Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl's Corporation Second Quarter 2023 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] Thank you. Mark Rupe, Senior Vice President, Investor Relations and Treasury, you may begin your conference.

Thank you. Certain statements made on this call, including projected financial results, and the company's future initiatives are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause 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 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 may make reference to non-GAAP financial measures. Reconciliation of 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me this morning are Tom Kingsbury, our CEO; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Mark, and good morning everyone. I am pleased to report that we continue to make progress in our efforts to significantly improve Kohl's business over the long-term. Our second quarter earnings were in line with our expectations. We feel good about our performance, given the persistent macroeconomic pressures on our customers and that many of our strategic efforts are just underway. In 2023, we continue to focus on four strategic priorities, which are; enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. We are confident that our strategies will drive sales and earnings performance. It'll take some time for the full impact of our efforts to be realized. However, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond. As it relates to our outlook for 2023, we are reaffirming our guidance. Let me now turn to the second quarter. Net sales decreased 4.8% and comparable sales were down 5%. Restore sales outperforming the total company and flat to last year. Sephora Kohl's continues to exceed our expectations, driving a total beauty sales increase of nearly 90% year-over-year. We opened nearly 200 Sephora shops in the quarter, and momentum in our existing Sephora shops continues to accelerate with greater than 20% comparable beauty sales growth in the Sephora shops opened in 2021 and 2022. And our home business, which we've highlighted is a major long-term opportunity for Kohl's, showed strong relative improvement in the quarter. Beyond the top line, we were able to successfully manage gross margin and expenses to achieve an operating margin of 4.2% and we reduced inventory 14%, both of which were better than plan. I'll now turn to our…

Thanks Tom and thank you everyone for joining. For today's call, I will review our second quarter results and provide details on our fiscal year 2023 guidance. As Tom shared, we made additional progress against our strategic priorities and delivered earnings in line with our expectations. Turning to our results. Net sales declined 4.8% in the second quarter and are down 4.1% year-to-date. Store sales were flat to last year in Q2, driven primarily by strong Sephora sales growth with sales in home showing the most improvement versus Q1. Digital sales remained pressure in Q2 down 17% to last year and penetrated at 25%, so both are up versus pre-pandemic levels. We are seeing customers shift back towards stores and sales were impacted as expected by the elimination of online only promotions as we work to simplify our value strategies. From a product perspective, national brands outperform private brands in the quarter. Our top performing national brands included Nike, Under Armour, Hager, Izod, Hurley, and Eddie Bauer. While our top performing private brands were Apartment 9, LC Lauren Conrad and Jumping Beans. Accessories was our best performing category up 25% to last year, driven by Sephora Kohl's. The increase in beauty sales was partially offset by displaced sales in jewelry. As it relates to some of our other categories, as previously noted, home showed the strongest improvement in trend from Q1 with encouraging early reads in our new growth categories. Footwear also showed trend improvement driven in part by increased Nike and Under Armour sales in the category. Other revenue, which is primarily our credit business, declined 3% in the second quarter, an improvement in trend versus Q1. Moving down the P&L. Q2 gross margin was 39%, a decline of 61 basis points to last year, driven by product cost…

[Operator Instructions] And your first question comes from the line of Bob Drbul from Guggenheim Securities. Your line is open.

Hi. Good morning.

Good morning.

A couple questions. First, Tom for you, when you think about the progress that you're making, can you just talk a little bit more around the learnings, the opportunity that you see now that you're sort of into it a few quarters in terms of the business and where you're taking it. And the second question, Jill, can you give us some insight on credit just in terms of the relationship, the bad debt, the delinquency rate, and I think the launch of the new program that you're doing this year. Just sort of how we should be thinking about trends in credit right now, and as you look into the back half of the year. Thanks.

