Good morning. My name is Audra and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl's Corporation Fourth Quarter 2023 Earnings Conference Call. Today's conference is being recorded. 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] At this time, I would like to turn the conference over to Mark Rupe, Senior Vice President, Investor Relations and Treasury. 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. 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. Today's call will reference material included in an investor presentation included as an exhibit to our Form 8-K furnished to the SEC, which is available on the company's Investor Relations website. In addition, during this call, we may make reference to non-GAAP financial measures. Reconciliation of non-GAAP financial measures can also be found in the aforementioned investor presentation. Please note that this call will be recorded. However, replays of this call will not be updated. If you're listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.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. Our fourth quarter performance capped off an important year for Kohl's. As we've discussed throughout 2023, our company has undergone a significant amount of change across the business as part of our efforts to strategically reposition Kohl's for growth in 2024 and beyond. During the year, we assembled a largely new leadership team, enhanced our store experience, expanded our partnership with Sephora, invested in underpenetrated categories and adjusted our go-to-market strategies in existing categories such as rebalancing assortments across all lifestyles. In addition, we made further progress in simplifying how we deliver value to our customers and embedded new inventory management processes. Through all of this change, we stayed focused and executed against each of our 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. The early success of our strategies is evident. Our store business had its best comparable sales performance since 2010. Sephora at Kohl's continued to drive meaningful beauty sales growth. We managed inventory down 10% at year end and we delivered 2023 earnings ahead of our expectations. I want to thank the broader Kohl's team for adapting to new ways of working and for driving significant change across the organization. We accomplished a great deal in 2023 and while there is more work to be done, I am confident that, through our collective efforts, Kohl's is becoming more relevant to customers. Looking ahead to 2024, we are incredibly focused on driving growth. We are expecting comparable sales to be in the range of flat to up 2%. Key drivers of comp growth in 2024 will be continued growth in Sephora at Kohl's, which will represent over 10% of our net sales…

Thank you, Tom, and good morning, everyone. As you just heard, 2023 was an important year where we made progress in our efforts to reposition the business for future sales and earnings growth. We are excited to see our actions build further momentum in 2024 and beyond. I will now provide additional details on our fourth quarter and full-year 2023 results and then discuss our guidance outlook for 2024. Net sales declined 1.1% in Q4 and 3.4% for the year. Comparable sales, which exclude $164 million of sales from the 53rd week, declined 4.3% in Q4 and 4.7% for the year. Store comparable sales were down 1% in Q4 and were flat on the year, which, as Tom shared, was our best performance since 2010. In the quarter, store sales were driven by strong performance from Sephora at Kohl's and growth in the home category. Digital sales, excluding the 53rd week, declined 10% in Q4 and 15% for the full year. From a penetration perspective, digital accounted for 35% of Q4 net sales and 29% of full year net sales. In the quarter, digital sales trends improved as the quarter progressed, with December and January down mid-single digits percent to last year, which gives us confidence as we look to 2024. Other revenue, which is primarily our credit business, grew 1% in Q4, in line with our expectations as we began to benefit from our recently launched co-brand card, offset partially by higher loss rates. For the full year, other revenue declined 5%. Moving down the P&L. Gross margin in Q4 was 32.4%, an increase of 937 basis points. The year-over-year increase was driven primarily by reduced clearance markdowns as we lapped last year's significant actions to clear inventory. Gross margin also benefited from lower freight expense and digital-related cost…

[Operator Instructions] We'll take our first question from Bob Drbul at Guggenheim.

I guess two questions that I have for you, Tom. I think the first one really is for the full year, can you just talk more around the confidence that you have in achieving positive comp store sales growth this year? And then the second one, I think, for Jill, is on the CFPB ruling. Can you just expand a bit more around your assumptions like the sort of magnitude of the second half headwind, any of the mitigations that you could implement in the second half of the year? I know you talked about that $250 million opportunity, but just a bit more granularity on the credit piece would be pretty helpful to us.

