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 First Quarter 2025 Kohl's Corporation Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. [Operator Instructions] At this time, I would like to turn the conference over to Trevor Novotny, Senior Manager of Investor Relations. Please go ahead.

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements. 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. Please refer to the cautionary statement regarding non-GAAP measures and reconciliation of these measures included in the investor presentation filed as an exhibit to our Form 8-K, as filed with the SEC and available on our Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So if you are listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me this morning are Michael Bender, our Interim Chief Executive Officer, and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michael.

Thank you, Trevor, and good morning, everyone. Thank you for joining Kohl's first quarter conference call. I'm honored to assume the role of Interim Chief Executive Officer at such an important time for our company. Kohl's has a substantial opportunity to better serve our customers every day, build long-term financial health, and deliver shareholder value. While I'm no stranger to Kohl's, having served as a board member since 2019, I'm also very familiar with the consumer retail industry. I have over 30 years of experience in the industry, holding leadership positions at Walmart, L Brands, PepsiCo, and most recently I served as CEO of iMart Express. I'm excited to leverage my Kohl's board and past leadership experience to lead and support Kohl's through this CEO transition. I do want to recognize that there has been a lot of change for Kohl's this past year, especially the last few weeks. While change can be difficult, it also represents an opportunity to reassess and commit to a path forward. The good news is we already have that plan in place for 2025, and we're making good progress against this plan. Our plans, which are centered on customer priorities, have us working more collaboratively across the business, staying more accountable for incremental progress, and communicating more transparently to effectively drive the work. As we navigate through this period of change, we're committed to moving forward and showing up for our customers each day. It has been a busy few weeks. And I've enjoyed the opportunity to dive into our business. After visiting several stores and engaging in meaningful conversations with key partners, vendors, and investors, I'm more energized than ever about the road ahead. Seeing firsthand the dedication of our teams, the strength of our operational network, and the passion of our partners…

Thank you, Michael, and good morning, everyone. Our first quarter results came in ahead of our expectations. And while we are in the early stages of our initiative, it is clear that the actions we are taking are beginning to resonate with our customers, and we are starting to build momentum in key areas. However, I want to level set that this is a turnaround and will continue to take time, and much of the work remains ahead of us. Progress starts with the actions we are taking in 2025 to address opportunities and better serve our customers. These efforts are centered on three key areas of focus. First, offer a curated, more balanced assortment that fulfills needs across all customers. Second, reestablish Kohl's as a leader in value and quality. And third, deliver a frictionless shopping experience. Let me begin with our first area of focus, offering a curated, more balanced assortment that fulfills needs across all customers with a goal to drive improved assortment clarity and a purpose behind each brand. Our focus over the last couple of years has been heavily weighted on new products to attract new customers, and we have deemphasized products and categories that are important to our loyal customers. We know our customers come to Kohl's with an expectation that we will deliver the products they need for themselves, their families and their homes. We are working to rebalance our full product assortment across all categories. A more curated balanced assortment will ensure a more consistent and inspirational shopping experience every time. The most notable area we are correcting is our jewelry business, which we displaced as we rolled out Sephora in our stores. This was a category that was highly penetrated by our most loyal Kohl's card customers. In fall, we reintroduced…

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And we'll go first to Mark Altschwager from Baird.

Good morning. Thank you for taking my questions. Maybe to start off for Michael here. The strategic priorities outlined today fairly consistent with what we heard on the last call, -- just any adjustments you're planning in the near term? And what do you think it will take to return to comp growth?

Thanks for the question, Mark. And good morning. I'm 30 days in, so it's early days, but the evaluation of the plan is not something that we're considering major changes to. As a board member, before I stepped into this interim CEO role, we are very aligned with the management team on the strategy that we're executing. So I don't see us making major shifts or changes to what's been articulated in terms of the strategy going forward. As it relates to your second part of your question with respect to what it's going to take to restore growth. As Jill mentioned, we're in the middle of the transformation in early days, honestly, of it. And so it's going to take some time for us to get back to that. But the bottom line is that we're trying to align the business to meet the needs of our customers. And right now, our customers -- some of them are stressed. And so we're trying to focus on value, and restoring that confidence that the customer needs to be able to come to Kohl's and find what they're looking for at a great price so that they can stretch the dollars that they're looking for. I look at it almost Mark, as when I break it down, there are kitchen table conversations going on across America every day. People are trying to figure out how to make sense of the dollars that they have to spend and they're prioritizing where they want to put it. And so for -- put those dollars. And so for us, what's important is making sure that we are as close to being inside their heads and understanding what their needs are and meeting those needs at the time they need them. And that's what it will take for us to get back to growth over time.

