Q4 2019 Earnings Call
[music].
Good morning, My name is Michelle and I will be your conference operator today.
At this time I'd like to welcome everyone to the cools Q4 2019 earnings conference call. All lines have been placed on mute to prevent any background noise.
With the speakers remarks, there will be a question and answer session you would like to ask a question. During this time simply press star followed by the number one on your telephone keypad. If he would like to withdraw your question. Please press the pound key I went down like to turn the conference over to Mark Rupe, Vice President of Investor Relations Kohl's. Please go ahead.
Thank you Michel good morning, everyone certain statements made on this call, including projected financial results in the company's future initiatives are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Coals intends forward looking terminology such as believes expects may will should anticipate plans or similar expressions to identify forward looking statements.
Such statements are subject to certain risks and uncertainties, which could cause cold actual results to differ materially from those predict projected in such forward looking statements.
Such risks and uncertainties include but are not limited to those that are described in item one day in coal. His most recent annual report on form 10-K.
And as may be supplemented from time to time in calls other filings with the FCC all of which are expressly incorporated herein by reference.
Forward looking statements relate to the date initially made in Kohl's 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 to reconcile. These non-GAAP measures can be found in our press release, which is filed as an exhibit two or form 8-K with the SEC.
And is available on the company's Investor Relations website.
Please note that this call will be recorded however, replays of this call will not be updated so if you're listening to a replay of this call. It is possible that the information discussed is no longer current.
And coal 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 will now turn the call over to Michelle.
Thank you Mark good morning, and welcome to call its fourth quarter earnings Conference call.
Let's start by discussing our 2019 performance with a particular focus on the areas that influenced our overall results.
I will then touch on our fourth quarter, followed by a review of our 2020 priorities and the initiatives, we haven't place to stabilize and position the business for future growth.
Joe will then review our financial performance and 2020 guidance.
As we look back at 2019, our results did not meet our expectations, primarily due to three key factors home women's in gross margin.
First our home business had a tough first half driven by competitive pressures pricing challenges and not enough newness.
The team responded with agility by adjusting our pricing strategies in introducing new brands and category innovation.
Together these led to materially better performance in the second half.
Second our women's business remain challenged throughout the year.
We recognize that we need a much more significant reinvention in women to improve the trajectory moving forward.
I will discuss some of the actions we're taking in a moment.
Third as it relates to margin our performance was pressured due to a combination of category mix and aggressive promotional stance to protect market share and a more pronounced shift to digital than expected, which resulted in a greater cost of shipping headwind.
Despite these challenges that we are actively addressing we are encouraged with our progress in the falling areas.
We've seen improvement in traffic in our stores in the second half of the year driven by our key initiatives.
Our rate of new customer acquisition accelerated to double digits growing our overall customer base.
We've enhanced our offering through new relevant brand introductions and partnerships.
Our focus on creating a compelling digital experience is resonating with our customers as digital sales continue to grow double digits.
Key focus areas like active and beauty have strong momentum.
And lastly, we further evolve the way we work and are driving greater efficiencies for the business through operational excellence initiatives that continue to enable increased investment to drive future growth.
The fact that we are driving traffic in growing our customer base shows that kohl's positioning and relevance in the market continues to be very strong.
It also demonstrates the strength of our team's ability to constantly evolve the model to adapt today's consumer.
However, it's clear we need to act with a greater sense of urgency.
The upcoming year will be one where we will continue to drive newness and innovation, while executing on our core fundamentals.
We are focused on stabilizing sales and margins and returning the business to sustainable and profitable growth.
In addition, we're putting tremendous emphasis on our inventory management discipline.
As Joe will speak to our inventory levels ended slightly higher than anticipated and we are working swiftly to course correct. This early in the year.
Last month, we executed a restructuring effort across all parts of the business, including merchandising marketing stores and technology.
The changes, we made position close to be a stronger and faster company.
In this effort, we reduced management layers and streamline processes to more fully empower teams and increase our overall customer focus.
We took these actions in a manner consistent with our values knowing they were a necessary part of how we will work differently to support the future needs of the business.
As part of the merchandising restructuring effort, we are directly aligning our product development design and marketing teams to further enhance our speed to market focus.
And within our women's business, we have put into place a new leadership team who has aggressively addressing the issues we face in the category.
In addition to these restructuring efforts, we're also making bold moves to better position our brand portfolio.
After a critical assessment across our entire brand offering we've made the decision to exit eight women's brands over the coming year.
We believe this will provide greater clarity for our customers and a more compelling and current offering.
