Q1 2020 Earnings Call

[music].

Ladies and gentlemen, thank you for standing by welcome to de Q1, 2020 Cools Corporation earnings Conference call.

At this time, all participants are going to listen only mode.

After the speakers presentation, there will be a question and answer session.

Good question during the session you read the press Star then one on your telephone.

And if you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Mark Rupe, Vice President Investor Relations. Thank you. Please go ahead.

Thank you operator.

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 of 1995.

Coals intends forward looking terminology 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 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 a and calls most recent annual report on form 10-K.

And as may be supplemented from time to time and cools other filings with the SEC.

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 to reconcile these non-GAAP measures can be found in our press release and investor presentation.

Both of which have been filed as exhibits to our form 8-K with the SEC.

And our available in the company's Investor Relations website.

Please note that this call will be recorded however, replays of this call will not be updated.

So if you're listening to a replay of this call. It is possible that the information discussed is no longer current.

And Kohl's undertakes no obligation to update such information.

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

NGL, Tim our Chief Financial Officer.

I will now I'll turn the call over to Michelle Thank.

Thank you Mark good morning, and welcome to calls first quarter earnings Conference call.

A lot has happened since our last earnings call on March Threerd.

Discoloration of the Covet 19 pandemic has challenged the world in ways never thought imaginable.

It is affected each of us to varying degrees and has had a significant economic Tal.

I Hope you and your families are safe unhealthy during this time.

As difficult as this unprecedented health crisis has been.

Im comforted by the resilience and generosity that has been exhibited by so many.

Our sincere gratitude goes out to all of those on the front line that have worked tirelessly to support the greater good.

I'd like to thank our associates for their support and commitment as we have continued to operate portions of our business.

I would also like to recognize and thank our many business partners and vendors that have been instrumental in helping us navigate through this crisis.

We've had to make difficult decision to ensure our business continuity and I'm incredibly proud of how our organization has stepped up to the challenge we've learned a lot and will be sure to leverage these insights into the future.

We expect will be operating differently for quite some time, but we are pleased that we have now begun the rebuilding process.

We have taken our first step in this direction and have begun to reopen stores.

As we continue to move forward, we will do so with the health and safety over associates and our customers remaining our top priority for today's call I'm going to discuss how we're navigating the current environment.

Touched on our first quarter results review, our store reopening strategies.

And then share with you an update on our strategic initiatives and the opportunities we have to take market share.

Joe will then review the financial results and provide detailed on the actions we've taken to ensure our liquidity and financial flexibility to navigate this crisis.

And overtime become a stronger company.

We entered 2020 with a strong foundation and a healthy financial position.

As we shared with you on last quarter's call. We had a record 65 million customers shopping at Kohl's and 2019.

This is a testament to call differentiation and the value proposition, we provide our customers.

We also entered the year with over $700 million in cash and modest leverage.

We have a long history of disciplined and prudent capital management and have reduced our debt in recent years.

This has put us in a solid position to navigate this crisis and we'll continue to serve us well as covert 19 escalated we established to short term priorities. The first protecting our associates and customers and the second preserving the financial position of the company.

Consistent with these priorities we closed all of our stores on March Twentyth to do our part in helping to slow the spread of the virus.

We also took immediate action to reduce our cash outflow.

Essentially everything was on the table and we operated swiftly and decisively.

We reduced inventory receipts extended payment terms and reduced expenses across the business, including marketing technology and operations.

We also made the difficult decision to furlough 85000 associates, most of whom work in our stores in store distribution centers.

These are valued members of the calls family and we supported them through two weeks of pay and continuing their existing health benefit.

In addition to expenses, we also increased our liquidity through significant leave reducing our capital spend suspending our dividend and share repurchase program.

Replacing an upsizing, our revolver and issuing new debt.

I will now turn to our first quarter results.

As expected our business has been materially impacted by Cobot 19.

While we have a fast growing digital business. It is only replaced a small portion of the sales loss from our entire store base being closed during the second half of the first quarter.

Our business was on track entering the crisis with comparable sales trends consistent with our previous guidance at the time of our fourth quarter earnings release.

However, shortly thereafter, we began to see the traffic impact to our stores and then we closed all of our stores on March Twentyth with our entire store base closed we responded with speed and agility leaning into our digital business as the only channel to engage with our customers.

We amplified our digital marketing and updated digital site content to be relevant to what customers were interested at this time.

We also leveraged our large and growing E mail file of more than 50 million customers to reach them in new and personalized ways.

These efforts paid off.

Digital sales increased 24% for the quarter.

And accelerated to 60% in the month of April.

All of the key performance metrics were positive, including traffic conversion average unit retail and units per transaction.

And we were pleased to see more new customers and younger customers shopping on our digital platform.

Importantly, our stores fulfilled a higher percentage of digital orders, which aided our efforts to reduce in store inventory.

More than 40% of digital orders were fulfilled by ship from store and customer pick up during the first quarter.

And this percentage was much higher in April following the successful launch of store drive up where we've seen great customer uptake.

In fact in the over 900 stores, where it is offered the percentage of digital demand fulfilled by store drive up was 15%.

Exceeding that of buy online pickup in store before the crisis began.

While we had been testing this capability in a couple of stores. It was still very new to us.

As a health crisis unfolded, our team swiftly put a strategy together and launched it scale very quickly.

This is a great example of the responsiveness and agility of our organization.

From a line of business perspective, we achieved positive digital sales growth in all of our categories home was the strongest with digital sales increasing more than 50% for the quarter.

The home category has historically penetrated higher digitally for us and was influenced by stay at home mandates.

We saw particularly strong demand for kitchen, electrics vacuum electronics and gaming.

We also saw continued digital strength in areas like active toys and beauty.

And we saw growth in areas like basics, intimates, and sleepwear, however, apparel and footwear labs overall digital growth.

Now I'd like to discuss our reopening strategy.

Stores are the lifeblood of cold and more than 90% of our customers have historically shop them.

While the current crisis has had a significant impact to our store business. We continue to see our store portfolio as one of the core assets of our strategy going forward.

A key reason for this is that our stores are financially healthy 99% of them generated positive for while cash flow in 2019.

Another reason is that they're located off mall in suburban neighborhoods, where our customers live and work.

We see this as an advantage as the majority of our stores are located next to high traffic areas, where our customers are already shopping.

We also believe the size of our store provides us a unique advantage to facilitate social distancing as customers begin to journey away from home.

Our goal is to operate the cleanest and safest environment in retail, where our associates feel comfortable providing excellent customer service.

And where our customers feel confident to shop.

And we are investing to ensure this happened since the day, we close all of our stores. Our team has been working on a thoughtful and comprehensive plan to adopt the latest health and safety measures as we reopened our stores.

These include operating with limited store hours, social distancing signage elevated cleaning procedures.

I knew returns process among many others.

We will continue to offer store drive up as a convenient offering for our customers.

We will also resume our Amazon returns program as stores reopen and we expect to see traffic build as customers return items purchased over the last several months.

We are implementing health and safety best practices for our store associates as they returned to work.

Associates will undergo training on the new procedures as well as take part in mandatory wellness and temperature checks before each shift.

We'll also provide many of the things like masks and glad that are becoming standard in this new environment.

And we are adjusting work spaces to enable social distancing.

We believe that all of these elements create the right environment for our associates and customers as they are welcome to back to stores.

Since may 4th we have reopened about 50% of our stores across the country.

We have followed a set of criteria, including state guidelines health data store readiness and field insights to help us determine the timing of story openings.

We have been reopening stores on a state by state basis. However, we will continue to be agile in our approach as conditions are still evolving.

As you can appreciate as we reopened stores there is a great sense of pride for the entire organization.

Spend a difficult wrote over the past two months, but we've made the right decisions and strategic moves to put us in a position to begin rebuilding we're very excited to commence this process knowing that we can build a stronger coals in the future.

That said, we will remain present to the situation and be prudent our planning recognizing that cobot 19 will present challenges for some time, let me now discuss how where you're thinking about the rebuilding process.

As we look forward, we are planning our business based on the assumptions that sales will rebuild gradually during the remainder of the year as people get more comfortable living in this new normal.

Based on this we are planning the business conservatively.

Our company has a long history of operating with great discipline, and we believe prudence dictates caution in the near term.

To be clear, though the decisions, we're making in the short term related to covert 19 will not alter our conviction about growing this business over the long term.

To that end our primary focus continues to be navigating the current crisis.

Though we are beginning to look towards the future ensuring that kohl's is as relevant if not more so based on expected changes in the competitive in consumer landscape.

We were looking forward to presenting a thorough strategic update at an investor day in March.

Given that we were unable to do so I thought it would be helpful to share the overarching themes that remain relevant post cobot 19, though we will continue to take advantage of new insights presented during this dynamic time.

Let me remind you that Kohl's is a leading omnichannel retailer with a strong foundation and a loyal base of 65 million customers.

Over the last five years, we've enhanced our very healthy store portfolio with a thriving and growing digital business. We view. These two channels as not distinct but highly connected to present, a unified experience to the customer.

In addition, we've also been able to leverage the operations of both our stores and digital platform to deliver easy and seamless experiences.

Coals has a differentiated position in the market anchored in three important characteristics.

An unmatched brand portfolio at the best value.

Easy and inspiring experiences.

And an industry leading loyalty program.

As we look forward, we will leverage our strong foundation and differentiation against the following focus areas.

Strengthening our product leadership elevating the experience leading the next generation of loyalty and operating with excellence.

Let me share a little on each of these.

First as it relates to strengthening our product leadership, we are focused on modernizing our women's business.

Continuing to lead in active for the family.

Building, a much larger beauty business and enhancing our position in our other core categories.

As we discussed on last quarter's call improving our women's performance is a top priority.

While the current environment will pose challenges, we are moving barb several bold moves.

We will exit eight down trending women's private brands. These include Dana Buckman, Jennifer Lopez mud candies, rocking Republic pop sugar al and Juicy couture.

This will create space to introduce a more compelling and current offering to our customers while improving the overall clarity to reduce choice counts.

We're also committed to growing the active category, we've nearly doubled our active sales from 2013, and we see continued momentum in this category as customers focused on staying healthy.

And we continue to be very committed to building, a large beauty business and our investing to make that happen.

Last year, we added many new brands and expanded our elevated beauty experience to 12 stores.

This year, we will add 50 more stores with the elevated experience.

Lastly, we will continue to bring new relevant brands to calls as we know that constant newness and discovery is absolutely key to engaging our existing customers.

As well as to attract new younger customers in 2020, we will introduced several new brands, including lands end and Tom.

Land that is an iconic brand in a market leader in the classic casual lifestyle. Beginning this fall we will offer the full lands on assortment on coal dotcom as well as feature a shop in shop experience and 150 of our stores.

And we expect ponds will resonate with our millennial target.

