Q3 2019 Earnings Call

Ladies and gentlemen, thank you for standing by welcome to call Q3, 2019 earnings release Conference call. At this time all participants are in listen only mode, where do we will conduct a question and answer session. If you wish to ask a question. Please press Star then one on your Touchtone phone.

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A reminder, today's conference is being recorded I would now like turn the conference over to Mark Rupe, Vice President of Investor Relations of calls. Please go ahead.

Thank you Greg.

Certain statements made on this call, including projected financial results and the company's future initiatives are forward looking statements within the meaning of the private Securities Litigation Reform Act up 1995.

Goals intends forward looking terminologies such as believes expects may will should anticipates plans or similar expressions to identify forward looking statements.

Such statements are subject to certain risks and uncertainties, which could cause a cold 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 one <unk> and Kohl's. Most recent annual report on Form 10-K , and as may be supplemented from time to time and called other filings with the FCC.

All of which are expressly incorporated herein by reference.

Forward looking statements relate to the date initially made in calls undertakes no obligation to update them.

In addition, during this call we will make reference to adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures.

Information necessary reconcile these non-GAAP measures can be found in our press release.

Which is founded as an exhibit two or form 8-K, with the FCC and is available on the company's Investor Relations website.

Please note that this call will be recorded.

However, replays of this call will not be updated.

So if you're listening to a replay of this call. It is possible that the information discussed is no longer current in cold undertakes no obligation to update such information.

With me today are Michel Gos, our Chief Executive Officer.

And Jill Tim our Chief Financial Officer.

I'll now turn the call over to Michelle.

Thank you Mark good morning, and welcome to Cold third quarter earnings Conference call.

We're pleased to report that our business recaptured momentum during the third quarter returning to growth well the comparable sales increased 8.4%.

The quarter start up positive in August driven by our third consecutive year of growth during the back to school season and ended strong with October being the best performing.

A few of the key highlights of the quarter included an acceleration in our active business continued strength in digital improved performance in our stores and improvement across all of our lines of business versus the first half.

In fact, all of our lines of business were positive except for one which I will address later.

This gives us confidence as we move into the important holiday season.

We have an increasingly relevant product offering we are seeing positive traffic trends.

And we have a compelling marketing plan in place to drive traffic and sales.

Our opportunity to drive growth and capture share this holiday is significant.

We are leaning into growth and investing in customer value to drive engagement and new customer acquisition.

Our holiday kickoff event on November 1st was successful exceeding our expectations.

I'd now like to welcome guilt him as our new Chief Financial Officer, who many of you already know.

They well respected and season finance leader with a great understanding of our business and the retail industry.

She joined Cold and 1999, and most recently served as SVP of finance.

Leading the finance organization and our operational excellence strategy as well as supporting many of our top strategic initiative.

Joe has been an invaluable partner to the entire leadership team and I'm confident that she will continue to contribute significantly to the business.

I would also like to thank Bruce Besanko for his significant contributions to the company Bruce adding great value across many parts of the business. During his time here and further strengthened our overall finance organization.

We wish him well in his retirement.

I'll now turn the call over to jail who'll provide details on our financial results.

After John's remarks, I will return to add more color on the business and update you on a key initiative.

Thank you Michelle and honored and excited to lead calls finance organization. During this very exciting time.

Called is an outstanding company with a strong foundation and promising future and I look forward to continuing partnering with Michel the entire leadership team to successfully drive our strategic initiatives, creating new opportunities for growth and drive value for our shareholders.

I will now discuss our Q3 financial result.

Comparable sales increased 0.4%, representing a significant improvement in the first half of the year decline down 3.2%.

Michelle indicated we had successful back to school season.

However, we experienced softness during the middle of the quarter as we saw an increasingly competitive promotional environment.

Seasonally warm weather and encountered modest disruption from all the activity taking place in our stores as we launched a record number of brands.

We reacted by enhancing our marketing offers and investing more in pricing.

We are pleased with how the business responded with sales accelerating in October .

Digital sales growth remained strong increasing at a mid teens percent rate, which is on top of a mid teens increase in the prior year.

We also saw notable improvement in our stores during the period.

Overall, the was mid west and South central were the strongest region.

From a line of business perspective, all improved relative to the first half of the or.

In particular, mens accessories, and footwear outperformed the company well home and children's wear inline and women's was below the company average.

Importantly, all lines of business were positive during the quarter, except womens which was down 1%.

Michelle will provide additional comments our sales result in her remarks.

Moving to gross margin.

Third quarter gross margin decreased 67 basis point.

Margin contracted more than we planned at the time of our August aren't call.

As we progress through the quarter, we made the intentional decision to be more aggressive with our pricing in response to the competitive environment and to build momentum in October ahead of the holiday season.

This decision along with the unfavorable mix due to the underperformance in our women's business impacted our gross margin.

Well cost to shipping continued to be a headwind at normalizing Q3 and was inline with our expectation.

I see an increased 3.2% as we expected or $44 million to $1.4 billion.

The increase was driven by a combination of the following.

Store expenses increased as expected due to factors, including costs related to the significant number of brand launches.

Wage rate pressures.

Earlier holiday hiring.

And the Amazon returns program.

Marketing expenses increase to support our efforts to accelerate sales.

And technology expenses increased as we continue to prioritize in Boston.

And due to the new lease accounting standard rent expenses higher.

Depreciation expense of $227 million was $16 million lower than last year.

The decrease was primarily due to the maturity of our store portfolio.

