Q4 2020 Kohls Corp Earnings Call
Kevin what do you would like to ask a question during that time. Please press star one on your telephone keypad I would now like to hand, the conference over to your Speaker today, Mark Rupe, Vice President Investor Relations. Please go ahead.
Thank you certain statements made on this call, including projected financial results and of company's future initiatives are forward looking statements within the meaning of the private Securities Litigation Reform Act of 1095, Kohl's 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 <unk> 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 closed most recent annual report on form 10-K, and the quarterly report on form 10-Q for the quarter ended May 2020, and as may be supplemented from time to time and cause other filings with the SEC all of which are expressly incorporated here.
And by reference.
Forward looking statements relate to the date initially made in close undertakes no obligation to update them.
In addition, during this call we will make reference to non-GAAP financial measures, including adjusted net income adjusted earnings per share of free cash flow information necessary to reconcile these non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our form 8-K filed 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 It is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.
With me today are Michelle Gass, our Chief Executive Officer, and Jill Timm, Our Chief Financial Officer, I will now turn the call over to Michele.
Thank you Mark good morning, and welcome to call of <unk> fourth quarter earnings Conference call I Hope that you and your loved ones remain healthy and safe.
2020 turned out to be very different than what we imagined when we spoke to you this time of year ago.
The pandemic has had an impact on each of us personally and professionally.
I am optimistic brighter days are ahead.
At this time today's release, our organization has continued to navigate through the pandemic successfully.
Our business is gaining momentum and our strong cash generating model has proven resilient.
We ended the year with $2 3 billion in cash up more than $1 $5 billion from last year.
Looking ahead I am extremely confident in our outlook.
We're executing with a clear strategic plan to continue building on the momentum in our business with an intense focus on improving our profitability.
We have delivered strong initial progress against our strategy over the past two quarters and we are positioned to deliver a multiyear improvement in sales and operating margin.
Based on our progress and outlook. We are pleased to share that we will be resuming our capital allocation strategy in 2021.
This includes increasing our capital expenditure.
Stating the dividend resuming share repurchases and employing liability management strategy.
For today's call I am going to provide a high level overview of our fourth quarter performance.
Discuss the progress we are making against our strategic framework.
And highlight the key initiatives, we have insights for 2021 and beyond.
Joe will then provide details on our operating margin goals and capital allocation strategy, followed by a review of our Q4 results and 2021 outlook.
Let me start by touching on our fourth quarter performance.
Our results exceeded our expectations across all key metrics in what was a highly unique holiday period.
Sales improved sequentially for the third consecutive quarter and strengthen as we move through the period.
Digital sales growth was strong up 22% and accounted for 42% of net sales versus 31% last year.
Our store has played a critical role in supporting this heightened digital demand.
Selling nearly 45% of digital sales.
At significantly from 35% last year.
Our home business led the way once again delivering positive sales growth.
And we were pleased with the solid outperformance in active and beauty and have seen continued improvement in our women's business.
Each of these are key areas of our growth strategy, which I will discuss in more detail in a moment. We are also making great progress in our efforts to expand our operating margin.
Our fourth quarter gross margin performance and expense discipline highlight the traction we have already made as we look to make further progress against our strategic goals.
Accordingly, these are not one time benefits, but rather fundamental changes we are making at our operations that will drive sustainable improvements to our business.
Let me now transition to our strategic framework discuss our progress and highlight the key initiatives, we have in place for 2021 and beyond.
As we shared at our Q3 call. Our vision is to be at the most trusted retailer of choice for the active and casual lifestyle.
The trend towards casualization and living actively has been underway for some time, but has accelerated with the pandemic.
Kohls is uniquely positioned to differentiate itself and address the active lifestyle needs of today's families. Given our breadth of relevant categories are accessible and aspirational brand portfolio, our seamless omnichannel experience and healthy store base and our leading loyalty program.
Over the past year, we have shared with you updates on our early work in transforming our product portfolio, our store experience and our digital capabilities.
We have made a lot of progress with much of this transformational work beginning to come to life in 2021.
Coles will emerge as a fresher and more relevant concepts, while preserving what works for us today.
Our customers are going to see greater emphasis on categories and products that are more compelling for them.
They will encounter a completely new and elevated experience in beauty through our recent sephora partnership.
We will also deliver on our promise to offer both accessibility and aspiration to a tightly curated brand portfolio of our most successful private brands, including Sonoma, So LC, Lauren Conrad and jumping beans.
These are complemented with both strong existing and new national brands that our customers have been asking for such as Calvin Klein, Eddie Bauer of Cole Haan and more that we will discuss in the future.
Through our merchandising and inventory strategies, we will continuously seek new discoveries for our customers with a focus on removing under productive products and ensuring we maintain clarity by having the right choice levels and debt and assortment.
Our stores and our digital experience will be aligned to our vision with our most productive categories like active and beauty prominently positioned.
And we will continue to deliver innovative omni experiences like focus and bought curbside pickup and Amazon returns.
Through these collective efforts, we will firmly position kohls as the leading destination for the active and casual lifestyle.
I want to highlight the strong progress we are making in four key areas.
Our sephora partnership and launch plan.
Active expansion women's progress at.
And our omni channel efforts.
Starting with Sephora.
I am confident about the long term opportunity we have to build a formidable beauty business with sephora, the world's largest specialty beauty retailer.
With Sephora as our exclusive partner Kohls will become a leading beauty destination.
The highly complementary partnership unites two innovative customer centric companies leveraging each other's strength to capitalize on the significant growth opportunity in the U S beauty market by making aspirational beauty far more accessible to millions of new and existing customers across the.
Free.
