Kohl's Corporation

Good morning and welcome to the Coles Corporation fourth quarter 2024 results conference call. All participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question at this time, you'll need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Trevor Novotny, Senior Manager of 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 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 here and 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, including adjusted net income, adjusted diluted earnings per share, and adjusted free cash flow. please refer to the cautionary statement regarding non-GAAP measures and reconciliation of these measures included in investor presentation filed as an exhibit to our Form 8K as filed with the SEC and available on our investor relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So if you are listening to a replay of this call, it is possible that the information discussed is no longer current.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 Ashley Buchanan, our Chief Executive Officer, and Jill Tim, our Chief Financial Officer. I will now turn the call over to Ashley.

Good morning, everyone, and welcome to the Kohl's Fourth Quarter Earnings Call. I would like to start today by saying thank you to the Kohl's organization and our Board of Directors for giving me a warm welcome to Kohl's. I am very excited to lead this great company, and as you will hear today, I believe Kohl's has a substantial opportunity to build on its solid foundation and position the company for future success. I have been in the retail industry for nearly 20 years now. I have held leadership positions at Sam's Club, Walmart, and most recently served as the CEO of the Michael's Companies for the past five years. I love the fast pace of the retail industry and the challenge of meeting changing customer expectations during the ongoing retail evolution. To stay ahead, we need to take a data-informed approach to listen to the customer and meet them where they desire to be met. My review of the business is still ongoing, but today I want to share my initial takeaways and discuss a few opportunities that we have identified to reposition ourselves for improvement in 2025 and to lay the groundwork for future progress and initiatives. Jill will then address our fourth quarter and year-end performance. Since joining Coles in mid-January, I have taken time to analyze our current business trends, review our strategic framework, and assess our operational structure. I've been engaging with teams across the company, visiting numerous stores, and most importantly, getting to know our customers' perceptions and expectations of Kohl's. It is very clear to me that Kohl's is built on a solid foundation that includes operating more than 1,100 conveniently located stores nationwide, serving over 60 million customers, with 30 million of those customers being Kohl's loyalty members. With this foundation in place, Kohl's had a tremendous opportunity to build on our strengths, address key areas of opportunity, and better serve our customers more consistently every day. Kohl's customers expect great product, great value, and a great experience. Over the past few years, we have implemented a significant amount of change across our assortment, value strategies, and store experience in an effort to attract new customers. While the intention of this strategy to engage a new customer has been important, it has also caused friction with our core customer. We need to reprioritize our initiatives to deliver on these key tenants to better serve all of our customers, both new and existing. When examining recent performance, we have fallen short of fully delivering what our customers want and expect from Kohl's. Most of what we need to do is in our control and can be achieved by setting a clear vision and holding ourselves accountable to executing at a higher standard. As you will see from the financial guidance we are giving today, I want to set the expectations that this turnaround, while very achievable, is going to take some time. Progress starts with the actions we are taking in 2025 to address opportunities and better serve our customers. This marks the initial phase of actions for my ongoing assessment. Let me now discuss a few areas of focus. Offer a curated, more balanced assortment that fulfills needs across all our customers. Second, reestablish Kohl's as a leader in value and quality. And third, deliver a frictionless shopping experience. Let me begin with offering a curated, more balanced assortment that fulfills needs across all our customers. As we are working through our merchandise strategies, our goal will be to drive improved assortment clarity across all categories. with a purpose behind each brand and each product. Recently, our focus has been heavily weighted on new products to attract new customers, and we have de-emphasized the products and categories that our core customers love. Kohl's began to recognize this in 2024 and immediately began to refocus attention on categories where we had lost traction, including fine jewelry, petites, and proprietary brands. Now, we are encouraged with the improved trends we are seeing, with the majority of the recovery still ahead of us. While we readjust these categories, I want to be clear. We will also continue to prioritize our key growth categories that are resonating with our customers, including Sephora, Home Decor, and Impulse. We have built solid momentum in these categories in 2024 and know there is an additional growth potential in each of these areas. We are working diligently to find the right balance within our assortment and will deliver what our customers want and expect from Kohl's. Second, reestablish ourselves as a leader in quality and value by offering