Ladies and gentlemen, thank you for standing by. Welcome to Kohl’s Q1 2019 Earnings Release Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, today's conference is being recorded. I will now turn the conference over to Mr. Mark Rupe, Vice President of Investor Relations of Kohl's Department Stores. Please go ahead.

Thank you, John. Certain statements made on this call, including projected financial results and the company’s future initiatives are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl’s intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans, or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl’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 Kohl’s most recent Annual Report on form 10-K and as maybe supplemented from time-to-time in Kohl’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 will make reference to adjusted net income and adjusted diluted earnings per share which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures can be found in our press release, which is filed as an exhibit to our Form 8-K with the SEC and is available on the company's Investor Relations website. Please note that this call will be recorded and be available for replay through June 21st. Replays of this call will not be updated, so if you’re listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl’s undertakes no obligation to update such information. With me today are Michelle Gass, our Chief Executive Officer; and Bruce Besanko our Chief Financial Officer. I will now turn the call over to Michelle.

Thank you, Mark. Good morning and welcome to Kohl’s first quarter earnings conference call. As we closed out 2018, we spoke to you about the momentum we've had over the past two years and our optimism entering 2019. While we continue to remain excited about our strong pipeline of innovation and newness, we acknowledge that the year has started off slower than we'd like and we have adjustments under way to get us back on track. The first quarter featured a lot of volatility with February being particularly tough. And while March and April trends did improve, they were below our expectation. This is reflected in our Q1 comparable sales decline of 3.4%. While we are disappointed in our sales performance, the team was agile and reacted appropriately by managing expenses, while continuing to invest in future growth. It's a highly competitive market and we've seen more aggressive pricing and promotions in categories like Home. Looking ahead, we plan to be more aggressive in driving top line sales to regain our momentum and grow market share. As Bruce will discuss in more detail based on the soft start to the year, the adjustments we are making to be more competitive and higher cost due to tariff we are planning the year more conservatively. We expect softness to continue into Q2 followed by a return to growth in the second half of the year, as we deliver on our strong pipeline of innovation. We are incredibly excited about the nationwide rollout of the Amazon Returns program, which we expect to be a significant traffic driver to our stores. And we also have several important brand launches as well as program expansions. We are confident that the combination of these initiatives will drive incremental sales in the second half of the year. I'll now turn the call over to Bruce, who will provide details on our financial results. After Bruce's remarks, I will return to add more color on the business and update you on our key initiatives.

Thanks, Michelle. The 3.4% comparable sales decline that Michelle just mentioned was driven by a combination of unfavorable weather, soft home category sales and less productive key promotional events. Weather was challenging during the quarter resulting in suppressed demand for our spring seasonal goods, which were down high single-digits; while in contrast all goods were up high single-digits. Digital sales remained strong growing high single-digits, which was on top of the mid-teens percentage increase in the prior year. From a line of business perspective, Children's, Men's and Women's outperformed the company, while Home and footwear performed below the company average. Geographically, the Midwest and Mid-Atlantic regions were the strongest followed by the Northeast. We attribute the relative strength in the Midwest to competitor store closures. Michelle will provide more color and comments on our sales results in her remarks. Moving on to gross margin and inventory. Despite the softness in the quarter, gross margin was consistent with our expectation decreasing six basis points. First quarter margin reflects an unfavorable mix shift between spring and fall goods and higher penetration of digital sales resulting in increased cost to shipping. Our inventory per store decreased 1% and our units decreased 2%. We continue to manage inventory at the omni-channel level and are benefiting from our key initiatives to strategically reduce inventory levels, such as standard to small, localization, choice count reduction and speed. Given our Q1 results, we now expect a low single-digit percentage decrease in our inventory levels in dollars for 2019. Consistent with our expectations, SG&A increased 1.2% or $16 million to $1.3 billion. Our stores organization once again reacted to the dynamics of the business and did a good job managing their expenses. Marketing expenses were higher, as we continue to make investments to target market share gains over…