The transformation of collaboration combined Sephora is unique and immersive prestige beauty experience with kohls expansive reach of more than 65 million customers and strong omnichannel platform across our stores and accelerating digital business.
Accordingly, there are minimal store end customer overlap, which allows for a significant acquisition of new younger customers.
As it relates to timing a big moment for us will be on August one when the sephora at Kohls beauty experience launches encore dot com.
We will also begin the sephora at call store rollout in August with plans to open 200 this year.
The 2500 square foot shop will be prominently positioned at the front of the store and we will display both kohls and sephora branding on exterior entrances to maximize awareness.
We selected the stores based on a number of factors, including market opportunity customer insights and existing sephora store proximity.
We continue to plan for at least 850 stores by 2023 with 400 targeted to open in 2022.
We will be introducing over 100 prestige beauty brands, which include such names as expenses benefit Tata the ordinary rare beauty by Selena Gomez hued of beauty fresh and Charlotte Tilbury.
We are excited at a good number of these are exclusive to sephora and will be featured at Sephora at kohls.
But as of for our partnership is a game changer for us.
Not only will drive significant beauty sales growth at an accretive margin. It will also have a halo effect across the entire store and drive sales in other categories, including positively impacting our women's business.
The economic structure is favorable and structure to drive joined success, where we will equally share in the operating profit.
Overall, the partnership with so far is a perfect illustration of the bold moves we are making to differentiate our business accelerate our growth and capture market share.
Let me now update you on our active expansion.
We continue to strength in Kohl's positioning as a leading active destination for the family.
With the goal of increasing active penetration to 30% of our business from 20% currently.
We have several initiatives in place to accelerate sales, including space expansion, new brands and extending assortment in athleisure and outdoor.
As active as one of our most productive categories, we will be increasing space by at least 20% in 2021. Following a successful test in 160 stores during the past two years that drove incremental sales.
We will be adding elevated product from our three key national brands, including Nike Shine in women under armour cold gear as well as increasing our offerings in girls and special sizes, both plus and big and tall and in golf.
We are also expanding our assortment in athleisure and outdoor to areas, where we are currently underserved.
At leisure we are introducing flex this month, our new athleisure private brand filling an important white space in our mens and womens assortment.
In addition, we are happy to announce that we are introducing Calvin Klein underwear intimate and loungewear and more than 600 stores and online this fall.
Calvin Klein is one of the worlds most recognizable brands and is another example of how we are elevating our brand portfolio to increase our relevancy with our customers.
Further we will expand our offering of the champion brand, which continues to be in strong demand growing more than 95% in the fourth quarter.
Outdoor also represents a large incremental growth opportunity within active for coal.
We already offer great brands for the family like Columbia and lands end and later this year, we will introduce Eddie Bauer to our customers and approximately 500 stores and online.
We are confident that our moves in the active category in 2021 will further differentiate and strength in kohl's positioning and drive increased customer engagement.
I want to now provide a quick update on our women's progress.
As we've previously shared we undertook several bold moves in 2020 to reposition of our women's business for growth, we put in place a new organizational structure and new leadership.
<unk> reinvented the brand portfolio and improved our merchandising and clarity.
While we continue to refresh our women's business, we are pleased with the underlying progress.
Women's quarter over quarter improvement outpace the company and delivered strong results and active and intimates.
In addition, we saw positive sales growth in our Sonoma, and so brand and solid results in LC, Lauren Conrad and nine west all of which are important go forward brands.
Looking ahead, we will complete all of our 2021 moves in women in time to benefit the fall season.
We have significantly reduced choice counts are building depth and are improving the overall shopping experience for our customers. This includes continued investment in merchandising such as expanding the learnings from the outfit bar to all stores and doing a lot more product storytelling.
Let me now just take a moment to elaborate on our private brand portfolio overall across all of our lines of business at.
A year ago, we shared with you our strategy to significantly added our private brand portfolio to improve clarity and drive greater differentiation.
Our private brands continue to play an important role in the experience and value we offer our customers.
We have great. Examples of this with cat gear inactive jumping beans, and kids Big one at home simply Vera in women and Sonoma across all of our major category.
We have taken significant steps in repositioning our continuing private brands to ensure we are delivering the quality and value customer wants while capturing the appropriate margin through the sourcing strategy as Joe will talk about in a moment.
We are seeing this important strategy gained traction and in Q4, continuing private brands outperformed the company.
Now, let me pivot to our omni channel efforts.
The retail industry has undergone profound change during the past decade as consumer shopping preferences evolve we actively responded and invested significantly over the past several years and building a powerful omnichannel platform.
And the strength of our omni platform is increasingly being recognized by the industry and is a key differentiator as we build new partnerships.
Brands like Sephora, Calvin Klein and many other that we have attracted and see the value of coal strong platform.
65 million customers 1100, 60, conveniently located off mall stores.
Fast growing $6 billion digital business and best in class omni capabilities like curbside pickup and innovative services like Amazon returns.
As it relates to Amazon returns as expected at continues to be a key contributor to driving traffic and introducing new customers to kohls.
We especially saw this with the acceleration of post holiday traffic in January.
In 2020, we can attribute at least 2 million new unique customers shopping at Kohl's as a result of the Amazon returns program, a third of which are millennials.
And while the details of the partnership for confidential, we continue to see that this is accretive to both sales and profit.
As it relates to stores in 2021, we will step up our investment in refresh stores in tandem with the support of buildup.
In the next two years, we will refresh of approximately 675 stores.
This program along with all of the other initiatives will drive notable improvement in store productivity by creating a more inviting experience tailored to deliver ease and convenience, while also providing inspiration and discovery of shoppers.
Before I hand, it off to Joe Let me summarize my comments today.
We are making significant progress to be the leading destination for the active and casual lifestyle.
