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 first quarter 2025 Coles 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 1 again. At this time, I would like to turn the conference 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 herein by reference. Forward-looking statements relate to the date initially made and Kohl's undertakes no obligation to update them. In addition, during this call, we may make reference to non-GAAP financial measures. Please refer to the cautionary statement regarding non-GAAP measures and reconciliation of these measures included in the investor presentation filed as an exhibit to our Form 8 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 So if you are listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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 Michael Bender, our interim chief executive officer, and Jill Tim, our chief financial officer. I will now turn the call over to Michael.

Thank you, Trevor, and good morning, everyone. Thank you for joining Kohl's first quarter conference call. I'm honored to assume the role of interim chief executive officer at such an important time for our company. Kohl's has a substantial opportunity to better serve our customers every day, build long-term financial health, and deliver shareholder value. While I'm no stranger to Kohl's, having served as a board member since 2019, I'm also very familiar with the consumer retail industry. I have over 30 years of experience in the industry holding leadership positions at Walmart, L Brands, PepsiCo, and most recently I served as CEO of iMart Express. I'm excited to leverage my Kohl's board and past leadership experience to lead and support Kohl's through this CEO transition. I do want to recognize that there has been a lot of change for Kohl's this past year, especially the last few weeks. While change can be difficult, it also represents an opportunity to reassess and commit to a path forward. The good news is we already have that plan in place for 2025, and we're making good progress against this plan. Our plans, which are centered on customer priorities, have us working more collaboratively across the business, staying more accountable for incremental progress, and communicating more transparently to effectively drive the work. As we navigate through this period of change, we're committed to moving forward and showing up for our customers each day. It has been a busy few weeks, and I've enjoyed the opportunity to dive into our business. After visiting several stores and engaging in meaningful conversations with key partners, vendors, and investors, I'm more energized than ever about the road ahead. Seeing firsthand the dedication of our teams, the strength of our operational network, and the passion of our partners has only deepened my confidence in the incredible potential of this business. The insights gained from these interactions have reinforced the scale of the opportunity before us and the impact we can make by working together with focus, innovation, and a relentless commitment to excellence and execution. Last quarter, We identified key priorities focused on the Kohl's customer, which Jill will speak to shortly. These areas of focus are all designed with the customer in mind and will help us provide the products and shopping experience we know our customers want from Kohl's. Our work is underway and we have cross-functional teams that are working with urgency and care to deliver on these actions. Our first quarter performance was ahead of our expectations and the actions we're taking are making progress with early signs of positive impact. Kohl's has a strong foundation of 1,100 conveniently located stores and over 60 million customers, including a strong, loyal customer base that continues to grow. We have a tremendous opportunity to build on this foundation, and I'm truly excited to lead this next chapter and build on the momentum we've already begun to generate. Lastly, I would like to give a heartfelt thanks to our COLES team. I greatly appreciate all your hard work, dedication, and commitment to COLES, and I look forward to working closely with you to lead COLES to a successful future. I'll now hand the call over to Jill to speak to our first quarter performance and give an update on the progress we're making against our 2025 actions.

