Q3 2020 Kohls Corp Earnings Call
[music].
Ladies and gentlemen, thank you for standing by and welcome to the Q3 2020 Kohls Corporation earnings Conference call at this time.
Time, all participants are in listen only mode. After the speakers presentations will be a question and answer session.
Question during the session pretty depressed star one on your telephone if you require and further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, Mark Rupe you may begin.
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 995.
Kohls 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 kohls actual results to differ materially from those projected and such forward looking statements.
Such risks and uncertainties include but are not limited to.
Those that are described and item one a day and kohls. Most recent annual report on form 10-K.
And most recent quarterly report on form 10-Q.
And as may be supplemented from time to time and kohls other filings with the SEC all of which are expressly incorporated herein by reference.
Forward looking statements relate to the day initially made and kohls undertakes no obligation to update them.
In addition, during this call we will make reference to non-GAAP measures, including adjusted net income adjusted EBITDA adjusted earnings per share and free cash flow.
Information necessary to reconcile these non-GAAP measures can be found in the investor presentation filed as an exhibit to our form 8-K with the SEC and is available on the company's Investor Relations website.
Please note that this call will be recorded however, replays of this call will not be updated so if you're listening to a replay of this call. It is possible that the information discussed is no longer current and.
And kohls undertakes no obligation to update such information.
With me today, and Michelle Gastar, Chief Executive Officer, and Jill Tom Our Chief Financial Officer, I will now turn the call over to Michelle.
Thank you Mark good morning, and welcome to call It third quarter earnings Conference call.
I sincerely hope you and your families are safe and healthy.
The COVID-19 pandemic has continued to remain a global health and economic challenge.
As cases have risen to record levels here and the U.S.
I want to extend our sincere gratitude once again to all of those working tirelessly across the country for the greater good.
While we don't know how long the pandemic will persist.
I am pleased with our team's efforts to navigate through this crisis and create more stabilization and our business.
We are successfully executing against our short term priorities to protect the health and safety of our associates and customers and preserve the financial position of the company.
As you saw in this morning's release, our business is strengthening.
Our third quarter results exceeded our expectations with significant sequential sales and profitability improvement.
We also further enhanced our financial position during the quarter.
Driven by solid operating cash flow.
We ended the quarter with more than $1.9 billion and cash and no amount outstanding on our revolver.
Based on the progress we are making and through disciplined capital management. We are pleased to share that we plan to reinstate a dividend during the first half of 2021.
For today's call I'm going to provide a high level overview of our third quarter performance.
Touch on how we are approaching the holiday season.
And then most of my time discussing our new strategic framework for the years ahead.
Joe will then review our financial results and capital structure and discuss our key initiatives to drive improved profitability.
Let me start by recapping the third quarter.
As I said, a moment ago, our third quarter results exceeded our expectations. Despite a very challenging start to the quarter and.
As we indicated on our Q2 earnings call the pandemic significantly impacted back to school sales and this weighed heavily on our sales performance in August.
However, our sales trend nicely rebounded in September and October.
For the quarter, we were particularly pleased with the continued strong positive growth and our home and toys businesses as well as our performance and active and beauty.
We are encouraged by these trends given that these categories grow and importance over the holiday season, and they are a key part of our strategy going forward.
In addition to and improved top line trend I am, especially pleased with how the team managed the business with discipline.
As you will hear from Joe we made tremendous progress in gross margin, resulting from efforts and inventory management and the acceleration of our value strategy.
Importantly, we were able to fully repay our revolver this quarter due to our robust cash flow generation.
Now let me touch on how we are approaching the holiday season.
Kohls has always been known as a holiday destination and this year will be no different despite cobot altering all aspects of customer expectations.
We entered the holiday season, well positioned and prepared amplifying, our omni channel capabilities to serve and support our customers.
Given the heightened role and digital is share it will be more important for us to further drive awareness of our store and curbside pickup services.
Ship from store will also continue to be critical and supporting our omni channel network.
And we are more than doubling the number of stores carrying incremental inventory to fulfill digital orders during peak.
While we feel good about our inventory position, we are actively monitoring and supply chain.
We are operating very safely and we expect many customers will shop and our stores.
We implemented extensive health and safety measures earlier this year and have put in place additional precautions to ensure store cleanliness and to support social distancing. During this busy time of year.
From a product perspective, weve entered the season with a compelling assortment based on what customers want.
And in areas of strength for Kohls, where we already have momentum.
We are emphasizing active home cozy and comfort and toys.
These areas become even more important in the fourth quarter, which positions us well.
We also expect to see more practical gifting and a continued focus on value. This holiday, which calls is known for.
This holiday period is going to be unique and we're prepared and confident that we will deliver the great experience that our customers always expect from Poles.
Let me now transition to how we're planning the business beyond this year and discuss our new strategic framework.
Last month, we shared and updated investor presentation, introducing this new framework, we're excited to share more color on this new strategy with all of you today.
Our vision is to be the most trusted retailer of choice for the active and casual lifestyle, where.
We are uniquely positioned to deliver against this vision.
We serve the entire family.
We offer and accessible and Aspirationally brand portfolio.
We provide a seamless omni channel experience.
And we have a leading loyalty program.
To bring this vision to life and create long term shareholder value, we have four key areas of focus.
Driving top line growth.
Expanding operating margin.
Disciplined capital management, and an agile accountable and inclusive culture.
I am confident and our organizations ability to deliver on these four focus areas.
With respect to our stated operating margin goal of 7% to 8%. It's important to remember that we delivered this margin in 2017 and 2018.
With a modest level of growth.
Our transformational margin initiatives already underway and our continued focus on operational excellence.
We are confident that we can return to this level.
So back to our strategic framework I will kick off the discussion by sharing more depth around the strategies, we are deploying to drive top line growth.