As you heard today, we are completely transforming the customer experience through the products and categories, we offer as well as the environments, we deliver them in.
Our business is building momentum.
And we have a clear strategic plan to accelerate the top line with an intense focus on improving profitability.
Our entire team is laser focused on executing against the strategy.
I want to thank all of our associates around the country for your ongoing commitment to cost and to our customers.
I appreciate your resilience agility and hard work during such an unusual year.
Through our collective efforts, we exit 2020, and a strong and stable position and we look forward to an even brighter future.
With that I'll now turn the call over to Joe who will provide details on our financial results and outlook.
Thank you Michelle and good morning, everyone.
This morning, I'm going to provide more details on our path to of 7% to 8% operating margin.
Discuss resuming our capital allocation strategy in 2021.
And then other commentary on our fourth quarter results and 2021 outlook.
Let me start with our operating margin goal.
We are confident in our ability to expand our operating margins of 7% to 8% by 2023 and have detailed plans and initiatives underway that support that.
From a baseline adjusted operating margin of six 1% in 2019.
Targeting 90 to 190 basis points of improvement driven by both gross margin expansion and SG&A expense rate improvement.
As it relates to gross margin, we are targeting of rate improvement of 20 to 40 basis points for approximately 36% by 2023 from 35, 7% in 2019.
This assumes digital sales penetration of 40% in 2023 up significantly from 24% for 2019.
The increased digital penetration of percent of headwinds margin. However, our efforts to expand gross margins are expected to more than offset debt.
For key areas driving margin improvement our inventory management.
And cost reduction.
And promotional optimization and supply chain transformation.
The first is inventory management.
We are committed to disciplined inventory management and of established an inventory turn goal of four times or higher.
There are several initiatives underway that will drive margin in turn including our brand portfolio transformation, where we have reduced choice count and pivoted towards more productive categories like active commodity.
In addition, we will drive better inventory allocation by leveraging technology to achieve higher regular sell through and reduced clearance level.
And we are already making progress as evidenced by our Q3 and Q4 underlying margin performance and inventory turnover that was at five and 10 year highs respectively.
In addition to these we are resuming our in store day Densification strategy in 2021.
As you May remember a few years ago, we executed our standard to small initiative in 500 of our stores for.
Moving fixtures widening the aisle and reducing inventory.
This initiative was a key contributor to our gross margin improvement in 2017 and 2018.
As part of our overall in store experience effort de densify the balance of the chain, which we believe will enhance the overall customer experience and inventory efficiency, while improving margins.
The second area of focus reducing our sourcing cost.
We're committed to lowering our private brand costs by 125 million to $175 million by 2022.
As part of this will enable centralized sourcing enforced direct factory negotiation and reduce our reliance on third party agents.
The third area is optimizing our pricing and promotion strategies.
We discussed on our Q3 call of the early success, we had in optimizing our pricing and promotional strategies and.
And we built on the success in Q4.
We continue to reduce the number of general promotional offers and stackable offers while increasing usage of price flood events to offer more value every day.
We're also leaning into more targeted and personalized offers to drive efficiencies.
And lastly, we have of supply chain transformation underway for we are focused on optimal inventory deployment.
Minimizing fulfillment costs enhancing our sourcing engine end demand shaping.
Through our efforts, we will leverage real time demand insights and improve supply chain visibility to allocate guidance closer to demand.
<unk> increased store fulfillment.
Further reduced split shipments.
Increased markdown avoidance.
And create better connections between digital customer demands and local supply to fill orders more profitably.
Now, let me turn to how we are going to improve SG&A expense efficiency.
Embedded within our 7% to 8% operating margin goal is reducing our SG&A expense rate to approximately 27% to 28% sales by 2023.
This represents a 70 to 150 basis point decrease from 28, 6% in 2019.
We are focused on four key expense areas stores marketing technology and corporate.
And we expect our initiatives in these areas to more than offset ongoing wage inflation assumed at a rate experienced in recent years.
As it relates to stores, we are focused on transforming our store labor.
We see significant opportunities to embed and leverage technology to drive self service transactions and improve overall associate productivity.
We plan to scale self service capabilities in our stores.
<unk> checkout returns and order pickup with the goal of reaching more than 25% of total in store transactions.
We will also continue to operate with localized hours, which will improve our cost efficiency.
In terms of marketing, we are committed to lowering our marketing to sales rate to 4% or below by 2023, which compares to five 1% in 2019.
We have learned a lot during the pandemic for shifting more of our spend towards digital and improving the response rate from existing channels like direct mail as well as leveraging technology and our in house capabilities.
These efforts resulted in a 19% decrease in marketing spend during the second half of 2020 and improved our marketing and sales rate by more than 40 basis points.
We also expect to drive expense efficiency and technology.
We leveraged our technology spend in both Q3 and Q4 and expect further improvement in 2021, as we have shifted to a more balanced internal versus external staffing model.
Simplified our infrastructure and reduced support services.
And lastly, we will continue to seek out efficiencies across corporate and all other areas leveraging our core discipline of operational excellence.
Our previous corporate restructuring actions of 2020 will deliver expense savings of more than $100 million on an annualized basis.
To summarize we are confident that our detailed plans and initiatives will allow us to achieve our objective of of 7% to 8% operating margin by 2023.
And as I will discuss in a moment, we will continue to make solid progress in 2021 on our path to achieving it.
I will now discuss our capital allocation strategy, which we are resuming in 2021.
In response to the pandemic, we made many difficult decisions to ensure we were executing our two key priorities of protecting the health and safety of our associates and customers.
And preserving our financial position.
We reduced capital expenditures by more than 60%.
