Kohl's Corporation

Good morning, my name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2024 Kohl's Corporation Earnings Conference Call. Today's conference is being recorded. 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 the star key, followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. At this time, I would like to turn the conference over to Mark Rupp, Senior Vice President, Investor Relations and Treasurer. 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 Chief Executive Officer, and Jill Thim, our Chief Financial Officer. I will now turn the call over to Tom. Thank you, Mark.

And good morning, everyone. We continue to work hard to reposition coals for future growth and have taken significant actions to accomplish this. While we recognize efforts of this scale take time, we were hopeful that a return to top-line growth would materialize more quickly. We are making progress against our strategic priorities. However, our performance has been impacted by a continued challenging environment and in softness in our core business. During the second quarter, we attracted more new customers to Kohl's and experienced an increase in overall transactions, both of which are positive developments. At the same time, however, our customers exhibited more discretion in their spending. which pressured overall sales and overshadowed strong performance in our key growth areas, including Sephora, Home Decor, Gifting, and Impulse. Although we are disappointed with our second quarter sales, we continue to execute well operationally, enabling us to deliver a 13% increase in earnings driven by gross margin expansion and strong inventory and expense management. Looking ahead, we are focused on ensuring that the substantial work that we've done across product, value, and experience is fully recognized by both new and existing customers. We will capitalize on new opportunities such as our partnership with Babies R Us and expect to continue to benefit from our key growth areas. And we will evolve our marketing to highlight all of our new product initiatives while also amplifying our focus on value with an emphasis on lower price messaging. As Jill will discuss in more detail, Our outlook for the balance of the year assumes the macroeconomic environment will remain challenging. Importantly, our operating discipline, our solid cash flow generation, and healthy balance sheet will continue to provide meaningful support as we work to return coals to growth as demonstrated by our Q2 operating performance. Through all of this, we will remain focused on executing against our 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. As I look at the progress we are making, we continue to manage inventory and expenses tightly and have strengthened our balance sheet. And though we have taken significant action to enhance the customer experience and simplify our value strategies, We simply have more work to do to ensure we are fully capitalizing on our efforts. Let me start with what's working. First, Sephora at Kohl's continued to deliver strong growth in Q2 with total beauty sales increasing approximately 45%. Comparable beauty sales grew in the low teens percent with consistent performance across shops opened in 2021 and 2022. And shops opened in the past year are performing better than expected. We also continue to see solid growth digitally. Fragrance, Bath and Body, and Skin Care were especially strong in the quarter And brands including Sol de Janeiro, Sephora Collection, and Rare Beauty and Charlotte Tilbury drove impressive growth. Our partnership with Sephora has been incredibly successful. Together, we have acquired millions of new customers and gained significant market share within the industry. Sephora now has a presence in 1,050 of our stores. following the opening of 140 shops this year. Looking ahead, we are confident in our ability to continue driving solid growth. We are introducing new brands such as House Labs by Lady Gaga and Glossier in makeup and Ariana Grande in fragrance. We are also significantly expanding our holiday gifting assortment building off of last year's success. Second, our work in under-penetrated categories continues to gain traction. Sales trends in home decor, gifting, and impulse accelerated in Q2. And earlier this month, we successfully launched our partnership with Babies R Us. These collective areas continue to represent a significant sales growth opportunity in the coming years. Let me share a little more on each of these. Our efforts to build our home decor business continues to progress, benefiting from our expanded assortment and recent investments in marketing. In Q2, sales of seasonal and everyday decor increased more than 35% year over year. and we also experienced strong growth across many other areas such as storage, wall art, glassware, and pet. For back to school, we have highlighted backpacks and dorm room essentials. In gifting, our customers continued to respond well to our assortment and front of store positioning. In Q2, sales increased more than 30% with solid performances across key events, including Mother's Day, Father's Day, and Fourth of July. We will build on our success with an even more robust gift assortment for the upcoming holiday season. As it relates to impulse, we drove sales growth of more than 70% as we expanded queue lines to 50 more stores in the second quarter. In Q3, we will add 200 more queue lines, bringing the total to 435 queue lines in time for the holiday season. Now let me provide a brief update on our initial launch of Babies R Us, which allows us to broaden our reach with young families. We're in the process of opening 200 baby shops featuring thousands of products across baby gear, furniture, and accessories from a number of high-quality brands. We have opened more than 100 of our shops in August and are planning to open the remainder during the next month. Our baby offering is also available to customers online. We will learn from this initial launch, which will inform our plans for future expansion. In conjunction with the launch, we are introducing motherhood a leading maternity brand to enhance our offering for expectant mothers. And in Q3, we will introduce a Babies R Us registry. In addition to baby gear and maternity, we'll also see a halo opportunity to grow sales of our infant and newborn apparel. Moving beyond product, let me share some of our other initiatives that are working. We continue to effectively manage inventory and expenses. Inventory in Q2 declined 9% versus last year. We continue to operate with greater flexibility and open to buy, which has enabled us to manage our inventory effectively despite lower sales. Looking ahead, we remain committed to increasing inventory turn and managing inventory down mid single digits. And from an expense