So, Bob, to talk about what's going on with the strategy, we feel pretty good about what's been going on here. We really look at the business. When we look at the stores business, we have a positive trend in stores that just really represents a lot of the work that we've been doing overall. Most of our decrease came from digital, and that was somewhat self-inflicted because we have reduced the amount of online only general public offerings. We, obviously, moving more to omni, having this more simplified pricing strategy -- to have two different pricing strategies just wasn't good. So -- and we're encouraged by August -- the August business as well. But one of the things we've learned the Sephora business has been incredibly good, to have a 20% comp in the stores in from 2021 -- in 2022, it's pretty remarkable. It's bringing in a younger more diverse consumer as well. So -- but it's been really a driver and we're moving right along. And over the next couple years it'll be in all stores. We're really moving on, bringing in more home product in the home decor category. And we've been working with the marketplace to secure goods in real-time. And we really feel that that's going to pay dividends in the long run as more and more product comes into the company in those categories. The impulse business is good. It's going to get even better as we get closer to holiday. So that's very good. And the other thing that we're going to look at down the road is obviously new stores. We have not a whole lot this year, but maybe going forward we'll be looking at expanding that effort, but that work is still underway. But we just -- we're just really feel good about. We see the product coming into the company, the stuff that we're underpenetrated with and it's working well. And so, we feel that -- if we can continue to grow the Sephora business, if we can continue to make progress in home, I think we'll be in a pretty good position.

And in terms of credit, Bob, credit has obviously been a core component of our value equation over a long period of time, and we have a very stable portfolio in our credit. We have a partnership with Cap One. What I would say is, other revenue is a good proxy for what you saw with credit. We said it was going to be in line with sales. We still continue to expect that as we looked to the -- out of the year. We did see payment rates drop as we expected. Those payment levels are still actually above 2019 levels. And then we did see more of a normalization of our credit losses. So those credit losses did increase over what was obviously a really low year last year. But as anticipated -- I think, we've spoke to the fact that we did take early actions as we did anticipate the macroeconomic environment to worsen and to people to have less cash in their bank account. So as we looked and worked with our partner, at the risk, we did take back some of those risk cells to not continue to offer that. So I think we're very proactive as we approached this. So I would say it is performing as we anticipated with payment rates down, losses up, but really we feel good with that portfolio as, and it's coming in just as expected, and we continue to expect it to really go with sales. In terms of co-brand, we're excited to be able to offer a new vehicle to customers who maybe didn't want a private label credit card. So this really affords us the opportunity to spread that value equation to customers that we think are younger, more diverse, really hitting on that customer that we're driving. And for Sephora to say, could we bring them into a credit card, but not necessarily as they're open to a PLCC card. So we've brought in about 700,000 of our credit card customers and migrated them over to the co-brand card. And we'll just kind of watch that and learn from that migration before we extend that out, but then we'll be expanding that out in 2024 based on those results.

Thank you.

And your next question comes from the line of Oliver Chen from TD Cowen. Your line is open.

Hi, Tom and Jill. As we look ahead, what are some of the major catalysts for holiday in terms of your plans and inventory planning as well as flow, just highlights we would love there? Also, as we think about the online business, the comparisons will get easier. What should be the path ahead for a resumption of growth there? And finally, on the stores and traffic, would love your thoughts on traffic and transactions, and if you've seen a lot of volatility in what your forecast assumes for how traffic may move. Thank you.

Well, the big catalyst for holiday is really maximizing the gift business. We did some of that last year by moving the gifting product to the front of the store, and it did very well. We're going to be doing it again this year and making a major statement. In the front, we do have some extra square footage because we removed some register base for gifting as well. But I really feel that by making a strong gifting statement, we're going to have a good holiday season. Digital -- as far as digital goes, we see it improving as we progress through this year. And then obviously, we anticipate back to growth in 2024, once we anniversary all these online only promotions that we had.

