Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Kohl’s Corporation Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mark Rupe, Senior Vice President, Investor Relations. Please go ahead.

Thank you. Certain statements made on this call, including projected financial results and the Company’s future initiatives are forward-looking statements 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 Item 1A of Part 2 of the Company’s quarterly report on Form 10-Q for the first quarter of fiscal 2022 and as may be 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 So, if you’re listening to a replay of this call, it is possible that the information discussed is no longer current.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. Today’s call will be abbreviated as compared to past earnings calls. We are planning the call to last approximately 40 minutes. With me this morning are Peter Boneparth, our Independent Chair of the Board; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Peter.

Thank you, Mark, and thank you for joining us this morning. I’m going to provide some brief introductory remarks, and then I’ll turn it over to Jill to review our third quarter results. We will then take some Q&A. As we shared last week, Michelle Gass decided to step down as CEO to become the successor CEO at Levi’s, a valued brand partner of ours. On behalf of the Board, management and all of our associates, I want to thank Michelle for her contribution to Kohl’s during the past nine years. Her efforts to strategically transform Kohl’s through brand introductions and partnerships like Sephora and her focus on building an inclusive and collaborative culture will benefit the Company for years to come. Michelle is an outstanding leader, and we look forward to continuing to work with her in the future. We have plans in place to facilitate a smooth transition. The Board appointed Tom Kingsbury as interim CEO. Many of you know Tom from his leadership and success at Burlington. He’s highly regarded as an exceptional operator with a keen focus on inventory management. I knew Tom from his early days at Filene’s, and I personally have always had a great deal of respect for his professionalism, retail acumen and integrity. Tom is no stranger to Kohl’s. He calls Milwaukee home. He’s been on the board since 2021 and has been intimately involved in working with Michelle and the team. He is the perfect fit to lead the Company during this interim period, and we greatly appreciate his willingness to serve in this capacity. We expect him to hit the ground running. Given the recent volatility in our business and consumer behavior, the significant macroeconomic headwinds, along with the unexpected CEO transition, we will not be giving guidance for the…

Thank you, Peter, and good morning, everyone. Before I get started, I too want to thank Michelle for her leadership and partnership over the past decade. Let me now review our third quarter results and business performance. As we shared last week, sales were down approximately 7%. Our operating margin was 4.7% and diluted EPS was $0.82. Our performance during the third quarter was relatively in line with our expectations as the organization continued to manage the business effectively in a challenging macroeconomic environment. Persistently high inflation continues to dampen consumer spending and our business, given our exposure to discretionary categories, like apparel and home goods, which are facing disproportionate pressure. During the quarter, we saw our middle income customers continue to purchase fewer items per trip and trade down to our value-oriented private brands. From a channel perspective, store sales outperformed digital and improved sequentially in Q3 due in part to having more Sephora shops open and our investment in labor to enhance execution across the store. Digital sales were down 8% to last year, but still up nearly 20% to the third quarter of 2019. Digital accounted for 29% of sales. From a product perspective, sales of our private brands increased slightly to last year, with strong performance in our top private brands, including Sonoma, Croft & Barrow, Jumping Beans, Nine West, Tek Gear and Lauren Conrad. Accessories with our best-performing line of business up mid-teens percent, driven by strong performance from Sephora Beauty sales. We continue to see mid- to high-single-digit percent sales lifts in stores with Sephora relative to the balance of the chain. This was partially offset by lower sales of jewelry, driven by in-store displacements. Our core women’s business outperformed the Company average and excluding juniors was flat to last year. We maintain momentum…

[Operator Instructions] And your first question is from the line of Mark Altschwager with Baird. Please go ahead.

First, Peter, with respect to the CEO search, could you expand on the key attributes the Board is looking for? Are you looking for an individual who can execute on the current strategy the Company has outlined or perhaps looking to shake things up a bit? And finally, is there a scenario where Tom continues in the role for more than an interim basis?