Thank you, Michael, and good morning, everyone. Our first quarter results came in ahead of our expectations, And while we are in the early stages of our initiative, it is clear that the actions we are taking are beginning to resonate with our customers and we are starting to build momentum in key areas. However, I want to level set that this is a turnaround and will continue to take time. Much of the work remains ahead of us. Progress starts with the actions we are taking in 2025 to address opportunities and better serve our customers. These efforts are centered on three key areas of focus. First, offer a curated, more balanced assortment that fulfills needs across all customers. Second, reestablish Kohl's as a leader in value and quality. And third, deliver a frictionless shopping experience. Let me begin with our first area of focus, offering a curated, more balanced assortment that fulfills needs across all customers with a goal to drive improved assortment clarity and a purpose behind each brand. Our focus over the last couple years has been heavily weighted on new products to attract new customers. And we have de-emphasized products and categories that are important to our loyal customers. We know our customers come to Kohl's with an expectation that we will deliver the products they need for themselves, their families, and their home. We are working to rebalance our full product assortment across all categories. A more curated, balanced assortment will ensure a more consistent and inspirational shopping experience every time. The most notable area we are correcting is our jewelry business, which we displaced as we rolled out Sephora in our stores. This was a category that was highly penetrated by our most loyal Kohl's card customers. In fall, we reintroduced jewelry and rolled out 200 fine jewelry shops in select Kohl's stores. In Q1, we saw a strong response to our jewelry business with jewelry sales up 10% of the quarter, driven mainly by our cold card customer. We see more opportunity with this category as we continue to work through assortment and staffing of our fine jewelry business. In women's, we over-assorted new brands over the last couple of years, which led to women's underperforming the business. We are working diligently to find the right balance within our apparel assortment and we believe rebalancing the assortment will better deliver to our customer expectations and improve the category performance. As we move forward, Women's is focused on delivering more depth and essentials, improving assortment clarity in sportswear, and making significant choice reductions as it divests from the market brands and invests into proprietary brands. We also completed the rollout of our Petites business to all stores at the end of last year. The Petite's business also had solid performance in Q1, up high teens, driven by the introduction of Simply Vera Vera Wang and Lauren Conrad, with an outsized performance in stores and positive performance from both our core and new customers. In addition, we will continue to invest in key growth categories, specifically Sephora and Impulse. This spring, we will open 105 Sephora small format shops. which completes the full chain rollout of Sephora at Kohl's. Sephora has been a huge success for Kohl's and in just four years, we successfully launched over 1,100 Sephora at Kohl's shops and built nearly a $2 billion beauty business. In Q1, Sephora delivered another quarter of positive sales with net sales up 6% and comparable sales up 1%. In Q1, we made the decision to expedite the rollout of the impulse queue lines in 2025 to an additional 613 stores, resulting in an impulse queue line in nearly all of our stores by Q3. The impulse business has been a great success, specifically in stores, as it is highly incremental and drives additional units in the basket. Moving to our next area of focus, reestablishing Kohl's as a leader in value and quality. Our goal is to offer great products at a great price and enhance our promotions to deliver more value to our customers. This work begins with elevating our proprietary brands, which offer lower price points on quality products and give customers an exclusive reason to shop at Kohl's. Proprietary brands play an instrumental role in our value proposition and highly resonate with our core loyal customers. We believe there's a substantial opportunity for us to lean into our value oriented proprietary brands to offer more relevance, value and quality to our customers. As we've begun to invest back in our proprietary brands, we have seen sequential improvement in the quarter over quarter performance with Q1 approximately 400 basis points better than Q4. This improvement was driven by strong performance in key existing proprietary brands such as TechGear and Flex and Active and Lauren Conrad and Women's. We will also look for opportunities to introduce new proprietary brands that fill a purpose for our customer and drive productivity within our merchandise portfolio. We have recently introduced three new home brands, Mariana, Atelier, and Mingle & Co. and have seen a strong initial response resulting in improved performance in our bedding, bath, and tabletop categories. While this progress is reassuring, our proprietary brands are still underperforming the company average. We expect to continue to show improvement in our proprietary brands as we increase the flow of new goods as the year progresses. Another way we are delivering value to our customers is by enhancing our promotions. Our national brands also play an integral role in delivering quality and value. Our customers buy these brands at Kohl's as they know they got a great deal through exceptional promotions, coupons, and Kohl's cash. However, over the years, our promotions have become less impactful as a result of a growing list of brands that were excluded from the coupon. At the end of April, we began our initial phase to move more brands to be included in our coupons. We are being thoughtful in actions and are taking a phased approach to read how the customer is reacting to the change. Early reads show our customers are responding positively to the change, especially in our digital business, and we expect to roll out more coupon-eligible brands throughout the year, with the majority of the changes completed by mid-August, to ensure our customers can use their promotional coupons to unlock more value on more brands for back-to-school and holiday shopping. The changes we are making to simplify our promotions and invest in our proprietary brands allow us to drive more value, which is especially important as consumers remain pressured. Our last area of focus is enhancing our omnichannel platform to deliver a frictionless shopping experience. Our customers desire an easier and more reliable shopping experience, both in stores and online. To deliver this elevated experience, we are focused on optimizing our store layout restoring trip assurance, and increasing inspiration in stores and online. Following the completion of some preliminary productivity and adjacency analysis, we began to make AddictStore's store layout, specifically with our accessories and junior's businesses. We created an accessory shopping experience behind the Sephora shop and moved the junior's business to the front of the store across from Sephora. as both of these businesses over-presentate in cross-shopping with Sephora. While these moves are recent, we are very encouraged with the results we saw in both categories in Q1. Accessories comparable sales, excluding our Sephora business, were up 4%, and Juniors comparable sales were down 1%, both well ahead of the company performance. In addition to the sales performance, we experienced heightened cross-shopping in both categories from our Sephora at Kohl's customers during the quarter. As we are