Thank you all for standing by and welcome to the Kohl’s Corporation’s Q1 2022 Earnings Conference Call. [Operator Instructions] I will now turn the call over to your host, Mark Rupe, Vice President of Investor Relations. Sir, you may now begin.

Thank you. 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 non-GAAP financial measures. Information necessary to reconcile these non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC and is available on the company’s 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 So if you are listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl’s undertakes no obligation to update such information.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 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. Before we share details on Q1 results and long-term strategy, I want to acknowledge the much broader context of this past quarter. Over the past 3 months, Kohl’s has been at the center of an unusual amount of attention and speculation. At our annual meeting last week, we were very pleased that our shareholders voted to retain all 13 of our directors. This Board is committed to overseeing the successful transformation of the company and fulfilling its fiduciary responsibility to maximize shareholder value. Through this process, we have the opportunity to engage frequently and openly with our shareholders. I want to thank each of them for sharing important feedback to our Board and management team, which we take seriously. On that note, shareholders want to ensure that the Board will continue to run the sale process with shareholders’ best interest in mind. We continue to engage with multiple interested parties. As we have described, they are working to prepare fully financed binding proposals. At this point, we have formally communicated to the multiple parties in our process the specific procedures for the submission of actionable bids due in the coming weeks. We continue with our detailed diligence phase and are pleased with the number of parties who recognize the value of our business and plan. We will update the market when it’s appropriate to do so. While these circumstances have put some stress on our team, I am incredibly proud of the resilience and perspective that our associates and leaders have demonstrated during this time. Throughout all of this, we have stayed focused, we are financially healthy and we have the right strategies in place. With that perspective, let me turn to our comments on the…

Thank you, Michelle, and good morning, everyone. For today’s call, I am going to review our first quarter results, discuss our capital allocation actions during the quarter and go-forward plan and then provide details on our updated 2022 guidance outlook. Starting with the first quarter, as Michelle indicated, sales started strong with a positive low single-digits comp through late March. Sales then considerably weakened in April as we encountered macro headwinds related to lapping last year’s stimulus and an inflationary consumer environment, which resulted in a 5% decrease in net sales to last year. Digital sales slightly outperformed stores and represented 30% of net sales. Other revenue, which is primarily credit revenue, increased 8%. While our first quarter results did not meet our expectations, we have seen improved trends in May, with strength in our spring seasonal categories and continued outperformance in our stores with Sephora. And as we look to the balance of the year, we expect progressive improvement driven by key initiatives, such as the opening of 400 additional Sephora stores and enhancing the Kohl’s Rewards earn rate to 7.5% for Kohl’s cardholders. Turning to gross margin, Q1 gross margin was 38.3%, down 69 basis points from last year, driven primarily by higher freight costs, offset partially by our continued pricing and promotion optimization strategies. SG&A expenses increased 10.5% to $1.3 billion, driven largely by investments in our key strategic initiatives. This includes nearly $50 million to support the Sephora store openings, store refreshes and reflows. During Q1, we executed 220 store refreshes and constructed approximately 170 Sephora shops, with the first of these 48 Sephora shops opening the last week in April. In addition, we incurred $17 million of expense related to the proxy contest and ongoing sale process. And the remainder of the SG&A increase was…

[Operator Instructions] Your first question is from the line of Bob Drbul of Guggenheim. Your line is now open.

Hi, good morning. I have two questions. The first one is when you look on the updated outlook, just in terms of the progression and the improvement, can you just elaborate more on confidence of the outlook and just like the biggest drivers on the improved fundamental or the profitability expectations that you have? And then the second question that I have is, Michelle, can you just spend a little more time on the management changes, the management departures? Just sort of what drove that and really what you’re thinking about as you do think about those positions going forward. Thanks.