Yes. Thanks, Mark, and good morning. As regard to your first question, just to elaborate, the Board and the current management team and Tom are fully aligned that the strategy that we’ve embarked upon is the right one. So, we’re not looking for a CEO who’s coming in to change the strategy that we’ve embarked on. What we are looking for is a very strong operator, as I said, somebody who can drive sales, somebody who can drive earnings per share and somebody who understands the basic tenets behind the Kohl’s value proposition and the brand strategy. So, what we are confident in is that this is amongst the top grade jobs in retail and that the search firm is going to lead to us to somebody who can run this business for a long time. As it relates to Tom’s ongoing involvement, Tom has committed to us that he will be interim CEO until we find one. So -- while there’s no end in date that it’s very clear that his assignment at this point is interim. We couldn’t be asking for a better leader at this time given his background and his support of Kohl’s along the way.

And Jill, I know you don’t like to provide a lot of monthly detail, but given the decision to withdraw the guide, any more color you can give us on the volatility in late October and early November, would be helpful just as we try to get a sense of what the run rate is kind of exiting the quarter and into early Q4. And then on gross margin, you called out some of the puts and takes in Q3 on freight and costs and shrink. Just any thoughts on what those factors look like in Q4 relative to Q3 based on what you see today? Thank you.

Sure. Good morning, Mark. I think for sales, we mentioned in the call, we saw stable sales in August and September. It was a late part of October that we really saw softness. You can read that into it actually underperformed the quarter. We saw softness continue in November. What I would say is it’s moderately better. So we are seeing some improvement. Like we mentioned, we are looking to see that shopper reverting back to more of that pre-pandemic 2019 shopping period because last year, we did see an acceleration due to the scarcity of inventory. But given the volatility and really the uncertainty in the macro environment, we just don’t have a lot of visibility into that, which led us to partially withdraw -- or why we wanted to withdraw the guidance today. In terms of margin, we had talked a lot about freight being a headwind all year. We knew we would start lapping that as a headwind in Q4. So, that will actually moderate. But what does come back in Q4, as you saw, we called out, is that cost inflation. So, where freight will moderate, cost inflation actually elevates. So, we’ll see a similar pressure there. And then shrink is just really ongoing. I think you’ve heard about that more macro. So, we’ve continued to see shrink as a headwind for us. We’re doing a lot of things to try to manage that with, of course, the first and foremost priority of us keeping our associates and our customers safe as we go through from that perspective. So, I think that’s kind of the color I can give you as we move into the fourth quarter. But I would say just overall, it’s the uncertainty and the lack of visibility we have, not that we don’t have a conviction and confidence in the strategy that we’re employing.

Your next question is from the line of Bob Drbul with Guggenheim.

I just want to sort of follow up on Mark’s questions. But I don’t know if this is Peter or Jill or both. But, can you just talk about the decision to actually withdraw the guidance versus maybe a wider range? Any framework that you can give us around Q4, but even into ‘23, as you think about how you want to position the business to ‘23? I think that would be pretty helpful. And then, I do have a follow-up.

Yes. Bob, maybe I’ll start and toss it over to Jill. First of all good morning and nice to talk to you. So, as you know, I’ve been doing this a long time, as have many members of our Board as has Jill, and I would say that the visibility for the fourth quarter has been as difficult as any period I could remember. So what you have, as we’ve said, is on the one hand, you had last year a situation where nobody had an inventory. Everybody, as a result, all customers were inclined to buy early and so you had these big numbers early in the quarter, so people had a lot of conviction. Of course, by the end of the quarter, people had inventory problems, had issues and we had that as well. Now, you flip over, everybody has a lot of inventory, the customers, obviously, we’re anticipating a highly promotional calendar. And then, we saw this pronounced slowdown in October going into November was that consumer behavior? Was that weather? Was that the elections? I don’t think anybody really knows. It’s probably a combination of all those 3 factors. You then combine that in our minds, with obviously an unexpected CEO transition and our judgment call, which frankly is a 51-49 call. Our judgment that it was very important to give Tom and the team the latitude in the fourth quarter to execute on our basic strategy, which is to drive value and sales during a very promotional environment. You’ve heard from other competitors, I think it’s consistent with what everybody is saying out there. I think everybody believes that Christmas will come but I don’t think anybody out there today knows for sure exactly what’s going to happen. I don’t know, Jill, if you have anything to add to that?