Thanks, Bob. As far as growth goes, we feel very confident about being able to hit our guidance of 0% to plus 2%. 2023 was really a setup year for all the initiatives that we think we'll be able to really take advantage of in 2024. The Sephora thing, you've heard us talk about it a lot. I mean we just feel really, really good about it. And we already have it in 910 stores. We're going to add another 140 small formats. We're already stating that we're going to beat our goal in 2025. So that's going to keep on giving us some plus sales. And then one thing I'm really excited about is what we're doing in our home business. We're investing in a lot of categories candidly that we weren't really in, I mean, in terms of home decor, wall art, lighting, pet. And if you go into our stores now, you'll see the elevated inventory levels in those categories now. I'm really happy with what our team has done so far in order to obviously improve that presentation. Gifting, we've done very, very well since moving gifting to the front of the store. We did well in Valentine's Day. We did really well in holiday, as I mentioned before. But we want to be known for gifting headquarters, and we're doing a good job of getting there overall. Impulse, it's another big category for us. We're adding queuing lines to 350 stores to bring it to 435 totally. I think we're a little bit behind the 8 ball in terms of really building out the impulse business. Obviously, a lot of people are doing it, and we expect significant growth out of that category overall. Today, we announced that we have a partnership with Babies R…

Great. And then, Bob, in terms of the credit and the CFPB, obviously, you know credit has been a really important part of our loyalty program that credit customers are incredibly important to us, not just from the credit revenue side, but they shop at the most, they give us the most share of their wallet. And we have been testing the co-brand card to really be an extension of that loyalty. It actually allows us to reach a broader customer and one that prefers more payment flexibility. So with that launching, we did that last year. We tested it with about 700,000 people. And so as we assume the CFPB legislation goes into the back half of the year in conjunction with that, we’re also rolling out the co-brand card to another 5 million customers, which helps us then offset some of those headwinds. Obviously, it’s a build, so as we gave the guidance with other revenue being down mid-teens for the year and only down mid-single digits in the front half of the year, the bulk of that headwind comes in the back half. But then as we indicated, those balances will build. Obviously, on a co-brand card, it’s a much larger line of credit available to them, and it gives us other revenues like interchange fees to offset. So by the end of 2025, that’s where that incremental $250 million to $300 million will come in to fully offset any headwinds that we see from this legislative changes.

We'll move next to Mark Altschwager at Baird.

You quantified the $2 billion incremental sales opportunity in underpenetrated categories. How are you thinking about the pace and the build to $2 billion? And just any thoughts on sales displacement as you make room for some of these newer categories.

We don't see a lot of displacement of product. We continually are reducing our inventories. We're down 10% at the year-end, so that makes way for a lot of more categories, a lot more choices that we can give the customers. We're looking at the $2 billion over several years. So we'll have incremental growth in those categories really starting now. And Babies R Us will obviously add in the fall season, but it's just spread over several years.

Yes, I would just add, Mark, you know we've talked a lot about having excess space in our stores, and we've tried different partnerships and different arrangements over time to how we can capitalize on that space. So I think partnerships like bringing BRU allows us to really just drive more productivity, as Tom had mentioned, was one of our key goals to do this year. And then obviously, a lot of the market brands and the changes is really just on turn, choice count and leveraging our inventory better than we have in the past. And I think you've seen that throughout the year that we're really committed to that inventory management being down 10% and, as we mentioned on the call, being down again, mid-single digits in 2024.

And just a follow-up on the comp guide. First, just anything you're willing to share on the quarter-to-date trend relative to how you spoke to the Q1 comp? And what are your expectations for Sephora comps for the year?

I think in Q1, you have to remember, February is when we lap our large clearance event. So we would tell you, that's why we expect it to be at the lower end and then obviously, the build of everything that we spoke about. But what we feel really good about is the positive momentum we're seeing in our reg price business. We saw that as we exited the year, we continue to see that positive momentum into February and March, which shows us that our customers are really reacting to the newness that we're putting on the floor. And it's really resonating with them. And so that's been a key indicator that things are working. Tom also mentioned, we saw our Valentine's Day business do incredibly well. So as we really lean into that gifting, we move it to the front of the store. It's resonating with the customer. . Another thing to point out and we talk about Sephora, we actually continue to see really great strength in Sephora. So our comps continue to be up. We're seeing that be a great traffic driver of new customer. We talk about that affinity, and the affinity across the store happens to overlap a lot with these new initiatives. The basket build is an impulse. It's in kids, which now we're complementing with Babies R Us. It's in the juniors business, with us bringing in those market brands are really going to resonate. So we definitely think there's a big opportunity not just that the comps will continue in the Sephora shop but really that halo effect in the rest of the box with a lot of the initiatives that we're enhancing this year.