Yes. Thanks, Bob. Good morning. So, to your first question, our expectations surely as we look at – as the balance of the year that we will see progressive improvements, I think as we talked about this morning on the call that we did face some headwinds this past quarter. The combination of inflationary pressures, lapping the stimulus, downward pressure in categories like home and kids and then the seasonal weather impact, which as we spoke to, we’ve seen marked improvement as the weather improved in May. So we expect that trend to continue. But I think more importantly, the biggest call out in our first quarter is what we’re seeing in our transformed stores with Sephora. So those stores, the 200, which are still a very small part of our business, comped positively. And that’s the total store, not just beauty, but the entire store, which really speaks to our strategy. Yes, Sephora is a cornerstone, but we made lots of changes in those stores to reflect our new strategy, putting Active in the front, reflowing categories, updating merchandising, refreshing the stores, etcetera. So this is about scale. We are in the midst of building out a lot more Sephora shops. We will build another 400 that will take us to 600, more than half the fleet by the end of summer. And that tailwind of that positive comp now will have a material impact to lift the overall company. So that, undoubtedly, is our biggest driver. And like I said, it’s beauty, but it’s everything Sephora, but it’s everything around that total store where you’re getting the lift in the entire store and it’s worth noting as well that in those stores, we continue to see a lot of new customers, 25% of the customers coming into shop…

Thank you.

Next question is from the line of Oliver Chen of Cowen. Your line is now open.

Hi, thank you. Given some of the headwinds that you are seeing, how are you feeling about the inventory trends and composition relative to demand? And also would love your take on the nature of the promotional environment. And a follow-up, as you do think about products in women’s and kids, what do you see as the bigger opportunities for improvement? You called out fashion and also the customers is rapidly changing in terms of going out and what they are looking for as well within apparel. Thank you.

Sure. Hi, Oliver, it’s Jill. I’ll start with inventory. I think we tried to lay out that although inventory being up 40%, a lot of that was due to either investments in key initiatives like Beauty and Sephora being $300 million. A second part of that is in-transit. And if you recall, last year in the back half, we talked a lot about a higher in-transit amount of inventory. We’re seeing that persist. So we will expect that to continue in the front half of this year. But clearly, we had said we wanted to go after that inventory to make sure we had it. So we weren’t sitting in a liability of not having the sales and meeting customer demand. And then the third big piece of that is pack and hold. As we did have late fall receipts specifically in sleep and fleece, we’re holding that, and we will put that back out for sale. So still good inventory, still resonates with the customer in the fall side. The remainder of that core balance of 16% is really feeding a lot into both Women’s and Active. And if you think of Women’s last year, that was our most disruptive category. We are exiting out brands. We are bringing in new brands and we called it out as probably the most disadvantaged from their inventory position. So we made that investment. We feel very good with its positioning. Specifically, Michelle called out the key categories, dress is doing incredibly well, denim being up as well. So the places and strategies that we’ve talked about for a while with Women’s are really resonating. And then the other piece of it is Active. And as we made that reflow of Active to the front of the store, we did give it…

Yes, you bet. So first, what I’d say, Oliver, is that we continue to absolutely believe our strategy is the right one in serving this active and casual lifestyle. That’s a very broad umbrella and truly reflects how people are living and how they are addressing today. And we’re seeing that even as people are going out or returning to the workplace, maybe even that’s in a bit of a hybrid way. They still want to dress comfortably. And so yes, we are seeing some of, call it, a more fashion a polished looks, but what we’re doing is we’re innovating in those spaces. So if it’s men’s blazers or women’s tops, maybe a bit in some cases, more fashion more elevated, but we’re using technical fabrics and the like. And that’s resonating. So I think, first of all, we are certainly not taking our foot off the gas on Active. Active clearly up versus last year significantly, as I mentioned in my remarks. But even going back to 2019, we’re still up in the Active category double digits. So over the long-term and we have lots of data and insight that this is, again, how people are intending to live their life. And also important to note that when we talk about Active, it’s in its broadest sense, it’s active, it’s athleisure and outdoor. We are seeing a lot of momentum on the outdoor brands that we brought in, whether that’s Eddie Bauer. We’ve got under Armour Outdoor and even Lands’ End. But it’s important to offer choice to our customers. And you specifically called out women’s and kids. I’d say on the women’s side, really encouraged in that kind of core Women’s business and brands like Nine West that do have a bit more fashion, do have a…

Thank you very much. Best regards.

Thank you.