Our team here is continuing to seek out other relevant brands to offer to our cold customers. We look forward to sharing more in the future.

Next let me talk about how we are elevating the experience when we think about experience. We think broadly on every touch point and interaction we have with our customers across all channels.

We see many areas of opportunity to elevate the experience, including refreshing the existing store experience driving localization and accelerating our digital growth.

A few examples include investing to create more compelling merchandising leveraging in store technology to drive better customer experience and efficiency.

And implementing a more tailored approach to local market.

In addition, we will continue to invest in supporting the growth of our digital business.

Which has more than doubled in sales since 2014.

Our next priority is leading the next generation of loyalty.

We have an incredibly strong foundation and loyalty with 30 million members and we don't take this for granted.

We have three key differentiating elements of our loyalty program.

Hi, chronic kohl's cash.

Our rewards program and the kohls charge private label card.

We know that as we move customers up the loyalty ladder sales productivity significantly increases.

To enhance our efforts on this front, we are integrating our loyalty assets and leveraging personalization.

We look forward to sharing more details on our progress in the future.

And lastly, let me talk about operating with excellence.

Operating with excellence and enhancing our profitability has been one of our strategic priorities for several years and it is deeply ingrained in every corner of our organization.

It's also a concept that underpins all of our initiatives and has been particularly useful as weve navigated through the coated 19 crisis.

Before I hand, it off to Joel Let me summarize my comments today.

Our financial performance like many other retailers will be materially impacted by cobot 19 in 2020.

Our focus will remain on striking a balance between the short term and the long term.

Recognizing the decisions we make today can influence our long term opportunity.

We are confident that our strong fundamentals and financial discipline will enable us to not only navigate the short term uncertainty.

But also position us to take advantage of unique market and customer opportunities in a post cobot environment.

Much of what has made calls the vibrant and resilient retailer. It is today, we'll make calls a stronger company in the future.

We will maintain a clear and unwavering focus on providing families and unmatched brand portfolio at a great value and an easy and convenient experience.

And we will leverage our strong foundation that isn't built through significant and consistent capital investments and Omnichannel technology in our stores.

In closing I want to thank our associates for their incredible commitment and resilience for stepping up in the phase of this unprecedented challenge.

Each of you has given me great inspiration.

I said on last quarter's call the strength of our company is rooted in our people in our innovative culture.

And that is certainly proven to be the case at this time.

I also want to express gratitude to our business partners and vendors that have provided tremendous support in helping us enhance our short term financial flexibility.

We look forward to rebuilding our business with you in the months and years ahead.

This has been an extraordinary period of time and we've learned a great deal through this process about our business our team our agility and our perseverance.

While we still face challenges ahead, we are a strong company and well positioned financially to emerge from this.

To everyone listening on the call we wish you and your family's health and safety as we began to resume some level of normalcy in our lives.

I'll now turn the call over to Joe who will provide details on our first quarter results and financial position.

Thank you Michelle and good morning, everyone.

Let's start by providing some additional contacts on the actions we've taken in response to covert 19 I.

I will then discuss our first quarter results and share some high level thoughts on our business for the remainder of the year.

From the outside of this health crisis, preserving our strong financial position has been a top priority.

We leveraged our operational excellence strength to swiftly and aggressively manage our cash outflow.

Our first action was to address inventory given the anticipated cobot 19 sales impact.

We immediately pulled back in March and April orders, which allowed us to reduce first quarter seats by over 30% and helped us manage inventory down 3% to last year.

We expect to further reduce inventory in the second quarter as we lowered our receipt by more than 60%.

We also partnered with our vendors to extended payment terms.

Our quick and aggressive response to address our inventory receipts significantly enhanced our financial flexibility.

Next we reduced expenses across all areas of the company our largest declines came in store payroll due to the store closures and marketing, where we significantly reduced Oliver media, while continuing to invest in digital we acted promptly and given the timing of the crisis, we realized most of the benefit in April.

Another important measure we took to improve our financial position was to adjust our capital allocation priorities, we've been very consistent and messaging our approach to the deployment of cash.

First we invest in the business.

Second has been our commitment to the dividends.

Third is opportunistic and complimentary M&A.

And fourth has been funding share repurchases with excess cash flow.

Importantly, each of these four are supported by and evaluated through the lens of maintaining a strong balance sheet.

In response to covert 19, we unwound these priorities in reverse order.

We started by suspending share repurchases and then suspended our quarterly dividend beginning in the second quarter.

These two actions will enhance our flexibility by more than $650 million this year.

Next we lowered our capital spending forecast to $250 million for the year, a decrease of $500 million, including reducing technology spend.

Delaying the opening of our six ecommerce fulfillment center and executing fewer store refreshes and right sizes.

That said, we are still investing in important long term growth initiatives like beauty.

And lastly, we increased our financial liquidity during the quarter.

We replaced our previous $1 billion revolver with a 1 billion in a half dollar secured revolver of which $1 billion was drawn at quarter end.

In addition, we issued $600 million and knew that importantly, our that remains investment grade and we have no maturities until 2023, the collective financial impact of these efforts has been significant we generated positive operating cash flow and we ended the quarter with over $2 billion in cash and 500 million.

Dollars available under the revolver.

Now, let me briefly discuss our first quarter results.

As you saw on the earnings release, our results were materially impacted by covered 19.

Net sales declined 43% as our entire store base was closed for half a quarter.

Digital sales increased 24% and improve progressively during the quarter as we took action.

We're especially pleased with the solid growth from non kohls charge customers, which as a result of our new customer acquisition efforts.

Other revenue, which consists primarily of Netcredit revenue was up slightly.

Net credit revenue was not materially impacted by the crisis in the first quarter. However, we do expect pressure in future periods is driven by the lower sales due to the store closures.

Turning to gross margin.

Gross margin was materially impacted by Coven 19.

The decline of 1900 50 basis points was driven by three primary items.

Approximately 1500 basis points related to inventory action.

250 basis points related to cost of shipping due to increased digital sales penetration.

And 200 basis points related to mix as home outperforms and due to increased promotional activity.

We took to inventory actions during the quarter.

First we took our usual clearance permanent markdowns in February.

As a reminder, we account for inventory on the retail inventory method.

When we take a permanent markdown it results in a downward adjustment of both the expected retail value and our cost which has an immediate impact on our margin.

This impact is typically recovered when the inventory subsequently sold.

However, given the timing of cover 19, our store closures and the related pressure to sales the permanent markdown had an unusually large impact to margin during the first quarter, despite our markdown being lower relative to last year.

The second inventory action was the establishment of a reserve for access seasonal inventory recognizing the need to markdown inventory given the expected lower sales demand.

Let me be clear.

This highly unusual pressure on our margin was driven by the significant decline in sales due to the cobot 19 crisis and related store closures.

As it relates to cost of shipping the 250 basis point impact to margin is inline with our past commentary about 20 to 30 basis point annual headwind to margin as digital sales penetration increases.

Over the past five years digital penetration is increased approximately 200 to 300 basis points annually.

During the first quarter, both the shift in digital sales penetration and the cost of shipping headwind for 10 times higher than normal as digital sales represented 45% of sales versus 21% in the prior year.

Looking ahead, we continue to expect gross margin to be pressured due to lower sales volume as we reopened stores.

Increased cost of shipping as we expect digital penetration to remain elevated and last we're planning for a heightened promotional environment as the industry addresses repercussions of closed stores during the crisis.

Now, let me discuss SGN a.

In Q1, asking expenses decreased 16% to $1.1 billion, driven primarily by lower store payroll marketing and credit expenses.

Of note as seen a would've been down 19.5%, how we not incurred approximately $40 million expenses related to coordinate team.

And it's important to mentioned again that given the timing of the crisis. The full impact of our expense actions was not realized until April.

As we look forward. We're planning asked you need to continue to decline for the rest of the year. However, the savings will be balanced as we move into the rebuild phase and reopened stores with new safety measures.

We have a long history of focusing on operational excellence and we will continue to leverage this cost discipline strength.

Lastly, let me touch on some additional financial items.

Depreciation was $3 million lower versus last year, and we expect us to continue due to reduced capital funds.

Nonrecurring charges of $66 million include technology impairment and brand exit.

And interest expense increased in Q1 due to accessing our revolver and we'll continue to be higher in future periods. As a result of last month bond issuance.

On a GAAP basis for the quarter net loss of $541 million, our loss of $3.50 per share.

Excluding the nonrecurring items that I, just mentioned for the quarter net loss was $495 million or loss of $3.20 per share.

We are happy to take your questions at this time.

Thank you.

As a reminder to ask a question the press Star then one on your total.

And to withdraw your question breast about your hash key.

The first question is from drew ball with Guggenheim Burgers. Your line is open.

Hey, good morning.

Good morning, Bob.

Hum.

Just a couple of questions I think first I think largely from CRE Jill.

On the payables was can you just give us a little bit more color in terms of how the payables are structured given the cash balance and so there's some of the the terms that you have in place on your payables and then the second question is is only the reserve for access seasonal inventory.

Can you maybe just elaborate a little more in terms of should the how big that reserve is or just essentially how that's going to flow through.

Especially given where the inventory levels.

On the books at this point thanks.

Sure. So obviously, Bob this quarter, we took a lot of actions to preserve our financial position and minimize our cash outflow. One of those actions was to work hand in hand, with our vendor partners to extend our payment terms. So we did extend our terms with all of our vendors the merchandise vendors, we extended up to 100 days, which obviously helped US a bridge.

The store closures and maintaining that cash flow to the point in which we could open stores. So the timing worked out really well as we now have stores opening as a source of cash inflow and now as we'll go back to a normalized payable structure going forward in terms of the reserve for inventory, obviously is atypical for us because of the retail inventory.

Sorry method that were on but recognizing that the stores were closed we did have access inventory. So we did a cost adjustment to that inventory you would see it as an impact to both gross margin and a reduction of inventory recognizing that it was access during the quarter and so that is essentially going to stay with us as a reduction of Evans.

Sorry.

Great. Thank you very much.

Sure.

The next question is from Mark Mark Altschwager with Baird. Your line is open.

Good morning. Thanks for taking my question was hoping you could talk about what you're seeing thus far in may overall interest any early takeaways from the source of reopened and overall just can you give us a sense of the various scenarios you're planning for for the remainder of the year and then yes understanding that there's a lot of uncertainty and what the demand.

Backdrop will look like just thinking ahead to 2021.

Do you think it's possible for EBIT margins to get back to 29 to levels without sales fully recovery.

Thanks.

Great. So mark I'm Michel here I'll take the front end of your question and then I'll have Joe comment on the EBIT margin piece.

So first of all in terms of May let me add a little contacts color on both of our channels. Let me start with digital actually so as you heard.