Thank you, Bruce. As I said in my opening remarks, the year has started off slower than we'd like. Our first quarter sales performance did not meet our expectations. As Bruce mentioned, the sales decline in the first quarter was driven by three things, unseasonable weather, soft business in our Home category and less productive key promotional events, all of which we are actively addressing. Let me provide some additional perspective on each of these. First, as we indicated on last quarter's call, February sales were challenging. This persisted into March and was clearly visible in the disappointing performance in our spring seasonal goods. As the weather turned however, we did see an improvement in demand. And apparel sales in particular showed strength as the quarter regressed with combined March and April sales flat versus the prior year, validating that our core offering remains healthy. Second, the sales performance of our Home category was below our expectations, a reversal of last year's Q1 trend when Home led the company. The sales decline was driven by an increasing level of competitive activity as well as a lack of newness compared to our offerings last year which we are addressing with several brand launches this year. These include, the fall Home the core launch of Scott Living at Kohl's; the expansion of Amazon-branded smart home products to over 600 stores; and the launch of a new exclusive line of soft home goods by Koolaburra by UGG. The third factor that impacted Q1 sales was marketing. We see this as an area of opportunity as some of our key promotional events weren't as productive during the quarter with our customers. We are reexamining both spend level as well as media mix, as we progress through the year. While sales pressure has persisted into…

[Operator Instructions] And first we'll go to Matthew Boss with JPMorgan. Please go ahead.

Thanks. So maybe just to break down the 440 basis points slowdown in comp relative to the fourth quarter, I guess what was the breakdown between transactions versus ticket in the quarter? Could you elaborate maybe just a little bit more on some of the competitive changes that you've seen in pricing and promotion? And then finally, what's the lift that you're assuming for Amazon in the back half of the year from a comp perspective?

I'll take the first and third questions Matt. So, on the third portion of the question on Amazon, we're not going into any of the details on the economics. But obviously we expect that there will be a good draw of traffic from the returns. And consequently, it's our expectation that we'll be able to translate that traffic into sales. We also have spoken just a second ago about the SG&A impact for the payroll on reverse logistics, but that's about all we're going to say in terms of the economics. But there is an expectation of obviously a sales draw. On the first part you had asked about traffic. We had a good – we've had great momentum for the last two years in sales. Part of that was driven particularly last year by traffic benefits. Obviously, given the level of decline that we saw in the first quarter here you can assume that traffic was a challenge. But that's – we're not going to go into the breakdown of those components, but it's obviously that this was obviously it’s a soft start to the year and we have a lot of work in front of us.

Yes. So and I’ll build on that as well. So specific to Q1, I guess to elaborate a little bit on what we commented on. We really do attribute to three things. Number one was weather; second was Home; and third was our promotional activity. So on the weather front, and I think we've talked about for a long time that we do have a dependence to our seasonal business. And so we benefit when it's strong and sometimes we face the headwinds when it's unfavorable. And unfortunately Q1, I think you can relate to the fact that it was in many parts of the country it was unseasonably cold, and especially in the core areas where Kohl's has strength like in the Midwest and Northeast. So that definitely had an impact and we saw that especially exaggerated in February. It did improve in March, April. And I think I mentioned in my commentary that actually our apparel business in March, April got to flat. But all together when you just take the quarter in aggregate, our spring goods were down high single-digits. Now in contrast our fall goods were actually up high single-digits. The practical reality there is the team is doing such a great job managing inventory. We came into Q1 really clean. So there wasn't a lot of fall goods to actually sell because we were on the down cycle on that. So that definitely was a headwind. I view this as kind of a temporary thing. Obviously, as the weather picks up in Q2 and we've seen that already improved. So again, I think pointing to the strengths in our apparel business in March, April really highlights, there isn't a core systemic challenge there. Moving over to Home and it is somewhat related to the pricing…

Great. And then just a follow-up, Bruce, given the competitive pricing and promotional changes that you're making, it just really seems like an offset to the inventory management initiative which was doing pretty decent job in mitigating the e-commerce pressure. I guess do you still believe in positive gross margin expansion multiyear? Or is it best not to think flat beyond this year as a result of some of these competitive changes?