Next question is from the line of Mark Altschwager of Baird. Your line is now open.

Thank you. Good morning. I was hoping you could give a little bit more detail on the April and May to date trends. Trying to get a better sense of as we look at some of the softness in late Q1, what was tough comparisons on favorable weather, which may be transitory versus perhaps the broader – a broader slowdown in demand given some of the macro pressure on the consumer. And then kind of a related question there, curious what you’re seeing in terms of credit trends. Is penetration increasing or decreasing relative to last year, seeing any changes in the health of the portfolio? Because again, in the context of where the consumer is, curious if you’re seeing any signs of strain as you look at the credit trends within – in your portfolio?

Great. Thanks Mark. Why don’t I take the first one and then Jill can answer your credit question. So I think you said it well, like there were parts of Q1, especially in April, where we had, I’d say, three primary pressures. One was lapping the stimulus, and we saw that especially in a couple of categories I mentioned like Home. Second is what happened almost simultaneously was the very rapid escalation of inflationary pressures as consumers are spending a lot more on basics and fundamentals like food and gas. And then third, we have this weather thing that just amplified all of it. As I look forward, I think we probably all agree that the inflationary piece is going to be here with us for a while. I do believe that the stimulus lap was a bit of a bubble. The weather piece, as we alluded to, as whether it was almost like a switch as we saw, especially in our northern markets where we saw a headwind, it was about an 800 basis point delta. We saw a big shift in early May. So to me, two of the three were much more pronounced in that April time frame and we are seeing that in our business. So as we have moved past the stimulus lab and the big weather headwind, we’ve seen a dramatic improvement. And then on the inflation side, we’re adapting our plans. So again, I’ll go back to our newly renovated shops, the 200 with Sephora, but a lot of other changes. Even despite these three headwinds, they still comped positively overall. So as we see inflation continue, the success of those new stores is more than offsetting the consumer pressure, which to me is really, really encouraging. But yes, so to answer your question, I think two of the three were largely passed. And then as it relates to the inflation, we’re making changes, but our core strategies are working up against even those pressures. And then Jill, to you.

Yes. And then on the Kohl’s charge card, I would say we’re still seeing it what – over half of our sales. So the penetration continues to be consistent. Actually, we have seen a heightened payment rate over the last year or so as the customers are really healthy. We are starting to see that subside obviously in light of the change in the macroeconomic headwinds and lapping the stimulus is something that we’re watching. But we have an incredibly healthy portfolio as we look at it today. But as those payment rates do subside, we do see it revolve more, which is good from revenue, but then we have to watch from the delinquencies perspective. So at this point, there is nothing to indicate that we don’t continue to see this healthy portfolio, but we are watching a tick down in that payment rate, which could lend to more delinquencies. But I think you saw our other revenue was up about 8% in the quarter. So we feel good with the health of our credit portfolio at this point.

Thank you. And then, Jill, the change in the operating margin guidance does look fairly modest in relation to the sales adjustment and some of the gross margin commentary. It really seems like SG&A savings in the back half of the year is key to hitting that outlook. I was hoping you could provide a little bit more color on your visibility and confidence there as we all see the inflationary pressures out there in distribution and labor and otherwise? Thank you.

Yes. I would say we did anticipate higher expenses in the front half of the year given the strategic investments we are making with Sephora, the reflow and the refresh. We then look at next year – or the second half of the year, and we’re lapping those same Sephora reflow, refresh investments we were making in Q3. So there is savings there. We’re also lapping significant hiring incentives that we made last year that we’re not anticipating to need this year. We feel good with where our levels of hiring are at this point. We made significant wage adjustments in fall that we’re now still up against in spring, but lap and fall as well. And so, all of those things will be, I think, easier compared to what you have seen in the front half of this year when you add in that investment. And then secondly, marketing investments, we’re continuing to leverage our marketing ADAS to get to our goal of 4%. When you actually look at first quarter, we made more marketing investments, and we didn’t leverage our ADS because as we look at our media mix modeling, are able to move some spending out of Q4 into Q1, which helped us from an optimization and efficiency perspective. So we will get further leverage in marketing in the back half of the year that we didn’t see in Q1 of this year as well. And then third, we will continue to leverage our automation in the stores for store labor. We will have self-pickup, the self-returns will continue to expand. And then we’re doing more robust testing and self-checkout. So those are definite ways that we will be addressing the top expenses that we’re seeing as well as having some easier compares in fall based on the investments we made last year that we are not having to make this year such as an incentive.