Our remarks for the quarter, we were up 24%, but we really saw the acceleration towards the end of March and into April with April at plus 60% I also do want to add a little color to that as well some of our categories really did phenomenally well our home business, our kids business in our active business or.

All north of plus 100%. During this time, we've continued to see that momentum actually accelerate into may. So we're feeling very good about our digital channel and that's been a result of a combination of really leaning into our digital marketing efforts.

Adapting our site to be addressing relevant categories and then the introduction of our curbside drive up which we introduced on April 2nd, which we do plan to continue even as we open up stores. So that's on the digital side on the store side. We started opening up stores in early may. So on May 4th we opened about 50 stores.

But 5% of our base, we opened up we were open but 25% of our stores last week and we just got to 50% yesterday. So it's very early days what I can tell you is that as the stores have been opening they've been doing 50% to 60% of productivity that we would typically see it.

This point in time, so there are customers and our stores and we're we're happy about that and we're encouraged by seeing the progressive improvement of the stores that have now been opened two weeks, so where they started at 50% to 60% we've actually seen them ramp up in their second week now I will caveat and say that's 5%, it's only 50 stores.

Yes.

Like I said, we are we are encouraged and we know that that's going to take some time.

As it relates to the balance of the year I mean, we are planning the business very conservatively you and we're in a very uncertain time, you know, there's there's a lot that could unfold in the coming months. So we're taking a very prudent approach to how we're planning inventory, how we're planning expenses to navigate through the balance.

Through the balance of the year.

And we will do everything we can to be fluid and response to demand. So if our demand is actually higher than we expect we've demonstrated our ability to chase goods, even when our inventory is is depressed. So I think again the the theme on this would be prudent but our ability.

To chase into goods and to also amplify things like marketing as we see where the customer goes through the balance of the year and then I'll, let Joe address margins, Yeah. What I would say is right now obviously, we're in uncertain times for planning the business incredibly conservatively. It's why we haven't given guidance and to look out to 2021, Mark we're going to.

On a several different scenarios, but I think of yourself that they're all going to be incredibly conservative we're going to manage down our inventory, we're going to continue to leverage our cost discipline demand is down expenses and that as we indicated we do expect there'll be some pressure to our gross margin line as digital continues out penetrate but as we look across the organization leveraging operational.

We're going to find ways to offset those costs throughout the organization, including deployment of technology to make as much more efficient on how we fulfill orders in how we allocate inventory and then as while we expect the heightened promotional environment, which will weigh on our sales. It is a strength of ours, we will lean into that strength we've done this while.

You know as we watch other disruption in the retail market, we've taken advantage of that through strategies of marketing and we'll deploy those strategies today as well as we continue to grab market share, but I think it's too early to tell what we will see in 2021 from margin perspective.

It's all very helpful detail, if I could just ask a quick follow up to the extent, we see a step function change digital mix, how do you see the store operating model changing hopes that it can remain 99% four wall free cash flow positive in the new normal.

I think first we use our stores Michelle mentioned in her comments to fulfill over 40% of our orders, we just launched drive up which you'd seen was very much adopted by our customer at 15% and the eligible stores. So it surpassed BOPUS. So we'll continue to market for pickup whether it be with BOPUS boss and now our drive up mentality. So we.

We leverage our store they think not just for the experience component, but also for fulfillment, but I do think we're encouraged by the adoption we seen in the the progressive improvement just in the first two weeks of our stores opening that they are still highly relevant to the customer you know as we look out we do an annual review all of our stores Mark. So we will continue to do.

Do that review and if we see that the customer behavior is changing and those stores don't say stay 99% positive cash flow. We will then look at opportunity to close which we've shown you're doing in the past. We've just done it on a minimal basis because of the health of our store base. The only thing I would add to that is you know as we over time have review.

You'd our business looking at.

Our stores proximity and digital sales they've actually strengthened each other and so so we actually look at that as an asset and our omni channel customers those customers, who shop, both online and stores are our best customers and we're actually seeing those omni customers buying more during this period obviously on.

Mine and we'll be study not as as we look to more stores opening.

Thanks for all the color as to look.

Thanks Mark.

The next question is from older Chen with Cowen.

So.

Hi, Thank you what would you highlight some of the permanent changes that will happen as a result to this and any big surprises along that line.

You've also been really agile with planning across many disciplined.

Given the the reality of the promotional environment ahead, how do you prepare for that in advance as best you can and also when thinking about inventories, it's been a challenging environment as consumer demands have shifted rapidly as well.

What are your thoughts for the for Q4 inventory planning and some of the.

Challenges and opportunities says, it's not easy for the vendor community as well. Thank you.

Great Oliver well, thanks, Michele here I'll answer and that color to your questions. So first of all you sort of asked the question around permanent changes to our business coming into our or emerging from this this cobot period I think the obvious one is is clearly how our stores operate and.

Whether or not this is for a year or forever, but all the safety precautions that we've put in place those have been really embraced well by our associates and our customers feedback has been very positive I'm I'm, obviously interacting a lot with our field I've been in some of our open stores and everything from the plex seized to the U.S.

The math to right now it's reduced hours that could be you know fluid as as we see things unfold and we're doing a lot around our associates as while making sure that they're they're safe and well when they come into work things like temperature checks. You know we are taking the opportunity to take a step back and look at our business as you would expect I think theres. Some some time.

Tactical changes, we're making so if you go in visit the store, you'll see we've cleared out spaces like our race track design, where we removed a lot of the impulse areas to create more space and we actually believe it's creating a better shopping experience for the customer. So that's one but I think importantly, it's really understanding where the concern.

Tumors going in this kind of post coven environment, what from an economic standpoint, what that looks like I say the good news there as we stand for value. So we expect to be as if not more relevant during this period, we will obviously lean into categories that the customers responding to so again I'd say the good news there.

We've been on this active in athleisure journey for quite some time as you know and we're just seeing that accelerate further and then there are new new areas for us that were part of our original strategic plan like beauty and so as we look to categories that are perhaps less relevant downsizing knows and creating space for a category like beauty and even do.

During this kobin period digitally our beauty business, albeit we're you know not as penetrated as highly as others, but we're seeing really really strong growth.

Then as we look to how we how we navigate through the balance of the year I think you use the word agile I'm. So that is absolutely our approach and you know I've been really pleased to see how the organization has operated in a very nimble and agile way through this period I think the drive up as a good example, and while we certainly aren't the first to bring it to the mom.

Market and we had been testing it on and just a couple of stores. They were able to scale. This very quickly in a matter of two weeks and so also related to permanent changes I think culturally the expectation on how we can innovate and try things and and be a lot faster that is certainly the expectation going forward. So similarly as we.

Plan for you know a couple of big seasons coming up back to school and and holiday. We are planning as I mentioned earlier, very prudently and cautiously, but we have great vendors and business partners. They have been outstanding. During this process, we worked with them side by side. So we are bringing in fresh receipts for back to.

School in holiday of course, we'll chase into goods as we see wet the come up customer demand is and I'd say the same with marketing right now like in the month of April we were 100% digital in marketing now we will bring back some of the more mass media in in the June timeframe as as our stores come back up a mine, but what data.

For the us as to be really nimble as it relates to messaging and flexing media up and down. So I think you can expect really through the balance of the Erin I don't think it ends at the end of the year, just a very nimble approach to be responsive to where the customers going.

Okay. Thank you really hopeful and on the promotions front end customers looking for value.

What is the best way to manage that in a lot will be out of your control with the competitive landscape and how this manifest as well.

Yeah, no. It's a great question and we're fully anticipating it will be a promotional environment given the inventory that's out there as you know we we did on tape we did take our markdowns as Joel spoke to earlier and she also said, we're expecting a promotional environment and so were planning for that to create margin pressure as we look ahead.

And I think the same thing goes you know we're going to be very present to it we're going to see how our customers are responding I would say you know the good news here is we we know how to do promotions, we know how to leverage our kohl's cash we know how to do great sales friends and family eventful. This goes on so we will flex those promotional muscles as we see fit to make sure.

With that we are driving the kind of demand and traffic that we need to.

Nice job on the reopening best regards.

Thank you ever take care.

The next question is from Lorraine Hutchinson with Bank of America. Your line is open.

Thanks. Good morning, you mentioned that you lowered second quarter received by about 60% is that the way you're thinking about sales for the quarter and then are you ordering down similarly for the second half foresee.

Sure. So Lorraine Michel here, we obviously have not put guidance out in terms of sales what I would tell you is we're taking an even more cautious approach to receipts than our sales I mean, our expectation in terms of as we kind of emerge and open up our stores is that we should you know we're expecting greater turns on.

Inventory that's been part of our strategy I think this is a forcing function to enable that so you know really we don't know how sales are going to unfold like I said, where we're cautiously encouraged by what we've seen in the first couple of weeks, but as a very small sat and we know that this entire crisis is.

Very uncertain time, but so while we don't we haven't provided specific sales.

Expectations no that we can drive more sales of the demand is there and like I said earlier, we can chase product as we as we see the demand.

Come forth.

Thanks, and then as you think about opening each store, but what's the level of sales that you need to offset the cash burn.

You face initially to get that store open.

Yeah, it's very low and what we need to offset the cash burn in terms of what we have to open first obviously any dollar we get does help offset a fixed cost that there anyway. So we look at it that way, but we run a really lean model as you know Lorraine I mean, the biggest variable cost for US right now is store payroll and we have shown that we run a very lean.

Model for store payroll, we flex that incredibly well when it comes to sales. So as you look at how we're opening up our stores were opening up one on trends so not all of our cash registers will even be open we're not including fitting rooms, obviously the receipt reduction is incredible. So we don't have to staff flavor. There. So there are a lot of ways that we're able to cut labor out too.

Run it lean so it's a very low hurdle for us to look at and suggest can we are count. We open up those stores also comes from a very healthy base. So remember 99% of our stores where cash flow positive last year. So that goes through a large gamma as you know we have large stores and small stores. So it does show we know how to operate that model on the.

Big and when they're big volume stores as well as a small volumes doors. So we're deploying all of those lessons as we opened stores today.

Thank you.

Your next question is from Dana Telsey with Telsey Advisory Group. Your line is open.

I think everyone as you think about the exit of the eight brands that you have what kind of volume is today.

Exiting from those eight brands and how do you think of positioning of new brands that you had talked about like Violet for juniors does that still move forward or does that extend to next year and then given the payroll costs given that now you bring stores back online now with the new initiatives cleaning.

How do you think of caution is there a higher breakeven on sales that you need in order to leverage some of those higher cost of the new new ways of doing business and just lastly, how did the women's business do anything that you saw there. Thank you.

Sure. So Dana I'm still here I will take your question on women's boat the brands and what we're seeing the women's business and I'll, let gillette into the other one so as it relates to women's I'd say overall, we're still highly committed to the women's business. You know obviously in the short term, we're facing some challenges here, but we.