And I will also touch on the organizational changes, we are making to be a more agile and diverse culture.
Jill will follow with the initiatives, we have in place to expand our operating margin and fulfill our commitment of disciplined capital management.
Now, let me go into more detail around our key initiatives to drive top line growth beginning with product.
As I referenced earlier, our vision is to be the most trusted retailer of choice for the active and casual lifestyle.
Against this objective we intend to further build on our position as a leading destination for active and outdoor.
Next we must reignite growth and our women's business.
And third we have a tremendous opportunity to build a significant beauty business.
Let's start with active.
We plan to expand active from 20% to at least 30% of our business.
As we think about active we think of it in the broadest sense covering multiple categories, including active apparel and footwear accessories athleisure and outdoor.
Our insight show that more people are focusing on health and wellness.
Whether it's working out are spending time outdoors.
In addition, they are active and athleisure wardrobe is expanding into many new occasions.
And we expect this trend to continue.
As you know active has already been a key growth driver of our business in recent years and doubling and penetration since 2013.
Clearly the customer is giving us permission to play here.
In Q3 active once again outperformed the company with notable positive apparel sales growth driven by our key national brands.
We'll look to further accelerate our active sales in 2021 through the following initiatives.
First we will be increasing our space dedicated to active and our stores by nearly 20%.
The outperformance of our existing 160 active expansion stores gives us confidence that as we growth space across the fleet, we will drive incremental sales and productivity.
Next we are introducing flex our new athleisure private brand in March 2021.
Flex filled a white space and our current men's and women's assortment featuring a modern and elevated acetic made with performance fabrics and sustainable materials.
In 2021, we're also looking forward to amplify and the success, we're seeing with the champion brand, which grew 95% and the third quarter we.
We see great runway ahead and will further expand placement in mens womens and kids.
Consumers have also shown growing interest in the outdoor lifestyle.
Calls is uniquely positioned to serve the entire family with great brands like Columbia, and our newly introduced lands and offering.
Given the early success, we are seeing with Lands' end, we will continue to offer their full catalog online and we will be doubling the number of stores offering lands and in 2021.
Next let me tell you about our initiatives underway to improve our women's business, which as you know has been under some pressure in recent years.
We have already made several bold moves earlier this year to reposition the business stock.
Starting with putting a new leadership team and structure in place.
This team has been hard at work increasing the relevancy of the brand portfolio by exiting eight down trending brands and focusing on improving clarity by significantly reducing choice counts and build and depth.
While this is a long term strategy, we are beginning to see some early wins.
Consistent with where customer trends are going we are leaning into categories like athleisure lounge, and sleepwear, and intimates, which performed very well and Q3.
We also saw some of our casual brands like so and nine west deliver strong growth during the quarter.
Looking ahead, we feel good about our ability to show continued progress.
And 2021, we will further elaborate and evolve the portfolio to drive even more relevancy.
This will include and moving away from the apartment nine brand and womens as we shift our focus to nine west.
And exiting the chaps brand altogether.
We are going to tightly manage the brand portfolio and we'll exit additional down trending brand to make room for new relevant brand introductions.
Third we continue to see beauty as a significant incremental opportunity for us and have our sights set on net leased tripling our sales and this category.
While only a modest low single digit penetration of our business today, we've driven steady growth of nearly 40% over the past five years.
We know customers want a bigger and bolder beauty experience at kohls.
We are seeing meaningful outperformance in our elevated beauty shops that we've just recently expanded to 62 stores.
We are pleased with the response, we are seeing with and units we've introduced to customers as well, including our recent launch of Lauren Conrad beauty.
In addition to these.
We remain committed to driving newness and discovery with our customers.
We've seen great response to our introductions of Toms shoes, and lands and earlier this year with both exceeding our expectations.
And in 2021, we will look to build on the success with the introduction of Cole Haan and several more new brands and the pipeline that we look forward to discussing with you in the future.
With the clarity of our new strategy and serving the active casual and wellness needs of the family, we will be innovating and experimenting in new ways to serve our customers.
One example of this is our curated by Kohls platform that we are expanding this holiday to 300 stores.
And we recently began piloting a new concept called the wellness market in 50 stores and online.
The wellness market is a way for us to introduce new categories to see how they come to life. It.
It includes everyday products across home and beauty personal wellness baby and pet care with an emphasis on sustainable attribute.
This umbrella and wellness affords us the opportunity to experiment with many different products.
And we are already getting good initial insight into areas like baby, Pat and household supplies.
Our strategy gives us a clear lane to experiment and we are excited to pursue many new opportunities.
Now, let me shift our strategic efforts around loyalty and value.
As a leader and the loyalty and value space. The current environment presents an opportunity to further separate ourselves and drive greater clarity and innovation and how we deliver value to our customers.
We are approaching the strategy on two levels.
First let me start with our core value equation.
This is the combination of how we competitively price our goods, while we offer relevant promotions that resonate with both new and existing customers.
Our customers give us very high marks and delivering great value, but we know that expectations are evolving and we need to evolve to.
One of the insights we have is that customers want to understand the and price they are paying more quickly.
While promotions will continue to be important we're balancing this out by investing more and price.
This means and practice is you will see us shift even more into price, let events, while still maintaining the promotions that matter the most.
We've been testing and evolving into this model over the last year, and we scaled and more aggressively in Q3.
This approach resonated with our customers and we saw a gross margin benefit as well as Joe will discuss later.
To be clear value is part of the core DNA of cold.
We know where the customer is going and we are evolving thoughtfully I'm encouraged by the results we are seeing.
And second day critical and highly differentiated part of the value equation for Kohls is our loyalty program delivered through our kohls cash our recently updated kohls rewards program and of course, our leading private label Kohls charge card.