Yes. I'll refrain from commenting on any sort of long-term trends at this point with respect to margin. I can't tell you that we are absolutely committed to getting back the momentum in the business that we are all laser-focused on at this reset is the result of the disappointing start that we saw in Q1 and as Michelle mentioned, the expectation of some continued softness in Q2. We do expect the back half to be much more robust in part because of the Amazon rollout and because of the new brand launches that Michelle went through. And in regards to gross margin, we're taking it down. There's -- the two drivers of margin right now are the increase in tariffs that we just didn't have baked into our outlook and the fact that we're going to be more aggressive in our pricing and promotional activity to go capture this market share that we think we deserve. And so best driver behind the 20 to 30 basis point decline. I would also say, in the second quarter there's another -- there's some permanent markdowns we're going to take in beauty as we roll a new beauty brands. And so that will have an effect on the second quarter which is why it's going to lag a little bit in Q2 relative to this new guidance of down 20 to 30.

Great, best of luck.

Thank you.

Our next question is from Bob Drbul from Guggenheim. Please go ahead.

Hi, good morning. I guess Michelle, the first question I have is can you elaborate on the active? I guess you said active apparel was positive, but the footwear piece of it was a drag. Can you just talk about what you're seeing there from a trend perspective? And like you said you're increasing some more space. Is that going to be more apparel space? And I don't know if you could maybe elaborate a little bit more on I think you said these were doing well, but just the puts and the takes because that's been a pretty strong driver for you over the last few quarters and years.

Yes, great question Bob. We remain very enthusiastic about the active opportunity. I did mention we start with active apparel across all three brands. We had great strength across the board, Men's, Women's, Kids and Nike, Under Armour, Adidas. So the house continues to be there. And consistent with our strategy actually across the board both with apparel and footwear, we're planning a pretty significant expansion into 160 doors. So the second part to your question, what's happening with footwear? We see this as a temporary issue, but we were kind of lapping some newness from some of our key brand partners like Nike and Under Armour, so we're a little softer in the first quarter. But there's been lots of plans underway for many months to introduce a lot of newness and freshness with our back-to-school launch. And that's really where the business is very important as we really kick off this season. So the teams have been really hard at work with our key vendors. And I'm like I said confident as we head into the back half and for athletic in particular as we launch back-to-school because that's always a big key driver for us. And then I think, I did already address, but yes our plans continue to drive the expansion. It's a significant growth opportunity for us in these 160 doors. We'll be expanding the footprint by about 25%. We tested this very rigorously in 30 of our doors. We saw great results. It was net incremental net positive to the entire store. So, it's clear to me that we have not yet fully satiated the appetite of our customers for active. And then on the Adidas front, as you asked, that's been -- this has been on fire. I mean it's doing really well, highly committed team, really with all three of our partners and with Adidas as they look to invest and to create even more interesting engaging experiences in our stores. So, as an example, we're going to be growing today. We have about 75 launch pads. So, they're kind of shop-in-shop for Adidas can become launch pad, but like shop-in-shop and we're introducing another 100 of these launch pads across the country because they've been so successful and so productive. So, the active story continues. Overall, even despite the footwear headwind, active did have a positive comp, really driven off of the success of apparel. And we expect both will be positive as we get to the back half of the year.

All right. And I guess my second question is around the lack of productivity in some of your promotional events. Do you think there's been a change in the consumer mindset over the last few months? And you called out some rising costs on the tariff stuff. I'm just curious if you could maybe address both of those and your ability to sort of mitigate some of these rising costs that you're seeing?

Yes, it's a great question Bob. I think we like everyone else are staying close to the consumer. All the indications continue to be really strong in terms of unemployment, customer confidence. Perhaps they've -- things like customer confidence have come off a little bit from being exceptional tailwind that we have last couple of years. But that being said, we do see the customer as healthy. As we look at our soft start, we would point to either macro issues like weather which we are particularly susceptible to or some of the things that we're course correcting ourselves. And it's probably worth mentioning as well even on the marketing front, we are still acquiring new customers. So, that's been a key strategy for us. We saw that occur again into the first quarter. Our opportunity is to drive even more trips and frequency across the Board and we've got our team here that is highly focused. We're testing some new things. But I think we're going to see an impact. I believe we're going to see an impact right in Q2 and surely for the back half.