Well of the adoption of the new lease accounting standard, which essentially offset the related higher I see an expense.

Net interest expense was $11 million better for the quarter due primarily to the benefits of last year's debt reduction and the adoption of the new lease accounting standard.

Moving on to taxes.

Our effective tax rate for the quarter was 23.6% as compared to last year, 17.6%, which benefited from favorable audit result.

As it relates to one time item.

During the third quarter, we recognized a 9 million dollar gain on extinguishment of debt related to the purchase of leased equipment that was accounted for the financing obligation.

On a GAAP basis for the quarter net income was $123 million diluted earnings per share was 78 thought.

Excluding the nonrecurring benefit, but I just mentioned for the quarter net income was $116 million diluted earnings per share with 74 cents.

Looking at our store portfolio.

We ended the quarter with 1100 59 coal stores.

Gross but it was 98 million square feet and selling but it was 82 million square feet.

Opened for smaller format stores during the third quarter.

Turning to the balance sheet.

We ended the third quarter with $490 million of cash and cash equivalents.

This was a decline from last year, a strong cash flows from operations over the past year, we're used to repay debt. In addition to funding our annual share repurchase program and dividends.

Our inventory dollars increased 1%, which was an improvement relative to last quarters, 2% increase.

We continue to expect to end the year with approximately flat inventory dollars.

Moving on to capital management.

Capital expenditures were $678 million year to date $220 million higher than the prior year as a result of our sixth ecommerce fulfillment center.

And increased investment in our store strategies, including refreshes, new stores and Rightsizing.

Both the weighted average diluted shares and shares outstanding at quarter end were 157 million.

We repurchased 2.7 million shares of our stock during the quarter.

Last week, our board of directors declared a quarterly cash dividend of 67 cents per common share.

The dividend is payable on December 24th to shareholders of record at the close of business on December 11.

Turning to guidance.

As you saw in the release, we're revising our annual adjusted earnings guidance to $4.75 to $4, a 95 cents per share.

Our updated annual guidance incorporates our year to date result, and the investments, we're making to take advantage of the opportunities to further accelerate our sales and capture market share.

We expect the heightened promotional environment to continue through the balance of the or.

Well the topline, we now expect comp sale of down 1.5% down 1% for the year, which implies Q4 comparable sales in the range of flat to up 1%.

As it relates to gross margin rate, we now expect it to be down 60, 65 basis points for the year.

Which reflects our year to date performance and our outlook for the fourth quarter.

Ross you name, we expect expenses to be at the high end of the existing range, which is a one at a half to 2% increase for the year.

As a reminder, approximately 40 basis points on the increase in 2019 is related to the new lease accounting standard.

And lastly, our guidance continues to assume share purchases at the higher end of the 400 million dollar to 500 million dollar range.

I'll now turn the call back to Michelle will provide additional detailed on our result, and an update on our key initiatives.

Thank you Jill let me touch in our Q3 performance and then move into providing an update on our key initiatives for the holiday season and beyond.

On last quarter's call. We highlighted the returned to positive comparable sales trend late in the period.

This continued into August and led to another successful back to school season, driven by growth and many of the key areas, we leaned into including active denim and our children.

However, as Joe indicated we experienced softness in September as we saw an increasingly competitive environment, an unseasonably warm weather.

There was also an incredible amount of activity taking place in our stores. During this time as we launched a record number of brands.

Given the heightened competitive environment, we responded by investing in pricing and enhancing our marketing offers recognizing the importance of entering the holiday season with momentum.

Our decisive actions were successful and enabled us to deliver a strong sales performance in October .

While the quarter didn't meet our expectation I am pleased with how the entire team responded and worked with speed and agility to successfully execute all of our initiatives in doing so we've positioned the business for a strong holiday season.

I will now give you a little more color on our two three sale.

Active continues to be a key growth driver in our business.

Active sales increased 7% compared to last year.

Active apparel sales increased at a high single digit rate driven by strong performance from our three key national brands Nike under armour entity to.

As well as additional relevant brands, including champion.

An active footwear returned to positive growth with solid results from Adidas under armour bands anything.

During the third quarter, we added under armour, big and tall and further executed against our in store acted expansion strategy.

We increased the number of stores with additional acted space to approximately 160 from 30, and we added 100 Adidas shop in shop, expanding the penetration from 75 to 175 doors.

Now some additional details on our lines of business.

Men led the company driven by act isn't big and tall.

Our team business was also strong and benefited from the launch of our expanded online assortment with an addict.

Men's casual apparel was also a strength and from a brand perspective, Levi's and hager as well as our private brand Sonoma an apartment nine all experienced solid growth.

Our accessories business performed well once again and was above the company average driven by strong growth in beauty, which was led by fragrance.

We're also particularly pleased with the growth, we're seeing in fine jewelry and in our gifting categories.

But were also performed above the company average and we're pleased to see this returned to growth after a soft start to the year.

Growth was driven by active in our women's dress casual business.

Oh improved significantly in Q3, driven by the introduction of our new brand Koolaburra by alcohol and Scott living.

As well as innovation in many of our tea categories like Housewares and electronics, where we saw strong growth in vacuums and gaining.

Home in particular benefited from our investments in pricing.

Children's continued to be solid and performed inline with the company.

During the quarter, we saw strength in key classification, which is active and licensed entertainment.

And lastly, let me address our women's business, which made progressive improvement relative to the first half of the year, but was our only negative performing category it down 1%.

We continue to be pleased with the strong performance, we're seeing in our active in intimates business. However, we are seeing mixed results in casual apparel.