Suspended our dividend and share repurchase program and increased our access to new capital for a new upsized revolver of sale leaseback transaction for two of our distribution centers and issued new debt, while maintaining our investment grade rating.
These actions strengthen our financial position as we progress through 2020.
We generated $1 3 billion of operating cash flow more than $900 million free cash flow and ended the year with $2 3 billion in cash.
Given our strong liquidity position and significant cash flow generation, we are pleased to resume our capital allocation strategy in 2021.
This includes increasing capital expenditures reinstating the dividend resuming share repurchases and employing liability management strategies to improve our leverage ratio including debt repurchases.
From an investment perspective, we are planning capital expenditures of $550 million to $600 million.
Which will be largely driven by the launch of our Sephora partnership in 200 stores and online.
The opening of our sixth E Commerce fulfillment center and our store refresh activity.
These investments will support our plans and initiatives to drive accelerated top line performance as it relates to the dividend. We are pleased at our board of directors approved reinstating of quarterly cash dividend of <unk> 25 per share payable on March 31, 2021 to shareholders.
The dividend has been an important element of our capital return program to shareholders of the past decade with.
For the commitment to sustaining and growing the dividend in the future the affordable evaluate a number of factors, including the economic environment, our outlook for future earnings as well as our payout ratio and yield in the context of the broader market.
We will also resumed share repurchases of 2021 and are currently planning $200 million to $300 million.
Similar to the dividend share repurchases have been a key element of our capital return program.
2007, we have bought back over half of our outstanding shares.
And lastly, we plan to improve our leverage profile for employing liability management strategies.
Our focus remains on managing the business to sustain our investment grade rating and our efforts to improve our leverage profile of support that and.
In 2021, we intend to optimize our debt structure, while also reducing the total amount outstanding.
Now, let me touch on fourth quarter results.
We made good progress in Q4 with sales and earnings improving significantly relative to the third quarter.
Net sales declined 10% with sales strengthening at the move to the period of January benefiting from our Amazon returns program.
Digital sales increased 22% for the quarter and accounted for 42% of total sales up from 31% last year.
From the line of business perspective, as Michelle indicated we saw strong results in areas like home active and beauty.
Our home business remained positive during the fourth quarter. We saw continued interest in the kitchen for items at cookware food preparation and kitchen electrics.
As well as of living spaces for demand response for bedding Bath and floor care.
Our active offering outperformed in the quarter with notable strength in our childrens business.
And beauty also performed well driven by Bath, <unk> body fragrance and skincare.
Turning to gross margin.
Q4, gross margin was down 73 basis points for last year, which further underlying margin improvement and was better than we expected.
In fact, excluding holiday related freight surcharges of approximately 60 basis points. Our gross margin was down only 15 basis points. Despite the significant increase in digital penetration during the period.
Our disciplined inventory management efforts and further progress on pricing and promotion optimization strategies drove an increase in merchandise margin year on year.
This was a major offset to the cost of shipping headwinds.
Now, let me discuss SG&A in Q4, SG&A expenses decreased 8% to $1 6 billion.
Driven primarily by lower store payroll marketing technology with credit expenses.
Of note SG&A would have been down almost 10% excluding expenses related to COVID-19.
Last let me touch on some additional financial items.
Depreciation was $14 million lower than last year due to reduced capital spend in 2020.
Interest expense increased $20 million versus last year due to higher debt outstanding during the quarter.
Our tax rate in Q4 benefited from losses eligible for carry back under the cares Act and tax planning strategies.
On a GAAP basis for the quarter, our net income of $343 million and earnings per share was $2 20.
Excluding nonrecurring items for the quarter adjusted net income $346 million and adjusted earnings per share with $2 22.
Earnings per share includes $1 15 of incremental tax benefit driven by tax planning strategies.
Turning to the balance sheet, we ended the quarter with more than $2 3 billion of cash and cash equivalents.
At one 5 billion increase from last year.
Our strong cash flow generation during the quarter and full year positions us well to resume our capital allocation strategy at <unk> highlighted.
We continued to manage inventory tightening in the fourth quarter, resulting in a decrease of 27% for last year and marks the 10 year high in inventory turnover.
We feel good about the composition of our inventory entering 2021.
Turning to cash flow, we generated positive operating cash flow of $1 3 billion in 2020, including $428 million in the fourth quarter, driven by our actions to reduce both inventory and expenses.
Capital expenditures for $334 million in 2020. This is significantly below last year as we reduced spending across technology omni channel and our store strategies due to COVID-19.
We feel good about the progress made against our strategy in the fourth quarter and of further strengthening of our financial position, we enter 2021, well positioned to make major strides against our stated operating margin goals of 7% to 8%.
Turning to our guidance outlook for 2021 for us.
It still remains a lot of uncertainty regarding the ongoing impact of the COVID-19 pandemic.
And although we are confident in the strategies, we just outlined we remain cautious in our planning for the current macroeconomic environment to continue in the short term with some improvement as the year progresses. We currently expect net sales to increase in the mid teens percentage range.
Operating margins to be in the range of <unk>.
For 5% to 5%.
And EPS to be in the range of $2 45 to $2 95 <unk>.
Excluding any nonrecurring charges.
This guidance assumes interest expense of $310 million and of tax rate of approximately 25%.
I would also like to call out one additional item product revenue to underperform net sales for the year end specifically in the first quarter.
Given the sales decline in 2020, our accounts receivable.
Great.
This coupled with.
With last year's strong outperformance in the first quarter is expected to result in a decline in credit revenue in the first quarter followed by growth in the remaining quarters of the year.
In summary, 2020 was an extraordinary year, we have successfully navigated through the pandemic with an intense focus on managing cash for the future.
Our business of gaining momentum and our competitive positioning has strengthened.