At our March 16th Investor Day, we'll share more about this repositioning of our brand portfolio as well as some of the new brand introductions that will address the changing needs of our customers.
Let me now touch on our fourth quarter results.
As you saw on the earnings release comparable sales ended flat in Q4. This was within our latest guidance range and on top of two years of strong growth.
As I discussed women's was challenging in the fourth quarter and we are taking action.
Softness was driven by our women's classic and contemporary sportswear businesses.
We continue to see strength in our women's national brands and in our Internet business.
Despite the challenges we saw in our women's business. We are encouraged by the ongoing momentum in several of our key strategies.
First our robust marketing plan over the holiday period drove customer engagement and a double digit increase in new customer acquisition with solid performance over each of the key promotional events.
Our stores benefited from increased traffic during the period driven impart by our Amazon returns program.
I'm, particularly pleased with how our team managed the surge of post holiday Amazon returns.
As Joe will highlight in a moment the Amazon returns program helped drive positive comps in January.
Second we further asserted cold leadership as an active destination for today's family.
Active sales continued to grow in Q4, driven by both apparel and footwear.
As we've discussed in past calls asked it has been an area, where we have invested through expanded square footage in 160 of our stores.
Installation of a 175, Adidas launch pad and expanded sizing options such as under armour big and tall.
These investments continue to pay off and are also leading to increased access to elevated product from our brand partners.
We remain confident in our ability to maintain our active business momentum in 2020.
Third we continue to drive strong growth in our digital business, which was up double digits in Q4.
Mobile and the Kohl's App continued to be the primary drivers of growth together accounting for 75% of traffic and more than half of our sales.
I'm, especially pleased to see our efforts in driving app adoption paying off.
For 2019, we had a record number of active app users approaching 16 million.
Relative to the industry. This level of App engagement is best in class and its translating into higher conversion and spending.
Fourth our investments in beauty continued to produce promising returns beauty sales were up high single digits in Q4 with solid growth achieved both in stores and in our digital business.
New brand introductions, where a key driver of this growth.
In addition, we saw strong results in the 12 stores with the new elevated beauty experience.
Beauty remains a large opportunity for calls and we will share more of our plans at our Investor day.
And lastly, we're pleased with the collective performance of our new brand introductions across the business.
As I've mentioned before we're instilling a culture of innovation here at Kohl's.
We know that bringing constant newness and discovery is absolutely key to attracting new and younger customers.
In 2019, we launched a record number of new brands and partnerships all designed to strengthen our differentiation acquiring new customers engage existing customers and to drive future growth and.
And while many of performed above our expectation some have yet to reach their full potential and we're learning and adjusting to ensure a greater success in 2020.
Let me now touch on our 2020 initiatives.
As you might expect we're gonna say detailed on our long term strategy and initiatives for the Investor day in two weeks.
However, I'd like to take the opportunity to provide an update on how we are further building on our 2019 initiatives.
As it relates to product first we will continue to support our 2019 brand introductions through merchandising and marketing focus.
This includes the ongoing support of brands like nine West Calabro by a dog and Scott living.
I'm also pleased with the expansion of our fanatics partnership which dramatically increased our online assortment, we are seeing younger customer and it is driving strong results in our team business.
We're also excited to launch our Elizabeth and James collection. This spring following a successful holiday capsule.
This is an important launch to deliver against our millennials strategy.
It will also help us address the softness in our contemporary sportswear business.
And building on our focus with the younger female audience, we will be introducing a new private juniors brand called by let.
In fall 2019, we tested Viallet in 125 stores and saw solid results with strong digital engagement.
We are planning a full chain rollout in time for back to school.
We're also encouraged by the early results of our curated platform, which showcases new emerging brands.
As we've discussed on past calls curated provides us valuable insight entire customers respond to each brand, which inform us of a potentially larger opportunity.
Case in point based on the customer response and strong results, we saw with three of the brands in 2019.
We've decided to rollout love pop Kid made modern and Luca and Danny to a majority stores in 2020.
Turning to experience.
In 2020, we will continue to elevate the in store and digital customer experience.
With regards to our stores will be stepping up our investments to modernize our store base through supporting new brand launches merchandising initiatives and targeted store refreshes.
As an example of one of our merchandising initiatives, we will expand our outfit bar concept to 800 stores. This fall following the successful pilot in 50 stores in 2019.
As a reminder, the outfit bar cure rates, a rotating assortment of modern brand to bring outfitting solutions to our female customers.
The output bar drove high customer engagement, and importantly increased our women's basket through greater units per transaction during our.
Okay.
This gives us the confidence to expand the concept to a majority of our stores.