Thank you. And Jill, just with respect to the guide, first, any color you can share on quarter-to-date trends would be great. And then you're holding the full year guide even with Q1 ahead of expectations, and then obviously, there's the tariff piece. I was hoping you could just walk us through some of the puts and takes there in terms of your thought process for the year? And what specifically are you doing to offset the tariff costs on your direct imports? Thank you.

So I think from a guidance perspective, clearly, we were happy with the performance we saw in Q1, but I think we all know we're working in a very uncertain and what I would call fluid environment. And so as we thought about the pressures that we're seeing in particularly our middle-income customer, the uncertainty that we're navigating for the rest of the year, we just thought it was the right thing to do to hold the guidance despite the beat in Q1, which helps us have the room to navigate through that uncertainty for the rest of the year. In terms of the quarter-to-date trends, I would say our quarter really was a pretty consistent performance. We did see our reg price selling improve as the quarter progressed. And we saw that actually into May. I'll call it one exception last week. It was pretty cold across the country. So we did see a little bit of a step back in our spring seasonal business. But I would say very much attributed to weather one week. And we felt really good with the momentum that we had been building in our regular price business. And a lot of that was driven with the newness that we're flowing in. We talked about on the call, we need to be back into that proprietary brand, and we are seeing that the customer is reacting as we flow in that newness to our proprietary brands. That is an opening price point. So as we talk about value, it's one key way that we can continue to deliver value to the customer. From a tariff perspective, we kind of tried to outline in the call what we are looking at. But back in, I think, 2017, when we were talking about border tax, we had started diversifying our countries of production. And our sourcing team has done a really nice step ensuring that we have a very diverse portfolio of countries that we leverage. And so we're not overly reliant on any one country. So they have been working tirelessly with our buyers to move our production to different countries to the lower tariff countries to help mitigate against those costs. We also have adjusted orders. So we know we have high elastic categories like a small electric that may be taking price increases from a national brand vendor. We'll adjust our orders down knowing that the velocity of that demand just won't be there. And so we're making those choices real-time and working very closely with our supplier and vendor base to proactively offset any imports. Because at the end of the day, our goal is really to continue to drive incredible value to consumers during the uncertainty that we're navigating.

Thank you.

We'll move next to Oliver Chen at TD Securities.

Hi, Michael and Jill. This is Julie on for Oliver Chen. Could you please break down the year-over-year increase to gross margin we saw this quarter in terms of how much came from markdowns versus category mix and proprietary brands? And then any color you could provide on private label penetration and AUR and gross margin delta versus national brands within private label? Thank you.

Yeah. I mean on gross margin, the biggest piece is we're seeing a mix benefit. And I think we've talked a lot about our proprietary brands have a better margin structure. And so as we move more into that, we'll see improvement. Kind of the rule of thumb we use is for every 100 basis points of penetration, we improve our proprietary brands. You'll get about 10 to 15 basis point improvement in our margins. I think the other big thing is, and this is pretty consistent internal and external is my pass around inventory management. The more we can manage the inventory, the better reg selling, as I indicated, we have the better margin structure. You continue to see that a key enabler for us to continue to grow margin. And so I would say those are the two big drivers that we outlined because that's really where we see the benefit coming through from a margin perspective. And I think as the year progresses and our strategy really is aligned around the proprietary penetration. And we don't have a goal for that. We're always going to let the customer tell us where proprietary brand penetration needs to be. But what I would tell you is we're probably at an all-time low what our penetration was, I think we're averaging around 30% penetration there. We've been up and down over the course of the last decade. I will say that we never will hit back to the highs you would have seen when we were closer to 50-50 because Sephora is obviously a national brand and has a large penetration being close to a $2 billion business. But we do have a lot of room here to move back into proprietary brand penetration. And I think it's very timely…

Thank you so much.

We'll move next to Dana Telsey at Telsey Advisory Group.

Hi, good morning, everyone. As you think about the store footprint, and I know a lot of the stores are profitable, how are you assessing what the right number should be? Should there be any additional closings and also the size of the format? And then just lastly is just unpacking the tariffs, just one more time with the latest news on tariffs, how are you thinking about inventory levels and pricing as we get to the fourth quarter? Thank you.