And then from a store's perspective, obviously we're really excited that. We're actually positive on the year of flat performance in Q2. And a lot of the efforts that Tom had talked about are really happening in our stores as we speak. It's the increased presence of home where we at least got rid of the registers. It's having a stronger presence of gifting. We saw great sell-throughs through Mother's Day, Father's Day, 4th of July. So we're excited as we move into back-to-school and especially the all important holiday period there. And then, of course, clearly Sephora continues to work for us as we open another 200 doors. We have 50 more doors going in August and 45 small in October. So I think from a store's perspective, we're excited to continue to see that business do well and being an outperformance, which you haven't heard from us in some time. And just to reiterate on digital. I think we're seeing similar performances out of categories. It's just that the promotions is having an out weighted impact there. And so we know we have to get through that, but it's really the right thing to do. As Tom said, just to reiterate, we want to have an omnichannel experience, so having specific offers online was counter to that. So we think this is the right thing to do from a long-term perspective, which is why we believe we'll get back to growth in 2024.

Okay. Great. Tom, a follow up on the merchandising brands around Sephora. What are the leading strategies to synergize and get the pickup from the tremendous growth you're seeing at Sephora? And related to that women's and younger women's clothing and apparel, would love your thoughts on rebalancing and the brands and the strategy there about what will it take to get sustainable growth with that younger customer?

As far as brands go, we've been looking at a lot of different brands that would compliment the Sephora offering. We've been going -- Nick Jones, the chief merchant. I have been going to New York pretty much every week now looking for this. And we haven't made any real decisions yet. But there is opportunities out there to bring other things in. But we think we can get some of the Sephora business with the brands we currently have, and we can change the offering. We can have more prints, more color in the assortments. I mean, we don't have to radically change the vendor mix to capture this. But we are looking at the young women's business. We really feel that that could be an opportunity for us as well as you just mentioned. So there's plenty of things that we can work with in our current brand portfolio. And then we're going to -- we're looking for other brands that to add over time. I think the other thing that could be very good for the Sephora customer is our expansion of home decor and gifting. We really think that's in line with that customer as well.

Thank you. Best regards.

And your next question comes from the line of Mark Altschwager from Baird. Your line is open.

Good morning. Thanks for taking the question. Tom, any change to your views on the macro consumer backdrop versus a few months ago? You're reiterating the guide, the environment's obviously pretty dynamic and the guide allows for a range of outcomes. So just curious if you can share any additional thoughts there. And then Jill, gross margin, I noticed you didn't call out the clearance shift as a factor impacting gross margin this quarter. That was a little bit surprising. Just I guess any color you have there would be helpful as well. Thank you.

Well, I think the macro environment continues to be challenging for our customer as I mentioned in prepared remarks. That's a reason why -- we're really focused on delivering as much value as possible, because obviously, that customer's has less money to spend. We've brought -- we're doing the key value items, bringing goods in at competitive high volume pricing to deliver more value to the selling floor as well. But we're going to just really work hard on making sure that we have as much value as we can have. We've already started that and it'll just continue through the third and fourth quarter and -- but it's critical that we deliver the value for them.

And then in terms of gross margin, I think we did actually take all the clearance mark that we anticipated. I think a couple things that helped us set that. One is, as we talked about we were able to take out the promotions. The ones that were really the stackable ones, the ones that we didn't see have a lot of impact to our top line. So as we were able to benefit from less promotions, that helped us offset some of the clearance. And I think the bigger factor is our inventory was down 14%. So as we look at the content and the currency of the inventory, we feel very well positioned as we move into the back half of the year. And so we were able to clean up what we needed to. But I think a lot of the efforts and disciplines that Tom has instilled in the merchant organization really took hold quicker than we anticipated. And the discipline around inventory management, receipt management, and just the agility to chase really benefited us more than we anticipated into Q2. And we expect that to continue to benefit us the rest of the year, which is why we're expecting our margin to grow both in Q3 and Q4.

That's helpful color. And then just a quick follow up, August to date off to a good start, should we read that as tracking ahead of the down 5% Q2 comp rate?

I would say we're pleased. Obviously, if you look at the quarters, we had talked Q2 in May and we used the word slightly below. You can see that June and July obviously were better than that. And I would say we feel good with the start we have in August. So yeah, I would say we're definitely trending above that.