refining our buying strategies, we are determined to restore the trip assurance our customer expects by providing greater depth in key items. This is especially important in our basics and essential apparel businesses. We improved our in-stock rates on core basics and saw those businesses outperform the company, specifically in men's and kids. We expect to make continual progress throughout the year as we realign our buying disciplines to provide better depth and clarity to our customers, all while tightly managing our inventory receipts down throughout the year. The goal of all this work is to make shopping at Kohl's a more enjoyable and reliable experience. We are encouraged with the initial results from these efforts, and we expect to continue this momentum throughout the year as we reposition our business for future success. In addition to these priorities, our organization will carry forward our commitment to driving operational excellence. We know that part of setting up the company for future success is operating with a high level of discipline and managing our costs. Every day, we are working to create a more efficient organization that is focused on reducing costs to allow us to invest into our growth initiatives. You see the benefits of this effort through the 5% reduction in our SG&A costs this quarter on top of a 3.7% decline in Q4 of last year. Now let me provide additional details on our first quarter performance. Net sales declined 4.1% and comparable sales decreased 3.9% in the quarter. The variance between net sales and comparable sales was due to the closure of 24 stores in the quarter, which was completed in late March. From a channel perspective, our stores continue to outperform the company with a comparable sales decline of 2.6% in the quarter. We have a strong store base that continues to generate both four-wall operating profit and four-wall cash flow. And although we have seen an improvement in our digital business, it continues to underperform with sales declining 7.7% in the quarter. The digital business over penetrates in the home category, as well as our core credit customer. both of which underperformed in the quarter. However, we are seeing the digital business respond well to the investment we made in adding brands back into the coupon. We continue to see strong sales from our new and non-Kohl's Card customers. However, our Kohl's Card customer performance continues to lag the company. Our decisions related to downsizing our in-store jewelry business, exiting the Petites business, decreasing inventory and proprietary brands, and increasing coupon exclusions had an outsized impact to Kohl's charge customer performance. As we have made investments back into these categories and reduced coupon exclusions, we have seen an improvement in the sales trend of these customers. In addition, our middle and low income customers remain the most pressured. These customers are prioritizing value and are trading down into lower price point products. The work we are doing to deliver value will help better serve these customers as they continue to be more choiceful with their purchases. Moving down the P&L, other revenue was $184 million in Q1, a 10% decrease versus last year. The decrease was primarily driven by a portion of our credit expenses shifting against other revenue as we move part of our account servicing to the third party that owns the accounts. Gross margin in Q1 was 39.9%, an increase of 37 basis points. The year-over-year increase was driven by category mixed benefits and continued inventory management. SG&A expenses in Q1 decreased 5.2% to $1.2 billion, leveraging approximately 32 basis points versus last year. The decrease to last year was driven primarily by lower spending in stores, marketing, as well as the benefit of a portion of credit expenses shifting into other revenue. Depreciation expense was $175 million in the quarter, a decrease of $13 million versus last year. The decrease was driven by lower capital expenditures and the impact from closed locations. Interest expense in Q1 was $76 million. Relative to last year, interest expense decreased $7 million primarily due to lower lease interest expense following the closure of 27 stores. Our tax rate was 10% in Q1. This resulted in a net loss for the quarter of $15 million, an earnings-polluted share of negative 13 cents, a 46% improvement from last year. Moving to our balance sheet and cash flow. We ended the quarter with $153 million of cash and cash equivalents. Inventory was up 1.7% compared to last year, driven by inventory strategies implemented to navigate the tariff pressure, including the pull forward of receipts and pack and holding seasonal inventory to be sold in the back half of the year. We continue to expect our inventory to be down high single digits by the end of the year. Operating cash flow in Q1 was a use of cash of $92 million. Capital expenditures for the quarter were $110 million. We continue to expect to spend $400 to $425 million of CapEx this year related to the completion of the Sephora rollout, the impulse queue line rollout to 613 stores, and the expansion of our e-commerce fulfillment center in Indiana. In Q1, we returned $14 million to shareholders through the dividend. We ended the quarter with $545 million outstanding on the revolver. Now let me provide an update on the refinancing for July 2025 maturities. Earlier this month, we completed a private offering of $360 million aggregate principal amount of 10% senior secured notes due in 2030. The notes are secured by 11 of our distribution and e-commerce fulfillment centers which will be held by a newly formed holding company. The offering is expected to close on May 30th. We intend to use the net proceeds from the sale of the notes in a series of transactions resulting in the repayment of borrowings under its revolving credit facility. Coles expects to borrow under its revolving credit facility to repay all of its 4.25% notes due in July of 2025 at maturity. Following this refinancing, Cole's nearest debt maturity is not due until 2029, and our long-term debt remains at a 10-year low. This provides us with ample liquidity to navigate the macroeconomic uncertainty and invest in strategic initiatives of the company and build a stronger cash position. Next, I would like to provide context around how we are navigating tariffs and the impacts they have on our 2025 outlook. Over the last several years, our talented and experienced global sourcing team has done an incredible job diversifying our countries of production to ensure that we are not overly reliant on any one country. Although tariffs remain a fluid and uncertain situation, the teams continue to work to reduce our exposure to high tariff countries by leveraging our diverse factory network to move production, adjusting orders based on pricing elasticity analysis, and working closely with our supplier and vendor base to proactively manage any impacts with the goal of continuing to drive value to our customers. As we look to the remainder of 2025, we remain focused on three key initiatives to better serve our customers. Given what we know today and the current actions we are taking to mitigate tariffs, we believe we can achieve our financial guidance for the year of comparable sales down four to down 6%, operating margin of 2.2 to 2.6 percent and diluted eps of 10 cents to 60 cents lastly i would like to take a moment to acknowledge the amazing team at kohl's we are navigating through a lot of change and your loyalty dedication and hard work have been unwavering thank you for all that you do for kohl's and the millions of customers we serve each day With that, we are happy to take your questions at this time.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star 1 again. And we'll go first to Mark Altschweger from Baird.