great products at great price and enhancing our promotions to drive even more value. We will start by rebalancing our assortment to match customer needs by elevating our focus on our proprietary brands. These brands provide quality, value, and exclusive reason to shop at Kohl's. They resonate with our core loyal customers, and we have an opportunity to reengage this customer by unlocking the full potential of our proprietary brands. Colas has amazing proprietary brands, such as Sonoma and Flex, that our customers love. They serve an important purpose in our value proposition, offering lower price points on great products for our customers. Strengthening our proprietary brand offering is key to our success. We will build on brands like Sonoma Flex, enhancing our current brand portfolio to become a destination for affordable quality products that you can only get at Kohl's. We will also look for opportunities to introduce new products that fill a purpose for our customer and drive productivity with our merchandise portfolio. Our national brands also play an integral role in our commitment to quality and value. Key national brands bring a known sense of quality in their assortments. We know our customers love national brands and they trust to buy these brands at Kohl's, knowing they got a great deal. Kohl's has historically delivered additional value through exceptional promotions, coupons, and Kohl's cash. Promotions have always been a key part of our value proposition. Over the years, our list of excluded brands on our coupon has grown too large, with the percent of sales that are excluded from coupons reaching an all-time high in 2024. This has created confusion and frustration with our loyalist customer. We're in the process of reversing some of these exclusions to simplify the experience and allow our customers to shop with our promotional coupons more consistently. In addition to promotions, our customers want more clarity in our price and value messages. We will continue to work to simplify our messaging by reducing the complexity of our offers as well as amplify our great prices as we have seen this start to resonate with our customers. Our goal is to offer quality products at great prices across our entire brand portfolio so our customers can more clearly see the value they are getting with their purchase. Making these pivots will allow us to simplify our promotions and clarify our value messaging to create a better shopping experience. Which leads us to our third priority, enhancing our omnichannel platform to deliver a frictionless experience to our customers. We want our customers to have a consistent experience across all channels, restoring trip assurance for key items, increasing inspiration in-store and online, and provide a more consistent store and digital experience so our customers can easily shop Kohl's at any store or online in any platform. We can improve the customer experience for more consistent in stocks for high volume items, particularly our basic and essentials. We will continue to manage inventory tightly but need to restore trip assurance for our customers through greater buy depth and supply chain agility. The optimization of our store layout will be done through a combination of productivity and adjacency analysis. This will provide clarity to the customer of the purpose of each brand. We will also thoughtfully improve category placement to create an easier shopping experience for customers to find their frequently purchased items and discover new and relevant choices. Achieving a successful omnichannel platform requires both the store and digital business to work together in tandem. While our store and digital business do have some synergies, there are many aspects in how we operate that we can do better. We have identified opportunities in our omnichannel business and some of the initial work is already underway. While it is too early to share any details, we are excited about the opportunity to leverage technology, and we have more to share later in the year as we develop these plans. The goal of all this work is to make shopping at Kohl's a more enjoyable and reliable experience. Importantly, while these areas will be the focus in our near term, it is also my expectation that every associate in our organization has a commitment and a role in driving operational excellence. Simply put, we will work to create a more efficient organization that will focus on reducing costs to allow us to invest in our future growth. We know that part of setting up the business for future success is to have a high level of discipline on managing costs. To summarize my comments today, I'd like to reiterate my takeaways. First, Kohl's is a strong company built on a very solid foundation. With over 1,100 stores serving more than 60 million customers, the opportunity that lies ahead of us is substantial. Kohl's serves an important role in the retail landscape, and we have the ability to better execute and serve our customers. Second, we have identified areas that are repositioning us for improved results as they better align with what our customers want and expect from Kohl's, including offering a curated, more balanced assortment that fulfills needs across all customers, re-establishing Kohl's as a leader in value and quality, enhancing our omnichannel platform to deliver a frictionless experience. And last, this will take some time. I want to be realistic in how we are setting our expectations. My full review of the business and go-forward strategy is still ongoing. The actions we are taking in 2025 are a step in the right direction, but there is more work to be done to unlock the full potential of this company. We will have the details on additional initiatives later in the year, and I will hand over the call to Jill.