The as part of just the overall coven 19 challenges, but that being said we are seeing some bright spots on the women's business.

Our contemporary wouldn't women's business is performing well and as I mentioned earlier, our overall active business is doing really well north of 100% in that include in the month of April and that includes our women's active business as well. So you know highly relevant to this time period and areas like our basics intimate sleepwear, all all doing well.

So you know where were encouraged to see that kind of momentum online obviously will be monitoring that as we now opened stores on but we remain really highly committed as it relates to the exit.

There's a couple of objectives, one is overarching really the need to drive greater focus and clarity with our women customer. So these eight brands were down trending they were our least productive and we think you know exiting them will create focus and clarity on the brands that will continue so not.

Only the new brands, but our existing very strong brands like Sonoma as an example, or simply Vera Vera Wang or Lauren Conrad. We obviously are also using the space on some of the newer brands that we've either just recently launched or that plan to launch. So that includes nine west that we launched last year, which.

We're highly committed to we're in the process of launching by let as you mentioned, we just this spring introduced Elizabeth and James and then of course, we have the lands end launch that's coming up later this year that we think is really going to be a great addition to our classic customers. So we think the combination of clarity reducing choice count fewer brands re.

Really elevating our existing strong brands and then bringing in some newness that is highly relevant to our new customers, especially the millennial customer we feel like we're on a good path there.

I don't have never Jill sharp and Dana just to step back and you know we have an incredible strength on cost comes to costs are asking is only increased one and a half for signed over the last five years on a compounded basis. So weve found ways to off that incremental costs like wage pressures that we've increased over the last several years, we clearly are number one.

Priority is the health and safety of our associates and customers. The we're going to invest and ensuring we haven't clean environment and that we have the right safety measures in place and we're providing our associates with the pp that they deserve the math the gloves et cetera. So those are cost that we will make an investment, but we will leverage our operational excellence initiatives fine.

Ways to offset that we can continue to drive down actually in a cost for the remainder of the year like I had indicated in our comments.

Thank you.

The next question is really Matthew boss JP Morgan Your line is open.

Great. Thanks, Michele <unk> as we think through lateral store closures and the bankruptcies that are happening in the space.

And we think about that relative to the merchandising changes that you're making in women's and active how do you see kohl's position to potentially take market share out of the pandemic and any offensive initiatives that you're specifically focused on to take advantage of all of the disruption. That's currently in the space.

Yes, Thanks, Matt for the question I mean, we'll clearly we're in this unprecedented period of change and consumer changing their expectation and as you just said the marketplace is changing I, yeah, we're saying very close and making sure that we can lean into those market share opportunities and take advantage and we do feel like we're in a strong positions.

Capture market share I'd say first is our store base, 95% of our stores are off mall and we believe that this isn't it is really an advantage, especially in a kind of co better post cobot environment, where customers are not only looking for the convenience that that always offers but also a really say.

Great environment, and you know as we've been talking about we've taken above and beyond measures to ensure that our customers really feel safe as they walk in the door and 'em. We think our you know our stores are there spacious they're big they're kinda naturally built for social distancing and we've enhanced that further.

We take a lot of pride and how clean we show up every day. So we do think that as customers are making choices of where they want to go now we're adding this layer of where am I going to feel safe and we believe colder showing up really really well on that standpoint.

As you know we've talked a lot about innovating within within our stores innovating and investing in the experience.

Bringing in new concepts like Amazon returns, which you know as we opened stores were bringing that back and that will continue to be a priority. So that customers again are looking at kohl's as top of choice in terms of where they want to shop. So sort of this for a second I would point to value. I mean, you know we know we're gonna be an environment where value is really critical when we were.

On the recession in 2008 calls performed well on because that was that was high on the list and we're known for value I think our Kohl's cash program, our loyalty program will only further enhance that.

And third is our brand portfolio. So you know this really unique mix of our proprietary brands I do offer that great value, whether it's a jumping beans for kids as an example, which has been doing phenomenally well as we sit here right now on our online business, but then complemented with our assortment of really trusted national brands and to your point.

In terms of market share opportunities I mean today, we're the number one retailer Levi's as an example, we're one of the leading retailers in the active spaces, you're familiar with Nike Adidas under armour, the like Carter. So so we feel like this this combination of the trusted national brands and trust clearly being a key component looking forward as.

Well as valued brands and then for has been the acceleration of our digital business and our omni capabilities. So we pointed to a number of things on those fronts, but in terms of really connecting with customers, both existing and new customers leveraging our digital capability, our personalization capability.

Hi, I'm driving new customer acquisition, we have seen new customer shopping kohl's. During this period online. So were encouraged by that last year, we achieved a record number 65 million, new customer or 65 million customers under the highest level of new customer acquisition. So we think all of these things really set us up.

As we emerged from this crisis to take advantage of market share opportunities.

That's great color, Joe maybe as a follow up what so overall what percentage of your expense base is variable today and I guess could you just expand on the comment that you made about continue to us DNA reductions through the year as we think about maybe the cadence for Twoq, you and the opportunity on SGN a versus the back half of the year, because I think you talked about.

The rebuild process.

Sure well, obviously, we expect our us JV down the rest of the or it will obviously flex and a couple of things one will be sales too we will make an investment back into the safety and cleaning for the associates, but given the prudent approach and conservative approach that we're taking we do see it being down the remainder of the year, obviously, we're not giving.

Cadence at this point as much as I indicated in my remarks, we expected to be balance. So we saw a huge and decrease in April of their stores close now as we're reopening we'll expect to be akshay follow as well in terms of variable versus fixed Matt I would say that we broke them old on that we aren't looking at anything as affair.

Fixed costs. This time around we went after every costs to take it out of the business and the two examples I would give you as one marketing typically in the past if we would see sales lagging we lean into marketing to drive more sales in this case as Michelle indicated we caught all of our marketing with the exception of digital so we weren't trying to create sales demandware we knew.

There wasn't any and we stuck to the digital channel and obviously that worked well for US as you saw the progressive improvement in our digital business up 60% in April 2nd we use it in technology, we exited our third party contractors, we went back and looked at contracts to see if we could actually renegotiate them to cut costs out of that space.

Base as well and those are two places I would have suggested in the past would have been more in the fixed drama and the third example, I'll give and although this wasn't necessarily an expense cuts, but we did address Ryan and we worked in partnership with all of our landlords to come to a deferral.

Solution and indicators that we didnt differ rent, we did make the payment, but we were actually in a really good place our property of element team did a great job and working with them proactively. So we're able to make those deferrals and preserve the cash flow. So in light of what we just went through I would say, we kind of broke out of the fixed versus variable and put everything on the table when after that.

You'll continue to see that mentality the rest of the year.

Thanks for all the color best of luck.

Thanks, Matt.

Your next question is from Omar Saad with Evercore. Your line is open.

[noise] Omar Saad with Evercore. Your line is open. Please go ahead.

Thank you sorry about that thank you. Thanks for taking my question.

A couple of follow ups in terms of the run rate you're seeing in the stores that have been opened recently I appreciate that color.

Are you, saying, yes, 50, 60% building from there are you seeing any impact on the E commerce side in those markets.

Eating into the ecommerce business as the stores reopening.

And also any color on what you're seeing a conversion versus traffic as stores. We opened are you, saying customers coming in a big orders and the traffic is below that level or is it kind of equal yes. Thanks guys.

Yeah. Thanks Omar so on your second question such early days, it's really hard to gauge at this point the traffic and conversion. So we'll make sure to follow up with you as we have more data detail you know in the coming in in coming quarters back to your first question on run rate were actually encouraged to see.

That there has been very little follow us and our digital business. As these stores have opened where we're watching that closely we're continuing to see the adoption of drive up our associates are really excited about that our customers are excited about it and the digital business continues to be very strong overall may has accelerated even further.

April's level of 60% and like I said in the markets that we're now open which has been about 25% up until yesterday. So it's very early days, but our digital business has remained very strong.

Got it got it and then one follow up.

It's one of the upshot here I know, there's a lot of unpredictability, but that's kind of step function acceleration in digital omnichannel.

Especially with the new options for consumers to pick up in the store.

Or drive sort of drive by pick up are you guys happy where you are on I T logistics and inventory visibility inventory logistic capabilities to really kind of meet that step function change or are there some incremental investments and skill set that need to be built there. Thanks.

Sure. So I would say, yes, and yes, I'd say, we're very pleased with the level of innovation and agility that is coming out of our teams right now and that's been strengthening over the last couple of years, but I would say over the last couple of months that has been a step change and really across all levels.

Operation our FCS have continued to operate our stores as we mentioned in her remarks, I'm, 40% was fulfilled from our stores, that's helping us on many fronts, including leveraging our inventory there and then rapidly scaling within a matter of weeks. This drive up that we see as a.

As a continuation but.

But to your point you know we expect this higher penetration of digital to continue so I'd say on two fronts. One from an innovation standpoint, making sure that we're offering great experiences to our customer really leveraging our entire kind of omni channel capability driving innovation and then secondly also through our operator.

Funnel excellence, recognizing that there's going to be opportunities to reduce cost and reinvest from a customer facing standpoint. So we have efforts really on on both fronts, but I'm very encouraged I think the team's been doing a great job then more to come on that front.

Thanks for self best wishes.

Great.

Thank you. Good next question is from Chuck grown with Gordon Haskett. Your line is open.

Hi, good morning, especially dared green, let alone for Chuck Thanks for taking my questions have one quick one.

Regarding your credit revenue.

Isn't that it was probably are coming down.

For the rest of year as sales slow JC Penney kind of guided to about 6% reduction this year.

Slide 20, I was wondering if that's.

I'd like to high number for what you're expecting or if you could buy anymore color on that.

Sure. So obviously, we didn't see any impact to credit revenue in Q1, but our stores did close next quarter and you saw a significant impact through our top line from that perspective, given that we do expect there to be some pressure to credit revenue as the year persists <unk>. They are our best customer you know so we do see.

Them coming in shopping the most with us as well as the baskets I don't think it's a one for one with the top line, but at this point I think it's it's too early to give you any type of guidance and what we expect for the rest of year also as we emerged from this crisis, depending on what economic crisis per says we'll have to be looking at you know what those type of pressure is also one too.

If we go back to 2008, our portfolio did incredibly well I think we outperformed the market we take.

A lot of care working with cap, one and who we extend credit to which does help us mitigate some of the risk on the portfolio as well. So I would expect that you know with sales down we're going to see some pressure to credit revenue, but I don't have an estimate them and share at this point.

Okay. Thank you very much that's all it.

Great. Thanks.

Our final question for today's from proceeds at Deutsche Bank. Your line is open.

Well truslow with Deutsche Bank. Your line is open. Please go ahead.

Yeah.

And my apologies it looks like Mr. Trestle is are the responses.

