Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Kohl's Corporation Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mark Rupe, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, operator. 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 incorporate 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 and investor presentation, both of which have filed as exhibit to our Form 8-K with the SEC and are available on the company's Investor Relations Web site. Please note that this call will be recorded. However, replays of this call will not be updated. So, if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me today are Michelle Gass, our Chief Executive Officer; and Jill Timm, 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. A lot has happened since our last earnings call on March 3. The escalation of the COVID-19 pandemic has challenged the world in ways never thought imaginable. It has affected each of us to varying degrees and has had a significant economic toll. I hope you and your families are safe and healthy during this time. As difficult as this unprecedented health crisis has been, I am comforted by the resilience and generosity that's been exhibited by so many. Our sincere gratitude goes out to all of those on the frontline that have worked tirelessly to support the greater good. I'd like to thank our associates for their support and commitment as we have continued to operate portions of our business. I would also like to recognize and thank our many business partners and vendors that have been instrumental in helping us navigate through this crisis. We've had to make difficult decisions to ensure our business continuity, and I am incredibly proud of how our organization has stepped up to the challenge. We've learned a lot, and we'll be sure to leverage these insights into the future. We expect we'll be operating differently for quite some time, but we are pleased that we have now begun the rebuilding process. We have taken our first step in this direction, and it has begun to reopen stores. As we continue to move forward, we will do so with the health and safety of our associates and our customers remaining our top priority. For today's call, I'm going to discuss how we are navigating the current environment, touch on our first quarter results, review our store reopening strategies, and then share with you an update on our strategic initiatives…

Thank you, Michelle and good morning everyone. I will start by providing some additional context on the actions we've taken in response to COVID-19. I will then discuss our first quarter results and share some high-level thoughts on our business for the remainder of the year. From the outset of this health crisis, preserving our strong financial position has been a top priority. We leveraged our operational excellence strengths to swiftly and aggressively manage our cash outflow. Our first action was to address inventory given the anticipated COVID-19 sales impacts. We immediately pulled back in March and April orders, which allowed us to reduce first quarter receipts by over 30% and helped us manage inventory down 3% to last year. We expect to further reduce inventory in the second quarter as we lowered our receipts by more than 60%. We also partnered with our vendors to extend payment terms. Our quick and aggressive response to address our inventory receipts significantly enhanced our financial flexibility. Next, we reduce expenses across all areas of the company. Our largest declines came in store payroll due to the store closures and marketing where we significantly reduced all of our media, while continuing to invest in digital. We acted promptly and given the timing of the crisis, we realized most of the benefit in April. Another important measure we took to improve our financial position was to adjust our capital allocation priorities. We've been very consistent in messaging our approach to the deployment of cash. First, we invest in the business. Second has been our commitment to the dividends. Third, is opportunistic and complimentary M&A. And fourth has been funding share repurchases with excess cash flow. Importantly, each of these four are supported by and evaluated through the lens of maintaining a strong balance sheet.…

Thank you [Operator instructions]. The first question is from Bob Drbul with Guggenheim Partners. Your line is open.

I have just a couple of questions. I think first, I think largely for Jill, on the payables line, can you just give us a little bit more color in terms of how the payables are structured given the cash balance and sort of some of the terms that you have in place on your payables? And then the second question is on the reserve for excess seasonal inventory, can you maybe just elaborate a little more in terms of how big that reserve is or just especially how that's going to flow through especially given to where the inventory levels are on the books at this point? Thanks.

So obviously, Bob, this quarter, we took a lot of actions to preserve our financial position and minimize our cash outflow. One of those actions was to work hand-in-hand with our vendor partners to extend our payment term. So, we did extend our term with all of our vendors. The merchandise vendors we extended up to 100 days, which obviously helped us bridge the store closures and maintaining that cash flow to the point in which we could open stores. So, the timing worked out really well as we now have stores opening as a source of cash inflow and now as we'll go back to a normalized payable structure going forward. In terms of the reserve for inventory, obviously, this is atypical for us because of the retail inventory method that we're on. But recognizing that the stores were closed, we did have excess inventory, so we did a cost adjustment to that inventory. So, you would see it as an impact to both gross margin and a reduction of inventory recognizing that it was accessed during the quarter. And so that is essentially going to stay with us as a reduction of inventory.

