Good morning, and welcome to the Kohl's Corporation First Quarter 2024 Earnings Conference Call. Please note that today's conference is being recorded. [Operator Instructions] It is now my pleasure to turn today's call over to Mark Rupe, SVP of IR 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. 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 investor presentation filed as an exhibit to our Form 8-K filed with the SEC, which 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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. Our first quarter results did not meet our expectations and are not reflective of the direction we are heading with our strategic initiatives. We knew the first quarter would be our toughest comparison of the year. This was predominantly due to last year's elevated clearance activity, which was more than 600 basis points of drag on comp sales in Q1. That said, we expected our regular price business to offset this headwind. Regular priced sales were strong through the first eight weeks of the quarter. those softened in late March and into April, especially for our spring seasonal product. And while regular price sales did increase low single digits in the first quarter, their best quarterly comp performance since 2018, they were below our expectations. With the clearance headwind now behind us, we expect our performance will improve building on our positive regular price trends driven by our early success in new categories and continued growth in Sephora. We are also effectively managing inventory controlling our expenses which resulted in gross margin expansion and SG&A decline in the quarter. However, there are areas of opportunity that we are actively addressing, including our active and jewelry businesses. We continue to have high conviction in our strategy. supported by the traction we are gaining in our key growth areas as well as the increase we are seeing in the number of new customers. That said, as Jill will discuss in more detail, our updated fiscal year guidance reflects the first quarter underperformance in a more conservative outlook, given the ongoing uncertainty in the consumer environment. As it relates to the consumer backdrop, our customers continue to be pressured by a number of economic factors, including high interest rates and inflation. While spending among our high-income…

Thank you, Tom, and good morning, everyone. For today's call, I will provide additional details on our first-quarter results as well as an update on our fiscal year 2024 guidance. Net sales decreased 5.3% in Q1. Comparable sales declined 4.4%. As Tom indicated, clearance was a significant headwind in the first quarter, representing more than a 600 basis point drag on comp sales. Stores slightly outperformed digital in the quarter, with both down to last year. Other revenue, which is primarily our credit business, decreased 5.7% in the quarter as loss rates increased year-over-year in line with our expectations. Now let me turn to the rest of the P&L. Gross margin in Q1 was 39.5%, an increase of 48 basis points. The improvement year-over-year was driven primarily by strong inventory management and lower freight expense. SG&A expenses declined approximately 1% to $1.2 billion in the first quarter. As we continue to control expenses tightly across the organization, while also investing in marketing and our new growth initiatives, including new Sephora shops and impulse queuing lines. Depreciation expense in the first quarter was $188 million flat to last year. Interest expense was $83 million in the quarter, down $1 million from last year. Net loss for the quarter was $27 million, and loss per diluted share was $0.24. Now on to the balance sheet and cash flow. We ended Q1 with $228 million of cash and cash equivalents. Inventory at quarter end declined 13% compared to last year. As we have discussed in past quarters, inventory management has been a key focus of ours, with the goal of increasing churn, which we were able to do in the first quarter. Our new disciplines once again allowed us to operate with greater flexibility and manage inventory more efficiently. Operating cash flow with…

[Operator Instructions] Our first question comes from Bob Drbul from Guggenheim. Please go ahead. Your line is open.

Hi, good morning.

Good morning.

Tom, I was just wondering if you could just talk some more just around the general confidence in the strategy on a go-forward basis. When you think of some of the challenges that you're seeing within your own business and even within the industry?

Okay. As the prepared remarks indicated, we feel very good about what we have in terms of our overall strategy. We're going to tweak things along the way. I think when you look at the first quarter results the clearance headwind really hurt us, 600 basis points. So we had a strong performance in our regular price business, which obviously is important, especially for go forward. But fundamentally, things that are working as part of our strategies, support is still working very well, with a 60% total growth and 20% comp. And we've done very well in categories in the home, which are part of our major strategies, like seasonal and everyday decor. Our pet business is good, our gifting business is good, impulse is good. We've made a lot of progress in our apparel businesses by growing the polished casual and dress business really across the board. Our value strategies are working, our high volume pricing has worked very nicely. We've gotten a lot of positive feedback from our customers. And we're doing a good job of managing our inventories and expense. And so those fundamentals are still in place. And Jill talked about reducing our long-term debt. But we have work to do though, candidly, even though we feel our strategy is a good one, but we need to do a better job in rebuilding our active business. That's one of our priorities overall. The accessory business, our jewelry business is a huge, huge opportunity for us. We've lost a lot of business with the Sephora rollout overall. And some of the legacy businesses in homes, such as floor care and bedding and kitchen electric, underperformed, so we're working hard on that to bring in more newness in that. And then we're working hard to drive traffic in stores and in digital. So -- but long answer, but we feel good. We feel good about what's happening. And we feel good that the clearance headwinds, we took a ton of markdowns in the fourth quarter of 2022 to clean all the inventory up. So obviously that was a huge headwind for us in the first quarter.

