Kohl's Corporation

Thank you for standing by and welcome to the Coles Corporation second quarter 2025 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, again press star one. Thank you. I'd now like to turn the call over to Trevor Novotny, Director of Investor Relations. You may begin.

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause COLE's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in item 1A in COLE's most recent annual report on Form 10-K, and as may be supplemented from time to time in COLE's other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and COLE's undertakes no obligation to update them. In addition, during this call, we may make reference to non-GAAP financial measures. 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 8K as filed at 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 So if you are listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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. And thank you for joining Kohl's second quarter earnings conference call. On today's call, I'll be discussing highlights from our second quarter performance, followed by the progress we're making against our 2025 initiatives. Before I get into the performance, I would first like to say thank you to all of our associates at Kohl's. It's been a pleasure to work with you over the last four months. Each day I've been inspired and energized by your commitment and hard work. And I'm very proud of what we've accomplished, and I'm excited about continuing to make progress against this significant opportunity that lies ahead for us. Now, let me turn to our second quarter performance. We're pleased with our results as we delivered comparable sales of down 4.2% and adjusted earnings per diluted share of 56 cents. both of which were ahead of our expectations. These results reflect the continued progress we're making against our 2025 strategic initiatives. Now, while it's clear that these efforts are beginning to resonate with our customers, we also recognize that this performance is not yet where we aim to be. Our entire team remains focused on enhancing the way we serve customers and over time returning the company to growth. We saw our sales progressively improve throughout the quarter, with May having the softest performance due in part to colder, wetter weather over the last couple of weeks of the month, including the Memorial Day holiday, which negatively affected our spring seasonal businesses. We saw improvement in June and ended the quarter strong with July comp sales flat to last year. The improved performance was driven by our digital business and our proprietary brand sales, both of which performed positively in July. In addition to better than expected top line performance, we continued to operate the business with discipline. We were able to expand our gross margin by approximately 30 basis points, lower our inventory by 5%, and reduce our SG&A expenses by 4% in the quarter. Although we are encouraged by our second quarter results and the improved sales trend we saw throughout the quarter, we also recognize that consumers continue to be pressured and are being choiceful with their purchases. Specifically, our lower to middle income customers remain the most challenged, while our higher income customers have proven to be more resilient. These lower to middle income customers continue to prioritize value and are trading down into lower opening price point products. Several of our key initiatives are focused on delivering greater value to these customers through investing in our proprietary brands and adding more coupon eligible brands. As Jill will discuss in more detail, our outlook for the balance of the year assumes the macroeconomic environment will remain challenged. However, our strong operating discipline and improved cash flow generation will continue to provide meaningful support to drive progress against our initiatives and build on the momentum from the first half of the year. Our efforts are focused on three key strategic priorities, all rooted in putting the customer at the center of our decisions and delivering the products and experiences they expect from Kohl's. First, offering a curated, more balanced assortment that fulfills the needs of our customers. Next, reestablishing Kohl's as a leader in value and quality. And lastly, delivering a frictionless shopping experience across our omnichannel platform. Beginning with our first initiative, offering a curated and more balanced assortment that fulfills the needs across all of our customers. In recent years, Kohl's focused too heavily on altering our merchandising assortment in order to attract a new customer. This overemphasis led to unintentional displacement of products and categories that were important to our most 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're working to rebalance our full product assortment across key categories. A more curated balanced assortment will ensure a more consistent and inspirational shopping experience every time. Women's is a very important category for us as it serves our core customer and is a key driver of overall company performance. During the second quarter, we started seeing progress in our women's business as we invested back into proprietary brands, streamlined the choices in Intimates and reintroduced the Petites category. Our women's business over-penetrates in our proprietary brands, and as we've reinvested in these brands, the women's business has benefited. Although women slightly lagged the company performance, we saw steady improvement as our