Great. Thanks again.

Your next question comes from the line of Matthew Boss from JP Morgan. Your line is open.

Great. Thanks. So Tom, maybe given progress that you've made with inventory and the balance sheet, how best to think about category opportunities or the timeline you see from here to reach an optimal assortment? Or maybe said differently, do you see the opportunity to return to top line growth in 2024 as you just consider the macro versus all of these micro initiatives that you're putting in place?

I would think that in 2024 we could potentially get back to positive. That's obviously our objective overall. And the categories, I've really touched on a lot of the categories before. But the one thing about it which makes it exciting is the fact that there's some -- there's categories we're just underdeveloped in. And if we can just capture those opportunities, it should help position us for growth in the future. Again, home decor, pet, gifting, impulse, all that things that we've been talking about will really help us to get there. If every business was in the right penetration, it'd be a lot harder. But we just have these really low hanging fruit in terms of business that we can capitalize on and really help us move it forward quicker.

Great. And then maybe a follow up for Jill. So with first half of the year gross margin, I think more than 100 basis points above 2019. I guess how best to think about gross margin structurally from here if we think relative to 2019 levels? Or maybe asked differently, is there a ceiling to the 36% to 37% gross margin target longer term?

I think right now we just feel very comfortable working within 36% to 37% range. Obviously, depending on where we see assortment moving in and out. Obviously, Sephora is a gross margin driver. We think home decor and impulse can definitely be benefits as well from an assortment perspective. So there's definitely a mixed component to it as well as then the digital growth. We've been getting some tailwinds as digital has softened, but if we can continue to grow that business, you'll see cost of shipping come out. So I think we feel great that we're operating within the 36% to 37%. That was really the long-term plan that we outlined, and I think that's really where we feel most comfortable, that we're able to still deliver the value that our customer is used to getting from Kohl's in that margin range. And then also bringing in some of these new white space opportunities that Tom has outlined to get the top line growing. So I think our model works from a long-term operating margin with a small amount of top line growth. That's really the big focus. I think we feel great with the margin that we're putting out this year. Our SG&A disciplines are there and will great -- gain great leverage off of just a small amount of top line growth. So that's really the focus, I think, from a long-term perspective.

Great. Best of luck.

Thank you.

And your next question comes from the line of Dana Telsey from Telsey Group. Your line is open.

Hi. Good morning, everyone.

Good morning.

As you think about -- hi -- as you think about what's happening with shrink out there, what are you seeing in your stores and has it -- is there -- what investments are you making to deter shrink? And then Tom, you mentioned about potential new stores. What are you thinking about in new stores, whether it's size, location, and how you thinking about that in a store opening or a closing program? And lastly, you talked about the home category and that opportunity. How do you see that opportunity with branded versus private label and the impact on margins? Thank you.

Okay. I'll start with shrink. I mean, I think, Dana, shrink is definitely a retail industry problem. And it's definitely something that we -- we've called out in the last two quarters, has weighed in on our margins. We expect it to continue to remain a headwind in the second half, but we have put a lot of efforts in place really to prioritize the safety of our associates and our customers. But we've taken different measures. We are cabling product to fixtures. We're going to just testers within beauty. We have more attendance in the fitting room. We have more presence in the front of store, so we're doing everything we can to mitigate shrink, but really prioritizing the safety of our associates and customers. But I think until -- it's really just -- it's going to be a retail problem until we see a bigger step up I think legislatively, so it's something we've planned for and have put in our expectations.

I'll talk about the stores. We're looking at it very, very thoughtfully in terms of how we should expand. We're really just begun the analysis. And obviously in later earnings calls we'll share more. But one thing we know we're going to do is we're going to open smaller stores. The biggest store will open going forward. It's 55,000 square feet. We'll be adding probably a lot of 35,000 square feet. And we're -- but we're still developing the seed points where we can have additional stores. Again, that analysis is being done now. But mostly we're really looking at the size of the stores and we're looking at the cost of the stores. And we're looking at how we effectively can and add some additional stores, but we're going to do it with a lot of analysis behind it. As far as the home goes, I think there's opportunities both in brands and in private label. Maybe a little bit more in brands because of the fact that we want to chase product and we've already do -- we're already doing that. And going into the market and buying the product in real-time. As far as margin goes, I think it could be home decor is higher margin business. So the more we go after that, I think it could be a positive to the gross margin overall. But again, it's -- a lot of chase is going to happen in this business because we want to be able to react in real-time.