The next question is from Mark Altschwager with Baird. Your line is open.

I was hoping you could talk about what you're seeing thus far in May overall, and just any early takeaways from the stores that have reopened? And overall, just can you give us a sense of the various scenarios you're planning for, for the remainder of the year? And then understanding that there's a lot of uncertainty and what the demand backdrop will look like, just thinking ahead to 2021. Do you think it's possible for EBIT margins to get back to 2019 levels without sales fully recovering? Thanks.

So Mark, Michelle here. I'll take the front end of your question, and then I'll have Jill comment on the EBIT margin piece. So first of all, in terms of May, let me add a little context color on both of our channels. Let me start with digital actually. So, as you heard in our remarks for the quarter, we were up 24% but we really saw the acceleration towards the end of March and into April with April at plus 60%. I also do want to add a little color to that as well. Some of our categories really did phenomenally well. Our home business, our kids business and our active business, were all north of plus 100% during this time. We've continued to see that momentum actually accelerate into May. So, we are feeling very good about our digital channel, and that's been a result of a combination of really leaning into our digital marketing efforts, adapting our site to be addressing relevant categories, and then the introduction of our curbside drive up, which we introduced on April 2, which we do plan to continue even as we open up stores, so that’s on the digital side. On the store side, we started opening up stores in early May. So on May 4, we opened about 50 stores, about 5% of our base. We opened about 25% of our stores last week and we just got to 50% yesterday. So, it's very early days. What I can tell you is that as the stores have been opening, they've been doing 50% to 60% of productivity that we would typically see at this point in time. So, there are customers in our stores, and we're happy about that. And we're encouraged by seeing the progressive improvement of the stores that have now been open two weeks. So, where they started at 50% to 60%, we've actually seen them ramp up in their second week. Now, I will caveat and say that 5% is only 50 stores. But like I said, we are encouraged, and we know that that’s going to take some time. As it relates to the balance of the year, I mean we are planning the business very conservatively. We are in a very uncertain time. There's a lot that could unfold in the coming month. So, we're taking a very prudent approach to how we're planning inventory, how we're planning expenses to navigate through the balance of the year, and we will do everything we can to be fluid in response to demand. So, if our demand is actually higher than we expect, we've demonstrated our ability to chase goods, even when our inventory is suppressed. So, I think again the theme on this would be prudence, but our ability to chase into goods and to also amplify things like marketing as we see where the customer goes through the balance of the year. And then I'll let Joe address the margins.

Yes, what I would say is right now obviously, we're in uncertain times for planning the business incredibly conservatively. It's why we haven't given guidance and to look out to 2021, Mark. We're going to run several different scenarios. But I think as Michelle said, they're all going to be incredibly conservative. We're going to manage down our inventory. We're going to continue to leverage our cost discipline to manage down expenses. And then as we indicated, we do expect there will be some pressure to our gross margin line as digital continues to out penetrate. But as we look across the organization leveraging operational excellence, we're going to find ways to offset those costs throughout the organization, including deployment of technology to make us much more efficient on how we fulfill orders and how we allocate inventory. And then as well we expect a heightened promotional environment, which will weigh on our sales. It is a strength of ours. We will lean into that strength. We've done this well. As we've watched other disruption in the retail market we've taken advantage of that through strategies of marketing and we'll deploy those strategies today as well. So we continue to grab market share. But I think it's just too early to tell what we will see in 2021 from a margin perspective.

If I could just ask a quick follow-up. To the extent we see a step function change in digital mix. How do you see the store operating model changing, such that it can remain 99% four wall free cash flow positive in the new normal?