Let me just spend a minute on our new Kohls rewards program.
As I've shared with you before kohls rewards is based on our iconic kohls cash and now more fully integrate our digital omni channel and store capabilities.
We have a great program and now we've made it even easier.
Even seemingly small things like customers always knowing the total balance of their kohls cash.
And reminders, we send them when they're kohls cash is expiring are delivering a better and more seamless experience we.
We launched the new program in September and we've seen increased engagement with significant growth and sign ups and higher redemption rates.
Now, let me shift to our third focus area and driving growth delivering a differentiated omni channel experience.
The COVID-19 pandemic has no doubt accelerated the shift towards digital and we've seen this in our business.
Digital sales represented 32% of our total sales this quarter increasing 25%.
Our stores reported much of this growth the feeling nearly 40% of the digital sales.
Kohls is positioned to continue benefiting from the shift we.
We have an extremely healthy and flexible off model store base.
A large and growing digital platform.
And compelling and differentiated omni capabilities, which reach our base of 65 million customers.
Our omni channel customer is six times more productive than a digital only customer and four times more productive and a store only customer.
We were pleased to see a number of our store only customers become omni channel customers. During this time and.
And we expect this to continue as they enjoy the convenience of shopping digitally in addition to our stores.
We are incredibly focused on evolving and elevating the customer experience across our store and digital assets.
We are modernizing the total store experience by refreshing the look and feel the environment and improving overall clarity to our inventory management initiatives.
We also continue to build on our new digital experience launched in January of this year by delivering more personalization that are filtering and tailoring our messages with greater agility as customer needs shift.
We will continue to invest in our omni channel capabilities as is truly leverages, our advantageous off mall presence.
We are focused on driving further adoption and our pickup offerings and a specialty store drive up and we continue to be pleased with Amazon returns, both from a customer experience and economic standpoint.
We are also experimenting with new services, such as self service returns, which provide both and easy experience to customers and and expense benefit as well.
Now let me touch on how we are evolving our organization to become even more agile and diverse.
We are fortunate to have an outstanding culture here at kohls, driven by our passionate and talented associates.
The team is innovative agile and accountable and we will continue to evolve how we work to accelerate our progress against our strategy.
Even during this unprecedented time with all of our people working in new ways, whether that's in our stores fulfillment centers or corporate offices.
I have never seen the level of innovation and creativity that I'm seeing today.
We are deeply committed to fostering a diverse equitable and inclusive environment for our associates and customers.
And we recently established a diversity and inclusion framework to accelerate our progress.
This effort is being driven by a diversity task force with leaders from across the company and we are focused on a number of key initiatives across the three pillars of our DNA framework.
Our people our customers and our communities.
I look forward to sharing our progress with you and as important focus area of the company.
We have made great progress in the area of EPS GE, a journey that began more than a decade ago.
We have established 2025 goals related to climate change waste and recycling and sustainable sourcing.
Our efforts receive frequent recognition, including the Dow Jones sustainability index and Barron's most sustainable companies.
Maintaining our strong culture, while driving progress against our operational excellence efforts requires difficult actions at times.
In September we reduced our corporate positions by approximately 15% to align our cost base in response to the business impact resulting from the pandemic.
As difficult of a decision. This was it was an important step to set us up to deliver against our strategic framework.
Before I hand, it off to jail, let me summarize my comments today.
I continue to be very proud of how our organization is navigating through the COVID-19 pandemic Arthur.
Our third quarter results exceeded our expectations with significant sequential sales and profitability improvement.
Our performance also showcased the power of our business model, specifically, our cash flow generating capabilities, despite facing pandemic driven headwinds.
We've also learned to run the business with greater speed agility and creativity. During this pandemic, which will continue to benefit us going forward.
The ongoing disruption and the retail industry presents significant market share opportunities and we are aggressively taking advantage of that we began to redeploy our competitive store closure strategies. During Q3, and we are pleased with the initial traction you're seeing.
We've said this before but it's worth saying again kohls is a well disciplined operator with a strong foundation.
We have a new strategic framework in place that will enable and even more compelling customer proposition and we are working hard to create significant long term shareholder value.
In closing I want to recognize all of our associates around the country and across the business for their incredible resilience and commitment to kohls and what has been a challenging and ever changing year.
Your perseverance is a testament to the strength of this organization.
With that I'll now turn the call over to Joe who will provide details on our third quarter results and financial position.
Thank you Michelle and good morning, everyone.
Before reviewing our third quarter results I want to provide some additional color on our initiatives to expand operating margin and fulfill our commitment to disciplined capital management.
As Michelle indicated returning to a 78% operating margin level and require modest sales growth and a normal environment growth.
Gross margin improvement and a lower SNA expense ratio as compared to 2019.
Let me discuss how we plan to get there starting with growth margin.
First we are focused on inventory management and increasing our inventory turns.
Our efforts on this front include a focus on fewer choices with greater depth per choice.
In addition, we will shift towards more productive categories like active while.
While streamlining less productive categories like dress apparel, and mens and womens and fine jewelry.
We've already begun to make progress and showing our Q3 margin performance and increased inventory turns.
Second as Michele discussed we are encouraged by the progress we are making to simplify our core value equation.
We are in the beginning of this journey, but the early results are encouraging.
During Q3, we optimize our promotional strategies.
Focusing on the most productive offers and we.
We invested and price to drive a clear compelling value to our customers.
We see further opportunity going forward.
And third we have a supply chain transformation underway, where we are focused and optimal deployment of inventory to increase service levels reduce clearance and shipping costs, while improving turns.
This includes increased precision of inventory placement by channel and formed by Disney and forecasting and expanding our sourcing and and capabilities to avoid future markdown risk.
Now turning to adjusting expense opportunities.
We have managed assets you need to 1.5% CAGR over the past few years.