Great. Thank you very much.

Our next question comes from Oliver Chen from TD Cowen. Please go ahead, your line is open.

Hi, Tom and Jill, a lot of helpful comments. Why do you think the clearance impact was worse than you had originally guided to? And as you think about the biggest needle movers going forward, it sounded like Junior's Active Apparel Jewelry. What will really drive the comp better, as we think about guidance and what should happen sequentially in the back half? And a follow-up with your comp guidance for the quarter, what's assumed for June and July relative to May? And are you thinking that traffic will be negative, positive or flattish? Thank you.

Sure, I'll start. And just for clarification, it wasn't clearance that I think we got wrong on the guide. It was just, it was a big headwind in the quarter. I think that was unique to us. And what we did is we started the quarter well with our reg price business incredibly strong, offsetting the clearing headwind. And so as we came out of the market, we felt really good initiatives and the momentum behind those to help offset clearance as we moved into the latter part, the late part of March and into April, we saw a slowdown there, reg price selling, particularly around our spring seasonal goods. And that became the headwind that we couldn't overcome to get back into that flattish comp that we had guided to enter. And so that really is what happened in the quarter. I think fundamentally the company still did well, we manage the inventory when that a lot of new discipline in the past, we want to add to being down 13% inventory when we saw the sales decline really is a testament to that new muscle that we have that obviously helped drive our margin and we are able to hit our margin. And then we pulled back on expenses. So our expenses actually came in better than we had anticipated because we are able to react. So I think that just goes to the testament of this organization and the agility we have when we do have some businesses on the top line that really came that regular-price slowdown. So if I got a comp guide and on for Q2, obviously not going to speak to the monthly our guiding. But what I would say is when we saw improvement in our business, once we got through the clearance impact, we saw a lot of that comes through our traffic and transactions, and that was actually relatively flat as we went into March and April. So we do see that we are gaining those steps and the momentum, but we also know the company, the customer as a little bit more discerning out there that we have to make sure are putting our first best step forward with that value, which you know calls is known for, and that's what we're going to go ahead and do. You know May did start out a little slow like April ended but what I will say is that we are progressing. We're seeing ourselves pick up, particularly in that spring season doesn't coming a little bit later. We can continue to see the momentum in the strategic initiatives that Tom has outlined, and that's what's really helping us drive back to say the rest of the year will be flat to down two, but we're still being mindful of the uncertainty in the consumer and the macro environment.

Yes. And to answer the question about what's going to drive the comps, as I mentioned before, support to see is going to help us a lot on the balance of 140 shops will be rolled out by the end of the second quarter. So that should help us a lot. Building on our underpenetrated category, as I mentioned before, the core business is up 30%. That was up 100 gifting up 30, impulse up 60. We opened up 100 impulse queuing lines in the first quarter. We have another 50 that we're rolling out in the second quarter and 200 million in the third quarter. So obviously, that based on the performance of that, that will be good. And we're doing well in juniors from a regular price perspective with all the new market brands that we're introducing. The women's dress business has been very, very strong. Men’s suiting has been very good as well. One of the things that we're working diligently on, as I mentioned, is how to rebuild -- how to rebuild our active business to the level that we want it to be. But it was really negatively impacted by a significant amount of clearance in the first quarter as well. We ended inventories at the end of 2022 high inactive. But -- so we have a lot of things that are working that are going to help the comp overall. And obviously, we're working diligently on that.

Thank you. Best regards.

Thanks, Oliver.

Our next question comes from Mark Altschwager from Baird. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. So the 600 basis point headwind on the lower clearance, how much of that would you categorize as somewhat onetime as you cycled last year's actions? And how should we think about that moving forward? And I guess you continue to manage inventory very lean. So would it be fair to think that reduced clearance product availability would be a headwind moving forward? And then bigger picture, do you think you're losing a cohort of your customer base to other retailers as you manage to this much lower level of clearance product? And what are you doing to engage that customer and make sure they still see value in the overall assortment, but that clearance product no longer being there to such an extent?