No, I would echo sentiment. I think it’s really about the unpredictability and the volatility and the trends that we’ve seen over the last several weeks. It’s not that we’re not confident in the strategy. As we enter into the holiday season, we know it’s going to be very focused on value. It’s a core tenet for Kohl’s. So this affords us the opportunity to make sure that we can compete, go after the market share, we’re set up really well. We have 600 Sephora shops. We have a lot of newness across the store, including smart home, pet, leaning into successful areas like outdoor and dress. So, we have confidence in the strategy. I think it’s much more about the uncertainty and the unpredictability of the macro environment that Peter had mentioned.

Got it. And Jill, I just -- I have a follow-up question. So, I think one of the brands that you called out was Lauren Conrad brand, one of the products that seems to be creating a lot of chatter is the women’s LC Lauren Conrad mid-rise leggings. And I was just wondering if that’s enough to really sort of carry the brand, if any comments around how that is performing in stock, or how important it will be to you in the fourth quarter?

Well, Lauren, we did call out -- I think we have called out has been a successful brand for us and is really resonating with our customer. I personally am a Lauren Conrad shopper, as everyone knows, and who doesn’t love a great pair of legging. So I think it’s just really indicative of the success of -- her leggings are doing well, but really just of the brand in general. And we talked about women, the core women’s business was flat on the quarter. So, when you take out juniors, which we’ve talked about, we’re working through some of the issues we have there. So, we feel really happy with how women’s is performing. And overall, Lauren is just a great brand. We’re happy with the partnership. And I’m really happy that you actually know about the Lauren Conrad leggings. So apparently, our special marketing is broad reaching.

Thank you.

Your next question is from the line of Gaby Carbone with Deutsche Bank. Please go ahead.

So on inventory, last quarter, you mentioned it would likely be at maybe high-teens at the end of the year, which kind of brings you back in line with 2019 levels. Curious if that’s kind of how you’re still thinking about it. I understand you aren’t providing guidance. And then just on the promotional front. Just curious of your activity and kind of how you’re thinking about the holiday maybe is still going to be better than what you saw in 2019.

Sure. In terms of inventory, I think inventory is actually right where we expect it to be. I think we talked we knew we weren’t going -- we were going to make improvement, but it wouldn’t be a large amount of improvement because we wanted to protect holiday. We wanted to make sure we were flowing those fresh receipts, which we did. So, a lot of that benefit would come to us after we flowed the holiday receipts. We’re still very focused on inventory. I know just talking with Tom, it’s a key focus of his as well. So you will see that we are positioning ourselves with the flexibility to make sure that we enter 2023 clean and ready to be successful in that year. So, I would say we’re going to continue to focus and bring that down. I’m happy with the fact that we’re flat to ‘19 from an inventory perspective, even with the investments we’re making into beauty. So, the progress is right where we expected it to be. In terms of the holiday period, I mean, holiday is always unique. And we know there’s a lot of business still in front of us for holiday. We know it’s going to be promotional. When Peter started this call, he talked about the core values of Kohl’s and value, convenience and brands. And so, we’re going to really lean into that. We have the iconic Kohl’s Cash. We have our Kohl’s Rewards program. We’re going to use our Kohl’s credit value offering as well to really drive that business through the holiday season and make sure that we’re competitive. And I think that’s another portion of what the actions we took. This is really going to give us the flexibility to compete and make sure we’re getting that market share.

Our next question comes from the line of Oliver Chen with Cowen. Please go ahead.

Hi Peter and Jill, nice to talk to you, and nice job on Lauren Conrad as well. As we look ahead in this uncertain environment, which categories do you think might have more promotional intensity? And would love your general views on what’s happening with the consumer with these cross currents because there’s still as low unemployment and some savings, but the consumer is just becoming much more price conscious.