Thank you, Ashley, and good morning, everyone. I'll provide details on our fourth quarter performance and then discuss our guidance for 2025. Net sales declined 9.4% in Q4. and 7.2% for the year. Comparable sales decreased 6.7% in Q4 and 6.5% for the year. The variance between net sales and comparable sales in Q4 is primarily due to the 53rd week last year, which we previously stated was worth $164 million. From a channel perspective, our store comparable sales declined 3.1% in Q4, and we're down 5.6% for the year. Store sales benefited from strong average transaction value and saw improvement throughout the quarter, with January having the strongest performance. We experienced underperformance in our digital business during Q4, with comparable sales declining 13.4% in the quarter and down 8.7% for the year. Digital sales were pressured from softness in home, particularly in legacy home, which over-penetrates into our online business. We also saw headwinds in our digital conversion in Q4. Part of the conversion headwind was due to an online inventory suppression issue that impacted our availability. We have corrected this issue and are seeing an improved conversion and performance quarter to date. Turning to line of business results. Nearly all lines of business improved their comparable sales performance versus Q3. Sephora continued to be a strong sales driver with comparable beauty sales increasing 13%, an acceleration from the third quarter. Fragrance, bath and body, and skincare continued their outperformance in the quarter. Our expanded offerings of gift sets resonated extremely well with our customers. And we continue to see brands such as Sol de Janeiro, Laneige, YSL, and Summer Fridays perform especially well in the quarter. In addition, our accessories business, excluding Sephora, had a flat comp for the quarter. This was driven by our investment back into jewelry with strong performance in fashion and bridge jewelry, as well as fashion accessories and our impulse business. We have made good progress on rebuilding our proprietary brand inventory position through the quarter. As we received fresh receipts in our proprietary brands, we saw a relative sales lift throughout the quarter. This helped deliver a notable comparable sales improvement in our apparel businesses when compared to Q3. We expect these businesses to continue to improve in 2025 as we rebalance our inventory. Last, we continue to see collective outperformance in our key growth categories, including impulse, gifting, home decor, and baby gear. However, this outperformance was not enough to offset our legacy home business, which remained challenged in the fourth quarter. Our kitchen electrics, floor care, and bedding continue to underperform. Moving down the P&L, other revenue was $222 million in Q4, a $24 million decrease versus last year. The decrease was driven by a decline in credit revenue due to lower revolving credit balances and lower flight fees. Gross margin in Q4 was 32.9%, an increase of 49 basis points. The year-over-year increase was driven primarily by optimizing our promotional events as well as lower digital penetration. For the full fiscal year 2024, growth margin increased 50 basis points to 37.2%. SG&A expenses in Q4 decreased 4.5% to $1.5 billion, deleveraging approximately 148 basis points versus last year. The decrease to last year was driven primarily by lower spending in stores, marketing, and supply chain. For the full year, SG&A decreased 3.7%. Depreciation expense was $183 million in Q4 and was $743 million for the full year. As compared to last year, depreciation expense declined $4 million and $6 million, respectively, driven by reduced technology capital spend. Interest expense in Q4 was $74 million and $319 million for the full year. Relative to last year, interest expense decreased $8 million in Q4 and $25 million for the year, driven by the retirement of $113 million of debt in Q2 this year. Our tax rate was 17% in Q4 and was 12% for the fiscal year. Adjusted net income for the quarter was $106 million and adjusted earnings per diluted share was 95 cents. For the year, adjusted net income was $167 million and adjusted earnings per diluted share was $1.50. During the fourth quarter, the company announced the closure of 27 underperforming stores and one e-commerce fulfillment center. These measures are part of the company's ongoing effort to increase efficiency and support the health and future of its business. The impact of this decision resulted in a one-time charge of $76 million and earnings per diluted share of 52 cents. and have been excluded from the numbers discussed. Moving to our balance sheet and cash flow. We ended the year with $134 million of cash and cash equivalents. Inventory was up 2% compared to last year, driven by our investments to rebuild our proprietary brand inventory. Operating cash flow is $596 million in Q4 and $648 million for the full year. Capital expenditures for the quarter were $99 million, and $466 million for the year. In 2024, we retired $113 million of bonds and returned $222 million to shareholders through the dividend. We ended the year with $290 million outstanding on our revolver. Now let me provide details on our outlook for 2025. As you heard from Ashley this morning, Kohl's is a solid company with substantial opportunity, but this will take time. We have undergone a lot of change over the last couple of years. Some changes were positive, while other changes led to some missteps. As we approach 2025, our guidance outlook recognizes both the time needed to make the necessary changes, as well as the uncertainty in the macro environment. For the full year, we currently expect net sales to be in the range of a 5% decrease to a 7% decrease versus 2024. Comparable sales to be in the range of a 4% decrease to a 6% decrease. Comp sales will have an approximately 90 basis point benefit from net sales due to store closures. Operating margins to be in the range of 2.2% to 2.6%, and earnings per share to be in the range of $0.10 per diluted share to $0.60 per diluted share. Now let me share some additional guidance details. We expect other revenues to be down 12%. The decrease is due to an accounting change that requires us to move a portion of our credit expenses from SG&A to net against credit revenue, as well as lower accounts receivable balances driven by sales underperformance in 2024, especially by our credit customer. Gross margin to expand 30 basis points to 50 basis points driven by continued inventory management, increased proprietary brand sales, and optimizing promotional offers. SG&A dollars to be in the range of down 3.5% to down 5%. These savings will be driven by our Q4 actions, resulting in lower store payroll and supply chain costs, as well as lower marketing expenses and a benefit from a portion of the credit expenses moving into other revenue, as I previously mentioned. Depreciation and amortization of $730 million, interest expense of $315 million, and a tax rate of 18%. As we anticipate the new initiatives to take time to have an impact, we expect a sales build throughout the year. And although we are pleased with our start to Q1, there's a lot of quarter still ahead of us. Given the uncertainty in the macro environment, we will stay prudent and expect Q1 comparable sales to be at the low end of our sales guidance range for the year, with the remaining metrics balanced by quarter. Next, I would like to discuss how we are prioritizing our capital allocation for 2025. In 2025, our focus will be rebuilding our cash balance, reducing our reliance on the revolver, and capitalizing on opportunities to further reduce our debt and overall leverage. We will be addressing our July 2025 maturities this spring with the intention to refinance the debt. We expect capital expenditures to be in the range of $400 million to $425 million. CapEx in 2025 will include investments to complete the rollout of Sephora, expand impulse queuing fixtures, and omni-channel enhancements. Additionally, we will be opening two small stores in the first quarter. Given our priority to rebuild our cash balance, the Board has made the decision to reduce the dividend. Although we remain committed to returning capital to shareholders, this reduction allows for greater balance sheet flexibility. This morning, the Board declared a quarterly cash dividend of 12.5 cents per share payable to shareholders on April 2nd. With that, Ashley and I are happy to take your questions at this time.