Yes. And Sephora, another thing that will help the growth is we're adding about seven or eight new brands to the assortments overall. So obviously, newness is very important. But we're seeing from some of the brands that we've had since opening. So Deschanel is really strong. It's one of our top brands actually in the company. The Sephora collection is doing extremely well and Rare Beauty. Those three brands are doing really, really well. So between the newness and the receptivity to the existing brands, we really feel that Sephora can keep on working well.

We'll take our next question from Oliver Chen at TD Cowen.

Tom and Jill, there's a lot of great initiatives, and a lot of it seems incremental. So which part of the portfolio is more of a drag or negative? Is it juniors? And Sephora clearly gets young customers. What kind of closing do they want? And how are you executing to become more trend-relevant? And Jill, as we look at the model throughout the year, the gross margin compare gets tougher, given great execution there. I would love thoughts on the complexion of that as well as thinking we should expect a better second half on the comp side given your Q1 guidance. And then finally, you've been doing a good job cleaning up the online business or thinking about it for the long term. Should we still expect that to be negative and stores to be slight positive? Would love thoughts there as well.

Okay. I'll take a portion of it, and then I'll let Jill weigh in. First of all, online will perform comparable to the brick-and-mortar business. We did clean up a lot, as you said, and we expect it to return to growth in 2024. As far as attracting the Sephora customer, juniors is really, really key. And we're already doing very well. We're going into the marketplace, and we're buying product. And so we can react to trends. The Sephora customer really is trend-driven, and our junior business is going to give us that opportunity. But we were buying a lot of goods in juniors through our proprietary brands. And we'd buy it 12, 14 months out. And by the time we delivered it, it would be dead on arrival just because the customer reacts quickly to trends overall. So using the marketplace to get the product is really going to help us satisfy the needs of the Sephora customer. We feel very confident about that.

And I think a good proof point for that was that we did see a trend change in juniors business. It improved by over 500 points in Q4. So as a lot of these initiatives started landing with that product, it really resonated with the customer. And like I mentioned earlier, it was one of the top things in their basket from a Sephora customer halo effect. So I definitely can build on that. From a modeling perspective, what I would say is we expect margin to actually be up 40% to 50% relatively comp across the quarter. So I think there's some benefit early on from price that may ease, but then we have some other back half. So I would expect that to be pretty comp across the year. You're right with the comp build. So as we mentioned, Q1, we expect to be at the low end of the range, one, because we lapped such a big clearance impact last year in February, but also because a lot of the initiatives that Tom's outlined are going to build. We're launching and building out our impulse lines as we speak, but that's happening end of the quarter. And into Q2 and Q3, Babies R Us is going to launch in the back half of the year. So a lot of these initiatives will build as the year goes on. And quite honestly, it just takes time for the customer to identify and realize we have that newness to drive them back in from that perspective. And then I think the last thing I'd just say from a digital perspective, agreeing with Tom, we think you can get back to it, we don't have the headwinds from the offer reductions. We got through that from last year, which obviously was something that weighed on us differently. But we're also doing things to drive and enhance our search capabilities, so we have better querying, better search results. So there are definitely things that we're doing to drive, not only the traffic but also conversion within our website as well that we think will be contributors to getting that digital back to flat to growth in 2024.

We'll go next to Matthew Boss at JPMorgan.

Great. So Tom, could you elaborate on drivers of store comps in the fourth quarter? I think you cited it as the best since 2010. And then maybe just to break apart your flat to 2% same-store sales guide, what are you embedding -- or what do you need from the core, so meaning apparel and footwear comps maybe relative to the negative performance this year in that category?