Great. Thank you for all the detail.

Next question is from the line of Chuck Grom of Gordon Haskett. Your line is now open.

Hey, good morning, guys. I hope you well. I heard you talk about the second half comps being positive, but I didn’t hear what you expect for the second quarter. It sounds like May has improved a lot. But just wondering if you could just help us with our modeling on that one?

Yes. I think we expect May – May has gotten notably better. We expect Q2 to be better, but we’re also being cognizant of the environment that we’re working in. So I would say we’re going to expect it to be down maybe in that low single-digit range in Q2 especially as we’re still ramping up and opening up those shops. We will have all of our shops open, I think, by the first week of August, so having that big benefit in the back half of the year from having the disruption gone, the shops open and benefiting from those initiatives. So I would say I would model a low single digit in Q2.

Okay. Thank you. And then you called out a low-single digit lift in stores with Sephora. I thought on the fourth quarter call, you guys called out a mid-single digit lift and I could be completely wrong there, but I didn’t know if it changed at all in terms of the improvement that you are seeing from Sephora?

Yes. So, I think it’s two different compares. What we had said was the Sephora stores were outpacing our existing stores by mid-single digits. Now, we are actually just telling you the comp in the Sephora stores is a low-single digit positive comp. So, in – historically, we were making a compare versus Sephora versus non-Sephora. Now, we are actually just giving you the performance given that they have been open for a longer period of time.

Okay. Thanks a lot. I just wanted to clarify that. We got a couple of questions today on that front. And then just pick on the consumer – sorry, go ahead.

I would say also, if you look at it, they are up a low-single digit, company was down 5. You can see that it’s accelerated on setting itself apart from the non-Sephora stores as well. So, that mid-single digit would actually be better if we gave you that compare, but we just thought it would be easier to give you low-single digit from a modeling perspective.

Yes. Okay. I am sorry to cut you off there, Jill. And then just on the consumer, the inflationary pressures that everybody is talking about. I was wondering if you guys could just maybe go a little bit – a layer deeper on any insights on that front. Are you seeing certain demographic cohorts behaving differently, particularly maybe with the lower income customer that you serve? Are you seeing trade down into certain private brands? Just one of you can amplify on that comment.

Yes. You bet, Chuck. Thanks for the question. So, I will take that one. Yes, I mean, if you peel it back, I think what we are seeing is a bit of a bifurcation. So, we are seeing some customers who are trading up into those more premium brands and a lot of the newness we have brought in, like Calvin and Tommy, brands like Hurley, etcetera, Levi’s. And then you also see though a lot of customers going to the private brand. So, Sonoma, Jumping Beans, those two brands had especially strong comps this past quarter. But I think as it relates to – as we go deeper around the consumer dynamics, I mean one thing we are seeing is like as customers are coming in, we are still keeping our customers, but we are actually seeing the average spread go down a little bit. Or another way to look at it is our units per transaction have come under a bit more pressure this quarter, which also says to us that customers, their wallets are being squeezed. And so they are coming into the store, and they are being a bit more mindful of the brands they are buying and what’s all going in their basket. But we are just having that conversation on the Sephora side, we are actually seeing the opposite in those stores where the UPTs in those stores and the Sephora shops are higher than the average and those customers are coming in more frequently. So, like we continue to say, as those scale. And by the way, to Jill’s point, on the low-single digit total comp, that’s what we saw in Q1. That doesn’t mean it’s not going to accelerate in the back half because those stores also had some of the pressures…

That’s very helpful. Thank you.

Alright. Thanks.

Next question is from the line of Stephanie Wissink of Jefferies. Your line is now open.