And from a digital perspective, two weeks ago, we launched our new site experience following a successful pilot over the holiday period.
The goal of the new site experiences to provide greater inspiration and storytelling around our products, while continuing to drive our value message importantly, we significantly enhance our capabilities around filtering personalization and search.
From an innovation perspective, we continue to be very pleased with the results. We are seeing from our Amazon returns program.
As I indicated a moment ago, we've seen sequential improvement in traffic in our stores following the nationwide rollout.
We continue to see increased levels of new and younger customers.
Our store associates deliver an exceptional customer experience validated by a world class net promoter score with this program.
It's worth noting that our original pilot markets, which had been in place for over two years continue to perform very well.
This gives us confidence as we move forward with the nationwide partnership that we have an opportunity to build in our performance.
Beyond to Amazon, we are exploring new opportunities that take advantage of our strategic assets, including our physical stores and our base of 65 million customers.
We look forward to discussing these new concepts with you in the future.
Lastly, we will remain very discipline in managing costs in 2020.
We had been successful in managing our costs, an offsetting inflationary pressures and other headwinds through our operational excellence initiatives.
Equally important they have allowed us to fund key investments to drive our strategic growth goals.
Our intense focus on this Ryan will continue in 2020 and beyond.
And before I turn it over to Joe Let me address the krona virus.
We are actively monitoring the corona virus outbreak in the first concern of course is the wellbeing of our associates customers and vendor partners.
As it relates to the business the situation remains fluid, we're working closely with our vendors to manage any disruption to our supply chain.
In closing it's important to reiterate that Kohl's Foundation remains very strong we are seeing increasing levels of traffic in our stores and online.
And we are growing our overall customer base.
I am confident in our ability to return the business to sustainable and profitable growth over the long term.
I'd also like to thank our passionate and committed associates around the country.
We've introduced a lot of change over the past year and I continue to be impressed by our team's ability to evolve and adapt.
The strength of our company is rooted in our people and our innovation <unk> culture, we have a bright future and we look forward to capitalizing on our full potential going forward.
I look forward to seeing many of you at our Investor Day on March 16.
I'll now turn the call over to Joe who will provide details on our financial results and outlook for 2020.
Thank you Michelle.
I'll first review our fourth quarter results and then we'll discuss our 2020 outlook.
Comparable sales for the quarter were flat slightly better than the holiday period, driven by a positive comp in January which was aided by strong traffic in stores.
Digital sales remained strong increasing at low double digits rate, which is on top of a similar increase in the prior year.
And geographically the southeast last mid Atlantic and northeast were the strongest region.
Now, let me share some details on each of our lines of business performs.
Footwear led the company with its strongest performance of the year.
Growth was driven by women children and active.
We saw strong results across a number of brands, including Adidas vans Koolaburra by AWG nine last and Clarks.
Children's had another solid performance in Q4 outperforming the company average and with positive on the year.
Timberlands was led by another strong holiday performance and toys, driven by Lego as well as active and solid results on our private brand jumping beans.
We also achieved a record year in license entertainment with strong sales of frozen too and Star Wars merchandise.
Mens also outperformed the company average and continues to be a strong core category for us that sixth consecutive years of comp growth.
In Q4 months was driven by active big and tall, and our team business, which benefited from our expanded snacks relationship.
From a brand perspective, we saw strength in national brands, such as the Ddas Hager under armour and Nike.
And in our private brand Sonoma and apartment nine.
Home with relatively in line with the company average and showed significant improvement in the second half of the year after a tough start.
In Q4, we saw strength in soft home led by the introduction of Koolaburra by odd.
In addition, we achieved solid growth in new innovation within kitchen, electrics, and Floorcare led by National brands Ninja Shark and vessel.
Our accessories business performed slightly below the company average.
While beauty sales were up high single digit it was offset by softness in jewelry.
Lastly, our women's business was a headwind to our overall performance and the principal reason our comp came in at the low end of our expectation.
We saw continued pressuring our classic and contemporary offerings.
This was partially offset by continued strength in intimate driven by solid growth and made in warm and bally.
In addition, we saw solid performance in outerwear driven by Columbia.
As Michelle highlighted we are moving fast to address the women's business, including exiting a number of down trending brands as well as delivering clarity to reduce choice count.
These moves coupled with our new leadership and structure give us confidence that we'll see improved results as we progress through 2020.
Moving to gross margin.
Fourth quarter gross margin decreased 81 basis points inline with our expectation.
As we discussed on last quarter's call, we took an aggressive pricing stance over the holiday period to drive engagement and new customer acquisition.