In the short term, we've made a number of moves to position the business for long term health.

This included exiting the Dana Buckman brand and introducing nine west and Elizabeth and Jane.

With these introductions, we re slowed the layout of the women's area in our stores. So the branded Jason's he's would better align customer shopping preferences.

Well this had some disruption in the short term it positions us well for the long term.

No well women underperformed in our stores it outperformed in digital which shows our new brands are resonating with our customers.

Speaking of digital we continue to be pleased with the momentum were seeing as Joe noted digital sales increased at a mid teens rate in Q3, which is on top of a similarly strong mid teens growth last year.

Mobile continues to be the primary driver of digital growth with particularly strong performance on the called out.

During the third quarter, the called out grew significantly faster than digital overall.

With nearly double the traffic growth and nearly triple the sales growth as our loyal customers have increased their usage.

We also continue to see benefits from customer adoption of BOPUS in by.

In Q3 in store customer pickup penetration further increase as a percent of digital orders.

We're also improving on speed with 95% of BOPUS orders available within one hour, which positions us very well for the holiday rush.

Our stores are also selling more digital ship to home orders and this holiday we will expand the number of stores from 10 to 135 caring incremental inventory to support the peak volume periods of or digital business.

Now, let me share a brief update on the Amazon returns program.

As you know we completed the nationwide rollout of the Amazon returns program late in the second quarter.

We continue to be very pleased with its overall performance.

And based on the results. We are seeing we remain confident that it will have a positive contribution to operating income in 2019.

With the expansion of the program consumer research indicates that customers are very satisfied with the service they find it simple and easy to use and they intend to use it again.

The program is driving incremental traffic into our stores and we're particularly encouraged by the disproportionate amount of new customers, which on average are also younger than a typical calls customer.

We're very much looking forward to the holiday season, which will be the first with Amazon returns in stores nationwide.

The entire organization is focused on delivering exceptional customer service and ensuring that we're capitalizing on increased traffic.

While we're pleased with the conversion rate and it's performing consistent with our pilot stores.

We're continuing to innovate and test ways to further improve productivity.

You. Examples include enhanced training testing different offers and merchandising the customer service area to drive impulse purchases.

I will now provide an update on our t. initiatives for holiday and beyond.

We remain very confident that we are set up to have a strong holiday season.

This is driven by four key strategies.

First as I just mentioned, we will have Amazon returns in stores nationwide. This holiday for that first time, which will drive additional traffic into our stores.

Second we have more new brand launches than ever before.

Third we have a robust marketing plan and we'll be investing in value in pricing to drive new customer acquisition.

And fourth we expect our strong double digit growth in digital to continue.

The holiday season is one called is at its best and this year will be no different our customers will discover new brand and be inspired by new gifting options literally at every turn.

We're pleased with how we kicked off the holiday with our Black Friday preview then on November 1st.

As we now look forward to the holiday season, we're confident that we have the right plans in place as they move into the key shopping weeks, leading new brand exciting collaboration new partnerships and leaning into key gifting categories.

As it relates to new brand, we're delivering a record amount of newness this holiday.

In September we launched the liberal by alcohol and nine west footwear apparel and accessories.

In October we launched got living living our collaboration with the property brothers, Jonathan Andrew Scott, which fills an important white space opportunity in offering modern home decor.

And recently, we launched our partnership with Ashley and Mary Kate Olson, where we became the exclusive retail or the lives it doesn't James branded apparel handbags and accessories.

We view each of these brand launches as an investment in driving future growth, while modernizing the calls brand and attracting younger customers.

Collectively they're off to a good start.

In addition, we have exciting collaboration is in place. This season, we just introduced an exclusive limited edition women's apparel capsule designed in partnership with globally renowned designer Jason <unk>.

We also just launched a collaboration with Alan degenerate on an assortment of pet offerings.

New partnerships are also a key focus for us through our expanded relationship with fanatics, we've become an even stronger destination for team logo sportswear and are attracting new and younger customers.

And of course being the holiday season, we're leaning into key gifting categories.

We've expanded our cozy platform doubled our toy assortment and are introducing new guess, that's in beauty fragrance and fine jewelry.

We will support our position as the leading destination for active for the entire family with newness across leasing outerwear and we expect a strong licensed entertainment business driven by the upcoming releases, a frozen to and Star Wars.

As we think about our marketing efforts, we know we need to be bold and strategic to cut through the increasingly competitive environment.

The holiday period is the best time to capture new customers and we will take full advantage of maximizing this opportunity.

We are committed to giving customers the most compelling and differentiated reason to make cold their holiday shopping destination.

This season, we are building on the strength of our marketing foundation and experimenting with new innovative ways to reach our customers both our core loyal customers and an increased focus on reaching millennials.

We continue to make progressive improvement in our personalization efforts, reaching customers with the most relevant messages for them.

For the holiday season tens of millions of our customer connections will be personalized in some way.

Our ongoing testing demonstrates that we see an increase in both traffic and conversion through these personalize messages.

And we continue to leverage digital media more extensively and more efficiently to reach customers where they are.

As an example, this past quarter, we completed our effort to bring digital surge in house and.

And we are partnering with Google to increase the use of machine learning and our media buying.

We have also significantly increased our use of social media to reach both our core and younger audiences.

Based on all of the efforts I have highlighted we are well positioned for a strong holiday season and are strategically increasing our investments to fuel growth and customer acquisition.

We believe that investing in the short term will support our strategies to drive profitable growth over the long term.