Good morning. Thank you for taking my question. Maybe to start off for Michael here, the strategic priorities outlined today fairly consistent with what we heard on the last call. Just any adjustments you're planning in the near term, and what do you think it will take to return to comp growth?

Thanks for the question, Mark, and good morning. I'm 30 days in, so it's early days, but the evaluation of the plan is not something that we're considering major changes to. Um, as a board member, uh, before I stepped into this, um, interim CEO role, we were very aligned with the management team on the strategy that we're executing. So I don't see us making major shifts or changes to, um, what's been articulated in terms of the strategy going forward as it relates to, um, your second part of your question with respect to what it's going to take to restore growth. As Jill mentioned, we're in the middle of a transformation in the early days, honestly, of it. And so it's going to take some time for us to get back to that. But the bottom line is that we're trying to align the business to meet the needs of our customers. And right now, our customers, some of them are stressed. And so we're trying to focus on value. and restoring that confidence that the customer needs to be able to come to Kohl's and find what they're looking for at a great price so that they can stretch the dollars that they're looking for. I look at it almost, Mark, as when I break it down, there are kitchen table conversations going on across America every day. People are trying to figure out how to make sense of the dollars that they have to spend And they're prioritizing where they want to put it. And so for, put those dollars. And so for us, what's important is making sure that we are as close to being inside their heads and understanding what their needs are and meeting those needs at the time they need them. And that's what it'll take for us to get back to growth over time.

Thank you. And Jill, just with respect to the guide, first, any color you can share in quarter to date trends would be great. And then you're holding the full year guide, even with Q1 ahead of expectations. And then obviously there's the tariff piece. I was hoping you could just walk us through some of the puts and takes there in terms of your thought process for the year. And what specifically are you doing to offset the tariff costs on your direct imports? Thank you.

So I think from a guidance perspective, clearly we were happy with the performance we saw in Q1. But I think we all know we're working in a very uncertain and what I would call fluid environment. And so as we thought about the pressures that we're seeing in particularly our middle income customer, the uncertainty that we're navigating for the rest of the year, we just thought it was the right thing to do to hold the guidance despite the beat in Q1, which helps us have the room to navigate through that uncertainty for the rest of the year. In terms of the quarter date trends, I would say our quarter really was a pretty consistent performance. We did see our REG price selling improve as the quarter progressed, and we saw that actually into May. I'll call it one exception. Last week it was pretty cold across the country, so we did see a little bit of a step back in our spring seasonal business, but I would say very much attributed to weather one week, and we felt really good with the momentum that we had been building in our regular price business. And a lot of that was driven with the newness that we're flowing in. We talked about on the call needing to be back into that proprietary brand and And we are seeing that the customer is reacting as we flow in that newness to our proprietary brands. That is an opening price point. So as we talk about value, it's one key way that we can continue to deliver value to the customer. From a tariff perspective, you know, we kind of tried to outline in the call what we were looking at. But back in, I think, 2017, when we were talking about border tax, we had started diversifying our countries of production and And our sourcing team has done a really nice job ensuring that we have a very diverse portfolio of countries that we leverage. And so we're not overly reliant on any one country. So they have been working tirelessly with our buyers to move our production to different countries, to the lower tariff countries, to help mitigate against those costs. We also have adjusted orders. So where we know we have high elastic categories, like a small electrics, that may be taking price increases from a national brand vendor, we'll adjust our orders down knowing that the velocity of that demand just won't be there. And so we're making those choices real time and working very closely with our supplier and vendor base to correctly offset any imports. Because at the end of the day, our goal is really to continue to drive incredible value to consumers during the uncertainty that we're navigating.

Thank you.

We'll move next to Oliver Chen at TD Securities.

Hi, Michael and Jill. This is Julia on for Oliver Chen. Could you please break down the year-over-year increase to gross margin we saw this quarter in terms of how much came from markdowns versus category mix and proprietary brands, and then any color you could provide on private label penetration and AUR and gross margin delta versus national brands within private label? Thank you.