Okay.

We will close it here. Thank you to everyone listening on the call today, please be safe and stay well and we look forward to updating you on our progress in August.

Ladies and gentlemen. This concludes today's conference call you may now disconnect. Thank you.

Oh.

[music].

Yes.

[music].

Mhm.

[music].

[music].

Yes.

[music].

Ladies and gentlemen, thank you for standing by and welcome to the Q1 2020 Equals Corporation earnings Conference call.

At this time, all participants are in listen only mode.

After the speakers presentation, there will be a question and answer session to ask a question during the session annually to press Star then one on your total.

And if you require any further assistance please press star zero.

I would now like to hand, the conference over to your Speaker today, Mark Rupe, Vice President Investor Relations. Thank you. Please go ahead.

Thank you operator.

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 anticipates plans or similar expressions to identify forward looking statements.

Such statements are subject to certain risks and uncertainties, which could cause kohl's actual results to differ materially from those projected in such forward looking statements.

Such risks and uncertainties include but are not limited to those that are described in item. One a in calls most recent annual report on form 10-K.

And as may be supplemented from time to time and cools other filings with the SEC.

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 and investor presentation.

Both of which had been filed as exhibits to our form 8-K with the SEC.

And our available in 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.

Pulls undertakes no obligation to update such information.

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

NGL, Tim our Chief Financial Officer.

I will now I'll turn the call over to Michelle Thank.

Thank you Mark good morning, and welcome to calls first quarter earnings Conference call.

A lot has happened since our last earnings call on March Threerd.

The escalation of the Cobot 19 pandemic has challenged the world in ways never thought imaginable.

It has affected each of us to varying degrees and has had a significant economic tool.

I Hope you and your families are safe and healthy during this time.

As difficult as this unprecedented health crisis has been I am comforted by the resilience and generosity there has been exhibited by so many.

Our sincere gratitude goes out to all of those on the front line that have worked tirelessly to support the greater good.

I'd like to thank our associates for their support and commitment as we've continued to operate portions of our business.

I would also like to recognize and thank our many business partners and vendors that have been instrumental in helping us navigate through this crisis.

We've had to make difficult decision to ensure our business continuity and I'm incredibly proud of how our organization has stepped up to the challenge we've learned a lot and will be sure to leverage these insights into the future.

We expect will be operating differently for quite some time, but we're pleased that we have now begun the rebuilding process.

We have taken our first step in this direction and have begun to reopen stores.

As we continue to move forward, we will do so with the health and safety over associates and our customers remaining our top priority for today's call I'm going to discuss how we're navigating the current environment.

Touch on our first quarter results review, our store reopening strategies.

And then share with you an update on our strategic initiatives and the opportunities we have to take market share.

Joe will then review the financial results and provide details on the actions we've taken to ensure our liquidity and financial flexibility to navigate this crisis.

And overtime become a stronger company.

We entered 2020 with a strong foundation and a healthy financial position.

As we shared with you on last quarter's call. We had a record 65 million customers shopping at Kohl's and 2019.

This is a testament to called differentiation and the value proposition, we provide our customers.

We also entered the year with over $700 million in cash and modest leverage.

We have a long history of disciplined and prudent capital management and have reduced our debt in recent years.

This has put us in a solid position to navigate this crisis and we'll continue to serve us well as cobot 19 escalated we established to short term priorities. The first protecting our associates and customers and the second preserving the financial position of the company.

Consistent with these priorities we closed all of our stores on March Twentyth to do our part in helping to slow the spread of the virus.

We also took immediate action to reduce our cash outflow.

Essentially everything was on the table and we operated swiftly and decisively.

We reduced inventory receipts extended payment terms and reduced expenses across the business, including marketing technology and operations.

We also made the difficult decision to furlough 85000 associates, most of whom work in our stores and store distribution centers.

These are valued members of the calls family and we supported them through two weeks of pay and continuing their existing health benefits.

In addition to expenses, we also increased our liquidity through significant leave reducing our capital spend suspending our dividend and share repurchase program.

Replacing an upsizing, our revolver and issuing new debt.

I will now turn to our first quarter results.

As expected our business has been materially impacted by Cobot 19.

While we have a fast growing digital business. It is only replaced a small portion of the sales loss from our entire store base being closed during the second half of the first quarter.

Our business was on track entering the crisis with comparable sales trends consistent with our previous guidance at the time of our fourth quarter earnings release.

However, shortly thereafter, we began to see the traffic impact to our stores and then we closed all of our stores on March 20, it with our entire store base closed we responded with speed and agility leaning into our digital business as the only channel to engage with our customers.

We amplified our digital marketing and updated digital site content to be relevant to what customers were interested at this time.

We also leveraged our large and growing email file of more than 50 million customers to reach them in new and personalized ways.

These efforts paid off.

Digital sales increased 24% for the quarter.

And accelerated to 60% in the month of April.

All of the key performance metrics were positive, including traffic conversion average unit retail and units per transaction.

And we were pleased to see more new customers and younger customers shopping on our digital platform.

Importantly, our stores fulfilled a higher percentage of digital orders, which aided our efforts to reduce in store inventory.

More than 40% of digital orders were fulfilled by ship from store and customer pick up during the first quarter.

And this percentage was much higher in April following the successful launch of store drive up where we've seen great customer uptake.

In fact in the over 900 stores, where it is offered the percentage of digital demand fulfilled by store drive up was 15%.

Exceeding that of buy online pick up in store before the crisis began.

While we had been testing this capability in a couple of stores. It was still very new to us.

As a health crisis unfolded, our team swiftly put a strategy together and launched it scale very quickly.

This is a great example of the responsiveness and agility of our organization.

From a line of business perspective, we achieved positive digital sales growth in all of our categories home was the strongest with digital sales increasing more than 50% for the quarter.

The home category has historically penetrated higher digitally for us and was influenced by stay at home mandates.

We saw a particularly strong demand for kitchen, electrics vacuum electronics and gaming.

We also saw continued digital strength in areas like active toys and beauty.

And we saw growth in areas like basics, intimates, and sleepwear, however, apparel and footwear lagged overall digital growth.

Now I'd like to discuss our reopening strategy.

Stores are the lifeblood of Kohl's and more than 90% of our customers have historically shop them.

While the current crisis has had a significant impact to our store business. We continue to see our store portfolio as one of the core assets of our strategy going forward.

A key reason for this is that our stores are financially healthy 99% of them generated positive four wall cash flow in 2019.

Another reason is that they are located off mall in suburban neighborhoods, where our customers live and work.

We see this as an advantage as the majority of our stores are located next to high traffic areas, where our customers are already shopping.

We also believe the size of our store provides unique advantage to facilitate social distancing as customers begin to journey away from home.

Our goal is to operate the cleanest and safest environment in retail, where our associates feel comfortable providing excellent customer service.

And where our customers feel confident to shop.

And we are investing to ensure this happens.

Since the day, we close all of our stores. Our team has been working on a thoughtful and comprehensive plan to adopt the latest health and safety measures as we reopened our stores.

These include operating with limited store hours, social distancing signage elevated cleaning procedures.

A new returns process among many others.

We will continue to offer store drive up as a convenient offering for our customers.

We will also resume our Amazon returns program as stores reopen and we expect to see traffic build as customers return items purchased over the last several months.

We are implementing health and safety best practices for our store associates as they returned to work.

Associates will undergo training on the new procedures as well as take part in mandatory wellness and temperature checks before each shift.

We'll also provide many of the things like masks and globs that are becoming standard in this new environment.

And we are adjusting work spaces to enable social distancing.

We believe that all of these elements create the right environment for our associates and customers as they are welcome to back to stores.

Since may 4th we have reopened about 50% of our stores across the country.

We have followed a set of criteria, including state guidelines health data store readiness and field insights to help us determine the timing of story openings.

We have been reopening stores on a state by state basis. However, we will continue to be agile in our approach as conditions are still evolving.

As you can appreciate as we reopened stores, there's a great sense of pride for the entire organization.

Then a difficult wrote over the past two months, but we've made the right decisions and strategic moves to put us in a position to begin rebuilding we're very excited to commence this process knowing that we can build a stronger coals in the future.

That said, we will remain present to the situation and be prudent our planning recognizing that cobot 19 will present challenges for some time, let me now discuss how we're thinking about the rebuilding process.

As we look forward, we are planning our business based on the assumptions that sales will rebuild gradually during the remainder of the year as people get more comfortable living in this new normal.

Based on this we are planning the business conservatively.

Our company has a long history of operating with great discipline, and we believe prudence dictates caution in the near term.

To be clear, though the decisions, we're making in the short term related to covert 19 will not alter our conviction about growing this business over the long term.

To that end our primary focus continues to be navigating the current crisis.

Though we are beginning to look towards the future ensuring that cold is as relevant if not more so based unexpected changes in the competitive in consumer landscape.

We were looking forward to presenting a thorough strategic update at an investor day in March.

Given that we were unable to do so I thought it would be helpful to share the overarching theme that remain relevant post cobot 19, though we will continue to take advantage of new insight presented during this dynamic time.

Let me remind you that Kohl's is a leading omnichannel retailer with a strong foundation and a loyal base of 65 million customers.

Over the last five years, we've enhanced our very healthy store portfolio with a thriving and growing digital business. We view. These two channels as not distinct but highly connected to present, a unified experience to the customer.

In addition, we've also been able to leverage the operations of both our stores and digital platform to deliver easy and seamless experiences.

Calls has a differentiated position in the market anchored in three important characteristics.

And unmatched brand portfolio at the best value.

Easy and inspiring experiences.

And an industry leading loyalty program.

As we look forward, we will leverage our strong foundation and differentiation against the following focus areas.

Strengthening our product leadership elevating the experience leading the next generation of loyalty and operating with excellence.

Let me share a little on each of these.

First as it relates to strengthening our product leadership, we are focused on modernizing our women's business.

Continuing to lead in active for the family.

Building, a much larger beauty business.

And enhancing our position in our other core categories.

As we discussed on last quarter's call improving our women's performance is a top priority.

While the current environment will pose challenges, we are moving barb several bold moves.

We will exit eight down trending women's private brands.

These include Dana Buckman, Jennifer Lopez, mud candies rock and Republic pop sugar al and Juicy couture.

This will create space to introduce a more compelling and current offering to our customers while improving the overall clarity to reduce choice counts.

We're also committed to growing the active category, we nearly doubled our active sales from 2013, and we see continued momentum in this category as customers focused on staying healthy.

And we continue to be very committed to building, a large beauty business and our investing to make that happen.

Last year, we added many new brands and expanded our elevated beauty experience to 12 stores.

This year, we will add 50 more stores with the elevated experience.

Lastly, we will continue to bring new relevant brands to calls as we know that constant newness and discovery is absolutely key to engaging our existing customers as well as to attract new younger customers. In 2020, we will introduce several new brands, including lands end and time.