I will now transitioned to our customer experience initiatives underway in both our stores and digital channels.

From a digital perspective, and as I mentioned on last quarter's call. We began piloting a new site experience to elevate the customer experience, including more products storytelling more personalization and better search capability, while also continuing to deliver a strong value message.

Well, it's early days than we were only testing a small portion of our Tropic, we're seeing good engagement.

Based on the results, we will look to further expand the pilot to a greater portion our traffic early next year.

With regards to our stores, we've continued to make significant investments to improve the customer experience.

While new brand introductions had been in especially important element of this and 2019.

We're also stepping up our investments in modernizing our store base through a greater number of full refreshes.

This will remain an important part of our strategy going forward.

And beyond that let me highlight a few of these investment areas in our stores.

Active continues to represent a centerpiece of our strategy and is another way our customers are experiencing modernized calls.

As I mentioned earlier, we've expanded the penetration of Adidas shop in shops to 175 stores.

We've also increased active square footage by 25% in approximately 160 of our highest performing stores.

These stores feature a wider selection across all down additional fixtures and unique items.

And another example of how we're dedicating more to act. It is the expansion of our women plus assortment.

Building on the success of Nike, plus this quarter weird, adding adidas and under armour plot.

Based on a strong Q3 results and our ongoing test with the customer we continue to see acted as a long term growth opportunity.

In beauty, we're making great strides in our pursuit of significant long term growth.

We launched several new beauty brands this quarter expanded the pilot of our new beauty experience to 12 stores.

And rolled out our new beauty impulse concept in 200 stores and online.

Well beauty is a relatively small business for us today. It is growing fast and we have plans for it to be much bigger in the future. We look forward to sharing more with you early next year.

Some of the other in store experience projects include the out that bar and curated by called the Alpha Bar merchandising concept continues to test well and we're evaluating the opportunity to expand the pilot beyond the 50 current stores next year.

We continue to be excited about curated by calls our new innovative platform, where we are showcasing emerging digitally native brands.

We launched last month, and about 50 stores and online and are encouraged by the early results.

We are partnering with Facebook to bring curated to life through social marketing efforts and to help identify brands that are creating a following on both their Facebook and Instagram platforms.

We look forward to bringing new brands onto the platform next year.

We're also making progress with a store optimization strategy.

During the third quarter, two new Rightside locations were opened by our partners and we expect several more to open in the fourth quarter.

In addition, we opened for small format stores and see the potential for more in the future.

Through both our Rightsizing in small format strategies, we continue to learn which one form our future actions.

And lastly, let me remind you that we remain focused on our operational excellence initiative, which touches all parts of the business.

We've been successful and saving well over our target of $250 million during the past three years and this is funded many of our growth initiatives.

Our focus and effort on this front will continue going forward.

In closing, although the quarter didn't meet our expectation I'm pleased that the business returned to growth.

Direct result of the innovation the organization is driving across the company.

And we expect the impacted these initiatives to continue to build we remain firmly committed to driving strong financial performance and shareholder value over the long term.

I'd also like to thank our incredible associates around the country, we introduced a lot of change into our business. This quarter with the ramp up of the Amazon returns program. The launch of several significant new brands and a lot of newness across the entire business.

The team continues to execute very well and we are encouraged by the momentum heading into the important holiday season.

We are ready to deliver an outstanding experience to both new and loyal customers at a time when Kohl's is that it's very best.

We're happy to take your questions at this time.

Ladies and gentlemen, if you'd like to ask a question. Please press Star then one on your Touchtone phone you will hear its own indicating you have been placed in Q you may removed himself from queue at any time by pressing the pound Keith if you're using the speakerphone. Please pick up the handset before pressing the numbers. Once again if you ever question. Please press star one at this time and one moment. Please for your first quarter.

Yeah.

Your first question comes from the line of Oliver Chen from Cowen and company. Please go ahead.

[laughter] hi, Thank you again, congratulations Phil regarding promotions, it's been a promotional environment for awhile. So I would love your thoughts on how this is different this year and also.

What are your thoughts on what you're seeing with traffic it sounds like you're pretty pretty happy with traffic hasn't been volatile and then finally would.

I would love more color on re flowing the layout of women.

As it as it was a short term disruption, but seems like what the customer ultimately once.

How do we put that in the context of a lot of other new introductions that you're adding to the store. Thank you.

Thanks, Oliver for the question. So I'll address each of your questions sort of separately first of all your question around the promotional environment as we expressed in our remarks, we we did see a heightened promotional environment and the third quarter and especially as we entered into the more traditional fall season in some.

Timber I think for us at Kohl's, Yeah, we we stand for value, we have the best loyalty program and the industry and we're really known and famous for delivering outstanding value. So we must maintain and preserve this position.

We're at a really you need time at the company and with all of our initiatives all the innovation the new brands. The traffic we're seeing for Amazon returns, it's really important that we capitalize on this moment and drive market share and customer acquisition. So given the landscape and it is what.

It is in our guidance reflects that we expect that to continue into Q4, we are going to lean in and make this short term investment in pricing and promotion as we need to to make sure that we can capture these customers and importantly get them on our loyalty ladder for the long term.

You know secondly to your point on traffic overall traffic for the quarter. We are we are pleased and while you know they said in my remarks, we would have expected a different better result for the quarter, we made tremendous progress in both traffic and sales from the first half the year were up 360 basis point.