I think first we use our stores, as Michelle mentioned in her comments, to fulfill over 40% of our orders. We just launched drive up, which you've seen was very much adopted by our customer at 15% and the eligible stores, so it's surpassed BOPIS. So, we'll continue to market for pickup, whether it be with BOPIS, costs and now our drive up mentality. So we leverage our stores, I think not just for the experience component but also for fulfillment. But I do think we're encouraged by the adoption we've seen in the progressive improvement just in the first two weeks of our stores opening that they are still highly relevant to the customer. As we look out, we do an annual review of all of our stores, Mark. So, we will continue to do that review. And if we see that the customer behavior is changing and those stores don't stay 99% positive cash flow, we will then look at opportunity to close, which we've shown you doing in the past. We've just done it on a minimal basis because of the health of our store base.

The only thing I would add to that is, as we over time have reviewed our business looking at our stores, proximity and digital sales, they've actually strengthened each other. And so, we actually look at that as an asset. And our omni-channel customers, those customers who shop online and stores are our best customers. And we're actually seeing those omni customers buying more during this period, obviously online and we'll be studying that as we look to more stores opening.

The next question is from Oliver Chen with Cowen. Your line is open.

What would you highlight as some of the permanent changes that will happen as a result of this? And any big surprises along that line? You've also been really agile with planning across many disciplines. Given the reality of the promotional environment ahead, how do you prepare for that in advance as best you can. And also, when thinking about inventories, it's been a challenging environment as consumer demands have shifted rapidly as well. What are your thoughts for Q4 inventory planning and some of the challenges and opportunities as it's not easy for the vendor community as well? Thank you.

Michelle here, I'll answer and add color to your question. So first of all, you sort of asked the question around permanent changes to our business coming into or emerging from this COVID period. I think the obvious one is clearly how our stores operate and whether or not this is for a year or forever, but all the safety precautions that we've put in place, those have been really embraced well by our associates and our customers. Feedback has been very positive. I'm obviously interacting a lot with our field. I've been in some of our open stores and everything from the plexis to the use of masks to right now, it's reduced hours that could be fluid as we see things unfold. And we're doing a lot around our associates as well, making sure that they're safe and well when they come into work, things like temperature checks. We are taking the opportunity to take a step back and look at our business as you would expect. I think there's some tactical changes we're making. So, if you go and visit the store, you'll see we've cleared out spaces like our racetrack design where we removed a lot of the impulse areas to create more space and we actually believe it's creating a better shopping experience for the customer. So, that's one. But I think importantly, it's really understanding where the consumer is going in this kind of post COVID environment. What -- from an economic standpoint, what that looks, I’d say the good news there is we stand for value, so we expect to be as if not more relevant during this period. We will obviously lean into categories that the customer is responding to. So, again, I’d say the good news there is we've been on…

And on the promotions front and customers looking for value. What is the best way to manage that, and a lot will be out of your control with the competitive landscape and how this manifests as well?

We're fully anticipating it will be a promotional environment, given the inventory that's out there. As you know, we did take our markdowns, as Jill spoke to earlier, and she also said, we're expecting a promotional environment. And so we're planning for that to create margin pressure as we look ahead, and I think the same thing goes. We're going to be very present to it. Wwe're going to see how our customers are responding. I would say, the good news here is we know how to do promotions, we know how to leverage our Kohl's cash, we know how to do great sales, friends and family events, the list goes on. So, we will flex those promotional muscles as we see fit to make sure that we are driving the kind of demand and traffic that we need to.

The next question is from Lorraine Hutchinson with Bank of America. Your line is open.

You mentioned that you lowered second quarter receipts by about 60%. Is that the way you're thinking about sales for the quarter? And then are you ordering down similarly for the second half receipts?