Hi. It’s Blake on for Steph. Thanks for taking our question. I wanted to ask a little more on supply chain. Apologies, if I missed this earlier, but wondering if you talked about kind of what are you expecting for the rest of the year for supply chain. It sounds like that was an impact to gross margin in the Q1. How do we think about what you are embedding for the rest of the quarters, for the rest of the year? And then maybe if you could hone in a little bit on your ability to still source private label and the fuel cost side of it?

Sure. So, I think we have acknowledged, obviously, freight is going to be a headwind for us. It was a headwind in Q1. We expect it to continue to be a headwind throughout the year. We do lap some of that in Q4. So, we expect to see a little bit less in Q4. But we gave our margin guidance to be down 100 points to 125 points. And really, that’s to account for the freight piece, the inflation piece, and then we are offsetting that through our strategic initiatives such as the simplified pricing and promotion and also benefiting from our sourcing initiatives that we have talked about over the last year, which has helped us to mitigate against some of the inflation earlier into this year. So, I think we expect it to continue to persist. We expect the freight costs to be a headwind for us this year and planned accordingly from that perspective. From a sourcing perspective, we have a pretty diversified country of origin. We have a lot of diversification from our factories. And so we have a Head of Sourcing who has continued to navigate this incredibly well. We have added more lead times into our transit calendar, knowing that there has been a slowdown and given the disruption, we want to make sure that we were receiving these goods timely and meeting consumer demand. And in some cases, we have to bring those goods in a little early because it comes faster. We would rather err on that side than last year when we didn’t have the goods to serve our customers. So, we have been working through the supply chain disruption. We expect that, that will continue. We don’t expect that to abate this year, and we will continue to watch that into 2023. But I think we have made the adjustments accordingly and our Head of Sourcing continues to work with our factories and our countries of production to make sure that we are able to continue to produce. And I think the diversification that we have has afforded us that opportunity.

That’s very helpful. Thank you. And then the follow-up would be on – you talked about promotion simplification, if you could talk about maybe how that traction has been with the consumer and just really your rewards programs in general as inflation has gotten higher. Didn’t know if that’s been getting a higher adoption by consumers throughout the months you have seen recently and then if you could talk about that trend. Thank you.

Sure. So, we just rolled out our 7.5% rewards program for our Kohl’s charge customer, which allows them to earn about 50% more than a normal rewards customer. When we tested that, we saw about a point comp lift when we did that. So, we just rolled that out in May or to the portion of the way that we can continue to add value in a simplified manner when they earn back for every purchase they have use that Kohl’s Rewards on any items in our store. So, that’s definitely something that we have used to help us in a simplification perspective. But mainly the promotions that we have eliminated weren’t resonating with the customer. So, they were just general coupons or stackable coupons, and we weren’t seeing it really drive consumer behavior. Our strategy now is to be much more targeted in how we talk to those customers, so that we are talking to them in a manner that’s going to drive their behavior back into the store. If we know that they really like to earn rewards, we can do certain things like a roundup because they will feel fulfilled in that. If we really know that they love shopping more in Conrad, we can be much more targeted to give them a coupon to buy in Conrad. So, that continues to evolve, obviously, it’s very data-driven. We have a lot of data on our customers, both through our rewards program and our Kohl’s charge program, and that continues to inform and really refine the strategy as we move forward. Also pricing becomes really important. As we continue to drive in always new customers they may not have gotten some of the coupons or understand how you can earn rewards at that point, but how can we drive them in so they can just be really clear, great value. And with Sephora driving all these new customers we are seeing them comeback, and we are seeing the lift across the store through accessories adding to their basket Women’s and Active. They are really seeing that true value, and it allows us the opportunity to continue to install that we have great brands at the right value for these new customers without having them have to figure out the game of stacking coupons.

That’s very helpful. Thank you, guys.

Next question is Paul Lejuez of Citigroup. Your line is now open.

Thanks. It’s Tracy Kogan filling in for Paul. I first had a follow-up on gross margin. I was wondering if you could quantify the freight pressure in this quarter and whether it’s higher than your plan. And then were you guys hurt by higher markdowns in the quarter or is that a dynamic you are building in for second quarter as maybe inventory is right sized. And then I have a second question. Thanks.

