inventory management benefited cash flow. In Q2, we will reduce long-term debt by $113 million by executing a make-whole call on our May 2025 notes, which Jill will discuss in more detail. So we are making solid progress across several of our initiatives. We are delivering incremental growth in new under-penetrated categories in Sephora, as well as in portions of our apparel and footwear offerings. In addition, we are managing inventory and expenses with discipline and further strengthening the balance sheet. Now let me discuss some of the headwinds we faced in the quarter in areas of opportunity for us going forward. As I mentioned at the outset of this call, clearance is a major drag on our comp sales performance in Q1 as we lapped last year's elevated activity. This was a unique headwind that weighed heavily on results across our apparel and footwear businesses, and especially in active, juniors, and kids. Importantly, this headwind is now behind us as our clearance sales normalized following the first quarter of 2023. In addition, we experienced softer demand in spring seasonal product, dampening what otherwise was a strong positive trend in our regular price sales through the first eight weeks of the quarter. Categories including tees, shorts, and tanks were uniquely challenged, impacting our men's and kids' businesses, which have historically been sensitive to seasonal transitions. In addition to these headwinds, we also identified areas of opportunity for us going forward. The first area is active, which accounted for the majority of the overall sales decline in the quarter. Clearance is a major factor in the active decline. It was felt most significantly in our men's and kids' businesses. We continue to work with our brand partners to increase newness in the back half of the year and we are leaning into our value-oriented private brands, Flex and TechGear, which performed well in the first quarter. Flex Apparel was especially strong, growing in excess of 50% as we further expanded the brand to all stores. We see a long runway of growth for Flex as we build awareness for this very affordable athleisure brand that is building a solid reputation with customers. The second area is accessories. Over the past few years, as we made space for Sephora in our stores, we did not do a good job of retaining our jewelry sales, which have been on a consistent sales decline. We know there is still an opportunity to offer jewelry to our customers, especially during key events and holidays in the year. We are currently working to reestablish our presence, which will include expanding our in-store assortment and improving its in-store positioning by placing it near Sephora. We will also have a stronger presence in jewelry during the holiday season. The third area is our legacy home offering. During the first quarter, select areas within our home business underperformed with softness in the kitchen electrics, floor care, and bedding. To improve results, we are increasing newness in kitchen electrics as well as introducing new brands and ensuring we are providing excellent value to our customers across bedding and floor care. And lastly, it's important that we continue to drive traffic across our omnichannel platform. In Q1, store sales slightly outperformed digital sales, though both declined given the headwinds I discussed. However, transactions in each channel improve as we move past the clearance headwind. Looking ahead, we expect store performance to benefit from our growth initiatives, which are highlighted in stores. And in digital, we will continue to reinforce our value simplification in all communication and scale new targeting initiatives, while also improving the search and product recommendation capabilities. of our site to drive increased traffic and higher conversion. I will now summarize my comments today, and I want to leave you with three things. First, our Q1 results were not up to our expectations. Clearance was a major headwind to overall comparable sales and demand softened in late March and into April, especially for our spring seasonal product. However, regular price sales increased low single digits and we are actively addressing the areas of opportunity identified in the quarter. Importantly, the clearance headwind is now behind us, and we have confidence in our ability to address the opportunities we laid out. Second, many key areas of our strategy are working. Sephora at Kohl's has maintained its strong growth momentum, and we are driving incremental sales and home decor, gifting, and impulse, and we are seeing positive underlying trends in our women's business. And during the balance of the year, we'll open more than 100 additional Sephora shops, expand Impulse queuing lines to an additional 250 stores, and launch our Babies R Us partnership in 200 stores and online. For these reasons, we remain confident in our strategic initiatives. And third, the underlying structure of our business remains sound. While we work to drive top-line sales growth, we are managing inventory effectively, expanding gross margin, and tightly controlling expenses. We are also demonstrating our commitment to returning capital to shareholders through the dividend and strengthening the balance sheet by reducing long-term debt. Reposition of business of this size is not a simple task, and I want to recognize our associates across stores, distribution centers, and corporate for their continued resilience and dedication to improving COLE's results. I will now turn over the call to Jill to discuss our first quarter results and outlook for 2024.