So yeah, I mean, Dana, you know what my take on stores. We have an incredibly healthy store base in terms of they make four-wall operating profit, they make four -wall cash. We do an exercise every year to really look at our store base and understand where potentially there could be some edit. So we closed 27 stores. I look at that as hygiene. It's like 2% of our fleet. So we'll always be looking at understanding what does that mean. We also look at the fleet to say, as leases come due, which you know I think we have about 80-plus leases coming due a year, which gives us incredible flexibility. Are there opportunities to relocate them given just the shift of populations, where competition resides, et cetera, or downsize them as well given what sizes make most sense given community populations? I would say we've learned a lot. We've tried many different sizes. We have a 64,000 square foot store, 55,000 to 35,000 square foot outside of our normal prototype. And so we've really learned like what makes the most sense for Kohl's to be able to deliver the right assortment to the community. And I would say maybe the 35,000 square foot is a little too small. And so we're kind of really focusing and centering ourselves on the 55,000 square foot. And I think that's the way for us to reach more communities that we're not serving today. And potentially, as we make a downsized opportunity at some of our 88,000 square feet just to heighten the productivity of those stores. So I think there's always going to be edits around the store portfolio to continue to elevate its productivity. But I don't see that there's going to be a ton of closures there outside…

And Dana, just to follow on what Jill was mentioning on the tariff question. I think aside from national brands, which we have to follow the pricing on certain brands. We think that within the guidance that we've given, we can manage through the tariff issue. And now what we've said, as -- based on what we know today, that's what we're saying. But as we continue to move through it in last night's the example and the court ruling, I think, is just an illustration of how fluid the situation is. We'll continue to monitor it and make sure that we're taking the right steps. But we've already done that. And in many cases, we're not overly reliant on any one country that's causing us any challenges at this point.

Thank you.

Next, we'll move to Michael Binetti at Evercore ISI.

Hi. This is Jacquelyn Wang on behalf of Michael. Thank you for taking our questions here. Maybe just on Sephora. How many Sephora are in Kohl's right now? And how many stores do you expect to further expand or deepen this collaboration? Maybe a little bit more color on the operating environment in the first quarter with comp growth being at 1%? Thank you.

Sure. So from a Sephora perspective, we just finished the rollout. So I think it's in all of our stores at this point in time. I think 103 stores went or are in the process of finishing up as we're speaking. So we now have a presence in all the stores that we'll have Sephora. The last one that went were a smaller shop. So as we went into the smaller square footage stores, we put in a 750 square foot shop versus our larger stores, heavy 2,500 square foot shop. We actually are pleased with the performance we saw from Sephora. Although the comp stepped down, we expected that. Obviously, this is a relationships that I think now are in our fourth year. So we're going to expect these comps not to be as robust as we have less new stores opening. We are continuing to see market share gains in the beauty space. And we did see, I think, in Q1, in fragrance and hair and makeup are really the ones that stood out for us. I think we had some opportunity more in the skin care categories. As we go into Q2, we do have some newness coming in around hair care and then also make up with Glossier. And then we also have an opportunity with Father's Day. So men's fragrance actually outperformed in Q1. We're going to give it more exposure as we go into Father's Day. So we think that's a big moment as well that we can take advantage of. So as we think about the remainder of the year, I think we're pleased with where we saw Sephora, and it's on pace for our expectations.

Got it. Thanks, guys.

We'll take our next question from Paul Lejuez at Citigroup.

Hi. It's Tracy Kogan filling in for Paul. I had a question on your e-com performance in the quarter. I know you mentioned the sales decline. I was wondering if you could talk about the profitability there and when you think we might be able to see improved sales performance. And then I just had a quick follow-up on tariffs. Thanks.

Sure. So digital obviously improved, Tracy from Q4, pretty substantially. We obviously had some self-inflicted issues in Q4 that we corrected for. I think a couple of things that weigh on digital is it's highly penetrated in our Kohl's charge core customer, which is the area that has been underperforming for us given some of the decisions we've made over the last couple of years. So when we continue to see improvement in the core customer, we'll see some continued improvement in the digital business as well. Second, it over-penetrates in our home businesses and home underperformed for the category -- for the quarter. So we did have a little bit of pressure from that perspective. I would say that, we should continue to see progressive improvement from digital based on a lot of the changes that we're making. I think there's some opportunities in some of our new businesses, like we know Babies"R" Us particularly has a good digital business and how can we capitalize and take care of that. So there are some fixes that we're putting in, but I would say it's going to be a progressive improvement. And it's really going to be around that core Kohl's customer coming in to be able to drive that business forward from that perspective. I mean from a profit, I would say, we always say stores a little bit more profitable because we don't have a cost of shipping, but we're very pleased with the digital business. And obviously, across the organization, we've managed our expenses incredibly well. I think you know we're very disciplined, and we continue to see margin expansion. And that benefits both channels. So I think as we've continued to see below that sales line continuing to improve, that has a benefit on both sides. So from a profit perspective, we still think, I'm pleased with where we're moving it. Obviously, when you have a cost of shipping component, it's going to be a little less profitable than your stores. It's really going to get that top line back in check, and I think it's going to be progress not an overnight improvement.