We obviously have not put guidance out in terms of sales. What I would tell you is we're taking an even more cautious approach to receipts than our sales. I mean, our expectation in terms of as we kind of emerge and open up our stores is that we're expecting greater returns on inventory, that's been part of our strategy. I think this is a forcing function to enable that. So really we don't know how sales are going to unfold. Like I said, we're cautiously encouraged by what we've seen in the first couple weeks but it's a very small set. And we know that this entire crisis is a very uncertain time. So while we haven't provided specific sales expectations, know that we can drive more sales if the demand is there. And like I said earlier, we can chase product as we see the demand come forth.

And then as you think about opening each store, what's the level of sales that you need to offset the cash burn you faced initially to get that store open?

Yes, it's very low in which we need to offset the cash burn in terms of what we have to open. First, obviously any dollar we get does help us at a fixed cost that's there anyway. So we look at it that way. But we run a really lean model, as you know, Lorraine. I mean, the biggest variable costs for us right now is store payroll and we have shown that we run a very lean model for store payroll. We've flexed it incredibly well when it comes to sales. So as you look at how we're opening up our stores, we're opening up one entrance, so not all of our cash registers will even be open. We're not including fitting rooms. Obviously, the receipt reduction is incredible. We don't have to staff labor there. So there are a lot of ways that we're able to cut labor out to run it lean. So it's a very low hurdle for us to look at and suggest can we or can't we open up those stores. Also it comes from a very healthy base. So remember, 99% of our stores were cash flow positive last year. So that goes through a large gain. As you know, we have large stores and small stores. So it does show we know how to operate that model on the big ends on their big volume stores, as well as the small volume stores. So we're deploying all of those lessons as we open stores today.

The next question is from Dana Telsey from Telsey Advisory Group. Your line is open.

As you think about the exit of the eight brands that you have. What kind of volume are you exiting from those eight brands? And how do you think of positioning of new brands that you had talked about, like Vylette for juniors? Does that still move forward or does that extend to next year? And then given payroll costs given that now you bring stores back online, now with the new initiatives cleaning and what maybe. How do you think of the costs? And is there a higher breakeven on sales that you need in order to leverage some of those higher costs of the new ways of doing business? And just lastly, how did the women's business do anything that you saw there? Thank you.

I will take your question on women's, both the brands and what we're seeing in the women's business and I'll let Jill add to the other one. So as it relates to women's, I’d say overall we're still highly committed to the women's business. Obviously, in the short term we're facing some challenges here but we -- as part of just the overall COVID-19 challenges. But that being said, we are seeing some bright spots on the women's business. Our contemporary women's businesses performing well. And as I mentioned earlier, our overall active business is doing really well, north of 100% in the month of April, and that includes our women's active business as well. So, highly relevant to this time period and areas like our basics, intimates, sleepwear, all doing well. So we're encouraged to see that kind of momentum online. Obviously, we'll be monitoring that as we now open stores, but we remain really highly committed. As it relates to the exit, there's a couple of objectives. One is overarching really the need to drive greater focus and clarity with our women customer. So these eight brands were down-trending. They were our least productive. And we think exiting them will create focus and clarity on the brands that will continue. So not only the new brands but our existing very strong brands, like Sonoma as an example or simply Vera Vera Wang or Lauren Conrad. We obviously are also using the space on some of the newer brands that we've either just recently launched or that plan to launch. So that includes Nine West that we launched last year, which we're highly committed to. We're in the process of launching Vylette, as you mentioned. We just in the spring introduce Elizabeth & James. And then of course we have the Lands End launch that's coming up later this year that we think is really going to be a great addition to our classic customer. So we think the combination of clarity, reducing choice count, fewer brands, really elevating our existing strong brands and then bringing in some newness that is highly relevant to our new customers, especially the millennial customer, we feel like we're on a good pack there. And I'll pass it over to Jill.

And Dana just to step back, and you know we have an incredible strength when it comes to cost. Our SG&A has only increased 1.5% over the last five years on a compounded basis. So we've found ways to offset incremental costs like wage pressures that we've increased over the last several years. Clearly, our number one priority is the health and safety of our associates and customers. So we're going to invest in ensuring we have an clean environment and that we have the right safety measures in place, and we're providing our associates with the PPE that they deserve, the mask, the gloves, et cetera. So, those are costs that we will make an investment in. But we will leverage our operational excellence initiative to find ways to offset that. So we can continue to drive down SG&A cost for the remainder of the year like I indicated in our comments.