And then on your tariff-related question, let me just make a couple of comments Bob. So, we're obviously disappointed to see the increase in tariffs from 10% to 25%. Right now these tariffs primarily affect our China-sourced merchandise in our home and accessories business. Of course apparel and footwear at this point are not impacted. That home and accessory business for us is mainly national brands. China is not our largest source of merchandise, but it is a big one. It's a little over 20% of our goods. We know though, and this is the important point, we know that our customers are driven by our value equation. And so we want to make sure that our pricing is right for the customers and for Kohl's. And so the actions that we're going to take going forward are to be sure that our customers receive that value and that they come into our stores. We're going to take a prudent approach in terms of modeling these tariffs which is what we've done so we can have maneuverability with respect to our pricing behaviors.

I'll just build on what Bruce is saying regarding the tariffs. I mean, it's fair to say, it's still a very fluid situation right now. Our teams are working very closely with our vendors to make sure that collectively we've got a strong plan. So that's been of the highest priority for our merchant leaders and merchant teams. But I think it's important for us wherever this nets out, we're looking at this from a long-term standpoint and we're looking to make sure that we can protect the customer and protect our market share.

Great. Thank you very much.

Our next question is from Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

Thanks. Good morning. It seems like to offset the incremental SG&A that you guided to you need about 1.5 of comps from the Amazon initiative. How does that compare to the test results? And are you building in any kind of different performance based on the overall geography of the footprint versus the test market?

So that's a great question. Thanks for that Lorraine. So we're not going to share anything specific in terms of the details of what we've embedded in our assumptions for Amazon. We do expect that it'll be a contributor to the return to growth that we expect in the second half along with the brands and the expansions that Michelle talked about. The SG&A is obviously an increase. That's the result of the processing and payroll that we expect. Here's the important concept here is we know that we will receive traffic from Amazon customers coming into our stores. We need to take that traffic and convert it into sales. And we've modeled some sales into the back half and we're pressing our teams to be sure that they do that efficiently and that they do it well. And we're going to -- this is our number one priority for the company and we're not going to -- we're going to make sure that we get everything we think we can.

Yes. I'll let me build on that as well because it is as Bruce just said it is very top priority. It's a top priority to clearly maximize the benefit for both organizations right? We both have a lot to gain here in terms of the customer experience both Kohl's customers and Amazon customers. And I also think it's important that we do view this consistent on how we view all these initiatives as a long-term bet for us. It is about driving traffic and sales in the immediate term. And we've studied this for 18 months so we feel confident about that. But I think what's really key and what our data would suggest is that we're also bringing in new customer and we're bringing in a younger customer. And so as we think about the long-term value that is significant. So like I said we tested it for a long time. I feel very confident in the execution capabilities of our organization. That's something we're really strong on. And in terms of what the rollout looks like we learned a lot through the test. We've optimized. It's not an easy thing to do to get the whole end-to-end chain fully working and optimized on. But I think again given the sophistication of the team we were able to do this. And frankly nobody else that we can look to has created this type of experience. But I think the thing to take away is we clearly there is some investment. We do expect immediate benefits as it relates to once we turn this on in July. But that is an important long-term strategic priority for the company to acquire new customers.

And then you've been working a lot on speed. You have given the confidence in the softness. It sounds like you'll see in the second quarter how much can you adjust for 2Q and for the back half to make sure that the inventory is in good shape?