To get to a positive comp and for us momentum on the business and driving long term health and the business. It has to start with growth and then that has to start with traffic and traffic has been and we'll continue to be the number one priority and we are seeing really solid traffic in our stores and that's coming from the initiatives.

Launching our marketing efforts and yes, the ramp up of the Amazon returns program I would say where the volatility took place in the quarter was you know we came out of the gates really strong and back to school things softened up in September combination of factors promotional environment, we've hit on well.

There are becoming unseasonable and on favorable for US and then we did have some disruption in our business, which I think speaks your next question on the women's business that being said, we addressed all of those things and we mean, Dan when the conditions improved and ended the quarter with a very strong October .

Just like Oh, I'm, just going to hit on 'em. Your women's question on the Reflow.

Which is a a deliberate action on our part to set up the women's business for a long term growth and health Yeah. We have the a very aggressive and thoughtful strategy, which includes exiting brands that we don't see as part of our portfolio going forward and introduced.

Thing new relevant brands that will resonate with our core customers as well as drive a new younger customer and that includes brands like nine West of course, Elizabeth and Jane the.

The Jason when collaboration and they'll be more to come in the future that did require us to exit Dana Buckman, we have plans to exit more as we look forward and we took this opportunity to actually reflow the women's pad in our store so that the brand adjacent sees would make sense.

We know from history anytime you're moving things around in the store that's going to create some short this short term disruption, but we're confident in the rebound and importantly, the women's business digitally outperformed the digital average and those new brands of doing great. So I have great confidence, we're making the right moves for the long term.

Just a follow up on women's it's been a tough category across the sector and.

For you in this way what is your thought on.

What's happening with that shopper and timing of of reception of the new brands and store layout and just to assess.

The nature of risk within the women's apparel category.

Oh, you know Oliver you're absolutely right I mean, theres a lot of choices out there for women I think for calls we stand for value.

We stand for style relevancy, and we really stand for that casual apparel sector, and that's where where that's where we're leaning into really have that right balance of your casual basics as well as your fashion relevancy as I highlighted in my comments you the active business, which speaks to your house.

He's living today, the active athleisure, we had a very strong quarter women's apparel in active also intimate she's coming to us for the basic where work course correcting is to make sure that we can drive a better balance as it relates to kind of basics in casual apparel. The T shirts, the denim et cetera with fashion realm.

Even see and that's where we're leaning into brands like nine west and Elizabeth and James but I think ultimately where where kohl's wins is in this terrific balance of both that kind of casual active and and fashion.

Thank you best regards thank you all her.

Your next question comes from a line of Bob Drbul from Guggenheim. Please go ahead.

Hey, Good morning, Joe warning welcome one your new rule.

[laughter] I guess, just a couple quick questions for me.

But the Amazon return program are you seeing it really is there a number it or anything you could share with us in terms of [laughter] joined the new customers that are coming into the store that are making purchases at kohl's.

Signing them up you know as new coal car orders your customers from that perspective, and then I just curious on.

The variation between August in October and I guess could you also just give us any update in terms of how november's trended for you so far thanks.

Thanks, Bob So as it relates to Amazon wind turbines. We're we're really pleased I mean this quarter, we fully scaled that we are seeing performance very consistent with our pilot and I think we're especially pleased with the level of new customers, which you are asking about so we're seeing a disproportionate amount.

Out of new customers relative to the amount of new customers, we we generally acquire.

And we're seeing a younger customer, which is also very exciting and right inline with our strategic priority.

Today, our conversion right. So for people coming in who are shopping is also very consistent with what we saw in the pilot, which when you net that all out for the year will be accretive to our profitability, but you know we're not stopping there and we have a lot of focus we see the tremendous opportunity to drive even further.

Version, and so we're doing things like enhancing training for our associates were testing different offers on we're doing that as we speak today, and we're adding incremental merchandising opportunities right in the area, where the Amazon returns are accepted. So you know my my hope is that we can drive that conversion even further by.

Got it is today meeting expectations I do think really importantly to is that the way. We're doing it is hitting the bar of both coals and Amazon in terms of the customer experience and we're very pleased with that I mean, we've done statistical surveys and the customer is there.

Are you satisfied with the program they see a simple and easy which is intentional and importantly, they intend and they intend to use it again.

So very happy with that and I'll, let Jill actually talk about the quarterly sales flow.

Bob So I guess as we indicated started out really while we had a very strong back to school season, but we did see a softening in September some of that driven by the unseasonal weather well. We did that is we react as Michelle indicated and we leaned into our value equation and we drilled momentum into October so we actually ended October .

Very incredibly strong and we're building that momentum as we move into holiday season, I think another data point for the strong holiday that we're expecting is the fact that are add leak was very successful and that showcased a lot of our products and our merchandising strategies that were going to continue to lean into as move into the holiday. So I think the way the quarter came out with just a little bit.

The softening, but we reacted well we found out what worked with the customer and we feel confident with our merchandising strategy as we move ins the all important holiday season.

And just a question on the footwear piece of it I think you did call out Nike as you know one of the brands can you just maybe just give an update on what you saw from Nike or what you're seeing from Nike and.

Why it wasn't called out at this point. Thanks, Yeah sure about so as I as I mentioned overall for each of those brands. They were all positive and the brands had particular strength in apparel, including Nike on the footwear side and I believe we talked about this in the prior call. We did see softness on Nike footwear.

They are all over it and this past quarter, we saw improvement in Nike footwear from the first half were not all the way to positive yet, but I'm confident we'll get there it's a very big priority for them and we have new platforms coming in.

Thank you very much great. Thanks.