Thank you.

And your next question comes from line of Blake Anderson from Jefferies. Your line is open.

Hi. Good morning. Wanted to dig in a bit on Sephora. You had an impressive result there. Can you talk about the acceleration in the comp up to greater than 20%? What's driving that in terms of new customers versus transactions or basket? And then for the newer stores, are they still performing on a similar trajectory? And lastly, any beauty categories to call out that were stronger? Thank you.

So I think, obviously, Sephora has been a great performance for us. We continue to see it accelerate and I think it's just the fact that we're now getting those customers to come back repeatedly in terms of their replenishment. So we continue to see an acceleration in that. I would say newer stores are performing actually better. We're smarter I think on the assortment as we open these stores. So when we opened our first 200, we learned what our customer wanted, maybe relative to what Sephora had opened their stores with. So now we're getting smarter on how we're actually bringing those forward and really being able to be smarter on opening. But then even with replenishment, we're getting better in terms of how we're replenishing. So I think we feel great with how the new stores are opening and the existing stores are performing. So you can see they continue to accelerate on that. We do continue to bring new customers in. They're younger, they're more diverse. So I think that's a big opportunity that we talked about in terms of getting them to cross shop through the store. I think a lot of the areas that we indicated were white space for us, particularly impulse, gifting and home decor, it's a quick add into the basket. So as we're able to have a stronger presence of that in our store, we can take advantage of that new store and those extra steps coming in, in terms of that. Top selling brands, we talked about it, were Sol de Janeiro as well as the Sephora Collection, which is an opening price point, but then Charlotte Tilbury, which is a really high price point. So we're seeing that customer shop across all of the areas. And then I'd be remiss to talk, not talk about, we have men's brands, which is something you don't see in a Sephora store and we're seeing Clinique for men. Jack Black performing incredibly well there as well. So I just think we continue to learn. We continue to bring in new customers and we just have an opportunity to convert those customers into our loyalty program and getting them to shop. We are seeing those customer shop two times more often than our existing customer. So really we're going to have an opportunity to build on that as we build the assortment that Tom has indicated throughout this call.

Yeah. And I think the other thing that's pretty exciting about it is the smaller format store, which we brought in five -- where we set up five and they've done very well. So it gives us the confidence that we can have Sephora in all of our stores.

That's super helpful. And Jill, could you remind us how much expense is in each of the quarters this year for the new Sephora stores? I was just trying to figure out the impact to quarterly SG&A.

Yeah. I think really the biggest thing in Q3, the increase is going to be -- we have 50 stores opening in August that are full-size shops and 45 small shops that are opening in October. The Q2 numbers were up against Q2 numbers last year, so there wasn't a huge amount of increase from that perspective. So I would just say the step up in Q3 will be mainly those investments. We're also putting in our self-checkout in Q3, which has expense related to it in about 250 stores. We continue to see wage pressure, which you've seen throughout the year, which is a build on that as well. And then I think, we benefited in Q2 more than we had expected with the inventory reduction. So inventory being down 14%. We had said we were going to work in the mid single digit range, so obviously that benefit our SG&A because we had less store payroll and less logistics costs to move those units. I would tell you that in the rest of the year, we're still planning to be managing inventory in that mid single digit range. In fact, we want to make sure we're protecting ourselves in holiday. So I would say mid single digits, maybe a little bit better than that. Obviously, we're going to react and chase appropriately given the demand that we're seeing.

Thank you. Best of luck with the second half.

Thank you.