Got it. Thank you. And just a follow-up on tariffs. I was wondering how much margin pressure you're building into guidance? Or are you assuming that you can mitigate all of it? Thanks.

So we do think we can mitigate a vast majority of the tariff pressures based on everything we outlined earlier in the call. But everything that I just gave you from a guidance has been taken into consideration of any of the tariff exposure that we do have. So we feel very good, obviously, coming out strong in Q1, but then what that means for the rest of the year, we felt good and confident based on what we know today, that we'll be able to hit that guidance.

Great. Thanks very much.

Next, we'll move to Blake Anderson at Jefferies.

Hi, thanks for taking our questions. So first one was, you have a large and loyal customer base, especially with your private label offerings. I was thinking about -- as you think about the path forward back to sales growth, how are you prioritizing growth with existing customers versus gaining new customers?

I would say, first, our new customer growth has been great. Our performance with our new customers and what I would say, I'll call it a non-Kohl's charge customer has actually been positive. So we're feeling really good with the initiatives that we had to attract the new customer, to retain that new customer and actually even to see them shop more widely, particularly we've seen that in our accessories and Juniors businesses. It's the core customer that we are very focused on and what we need to do to get back to growth is to move that customer in the right direction. The good news is this customer has still shopped us. So they haven't stopped shopping us. They're just giving us less of their wallet share. And a lot of this is self-inflicted. So we laid out some of the things that we did. When we brought in Sephora, we took away jewelry. Well jewelry was something they came to Kohl's for, and it wasn't really substitutable. So if I wanted to find a necklace and earings, I didn't come to Kohl's there instead I'll buy a sweater. So we lost that trip, we lost that basket. As we've brought jewelry back in, we've seen it grow both in Q4 and again in Q1, seeing that positivity come through in the whole accessories pad. Just given that accessories status owned behind Sephora does have a nice cross shopping, we had four comp and accessories for the quarter. They also shopped a lot of Petite. So we had exited out of Petite. We brought Petites back in for the -- that customer, again, not substitutable. If you're a Petite, you're not going to buy regular. So we lost that trip, we lost that basket. So as we brought it…

And Blake, I would just add on top of what Jill said, a couple of things to note. We're doing a lot of work right now with our marketing organization to figure out who the -- about who the Kohl's customer is. We know who they are. But to the extent that we can understand how to reach them even more effectively. That's one area. In the store experience itself, Jill mentioned earlier in his opening remarks about the aisle adjacencies and moving products like Junior dresses outside of Sephora, so that when you talk about cross shopping and conversion, those are the types of things that will help enhance the experience that the customer has, once they decide to come to our locations, there or on the website. And then tripassurance is one of the things that's really important for both customers, new and existing and making sure that, that balance between having choice on the floor and on the site, but also depth so that when a customer does choose to come to a Kohl's location that they can actually find what they're looking for and the right sizes and colors, et cetera. Those are things that we're all working through right now as well to make sure that we fine-tune the business, again, to make sure that once the customer decides that this is where I want to go to shop that they can be satisfied with the experience that they have. At the end of the day, a customer asks four questions when they decide to come to anywhere. I mean you put your own hat on as a customer, whether you're going to a restaurant or a Kohl's store, they ask, what do you have? How much does it cost? Where can I get it and when? And we're working down through the answers to all four of those questions with a lot of work that's going on inside of our business right now to really codify what it is we need to do both online and in store to make sure that we're satisfying the needs of customers when they ask those four questions.

That's very helpful. Appreciate all the detail. And then I wanted to ask a follow-up. This was for you, Michael, on national brands, curious at a high level, if you can share any color on conversations recently you've had with your key vendor partners about maybe expanding or changing assortment? And then how do you think about the need to add new national brands over time?

Yeah. I'll take the second part of that question first. And I think as we have mentioned, we're on this journey right now of making sure that we provide the appropriate balance between our proprietary private label brands and the national brands. I think, candidly, we've added a lot of national brands over the past several years or so. And so our customers are actually asking for. And as Jill mentioned, the Kohl's credit customer, in particular, is asking much more for proprietary brands at this point. So we're trying to achieve that type of a balance. That doesn't mean that we won't consider adding national brands and tuning the assortment there. Conversations that we've had so far have been positive in terms of the focus that we have on continuing to provide national brands. We know we need to. That's what a large portion of our customers are interested in as well, and we'll continue to do that.

Great. Thank you both.