In addition, we experienced a higher shift to digital nine anticipated, which led to a greater cost of shipping headwinds.
As it relates to expenses in Q4, I see an increased 2.8% or $48 million to $1.7 billion.
The increase was driven by a combination of the following.
Cost to support the full rollout of the Amazon returns program.
Investment in marketing to drive holiday sales.
Ongoing wage pressures.
And the adoption of the new lease accounting standard, which resulted in higher rent expense.
Depreciation expense of $232 million was $7 million lower than last year.
The decrease was primarily due to the maturity of our store portfolio as well as the adoption of the new lease accounting standard, which essentially offsets the related higher as DNA expense that I just referenced.
Net interest expense in Q4 was $8 million lower than last year, driven by the benefit of the debt reduction in 2018 as well as the adoption of the new lease accounting standard.
Moving on to taxes.
Our effective tax rate for the quarter was 24.5%.
Slightly below last years, 24.8%.
As it relates to nonrecurring items.
During the fourth quarter, we recognize $57 million of nonrecurring costs.
These costs included the recent organizational restructuring.
And impairment related to technology projects that no longer aligned with our strategic plans and brand access.
On a GAAP basis for the quarter and income is $265 million diluted earnings per share was $1.72.
Excluding the nonrecurring items that I just mentioned for the quarter net income was $308 million.
Diluted earnings per share was $1.99.
Looking at our store portfolio.
We ended the year with 1100 59 Kohl's stores.
Gross footage was 98 million square feet and selling footage was 82 million square feet.
Turning to the balance sheet.
We ended the year with $723 million of cash and cash equivalents.
This was a decline from last year due to lower operating cash flow.
Higher capital expenditures.
An increase return of capital to shareholders through our annual share repurchase program and dividends.
Our inventory dollars at the ended the year up 1.8% while units for flat.
This was higher than planned due to sales coming in at the low and never expectation.
As well as increased inventory in women and key growth areas like active and beauty.
I want you to know that inventory the top priority in 2020.
Weve shown strong discipline in the past and I'm confident we have the right plans regained momentum in the upcoming year.
We are quickly addressing the elevated levels, which will put some pressure on margin early in the year.
For the full year, we expect inventory will be down low single digits.
Moving on to capital management.
Capital expenditures were $855 million in 2019.
Higher than last year, due primarily to the investment and our six E Commerce fulfillment center.
As well as increased investment in our store strategies, including refreshes, new stores and right sizes.
Weighted average diluted shares for the quarter were 154 million and shares outstanding at year end were 156 million.
We repurchased 1.6 million shares over stock during the quarter, an 8.7 million shares in 2019.
We remain committed to growing our dividend and are increasing it in 2020.
Last week, our board of directors declared a quarterly cash dividend of 70.4 cents per common share.
The dividend is payable on April 1st to shareholders of record at the close of business on March 18.
Turning to guidance.
As you saw in the release, our 2020 annual earnings guidance is $4.20 to $4.60 per share.
This does not incorporate any potential negative impact from risks related to the Corona virus.
We expect comp sales of negative 1% to positive 1% for the year.
As it relates to gross margin rate, we expected to be down 10 to 20 basis points.
Perhaps DNA, we expect expenses to increase 1% to 2% for the year.
As it relates to other line items, we expect depreciation expense of approximately $940 million.
Interest expense of about $210 million.
And an effective tax rate between 24 and 25%.
And our full year guidance assumes share repurchases of $300 million to $400 million.
We're planning for capital expenditures of $750 million.
Lastly, I would like to provide some context on our first quarter outlook.
While we don't intend to provide quarterly guidance on a consistent basis in the future.
We felt that given some of the actions, we're taking to reposition our women's business and improve our inventory position more specific Q1 guidance was prudent.
For the first quarter, we expect gross margin to be down more than the full year as we work through inventory, resulting in EPS of approximately 40 cents.
We're happy to take your questions at this time.
At this time if anybody has question. Please press star one on your telephone keypad, Nick I met with the start of one on your telephone keypad, let's just wait a moment to capella acuity roster.
Your first question comes from Bob <unk> Triple from Guggenheim. Your line is open.
Hey, good morning.
Good morning.
Just a couple of questions for you.
First on the on the women's business can you give us a little more colour on the.
Well, you're exiting how those brands like in aggregate weighed on your women's performance.
And just sort of.
Do you think Readdressing that segment, how big of a percentage was that in terms of the women just a little more color on on that initiative that will be pretty helpful.
Sure Bob its Michel I'll take that one so we are making a pretty big decision to exit eight brands as we said on the call.