Kohls has an extremely bright future and we look forward to further executing against our strategic framework to drive additional shareholder value.
We are happy to take your questions.
Oh sort of remind you would ask a question. Please press star one on your telephone keypad.
The first question.
As for Bob <unk> with Guggenheim Securities. Your line is open.
Hi, good morning.
Good morning, Bob Good morning couple of quick questions I think the first one.
This is michelle on the women's business and consider your plans to rejuvenate.
At that business going again can you talk a little bit about <unk>.
What do you think of the biggest initiatives to do that.
Over the next either this year or sort of in the next few end.
Joe on the this is michel or Joe, but the optimizing price and promotion strategies of simplifying pricing initiative can.
Can you talk about how kohls cash sure.
We will be affected and what youre trying to do in terms of the process there that'd be helpful. Thanks.
Alright, Thanks, Bob Michelle here I'll start with the first one which of your question on women's So you know as we.
<unk> commented in our remarks, we're beginning to see the women's business rebound and where we're pleased with that.
We've put in place a bolder strategy in women than at the bolder strategy, we've ever had I mean, it started with the restructure that we put in place of a year ago, and then I would first day.
The brand and product portfolio I mean, we made a significant transformation and reinvention of that starting with now the elimination of 10 down trending brands, and then refreshing and differentiating and leaning into the private brands that really matter for us like Sonoma and so.
<unk>, which were positive for women in the fourth quarter. So we're seeing that and then of course leaning in and investing in brands like LC, Lauren Conrad and simply Vera that have done really well for US nine West also was strong for the fourth quarter that will be of bigger brand for us.
We're really evolving that to be in the spirit of our new vision around the casual lifestyle and taken out even more casual so I really do think it's about having a much tighter focused brand portfolio.
I said sort of in service to the vision, we put out around the active and casual lifestyle. So on the casual more fashion side at the brands that I just mentioned.
Around active and athleisure the three national brands continue to be strong for us on the women's side and we have great things coming in the coming year working very closely with our partners Nike under armour Adidas, we're launching a broad assortment and champion in womens that has been accelerating and then of course some of.
The recent brand announcements starting with our own brand that we've spent a lot of time developing called flex, which speaks to that athleisure lifestyle. You can share at an act of situations, where we're at and more casual situations.
Also it's worth noting that we have a significant operating.
<unk> in denim.
We've been a leader in denim, we're going to we're going to amplify that further.
With our national brands like Levi's, and then from a more valued standpoint brands like Sonoma. So so big bold transformation in brands and categories.
Coupled with significant choice count reduction so that it's much simpler easier more inviting to shop for our customer end. It is of new day of women's for sure. We've never been this bold and addressing that opportunity and then investing in the shopping experience. So investing in things like mannequins to do better job in outfitting, we'll take care of.
<unk> from the outfit bar and we're taking that across the majority of our stores as well to mix and match brands.
And then the last thing I would mention is sephora and introducing sephora both online and then starting with 200 doors. This fall rolling out over the next three years to 850 doors and that will attract a female customer in new customer of younger customer and.
What our expectation is we're going to have a halo effect on the sephora launch that will transcend across other categories I'm, especially of women's business.
I'll hand, it over to Joe on your second question, Yes, good morning, Bob and pricing and promotion really that is more about our offers I would say of cold cash for us is a key value differentiator, we see it of actually part of our loyalty program ecosystem. It gives you that second trip and hopefully can move you into our rewards program and obviously up into the credit card.
Program, there's really going to be no changing and how the underlying kohls cash cadence is working because we believe it gives us that differentiation from a value perspective, but more across the general public offers that we were giving to everyone category offers that we didn't see as productive so as we're able to move those out and moving to much more productive targeted at.
Offers that's really what's working for US and you saw that in Q3, and then that continued into Q4 of really being a driver behind that merchandize margin that we referenced being up in the quarter. So that's what you'll see continuing end from learnings that we've had we've been testing that's for a while and we really were able to accelerate moving out of these offers during COVID-19 and you'll see that continuing into 2000.
'twenty, one and being a key contributor to our margin expansion.
Great. Thank you very much good luck.
Thanks.
Your next question is from Lorraine Hutchinson with Bank of America Merrill Lynch. Your line is open.
Thanks, Good morning.
Kind of sales you're covering is baked into your long term target.
Are you expecting to get that for 2019 sales of AMOLED in 'twenty, two and grow from there or how should we sort of contextualize the sales piece.
Because at 7% to 8% margin.
Sure. So I would say first the 7% to 8% is not dependent on us getting back to 2019 sales levels. The levers we're talking about really will work for us as we continue to drive efficiency in SG&A, and obviously optimizing our margin through the sourcing pricing promotion supply chain and obviously this inventory management overall we.
Do expect obviously of mid teens would suggest you get about half back and then we'll continue to see that improve in the out years, but I would say we.
It's hard to tell what that recovery looks like we tried to say that in our comments, we're being cautious as we look out and see what does the consumer recovery look like but we do expect we can at the 7% to 8% outside of hitting the 2019 levels now with that said, we do think we have a lot of great initiatives to accelerate that top line growth starting with Michelle just mentioned.
Womens continuing with active as we expand that space and add new brands and assortment into that area and then obviously really stepping into beauty with the for US starting in the back half of this year being three of those key drivers, but I would say, 7% to 8% is how we're going to hit that because of those are really going to be initiatives underlying what we spoke to.
You on the call that should drive that.
Thank you.
Your next question is from Mark of Schlager with Baird. Your line is open.
Hey, good morning, Thanks for taking my question.
So also on the topline I guess, thank you very much appreciate your willingness to issue an annual outlook given all of the ongoing uncertainty I was hoping to just get a better sense of I guess.