The next question is from Matthew Boss with JP Morgan. Your line is open.

Michelle, as we think through lateral store closures and the bankruptcies that are happening in the space, and we think about that relative to the merchandising changes that you're making in women's and active. How do you see Kohl's position to potentially take market share out of the pandemic? Aand any offensive initiatives that you're specifically focused on to take advantage of all of the disruption that's currently in the space?

I mean, clearly, we're in this unprecedented period of change and consumers changing their expectation, and as you just said, the marketplace is changing. We're staying very close and making sure that we can lean into those market share opportunities and take advantage, and we do feel like we're in a strong position to capture market share. I’d say first is our store base. 95% of our stores are off-mall. And we believe that this is really an advantage, especially in a kind of COVID or post-COVID environment where customers are not only looking for the convenience that that always offers, but also a really safe environment. And as we've been talking about, we've taken above and beyond measures to ensure that our customers really feel safe as they walk in the door. And we think our stores are, they're spaces, they're big, they're kind of naturally built for social distancing and we've enhanced that further. We take a lot of pride in how clean we show up every day. So, we do think that as customers are making choices of where they want to go, now we're adding this layer of where am I going to feel safe. And we believe Kohl's is showing-up really, really well on that standpoint. As you know, we've talked a lot about innovating within our stores, innovating and investing in the experience, bringing in new concepts like Amazon returns, which as we open stores, we're bringing that back and that will continue to be a priority. So that customers again are looking at Kohl's as top of choice in terms of where they want to shop. So, stores just for a second I would point to value. I mean, we know we're going to be an environment where value is really critical. When…

Jill, maybe as a follow up. So overall what percentage of your expense base is variable today? And I guess, could you just expand on the comment that you made about continued SG&A reductions through the year, as we think about maybe the cadence for 2Q and the opportunity on SG&A versus the back half of the year, because I think you've talked about the rebuild process.

Well, obviously we expect our SG&A to be down the rest of the year. It'll obviously flex on a couple things; one, will be sales; two, we will make an investment back into the safety and cleaning for the associates. But given the prudent approach and the conservative approach that we're taking, we do see it being down the remainder of the year. Obviously, we’re not giving guidance at this point. As I indicated in my remarks, we expect it to be balanced. So, we saw a huge decrease in April as our stores closed. Now, as we're reopening we’ll expect the SG&A follow as well. In terms of variable versus fixed, Matt, I would say that we broke the mold on that. We aren't looking at anything as a fixed cost this time around. We went after every cost to take it out of the business. And the two examples I would give you is one, marketing. Typically in the past, if we would see sales lagging, we’ve leaned into marketing to drive more sales. In this case, as Michelle indicated, we cut all of our marketing with the exception of digital. So we weren't trying to create sales demand, we knew there wasn't any and we stuck to the digital channel and obviously that worked well for us. We saw that progressive improvement in our digital business up 60% in April. Second, we used it in technology. We exited our third party contractors. We went back and looked at contracts to see if we could actually renegotiate them to cut costs out of that space as well. And those are two places I would suggest in the past would have been more in the fixed realm. And the third example I'll give and although this wasn't necessarily an expense cut, but we did addressed rent. And we worked in partnership with all of our landlords to come to a deferral solution. And in the cases that we didn't defer rent, we did make the payment but we were actually in a really good place. Our property development team did a great job in working with them proactively, so we were able to make those referrals and preserve the cash flow. So in light of what we just went through, I would say we kind of broke out of the fixed versus variable and put everything on the table and went after that, and you’ll continue to see that mentality the rest of the year.

The next question is from Omar Saad with Evercore. Your line is open. Omar Saad with Evercore. Your line is open. Please go ahead.