And we plan to manage this more tightly moving forward we.
We will continue to leverage our operational excellence initiatives and.
Focus on expenses across stores marketing technology and corporate.
As it relates to store expenses, we continue to learn from our actions taken through the crisis.
Weve operating with fewer store hours and.
Just one entrant open which has helped reduce payroll costs.
In addition, we are going to increasingly leverage technology to streamline and automate cash based work.
We are currently testing, both self checkout and self returns, which we plan to scale to more stores and 2021.
We've also learned a lot this year and our ability to be more efficient and our marketing spend.
During Q3 marketing spend was down 18%, improving our advertising to sales ratio.
We are investing in the most efficient media such as digital while reducing less productive areas such as print advertising.
We also leveraged our technology and in Q3.
As we pulled back and capital spend we are afforded the opportunity to rebalance our internal versus external model.
In addition, we have embedded greater discipline, and where we invest and have adopted a new more agile methodology, enabling us to deliver more value with less resources.
And lastly, we will continue to seek out efficiencies across corporate and other areas leveraging our core discipline operational excellence.
Our corporate restructuring actions in 2020 are expected to deliver expense savings of more than $100 million on an annualized basis.
Going forward, we will continue to look for cost savings opportunities.
And we're also committed to disciplined capital management.
This is a hallmark of ours, and we remain focused and managing the business to sustain our investment grade rating.
We showcased this and the third quarter through significant cash flow generation that reduction and now disclosing our plan to reinstate and dividends and the first half of 2021.
We will be thoughtful and how we reinstated dividend taking into account the payout ratio and yield as well and our intent to sustain and growth over time.
We also see opportunities to use and liability management and 2021 to further improve our leverage profile.
Now, let me review, our third quarter results.
We made significant progress and Q3, while sales and earnings remain down versus last year, the improved substantially relative to the second quarter.
Net sales declined 13% driven in part by challenging back to school sales and August.
We saw a nice rebound in sales and September and October.
Digital sales increased 25% for the quarter and accounted for 32% total sales up from 22% last year.
Other revenue declined 25% driven primarily by credit revenue.
This decline was due to lower accounts receivable balances associated with lower sales.
In addition, we saw an increase in payment rates, resulting in less interest late fees and write off activity as compared to last year.
From the line of business perspective, as Michel indicated we saw strong results and areas like home active duty and toys by just the apparel and footwear were soft due to the crisis.
Our home business remained strong during the third quarter with sales up 10% overall and up over 50% digitally.
Our customers continue to show interest and the kitchen with solid demand for cookware food preparation and kitchen electrics as well as other living spaces, where sales increased and floorcare combating.
Our active offering also outperformed in the quarter, we saw positive apparel sales growth driven by both our key national and private brands and.
And we continued to see growth and our assortment and inclusive sizes.
Childrens outperformed the company with double digit growth and toys and successful new brand introductions of lands and and Lidl and held by Lauren Conrad's.
This was offset by some softness and back to school categories, such as uniform backpacks and denim.
Turning to growth margin.
Q3, gross margin was down 48 basis points to last year, but showed significant sequential improvement from Q2.
While we continued to face headwinds from shipping costs due to the increase in digital sales penetration. We are pleased with our ability to offset the majority of the pressure through our intense focus on inventory management and pricing and promotion optimization.
Looking ahead to Q4 gross margin will continue to benefit from these efforts and will help offset some of the shipping cost headwinds from increased digital penetration and incremental free surcharges over the holiday period.
We estimate the freight surcharge impact to be 100 to 150 basis points of margin pressure.
Now, let me discuss SDMA.
In Q3 assay and expenses decreased 8% to $1.3 billion, driven primarily by lower store payroll marketing and credit expenses.
Of note as today would have been down 10% excluding expenses related to COVID-19.
Last let me touch and some additional financial items.
Depreciation was $17 million lower than last year, and we expect this to continue due to the reduced capital spending this year.
Non recurring charges of $21 million relate to the corporate restructuring activities incurred during the quarter.
Interest expense increased $26 million versus last year due to higher debt outstanding during the quarter.
For Q4, we expect interest expense to remain higher than last year as a result of the April bond issuance, but.
But lower relative to the third quarter as we fully repaid our revolver and October.
Our tax rate in Q3 with elevated primarily due to tax benefits from losses eligible for carry back under the cares Act.
We expect to continue to see that elevated rate and Q4.
On a GAAP basis for the quarter, our net loss was $12 million and net loss per share was eight cents.
Excluding nonrecurring items for the quarter adjusted net income was $2 million.
Our adjusted earnings per share of one cents.
Turning to the balance sheet we.
We ended the quarter with more than $1.9 billion of cash and cash equivalents, a $1.4 billion increase from last year.
Our strong cash flow generation during the quarter allowed us to fully repair revolver, which was previously had $1 billion outstanding.
We are really pleased with how tightly managed inventory during the third quarter.
Inventory decreased 26% to last year, and we increased turned to a five year high.
We also improved the health of our inventory with aged inventory down significantly from the second quarter.
We will continue to manage inventory tightly with the opportunity to chase and demand in Q4 and beyond.
Turning to cash flow.
We generated positive operating cash flow of $910 million year to date and.
Including $606 million and third quarter, driven by our actions to reduce both inventory and expenses.
Capital expenditures were $264 million year to date, including $68 million and third quarter.
This is significantly below last year, as we reduced spending across technology, omni channel and our store strategies due to covance.
However, we have resumed capital spending related to our six E Commerce fulfillment center, which will open in 2021.
We now expect capital expenditures for the full year to be closer to $300 million.
In summary, we further strengthened our financial position this quarter.
Sales and gross margin showed significant improvement from the second quarter.
We continued to deliver positive operating cash flow.