What's underpinning that outlook for tobacco perspective, and on the negative side, obviously, the ongoing uncertainty related to COVID-19 at the positive side potentially some more stimulus underway I'm just curious how those factors have been incorporated.
<unk> growth plan, and then for a specific standpoint.
Any details you can share on how youre thinking about the potential revenue benefits this year for competitive closures as.
As well as quantifying any expectations for what the support rollout will be at the back half of the year.
So mark Michelle here, good morning, and I'll I'll take this so first off I would say everything you just talked about is baked into our guidance and the mid teens that we spoke about in our remarks.
If we think about front half back half I would say from the front half standpoint. It continues to be the drivers that we've seen three of the pandemic and that have accelerated so categories like home we have of strength in home, we're seeing that actually strengthened across multiple categories is our active business and we.
Talk about how we are going to continue to amplify at in fact, this year expanding the space by over 20% on our roadmap to get to that being at least at the end of our business and I think it's important when we say active at that all encompassing so it's active athleisure and at.
Outdoor and as you know, we're introducing some brands I mentioned flex earlier, we get Eddie Bauer coming we just launched lands' end.
And we are eliminating brands that are less productive so I think on active.
We see this as really instrumental to driving overall top line given the productivity of those categories, especially in our stores. So front half of its active at home.
You mentioned the women's business is rebounding. So we expect that to help us in the first half into the second half and then of course digital.
Or are expecting in the front half of that there will continue to be pressure on our stores.
We do hope anticipate that stimulus.
Does that that gets passed because we.
We do know that that will help us like it will help many end families has been under a lot of pressure. This year so of that helps the GAAP.
Until we get to normalcy, we are very much in favor of that and then we are anticipating and I think theres been lots of published on this that in the back half of the year.
Some normalcy will begin to return as vaccines are more widely distributed in the economy opens up and you've seen folks like <unk> etcetera publish their numbers.
I think for us on the back half of those same drivers from a front half continue.
We would expect our stores to accelerate as.
People feel safer getting out of their homes and I actually do believe that with so much time spent and they're in their homes working from home at et cetera that there will be.
But there will be a lot of opportunity for customers not only to be shopping in stores, but buying the kinds of things, we sell notably apparel footwear seem to be beauty as they returned to a normalized going back to work traveling and the like.
The factors that have heightened during the pandemic like convenience play to our strength given our off mall position and concerns will continue to like curbside offerings that type of thing for that doesn't go away, but like I said again, we will expect that there'll be wanting to come in the store at probably a bit more than the pandemic and then the last thing for us shortly.
In the back half of the start of the rollout of Sephora and I was just talking about that very big deals starting in 200 doors.
But the big flip also on digital going completely Sephora on August one we.
We see a as do they a tremendous opportunity to kind of lean into our collective strength from an omni channel standpoint. So yes. So all of that leads us to have confidence in our guide and why we did put out from a topline standpoint mid teens, and then with our profitability strengthening from the $4 five.
For 5% on our journey began at $2, 7% to 8%.
That's great color. Thank you just a quick follow up.
Help on how to think through the gross margin implications of stores potentially recapture some share this year.
So obviously with stores, they're a more profitable channel because we don't have the cost of shipping, but I would say is in context of the four 5% of 5% we've taken into account the benefits from gross margin as well as the efficiencies from an SG&A perspective. So we'll continue to drive productivity in our stores as we opened them I think we learned a lot.
Through Covid, such as we mentioned localized hours and that will continue to persist for the remainder of time, just because we know we don't have to be open as widely as we were pre pandemic. So I would say, obviously that would be a benefit to us of the stores do open up we obviously utilize them tremendously from April so net perspective, and it fulfilled about 40% of our digital sales of this.
Sure, so really using them and at different way and then as the stores open they lap the closures from last year and we can see the consumer getting more comfortable coming in at the store, obviously that'll help us at some of the heightened digital penetration of you saw digital at 40% of sales. This year, we would expect that would come down slightly just given the stores performing better.
On what we had seen in 2020 due to closures.
Mark I would just add one thing you asked me about store closures and the opportunity there as well we feel like we're really well positioned I mean, we have historically gained market share, especially from the department store sector in particular as the industry was going through so much change when we look at the last few years in one.
Stores and concepts like Bon ton of like did close down we got at benefit there, but I think the opportunity for US is really what's ahead and it's the transformation that we have underway in the product portfolio of the brand portfolio and the health of our store base.
We've shared with you in the past of Stat on how positive cash flow. Our stores are we just update that analysis looking at 2020, and even amidst the pandemic with pressures on the store end part of the year actually being close right seven of up to 17 weeks, 95% of our stores were still cash flow positive.
So I think that just speaks to the health of our stores and we can not only take advantage of our store footprint.
But also the power of our omni channel with as we've been talking about things like curbside and the like and we're going to go after it but at the same strategy that is getting new customers from sephora at revitalizing our women's business, it's driving even a stronger active destination in the home business in Q2, and then the last thing I would add is.
We continue to believe in our Amazon partnership and as we shared in our remarks.
Of new customers and we drove more new customers than just Amazon, but with Amazon in particular, we can identify at least 2 million unique customers to co brand new a third of which are millennials. So I think we're really strongly positioned to capture market share in the years ahead.
Great. Thanks again, thanks Mark.
Your next question, Paul Trussell with Deutsche Bank. Your line is open.
Good morning, and thank you for the color I wanted to.
The conversation.
Moving right now on the top line for sure.
So your analysis before partnership for a few months ago.
Since that time, what have you learned.
Has you excited.
And we're still for.
You mentioned, how you expect that business to have a halo effect.