As a reminder, to ask a question, please press star followed by the number one on your telephone keypad. Our first question comes from Mark Altschweiger from Baird. Please go ahead. Your line is open.

Good morning. Thanks for taking my question. And, Ashley, welcome. Thank you. Ashley, could you talk us through your assessment of what has been working, what hasn't been working with the merchandising strategy, where you believe you can affect the most change in the near term, what may take longer to implement? And just bigger picture, what gives you confidence that Kohl's can return to growth?

Yeah, thanks for the question. You know, what I saw, obviously, before I took the job was, you know, when I assessed the entire business, I just saw opportunity, right? I saw an opportunity around the products we offer, the value that we're offering, the quality of the product, how we allocate, how we run the stores, and most importantly, how we do an auto channel experience. We had a lot of friction to the customer piece. Um, and I thought, you know, a lot of the, of the issues really were probably self inflicted over many years of the decisions. And you could just see what I saw from a customer base that we have a very loyal customer. I mean, when I toured stores, all I heard was how much they love Coles. And, um, what I realized is like, we're kind of making it hard for them to love us a little bit. Right. And, uh, With that being said, you could just see the opportunity in front of us as far as how we offer the customer value and product. And I just knew that we could do better, and I think the customers expect us to do better. And then I think the last thing that really kind of got me was I was amazed at our associates in the field, how committed they were, and how they were just truly customer-focused. So that's actually very hard to create, I think, in retail sometimes, is this very dedicated... associate base that really wants to serve customers. And so I knew if you have that and you can offer the right value proposition, I knew it could turn. It's going to take a little time. The things I laid out, they're really short-term and tactical in that sense. I'm still creating the long-term strategy and the greater value proposition. But if you look at the three things we laid out, they're kind of no-regret moves. I mean, really leaning into our proprietary brands, which our customers come to expect from us. re-implementing some of the categories we got out of. The categories we put in were the right ones. They attracted new customers. It was really, I think, in the execution of how we did it, we took away really productive space and product, which I think we could have done it probably a little bit differently and done both. And then if you look at how we do Omnichannel, it's clear in our results that there's a bifurcation between us and our peers on how our particular e-commerce business is performing. I was really pleased, actually, in the fourth quarter. We saw pretty good trends in our store base, which is kind of an anomaly in the retail landscape. That being said, we have saw a bifurcation in the e-com business, which, you know, given my experience, I feel very confident over time that we can adjust that trend and get it back in line with what we expect.

Thank you for that. And just a follow-up, I guess either for Ashley or Jill. What are the implications from a margin perspective as you aim to elevate the quality of the private brands while also broadening the brand inclusion with the promotional offers? And on the promotional offer side, what has been the feedback from your brand partners initially? Thank you.

Well, I mean, if you look at how we started the proprietary platform, you know, private brand, it had really been Q4 before I got here, and the customer was resonating. We kind of lost trip assurance on basically the key basics. So it's not really private versus national. It's really just reserving, I would think, from an inventory level for our customers, expect our core customers, around our proprietary brands. And how did we get there from a discounting perspective? How we do promotions and where we put our markdowns, I think there's a lot of opportunity, and particularly how we allocate product and where we send product. There's a lot of opportunity on the efficiency of that, and we could take a lot of cost out of that and put that into the price point. But over time, if you just look at it, our mix of what has been excluded from the coupon has gotten too high, and that's clear. There's really little doubt from a customer perspective, particularly our core Loyals customers, that we've excluded too many brands from that, which then, you know, has an impact on, obviously, how they view value from us. And I don't think – I think we can do both, and we've done it in the past. If you look at the mix between proprietary and national brands, obviously proprietary brands have a better margin mix, which then, I guess, creates a lot of fuel for productivity on price. So – It's going to take a lot of time to get there because, I mean, if you think about it, we've already bought, you know, pretty much through Q3. So I'm not saying this is an overnight piece, but I'll know how we get there over time as the mix changes and we can drive national brands while we increase our proprietary brands.

Thank you. Best of luck. Thanks.

Our next question comes from Dana Telsey from Telsey Group. Please go ahead. Your line is open.

Hi. Good morning, everyone. Ashley, welcome to Kohl's. And as you think about the store profile, we just heard about the 27 store closings that was announced like a month or so ago. How do you think of the store base? What are you looking for? We always knew that they were profitable stores. What's the right mix to be, both size and number? And then as you look at the merchandise assortment, given the reset that's going on, and we've been through active, we've been through numbers of different things. What do you want the mix to look like, and what kind of margins do you think is attainable for the business? Thank you.