Yes. I can definitely start on this one. Well, I’ll start with the consumer because you talked about it. We mentioned on the call in Q2 and now again, we’re seeing it as our lower income customers and higher income customers are growing. We’re really seeing that squeeze and who is our core customer, which is the middle income. And that continues into this quarter as well as we watch that customer move. So, we know value is important. We also thought Oliver and how they voted in the quarter. They’ve migrated both in Q2 and Q3 to our proprietary brands. So, they’ve outperformed national brands for the last two quarters, which is really the first time that we’ve seen that in a long time. So, we know value is definitely going to win this holiday season, and we need to lean into that. We talked a lot about newness, but even in our Sephora shops, we know that we have an opportunity to elevate gifting. So we’ll be doing that. But we’re going to have gifts that even start at $35. So, really leaning into the fact that we’re bringing in a little bit lower income customer and how can we make sure that we’re fulfilling their needs across the store. In terms of the promotional intensity, I mean, I definitely think it’s going to be widespread. I don’t know if there’s any particular category that’s going to have more promotional intensity than others. I just want you to know that is a core fundamental of who Kohl’s is, and we’re prepared to compete this holiday.

Your next question is from the line of Omar Saad with Evercore Partners. Please go ahead.

Jill, could you do a deeper dive on the inventory balance, how you feel about the positioning, especially kind of COVID winning categories versus kind of recovery and occasion-driven categories? Do you feel like you’re well positioned from an inventory standpoint as consumers return to some of their pre-pandemic shopping behaviors and categories they’re shopping in, or are you comfortable where you’re at? Thank you.

Sure. I think from an inventory perspective, last year, as we called out, we were low on inventory. So, we really needed to build back. And I think the two big places that we’ve built back in first and foremost was women’s. So, if we go back over time, we took a transition in women’s. We did a lot of exiting out of underperforming brands and then we’re trying to bring back in that newness. And it was tough to do last year, given the supply chain disruption. So, we were definitely under-inventoried. I think we feel well positioned from an inventory perspective for women’s. We’re seeing that resonate with the customer, dresses specifically has been a new category for us, right? We haven’t always participated in it, but we know that dresses and dress casual are more important. So, we funded into that inventory, and it’s definitely been performing for us. You’ll see even into the holiday period, we’re going to have more dresses really around that holiday occasional dressing as well. So, feel good and well positioned from that perspective. In home, we’re actually moving back into some of our electronics smart home, TVs, things that we haven’t necessarily participated in, but we know are big Black Friday deal drivers for people to come to the store. So I think the newness that they’re bringing in, in electronics is great. And then we’re also expanding our outdoor business. And so, you’re going to see things like tents and coolers and seating. So that’s really going to build off the strength that we’ve had over the past quarter. And then, I think last is active is a place that you’ve seen softness. But on the apparel side, we’re still trending well. So you’re going to see that we move that to the front of the store with Sephora, you’re going to see that we’re going to have a great array of product, but really going to see more on our FLX and Tek Gear because of the value orientation of those products, which are going to be much more important during the holiday season. So I think as I look across inventory, I feel like the progress we made is where we expect it to be, we feel good with the content that we have as we head into holiday, and then we will have the flexible to make any moves that we need to, to make sure we enter 2023 from a strong position.

Got it. Thank you. And then maybe any quick thoughts on what’s going on in the active footwear side of the business? And any levers you can pull to get that going again?

Yes. I think right now, it’s about the supply chain and just getting the newness in. When we do get newness, it sells well. We just don’t have enough of it. From my understanding, we should start seeing a flow happen more in Q1. So we expect spring ‘23, we’ll start pushing that back into a positive zone. But I would say what I’m excited about in footwear, Omar, is the dress side of the business is really coming through. We actually ran positive comps there, and we have a great boot business happening as well, which is a good statement as we move into the holiday period. So, I think active footwear will lag a little bit, but really excited about the dress side of the business.

Your next question is from the line of Ashley Helgans with Jefferies.