Yeah. It's a great question. Speed has been strategy and initiative for us for some time, and it is providing the benefits, some of which we spoke to earlier around inventory management coming into Q1. So, clean on our goods. We still even ended the quarter despite our soft sales being modestly down in inventory, but we're learning every day. So we're seeing what's working. So brands like SO, as an example, which is one of our top brands on the Speed platform, actually posted a positive comp growth in the quarter, despite all the headwinds I talked about. Our Apartment 9, women's business did particularly well. And so, it does give us the agility to react and respond. And so, it's a key driver for us. Overall, our speed brands, which in the quarter represented just north of 40% of our receipts, those brands and products collectively, did outperform the others. So, continues to be a key opportunity and we're driving it to react and respond to our business dynamics one way or the other, both as we chase into goods as we've seen that as well as course cracked where we have opportunities.

Thank you.

Our inventory is clean, and we feel pretty good about it, especially as the weather will turn.

Thanks.

Next we'll go to Dana Telsey with Telsey Advisory Group. Please go ahead.

Good morning.

Good morning, Dana.

As you think about -- hi, as you think about the promotional environment and the changes going on, are you cutting prices and layering in more promotions across the store? Or is it category-specific, like in the Home area for instance, in terms of what you're doing surgically? And as you think about Men's, the Beans category in the Women's category, what led to the strength in Men's greater than Women's? Thank you.

Sure. So, as it relates to your pricing and promotion question, what I would say is, it's definitely taking a surgical approach, and we said it a number of times. I think the Home category is kind of top of the pack on that one. The team learned a lot in Q1 in terms of where we were competitive or not competitive enough, so we are surgically addressing and that's already happening as we speak. So we expect that's going to help us regain our momentum in Q2 and beyond. As it relates to more the promotional side of it, the benefit that we have through our very deep loyalty program in our private credit card is we have a lot of data. And we are able to understand what customers are responding to. And customers are evolving all the time and the dynamics around us are evolving all the time. So, I think given our -- the data we have, the analytical horsepower that we've built, the team is digging in and really seeing how we can further optimize. So this is not a massive shift if you will. It's really about refinement and optimization, but we do believe with those refinements and optimizations that will just help us be better as we get through Q2 and then certainly look towards fall and the launch of back-to-school and then holiday. Just on that too, I know Bruce and I are speaking very confidently on back half. We have a ton of initiatives. Amazon is a piece of it, but it's only amplifying the strength that we have with all the brand launches going into the back half. And two key holiday events in back-to-school and our holiday season, which traditionally are very strong for Kohl's. So to your second…

Thank you. Best of luck.

And next we'll go to Mark Altschwager with Baird. Please go ahead.

Good morning. Thank you. So just bigger picture on the guidance, I think the midpoint of your guidance implies about a high single-digit decline in operating income over the remainder of the year versus the prior outlook that implied the EBIT closer to flat over that period. So you've made a number of comments on the drivers, but the wondering if you could just help us reconcile kind of order of magnitude why is the biggest changes were versus your prior outlook? How much of this is increased conservatism given the Q1 performance competitive backdrop tariffs or maybe just a guarded view on the contribution from the other traffic and operational excellence initiatives over the balance of the year?

Sure, Mark. So let me first start that, we're absolutely committed to getting back the momentum in the business. We view these results as simply a speed bump and we intend to go past it and regain the momentum as we move forward through the rest of the year. The outlook reset, as I said before is the result of a disappointing start in Q1 with the expectation of some continued softness in Q2 on the top line. And then, we have more confidence in terms of the second half driven by the brands, the expansions and of course the Amazon Returns. So overall, for the year then we're going to be flat to slightly down and I feel confident that we can deliver on that, and I don't have any worries. In terms of the margin, we're going to make necessary changes to pricing and promotion. I talked about the tariff impact. We will navigate that. And so the consequence of all of that is down 20 to 30 in our margin rate for the year. Q2 has a little more of an effect given that we're also going to take some permanent markdowns in the beauty area given the new brands that we're rolling in. And so that's the story behind the margin. And then on SG&A, I would tell you that the principal driver of SG&A right now is the Amazon rollout. We've increased that by about 50 basis points. And I would tell you that, we have a continued laser-like focus on our cost structure. Jill Timm is one of our executives, who's responsible for that and we're going to continue to drive forward on the operational excellence initiatives, and so I remain confident on the SG&A guidance. And I just want to take a step back and say, the management team here, Michelle and I and the rest of the management team are absolutely committed to profitable growth for our company. And there's two words there. There's growth. You have to absolutely committed to growing and we're committed to growing profitably. We've done a good job over these past two years. We're not letting this speed bump in Q1 affect that and we're going on back and get our fair share of the market as we move forward in the rest of the year.