On the their prepared remarks, and all of those are women's brands, we aren't going to go into detail on this call and we're going to say that for Investor day, because I think it's important to talk about those brand exits in context of the overall women's strategy and also with some of the new brands that were introducing some of which you already aware of nine West we're building on Elizabeth and.
James as an example on but we also have some new things to talk to you about.
As it relates to the brands, we are moving away from giving these are brands that have been down trending for some time.
On a relative percent its definitely an area, we have our arms around and it won't be material as we navigate through the next 12 18 months, we're going to exit them very thoughtfully.
And like I said really create that space to introduce and focus on some of the new brands. You know just building on the women's conversation. If you take a step back we've introduced a lot of change into womens and this year was not the year, we expected or anticipated we've learned a lot on first order of business.
For the women's team and as we said we have a new merchandising structure and a new team is should drive inventory management and reduced our choice count and increase debts and we know when we do that and then the best days of women's is one we fulfilled that really well. So that is there their first order business. We're rebalancing the brand portfolio like I said will do.
That very thoughtfully and then I'm really excited about the merchandising initiatives, we have in place we're introducing across many of our stores heightened demand. It can prominence and then this outfit bar that we've seen not only resonate with our millennial audience, but with our female customers at large it really does fulfill.
A solution for them on how to how to dress head to toe and you know people aren't dressing head to toe in mono brands anymore. So it's an opportunity for us to leverage across all the great brands, we do sell and we saw US as I mentioned, we saw increased women's basket. The last remark I'd make in what gives us encouragement on our brand strategy is the performance.
It's a women's in our digital channel, where we have actually seen womens either meet or exceed the overall digital performance. So we know the brands are resonating, we really have an opportunity in our stores around clarity inventory and merchandising.
Got it and I guess just.
Pushing on I just sourcing your supply chain just wondering if you could just give us some should help on that are you seeing any disruption in the supply chain and I guess when you think about you know as you look forward to first quarter, the second quarter back to school.
Any concerns around that aspect and I was just also wondering if some like your proprietary brands. Your house brands <unk> numbers around how much you are sourcing from China and aggregate will be helpful.
Sure I'll take that one as well Bob So you know obviously as we sit here right now the impact or the krona viruses is very fluid and we're all paying very close attention as it relates to our supply chain and receipts.
Spring goods, we do set a lot in February so those are in great shape.
We're staying close to understand if we'll see any impacts as we continue to flow in goods. So far we're in really good shape, we have tremendous relationships with our sourcing partners and with our vendors overseas and where you know in conversations quite literally daily to understand but they've been terrific in stepping up and.
Supporting our business you know as it relates to our private brands, which I'm represent about 40% of our business and apparel in particular on China, China is not our number one sourcing market. We have pursued a diversification strategy for some time, which does give us flexibility in these types of situations, but we'll stay close to it.
Great. Thanks, Michelle.
Based on.
Your next question comes from Mark Altschwager from Baird. Your line is open.
Great. Good morning, Thank you for taking my question.
So just wanted to ask on the guidance.
The initial guidance range implies I think it operating profit declined in the 10 Percentish range at the mid point, which is more conservative than some of the initial ranges you provided in recent years. So I was hoping you could just talk a little bit more about the process there beyond the gross margin pressure in the first half to address inventory are there some more some near term headwinds you see is particularly in <unk>.
Intense is there more conservatism baked into the outlook versus prior years, and then without stealing some of your own Thunder from the upcoming analyst day, just wondering bigger picture do you see 2020 years is the new earnings base from which you can grow and just any initial thoughts on how you're thinking about that algorithm.
Sure Mark I'll take that called so first I do think we look at 2020 is kind of a year of stabilization for us that you're going to hear about that at Investor day, but that's where we think 2020 puts us from a guidance perspective kind of I look at the top line the down one to one down one puts us where we we performed last year you know the midpoint of that really puts us where we.
We're at the back half of last year, when we were able to run slightly positive and then obviously the upside on the one start showing those initiatives taking hold so that's kind of how the topline was done margin being down I think there's three things. There. One is you know cost of shipping continues to be a headwind for us digital actually represents almost 25% of all of our sales. So we can.
Thank you to see that channel perform which puts a little more pressure on margin second we want to be able to address the elevated inventory levels appropriately specifically in womens, which as we mentioned, we'll put more pressure in Q1 and that margin and then third we anticipate it's going to continue to be a promotional environment. We want to make sure that were being thoughtful on how we go through those promote.