Well, first of all, the clearance levels going into 2023 totally unique. It was a once in a lifetime clearance level, because of trying to clean everything up as we went into 2023. So it's highly distorted. As a percentage total of our business it was obviously larger than ever. So we never want to get to that level. We want to sell the appropriate amount of clearance, but we're focused on regular price as well. But the situation going into 2023 was totally unique and we're never going to get to those levels. It's always going to be part of our business. But reducing our inventories overall in U.S. were down 13% at the end of the first quarter. We're not going to have as much clearance and we're going to go after the customer with building our Sephora business and building our underdeveloped, underpenetrated categories in home, we're going to go after gifting, we're going to go after impulse. We're going to continue to broaden our mix and apparel to include even more polished casual and dress. So we have a lot more than clearance. You don't want to pivot or you just don't want to have a business that has an underlying huge clearance position because that just shows I mean, those are mistakes, so we want to focus on regular price business.

Yes, I think just to summarize it, I would assess the whole 600 mark as it relates to Tom's point, coming off of what I would say is a highly unique one-time situation and clearing out the inventory. And we're going to have the regular balances of clearance going forward. So I think it's not a headwind, it’s not a tailwind because it's just, as Tom mentioned, part of the business. And that's really how we looked at it when we gave the guidance. I think the other thing is the newness we’re bringing in and it's really working. And that's really that discovery element that we're bringing with these market brand and having a faster turn, which we were able to improve our return quite significantly in the quarter. And that's really what we're looking to do is making the right price inventory work harder for us to better margins, we can deliver newness more frequently. So it's really just a better model that we are moving into, which will be a healthier business for us to be in and really deliver for the customer, but not for lack of value. We're still going to have value, we’re still not going to find on the clearance tracks, you're going to find it when you come in and sign new brands, brands you're not expecting and having it at a great price.

Thank you. And Jill, with the reduced comp outlook for the year, can you speak to any incremental opportunities you see on the cost side of the equation? And then is the 7% to 8% still the right way to think about longer term? And just any help in bridging the kind of that 400 basis point expansion versus what you're planning for this year? Thank you.

Absolutely. I think we held our margins are selling on the 40 and 50, which I think puts us at that 37 mark, which we spoke about as being at the high end of that bridge and the 7% to 8%, we feel really confident with that. I mean, everything here we talked on inventory and ranked price selling is really helping us continuing to drive the margin. And that's really what you're going to continue to see – organizations. So I feel very good with the margin we held that guide. It was in the 7% to 8% framework that we outlined a couple of years ago. From an SG&A perspective, we saw the numbers came in better for Q1. We did say they'd be down in that 1.5 range and for the rest of the year. So we know we're going to pull back commensurate with the sales being down. It's something that we're really getting calls. We have a great cost, disciplined culture. We are always looking for operational efficiencies across the organization. And so this is where it will play into that game or pullback on some of these expenses. We are still going to invest in growth initiatives. So as Tom mentioned, we're rolling out the impulse lines. We're going to do Babies R Us, and we have the Sephora shops, those are important. And so we're going to make sure that we're putting the expenses, where we're going to get that return back. And those are key projects that are going to be drivers for sales as we move forward. The big piece of getting back to 7% to 8% right now is going to be growth. That is really a huge focus of what we're looking at. A lot of initiatives like we mentioned are working, but we also are addressing the fact that we have opportunities and we’re well verse what those opportunities and we're working towards correcting those. And when we get back to growth, that's when you're going to see that margin expansion happen. But it will obviously take some time.

Thank you and best of luck.

Thank you.

Our next question comes from Matthew Boss from JPMorgan. Please go ahead. Your line is open.

Great. Thanks. Hi, so Tom, could you elaborate maybe on first quarter trends that you saw at stores versus digital? And how best to think about the sequential cadence across channels that you're expecting in the second quarter versus back half of the year? And then Jill, I just wanted to circle back on trends that you cited in May relative to what you saw in March and April with reg price selling.

As far as the digital two stores, our business, we're closing the gap, as you know, stores away outperform digital last year. And then the first quarter, they were much closer together. Going forward and incorporated in our guidance is the fact that we see digital and stores performing at the same similar levels in terms of comp. All the heavy promotions that we did previously are behind us now. And now it's obviously normalizing and we should see digital and stores come together.

And then in terms of the trends for me, I think we are really past the clearance component of that, Matt in February into early March. So as we saw the softening in late March and April, I think that's really the regular price business. The core business, I mean, clearance is a small percentage once they get through the beginning part of the quarter. And like I mentioned, we saw this office progress into May, but we are seeing progress and improvement as the month has gone on, particularly in that spring seasonal. It's coming a little bit later, but it's coming. And then the momentum that we've called out to Sephora home décor gifting impulse continuing to still be very productive. So as we’re making some of those corrections that Tom mentioned, particularly like newness start setting and small electrics, leaning into some more value in that space as well around home. And then impulse line will have more of them. We have 140 Sephora shops that will be opening in Q2. And then, you have Babies"R"Us that really is a huge free and never lost a lot of newness and on a new initiatives coming in front of us as well. That helps give us confidence in that flat to down Q3 for the rest of the year.