I mean, there's very, very few stores that are not for all profitable. So we're really blessed in that sense. We have a very productive prototype, particularly our main 80,000-plus prototype. It's very productive and very profitable. As we look at – so I don't really see, you know, obviously – We always do a healthy evaluation every year of our store base. But going into it, there's very, very few that are not profitable at this point. So with that being said, if you look at inside the box, right, how we allocate space among categories and products and adjacencies, I think we've lost a little bit of discipline on that part, and there's a lot of opportunity. I mean, just a simple thing we've done just recently before I got here is realigning casual pants next to the dress pants, and you saw an increase, right? It's just the traditional how the customer shops and the adjacency piece. As far as margin piece, I'm not going to get into the forecast portion, but like I said, it's a very productive box. I mean, we're still thinking through the smaller format piece as how we, the build-out cost and the productivity of that. Obviously, we built several in the last few years. I think it's still a work in progress on the $33,000 The 55s actually are doing pretty well. I still have a lot of opportunity, I think, on how we do the build-out and the return, but we're still learning. But our workhorse is still the 80,000, and it's a highly productive prototype.

Got it. Thanks. And just any comments on your customer, what you're seeing from the customer, how they performed previously? exiting the fourth quarter and what you're looking for them going forward. Thank you.

I mean, if you break down the customer, I think, you know, from a macro perspective, you see a pretty decent bifurcation among income level. We don't see it too much geographically per se, but when you look at income level, if you're making less than 50, that consumer is pretty constrained from a discretionary standpoint. If you're making less than 100, it's also different. pretty challenging. And you see that very clearly in numbers. And obviously, you know, we hear the inflation numbers, they're coming down or 2% to 3%, but they're still pretty elevated, particularly from a grocery and rent perspective over the last few years because they haven't actually deflated. And I'm not sure wages have kept up with that. So if you're in that income cohort, which we do have, you know, a decent portion of our customer base in that, it's a headwind from a macro perspective. You definitely see that in them. They're seeking out value. You see it in the mix of the product we're selling. You see it in the promotions that we are doing. They're definitely seeking value. I don't think we're an anomaly in that. If you listen to the other retailers that have come before us, they keep talking about people are looking for value. And that will probably expand probably across income cohorts over the next probably three or four months, I would assume. And I think, you know, that's really how we're positioning ourselves, which I led off in quality and value, which I think will resonate with our customers, particularly in this time.

Thank you.

Our next question comes from Oliver Chen from TD Callen. Please go ahead. Your line is open.

Thanks so much. Hi, Ashley. We were curious about which initiatives would be earlier versus later, and what's your take on what might be more difficult to achieve versus lower-hanging fruit? And Jill, you've had the experience of many changes at Kohl's over the years, as well as management. What are your thoughts about how this may be different and comparing it and contrasting it to aspects of the past. And Jill, as we model free cash flow, it's certainly less than last year. Are there puts and takes in networking capital and CapEx that we should know about to help inform the decline we're modeling, like less than half of the free cash flow this year versus last?

Thank you. Yep. I mean, like I referenced, it's going to take some time. Obviously, the three things I laid out, in 2025, or I call them, you know, almost tactical short-term no-regret moves. I mean, it's a long lead time business if anybody's been around, you know, we're looking at, you know, nine months in some cases to get product in. So the things that we have, the changes that we are implementing we'll take a little bit of time, right? We probably won't even see the initial opinion until next year. Obviously, there's a lot of things around how we operate the store from a cost perspective, how we do promotions, how we do our summer pricing, and the proprietary mix are more short-term. The longer-term piece around the value proposition and how we go to market, we're still developing. But like I said, this is a long lead time business, and so it takes a little bit of time to turn the ship, just the nature of how the product flows and it works.

And in terms of free cash flow, Oliver, I think what we're going to see this year is obviously we came into the year with our inventory up a little bit as we're building back into our proprietary brands. You know, we talked on the call that January was actually our strongest month. We said we had a strong start to February. So as we build back into January, that brand portfolio, we're seeing it really resonate with customers because it does give them value. So as we're doing that, we're not going to get as much benefit out of inventory, particularly in the front half of the year. We'll continue to work that down, and I'll expect by, you know, for the full year, inventory turn will be flat, which does mean our receipts will have to be down, but you'll see that be aggressive decline in receipts as the year moves on. So you won't get as much of a working capital benefit from inventory in 2025 as you did in 2024.

Okay. And Jill, what's your context for the nature of what needs to be done now, you know, relative to your experience?

Yeah, I think that how Ashley's outlined it, you know, some of the steps we took were probably a little too far, and we really polarized our core customer, and they're the ones who took some of the brunt from it. You know, you see that a little bit on the credit side, particularly in the credit revenue. That customer really came to look for value, wanted to use their coupon, wanted the familiarity of brands that we actually took away from them. They over-penetrated in jewelry or petite. So, you know, some of those actions, I think, were harmful to that core customer. So we need to move back and build that brand love with them again. What I would say is we did bring in a lot of new customers. I mean, obviously, Sephora was helpful from that perspective, and we're driving those customers into our loyalty program. But we really just really need to establish that we have a great experience when you come to the store. We have trip assurance so that we have that depth of inventory. When you come to the store, you can get what you're looking for. And we have the brands that you've come to love and look at for Kohl's from a value perspective. So I think, you know, again, just some of the basics, but I think as we moved farther away from that, that was what really became harmful and it really became that core customer from our perspective that we have to bring back in.