I mean, on gross margin, the biggest piece is we're seeing a mixed benefit. And I think, you know, we've talked a lot about our proprietary brands have a better margin structure. And so as we move more into that, we'll see improvement. Kind of the rule of thumb we use is for every 100 basis points of penetration, we improve our proprietary brands. You'll get about a 10 to 15 basis point improvement in our margins. I think the other big thing is, and this is pretty consistent, internal and external is my passion around inventory management. The more we can manage the inventory, the better reg selling, as I indicated, we have, the better margin structure. And so you continue to see that's a key enabler for us to continue to grow margin. And so I would say those are the two big drivers that we outline because that's really where we see the benefit coming through from a margin perspective. And I think as the year progresses and our strategy really is aligned around the proprietary penetration. And we don't have a goal for that. We're always going to let the customer tell us where proprietary brand penetration needs to be. But what I would tell you is we're probably at an all-time low in what our penetration was. I think we're averaging around 30% penetration there. You know, we've been up and down over the course of the last decade. I will say that we never will hit back to the highs you would have seen when we were closer to 50-50 because Sephora is obviously a national brand and has a large penetration being close to a $2 billion business. But we do have a lot of room here to move back into proprietary brand penetration, and I think it's very timely given the value that those brands bring to our customers. We're really missing that opening price point opportunity for our customers to shop us, and we know that they, especially our core customers, look for that opening price point. They've grown to love the quality and size and fit of those brands, and they were just really vacant. So as we brought those back in, We've seen good momentum, particularly with our core customers from that perspective. And then from an AUR perspective, I think, you know, all in our ATV is really what we saw more in the quarter, and that is based on consumers trading down. So they're trading down into lower AUR goods. We saw our UPT up a little bit, but they're still looking for that value. So I think everything that we're seeing and the way that our buyers are going to go forward are going to really be a driver of opening price point. So I do expect we're going to have some AUR pressures given those choices, but they are making up for some of that in UPT. The other piece of UPT is we did talk about expanding our impulse, and we do see our impulse lines add an item to the basket. So that's just a UPT driver. So getting that into 600 more stores by Q3, I think, will be a way for us to continue to balance out that basket.

Thank you so much. We'll move next to Dana Telsey at Telsey Advisory Group.

Hi, good morning, everyone. As you think about the store footprint, and I know a lot of the stores are profitable, how are you assessing what the right number should be, should there be any additional closings, and also the size of the format? And then just lastly is just unpacking the tariffs just one more time. with the latest news on tariffs, how are you thinking about inventory levels and pricing as we get to the fourth quarter? Thank you.

So, yeah, I mean, Dana, you know my take on stores. We have an incredibly healthy store base in terms of they make four-wall operating profit, they make four-wall cash. We do an exercise every year to really look at our store base and understand where potentially there could be some edits. So, We closed 27 stores. I look at that as hygiene. It's like 2% of our fleet, so we'll always be looking at understanding what does that mean. We also look at the fleet to say as leases come due, which you know I think we have about 80-plus leases coming due a year, which gives us incredible flexibility. Are there opportunities to relocate them given just the shift of populations, where competition resides, et cetera, or downsize them as well given what sizes make most sense given community populations? I would say we've learned a lot. You know, we've tried many different sizes. We have a 64,000 square foot store, a 55,000, a 35,000 outside of our normal prototype. And so we've really learned like what makes the most sense for Kohl's to be able to deliver the right assortment to the community. And I would say maybe the 35K we're finding is a little too small. And so we're kind of really focusing and centering ourselves on the 55K. And I think that's a way for us to reach more communities that we're not serving today. and potentially as we make a downsized opportunity out of some of our 88,000 square feet just to heighten the productivity of those stores. So I think there's always going to be edits around the store portfolio to continue to elevate its productivity, but I don't see that there's going to be a ton of closures there outside of the normal hygiene that we'll do every year as we look at that store base. In terms of tariffs, I would say it is a fluid situation given the news last night and this morning. So, obviously, everything that we were talking about was what we had known going into today's call. I would say if there is a pause from a tariff perspective, of course, that could be a positive, particularly around the consumer. If I play off of where Michael's comments were, we have a consumer who's stretched. Our middle-income customer that we are serving is definitely a stretched customer today. And so if they don't have to see price increases from tariffs and they have more discretionary income, that, of course, always would help our business. So we could see that as a positive. But it's really not actually changing a lot from how we're managing inventory. We expect our inventory to be down high single digits by the end of the year. We expect our receipts to be tighter. We have an opportunity to turn this business faster, and that's really what we're doing. But we're trying to do it on a paced approach because we don't want to pull too much out. We know flow of freshness and receipts is important. And so that's really the way that we're continuing to navigate the situation. But obviously, if there's different costs or price increases, the elasticity would change on some of those. So it could change our bias slightly. But I would say overall, positive more from a consumer perspective.