Paid off our revolver and ended the quarter with over $1.9 billion of cash and cash equivalents.
Although the pandemic will continue to create uncertainty. This holiday season, we will put our best foot forward, leveraging our strong financial position and the agility and the organization.
We are focused on maximizing our sales opportunities across all channels.
We will benefit from our margin driving initiatives and we remain focused on managing our expenses tightly.
Given this uncertainty and to a line more directly with our peers, we are not planning and providing a holiday sales update this year.
Therefore, we look forward to discussing our holiday performance and providing an update on our strategic progress on our Q4 call in early March.
This has been an extraordinary year on every level and we are proud of the way. We have managed through this time, we have shown progressive improvement and stability and the business and are focused on executing against our new strategic framework to drive long term shareholder value.
We are happy to take your questions at this time.
Okay.
At this time I would like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad.
Our first question comes from the line of Bob Dribble from Guggenheim. Your line is open.
Hi, good morning.
Right and Bob.
From and should it really is.
Can you talk a little bit just the ball.
Okay, and and we are putting our best foot forward. This holiday like we always do we are planned flow and prepared and this quarter and.
And we're ready to adapt as needed as a customer and.
Adapt.
That being said we are pleased with how the holiday has kicked off let me remind you were still and a pandemic and there's a lot of uncertainty ahead.
But the customer response, so far has been positive and like I said, we're pleased with the early results. We made a lot of adjustments to adapt to what we knew was going to require changes given the pandemic I'd say really hitting all elements of the holiday holiday season from timing product value and the experience.
From a timing standpoint, we have put more emphasis on the early part of the season. So we kicked off with great energy and early Black Friday campaign like I said, we're pleased with that I'm from a product standpoint, where leaning into categories that had been performing for us categories.
Like home and active and even toys that become even more important during the holiday season.
Value is always important this time of year and ever ever more. So this holiday season. Please that we just launched our new rewards program that off to a good start and I think Bob we have a really good balance of price, let events and also promotions that were quite famous for and lastly, getting specifically.
And your question on the channels as around the experience and I think we really benefit from having such a strong omnichannel present first start with our stores and.
And you know 95 per cent off mall clearly has been very important and during the pandemic and will continue to be so during the holiday season, and then digital we like like all are seeing digital acceleration, we've made a lot of investments and the last couple of years and the customers responding we're pleased with the strength, we saw and Q3, we expect that to continue into Q.
Sure and as you know typically queue for for US digital does penetrating and higher.
So we're prepared for that you'll see us amplify or pick up options and really leverage the store footprints again, we're pleased with the customer adoption of by only and pick up and sore and then curbside, which now represents a third of all the pickups that we're seeing from customers and then just specifically on you know try.
And the only thing I would comment is as we think about Q3, and how we entered and exited the quarter.
The beginning of Q3 was tougher giving back to school, but the back half of the quarter caused September October was stronger and we specifically saw the store traffic pick up once we got Pat once we got past that back to school season, and so improvement we saw in September and October really with all day.
And by improvement and the store performance.
Okay, Okay, and and she'll just one question on the women's business generally like.
Do you feel like you're making some progress and women's yet and I was just wondering like layered trends are actually starting to work a little bit women's and I was wondering if that was embarrassed and your business at all sort of two three and the queue for like.
Yeah, I know a great question, so I'd say like across all of our businesses. We did see improvement from Q2 and to Q3 and we have a lot of focus happening in women's and we've already made a lot of moves that we've talked to you about so including putting a new leadership team and the new structure and place we are really.
And focused on the brand portfolio. So we exited eight downtrend and brands, we just announced more on the call today and.
And we're seeing some early wins, we're seeing wins and categories like of course, active, but athleisure lounge, sleepwear intimates and and more casual brands like so and nine west specific day to your comment or question on trends and we are seeing that and our business and we've been deliberate to bring and a lot more layering pieces entity.
Dortmund, we have personalization capabilities, so you'll see that and our communication or emails to customers. So we are really balancing out our assortments and offering more more jackets and layering pieces to where the customer and how they're dressing today, which is definitely more comfortably and more casually.
Alright, thank you and and and should I be able to and.
And spot.
Loraine Hutchins done from Bank of America. Your line is open.
Thank you good morning and.
And can you comment on the health of the credit portfolio and then maybe just give us some indication of what kind of performance and speak into your seven to eight per cent margin target for credit specifically.
Sure and good morning, Loraine itself. So for credit obviously, it was down and acquire really two key components. There. One was the sales performance and the second was actually driven by a accelerates and the payment rates. So as the corner progressed, we star payment rates actually had all time highs in terms of how the customer respond.
Which then results and less late fees and interest charges. The good news is it means our customers incredibly healthy and have more open advise moving into the holiday period and it definitely day risks as as we move into 2021, I think you know going forward and what we're modeling from a credit perspective is really for it to stay back in line with sales I think we are and.
And some unique times right now based on how the customer and the economy is moving especially with and without the stimulus. Though this is definitely think and anomaly not how I would expect it to continue moving forward.
And so when you say get back in line with sales that implies that you're 2021 credit income would grow back towards 2019 level yeah.
Yeah, and definitely follow that so obviously a key component is our calls charge card you know, it's almost like a loyal customer we get the most spend from that customer does it continue to move forward, we would expect that to move back in line with sales and the houses a customer obviously, what it for that spending as well I think the other note and we are seeing new customer acquisition through.
Our market share disruption strategies that we started deploying this quarter. So those new customers move and and then we have the ability over the longterm to continue to move them up the loyalty ladder and you know and of the colds charge, which will help it continue to perform as well.
And then I think if we step back and and the other question was how we get to the operating margin levels and you know we tried out line that this will definitely be requiring some modest growth and the top line. The expansion of margin from a gross margin perspective, what you've seen us to do and the past and this will really be and able enabled through our inventory management and initiatives.