Lands and is an iconic brand in a market leader in the classic casual lifestyle. Beginning this fall we will offer the full lands and assortment on coal dotcom as well as feature a shop in shop experience in 150 of our stores.

And we expect ponds will resonate with our millennial target.

Our team here is continuing to seek out other relevant brands to offer to our cold customers. We look forward to sharing more in the future.

Next let me talk about how we are elevating the experience.

When we think about experience, we think broadly on every touch point and interaction we have with our customers across all channels.

We see many areas of opportunity to elevate the experience, including refreshing the existing store experience driving localization and accelerating or digital growth.

A few examples include investing to create more compelling merchandising leveraging in store technology to drive better customer experience and efficiency.

And implementing a more tailored approach to local market.

In addition, we will continue to invest in supporting the growth of our digital business.

Which has more than doubled in sales since 2014.

Our next priority is leading the next generation of loyalty.

We have an incredibly strong foundation and loyalty with 30 million members and we don't take this for granted.

We have three key differentiating elements of our loyalty program, our iconic Kohl's cash.

Our rewards program and the kohls charge private label card.

We know that as we move customers at the loyalty ladder sales productivity significantly increases.

To enhance our efforts on this front, we are integrating our loyalty assets and leveraging personalization.

We look forward to sharing more details on our progress in the future.

And lastly, let me talk about operating with excellence.

Operating with excellence and enhancing our profitability has been one of our strategic priorities for several years and it is deeply ingrained in every corner of our organization.

It's also a concept that underpins all of our initiatives and has been particularly useful as weve navigated through the cobot 19 crisis.

Before I hand, it off to Joe Let me summarize my comments today.

Our financial performance like many other retailers will be materially impacted by cobot 19 in 2020.

Our focus will remain on striking a balance between the short term and the long term.

Recognizing the decisions we make today can influence our long term opportunity.

We are confident that our strong fundamentals and financial discipline will enable us to not only navigate the short term uncertainty.

But also position us to take advantage of unique market and customer opportunities in a post cobot environment.

Much of what has made kohl's the vibrant and resilient retailer. It is today, we'll make calls a stronger company in the future.

We will maintain a clear and unwavering focus on providing families and unmatched brand portfolio at a great value and an easy and convenient experience.

And we will leverage our strong foundation that isn't built through significant and consistent capital investments in Omnichannel technology in our stores.

In closing I want to thank our associates for their incredible commitment and resilience for stepping up in the phase of this unprecedented challenge.

Each of you has given me great inspiration.

I said on last quarter's call the strength of our company is rooted in our people in our innovative culture.

And that is certainly proven to be the case at this time.

I also want to express gratitude to our business partners and vendors that have provided tremendous support in helping us enhance our short term financial flexibility.

We look forward to rebuilding our business with you in the months than years ahead.

This has been an extraordinary period of time and we've learned a great deal through this process about our business our team our agility and our perseverance.

While we still face challenges ahead, we are a strong company and well positioned financially to emerge from this.

To everyone listening on the call we wish you and your family's health and safety as we begin to resume some level of normalcy in our lives.

I'll now turn the call over to Joe who will provide details on our first quarter results and financial position.

Thank you Michelle and good morning, everyone.

I will start by providing some additional context on the actions we've taken in response to cover 19.

I will then discuss our first quarter results and share some high level thoughts on our business for the remainder of the year.

From the outside of this health crisis, preserving our strong financial position has been a top priority.

We leveraged our operational excellence strength to swiftly and aggressively manage our cash outflow.

Our first action was to address inventory given the anticipated told that 19 sales impact.

We immediately pulled back in March and April orders, which allowed us to reduce first quarter seats by over 30% and helped us manage inventory down 3% to last year.

We expect to further reduce inventory in the second quarter as we lowered our receipt by more than 60%.

We also partnered with our vendors to extended payment terms.

Our quick and aggressive response to address our inventory receipts significantly enhanced our financial flexibility.

Next we reduced expenses across all areas of the company our largest declines came in store payroll due to the store closures and marketing, where we significantly reduced Oliver media, while continuing to invest in digital.

We acted promptly and given the timing of the crisis, we realized most of the benefit in April.

Another important measure we talked to improve our financial position was to adjust our capital allocation priorities.

We've been very consistent messaging our approach to deployment of cash.

First we invest in the business.

Second has been our commitment to the dividends.

Third is opportunistic and complimentary M&A.

And fourth has been funding share repurchases with excess cash flow.

Importantly, each of these four are supported by and evaluated through the lens of maintaining a strong balance sheet.

In response to cover 19, we unwound these priorities in reverse order.

We started by suspending share repurchases and then suspended our quarterly dividends beginning in the second quarter.

These two actions will enhance our flexibility by more than $650 million this year.

Next we lowered our capital spending forecast of $250 million for the year, a decrease of $500 million, including reducing technology spend.

Delaying the opening of our six ecommerce fulfillment center and executing fewer store refreshes and right sizes.

That said, we are still investing in important long term growth initiatives like beauty.

And lastly, we increased our financial liquidity during the quarter.

We replaced our previous $1 billion revolver with a 1 billion in a half dollar secured revolver I've watched $1 billion was drawn at quarter end.

In addition, we issued $600 million and new debt.

Importantly, our debt remains investment grade and we have no maturities until 2023, the collective financial impact of these efforts has been significant we generated positive operating cash level and we ended the quarter with over $2 billion in cash and $500 million available under the revolver.

Now, let me briefly discuss our first quarter results.

As you saw on the earnings release, our results were materially impacted by coal the 19.

Net sales declined 43% as our entire store base was closed for half a quarter.

Digital sales increased 24% and improve progressively during the quarter as we took action.

We're especially pleased with the solid growth from non kohls charge customers, which as a result of our new customer acquisition efforts.

Other revenue, which consists primarily of net credit revenue was up slightly.

Netcredit revenue with not materially impacted by the crisis in the first quarter. However, we do expect crusher and future periods driven by the lower sales due to the store closures.

Turning to gross margin.

Gross margin was materially impacted by covered 19, the decline of 1900 50 basis points was driven by three primary items.

Approximately 1500 basis points related to inventory action.

250 basis points related to cost of shipping due to increased digital sales penetration.

And 200 basis points related to mix as home outperforms and due to increased promotional activity, we took to inventory actions during the quarter.

First we took our usual clearance permanent markdowns in February.

As a reminder, we account for inventory on the retail inventory method.

When we take a permanent markdown it results in a downward adjustment of both the expected retail value and our cost which has an immediate impact on our margin.

This impact is typically recovered when the inventory subsequently sold.

However, given the timing of cover 19, our store closures and the related pressure to sales the permanent markdown had an unusually large impact to margin during the first quarter, despite our markdown being lower relative to last year.

The second inventory action was the establishment of a reserve for access seasonal inventory recognizing the need to markdown inventory given the expected lower sales demand.

Let me be clear.

This highly unusual pressure on our margin was driven by the significant decline in sales due to the coven 19 crisis and related store closures.

As it relates to cost of shipping the 250 basis point impact to margin is inline with our past commentary about 20 to 30 basis point annual headwind to margin as digital sales penetration increases.

Over the past five years digital penetration has increased approximately 200 to 300 basis points annually.

During the first quarter, both the shift in digital sales penetration and the cost of shipping headwind for 10 times higher than normal as digital sales represented 45% of sales versus 21% in the prior year.

Looking ahead, we continue expect gross margin to be pressured due to lower sales volume as we reopened stores.

Increased cost of shipping as we expect digital penetration to remain elevated and last we're planning for a heightened promotional environment as the industry addresses repercussions of closed stores during the crisis.

Now, let me discuss asked DNA.

In Q1, asking expenses decreased 16% to $1.1 billion, driven primarily by lower store payroll marketing and credit expenses.

Of note asking a would've been down 19.5% had we not incurred approximately $40 million expenses related to covert 19.

And it's important to mention again, given the timing of the crisis the full impact of our expense actions with not realized until April.

As we look forward. We're planning asked you need to continue to decline for the rest of the year.

However, the savings will be balanced as we move into the rebuild phase and reopen stores with new safety measures.

We have a long history of focusing on operational excellence and we will continue to leverage this cost discipline strength.

Lastly, let me touch on some additional financial items.

Depreciation was $3 million lower versus last year, and we expect us to continue due to reduced capital funds.

Nonrecurring charges of $66 million include technology impairment and brand exit.

And interest expense increased in Q1 due to accessing our revolver and we'll continue to be higher in future periods. As a result of last month bond issuance.

On a GAAP basis for the quarter net loss of $541 million, our loss of $3.50 per share.

Excluding the nonrecurring items that I, just mentioned for the quarter net loss of $495 million or loss of $3.20 per share.

We are happy to take your questions at this time.

Thank you.

As a reminder to ask a question in the press Star then one on your total.

And to withdraw your question please press the pound or Heskey.

The first question is from Bob Drew ball with Guggenheim Burgers. Your line is open.

Hey, good morning.

Good morning, Bob.

Oh, just a couple of questions I think first I think largely for Jill.

On the payables was can you just give us a little bit more color in terms of how the payables are structured given the cash balance and sort of some of the the terms that you have in place on your payables and then the second question is is only the reserve for access seasonal inventory can you maybe just elaborate a little more.

In terms of the how big that reserve is or just essentially how that's going to flow through.

Especially given where the inventory levels.

Or on the books at this point thanks.

Sure. So obviously, Bob this quarter, we took a lot of actions to preserve our financial position and minimize our cash outflow. One of those actions was to work hand in hand, with our vendor partners to extend our payment terms. So we did extend our terms with all of our vendors the merchandise vendors, we extended up to 100 days, which obviously helped US a bridge.

The store closures and maintaining that cash flow to the point in which we could open stores. So the timing worked out really well as we now have stores opening as a source of cash inflow and now as we'll go back to a normalized payable structure going forward in terms of the reserve for inventory, obviously as an atypical for us because of the retail inventory.

Hi method that were on but recognizing that the stores were closed we did have access inventory. So we did a cost adjustment to that inventory you would see it as an impact to both gross margin and a reduction of inventory recognizing that it was access during the quarter and so that is essentially going to stay with us as it relates.

Sorry.

Great. Thank you very much.

Sure.

The next question is from Merck Merck old Schwenker with Baird. Your line is open.

Good morning. Thanks for taking my question was hoping you could talk about what you're seeing thus far in may overall interest any early takeaways from the stores that have reopened and overall just can you give us essentially the various scenarios you're planning for for the remainder of the year and then yes understanding that there's a lot of a search and what the demand.

Backdrop will look like just thinking ahead to 2021.

Do you think it's possible for EBIT margins to get back to 29 to levels without sales fully recovery.

Thanks.