And Dana, just to follow on what Jill was mentioning on the tariff question, I think this Aside from national brands, which we have to follow the pricing on certain brands, we think that within the guidance that we've given, we can manage through the tariff issue. And now we've said, based on what we know today, that's what we're saying. But as we continue to move through it, and last night's example in the court ruling, I think, is just an illustration of how fluid the situation is. We'll continue to monitor it and make sure that we're taking the right steps, but we've already done that. And in many cases, we're not overly reliant on any one country that's causing us any challenges at this point.

Thank you.

Next, we'll move to Michael Benetti at Evercore ISI.

Hi, this is Jesslyn Wong on behalf of MICA. Thank you for taking our questions here. Maybe just on Sephora. How many Sephora are in close right now and how many stores do you expect to further expand or deepen this collaboration? Maybe a little bit more color on the operating environment in the first quarter with common growth being at 1%. Thank you.

Sure. So from a Sephora perspective, we just finished the rollout. So I think it's in all of our stores at this point in time. I think 103 stores went or are in the process of finishing up as we're speaking. So we now have a presence in all the stores that we'll have. A Sephora, the last ones that went were a smaller shop. So as we went into the smaller square footage stores, we put in a 750 square foot shop versus our larger stores have a 2,500 square foot shop. We actually are pleased with the performance we saw from Sephora. Although the comps stepped down, we expected that. Obviously, this is a relationship that I think now we're in our fourth year, so we're going to expect these comps not to be as robust as we have last few stores opening. We are continuing to see market share gains in the beauty space, and we did see, I think in Q1, in fragrance and hair and makeup were really the ones that stood out for us. I think we had some opportunity more in the skin care categories As we go into Q2, we do have some newness coming in around hair care and then also makeup with Glossier. And then we also have an opportunity with Father's Day. So men's fragrance actually outperformed in Q1. We're going to give it more exposure as we go into Father's Day. So we think that's a big moment as well that we can take advantage of. So as we think about the remainder of the year, I think we're pleased with where we saw Sephora. And, you know, it's on pace for our expectations. Thanks, guys.

We'll take our next question from Paul Lejouet at Citigroup.

It's Tracy Cogan filling in for Paul. I had a question on your e-com performance in the quarter. I know you mentioned the sales decline. I was wondering if you could talk about the profitability there and when you think we might be able to see improved sales performance. And then I just had a quick follow-up on tariffs. Thanks.

Sure. So digital obviously improved, Tracy, from Q4 pretty substantially. We obviously had some self-inflicted issues in Q4 that we corrected for. I think a couple of things that weigh on digital is it's highly penetrated in our cold charge core customer, which is the area that has been underperforming for us given some of the decisions we've made over the last couple of years. So when we continue to see improvement in the core customer, we'll see some continued improvement in the digital business as well. Second, it over penetrates in our home businesses and home underperformed for the category or for the quarter. So we did have a little bit of pressure from that perspective. I would say that we should continue to see progressive improvement from digital based on a lot of the changes that we're making. I think there's some opportunities in some of our new businesses. Like we know Babies R Us particularly has a good digital business and how can we capitalize and take care of that. So there's some fixes that we're putting in, but I would say it's going to be a progressive improvement, and it's really going to be around that core cold customer coming in to be able to drive that business forward from that perspective. I mean, for a profit, I would say, you know, we always say stores are a little bit more profitable because we don't have a cost of shipping, but we're very pleased with the digital business. And obviously, across the organization, we've managed our expenses incredibly well. I think you know we're very disciplined customers. And we continue to see margin expansion. And that benefits both channels. So I think as we've continued to see below that sales line continue to improve, that has a benefit on both sides. So from a profit perspective, I still think, you know, I'm pleased with where we're moving it. Obviously, when you have a cost of shipping component, it's going to be a little less profitable than your stores. It's really going to get that top line back in check. And I think it's going to be progress, not an overnight improvement.

Got it. Thank you. And just to follow up on tariffs, I was wondering how much margin pressure you're building into guidance, or are you assuming that you can mitigate all of the things?

So we do think we can mitigate a vast majority of the tariff pressures based on everything we outlined earlier in the call. But everything that I just gave you from a guidance has been taken into consideration of any of the tariff exposure that we do have. So we feel very good, obviously, coming out strong in Q1. But then what that means for the rest of the year, we felt good and confident based on what we know today that we'll be able to hit that guidance.

Great. Thanks very much.

Next, we'll move to Blake Anderson at Jefferies.

Hi, thanks for taking our question. So first one was, you have a large and loyal customer base, especially with your private label offering. I was thinking about, as you think about the path forward back to sales growth, how are you prioritizing growth with existing customers versus gaining new customers?