Can you discuss your strategy.
At that customer to truly shop. The store was specifically all of the brands and the categories that you think that younger customer is going to be attractive to speak.
Speaking of a halo effect to what extent have you seen the Amazon partnership.
Just back in store.
Well Paul Thank you for that question and there's a few in there. So if I Miss anything I'll look over to my partner Jill here to to fill in well first of all as it relates to Sephora, let's say the further we get into at the more excited we get and the bigger opportunity that we see in front of us at is.
Unmistakably a game changer for the company I mean, it clearly will transform our beauty business, but it's going to transform the entire customer experience the store the digital and as you were just saying bring in a new younger customer to kohls, so starting with that.
I'd say both parties.
Ourselves and for working very closely.
Leadership myself CEO on their side.
And as you might imagine a lot of people on on multiple fronts, whether it's been the new brand acquisition and the build out of the store of the build out of the digital experience leveraging our capabilities and personalization.
For the loyalty programs and the like so that we come out with.
With a transformational opportunity for both of US I mean for them at <unk>.
And their reach dramatically getting into off mall locations, which we have seen and that will continue to be really relevant to the customer and then we get the global leader in beauty, let's say new developments since we initially announced that I made the remark earlier, but this is going to be a true sephora experience.
With more than 100 brands of names of the like which I mentioned right. These are.
So for a does they're the best at taking brands discovering brands from around the world and bringing those to their customers and creating a lot of excitement discovery and differentiation in several of these brands are unique to the simple experience. So we think thats going to be a very big deal and like I said, they've got a great expertise.
So not only finding those brands, but how they go to market. So they are going to drive that and the fact that we are going to create this 2500 square foot store the front of the store of the plans are coming together really really well we've shared our store lift that and then taking the opportunity to actually refresh the entire experience <unk>.
That right. So it's not like we just build sephora and everything else stays the same we are re flowing our categories to reflect our new strategy or evolved strategy around active athleisure casual.
Really clarifying our brands more narrow set of choices.
And then as it relates to the female customer I mean at old track the younger demographic, but it'll attract abroad demographics. So I think we'll see customers again with the Halo effect discovering.
All parts of our business, whether its flagship brands that we've had for some time.
On the private side brands like Sonoma or Lauren Conrad, but then bringing in some of these new brands and whether it's just like yesterday, we announced Calvin Klein and we got we got a few more coming so all of this fits into enrolled up to our broad strategy to completely reinvent the brand.
<unk> portfolio, the customer experience, both in our stores and online and in doing so also enhance our profitability.
Yeah, Paul I, just want to remind you we've done beauty of couple of times that we've talked about testing that and if you think back for the last beauty launch that we had we did talk about the Halo effect, we saw at two comp across the store that was driven really by incremental trips right. It's really the only replenishment item we have in our store and I, obviously think sephora is much more transformational than anything that we've.
Put in our store and the low customer overlap means it's not just about trip, it's about customer acquisition. So as we bring them in again remind me of with our sales.
Get them involved with kohls loyalty as well as the beauty insider and then they get introduced into this really new environment through the refresh program for the active expansion, we do see that that could be much more compelling than just really that additional trip that we saw in our previous efforts around BD.
No that's very helpful anything on the Amazon.
What you're seeing from Amazon for my head of Lora.
No absolutely so as it relates to Amazon, we continue to be very pleased with the partnership it is driving traffic at is driving new customers. We did quantify to the best of our ability.
Based on the data, we have and their engagement in terms of transactions and the offer usage, but we think at least $2 million brand New Nicole I think we would get really excited that a third of them are millennial customers at attracting the younger customers and year on year, our conversion so of the traffic coming in at is returning something from Amazon the conversion of.
Actually up year on year. So the teams are doing a great job as of traffic comes in converting and so all of that net is leading to increment instrumentality on the topline and incrementally on the profit side as well. So you know we're going to continue to drive. This partnership I think both parties are really happy in adults.
So probably just worth mentioning that as it relates to customer engagement.
Get World class resolved in terms of the experience that our customers new and existing customers experience through this platform and the only thing I would add to that at the 2 million customers or end Q4, but it's the life time value of those customers. So we bring them and we monitor the recurring trips from them. So that's really the benefit that continues to persist for us. So obviously, we're trying to.
To give you more data points to the benefit of this program and I can never reiterate enough that it is accretive to earnings of just to clarify thank Joe for 2 million and of course 2 million in the year of the year sorry, My bad.
For a few million across the year, but we did gain more new customers overall.
Especially in Q4, as we typically do and a lot of those coming into our digital channel.
Thank you and lastly, switching gears just over to the balance sheet.
Joe could you talk about cash priorities and maybe even bigger picture how to think about opex run rate through 2023.
You rollout and ramp up kind of so for.
Also what are the metrics you would be focused on debt.
That would.
Lead you to ramp up share repurchases.
More than kind of what you've initially outlined here.
And lastly.
What's the overall philosophy that we should know in terms of.
Monetize into space.
How you approach sale leaseback is that has been.
Yes.
Sure. So I think first and foremost our capital allocation priorities haven't changed we're always taking our cash first invest back in the business. This year. It's about $5 50 to 600 I do think that will step up obviously next year, we're going to do more sephora stores. Historically, we spent about $700 million of year, I think the pivot and our cash.
But at this year is gonna be it's much more store driven a low half over half will be stores. It includes the sephora rollout the refresh program the brand launches the active expansion and then obviously just normal store maintenance as well youre going to see Tac will be down for historic levels. So we obviously have made a big investment in our technology and now are.
At a place that we're actually leveraging that to really drive the strategic initiatives that we outlined today. So that's first second has been the dividend. So we since we are in state of the dividend back at you know we've increased at 10% of year. We've just reinstated at with 25% this quarter and we will continue to look at sustaining and growing that dividend.