Great. And then, Joe, just with the operating margin setback for this year's guide, is there any change to longer term that the 7% to 8% or do you see today's changes more transitory?

I would say there's not a change. We do believe we can get to 7% to 8%. I think a couple of things. Obviously, whenever we do have the CFPB legislation beginning in August in our number, you think that we have offset that we're working for us. But obviously, when you initially when we have more clarity on that will give an update. But at this point in time, I think you know, so a lot of uncertainties that remains in the quarter with them, and that's one step back. But I think we can get to 78%, like I mentioned already at 30 over 37 for our gross margins. That was above the bracket, as you can see. And as today, the discipline is there. I mean, our numbers are down year on year. And I think if you look over the last several years, our SG&A really hasn't risen. We've held it despite the inflation among wages and salaries are products that we're putting in. So we've gotten that discipline, it really comes to growth. And I think that's why the biggest focus here is how we continue to drive top line. And once we get that growth, the financial structure is sound and it's there and it's ready. And as soon as that growth happens, you're going to see that expansion from an operating margin perspective. But it will be more long-term as we step into the growth, and we can take advantage of that.

Great color, and best of luck.

Thank you.

Our next question comes from Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

Hi, thanks very much. Good morning. I wanted to go in and talk about the health of your peers, your customer today across income cohorts. And then maybe if we could talk about trends across apparel and footwear in the quarter relative to down four out of your own pocket regular versus clearance or if there's a way to split it out just to assess the health of those two parts of your business? Thanks.

So I think, we know that customers are definitely feeling pressure. You have heard that across the retail space particularly for us, it continues to be that middle income customer that's been the most impacted. I think that's been a pretty consistent theme for ours. So that's where we really have to lean into value for that customer and make sure, we deliver offering than value, whether that be through newness of value are really through our core customers to enjoy the coupon or going into deeper pricing events that making sure they know that they can come at a scratch further. Another positioning is private brands. It provides an opening price point for us, so I think that's definitely a place that we can lean into from that perspective. We've done a lot with our key high value pricing. Are you able to take some better pricing on our opening price point brands like Jumping Beans and Tek Gear. And as Tom indicated, we're really getting credit from a customer for delivering value as we go out and talk to them. And also in the quarter, our proprietary brand, our reg price business was flat. So we can see that it's really resonating with them as we move into that space and we're able to take those markdowns to happen. So that's what we're going to focus on is making sure that we can continue to deliver value to that customer, because we know at this point in time, the dollar has to be stretched a lot further, and particularly in that middle income customer who's really core to Kohl's.

As far as trends go, we're seeing -- I'm just going to put it all together between clearance and regular price. -- we're seeing great trends in expanding the assortments in apparel to have more and more polished casual and dress up product overall. The customers really looking for that. People are going back to work. People are obviously spending time, I don't know, special occasions, et cetera. So not only is the polished casual and dress good in apparel, we're also doing well in the footwear business as well. So that whole package is trending very well. The one area that's negatively impacting us from a trend perspective, as I mentioned, is our active business. We've done well with our own product, Tech Gear and Flex, but the balance of it, we have a lot of work to do in order to turn that business around overall. We really think it's an important business. We don't think it -- we don't think it should be in lieu of the polished casual and dress, but it's a big category, and we're working on that a lot. Whenever we have some special things in our assortments, as I mentioned in home, that really helps us. And the gifting business is really trending well. We've made a big emphasis in our stores on the gifting side of it. Like our Mother's Day business was very good. We anticipate a good Father's Day business. Americana product is selling very well also. So the impulse thing, that's a big opportunity for us in the future. And again, it's up like 60% already. So that's pretty much the trends we're seeing. Obviously, the beauty trend is huge as well. So it sort of sums it up.

Yes, that's very helpful. Thank you, Tom. Just one for Jill on the model. Just how should we think about the cadence and phasing of comps over the balance of the year? Should we think about it somewhere in the down 1% to 3% range by quarter? Or are you anticipating fourth quarter to be a little bit lower because of the five fewer days? And then on credit, you may have touched on this earlier, upon a couple of minutes late. Are you still anticipating down mid-teens dollar growth in 2024? Thank you.