I would say, first, Our new customer growth has been great. Our performance with our new customers and what I would say I'll call it a non-cold charge customer has actually been positive. So we're feeling really good with the initiatives that we had to attract the new customer, to retain that new customer, and actually even to see them shop more widely. Particularly, we've seen that in our accessories and juniors businesses. It's the core customer that we are very focused on and what we need to do to get back to growth is to move that customer in the right direction. The good news is this customer has still shopped us. So they haven't stopped shopping us. They're just giving us less of their wallet share. And a lot of this is self-inflicted. So we laid out some of the things that we did. When we brought in Sephora, we took away jewelry. Well, jewelry was something they came to Kohl's for. And it wasn't really substitutable. So if I wanted to find a necklace and earrings, I didn't come to Kohl's and say, instead I'll buy a sweater. So we lost that trip. We lost that basket. As we've brought jewelry back in, you know, we've seen it grow both in Q4 and again in Q1, seeing that positivity come through in the whole accessories pad. Just giving that accessories pad a home behind Sephora, which does have a nice cross shopping, we had a four comp in accessories for the quarter. They also shopped a lot of Petites. So we had exited out of Petites. We brought Petites back in for that customer. Again, not substitutable. If you're a Petite, you're not going to buy regular. So we lost that trip. We lost that basket. So as we brought it back in, we've seen it really resonate with that customer and our Petites business up in the teens for the quarter. Additionally, they were a proprietary brand lover. They knew the brand. They liked the quality. They liked the value that it brought. And it was coupon eligible. And we instead, when we moved to market brands, we replaced it with brands they didn't know at a higher price point without a coupon. So we really needed to make that correction. And we started doing that. Last year, we called it out in Q3. We saw it again in Q4. We're doing it in Q1. And as we're bringing those goods in, it's an opening price point. So it's squarely in the value center of what they're looking for. And they're finding the brands that they had come to love. So we just need to continue to flow that inventory thoughtfully. So that's where we feel there'll be some progressive improvement as those receipts and the newness sets. I think the last thing I would call out is we had a lot of brands that became excluded. In fact, we are more excluded than included or right at the 50-50 mark. And so when we did that, it really polarized from a core customer who came in with a coupon and felt disappointed they couldn't use it on some things. So in April 28th, we brought a lot of new brands back into the coupon. It's early, but we did see this as a place, I guess if I go back to Tracy's question, digital really reacted well to the coupons. It's very price sensitive. So as we can bring items back into the coupon, we also think that will bolster our digital business. but also plays very much to this core customer. So a lot of the strategies that we're outlining is really getting back to talking to that core customer and gaining back their trust and getting back the wallet share that we lost. But again, they're still shopping us, so that's a little bit easier of a challenge for our marketing team. They don't have to go find them. We just have to get them to come in more.

And Mark, I would just add on top of what Jill said, a couple of things to note. We're doing a lot of work right now with our marketing organization to figure out about who the Kohl's customer is. We know who they are, but to the extent that we can understand how to reach them even more effectively, that's one area. In the store experience itself, Jill mentioned earlier in her opening remarks about the aisle adjacencies and moving products like junior dresses outside of Sephora so that when you talk about cross-shopping and conversion, Those are the types of things that will help enhance the experience that the customer has once they decide to come to our locations there or on the website. And then trip assurance is one of the things that's really important for both customers, new and existing, and making sure that that balance between having choice on the floor and on the site, but also depth so that when a customer does choose to come to a Kohl's location that they can actually find what they're looking for and the right sizes and colors, etc., Those are things that we're all working through right now as well to make sure that we fine tune the business again to make sure that once a customer decides that this is where I want to go to shop, that they can be satisfied with the experience that they have. At the end of the day, a customer asks four questions when they decide to come to anywhere. And you put your own hat on as a customer, whether you're going to a restaurant or a coal store. They ask, what do you have? How much does it cost? Where can I get it and when? And we're working down through the answers to all four of those questions with a lot of work that's going on inside of our business right now to really codify what it is we need to do both online and in-store to make sure that we're satisfying the needs of customers when they ask those four questions.

That's very helpful. Appreciate all the detail. And then I wanted to ask a follow-up. This was for you, Michael. On national brands, curious if at a high level you can share any color on conversations recently you've had with your key vendor partners about maybe expanding or changing assortment. And then how do you think about the need to add new national brands over time?

Yeah, maybe I'll take the second part of that question first. And I think, as we had mentioned earlier, We're on this journey right now of making sure that we provide the appropriate balance between our proprietary private label brands and the national brands. Um, I think candidly, we've added a lot of national brands over the past several years or so. And so, um, our customers are actually asking for, and as Jill mentioned, you know, the Coles credit customer in particular is asking, um, much more for proprietary brands at this point. And so we're, we're trying to achieve that type of a balance. That doesn't mean that we won't consider adding national brands and tuning the assortment there. Conversations that we've had so far have been positive in terms of the focus that we have on continuing to provide national brands. We know we need to. That's what a large portion of our customers are interested in as well, and we'll continue to do that.