And to drive market share in new customer acquisition, which worked incredibly well for us in Q4 with a double digit increase in new customers. We will take a much more surgical approach to those promotions and ensure their productive for us as we move through 2020, but those are the big drivers from margin perspective, you know as you know I think we've managed incredibly well so well.
Keep in that wanted to range and the last thing I'll call out is really depreciation you see that up about $20 million to $25 million versus last year, which did put some pressure on the operating margin is due to a couple things. One is we spent about $100 million more in 2019 and capital which comes into play for depreciation next year.
Specifically around our six fulfillment center and then also you know 40% to 50% of that's been happens in technology, which has a much shorter life. So it hits our depreciation faster.
That's very helpful. And then if I could just a follow up on the recent restructuring announcement curious how you see the changes that product development organization organizational structure impacting lead times and speed to market and I'm wondering what will be the first season to be fully impacted by some of the.
Changes that you've announced.
Yes, and Michelle here I'll take that one mark so I'm I'm really excited about the new structure that we've put in place I'm on the merchandising side. It is one of the key objective is exactly what you're speaking to which is to enable speed to market. As you know on that has been a strategy for some time and while we have more.
Progress and we recognize we need to accelerate it, especially given the performance we talked about relative to our women's business and I'd say overall proprietary brands structurally what it does is really drives accountability and empowerment on our category teams. So we're now embedding our product develop.
Meant resources right into the merchant organization, removing rent redundancy like I said, creating clear accountability empowerment and speed of decision, making we are still maintaining a center of excellence in our design area as well as in our planning and sourcing, which also put greater focus.
On on those key areas, which are key for our success. So I'm looking forward to a really great impact on speed and agility from this new structure.
Thank you see in a couple of weeks.
Great. Thanks, Mark.
Your next question comes from Oliver Chen from Cowen and company. Your line is open.
Hi, Thank you regarding traffic and in store traffic, how would you prioritize key factors for driving the sustainability of that going forward.
Also a regarding the choice count discussion would love your thoughts on on managing the and managing risk in the context of making those decisions as well as but thinking about about your p. twos and ensuring that you're you're surgically.
Processing.
The around which which choice count decisions to make.
Great. Thanks, Oliver Michelle here I'll answer your questions and sort of the order you you showed them. So first as it relates to traffic and I'll speak with regard to as we look forward into 2020, obviously driving traffic and sales as the number one priority of the company that continues to be the.
Case traffic and customers as the life blood of any retail organization and it certainly our our top priority. So I would say you know a couple of things and point to really five things as we think about driving traffic into 2020 and beyond.
First of all its addressing the areas. We just spoke too so women's and inventory our key areas of opportunity and as we get those things working that will drive the topline seconds.
It's around newness innovation Irrelevancy as we continue to bring fresh things and interesting thing for our customers to buy that also will drive traffic than we've seen that play out third our strategic bets around active in beauty, both of which continue to perform in the positive territory, you'll see us continue to support those.
As areas fourth directly tied to traffic in our stores is Amazon returns and as we spoke to very pleased with the program. We saw that accelerate into January that enabled positive constant January and we're seeing both the newer markets that we brought online as well as our pilot markets, which are now.
I'll close to entering their third year. They continue to build on the momentum. So that's a key one for US and then lastly in terms of driving traffic I would say both of our channels of business. We're investing in the experience. So from a digital standpoint, we tested the news site experience in a limited way.
Growing sort of traffic that was going to the side over the fall and holiday time period. So very good results as it relates to our customer experience. So that is now scaled across all of our devices and then in our stores.
Which will be a big focus for us into 2020 and beyond it has been and we expect a heightened that even further we're making investments in merchandising and things like the output bar that I mentioned in some refreshes and that will continue so all of those individually and collectively will support our focus on traffic.
And then to your second point on inventory and choice Count you know, we know at Kohl's, where a destination for the basics and when we're out our best where a good combination of the basics in the fashion relevancy.
We've got to be in stock on the basics and in 2019, we had an opportunity there I'd choice our choice count grew.
When you look back in time, when we are effectively reducing down our choice count in managing that well, we increase our depth on it does drive sales. So we'll do that very thoughtfully and very surgically across all of our areas of business, but I'm very confident in this strategy. We've deployed in the past its worked for us It drive the topline.
Yeah, It drives inventory turn and it in a drives our margin. So we look forward to regaining that momentum in the coming here.
Thank you and lastly regarding I'm thinking about the new customers you've had really encouraging progress there what's your hypothesis for ensuring retaining and engaging the new customers and also minimizing churn as you look to abroad and stay relevant through a younger and different endeavors generation.