Over time, and so then the balance is really bad and that share repurchase program and so as we look at what our cash generation is and you know we generated typically about a $1 billion of free cash flow and we really put that back in its shareholders from 2017 of 2019, we've returned to shareholders $2 $4 billion evenly through the share repurchase program.
And the dividend this year of course as we were in the pandemic. We did place more debt. We are obviously looking to preserve as much cash as possible, especially when our stores were closed. So we'll come back now and really look at optimizing our leverage profile and doing some debt repurchases to get ourselves back into.
At the right range from a leverage ratio perspective, and maintaining that investment grade rating. So as we move forward and we continue to generate cash I think you can look back at history, We will return at but we're gonna of return it thoughtfully both through the dividend and the share repurchase program.
And then in terms of the sale leaseback, obviously, we look at what our cost of capital is and the most efficient means for us to get financing during the pandemic. You saw we did we did leverage some of our real estate because we were able to do that at a more efficient rate then we could place debt in the market as you look at the debt rate today, if we got into the capital market with our investment.
Rating, we think we can find the cost of capital would be a little less if we needed that cash obviously, we of $2 $3 billion of cash on our balance sheet as we end of year, we generate a lot of cash flow. So it's not a place that we find a strong need to go out and have to place additional debt and we do see our asset paying for us as Michel mentioned our stores.
Incredibly productive even within the pandemic, 95% of them are still cash flow positive in the vast majority of the votes were still over $1 million. So I think we're leveraging that asset really generate cash to bring it back out to our shareholder.
Thanks, So much good luck. Thank you. Thank you.
The next question is from Carlos <unk> with Citigroup.
Good.
Thanks, It's Tracy filling in for Paul I'm, Joe You mentioned earlier, the standard to small strategy and rolling out more of those this year and I was wondering what.
How it's going with your partnership.
With the grocery stores in the fitness centers.
How those are doing and if you anticipate doing any more of those this year. Thanks.
Hey, Tracy So I think we continue to innovate at the company and I think right sizes is one of those innovations that we've been testing so as we look at our store fleet.
Talked about do we have the right square footage in can we utilize that square footage differently. Obviously at the floor is a big partners of taking on some square footage, which we think will be highly productive the right sizes was a way for us to right size, our store and see can we drive more traffic into the center and capitalize on that for these partnerships with one of them being planet fitness and obviously the other.
They're being all of the during the pandemic. It was really hard for us to get a great read on how successful. Some of these would be what I would say is we continue to test and monitor them really at it even how our store closing some of those markets to see can this work we have done you've probably seen some right sizes with Amazon as well. So I would just say this is still.
All of Big test, but it's in the spirit of the innovation and some of these types of work and some won't end this one's going to just be a little bit longer in terms of how long at last I think this is still in less than 20 stores. So I don't want to overstate the impact of this but I think at the way for us to continue to optimize the real estate that we have.
Thank you guys.
Your last question is sort of the Stephanie Wissink with Jefferies. Your line is open.
Thank you and good morning, everyone. Two really quick questions. The first Michelle let's just for me inventory rebuild of the restocked for pets.
I think through your goals in terms of terms, but also your per core categories are you planning to kind of build back and an over index way of some of those categories do you hope to see over index in your sales. So that's question one and then question two I think this goes back to an earlier question, but just wanted to clarify on the wage rate inflation that youre anticipating in <unk>.
Your operating margin guidance for the year are you assuming the standard minimum goes up either elected or based on policies that would go to of $15 minimum. Thank you.
Sure. So I'll start with the first one in terms of inventory. So as you know our inventory was down quite significantly.
And we ended the quarter end.
And down significantly more than our sales and what we like about that is the inventory turn and we're baking that into you know a key metric as we look forward. So as Joe mentioned, we were at a 10 year high for the fourth quarter I would say that it was a little higher in certain pockets than we wanted notably in those areas that that did really well like home and active so to your.
Point as we rebuild back we will.
Especially rebuild back in the in the active categories in the home categories, we have fantastic relationships with our brand partners. So they are doing everyday everything they can to support us, but I will tell you even as we chase.
We are going to maintain this discipline and that our sales will run ahead of our inventory levels and that is there's no question about that we put out the goal to get to of Forex from an inventory turn and we're on our way and.
Our chief merchant and Jill and others, I mean, everybody is completely aligned and focused.
To make sure that we hit that goal and hopefully exceed it because we know theres a lot of good with that I mean at drive fresher product, it's better for our margins and.
Yes, it's a win win all around and then your next question I'll hand, it back to Joe Good morning, Steph So on wage rate, what we had thought as we assumed a historical wage rate inflation, which for US has been a net 5% to 6% range within all of the estimates that we had given but I will tell you is first we're above $15 in our fulfillment centers and second we actually have an <unk>.
Average hourly average hourly rate for our full timers in our stores that average of $15. So we are making progress into that we every year are making those adjustments, but we don't take a blanket approach. So if it would come out legislatively, we would obviously adjust accordingly, we do that today, we take a market by market approach in how we look at it based on.
Current based on competitive pressures and that has really worked for us in the past. Obviously, we've also gotten a lot of credit for how we staff our stores. The overall culture for calls and that's really kept us having a lot of nice tenured people in our stores as well. So we'll continue to watch the wage rate inflation, but I think those are a couple of facts that helped me get comfortable with where we're moving.
<unk>.
Great. Thank you. Thank you Jeff. Thank you to everyone listening on the call today, we look forward to speaking with you in May.
This concludes today's conference call you may now disconnect.
Thank you.
Okay.
Good day.
Sure.