Great. Thank you both.

We'll go next to Chuck Grom at Gordon Hassett.

Hey, good morning. Thanks very much. On the guide, Jill, you reiterated the 2.2 to 2.6% operating margin for the year, but I hopped on late, so I don't know if you spoke to the gross margin guide. I think you had formally thought up 30 to 50 and then SG&A dollars. Can you just hold our hand on that front and then on the gross margin front, just any thoughts on the phasing throughout the year?

Sure. So we talked briefly just about margin. I feel good with the guide, Chuck. A lot of the pressure for tariffs we were able to offset and what we are absorbing was in the guide. So we feel comfortable with the fact that we'll hit that for guide. I would say on the cadence for the year, maybe look at Q2 on a two-year stack the same way that you looked at Q1. And then, you know, the back half, we think we have some room to do some things. We're going to still be incredibly focused on value. You know, we are going to get benefits, Chuck, on our proprietary brand, so as that newness flows and we get that throughout the year, that's why I feel like back half, we have a little bit more room. That's margin accretive for us, so we'll continue to look at that. We are bringing, you know, products back into the coupon, so we do think being more promotional and having value orientation throughout the year is going to be important, particularly because this middle-income customer that we serve is pretty stretched in today's environment. I feel like the 30 to 50 points that we gave for margin is definitely still something that we can achieve, given all the efforts that our teams have put forth to mitigate tariffs, knowing we had these strategies to go back into proprietary brands and have more coupon eligibility. And so what I would just say, maybe on the two-year stack for Q2, look at it like you did for Q1. And otherwise, I'd say the back half, we have some additional benefits off of penetration for proprietary.

And we'll take our final question today from Brooke Roach at Goldman Sachs.

Good morning, and thank you for taking our question. I was hoping you could dive a little bit deeper into the progress that you've made in the women's business. It sounds like you do have some green shoots emerging in petites. If you look at the women's business as a whole, when do you expect to return to sustainable growth in that business, and how should we be thinking about that cadencing throughout the year? Yes.

I can start on women's. What I would say is women's is one of the, I think, fast adapters of moving into market brands. We definitely moved out of our proprietary portfolio more into market brands. I think our choices were up double digits and our depth was relatively down double digits as well because we were still managing inventory well in that area. Given the fact, if you look at historically, women's had an outsized penetration in proprietary brands. I think they're like 60% to 70% penetrated in proprietary brands. This move had a pretty big impact to their business. And so as they're moving back into proprietary brands, we're seeing that momentum build. And I'll use juniors. I mean, that's our fastest fashion business. It's our fastest business that we can correct. And it was only down one in the quarter. I think if you look at brands like Sew and Sonoma, we're moving back into those brands. We're starting to see some momentum there. Lauren Conrad, we called out as a positive. So as we've brought more of that in, it's helped the women's business. So I would say this will continue to be a progressive improvement in terms of getting women back to positive growth. You know, dress is still a great category for us. It was a white space category we moved into. So really continuing to build momentum behind some of that newness. But making sure that we still deliver the depth on key basics and essentials, making sure that we have the proprietary brands that those customers have come to love and they're looking for, I think are going to be key areas for us. I think one other place that rolls into women's has been Intimates, and that's been a little bit of a laggard in terms of softness from sales. So I know that that's another place that has a lot of skew intensity there. So really looking at building some clarity and kind of reducing some choice count and having some more depth in those categories as well. So I would say we'll see improvement in women throughout the year, but I don't know, like I can't tell you when it gets back to positive growth, but I think everything that the efforts they have afoot are making the right movement for us to have progress in that category.

Great. And then just one quick follow-up. Are there any updates that you can share on your credit business for the rest of the year, how you're thinking about that from a cadencing perspective, but also how to get that back to a more flattish or growth figure in the future?

Yeah, I think don't forget we made the move up from SG&A into other revenues. So a big portion of I think we guided that line down 12%, and I had said without that move, we'd actually be better than our sales. So I just want to make sure that that's understood, that there's a one-time adjustment that's showing a drain on that line that has nothing to do with the actual portfolio itself. You know, we talked a lot about our core customer, Brooke, being down. That weighs in on our credit, right? So as those sales are down, you build less of your AR, and therefore you have less revolving balances. So that is kind of weighing down on what we're seeing there. So as those credit customer sales that we're very focused on continue to make positive improvement, we'll see that obviously transfer into that revenue line. But I would say it's still leading from a sales perspective. It's just that change in terms of SG&A that's really showing the weight down.

Great. Thanks so much. Best of luck. I'll pass it on.

Thank you. And that concludes the question and answer session and today's conference call. Thank you for your participation. You may now disconnect.