I'll start with the second one. We are -- there's no change from a credit perspective. It came right in line with our expectations. In terms of the quarter, we'll expect that we still include, as I mentioned, the CFPB legislation in that number, and that's obviously why it's down mid-teens for the year. So the back half is much more down due to the legislation assumption starting on August 1. And then I think in terms of a cap cadence , you know, we're not really giving it. I think we feel really good with the flat to down to. The one thing that I would tell you is we do have new initiatives in front of us. And so as you think of Q2 to Q3 and then in holiday, we're opening up more Sephora shops in Q2, so that obviously would benefit partly Q2 and in the back half of the year. Babies"R"Us really opening in that Q3 period to help benefit in Q3 and then Q4. And then as we talked about with impulse, we'll have 50 stores in Q2 opening, and I think it's like another 200 in Q3 to bring it to the 350 for the year. So that's too in front of us. And then gifting just in general, I think, has been working. We've called it out in terms of Valentine's Day and Easter and Mother's Day. So we're really taking advantage of all of those periods, and I think we're getting better at it and having a much bigger presence in the stores and really resonating with customers to know we can be found for those type of holidays and those type of holidays and those types of gifts. So, particularly in the holiday period, I think you're going to see a much bigger set from that perspective and that should be a benefit as well, so really leaning into those key initiatives. And then, I mean, I just want to call it the fact that our women's business, our reg business is up 3%. And we haven't seen and talked about women's and juniors being positive in any sense in a long time, so really continuing to build off of that momentum as well. We have dress shops like Tom has mentioned, in 700 stores, those set in Q1, but we're expanding them as we move into Q2. So I just think there's going to be some build of these initiatives come throughout the year. But I guess, I'm not going to give you what that cadence looks like. I'll let you kind of discern how you feel that should be.

All right. Thanks Jill. Appreciate it. Thank you.

Okay.

Our last question today will come from Dana Telsey from Telsey Group. Please go ahead. Your line is open.

Hi. Good morning, everyone.

Good morning.

Tom, why – hi, Tom -- why was an ideal…

Hi.

And hi Mark. A while ago, you had talked about enhancements being made in stores, whether it's the queuing lines, anything you're seeing in stores with these strategic initiatives that is -- that you expect to help as we go through the balance of the year? And can you talk about the difference in performance of the digital channel versus the stores channel and what you're seeing? And I think you were thinking about either some remodels or downsize or new stores, how should we be thinking of that in light of the current environment? Thank you.

To answer the first -- the last question first. We're doing a regular maintenance on our stores this year, but we're not going to have any major remodels or any resets in the stores right now, focusing on the business in totality right now. So that's really key. The digital versus store business, we're really looking at them being comparable in terms of trends. There was a much shorter -- there's a much smaller spread between digital and stores in the first quarter. But it's -- we think going forward, they're going to perform at a similar level, as I mentioned earlier in the call.

Yes. And then I would just -- I would say, we've talked a lot about in-store enhancements like you talked about, but there are things in digital that we're working on as well, which is why we think they'll really run more in parity. We're doing a lot of sailing initiatives around targeting initiatives in terms of when you go on the store or on a site, if we're out of stock on something, how can we give you your next best choice. A lot of this we're using AI to help us power do that. We're doing more personalized and relevant content recommendations based on consumer behavior, really trying to work on that side of it from a conversion perspective. And then we're improving our search and product recommendations. We're moving to a new platform there as well. So, I think the enhancements we're bringing in store are also complemented with a lot of enhancements we're doing on the digital side, and that's why we think they can run more at parity. And then just to complete out your question, you asked about new storage. I think we have five new stores this year that are opening one reload. What I would say is you're not going to see a lot of new store space from us in this year or the upcoming years. I think really, right now, we want to get that formula right in our stores. We're making a lot of changes and a lot of enhancements. I do think you're going to see that smaller stores as we move forward. But we have a lot of work to do there, I think, within the 1,200 stores we own today. So you won't see a lot of newness there until we get that formula right, and then we do think there is opportunity. It will just be more in a long-term perspective.

To answer your first question, now, in-store improvements. As I mentioned earlier, the impulse business is really growing. -- it's up 60%. We opened 100 queuing lines in the first quarter doing 50 in the second quarter and 200 in the third quarter, and it's doing very well. And over the next couple of years, we plan to roll it out to all of our stores where it makes sense in general. We've really built the gifting centers are much more robust than they have been before. We're taking the junior business and we're moving it from -- within the women's business through the front of the store where it used to be so that when the customer comes out of the Sephora shop, they walk right into juniors, and we're working really hard on making sure that we have more trend product in the junior area, maximizing our efforts with the market brand overall. So we -- the stores, I think, are coming together very nicely, and we feel good about what's going to happen in the future.

Thank you.

Thank you. I think that's it. Thank you to everyone for listening on the call today. Have a good day. Bye.

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