Yeah, Great Great question, we're putting a lot of focus in that area from a marketing standpoint, I'd really point to two things one is our personalization efforts and the second is our loyalty efforts on both of which are getting a lot of traction from a personalization standpoint. This has been.
The journey, we've been on now for several years I'm, enabling the data and analytics and now driving that really across every channel business, we're driving in our digital channel our ecommerce platform I'm, we're driving it and things like our emails and we're also driving in social media and we're seeing a higher higher conversion rate.
Both in our stores and online so so that will be a very big focus as we now convert these new customers I'd also say that when we spoke earlier to the new customer acquisition. It grew our overall customer base and our customer retention is stable and that's a direct result of these personalization.
Personalization efforts and then loyalty you know we've been testing and piloting the next generation loyalty program first for sometime now we've had a few different iterations, where a test and learn culture feel very confident that we're now on the path for the program of the future. So we'll speak to you about that at our Investor day.
Thanks, Michelle Best regards.
Thank you Oliver.
Next question comes from Lorraine Hutchinson from Bank of America. Your line is open.
Thank you good morning, I wanted to follow up on the gross margin point till you laid out the three key headwinds for gross margin this year and talked about the first quarter being a little bit below the guidance can you just maybe.
Elaborate on the offsets to get this gross margin flat or maybe up into positive territory by the second half of the year.
I think the biggest key enabler for US Lorraine is gonna be the inventory management that Michelle had just discussed if you look back in 17 and 18, when we managed our inventory down where were able to better chase sales and have better sell throughs, which led to a better gross margin result, so I think thats key number one key number two.
Who is operational excellence continues to be an effort that we put forth across the organization specifically, we focus a lot of that on our cost of shipping. So we're leveraging our technology when it comes to our inventory placement. So we're able to butter source. It both on a cost and a speed metric. So that will continue to deploy as well as we continue to highlight.
Mark at our buy online pickup in store, which as you know as my favorite because there's no cost to that as all at all so I think those are two big initiatives that will continue to focus on that will help us drive margins at through as the year Progressive knowing Q1, we want to address the elevated inventory levels, which is why it will start out a little later.
And where would you put the digital or shipping headwind for the year.
And they get maintains in that 20 to 30 basis point range I think a lot of the efforts that we've put forth for costs are shipping maintaining that despite the increase in the penetration has been really a focus of ours and are result of the operational excellence efforts. So we've been able to take costs out. It's helped mitigate that had wouldn't becoming bigger as that business grows.
Thank you.
Thanks, sorry.
Your next question comes from Dana Telsey from Telsey Advisory Group. Your line is open.
Good morning, everyone can you talk a little doubt the real state plans for 2020, and how you're planning the side by side and how some of them had been performing so far what it's either at a tropical who you see a good partners and then as you think about Amazon returns as you as it is it.
As it is around longer just to close picture other synergies that com, okay efficiencies that we should see that cost picture of the Amazon return business be different in 2020 than in 2019. Thank you.
Hi, Dana Michelle here. Thanks for your questions first off as it relates to our real estate strategy. Our store portfolio why don't want to continue to push things to Investor day, that's a very important topic for us we've been spending a lot of time thinking about our future store strategy, so well out of.
Lot of color on on March 16th in particular to the what we call the Rightsizing initiative or the side by side that continues to be I'm, an area that where we're studying we have some stores that are doing well we have some stores that once we shrunk the footprint are not recapturing their sales. So so it's been a bit of a mixed reserve.
<unk> here and you know as as we say were big testers, we still believe there's an opportunity here for US we've got about 20 of those by the ended the year, we have great partners partners like like planet fitness and all the and some others and so we do believe overtime that this is an opportunity for us I'd say, we do.
Don't have that model fully right at this point, but you know, we'll look to address sat at Investor day, as well as our overall store strategy. I mean were highly committed to our store base as you know there they're very productive they generate a lot of cash and they're a great source of you know driving traffic and driving customer engage.
Agent. So we'll speak will speak more to that and then somewhat related in the spirit of driving traffic. Your question around Amazon as we spoke to earlier I'm really encouraged we're pleased with the program. We continue to learn a lot we're getting the traffic I'd say the focus areas for the team is to continue to drive that momentum the customer engagement.
I made a remark earlier that we generated world class net promoter scores, which is phenomenal and that was actually done during the busiest time of the year as well. So it really speaks to what is core to the company around great customer service I'm in the spirit of learning a lot. We are learning about how to drive efficiencies in the program and that.
Translates into our operational excellence initiative. So we do have a team that's focused on that as we get more time under our belt and I'd also say, we have an opportunity was driving even more conversion and so we're focused on areas like how do we showcased newness to these customers coming in drive more impulse share our private brand story et cetera.