inventory investment in proprietary brands gained traction, ultimately delivering a positive comp in July. The strength was driven by key brands like Sonoma, Lauren Conrad, and Flex. Next, in our Intimates category, we reduced the choice count and improved in-stocks, enhancing shopability and delivering greater clarity for our customers. As these changes took effect, we began to see meaningful improvement in the business, culminating in a flat comp performance in July. As we reestablished the Petites category in all stores, this business accelerated up almost 40% in the second quarter. This strong performance was led by the introduction of our proprietary brands, Lauren Conrad and Simply Vera, Vera Wang. We are extremely encouraged by these results as this category provides an incremental sale because it is not a substitutable category and over penetrates with our core and most loyal customer. Our accessories business continued to outperform the company by low single digits in the quarter. This strength was driven by reestablishing our jewelry business and investing in key growth categories such as Impulse and our Sephora partnership. In Q2, our jewelry business ran plus 12 versus last year. This category heavily penetrates into our Kohl's card customer and is another category that is often not substitutable. The positive performance in the jewelry business is driven by establishing a destination for accessories in our store, investing in fashion jewelry inventory, and continuing to test fine jewelry case lines in 200 stores. We experienced outsized performance in our fashion jewelry business in the quarter. The fine jewelry business continues to be an opportunity for us as we work to find the right assortment and staffing. In addition, we are continuing to invest in white space categories, specifically our impulse and Sephora businesses. In 2025, we made the commitment to implement 613 additional impulse queuing lines across our store fleet. And in Q2, we implemented the impulse queuing lines in over 300 stores and remain on track to complete this rollout by the end of Q3. Impulse sales increased 30% in Q2, driving more units in the basket. In spring, we completed the final phase of our Sephora at Kohl's expansion, adding an additional 105 small format shops. In Q2, Sephora at Kohl's grew 3% versus last year and was flat versus prior year on a comparable sales basis. This partnership has delivered exactly as intended, benefiting both companies and has created an inspiring experience for Sephora at Kohl's as a beauty destination. We remain on track to delivering our goal of creating a $2 billion beauty business. The partnership continues to draw a new, younger customer with over one-third of Sephora shoppers who are also exploring other areas of the store, most notably juniors and women's. which remain the top cross-shopped categories. As we look ahead, we are excited by the upcoming newness in Sephora that was set earlier this month. This includes brands such as Kerastase Hair, Rare Beauty Fragrance, Miu Miu Fragrance, and Josie Moran Body, as well as expansions of successful brands, including Summer Fridays and Laneige. Turning to our remaining lines of business, Men's and kids were the softest performing categories in the quarter, with both experiencing declines in spring seasonal assortments like shorts and tees. However, this softness was partially offset by stronger performance in opening price point proprietary brands such as Tech Gear and Jumping Beans. Our footwear business slightly underperformed the company, primarily due to softness in sandals and active footwear. However, this was partially offset by strength in dress casual styles and solid performance in our kids' footwear business. Our home business saw strength in home decor as well as in the bedding and bath categories. However, this was partially offset by softness in small electrics. Next, I would like to discuss our second priority, which is reestablishing Kohl's as a leader in value and quality. This priority is centered around delivering more value to our customers, which is particularly important in the current environment we're operating in where value is really resonating with the customer. The first action we're taking to deliver more value to our customers is by elevating our proprietary brands. We aspire for our proprietary brands to deliver trusted quality and relevant style at an incredible value. We know that we have a powerful set of proprietary brands that build customer trust and loyalty. In addition, customers who buy our proprietary brands spend more of their wallet with Kohl's. These proprietary brands play an instrumental role in our value proposition. They allow us to offer quality products at a lower opening price point, which highly resonates with our core loyal customers. As we are investing into our proprietary brands, we have continued to make progressive improvement in sales, which are up 500 basis points from the first quarter, delivering comparable sales down 3% in Q2, with July up low single digits. This outperformance was driven by strength in key brands such as TechGear, Simply Vera, Vera Wang, Lauren Conrad, and Flex. We will continue to explore opportunities to introduce new proprietary brands that serve a clear purpose for our customers while driving productivity across our merchandise portfolio. Recently, we launched three new home brands, Mariana, Hotelier, and Mingling Co., which have received a strong initial response, contributing to improved performance in our bedding, bath, and tabletop categories. Additionally, this