We'll go next to Chuck Grom at Gordon Haskett.

Hi, good morning. Thanks so much. On the guide, Jill, you reiterated the 2.2% to 2.6% operating margin for the year. And on late, I don't know if you spoke to the gross margin guide. I think you had formally thought up 30 to 50 and then SG&A dollars. Can you just hold our hands on that front? And then on the gross margin front, just any thoughts on the phasing throughout the year?

Sure. So we talked briefly just about margin. I feel good with the guide, Chuck. A lot of the pressure for tariffs, we were able to offset and what we are absorbing was in the guide. So we feel comfortable with the fact that we'll hit that for guide. I would say on the cadence for the year, maybe look at Q2 on a two-year stack, the same way that you looked at Q1. And then the back half, we think we have some room to do some things. We're going to still be incredibly focused on value. We are going to get benefits, Chuck, on our proprietary brands. So as that newness flows and we get that throughout the year. That's why I feel like back half, we have a little bit more room that's margin accretive for us. So we'll continue to look at that. We are bringing products back into the coupon. So we do think being more promotional and being -- having value orientation throughout the year is going to be important, particularly because this middle income customer that we serve is pretty stretched in today's environment. So I feel like the 35 -- 30 to 50 points that we gave for margin is definitely still something that we can achieve, given all the efforts that our teams have put forth to mitigate tariffs knowing we had these strategies to go back into proprietary brands and have more coupon eligibility. And so what I would just say maybe on the two-year stack for Q2, look at it like you did for Q1. And otherwise, I'd say in the back half, we have some additional benefits of penetration for proprietary.

And we'll take our final question today from Brooke Roach at Goldman Sachs.

Good morning and thank you for taking our question. I was hoping you could dive a little bit deeper into the progress that you've made in the women's business. It sounds like you do have some green shoots emerging in Petites. If you look at the women's business as a whole, when do you expect to return to sustainable growth in that business? And how should we be thinking about that cadencing throughout the year?

Yeah. I can start on women. What I would say is women's is one of the, I think, fast adapters and moving into market brands. And so we definitely moved out of our proprietary portfolio more into market brands. And I think our choices were up double digits and our debt was down -- relatively down double digits as well because we're still managing inventory well in that area. So given the fact if you look at historically, women's had an outsized penetration in proprietary brands, I think they're like 60% to 70% penetrated in proprietary brands. This move had a pretty big impact to their business. And so as they're moving back into proprietary brands, we're seeing that momentum build. And I'll use Juniors. I mean, that's our fastest fashion business. It's our fastest business that we can correct and it was only down 1 in the quarter. I think if you look at brands like SO and Sonoma, we're moving back into those brands. We're starting to see some momentum there. Lauren Conrad, we called out as a positive. So as we brought more of that in, it's helped the women's business. So I would say this will continue to be a progressive improvement in terms of getting women's back to positive growth. Dress is still a great category for us. It's a white space category we moved into. So really continuing to build momentum behind some of that newness, but making sure that we still deliver the depth on key basics and essentials, making sure that we have the proprietary brands that those customers have come to love and they're looking for, I think, are going to be key areas for us. I think one other place that rolls into women's has been intimates and that's been a little bit of a laggard in terms of losses [ph] from sales. So I know that, that's another place that has a lot of SKU intensity there. So really looking at building some clarity and kind of reducing some choice count and having some more depths in those categories as well. So I would say we'll see improvement in women's throughout the year. But I don't know, like I can't tell you when it gets back to positive growth, but I think everything that the efforts they have a foot are making the right movement for us to have progress in that category.

Great. And then just one quick follow-up. Are there any updates that you can share on your credit business for the rest of the year? How you're thinking about that from a cadencing perspective, but also how to get that back to a more flattish growth figure in the future?

Yeah. I think don't forget, we made the move up to -- from SG&A into other revenue. So a big portion when we guided -- I think we guided that line down 12%. And I had said without that move, we'd actually be better than our sales. So I just want to make sure that that's understood that there's a onetime adjustment that showing a drain on that line that has nothing to do with the actual portfolio itself. We talked a lot about our core customer book being down that weighs in on our credit, right? So as those sales are down, you build less of your AR and therefore, you have less revolving balances. So that is kind of weighing down on what we're seeing there. So as those credit customer sales that we're very focused on, continue to make positive improvement. We'll see that obviously transfer into that revenue line. But I would say it's still leading from a sales perspective. It's just that change in terms of SG&A that's really showing the weight down.

Great. Thanks so much. Best of luck. I’ll pass on.

Thank you.

And that concludes the question-and-answer session and today's conference call. Thank you for your participation. You may now disconnect.