Okay, and finally, just to follow up, Ashley, as you think about value intensely, what's the interplay between supply chain speed and agility relative to value. I think we're in a permanent phase of like unprecedented levels of volatility, um, you know, which may require shorter lead times, but I know you're often balancing that against a price and, uh, transport costs. Thanks.

Yeah. I mean, it's a really good question, obviously. Um, but what I've noticed over the last, you know, three to four years is, um, The semi-stocks seem to be more frequent over time, particularly from a supply chain and the way the world supply chains are becoming kind of rethought and obviously rebuilt. I was very pleased when I got here that Kohl's was actually kind of on the forefront of supply chain diversity and product assurance. I mean, they started really back in 18, diversifying their supply base, which I would say is probably two to three years ahead of most people that I'm that I'm aware of. So I was very pleased that there was a really strategic plan dating all the way back probably to 18 of having kind of a diverse agile supply chain. And one of our biggest, I guess, impressive parts is how well our supply chain actually works here at Kohl's. It is a well-oiled machine. There's a lot of opportunity on the allocation part from, say, the corporate side as far as the supply chain being some I've been very pleased with how that part of the company operates. And like I said, I think it was – they saw the dominoes falling well in advance around how getting supply chain diversity around security of supply. So not really over-indexed in the individual country, which has been quite helpful. Thank you.

Best regards.

Our next question comes from Michael Benetti from Evercore. Please go ahead. Your line is open.

Hey, guys, thanks for taking our question. Just a couple tactical ones. Could you maybe help us? Can you speak to the expectations going forward for Sephora this year in both, you know, maybe same store sales or store additions? I guess, secondly, could you explain the comment that the changes the last few years have caused some friction with the legacy existing core Kohl's customer? Maybe your answer was embedded in a couple of the other answers you had here. I just wanted to ask specifically that. what you what you saw with that comment and then also elaborate a little bit on the comment um of how you're addressing promotions where there's a lot of efficiency um that you can take costs out but but push the those savings into the price point just so we understand a little bit more tactically what you mean by that thanks yeah so i think this year um we will complete

We opened 140 stores in 2024. We'll complete our rollout this year in 2025 for the remaining stores. Those will all be small shops, though, because they're going to go into our smaller format stores. So the contribution from Sephora, you know, will become less. Now, we're excited that we actually saw, you know, a 13% comp in the quarter. It actually accelerated from Q3. So we continue to see it really resonate with our customer, particularly it's a trip driver for that customer. It's a new customer coming in. And we see that customer, you know, about 35% of the time buying something else while they're at Kohl's. So we have a big opportunity to continue to expand that basket. And I think that's where a lot of that opportunity lands. The newness continues to resonate. We called out a lot of great brands, and I know we have newness as we come into 2025 as well that will help continue to drive that, but obviously won't have the continued contribution of having new store openings. So you'll see a little bit less of that contribution there. to the overall comp in 2025 just because you have less new stores opening this year than you did last year.

Okay. And part two of that question, on the core customer piece, if you look at, so when we added these initiatives over time, we took away, I would call it, you know, highly productive, highly incremental product. I mean, Sephora went in. It was actually, you know, wildly successful. brought in a new customer base, did all the metrics that you would expect it to do, and they've been a fantastic partner. It went into the jewelry section, right? Which if you look at the way jewelry works, there really is no substitute. You come in for it. It's not like you're going to go buy, well, I'm going to go buy a shirt now. It was highly incremental and actually highly productive. Labor intensive, but highly productive. instead of just moving that and, I would say, removing duplicitous or duplicated product elsewhere or less productive space on the floor, it was just gotten rid of, right? Well, that's a core customer that really, you know, there's no other place for it to go. And then you replicate that among petite, you know, big and tall, and you have this kind of a rolling piece of where the ideas that were put in were right. I think it goes back to how you reallocate the space from a data perspective and making sure you're looking at any profit incrementality. Because Petite's, again, it's 100% incremental because you can't really find that product anywhere else because of the size fit piece. So the ideas were good. I think we could have done both if you look in retrospect. Obviously, easily when you're sitting here in my chair years later. But it definitely caused friction over time with our core customer that was used to that product, even though we attracted different customers.

Got it. And then the promotion comment.

And your question on the promotion comment, it was?

I just wanted to see if you could elaborate on the comment that you see an opportunity to make the promotions efficient, take some of the costs out, and push those savings into the price point. Just for us spreadsheet folks, what does that actually mean a little bit more tactically on a retail floor? Thanks.