I have a couple follow ups. In terms of the run rate you're seeing in the stores that have been opened recently, I appreciate that color. Are you seeing 50% to 60% and building from there? Are you seeing any impact on the e-commerce side in those markets eating into the e-commerce business as the stores reopen? And then also, any color on what you're seeing in conversion versus traffic as stores reopen? Are you seeing customers coming in with big orders and the traffic is below that level or is it kind of the go out there? Thanks, guys.

So on your second question, such early days. It's really hard to gauge at this point the traffic and conversion. So we'll make sure to follow up with you as we have more data detail in the coming quarters. Back to your first question on run rate, we're actually encouraged to see that there's been very little fall off in our digital business as these stores have opened. We're watching that closely. We're continuing to see the adoption of drive up, our associates are really excited about that, our customers are excited about it. And the digital business continues to be very strong. Overall, May has accelerated even further from April’s level of 60%. And like I said, in the markets that we're now open, which has been about 25% up until yesterday. So it's very early days but our digital business has remained very strong.

And then one follow up. As one of the upshots here, I know there's a lot of unpredictability but just kind of step function acceleration in digital omnichannel, especially with the new options for consumers to pick up from the store, or drive thru or drive by pickup. Are you guys happy where you are on IT, logistics inventory visibility, inventory logistics capabilities, to really kind of meet that step function change? Or are there some incremental investments and skill sets that need to be built there? Thanks.

So I would say yes and yes. I’d say we are very pleased with the level of innovation and agility that is coming out of our teams right now. And that's been strengthening over the last couple years, but I would say over the last couple months that has been a step change. And really across all levels of operation, our ESCs have continued to operate. Our stores, as we mentioned in our remarks, 40% was fulfilled from our stores that's helping us on many fronts, including leveraging our inventory there and then rapidly scaling within a matter of weeks just drive up that we see as a continuation. But to your point, we expect this higher penetration of digital to continue. So I’d say on two fronts. One from an innovation standpoint, making sure that we're offering great experiences to our customer, really leveraging our entire kind of omnichannel capability, driving innovation. And then secondly, also through our operational excellence recognizing that there's going to be opportunities to reduce costs and reinvest from a customer facing standpoint. So, we have efforts really on both fronts. But I'm very encouraged, I think the team has been doing a great job and more to come on that front.

The next question is from Chuck Grom from Gordon Haskett. Your line is open.

This is actually Garrett Greenblatt on for Chuck. Thanks for taking my question. I just have a one quick one regarding your credit revenue. You mentioned that it was primarily coming down for the rest of the year as sales slow and JCPenney kind of guided to that 6% reduction this year for FY20. I was wondering if that's kind of like a high number for what you guys are expecting or if you could provide more color on that front?

So obviously we didn't see any impact to credit revenue in Q1, but our stores did close in the quarter and you saw a significant impact to our top-line from that perspective, given that we do expect there to be some pressure to credit revenue as the year persists. They are our best customer, so we do see them coming in shopping the most with us as well as the basket. So I don't think it's a one-for-one with the top-line. But at this point, I think it's just too early to give you any type of guidance on what we expect for the rest of the year. Also, as we emerge from this crisis, depending on what economic crisis persists, we'll have to be looking at what those type of pressures also lend to. If we go back to 2008, our portfolio did incredibly well. I think we outperformed the market. We take a lot of care working with Cap One and who we extend credit to, which does help us mitigate some of the risks on the portfolio as well. So, I would expect that with sales down, we're going to see some pressure to credit revenue, but I don't have an estimate that I'm going to share at this point.

Our final question for today is from Paul Trussell with Deutsche Bank. Your line is open. Paul Trussell with Deutsche Bank, your line is open. Please go ahead. It looks like Mr. Trussell is unresponsive.

Okay, we'll close it here. Thank you to everyone listening on the call today. Please be safe and stay. And we look forward to updating you on our progress in August.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect. Thank you.