Okay. Drivers of comp overall Sephora, home, all the things that I've been talking about overall, the gifting, the impulse. And we really need -- we would need the quarter to help us hit the numbers we want to hit as well. But I think, as I articulated, I think that there is a big opportunity in the core if we can continue to go after things like lady's dresses, the juniors business, as I mentioned before, other polished casual businesses, same with men's overall, just having broader assortments of product. We have to serve a lot of customers, and we want to give them a lot of choices overall. We got a little too narrow in our assortments in terms of too much active and casual. We still feel very good about those categories, but we also feel that we're going to get the growth out of maximizing more of the dress-up product. People are looking for that. People are going out more, and they're obviously wanting that kind of clothing as they -- as part of their wardrobe. They're looking in their closet, and they don't have that product. So we're going to fulfill that.

Great. And then, Jill, on gross margin, what do you see as the right long-term gross margin target for the business? I think your guidance this year implies you exceed the 36%, 37% target for the year?

Yes. I would say we -- obviously, we're exceeding it. So we feel good. I think the algorithm to get to 7% to 8% is still really dependent on our top line growth, and that's where we have to continue to focus what you've heard a lot from us today and why we believe we can get back to growth. On the margin side, we did say 36% to 37%. We're exceeding that. So I would say, I think we can stay a little above 37% moving forward. I also would say our SG&A costs have risen a lot since the algorithm came in, in terms of wage inflation. So between the two, it still balances out to get us to the 7% to 8%, but I would say that our algorithm will be more margin-based based on the experiences that we're seeing. A lot of that benefit coming through from the inventory management discipline that we're seeing, so inventory being down 10%, continuing to plan it down mid-singles, taking our terms or clearance markdowns much more timely. This is less markdowns but more timely markdowns, so they're not as deep as well. And just having more choice rather than being so deep is also something that helps our turns. And so I always look back when we turn fast, we run some of our best operating margins. So that's really the focus on what's going to be a key driver from a margin perspective. And then from an SG&A perspective, we continue to do what we can do, obviously, from a cost discipline. Felt good we are down this year in our SG&A despite our 53rd week. So we’ll continue with that discipline. And with the top line growth, we’ll continue to make progress despite just a little bit of a step-back this year with the legislative change towards that 7% to 8%.

Our next question comes from Dana Telsey at Telsey Advisory Group.

Can you hear me okay?

We can hear you now, Dana.

Good. Perfect. So nice to see the improvements and certainly a lot of the initiatives. Tom, when you think about the private brands, how are the private brands doing? And with the new Babies R Us that's coming in, what does that replace in the store? And then just speaking about the stores, you had once talked about potentially even opening a couple of stores. How do you think of the store base today and the CapEx investment, whether in remodels, given the improvement in the store base? What are you thinking about in terms of that investment?

Well, we feel good about private brands. As far as private brands as a percent of total, it will probably go down a little bit because we're working really hard on delivering more and more national brands. But it's a product that delivers a lot of value on the selling floor. And that's obviously really key. But we are moving forward faster. We're trying to bring in more national brands overall. But we really -- private brands are critical to our success, and we're going to keep delivering that kind of value for a long time. Babies R Us, we have a lot of space, as Jill said, in our stores. And it's going to be part of the infant/toddler presentation. So we're just going to carve some space out. It's about 1,500 square feet. We have 1,500 square feet in the store that we can definitely utilize overall. So it's not really going to displace anything. Again, we're going to continue to reduce our inventories, mid-single digits for the foreseeable future. And we're going to have plenty of space. We're not worried about that at all. New stores, right now, we have five or six stores that we're opening. That's probably going to be our cadence for now. We're still working on what the smaller stores are going to look like. But as far as remodels, one of the benefits of Sephora is we were able to touch stores. We have Sephora in 910 stores of our 1,200. So a lot of those have already been touched because of Sephora when we made the move to clear out the space for Sephora. Do you have any comments, Jill, on the...

No. I would just say a couple of things on the -- a lot of what we're talking about, including Babies R Us, is touching white space opportunities and leveraging and increasing store productivity. And that's really what our goal is. Obviously, we're excited. We ran our best store comp since 2010. So that's a pretty good accomplishment that that's working in the right direction. In terms of store openings, you know we have an incredibly healthy store base that we feel great with the fleet we have. And I think over the long run, we do believe there's more store opportunities. But in this case, like Tom mentioned, we just have to figure out what that box needs to look like once we get a lot of these initiatives in flight. So I would say, our CapEx this year is still assuming we’re going to touch some of those stores from a refresh perspective with the Sephoras, but we’re able to keep that always in the $500 million of CapEx. And then our CapEx will elevate if we decide there’s this new store opportunity. But at this point, we feel really good with where we’re positioned for ‘24.