Your next question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Thanks, Good morning.

Looking at all the investments needed to drive this positive comp in Threeq and Fourq you could you help provide a roadmap to margin stabilization over the coming quarters.

Yeah, the Lorraine I think a couple of things and we stand back and look at the history of calls we've had a strong discipline around inventory management and that's really been a key enabler for us to expand margin in the past clearly Q2, we were impacted by the soft spring season, and our inventory was up 2% so in Q.

Q3, we did make progress our inventory was only up 1% and we really did this despite the fact that we support at all the new brand launches within the quarter and you've seen that we have our commitment to get back to flat by the end of the here. So we do believe that inventory management will be a key enabler, but of course, we're going to continue to take that over a paced approach because we always want to ensure we're protecting sales.

I think second we've done a lot of testing around personalization and we're going to lean more into targeted offers as we think that will be more productive from a club customer perspective, and then third we're going to continue to drive proprietary brands you see that with the new brand introductions, specifically in womens and that'll obviously benefit our merchandise.

Mix as well so I think those are three key enablers that are going to help us get back to a healthy margin.

And I would just I would add to Joe's comment and reiterate this is a really unique time for the company. We have a record level of exciting initiatives. We've got this new Amazon returns program. We just got off the ground, we're seeing more new customers and so we have to make sure we're putting our most assertive foot.

Forward to capture these new customers and get them on our loyalty ladder. So it isn't investment to drive new customer acquisition and traffic to ensure were positioned for profitable sales growth over the longer term.

And just any timeframe on when you think that you'll be able to drive that profitable sales growth.

Yeah, obviously, we don't give long term guidance at this point I think when we come back out in 2020 will give you some more details, but I think first it starts with gross growth for us. So we want to continue to lean into our number one priority of driving traffic. Obviously, we're continuing to work through inventory management. So we're gonna see those type of things starting to take hold as we move in to the next year.

Sure and now we continue to leverage our second priority of operational excellence to find efficiencies in all these processes and take out the cost whether it'd be in margin or asked you nay that'll help us deliver the long term growth. So I think you'll get more clarity on that as a move forward, but know that we're going to start with growth and we're committed to our operational excellence.

Initiative to help do that profitably over the long term.

Thank you.

Thanks.

Your next question comes from the line of Dana Telsey from Telsey Advisory Group. Please go ahead.

Good morning, everyone. As you think about the level of promotions required to drive the sales and you mentioned home being a key category a promotion how you're thinking about the investments that you mentioned the holiday is it solely promotion is it advertising well how do you how do you triangulate what the key strategic.

Investments are and where they fall in terms of the penetration rate as you think about 2020 Michel given all the newness that you haven't holiday any updates on what we should be looking forward to for 2020. Thank you.

Hey, Thanks, Dana so to your question around you know investments for the Q4 time period I mean, that's exactly what it is and we're really investing across all parts of our business I mean, clearly I'm, starting with ensuring that we're showing up with compelling value and that.

Takes the form of pricing it takes the form of promotion and of our loyalty program and we have a pretty sophisticated model where are we look at what levers are to be applied when you mentioned home and I think that's a good category to look at it had a really tough start in the first half of the year and we're.

Really pleased this quarter that we got it back to positive growth and roughly consistent with the company and home in particular is where we disproportionately lead into pricing, where we've seen a lot of that competitive activity. We also brought forward some new promotions et cetera, as I was saying.

Earlier, it's just absolutely critical that we maximize this opportunity right here right now to capture the new customers, especially coming in for the new brands were launching all the innovation and then new traffic in new customers, who are being introduced to calls for the first time through the Amazon returns program.

So you know our investment will certainly you know we we have like I said, we have sophisticated models pricing elasticity models that we use against the competitive environment to make sure that we are appropriately pricing ourselves and offering the right promotions I would say that you know the team has really built up its muscle.

To be responsive and operate with agility, so that when conditions are not in our favor like whether we can pull back and when they are in our favor we can lean in and not to the other part of your question that while well certainly pricing is investing in pricing is a part of it. It's also investing in media and a I mentioned in my remarks were.

Being very good results of bringing in our digital search capability in house on also elevating our partnership with Google with some new tools. So that our search activity can be that much more impactful. So when we lean and get the right methods right value. We will also elevate our efforts.

From a marketing standpoint, and I, just can't reiterate enough I mean holiday not only with all the initiatives we have but holiday is such a key time period for the industry and for cold around exposing all we do around around our innovation in our product offering you know and not just the newness, but also the.

Strength of our core offering we talked about active earlier and that was up 7%. We expect that momentum to continue so our organization I'm you know priority one.

Continues to be driving sales driving traffic to fuel long term customer acquisition, which ultimately leads to long term sustainable and profitable growth.

You know as it relates to 2020, while it's Joe was just saying you know we haven't put guidance out there per se I mean, you can expect to see the same kind of top line energy and focus on driving excitement within our core business, bringing in new brands. That's the key strategic priority for the company. The team is hard at work we have new.

The thing that we'll be sharing and rolling out next year, while we also drive our operational excellence discipline and that includes the focus on inventory management you know over time, we expect to get back to margin expansion and certainly the focus on our S DNA and our inner.

<unk> expense expense structure.

So I feel very I feel very good like I said, where I think right a point in time to make these investments both but I feel very confident in the strategies. We have ahead.

Thank you thanks, Dan.

Your next question comes from the line of Alex Wall. This from Goldman Sachs. Please go ahead.