Great. So mark the shell here I'll take the front end of your question and then I'll have Joe comment on the EBIT margin piece.

So first of all in terms of May let me add a little contacts color on both of our channels. Let me start with digital actually so as you heard in our remarks for the quarter, we were up 24%, but we really saw the acceleration towards the end of March and into April with April at plus 60% L.

I do want to add a little color to that as well some of our categories really did phenomenally well our home business, our kids business and our active business, where all north of plus 100%. During this time, we've continued to see that momentum actually accelerate into may. So we're feeling very good about our digital channel and that's been a.

Results of a combination of really leaning into our digital marketing efforts.

Adapting our site to be addressing relevant categories and then the introduction of our curbside drive up which we introduced on April 2nd, which we do plan to continue even as we open up stores. That's on the digital side on the store side. We started opening up stores in early may. So on May 4th we opened about 50 stores.

It's about 5% of our base, we opened up we were open but 25% of our stores last week and we just got to 50% yesterday. So it's it's very early days what I can tell you is that as the stores have been opening they've been doing 50% to 60% of productivity that we would typically see it.

This point in time, so there are customers in our stores and we're we're happy about that and we're encouraged by seeing the progressive improvement of the stores that have now been opened two weeks, so where they started at 50% to 60% we've actually seen them ramp up in their second week now I will caveat and say that's 5%, it's only 50 stores.

Yes.

But like I said, we are we are encouraged and we know that that's going to take some time.

As it relates to the balance of the year I mean, we are planning the business very conservatively you aware in a very uncertain times you know, there's there's a lot that could unfold in the coming months. So we're taking a very prudent approach our planning inventory, how we're planning expenses to navigate through the balance.

Through the balance of the year.

And we will do everything we can to be fluid and response to demand. So if our demand is actually higher than we expect we've demonstrated our ability to chase goods, even when our inventory is is depressed. So I think again the the theme on this would be prudent.

But our ability to chase into goods and to also amplify things like marketing as we see where the customer goes through the balance of the year and then I'll, let Joe address margins, Yeah. What I would say is right now obviously, we're in uncertain times for planning the business incredibly conservatively, it's why we haven't given guidance and to look out to 2020.

One mark we're going to run a several different scenarios, but I think as Michelle said, they're all going be incredibly conservative we're going to manage down our inventory, we're going to continue to leverage our cost discipline demand is down expenses and that as we indicated we do expect there'll be some pressure to our gross margin line as digital continues out penetrate but as we look across the organization.

Leveraging operational excellence, we're going to find ways to offset those costs throughout the organization, including deployment of technology to make as much more efficient on how we fulfill orders and how we allocate inventory and then as while we expect the heightened promotional environment, which will weigh on our sales. It is the strength of ours, we will lean into that strength.

We've done this while you know as we watch other disruption in the retail market, we've taken advantage of that through strategies of marketing and we'll deploy those strategies today as well. So we continue to grab market share, but I think it's too early to tell what we will see in 2021 from margin perspective.

It's all very helpful detail, if I could just ask a quick follow up to the extent, we see a step function change in digital mix. How do you see the store operating model changing hopes that it can remain 99% four wall free cash flow positive in the new normal.

I think first we use our stores Michelle mentioned in her comments to fulfill over 40% of our orders, we just launched drive up which you'd seen was very much adopted by our customer at 15% and the eligible stores. So it surpassed BOPUS. So we'll continue to market for pick up whether it be with BOPUS boss and now our drive up mentality. So.

We leverage our store they think not just for the experienced component, but also for fulfillment, but I do think we're encouraged by the adoption we've seen in the the progressive improvement just in the first two weeks of our stores opening that they are still highly relevant to the customer you know as we look out we do an annual review all of our stores Mark. So we will continue.

Do that review and if we see that the customer behavior is changing and those stores don't say stay 99% positive cash flow. We will then look at opportunity to close which weve Sonia doing in the past, we've just done a minimal basis because of the health of our store base. The only thing I would add to that is you know as we over time have review.

You'd our business looking at.

Our stores proximity and digital sales they've actually strengthened each other and so so we actually look at that as an asset and our omnichannel customers those customers, who shop, both online and stores are our best customers and we're actually seeing those omni customers buying more during this period obviously on.

Mine and we'll be study not as as we look to more stores opening.

Thanks for all the color as to walk.

Thanks, Mike.

The next question is really over Chen with Cowen.

Hi, Thank you what would you highlight some of the permanent changes that will happen as a result to this and that a big surprises along that line. You've also been really gyro with planning across many disciplined.

Given the the reality of the promotional environment ahead, how do you prepare for that and at the edge as best you can and also when thinking about inventories, it's been a challenging environment as consumer demands have shifted rapidly as well.

What are your thoughts for the for Q4 inventory planning and some of the challenges and opportunities. So it's not easy for the vendor community as well. Thank you.

Great Oliver well, thanks, Michele here I'll answer and I color to your questions. So first of all you sort of asked the question around permanent changes to our business coming into our or emerging from this this covert period I think the obvious one is clearly how our stores operate and.

Whether or not this is for a year or forever, but all the safety precautions that we've put in place those have been really embraced well by our associates and our customers feedback has been very positive I'm, obviously interacting a lot with our field I've been in some of our open stores and everything from the plexus to the U.S.

Math to right now it's reduced hours that could be fluid as as we see things unfold and we're doing a lot around our associates as while making sure that they're they're safe and well when they come into work things like temperature checks. You know we are taking the opportunity to take a step back and look at our business as you would expect I think theres. Some some time.

Tactical changes, we're making so if you go visit the store you will see we've cleared out spaces like our race track design, where we removed a lot of the impulse areas to create more space than we actually believe it's creating a better shopping experience for the customer. So that's one but I think importantly, it's really understanding where the concern.

Tumors going in this kind of post coven environment.

What from an economic standpoint, what that looks like it to the good news there as we stand for value. So we expect to be as if not more relevant during this period, we will obviously lean into categories that the customers responding to so again I'd say the good news there as we've been on this active in athleisure journey for quite some time as you.

No and we're just seeing that accelerate further and then there are new new areas for us that were part of our original strategic plan like beauty and so as we look to categories that are perhaps less relevant downsizing knows and creating space for a category like beauty and even during this kobin period digitally our beauty business, albeit we're.

You know not as penetrated as highly as others, but we're seeing really really strong growth.

Then as we look to how we how we navigate through the balance of the year I think you use or an agile I'm. So that is absolutely our approach and you know I've been really pleased to see how the organization has operated in a very nimble and agile way through this period I think the drive up as a good example, and while we certainly aren't the first to bring it to them.

Market and we had been testing it and just a couple of stores. They were able to scale. This very quickly in a matter of two weeks and so also related to permanent changes I think culturally the expectation on how we can innovate and try things and and be a lot faster that is certainly the expectation going forward. So similarly as we.

Plan for a couple of big seasons coming up back to school and and holiday. We are planning as I mentioned earlier, very prudently and cautiously, but we have great vendors and business partners. They have been outstanding. During this process, we worked with them side by side. So we are bringing in fresh receipts for back to.

School in holiday of course, we'll chase into goods as we see wet the come up customer demand is and I'd say the same with marketing right now like in the month of April we were 100% digital in marketing now we will bring back some of the more mass media in in the June timeframe as as our stores come back up a mine, but what that.

For those assets to be really nimble as it relates to messaging and flexing media up and down. So I think you can expats really through the balance of the year and I don't think it ends at the end of the year, just a very nimble approach to be responsive to where the customers going.

Okay. Thank you really hopeful and promotions front end customers looking for value.

What is the best way to manage that in a lot will be under your control with the competitive landscape and how this manifest as well.

Yeah, no. It's a great question and we're fully anticipating it will be a promotional environment given the inventory that's out there as you know we we did tape we did take our markdowns as Joel spoke to earlier and she also said, we're expecting a promotional environment and so were planning for that to create margin pressure as we look ahead.

And I think the same thing goes you know we're going to be very present to it we're going to see how our customers are responding I would say you know the good news here is we we know how to do promotions, we know how to leverage our kohl's cash we know how to do great sales friends and family events. The list goes on so we will flex those promotional muscles as we see fit to make sure.

Or that we are driving the kind of demand and traffic that we need to.

Nice job on the reopening best regards.

Thank you ever take care.

The next question is from Lorraine Hutchinson with Bank of America. Your line is open.

Thanks, Good morning.

You mentioned that you lowered second quarter received by about 60% is that the way you're thinking about sales for the quarter and then are you ordering down similarly for the second half foresee.

Sure. So Lorraine Michel here, we obviously have not put guidance out in terms of sales what I would tell you is we're taking an even more cautious approach to receipts than our sales I mean, our expectation in terms of as we kind of emerge and open up our stores is that we should you know we're expecting greater turns on.

Inventory that's been part of our strategy I think this is a forcing function to enable that so.

Really we don't know how sales are going to unfold like I said, where we're cautiously encouraged by what we've seen in the first couple of weeks, but it's a very small sat and we know that this entire crisis is a very uncertain time, but so while we don't we haven't provided specific sales expectation.

No that we can drive more sales at the demand is there and like I said earlier, we can chase product as we as we see the demand.

Come forth.

Thanks, and then as you think about opening each store what what's the level of sales that you need to offset the cash burn.

You face initially to get that store open.

Yeah, it's very low and what we need to offset the cash burn in terms of what we have to open first obviously any dollar we get does help offset a fixed cost that there anyway. So we look at it that way, but we run a really lean model as you know Lorraine I mean, the biggest variable cost for US right now is store payroll and we have shown that we run a very lean.

Model for store payroll, we flex that incredibly well when it comes to sales. So as you look at how we're opening up our stores were opening up one on trends so not all of our cash registers will even be open we're not including fitting rooms, obviously the receipt reduction is incredible. So we don't have to staff flavor. There. So there are a lot of ways that we're able to cut labor out too.

Ron It lean so it's a very low hurdle for us to look at and suggest can we are can't we open up those stores also comes from a very healthy base. So remember 99% of our stores where cash flow positive last year. So that goes through a large gamut as you know we have large stores and small stores. So it does show we know how to operate that model on the.

Big and when they're big volume stores as well as a small volume stores. So we're deploying all of those lessons as we opened stores today.

Thank you.

Your next question is from Dana Telsey with Telsey Advisory Group. Your line is open.

Good morning, everyone. As you think about the exit of the eight brands that you have what kind of volume is today.

Exiting from those eight brands and how do you think of positioning of new brands that you had talked about like file it for juniors does that still move forward or does that extend to next year and then given the payroll costs given that.

Now you bring stores back online now with the new initiatives cleaning.

How do you think of the caution is there a higher breakeven on sales that you need in order to leverage some of those higher cost of the new new ways of doing business and just lastly, how did the women's business do anything that you saw there. Thank you.