Simplified value equation as well as our supply team transformation and then we will continue to manage our expenses and it's been a cord that the point of cold, but you'll see us tightened on those expenses through some of the accident that we talked about automation and use the technology and the stores and continuing to focus on our productivity.
<unk> and marketing and tightening that Ada as as well as being much more efficient and our technology span and then your size and do some unique accident. This year for corporate but we'll continue to Labrador operational excellence across the organization to continue to drive down expenses, all of which will then line to the increase and the operating margin level, but I will say.
I know, we haven't giving you a time frame a lot of that is due to the continued uncertainty that we see and the environment today, but we do look at this is more of a near term goal. So I would say we expect to do this and the next two to four years versus over the long term, it's really just dependent and I'm only see some stabilization and and the market.
Thank you.
Mark also legere, they're your line is open.
Good morning, Thank you taking my question.
Specific to your gross margin and can you talk about some of the puts and takes over the holiday period to what extent and do you think benefits from inventory management and price and can offset shipping and the surcharged you talked about and your <unk>.
Bigger picture gross margin was just under 36 per cent. This quarter as we think about the new algorithm and human energy inventory more aggressively is 35 to 36 per cent gross margin the level and you think is achievable and fiscal 2021 or should we be thinking more it's kind of a multi your bill to get back to that.
So like I can definitely start here and thank you know obviously trying to get to the and all the seven to eight per cent operating margin is the Gulf. We're gonna focus you on and we will look to expand margin over that time, you know as we look at Q3, we are down about 50 basis points and a lot of that was drove and off of two key strategies first inventory management. These documents.
He was down 26%, we had a five year high from and inventory turn and over history, you've seen when we've managed our inventory tighter we turned faster we not only benefit for sales because we're chasing the right. Good we benefit I'm margin because they don't have to take the mark down. So it's much more productive for us that benefit will continue to persist and to <unk>.
Two four are managing tightly or casing into the areas that are trending so that will continue the core value of crazy and that Michelle I talked about during her script as well we know we're known for great value and promotion that is definitely not going away, but you also know we're known for testing and we have tested a lot over the past year or two.
Focus on the most productive offers you're gonna see is moving to pricing and instead of having as many promotion really getting the customer to the and price much more quickly and we're gonna Labrador personalization efforts to target offers so the office, they're gonna drive behavior and much more targeted and help us and expand margin and and Ah.
Same timeframe as well those two things will continue into the queue. For Q4 is you know digital always out sizes and in addition, this year, we do have during that holiday peak and short term headwind and we'll start charges, which we indicated and the call, which will and to about 100 and 150 basis points.
[noise] headwind this year and we move forward longterm, we're accelerating our supply chain transformation, and that's really and and and and supply chain and we're going after Cogs. So we're looking at forest and work to bring downloads expenses.
Also looking at how to optimally deploy our inventory and this is gonna help us and mitigate our cost of shipping we're gonna have much more real time inventory allocation and much more dynamic allocation to react to housing demand is coming and so we can best place that inventory to optimize our ship and costs and bring down and those levels, which is the pressure obviously that you've.
Scene with digital over the last several years, so that'll be more over the long term, but those three key initiatives Mark and what's gonna grow our gross margin and really contribute to that seven to eight per cent operating margin and go all out with that.
It's very hoping thank you and if I could also follow up and marketing just wanted to maybe you could speak about how you're thinking about marketing investment over holiday and into early 2021, and just you know.
A lot has changed and drove you'd be assortment dog. So is changing happening at a time with many consumers and I've been to visit stores and merchant apparel has been.
Mind, So I guess I'm wondering how are you thinking about balance and marketing efficiency and margins with the need to maybe invest more aggressive and marketing to drive customer acquisition and this type of environment.
Yeah, Mark says Michelle here I'll take your question. So we feel really really good about our marketing strategy. Yeah. We've used this opportunity to really kind of tightened and our marketing strategy drive greater impact and as a result drive greater efficiencies. So. Good example is how we have evolved or mix our media mix.
I'm driving a lot more towards digital and I'm moving out of some of the less productive elements of our marketing mix like say traditional newspaper and search et cetera, we will still use those surgically, but certainly what we're learning and where the customer's going is there highly responding to the capabilities that we.
On the digital marketing side, and we expect us to continue so we have as we've commented we have reduced our overall marketing spend just given that I damage to the pandemic, but we will always prioritize you know driving the top line, but driving it now and a much more impactful and efficient way the other big benefit we get with being.
So much more digitally drove and is that we have great flexibility and agility. So as the consumer trends have evolved over the time of the pandemic, we have been able to quickly adapt our messaging and our and our mix even within digital to go where the customer's going and what's resonating.
And with them and we were able to see real time, what they're responding to and day by day were flexing that marketing muscle to chase the demand, but do it any more efficient and impactful way, but that is you know over time as Joe was just talking about our our targets around [noise] overall.
Overall margin expansion driving marketing efficiency is a key lever, but like we've we often talk about many things were testing our way into it and we're very confident and the results were having that we can drive better impact and reaching customers and driving traffic and your customer acquisition, but do that and a more efficient.
[noise] way.
Thank you for that and the best to look over holiday and.
And my heart.
Oliver Channel from your line is open.
Alright. Thank you regarding reigniting women, what will be earlier versus later and your thoughts and timing and mix overtime for the women's part of the business Ah.
A bigger picture would also love your view of your longer term strategic goals in terms and speed, reducing whether sensitivity and also thinking about a month to month volatility book, we continue to see the you know for the foreseeable future and longer term. Thank you.