perspective, I am pleased with how the organization has remained disciplined in what continues to be a challenging environment. SG&A expenses in Q2 declined over 4% compared to last year. And lastly, we continued to strengthen our balance sheet. During the second quarter, we reduced our long-term debt by $113 million and reduced our revolver borrowings by $150 million as compared to last year. Now let me discuss some of the headwinds our business continues to face and the actions we are taking. As I previously mentioned, our customers exhibited more discretion during the second quarter. Inflation and high interest rates continue to pressure spending, especially among our middle-income consumers. We are seeing the clearest evidence of this in the performance of our core apparel and footwear offering, which experience broad softness in the quarter. To better navigate this environment, we are taking a number of actions to ensure that our customers recognize all of the enhancements we have made across product value and experience during the past year. We are evolving our marketing message to increase consideration of Kohl's as a leading destination for value for the entire family. Our advertising has already begun to include messaging around lower price points across our assortment. And we will begin leveraging real customers and influencers to showcase not only our great values, but also our enhanced product offering. And of course, we'll continue to lean into Kohl's cash as a key value differentiator. Beyond our marketing efforts, we know we have more work to do in our core apparel and footwear business to improve the sales trends, which frankly have been disappointing. To be clear, we remain confident that the product we are offering today is more relevant to our customers. This is supported by our recent customer insight work that indicates more of our customers feel calls resonates with them, and by an increase in conversion, we experience in the second quarter. We are delivering growth in our new products, including dresses, which are benefiting from expanded space in our stores, as well as market brands, which are resonating well with our customers. And we are seeing promising initial sell-through trends in newly introduced brands, such as Aeropostale and Limited Too. We were also encouraged by trend improvement in active we witnessed during the quarter. Our private active brands, which include Flex and Tech Gear, grew low double digits, and we delivered positive growth in several of our national brands, including Nike, Skechers, Columbia, and Eddie Bauer. As it relates to back to school, we are pleased with our positioning in backpacks, kids' footwear, and boys' and girls' apparel. Nonetheless, there are several areas of our business that are holding us back, some of which are self-inflicted. Jewelry is a good example of a category where we failed to retain sales as we made space for Sephora in stores. As we've discussed on last quarter's call, this is a category that was highly valued by our customers, and we are committed to reestablishing our positioning. This holiday season, we will reintroduce fine jewelry in 200 stores as well as expand in aisle placement of bridge jewelry. We have also identified opportunities to rebuild our assortment with increased newness in areas including Petites and classic sportswear where we've lost traction in recent years. And we continue to see opportunity in growing our juniors and legacy home businesses which candidly underperformed in Q2. During Q2, we began to reposition Juniors back to the front of the store, which is expected to positively influence sales this fall by capitalizing on the Sephora traffic. We will also continue to leverage market brands to bring in trend right product to better connect with our younger customers. As it relates to our legacy home business, sales within Kitchen Electric floor care, and bedding remained under pressure. However, we expect trends to stabilize as we move through fall based on increased innovation, new brand introductions, and a stronger value messaging. Lastly, it's important that we continue to drive traffic across our omnichannel platform. In Q2, digital sales outperformed store sales with transactions increasing in both channels. To support future growth, we are investing to enhance our Omni experience. In stores, we are strengthening our leadership structure, adding an additional layer of management closer to stores to ensure we are driving a consistent experience across the chain. And digitally, we continue to increase personalization while also leaning into social commerce to reach a younger audience. So, as you heard, we have a number of actions underway to stabilize and improve our sales trend. Collectively, we believe our strategic initiatives will help us reach new customers and increase engagement with existing customers. I will now summarize my comments today, and I want to leave you with three things. First, we continue to operate in a difficult consumer environment. Our customers are feeling the burden of the higher cost of living. This was evident in smaller basket sizes in Q2. Recognizing this, we have amplified our focus on value, especially in our marketing messaging. Second, we continue to execute well operationally and remain in a sound financial position. Despite the decline in sales, we increased Q2 earnings by 13%. We are expanding our gross margin managing inventory and expenses with discipline, and strengthening our balance sheet by reducing long-term debt. We also remain committed to returning capital to shareholders through the dividend, which is supported by our solid cash flow generation. And third, our investments in key growth areas are building momentum. Sephora Edcoals continues to drive strong sales growth and will benefit in the back half of the year from the additional 140 shops opened. We're also gaining traction in home decor, significantly expanding our holiday gifting offering and adding impulse queuing lines to 200 more stores in Q3, all of which are positioned to deliver incrementally this holiday season. And we are optimistic that our Babies R Us launch will bring in new customers as awareness builds. As I said at the outset, We are working hard to reposition coals for future growth, and we are taking significant action to accomplish this against a difficult economic backdrop. That said, our confidence in our strategy remains strong. We continue to believe that we are making the right strategic decisions to set coals up for the long-term success, and in time, I look forward to the delivering results that reflect this. I want to thank all of our associates for their dedication to COALS in support of our strategic efforts. I will now turn over the call to Jill to discuss our second quarter results and outlook for 2024. Jill?