Thank you. And then just a quick follow-up with respect to Amazon. Thinking through the timing of expenses versus sales, should this be pretty much in sync? Or any reason to think that the SG&A cost would build meaningfully ahead of the expected sales benefit?

They should pretty much be the same. I might say that as we move into Q2, Q2 will be in the annual range in terms of our increase maybe a touch to the high side of that given our expectations on things. But just focus on OE I think is going to -- should play well for us for the rest of the year.

Great. Thanks for all the detail.

Our next question is from Randy Konik with Jefferies. Please go ahead.

Yeah. Thanks a lot. I think Bruce you said that you had the Midwest was I think one of the best if not the best performing regions. And I think you attributed that to some competitive benefits as competitors closed. Just curious on if you could give us some perspective on how much better the Midwest was versus the balance of geographies? How much of that better outperformance was driven by competitor closures and/or partially helped by the Amazon testing in Chicago? Just some any clarity around that will be very helpful.

Sure. I'll start and then maybe Michelle can jump in with any added color. With respect to the geographic sales results, we did have a benefit in the Midwest. We believe it's attributable to the competitor store closures. We've seen that since call it the fall of last year. We believe we're getting more than our fair share of these Bon-Ton closures and we expect that we'll continue to put marketing against those efforts. We did that in the first quarter. That was part of the reason that we had a slight uptick in our marketing expense for the quarter. So we're going to continue to go out and grab more than our fair share of those competitor store closures. With respect to Amazon and the Amazon test there was -- the pilot was not large enough to have a material impact on the quarter. So I would not include that as an element of the geographic performance that we saw. It's mainly the -- we attribute it to the competitor store closures. And then of course, nationally we had really cold weather and precipitation which obviously was an offset as well.

And I guess just to be a little bit more clear, is there -- can you just get the level of the outperformance in the region relative to the others? And I guess, while you're not giving guidance on how much of a lift you think Amazon can provide from a traffic perspective, I think what we're all curious on is at least from a historical perspective on the tests in let's say Chicago what times -- maybe give us a couple of examples of something that that you saw were these benefits we saw in Chicago that were different from the balance of the chain that didn't have the Amazon partnerships? I guess that's what we're thirsting for. Just some perspective on what kinds of benefits we could see, obviously traffic -- but just give us a little bit of order of magnitude of what kind of changes you saw with the test and so forth. That's what we want to try to get some color on. Thanks.

Sure Randy. I'll take this one. So, first on the competitive store closures. I'll sort of reiterate that's been kind of an opportunity for us to capture market share. We have a lot of activity that is going after that business. So, marketing, of course, inventory working with our team brand partners. So, we feel good about the sustained benefit. At any given point in time whether it's regional or a time during the quarter, there's a lot of variance and volatility because you have a lot of other contributing factors. But -- so it's actually difficult to give a specific number. But directionally, we do see -- directionally, we do see a lift. So, we're going to continue to drive that. It's not the biggest piece in the equation for us. It's a notable piece, but the biggest piece for us is just how we execute against our key strategies. And I think you've heard us talk about the focus we have. I think Bruce alluded to the fact that we did hit a speed bump in Q1. There were some macro factors like weather. There are some of our own business issues and I'm confident in all the actions we're taking to address that. Then as it relates to Amazon -- as it relates to the two test markets, especially L.A. and Chicago, we tested those for 18 months, so we have a lot of data. It was important for us and Amazon to feel really good about the results and the customer experience. And clearly we do feel really good because we're taking it across our stores. I'd say the single biggest thing we saw and consistently across those markets and it was consistent and it was consistent across time was a pretty significant lift in traffic. Now, the bet for us is that some of that traffic converts over to sales and we did see that too. Given the proprietary nature of the relationship we don't share that, but one could assume that it was directionally positive on both traffic and sales in Chicago and L.A. hence we're rolling it out. And it supports the investments that we're making in things like our in-store staffing and our logistics expense. So, the model works. It works for us it works for Amazon. And importantly its part of our long-term strategy to create a great experience once the customer comes in the door to drive loyalty with those either further loyalty with existing customers and importantly create a new relationship with a new customer.