Yeah, So Oliver Michelle here. Thanks for the question so specifically to women's as you know that's a key plank and our new strategic blueprint to really reignite growth and women and it is amongst the top priority to the company and we have a great team and a great leader who's driving this change and as I mentioned earlier.
And my remarks were already starting to see the benefit of that you know what I would say first of all is getting a really good sense of what the customer wants from us and so we have been using insight to drive the changes were making around our brand portfolio. We're exiting we have exited and we're continuing to optimize the.
Portfolio over the brands to make sure that those are the ones that are most relevant to a broad base of women cause we we serve on broad demographic. So we want to make sure that we're hitting it across both our core customer and new customer and the customer is telling us they want they want greater clarity they want fewer choices and what we do put and.
Front of them has to be more meaningful and I'm I'm really encouraged by the progress I think we'll really see that into 2021 as we drive the new brand portfolio did mention that we're seeing great results and younger brands like so uhm nine west with a greater casual focused lands and which cuts across the.
Family, but it's resonating with our our female customer we have more and the pipeline as we look ahead into 2021 and beyond so it's the product that we offer is how we merchandise and doing a lot more caught storytelling, but with reduced inventory and choice counts, we have more space and the store to make a greater shot.
Thing experience and we're seeing that resonate with our customers and.
And this is both in stores and it's digital and our personalization engine is also really important to make sure that we can target customers with the right message as it relates to call. It early wins that we're seeing now will carry into us and and 2021 you know, it's the active category clearly, but athleisure and at.
Leisure as an extension of some of our core brands today as well as a new brand flex that where I'm very excited about in terms of and a white space for our survey not female customer cozy comfortable lounge sleepwear as well as you know more kind of talk to bottom casual dressing so and what I'm one of the top.
Retailer's of Levi's, as an example, which fit squarely into our new strategy. So I think the combination of that the portfolio. The value we offer the store experienced the dental experience I think we're really set up to pivot this business and 2021 and and beyond.
And then your second question around speed, whether sensitivity et cetera, Let me take whether first I mean, I think we're making tons and moves as as as as we're driving our new strategy to have fewer last whether headwinds as we looked at 2021 and beyond and we've talked about the momentum and categories like home.
And as we think about our new strategy and being that destination for the active and casual lifestyle and that includes home and so that has a nice benefit and reducing whether sensitivity and then categories like active tend to be less whether sensitive. So I think we're making all those right moved to give us that that installation and then our supply chain our product.
Development process speed is paramount and wear as we sit here today, our inventory turn is at a five five year high and that will only continuous and we look forward and speed to market is a critical part of that.
Thanks, a lot to follow up on beauty lives and like studying opportunity and what will be your approach to the brand matrix and as you think about and <unk>.
<unk> versus prestige was was.
Category highlights and what's different this time versus prayer for many years ago. Thank you.
Yeah, you bet Oliver So we're really excited about the beauty opportunity, it's a large attractive market for us, there's a lot and disruption happening and transformation and the industry. It is a small business for us today, but we've made steady progress over the last five years and we are growth is up nearly 40%. So the customer is giving us.
Permission here and and we have scale right. We serve 65 million customers 70 per cent are women and they're looking for a bigger and bolder beauty solution for us from us I should say and so we see a lot of upside as you might imagine, we're having lots of great conversations with brands given them.
Russia, and that's happening and the industry you know I'd say, our customer is looking for and elevated experience. They are looking for those higher and brands as we've offered them that customer is responding and the investments, we're making and what's different is working so building out we have a little over 50 stores now where we built out and much more per.
See me and experience that has dedicated associates to it and it's an opportunity for the customer to really explore and discover what's their that's working so you can expect to hear more from us on the beauty category in the and the month to come.
Best regards happy holidays.
Thanks Oliver.
Matthew boats from J P. Morgan your line is open.
Great. Thanks, Michelle maybe relative to home and active which I think accounted for roughly 40 per cent of sales pre pandemic, where do you see this mix strategically moving and you mentioned some of your test I think particularly on the active any key proof points give you confidence at kohls and it'll be the pre.
Mary customer destination for these two categories.
Yeah. Thanks, a lot for the question. So in terms of of mix you know what I pointed to say four and roughly the 40 per cent territory today.
Active alone we see growing to over 30 per cent. So that takes you north of 50 per cent right. There. So it will be a very they're very important businesses for us today and they'll become even more important as we look forward I would say we have a lot of proof points that this is where the customer wants us to go if I look at active.
And you know we've more than doubled the business. It's 20 per cent of our business today like I said growing to 30 per cent or more will take the customers lead on that and but I think importantly, you know the active productivity is significantly higher than the overall productivity and our store so even by dedicating more space.
And which we've done over time, and we're going to increase the space dedicated to active by another 20 per cent. This coming year, we know that that's gonna give us greater productivity and and the box. So that gives me great confidence you know the growth gives me confidence the active expansion stores that we've been testing and.
Getting 160 of them have had great results. They outperform the chain and I I, just think Matt where so uniquely positioned to deliver against this vision you know Wow, you know clearly active and athletes there has been a trend we really feel like we can own delivering active casual wellness beauty for the entire family.
Across so many categories and also the unique brand portfolio, we have really stretching from accessibility and great value too great aspiration with our national brand partner. So I think those things and and then just to finish off the power of our Omnichannel platform you off mall reach our digital platform.
Things can you give me great confidence that we can win and this space.
Great and then to follow up Jill and gross margin what was the headwind from cost of shipping and the third quarter and then on the composition of the fourth quarter gross margin. So the hundreds of 150 basis points free surcharge that you cited cause that incremental to underlying digital fulfillment headwind normal.
And the fourth quarter and what's your assumption for pricing and promotional activity year over year, This holiday or fourthquarter, maybe based on what you're seeing so far.