Right. So there's there's a lot of opportunity and upside as we look forward to the Amazon initiative.
Thank you.
Thanks, Dan.
Your next question comes from Matthew Boss from JP Morgan Your line is open.
Great. Thanks, So on same store sales, maybe if we break down your 2020 guidance, where do you see the top improvement opportunity. If we were thinking about traffic versus a you are and how best to think about the progression of comps through the year, meaning have you seen positive comps from January continue through February.
So Matt I'll I'll take that let me start with your first question around I'm kind of state of the state where we are right now I mean, obviously, where we're in the quarter. So we don't give a lot of color, but we're expecting year to be generally within our guidance and I'd say February met our expectation.
So yeah, we'll see how the year plays out, but we're sort of sticking with our down one to up one obviously, we want to aim for is high we can go so we hope to do better than that but we believe that were being thoughtful imprudent on the sales comp guidance.
And then as it relates to the initiatives that were betting on to drive the topline I spoke to a couple of these earlier, but I'll go through me again, and I'd say first priority for us is around driving traffic. Although I also believe we have an opportunity on our baskets I'm, especially in the stores. So I think inventory management will help.
With that but in terms of driving the topline one is improving the performance of what has been the weaker spots over the last year. So that's womens first and foremost and then across the board I think as our inventory management disciplines kick kick in on deeper that we should see a benefit across the.
Board. So so address those things that were a bit of headwinds for us in the last year and then amplify what is working and what we're seeing work. So amplify the newness and innovation, you'll continue to see that I spoke to in my remarks. The brands that we introduced in 2019 those are in very early days and I'd say from our experience.
And as we've introduced brands in the past to take under armour is a great example that has continued to build year on year. So we are taking that same merchandising and marketing approach to these new brands. We've introduced and are committed to like nine west Koolaburra, Scott living and the fanatics partnership which has really been a bright spot for us.
Our next we will continue to drive are you know two big strategic category beds, one being active and then beauty beauty is smaller part of the part in smaller part of our business today, but we see tremendous upside, especially on the basket building side of things its comping nicely we have been.
Your plans for it will address that on Investor day, as well and it's also worth noting on active which has been a strategy in place now for the last five years, we consistently see positive growth our partnerships with the top brands have never been stronger our assortment is growing and so we'll continue to do.
Dedicate even more space and in fact, when I spoke to the restructuring of the teams. We have put a very focused team on active to drive that business. Even harder next in terms of driving traffic I was just speaking about it which is the Amazon partnership just we're encouraged with the tailwind we're seeing and we expect that to continue into the year.
And then lastly, it's all around customer engagement and the experience and we have initiatives underway to build that both digitally and in our stores. So I feel like we have a very robust pipeline that really touches across all aspects of our business from brands to value to the experience.
Great Joe just a follow up on the SGN, a so for 1% to 2% SGN a dollar growth this year and timing of investments to consider between the front half versus back after the year and just any flexibility in the on the expense front if if needed.
Yeah, I would say, it's going to be pretty consistent throughout each quarter. As a reminder, you do recall Q2 for US was a pretty good performance last year. So it's probably are hard is like for like as we go through the balance of the year, but I would expect us to stay within that range. Given you know our leverage point is about a point and a half and that rang true throughout all of the year.
This year was a little higher but as you recall 40 basis points of our performance. This year was due to lease accounting standard so without that were back in that point and a half, which I think we've consistently shown that discipline. So I'd expect it to be pretty even performance across the quarters.
It's great really helpful Festival.
Thanks. Thanks.
Your next question comes from Alex Office from Goldman Sachs. Your line is open.
Good morning. Thanks, so much for taking my questions. So my first question is about active you called out strengths in the quota I Wonder if you could give any color on the growth rate in active apparel and active footwear and then as a follow up to that you know what are you planning in terms of axis of growth for a 20.
20, a you know and will that be driven by their more pot expansions or anything else.
Yes, great Alex Thanks for the question. So we're very bullish on active that you know from several years ago identified the white space for us to be the destination for active across the entire family as it relates to a and as I've had a positive comp throughout the year end in the fourth.
Quarter I'm on the apparel side, we saw strength in the mid single digits footwear, a little bit lower that was really driven by one brand that's kind of being course corrected as we speak but across the board feel really good, especially about our national brand partnerships Adidas under armour and Nike I mean these these are obviously iconic brands.
Our partnership has never been stronger and we'll continue to so in the coming year 2020 to your question allocate more space a drive innovation we have.