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

Thanks. Good morning. Can you guys talk about the success you're having in Sephora getting those shoppers to cross shop into other parts of the store. And I guess, over the past couple of years how that's evolved?

Sure. I think we talked about I think around 40%-ish of our customers to 50% are shopping around the store. So we continue to see that that's an opportunity. I think, like I mentioned, the big opportunity is going to be around these white space pieces. It's home decor, it's impulse, it's gifting. Those are easy adds to the basket. Particularly in home décor, you're going to see that in a much better opening price point. And so it's going to be easier for them to put into the basket. And then I think, the bigger opportunity and Tom has spent some time talking about that is really getting the woman to shop into the women's pad. And I think we know we have some opportunities there in terms of brands and fashion, we're working through that. So I think we feel great that we're in that 40% to 50% cross shop rate, but we think we can do more with that given the white space opportunities we've outlined as well as women's and moving that into the right direction and getting her to shop across that pad.

Okay. And is there any way to like think about how that 40% to 50% has evolved over the past couple of years. Has it continued to improve or has it been that way and just been stable?

I think it's been pretty stable in that range for -- since we've opened up the stores. I'd say in some of the more mature stores, the customers coming in maybe more for a replenishment trip, so we don't get as much in that basket. In the newer stores, they are excited just to see what Kohl's has to bring because they're a new customer. But I would say that has been a pretty stable range in totality, overall, but maybe the more age stores. I think hopefully when we introduce some of this newness, we'll gain that excitement back.

Okay. Great. And then another one for you Jill, just on the cadence and phasing of the back half of the year. Is there any way you can hold our hands on both the comp as well as the credit line? The comp on a one year basis is pretty similar, last year the cycle in 3Q and 4Q, but on a multi-year it's a little bit more choppy. So if you can maybe help us on that would be helpful.

Yeah. I think overall -- let's not talk about the 53rd week because obviously you get the 53rd week benefit in Q4. I think if you look at it on a -- I did the two-year stack for you Chuck, because I know how much you like stacks. I think you're going to see a pretty consistent two-year stack is what we're really outlining X the 53rd week. You saw -- if we looked at it, the two-year stack would've fallen a little bit in Q2 from Q1, but we did see that stack improve as the quarter went on. So I would say the exit rate was actually better than the two-year stack in Q1 and I'd expect to be around that level in Q3 and Q4 X the 53rd week, if that helps you.

It does. Great. Thanks Jill. Appreciate it.

Yep, of course.

And your last question for today comes from the line of Paul Lejuez from Citi. Your line is open.

Thanks. It's Tracy filling in for Paul. I had two questions. The first is I was wondering what your AUR and traffic looked like in the second quarter and what you're expecting for AUR in the second half. And then I was wondering if you could tell us what the overall comp were in stores that had Sephora locations opened in 2021 and 2022. Thanks.

Yeah. I would tell you, Tracy, the components AUR has been a driver for us for some time. I think we've talked a lot about. We've seen AUR growth and that's really going to be a function of the effect of the brands that we're bringing in. Obviously, Sephora has a higher ticket, which you would expect, which is driving our AUR up. But then on top of that you think of Tommy Hilfiger, Eddie Bauer. We're seeing our Nike and Under Armour businesses do well. So that all drives ticket. And I would say that's been pretty consistent over the last probably four or five years that we've seen our AUR moving up. And I would say we're going to expect that increase to consume, but I think more moderately now that we're comping some of these brand introductions and obviously continuing to be focused more on value. So we talked a little bit about our key value items, really focusing on driving the best, most competitive out the door price and focusing those in our private label, which we think could be really important to a customer in this uncertain and strained macroeconomic environment. So that's really where I would say we continue to look and see. And in terms of Sephora, I think we just feel good. It's up 20% as you can imagine. It's definitely driving a benefit. Our stores were flat on the quarter. We're up one on the season in our stores, so obviously it is driving much more productivity outta the box, which we're very, very pleased with.

Thank you.

Thanks. End of Q&A:

Thank you to everyone listening on the call today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.