My comments probably won't help you with your spreadsheet, but philosophically, though, if you look at what we promote and how we promote it, the depth of what we promote it and the efficiency and the incrementality of it, you get a little bit of a peanut butter spreading across many categories where some are actually way more elastic than others too. We tend to give away a lot of, I'll call it markdowns at the register. If you look at tactically how we do it, you know, the customer comes in and is not asking for that deal and we tend to give it to them. And so if you think about those two components, you're spending a lot of money at the point where the customer really doesn't, is not asking for that as opposed to them putting it into things that are highly elastic that the customer is really looking for. So there's some interesting ways that we operate, and it's just a legacy way of doing it. It's pretty typical sometimes when you see a retail, but you can take that money and probably get a higher return that the customers recognize more versus probably just at the register.

Okay. All right. Thanks a lot, guys. I appreciate the help.

Our next question comes from Ashley Helgens from Jefferies. Please go ahead. Your line is open.

Hi, thanks for taking our questions. So, to start, maybe you could just talk about what sort of kind of consumer health level is embedded in the guide for this upcoming year. And then, Ashley, for you, how are you thinking about the right mix of private label versus national brands? Thanks.

Sure. I think, you know, overall, we know that there's a lot of uncertainty with the customer and, you know, we try to definitely take a prudent approach with our guidance. So, really, our outlook both recognizes the time needed that we have to make the necessary changes that we've outlined today, as well as the uncertainty that a consumer is facing in the macro environment. And I think, you know, that's why, you know, we came out a little bit lower to make sure that we were addressing that uncertainty and the time needed. So I would say it's incorporated in everything we gave you today.

You know, it's a very common question, you know, what's the right mix and what is your target? In my 20-plus years, I have found that to be a very dangerous thing to actually throw out, particularly to merchandisers here in retail, because you can tell them to hit a target and they will hit a target. What I would say would be the customer will decide the mix in the end. I think there will always be a place for high-quality, high-value proprietary brands and then putting that in front of the customer, along with great quality master brands that people recognize. Um, and then you let the customer decide. Historically, when you set kind of artificial targets that this category is going to be 20% or 30%, um, I think it kind of takes the customer lens out and you're kind of forcing that upon the customer a little bit. So, ultimately, I think the customer will decide. I used to, yeah, I get the question, I used to get the question all the time, like, you know, what does your e-com mix want to, want it to be, what your store mix want it to be, whatever the customer wants. Our job is to meet the customer wherever they want to be met. Um, And we can do a better job of that. But I won't give a target because then they'll just hit it. What I want them to do is offer great products at great values and then let the customer decide and then tell them effectively. I know that sounds like probably not what you're looking for, but that's really the answer that is deserved for this organization for sure.

Great. Thanks so much.

Our next question comes from Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

Hey, thanks very much. You know, regaining traction with lost customers can be hard and oftentimes can take a long time. I'm curious, you know, what steps you're taking to improve on this front? You know, you talked about rebuilding the private brand mix. I'm just curious, like, what else you can do to go back to those customers? You have a big file. How are you attacking that, and is there a cost associated with that as well?

Yeah, it's good. I mean, obviously... It's easier to keep a customer than regain it historically, right, in retail. First, we actually have to make the changes. I'm going to start with that. We actually have to go back to proprietary brands. We have to put the categories back effectively in the store base. We have to get the brands that our customers want back on the coupon, and then we have to effectively tell them. The great news is we have a large, very large customer file that's still existing that We have a large database of active and deactivated customers that we can still reach out to. That part will take a little time. I don't think there's that much incremental cost associated with it, given our marketing budget. But that part will take a little bit of time. You have to do the first part before you can tell them. I think the worst thing you could do is tell them there's something different when it hasn't changed yet, which you can see that in the history of retail to be a very precarious situation. So for us, it's about getting the proposition right and then bringing them back. not in the reverse order.

Okay, fair enough. And then on the store fleet, you're closing 27 stores, and a lot of your peers are more aggressive on that front. I'm curious, what was the logic behind the 27, and I guess why not close more stores? And I guess are you prohibited because of the Sephora deal to closing stores, so that's why you're not getting more aggressive on that front?

I'll start. I think we've always talked about the fact that our fleet is incredibly healthy, and we didn't have a lot of stores that were underperforming. We're generating four-wall cash, four-wall profit out of the vast majority of all of our stores, so there's really not a need to close the stores. I look at these 27 stores as hygiene, and that's something we should be doing all the time. We look at it annually. We look at the stores that are underperforming. And, you know, we're closing those regardless. There's no limitations on which we could close. And what makes the most sense? I think as we come up in the next several years, we have a lot of leases coming due, which then affords you an opportunity to relook at should we be relocating that store, you know, downsizing that store, closing that store. But typically, because we're generating profit and cash in these stores, it's a pretty easy decision to continue moving forward. As, you know, Ashley mentioned, we could make the four walls more productive inside them, but as it sits today, there's just not a reason to have to make a lot of closures. In fact, I think as you look forward, we're testing into these small tour formats. We've talked a lot about the 55 and 35K, so it's more about where and how can we expand once we figure out the four walls of our box to say how can we get into some of these more rural markets that we know we have opportunity to serve with our format.

Great. Thank you.