fall, we will expand our successful Flex brand into the kids category, launching in 300 stores and online. We continue to work diligently to find the right balance in our assortment to deliver what our customers expect from their shopping experience at Kohl's. We believe there is a substantial opportunity for us to lean into our value-oriented proprietary brands to offer more relevance and quality at an affordable price point to our customers. The next action we are taking to deliver more value to our customers is by enhancing our promotional strategies. Kohl's offers an incredible product assortment with a mix of national and proprietary brands. Our national brands serve an important role in meeting our customers' needs as they bring awareness, relevance, and quality to our product offering. However, over the past few years, we have excluded a large number of these brands from our coupons. This created friction with our customer base as we were not providing the value they were looking for, especially with our loyal customer. Toward the end of Q1, we implemented the first phase of making more brands coupon eligible. This change generated an immediate positive response in our digital channel where pricing transparency plays a significant role in customer decision making. As the quarter progressed, we saw the performance improve in our stores as we increased investment in in-store signage and marketing. This resulted in over 800 basis point increase in the penetration of sales included in the coupon in Q2 when compared to the prior year. Given the success from this change earlier this month, We made the decision to launch a second wave of brand inclusions for smaller, more digitally native brands. We will continue to analyze the performance from this initiative and make additional decisions as we continue to learn what is resonating with our customers. Now, let me turn to our last priority, which is delivering a frictionless experience across our omnichannel platforms. Our goal is to create a simpler, more reliable experience, both in stores and online. To deliver this elevated experience, we're focused on optimizing our store layout, increasing inspiration, and restoring trip assurance. We know we currently have an inconsistent in-store experience without a unifying point of view of what we want the customer to feel when they walk in the store. To bring our customer proposition to life in the store, we will be adjusting product flows and adjacencies, including fixture layout and product placement. as well as adding brand support, in-store marketing, and visual presentation to provide more inspiration to our customers' shopping experience. We are in the early stages of this initiative and have begun making strategic adjustments to our store layout. These changes include establishing a dedicated accessories pad, relocating juniors across from Sephora, and moving active back to the men's and women's departments. The accessories category has shown positive comparable sales, excluding Sephora, since the transition, signaling early success. Our juniors business continues to benefit from its proximity to Sephora, remaining one of the top cross-shopped categories among Sephora customers. While the active category has trailed overall, we've seen encouraging growth in key proprietary brands such as TechGear and Flex. We're also investing in impactful entry statements to support key seasonal moments, enhanced graphics to highlight value and improve findability, and additional fixtures to support in-aisle and queue line placements to drive incremental units per basket. We're also focused on restoring trip assurance for our customers by refining our buying strategies to ensure deeper inventory and improved in-stock levels in our basics and key essentials businesses. An example of these efforts is within our intimates category. In the second quarter, we exited the least productive styles and streamlined choice counts across all brands. At the same time, we invested in inventory depth for key sizes, which significantly improved service levels and reinforced trip assurance. As these actions took effect, Intimate Sales improved by 300 basis points compared to the Q1 trend and continued to show momentum throughout the remainder of the quarter. The goal for all these efforts is to create a more enjoyable and dependable shopping experience at Kohl's. We're encouraged by the initial results and are confident in our ability to build on this momentum throughout the year as we continue to reposition the business for long-term success. I would also like to take a moment to welcome Ariane Parisi, our new chief digital officer, and Stephen Dee, our new chief technology officer at Kohl's. We're excited to have both of these leaders join our team as we increase our focus on the role of our digital channels in our omnichannel model and leverage technology and information platforms to effectively drive key business initiatives. We look forward to their future contributions here at Kohl's. In summary, I would like to reinforce three key messages for you. First, we are pleased with our Q2 performance, which came in ahead of our expectations. Second, customers are continuing to be choiceful with their discretionary income, and we are working relentlessly to meet their needs by providing quality products at a great value. And last, we are continuing to make good progress against our 2025 initiatives, However, these efforts will continue to take time and we are focused on showing progressive improvement each quarter. I will now turn the call over to Jill.