Base rate came in a little bit higher than we anticipated this quarter, but not meaningful. Obviously, we had expanded our margin down 100 points, 225 points new account [ph] versus a little bit of the heightened freight costs. In terms of markdowns, we came into this year pretty fresh from an inventory perspective. Obviously, we were really light as we exited holidays and that’s why we used the pack and hold, to be honest, Tracy, is there was a lot of goods that came late that weren’t salable, but we didn’t want to have to just mark them down. They were holiday sleep or fleece that really still have a life and will have a life involved. So, not really seeing a heightened amount of markdowns. And quite honestly, we have a really fresh level of inventory as we are bringing in these new receipts. Obviously, when you look at the balance sheet, up 40% for inventory seems like a lot, but when you break it down, a lot of that in Sephora, that’s not markdown, that’s really investing in inventorying these shops. In-transit piece is available for sale, so clearly not going to be a markdown liability. And then like I mentioned the investments we are making are in Women’s and a ton of newness really the dresses, denim inclusive sizing and then Active which is clearly a forward to our strategy in bringing in an expanded amount of offerings there. Specifically in outdoor, we continue to expand with Eddie Bauer and Under Armour Outdoor. So, I would say that I feel good with the inventory positioning, even though it seems heightened, when you look underneath it, there is not a lot of liability there from my perspective.

Great. Thanks. And actually, the follow-up was on the Women’s business and the women’s inventory. I know you have been working to build that piece of the business. And I was wondering if it’s kind of where you want it to be now as we enter 2Q? And do you still have aged inventory in Women’s that’s kind of an overhang or you still all of that was the older brands?

I thinks it was through all the owner brands, it was the exited though with last year in Q1 obviously we took markdown for those that have been out of the building. So, that’s where a lot of the city walk the core. And I feel good with where the inventory is positioned. The dress shop looks great, we are able to really have a big impression for dresses which for us hasn’t been a category that we participated in. So, that’s all upside which is really helpful from a Women’s perspective. I think they looks that obviously, the spring seasonal selling as well as Michelle had mentioned which weighed a little bit more on our apparel categories like women and kids. But now this weather has shifted, we have seen a notable shift in that business as well. So, I think we feel well positioned with the investments we made in the inventory in Women’s at this point.

Thanks very much Jill.

Next question is from the line of Omar Saad of Evercore. Your line is now open.

Thank you. Thanks for a lot of the information, that’s really helpful. I was wondering if you could maybe dive in a little bit more on the dynamic. If you are seeing the dynamic in your business where a lot of the COVID-winning categories, and you mentioned you called out home, and you are starting to see this maybe unwind and consumer behavior and spending shift back some of those more recovery categories, you mentioned beauty a lot, fashion versus basics, that sort of thing. Is that kind of an unwind that you are seeing going on in your business. And especially, what does it mean for the Active category, which has been a really big winner for you, are you seeing any sort of change in behavior and how consumers are spending in that category specifically as well? Thanks.

Yes. Thanks Omar for the question, Michelle here. So, in terms of category dynamics and lapping pandemic, etcetera, I mean first, let me start with your last question around Active. We see this as relevant today as we have the last several years. I mean clearly, this quarter we were up against some big numbers. But still relative to 2019, our active business in total is up double digits. So, the customer has made I will call it a permanent shift in how they are living, dressing and kind of going back to what I was saying earlier it’s Active, it’s athleisure, it’s outdoor working really closely with our brand partners. As you know we have great businesses with Nike, with Adidas, with Under Armour, Champion to make sure that we have that right balance and bringing new innovation and technology and in some cases like I said that athleisure streetwear. So, I feel great about that and even up against big numbers, our Active women’s and men’s apparel was positive. We are seeing even that more amplified in our new 200 updated shops, but again we reflowed and updated across the entire store and we partnered with our brand partners to elevate merchandising and what have you and that’s making also a material difference. So, in addition to more space, it’s also the experience of the consumer. So, that’s to me like that continues, it continues to drive the business forward where we did see a little pressure in Active this quarter was on the footwear side, and we had some receipt issues due to supply chain constraints. So, that’s the point in time. I mean we are all still dealing with some of the supply chain issues, and we are seeing it really now today, just more in…

Great. Thanks for all the color.