Our next question comes from Matthew Boss from J.P. Morgan. Please go ahead. Your line is open.

Great. Thanks. So, Jill, could you speak to the overall health and composition of inventories exiting the fourth quarter? And then just with the cost structure, maybe if you could speak to further areas of rationalization or is one to two percent still the comp required for SG&A leverage in the model?

Sure. I think from an inventory perspective, I feel really good with the health. Although it was up 2%, as we mentioned, we made that investment back into our proprietary brands. And also, actually, into some of the brands we exited, like jewelry, we did have a strong presence of that in the fourth quarter. We saw it resonate with our customers. And as we talked about, we saw a flat comp in accessories without Sephora by going back to that category. So I think as we move into the first quarter, we have an opportunity both with Valentine's Day and Mother's Day to take advantage of that category. So I feel good with the health and the composition of the inventory. Like I mentioned, we're going to continue to rationalize our receipts based on the sales guidance we gave today and for the year look for our turn to be flat. But I feel like we've done everything we need to do from a health of inventory as we entered into the year to set us up well for 25. In terms of the cost structure, obviously with the guidance down, we're down 3.5 to 5. So we are showing both in 24 and 25, we've cut costs at a more aggressive rate than the typical... you know, one to one and a half percent comp leverage point that we've given you. So I think if you run your model, you'll see we'll be well beyond that with the guide that we gave for 25. So I think as we look at these opportunities, we continue to, you know, we closed an EFC, we closed the 27 stores. We've done some headcount rationalization as well. So we continue to look for big ways to optimize. As we move into 2025, we have some other areas such as lowering our marketing costs. We've talked about, you know, moving that A to S goal down year on year to become more efficient there. So we'll continue to lean into that. And then always looking for ways to optimize our store payroll. We still have 250 stores with self-checkout. So as we test and learn there. How can we become more efficient from that labor pool as well? And then as we have been rationalizing down the inventory, that also alleviates labor both in our distributions and in our stores. And so those type of items will continue as we move into 2025. So I think, you know, the point that I like looking at is one and one-half comp, but we've clearly done better than that in 24 and the guidance would be for 25.

So full color. Best of luck.

Our last question today will come from come from Brooke Roach from Goldman Sachs. Please go ahead, your line is open.

Good morning, and thank you for taking our question. Ashley, I was hoping we could follow up on Mark's question and speak to the process of reversing the brand exclusions on the coupon program. What does that look like in practice? And are you seeing any headway on brand conversations in getting those exclusions removed? And then for Jill, I was hoping you could provide some additional color on what you're seeing in your credit business excluding the accounting change, how is the co-branded partnership scaling, and how should we be thinking about the contribution from balances and your credit customer health? Thank you.

That's a great question. I mean, we're currently in the process of evaluating every brand. Obviously, some brands that we've carried have always been excluded. I'm not going to sit here and say that we're taking them all off, actually. They'll always be very large astral brands that will always be excluded. I won't name them, but But there are, over the last, I don't know, several years, there have been many, many brands that didn't ask to be excluded. We excluded them unilaterally, if that makes sense. And you do a little bit, you know, every year over the last three to four or five years, and it adds up pretty quickly. And those are really the brands I'm talking about. Our larger, you know, some of the larger brands that's always been excluded, I don't really see a change in that value proposition anymore. But there's hundreds upon hundreds of brands that we, you know, unilaterally did that our customers over time added up and say, well, this is becoming too excluded when you add up all the product. And those are the ones we're actually looking at. And it doesn't really require that much of a conversation because they didn't ask for it, and sometimes they actually have – ask us to repeal it. So those are the easier ones. Obviously, we'll have strategic conversations on business planning with our much larger national brands and see where they are strategically. I don't see that those worlds will change that much in the short term. But those are between, they're really on joint business planning together, how we drive our brand and their brand together. But over time, we've just excluded, you know, laterally a lot of brands. And those are the ones that I will actively look at on a more immediate basis.

And in terms of credit, you know, as we called out with our sales being softer, we saw that softness more in our core customer, particularly in our credit customer. So that has been the softness that we've talked about in our credit revenue line is that AR balance has kind of continue to be reduced as the sales have down. We have less revolving balances. So that, I think, as we've projected, will go back into 2025. The S&A shift obviously makes that revenue look lower in 2025. Without that shift, our credit revenue would be better than the sales comp guide that we had given from a decreased perspective. In terms of the co-brand, we actually just fully completed the co-brand conversion to CAP1 in February. So that's been successfully completed from that perspective. We did see, though, that we gave a little bit less line increases with this last cohort than we had done with the original cohort we had done. And when we do that, we still have a little bit less spend. As the, I think, macro environment gets better, that provides us an opportunity to have a line increase, which will help generate more sales from that perspective. But I would say right now we have an opportunity in front of us to really generate more sales for that core customer in general, which would then help lift our total credit revenue as we move forward. But obviously in the guide we're looking at this being a little bit better than what we had seen from a total sales perspective. X the SG&A shift.

Great. Thanks so much. We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.