We'll take our final question today from Chuck Grom at Gordon Haskett.

I appreciate all the color this morning. Jill, can you just touch on the composition of your comp in the fourth quarter between traffic and ticket and then, as we look ahead, how you're planning the 0% to 2% from a similar perspective?

Sure. I think from the fourth quarter, and quite honestly, our biggest issue from comp perspective has been traffic. And so a lot of what you've heard about today on the initiatives is how do we continue to drive discovery and excitement to drive traffic, and our ticket has been relatively flat to up. We've driven higher AURs as we brought in new brands and especially with Sephora, a little bit higher ticket, Tommy Hilfiger, et cetera. So our wallet share has stayed and our transaction has stayed flat to up slightly. It's really been around our traffic that's been down, and that's been pretty consistent. So a lot of the initiatives that we're focused on is how we can drive that discovery, so they want to come in and see newness. It's having more choice count. It's having less depth. It's having that fashion setting a lot quicker, and we're going to be in and out. So there's newness for them to come in and see. I would say that's exactly how we're approaching it this year is the difference between the negative and positive having an improvement from that traffic perspective. We've consistently can see the ATV being up slightly. We expect that to continue, but the improvement is going to come with traffic through all these new brands, these new initiatives that we have landing. Particularly around impulse and gifting, it's giving them reasons to come in and then adding into their basket. So we feel like we're positioned well to achieve that.

Okay. Okay. That makes sense. And then the second question is just on the gross margins. And just to dovetail Matt's question earlier, at this point, your gross margins would be up over 37%. That hasn't happened in a long time. And I'm curious the thought process on reinvesting some of that margin back into price. You talked about the success that you had in the back half of last year in the high-volume pricing with some of the private brands. I guess why not invest more in gross margin to drive the traffic? Just curious the thought process there.

So we did roll out all of our high-value pricing as we stand today. So it is about really value, particularly on those private brands. That's what they stand for, and we're continuing to drive that. I would say one of the things that we're using, and this is a place that we're moving into more automation around, is our pricing strategies and really making sure that we're competitive. We're using elasticity miles. We're figuring out how to price that. So it will drive more from a customer perspective. I would say the benefit we're getting is more around targeted coupons, targeted promotions. Some of the offers that we are giving weren't as productive, and now we're really going to focus it on the customers that will drive the productivity. That's one. Two, like I mentioned, and I don't think I can say it enough, but all my merchant friends listening, it's inventory management and inventory discipline, faster turns, having to take less deep clearance. Less clearance is a huge driver for us as well. And so bringing in that newness and selling more reg price is a benefit to margin. So I would say, we're very keen on pricing. Value has been a core tenant of Kohl's since it's been started, and it will continue to be for us. We think that's a space that we play incredibly well in. So we aren't really driving margin and my opinion at the cost of taking prices up. We're driving margin based on the disciplines that we put in and just the learnings through a lot of the elasticity modeling that we've been able to put in, in the last couple of years as well.

Okay. Great. And then one for Tom. Just where are you guys on the journey to get younger with your customer base? You talked a little bit about the success you have with Sephora. Clearly, Babies R Us is going to help you. But I think that, that journey and where you are is an important thing to keep in mind. So just anything you can share and where you think you can get to over the next several years.

Well, again, as you mentioned, I mean, we're making great progress in that journey. Sephora is really helping us out a lot. The Babies R Us also, as I mentioned earlier, part of that strategy. And then building on our junior business, rebuilding our accessory business overall, even the home decor business, we really feel that, that's a younger consumer, overall. So I would say, we made a lot -- we made good progress in 2023, but we're going to continue to push hard because obviously, we want to be more attractive to the younger consumer. The Kohl's brand also is part of that strategy as well. So we've got a lot of things working in order to have that younger customer come into our stores. So thank you.

Thanks, everyone. Really appreciate it, and have a great day.

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