It’s Blake on for Ashley. Good morning. I wanted to ask two questions. One on the promotions and just the impact to gross margins. So, I think you mentioned freight is a headwind in Q3 and then product cost inflation. I don’t know if you could hone in a little bit more on the gross margin impact from promotions? And then, maybe any directional read how we should be thinking about Q4 or promotions.

I think, as you know, we have had a strategy around our pricing and promotion and really optimizing that. So, we actually called that out as a benefit to our margin in the third quarter, really helping offset some of these headwinds as well as helping us when we had to clear through some inventory to offset that. What I’d actually say is we’re optimizing those promotions to be much more effective as well. So much more targeted offers, much more personalized offers, eliminating a lot of stackability, which was confusing for the customer because they had to do math. So, really making sure that the offers that we’re putting in are meaningful to the customer to drive their behavior. So that strategy is still being employed. Pricing being really important during this holiday season to make sure that we’re being competitive and then underlying where is that extra benefit we can get from Kohl’s Cash specifically and then of course, all offers. As we move into holiday, it’s always promotional. It’s something that Kohl’s has thrived in over the years as we know how to be promotional. We know how to lean in and out. And I think the agility that we have today is a new muscle that you haven’t seen in years past. So, we’re going to be able to make those moves much more quickly, dependent on what we’re seeing from a consumer perspective. So, we’re able to promote to be competitive, promote to see where the product is moving and promote much more in a targeted manner to move consumer behavior. So, I feel that this actually plays to a strength of Kohl’s, and we’re set up to take advantage of that in the fourth quarter.

That’s great to hear. Thank you. And then also on Sephora, just wondering, you’ve had some of those stores now for about a year or year plus. So just wondering if you could comment a little more broadly on how those stores are comping. And then, how do you expect that customer to hold up under inflation versus your chain average? Thank you.

Sure. What I would say is, one, we’re still seeing great performance from Sephora. They’re up mid- to high-single digits, so outperforming the balance of the chain. So we feel good. The stores obviously just count for one month of the quarter but it is positive. So, we feel great that they are comping. I think that we’re seeing in beauty sales. I think that we’re seeing across is that beauty people need it. They see this as a need. We’ve always said this is a traffic driver for us. It’s why they come back. Even during inflationary times, they need to replenish their lipstick or makeup for cosmetics and skin care. So, we feel like this is definitely a thing that can continue to drive our business during the holiday period. Like I mentioned on the call, we know last year, gifting was something that outperformed for us. So, you’re going to see a much more expanded gifting assortment this year. We’re going to have some very good value price points to really take into accountability of the uncertainty and the inflationary environment that we’re in. And we’re going to do this all with a much more elevated marketing support and partnership with Sephora. So, I think we feel great with the strategy as it unfolds. We feel great as those first 200 stores start hitting their comp year, and we feel really well set up for the holiday period.

Your next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Good to see the progress on inventory, Jill. Last quarter, you guys provided a really nice slide on packing that across different buckets, core in transit, Sephora, pack-and-hold. I was wondering if you could maybe frame out those buckets for us, this go around.

Yes, so, made it a lot easier on us, Chuck. Honestly, the pack-and-hold is on the floor. So, it is literally not a difference to last year. Obviously, we didn’t buy into that inventory. So, that went away in third quarter. And then we mentioned on the call, our in-transits really just kind of came back in line. I think you saw across the supply chain disruption, we had written in a lot of extra time. That wasn’t needed because the ports are pretty clear. There’s capacity in that -- in the shipping lanes. So, we were able to really normalize that. So, we didn’t have to call it out. The one thing we did call out is about 500 basis points for beauty. So, as we now have the 600 stores open, we made that investment into inventory. So, that was the only reconciling item. So really trying to simplify what we’re looking at. But even with beauty flat to 2019, so we do feel good the progress, but more progress to come, as we mentioned, going through Q4. All right. I think that was our last question. So, I just want to thank you, everyone, for listening on the call today, and wish you a wonderful holiday season.

Thank you all for joining Kohl’s Corporation third quarter 2022 earnings conference call. This does conclude today’s call. You may now disconnect.