Sure. So Dana I'm still here I will take your question on women's boat the brands and what we're seeing the ones business and I'll, let gillette into the other one so as it relates to women that they overall, we're still highly committed to the women's business.

You know obviously in the short term, we're facing some challenges here, but we as part of just the overall coven 19 challenges, but that being said we are seeing some bright spots on the women's business.

Our contemporary wouldn't women's business is performing well and as I mentioned earlier, our overall active business is doing really well north of 100% in that include in the month of April and that includes women's active business as well so highly relevant to this time period and areas like our basics intimate sleepwear, all all doing well.

So you know where were encouraged to see that kind of momentum online obviously will be monitoring that as we now opened stores, but we remain really highly committed as it relates to the exit.

There's a couple of objectives, one is overarching really the need to drive greater focus and clarity with our women customer. So these eight brands were down trending they were our least productive and we think exiting them will create focus and clarity on the brands that will continue so not.

Only the new brands, but our existing very strong brands like Sonoma as an example, or simply Vera Vera Wang or Lauren Conrad.

We obviously are also using the space on some of the newer brands that we've either just recently launched or that plan to launch. So that includes nine west that we launched last year, which were highly committed to a more in the process of launching by let as you mentioned, we just the spring introduced Elizabeth and James and then of course, we have the lands end law.

That's coming up later this year that we think is really going to be a great addition to our classic customers. So we think the combination of clarity reducing choice count fewer brands really elevating our existing strong brands and then bringing in some newness that is highly relevant to our new customers, especially the millennial customer.

We feel like we're on a good path there.

I will pass over Jill sharp and Dana just to step back and you know we have an incredible strength on cost comes to costs.

As soon as only increased one and a half for sign over the last five years on a compounded basis. So weve found ways to offset incremental costs like wage pressures that we've increased over the last several years. We clearly are number one priority is the health and safety of our associates and customers. So we're going to invest and ensuring we haven't clean environment.

And that we have the right safety measures in place and we're providing our associates with the pp that they deserve the math the gloves et cetera. So those are cost that we will make an investment in but we will leverage our operational excellence initiatives find ways to offset that we can continue to drive down actually in a cost for the remainder of the or like I had indicated in our comments.

Thank you.

The next questions from Matthew Boss with Jpmorgan. Your line is open.

Great. Thanks, Michele <unk> as we think through lateral store closures and the bankruptcies that are happening in the space and we think about that relative to the merchandising changes that you're making in women's and active how do you see kohl's position to potentially take market share out of the pandemic and any offensive initiatives that you're spin.

Typically focused on to take advantage of all of the disruption. That's currently in the space.

Yes, Thanks, Matt for the question I mean, we'll clearly we're in this unprecedented period of change and consumer changing their expectation as you just said the marketplace is changing <unk>, where we're saying very close and making sure that we can lean into those market share opportunities and take advantage and we do feel like we're in a strong position.

And to capture market share I'd say first is our store base.

95% of our stores are off mall and we believe that this is it is really an advantage, especially in a kind of co better post cobot environment, where customers are not only looking for the convenience that always offers but also a really safe environment and as we've been talking about we've taken a.

But even beyond measures to ensure that our customers really feel safe as they walk in the door and we think our you know our stores are there spacious they're big they're kinda naturally built for social distancing and we've enhanced that further.

We take a lot of pride and how clean we show up every day. So we do think that as customers are making choices of where they want to go.

Now, we're adding this layer of where am I going to feel safe and we believe colder showing up really really well on that standpoint.

As you know we've talked a lot about innovating within within our stores innovating and investing in the experience.

Bringing in new concepts like Amazon returns, which we opened stores were bringing that back and that will continue to be a priority. So that customers again are looking at kohl's as top of choice in terms of where they want to shop. So sort of this for a second I would point to value. I mean, you know we know we're going to be an environment where value is really critical when we were.

On the recession in 2008 calls performed well on because that was that was high on the list and we're known for value I think our Kohl's cash program, our loyalty program will only further enhance that.

And then third is our brand portfolio. So you know this really unique mix of our proprietary brands that do offer that great value, whether it's a jumping beans for kids as an example, which has been doing phenomenally well as we sit here right now on our online business, but then complemented with our assortment of really trusted national brands and to your point.

In terms of market share opportunities I mean today, we're the number one retailer of Levi's as an example, we're one of the leading retailers in the active spaces, you're familiar with Nike Adidas under armour, the like Carter. So so we feel like this this combination of the trusted national brands and trust clearly being a key component looking forward.

Well as valued brands and then for has been the acceleration of our digital business and our omni capabilities. So we pointed to a number of things on those fronts, but in terms of really connecting with customers, both existing and new customers leveraging our digital capability, our personalization capability.

Hi, I'm driving new customer acquisition, we have seen new customer shopping cold. During this period online so were encouraged by that.

Last year, we achieved a record number 65 million, new customer or 65 million customers under the high level of new customer acquisition. So we think all of these things really set us up as we emerged from this crisis to take advantage of market share opportunities.

That's great color, Joe maybe as a follow up what so overall what percentage of your expense base is variable today and I guess could you just expand on the comment that you made about continue to us DNA reductions through the year as we think about maybe the cadence for Twoq, you and the opportunity on SGN a versus the back half of the year, because I think you talked about.

The rebuild process.

Sure well, obviously, we expect our us JV down the rest of the or it will obviously flex and a couple of things one will be sales too we will make an investment back into the safety and cleaning for the associates, but given the prudent approach and conservative approach that we're taking we do see it being down the remainder of the year, obviously, we're not giving.

Guidance at this point as much as I indicated in my remarks, we expected to be balance. So we saw a huge and decrease in April of their stores close now as we're reopening we'll expect to be akshay follow as well in terms of variable versus fixed Matt I would say that we broke them old on that we aren't looking at anything as a.

Fixed costs. This time around we went after every costs to take it out of the business and the two examples I would give you as one marketing typically in the past if we would see sales lagging we lean into marketing to drive more sales in this case as Michelle indicated we caught all of our marketing with the exception of digital so we weren't trying to create sales demandware we knew.

There wasn't any and we stuck to the digital channel and obviously that worked well for US as you saw the progressive improvement in our digital business up 60% in April 2nd we use it in technology, we exited our third party contractors, we went back and looked at contracts to see if we could actually renegotiate than to cut costs out of that.

Base as well and those are two places out as suggested in the past would have been more on the fixed ROM and the third example, I'll give and although this wasn't necessarily an expense cuts, but we did address right and we worked in partnership with all of our landlords to come to a deferral.

Solution and indicators that we didnt differ rent, we did make the payment, but we were actually in a really good place our property of element team did a great job and working with them proactively. So we're able to make those deferrals and preserve the cash flow. So in light of what we just went through I would say, we kind of broke out of the fixed versus variable and put everything on the table when after that.

Continue to see that mentality the rest of the year.

Thanks for all the color best of luck.

Thanks, Matt.

Your next question is from or worse with Evercore. Your line is open.

Omar Saad with Evercore. Your line is open. Please go ahead.

Thank you sorry about that thank you. Thanks for taking my question.

A couple of follow ups in terms of the run rate you're seeing in the stores that have been opened recently I appreciate that color.

Are you, saying 50, 60% that building from there are you seeing any impact on the E commerce side in those markets.

Eating into the ecommerce business as the stores reopening.

And also any color on what you're seeing a conversion versus traffic of stores. We opened are you, saying customers coming in a big orders in the traffic is below that level or is it kind of equal.

Scott.

Yeah. Thanks Omar so on your second question such early days, it's really hard to gauge at this point the traffic and conversion. So we'll make sure to follow up with you as we have more data detail you know in the coming and that coming quarters back to your first question on run rate were actually encouraged to see.

That there's been very little follow us and our digital business. As these stores have opened where we're watching that closely we're continuing to see the adoption of drive up our associates are really excited about that our customers are excited about it and the digital business continues to be very strong overall may has accelerated even further.

From April's level of 60% and like I said in the markets that we're now open which has been about 25% up until yesterday. So it's very early days, but our digital business has remained very strong.

Got it got it and then one follow up.

It's one of the upshot here and others, what about predictability, but this kind of step function acceleration in digital omnichannel, especially with the new options for consumers to pick up in the store.

Or drive through drive, but pick up are you guys happy where youre at I.T. logistics and inventory visibility inventory logistic capabilities to really kind of meet that step function change or are there some incremental investments and skill sets and to be built there. Thanks.

Sure. So I would say, yes, and yes, I'd say, we're very pleased with the level of innovation and agility that is coming out of our teams right now and that's been strengthening over the last couple of years, but I would say over the last couple of months that has been a step change and really across all levels.

Operation our FCS have continued to operate our stores as we mentioned in her remarks, I'm, 40% was fulfilled from our stores, that's helping us on many fronts, including leveraging our inventory there and then rapidly scaling within a matter of weeks. This drive up that we see as a.

As a continuation but.

But to your point you know we expect this higher penetration of digital to continue so I'd say on two fronts. One from an innovation standpoint, making sure that we're offering great experiences to our customer really leveraging our entire kind of omni channel capability driving innovation and then secondly also through our operator.

Funnel excellence, recognizing that there's going to be opportunities to reduce cost and reinvest from a customer facing standpoint. So we have efforts really on on both fronts, but I'm very encouraged I think the team's been doing a great job then more to come on that front.

Thanks for self best wishes.

Great.

Thank you. The next question is from sharp grown with Gordon Haskett. Your line is open.

Hi, good morning.

Derek Greenblatt owned for sure.

Thanks, Tim or questions one quick one.

Regarding your credit revenue.

You mentioned that it was probably are coming down.

The rest of the year as sales slow.

JC Penney kind of guided to about 6% reduction. This year grew about 20 I was wondering if that's.

I'd like to high number for would you guys are expecting or if you could present or color on that's true.

Sure. So obviously, we didn't see any impact to credit revenue Q1, but our stores did close next quarter and you saw significant impact through our top line from that perspective, given that we do expect there to be some pressure to credit revenue as the year persists as they are our best customer you know so we do see them coming.

Are working with cap, one and who we extend credit to which does help us mitigate some of the risk on the portfolio as well. So I would expect that you know with sales down we're going to see some pressure to credit revenue, but I just don't have an estimate that I'm in share at this point.

Okay. Thank you very much that's all it hmm that's great. Thanks.

Or final question for today's from Oprah So what's your bank your mind is okay.

[noise], well tressel with Georgia Bank your lines open. Please go ahead.

Mm.

Yeah, My apologies looks like Mr. Tressel his unresponsive.

Okay.

Well, we'll close it here. Thank you to everyone listening on the call today, please be safe and stay well and we look forward to updating you on our progress in August.

Ladies and gentlemen, this concludes news conference call and you May know disconnect. Thank you.