Sure So and Q3, what I would tell you their cost and shipping headwinds were pretty normalized to the stats that we are giving you. The 20th 30 basis points for 203 hundred basis points of penetration increase so we were back into that and arm. You know we were a little elevated and Q2 due to the store closures and the inventory and not be.
Absolutely place, though as we were able to move back into normalization and get our inventory fresh we ended up seeing that right in that normal as we move into queue for I expect you know the promotional environment, we're actually going to carry through a lot of what we've tested and learned and size success and Q3, you're gonna see us with pricing and.
And you're gonna see and so it's more targeted offers but obviously holiday is about value. It's what kohls stands force. So we're gonna continue to drive that through our promotional activity I, just think it's gonna be more moderated or normalize versus elevated based on what we're seeing and if it is elevated we can leverage are targeted personalized offers to really drives behavior.
It will help margin so that will continue to persist does it benefit as well our inventory management and we were down 26 per cent and inventory. It was the aging was down substantially from cute too we have a lot more clarity on the floor. So we feel very well positioned and as we move into cute for with our inventory and we're gonna continue to manage that down and and so.
And we will exit the ear very clean from and inventory perspective, the frame numbers and is a short term one time charge and it is on top of what we wouldn't normally see as our digital headwind and so you know and queue for digital typically out penetrates. So we will continue to see those same costs and shipping headwinds that we've seen and.
All year and on the normalize again like it did and Q3 and then on top of that we'll see about 100, and 250 basis points of headwind, but I don't want to leave without saying that the efforts that we have on the value equation and inventory management will benefit us and and we'll help offset some of those headwinds.
Great Best of luck.
Thank you.
Diana posts, Nissan and hopefully advisory group your line is open.
Good morning, everyone and nice to see the sequential improvement Michelle as you think about the market share opportunities that are out there that only seemed to be growing where do you see the most abundant share opportunities come and is it from a category is it from distinct retailers and as you've looked at your store format and whether it was the.
Other ancillary tenants as your subdividing some space, how do you think about that going into 2021 and beyond and Jill just on the investing and price what does that mean for gross margin overall and does it differ in store vs. On line. Thank you.
Thanks standard for the question, so I'll kick it off and then I'll and over to jail here. So we think there is a lot of market share opportunity for kohls as we look forward as you. All know if you just take brick and mortar alone. There are thousands of stores that are.
Clothing, or this year and going into next year, Yeah, I would I think about market share on two levels. Both in terms of our short term opportunity and then our long term opportunity. So short term you know as we sit here today headed into the fourth quarter at the beginning of next year and beyond it's how can we capture that.
And market share and capture those customers in a particular area and neighbourhood et cetera, and we've had this playbook and the past day and if you might remember as we've seen either chains or sore eyes closed down and it's worked for us quite successfully it did benefit and us and the 2018 timeframe, let's say and.
Everything about identifying those customers me and we can share target them. We can look at what the categories and product that they've been buying so for example, if a retailer had been selling some of the national brands and we've been Sal and and we can market those things directly. So I do think it's a combination to your question and both category and store specific.
Likely so I I believe we're well prepared and we're going to maximize that share gain opportunity and then over the long term, it's really capturing share by having and even more relevant proposition to the customer which is around and the new strategic framework and that we just shared with you and then it can you can you add a little more context. Your second question on the consumer.
And you just asked and on the subdivided of the stores, how you're adding the grocery or the planet fitness how's that going where do you see those opportunities yeah.
Yeah. So I would say on that one that is still and experiment for us Dana we have roughly 20 stores given the COVID-19 pandemic disruption over the last year, we put a little pause to that we we still look at our stores as a big asset for US you know their you know their cash generating now.
Anti per son over a million dollars and cash were invested and our fleet and we see a lot of possibilities and whether that is the right sizing or subdividing as you said or or frankly doing different things and experiments within the four walls ourselves. We mentioned that we have this 50 door wellness market that we're trying so and one of the best things coming out and.
[noise] Covid I mean, there's been lots of really negative things about COVID-19, but it has amplified the teams, we we've always been and experiment or and a test or and an innovator. We're taking that even further so you can see a lot of experiments happening and both digitally and and our stores and the and the months to come so more to come on that.
Okay, and then in terms of the margin and price first if we stand back and I, just Wanna remind you and the supply chain transformation initiative that we're accelerating part of that is there calmed work as well.
Going after ways to reduce our cost of goods sold through our sourcing efforts without taking away any value from our customer. So we're gonna still invest and quality, but we're also gonna invest and price and I think pricing for us doesn't mean, we're not gonna be on sale and it just means that we're trying to have more transparency with our price thing. So the customer can see the price and more quickly and make it much more.
Competitive and and home is a Prime example, here it's been a category, that's clearly a and outperforming and the industry and at Kohls and very price sensitive. So how do we bring that to life quicker and the customer sees the value that kohls had versus making them work through some of them as we've done in the past so you're gonna see we introduced the new price and you van and Q3.
It was called loud deal is really focused and sharp pricing versus more on the promotional activity that you have seen in the past and we're going to leverage that as a new muscle, which will help us I think as part of the effort to get to and expansion of op margin really optimize that and then use more targeted offers to drive consumer behavior versus blanket them across.
The the whole population of our customer base. So it will be a key enabler as we continue to move forward on our journey to get to the operating margin of 78 per cent.
And will there be a difference and stores vs on line Jill or does it hold similar and you know at this point, we have same pricing and stores and online and I would definitely say, it's something that we continue to look at and understand is there an opportunity to and more dynamic pricing and the future but at this point, it's not something that has been income based on what we've talked bad.
Thank you.
Hey, Thanks Dana.
Thank you to everyone listening on the call today, please stay well and have a wonderful holiday season, and we look forward to speaking with you and early March.
This concludes today's conference call you and they will disconnect.
And.
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