Understood. Thanks. Thanks guys.

Thank you.

Our final question will come from Alexander Walvis with Goldman Sachs. Please go ahead.

Hey guys. Thanks very much for the question. I had a few questions on tariffs if I may. So, I just wanted to clarify on what's embedded in the guidance in terms of tariff. So, could you clarify that the incremental pressure on gross margin comes from the hike in tariff on existing tariff bulk goods from 10% to 25%? Is there any details you can share on roughly how much of your assortment is currently affected? And then I wonder if you could share whether you're seeing any material differences in the impact of tariffs and the ability to mitigate tariffs for your private label goods versus third-party sourced products? Thank you.

Yes. I'll hit the first part and then if Michelle wants to add anything that would be great. Obviously, again we're disappointed to see the increase in the tariffs. In the guidance, we've assumed that there would be an impact to the gross margin which is in part why we've reduced the outlook for margin from what we previously had to the down 20 to 30. There are two components to that. One is this tariff increase and the second is to allow us to have pricing and promotional activity to get back to market share in the second quarter and then the second half of the year. So that's the basis. The tariff is a part of the gross margin rate change in our guidance. We know our customers are driven by value. And so we're going to make the necessary changes to price the promotion and drive that and we're not going to lose out as a consequence of pricing to competitors. We'll be surgical as Michelle said.

Yes. And I'll jump in as well. So just to clarify, in terms of what we've reflected is the increase from 10% to 25%, so the increase -- that increase wasn't contemplated when we first put out our guidance. And it's specific to the categories that are currently getting the 25% tariff. And for us that's largely in our Home and housewares category. That's the dominant component of it. And it's largely national brands. So I think that's really important that it's houseware it's national brands. There are some other ancillary categories, but that's the biggest piece. We're working very diligently with our vendors. This is -- I think as we alluded to, it's a very fluid conversation. There's a lot happening in the marketplace. And so we're working as by the day type of thing. But ultimately, we will do what's right for our business and importantly for our customers. And that's why we're saying really, really close and why we have built in -- we've built in the extra margin to make sure that we're prepared given where this goes and importantly that we can price and promote appropriately to be competitive. You mentioned just to close it out on the private label side. And again that's not today largely the contributor. This is a housewares and national brand story in our business.

Great. Thanks so much for all the color there. And I guess one final follow-up would be, any update at this stage how you're thinking about potential impact. There is a broadening in the list of goods affected by tariffs and other any mitigation strategies under way there as well?

Yes. Obviously, we're all in this business paying close attention. What I will tell you is Kohl's has always had a very diversified supply base and that's been a strategy with been going harder at over the last couple of years. So I think from that standpoint, we're well positioned. But clearly if it's something more dramatic happens to other businesses like apparel, there's an impact to the industry. So we're staying really close to that.

Thanks so much.

Great. Thank you.

Well, thanks everyone for listening on the call today. And we look forward to regaining our momentum on the business and talking to you in Q2. Thank you.

Ladies and gentlemen, this conference will be available for replay after 11:00 AM Eastern Day Light Time today through June 21, 2019, at midnight Eastern Day Light Time. You may access the AT&T Teleconference Replay System at any time by dialing 1-800-475-6701 and entering the access code 465049. International participants, please dial 320-365-3844. Those numbers again are 1-800-475-6701 and 320-365-3844, access code 465049. Replays are also available in the Investors section of Kohl’s corporate website. That does conclude our conference for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.