Thank you.

Your last question is from the line of Michael Binetti of Credit Suisse. Your line is now open.

Hey guys. Thanks for taking our question here. I guess if – I am trying to think did you – if I missed it, did you mention what the AUR did in the first quarter, would be curious to know and then if not and how much of the inventory units up at quarter end relative to the 40% year-over-year total inventory growth?

Sure. So, we haven’t given AUR, but what I would say is we have consistently seen our AUR grow over the last several years given the change in the offerings that we have had, obviously, adding more premium into the mix with Tommy Hilfiger, Calvin Klein, now with Sephora, so we have seen that. As Michelle mentioned, we have seen a bifurcation of our customer. There is a lot still going into national brands. Those brands are doing incredibly well. You see that specifically the men’s business over penetrates in that. But then seeing them also choose our opening price point value such as Jumping Beans in kids or Sonoma in Women’s. But as their AUR continues to be up, which is consistent with what we would have seen over the last several quarters and years. And then in terms of the 40%, our units are up less than that. And as you can imagine, with the mix of the business going more into a Sephora and Tommy and some of the new brands that we are bringing in, they come with a higher cost component. And then obviously, as we move forward, we continue to manage through the inflationary part of the business. I didn’t see that a lot in Q1 and we mentioned we had placed these receipts quite early before the commodity inflation happened but really, that’s more of a mix of the businesses that we are bringing in and a big portion of this being beauty brought that cost up. But the units are still up, but not as much as the 40% total dollars.

If I follow the kind of the trajectory of the comps for the year were flat or I guess net sales flat to up one and Sephora trending at plus low singles. Michelle, I think you said it could accelerate a little bit. I think could – I don’t know if you baked that in, but I think that leaves the core business down just a little bit, maybe some pricing in there. But I think Sephora will drive some good traffic as you get those stores out. So, I am just wondering how you are thinking about conversion in the core business as you get through the year relative to 1Q, are you assuming a more conservative stand versus what you saw in the first quarter?

Yes. I think obviously we think with 600 Sephora stores, so it’s really half of the chain. So, we will continue to expect that benefit. We have seen that benefit build, as we mentioned as well. So, the 200 are in a much more mature state. We are just starting to open the next 400, but we do expect that to benefit. But of course, given the uncertainty that prevails in the market, we are going to be conservative and how the consumer is going to react with all discretionary items. Michelle has mentioned, we are seeing that while it tightens, we wanted to be thoughtful on how we gave the guide. We still expect Q2, as I mentioned, to be down low-single digits and then that growth to happen in the back half of the year. We think the benefit of Sephora Women’s continues to resonate. And then also just having the benefit of being in stock, all give us some tailwind to move to the back half of the year, but we want to be thoughtful of the uncertain environment in which we operate, which is why we felt very good with the flat on sales.

Yes. And I would just – I would build on that. I mean clearly the team has focused on maximizing demand across all of our key strategies. So, Sephora is a big part of it, but we are seeing the lift to the total store. We are seeing baskets at least, I think it’s about half of the baskets are attaching at least one category in categories like Active and Women’s and even accessories. I think that’s really encouraging. And as you have heard us talk about, I mean we have got strategies in the men’s area. Women’s is off to a good start for the year. We expect seasonal to course correct over time, and value and loyalty. So, I think the timing couldn’t have been better for us to launch our updated rewards program when the consumer is feeling that pressure. So, we stand for value, we will lean into it. But that plus all of our transformational initiatives, really set us up. And we are very confident. We feel like we have put a good guide out there, but to Jill’s point, we also want to be prudent in the fact that we are all operating in a very challenging environment with inflationary pressures that we haven’t seen in a long time. But we have tailwinds on our key initiatives that I think really do differentiate us in the marketplace and differentiate our plan going forward.

Thanks a lot. Sounds very balanced. Appreciate the help.

Great. Well, thank you, everyone, for listening on the call today.

This concludes today’s conference call. Thank you all for joining. You may now disconnect.