Good morning. Thanks, so much for taking the question I have my first question is around the the smaller stores I believe you opened for this quarter can you talk a little bit about how those are performing and how the strategy is evolving that I think you said that that would be more of those to to come so any color on that would be would be interesting as well.

Yes, Alex So I'll take this on so we did open for stores and you know where somewhere in the 15 ish range right now on these stores. So just for clarity say, they're about 35000 square feet compared to our average at about 90000 square feet. So it at a much smaller footprint.

We have been in this vertical isn't what we do testing in it a rating along the way I will tell you I feel very good about these last for that we've opened because we've learned from the first versions of those and how to take kind of the best of cold to merchandise things differently to Oh my.

Modify the adjacent sees a based on what you need in a smaller format. So I'm really really encouraged and you know to the common of I think we have more opportunity I mean, there's still people are still building stores. Even in this environment, you know for us, especially given our omni channel reach the intent would be to five.

In places, where we can build these small footprint and what we do know is when we do have a presence in the neighborhood, but that also helps drive our digital business as well so while we certainly haven't put any specific numbers out there and I would consider we're still in the piloting stage, we're getting smarter about these stores and you can expect to hear more from us next.

Here on what our plans are.

Great. Thank you and then my second question is on the promotions expected to remain elevated through the holiday season any color at this stage on what we should expect into next year. If it promotional activity and gross margins is there do you have a timeline in mind on how long that elevated for.

Emotional environment is likely to evolved.

Well, it's I don't think we have any guidance into next year. Other than you know we're going to deploy the initiatives that I had mentioned around inventory management targeted offers and driving proprietary brands they'll continue to help lift our margin moving forward. I think Q4 is always a unique time of year says we saw the heightened promotional environment moving out of Q.

Q3, we fully expect it's going to maintain within the holiday period, because it always brings a new level of promotions. So we wanted to ensure that our guidance gave us the room to react appropriately. So we can continue to be relevant to the customer drives sales and the cells that acquiring new customers over the last two years, we've mentioned to you.

We've acquired customers and the low double digits. During this timeframe and this year, we had the unique Amazon returns partnership that we're gonna be able to capitalize on to actually accelerate that customer acquisition. So we look at this is not only disinvestment in terms of the sales growth, but really from a long term perspective, bringing in those new customers as Michelle said about.

Welcome to the loyalty ladder. So they can continue to unlock value which calls.

That's it thanks for all the color guys.

Okay.

Your next question comes from the line of Paul Trussell from Deutsche Bank. Please go ahead.

Hi, Good morning. This is Gabby Carbone also on for Paul Thanks for taking our question I'm. So tariffs haven't been mentioned yet was wondering if you discussed how to impact the results this quarter and kind of what you're expecting for the rest of year and then if you can just give an update on how your conversations with vendors are progressing thanks.

Makes gabby so from a tariff perspective, we have our our arms around that and what I want to phase we have an amazing merchant team. That's worked closely with our vendors. So that we were actually able to offset tariff and not really have an impact to our business. This quarter, while still delivering great value to our customers. I think you know we continue to and.

Boy, our diversification strategy, which we've been doing for quite some time and we'll continue to do that to further reduce our exposure to China. However, we do recognize us as a fluid situation. So everything right now is embedded in our outlook, but if the tariff numbers would change we would have to then come back and reassess that.

I I would add on just a comment to Joe's point, you know if you take a step back for <unk> for us from a sourcing strategy standpoint, you know we have been on this kinda journey and mission for some time and moving business to other parts of the world to have a great diverse supply base.

And that's been in full support of our speed to market opportunity you know when we talk about some of the other opportunities we have an inventory management et cetera. One of the biggest initiative supporting us is speed to market and we've reduced roughly 40% of our timeline end to end and that's been in do part by diversifying our supply base.

And producing in areas with vendors, who can get as part of quickly. So I would just echo what what Joe said on the tariff piece in particular in what China. We're in great shape, we have very deep long enduring relationships with these vendors and you know for me, it's managing that but also ensuring that we've got a gray.

Great diverse supply base base that can support us on our speed agenda.

Thanks, Ben just a quick follow up I understand you're making all these new you know strategical investing I'm could you kind of prioritize them for the rest of the year.

Can you elaborate a little bit more on that in terms of or.

Oh, just gonna how should we thinking about in a way you're prioritizing. These are these investments you're making.

What do you feel is the most important.

Yeah, I mean, the way I would think about it especially were talking for the fourth quarter is.

Ensuring that we have a very strong holiday season, and think that comes with a number of factors you know I would reiterate that we're entering a period with momentum and we had a strong holiday kick off we have lots of great activities planned over the next couple of months, then I would speak to our strategic initiatives that we are investing behind.

We're investing behind both our core business I mentioned the active investment as an example, we just expand and we just completed that expansion to 160 doors. We added roughly 100 shop in shops Adidas. So overall active in great shape, and we see Q4 as no different in terms of driving the active business.

That has been an investment as well as the investment on our lineup of all the newness and new brands. So that's the 0.1 too I mean, clearly we've been leaning into the Amazon returns program. We just had a really burst ramped up quarter on this will be our first holiday with Amazon returns. So we're leaning in investor.

There are digital business has been a strong performer, we will continue to support and best that business to make sure. We can maintain that double digit growth and then marketing, which we've spoken about given the competitive environment. We have to make sure that we are relevant and that we're leaning in during this real.

We critical period, where it's a naturally for cold been a place where we've acquired a disproportionate amount of new customers and that will only be exaggerated this quarter given all the new brands that were marketing behind and of course. The returns program. So you know I'm I'm really excited I feel.

Like we have positioned ourselves, we have positioned to corridor and guided appropriately. So we will make these investments are that we you know exited the quarter with a strong holiday and importantly, a whole bunch of new customers that we can now build loyalty for a long term profitable growth.

Great. Thank you so much for all the color right. Thanks.

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

Thanks, Good morning, a a few questions for me first I'm curious how the cadence of actual Amazon returns. It's your store progressed throughout the quarter and is it possible to quantify the lift.

Second is in the pilot locations for the returns cures to be tested somebody's value investments to get new customers on the loyalty ladder I guess, what gives you the competence that these price investments will actually pay off and then third with all that you're doing them a little bit surprised that you guided through to two to two year decelerating I'm here in the fourth quarter Im just curious if you could speak to maybe quantify.

How November start off and I guess, what why the why they expect that slowed on <unk> on the stocks. Thanks.

Okay. So I'll I'll take the first couple of here Chuck first of all on the the cadence on Amazon returns you know we were still ramping I mean, we have close to 1200 stores, we rolled it out across the system. So I think it's fair to say that during the quarter, we continued to see things ramp consistent with our expectations and the fourth quarter.

We'll continue to be the saying so we were not breaking out you know the particular cadence, but what I can tell you is that there has been an ongoing ramp as I'm customers get used to this new service and as I quoted in the research that we collectively done I'm, particularly encouraged with the strong customer reaction that they intend to use.

The surface again, the conversion rate is consistent with what we saw in the pilot and that is adequate to meet our financial objective, but we are testing an experiment experimenting with some new offers as you just asked about you know on that front I'm, where in the testing phase and so we have nothing yet that we're rolling out.

But know that we have multiple tests going on and we have the technology capability in order to test and try so I fully expect that will be implementing some new value offers you know by early next year. If if not before we are to your point on getting on the loyalty Louder you know it's early days so it's really.

Difficult I mean, we're only a few months in to track. The you know kind of ongoing stickiness of of whose converting to kohls charge et cetera, but we will be monitoring that and we have overt efforts to be messaging the value that you get with kohls charge at that point of interaction with the.

Amazon return customer and then I'll I'll, let Joel address the guidance piece.

Yes, I think we feel really good at the momentum that we pulled out of Q3, we feel good with the AD leak of that positions us well for the holiday.

However, as we thought at the very competitive environment. So as we gave our Q4 guidance. We wanted to be thoughtful we put up a point for comp. So this really you know book and that's comp for the quarter, but could show. Some acceleration. So you know I don't love the two year stack I could tell you to Santa three years back were up nine so that's another way to look at it but I think we feel really.

Good about how we approach the holiday period, all of these strategies that weve employed and the momentum that we've gained as we move out in October , but really just wanted to be thoughtful Chuck as we gave guidance.

Okay, and then you know bigger picture were enough to absorb up your margin structure clearly it looks like you're one of the you're close to it so 6% that's way lower than where you've been should we thinking about this is sort of the norm no new normal for you guys as you kind of focus on value and try to getting customers down the road.

So <unk>. So let me just reiterate I do believe we are at a very unique point in time, given all the initiatives what we've been talking about over the last hour you need time to get new customers and invest in them because of our initiatives Ams on returns et cetera, but we're very committed.

Good to growing both the top line and the bottom line overtime and while we haven't put out 2020 guidance. You know you can expect to hear from US next year, we have lots of efforts underway things we've talked about some things we haven't yet talked about to fortify and continue to accelerate our.

Topline sales.

Like I said earlier, we're pleased from where we started the year to where we are today, we saw a material improvement in the topline and none of it relates to our profitability. We have a number of initiatives building on the success, we've had with operational excellence in inventory discipline. So you absolutely should expect from us that.

Overtime, we love to drive sales and expand margins.

Okay, Great Joe Congrats thank you.

And we have time for one last question that question comes from a line of Mark Ultra order from Baird. Please go ahead.

Great. Good morning, Thanks for squeezing me in.

I'm curious on the traffic in spending trends, you're seeing from some of your more loyal customers I mean, it sounds like you're pleased with what you're seeing from a customer acquisition standpoint, you're just trying to reconcile that with the flat to 1% comp trajectory, maybe bigger picture as you transition the brand portfolio to really focus on that that younger that new customer how do.

We assess the risk of cannibalization of your existing sales space versus driving incremental topline growth. Thanks.

I think things like great. Great question, I think it absolutely critical for us to protect preserve and grow the core customer base, while we complement with this newer and arguably younger customer for the future. We have to do both we have many strategies that are aimed at both thing or product strategies, whether we're talking on there.

Apparel side, we've been talking about on the women side like a nine west we're seeing not brand resonate I'm, especially with existing customers Elizabeth and James might skew a little younger but again, we see the existing customer pick up on that and certainly all the home innovation speak squarely to that core customer. In addition to the new from a marketing standpoint.

Wayne and especially a loyalty standpoint.

Protecting our core is is vital and in fact 'em. We did see as we think about our newer customers versus our kohls charge customer we did see sequential improvement in the third quarter versus the first half of the year. So it demonstrates even in the third quarter that we are seeing this ah this enhancement improvement.

But but know that we're taking a very thoughtful balanced approach to make sure that we preserve the core while we reach for these more new customers.

Thank you best of luck were holiday.

Thank you I guess.

Thank you to everyone listening on the call today and wishing you all a wonderful holiday season.

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