Q3 2021 Kohls Corp Earnings Call
P J and thank you for standing by and welcome to the Kohl's Corporation Q3, 2021 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation, there will be a question and answer.
Recession.
Ask a question during the session you will need to press star one on your telephone if you require any further assistance. Please press star zero.
I would now like to hand, the conference over to your Speaker today, Mark <unk>, Vice President Investor Relations. Please go ahead.
Thank you 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 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 kohl's actual results to differ materially from those projected in such forward looking statements.
Such risks and uncertainties include but are not limited to.
Those that are described in item <unk> in Kohl's. Most recent annual report on Form 10-K, and as may be supplemented from time to time in Kohl's other filings with the SEC.
All of which are expressly incorporated herein by reference.
Forward looking statements relate to the date initially made and Kohl's undertakes no obligation to update them.
In addition, during this call we will make reference to non-GAAP financial measures, including 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 it is available on the Companys Investor Relations Web site.
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 It is possible that the information discussed is no longer current.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 Goff, 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 It third quarter earnings Conference call.
Our strategic effort to transform calls into the leading destination for the active and casual lifestyle continues to gain traction we delivered another outstanding performance in the third quarter.
And our momentum from the first half of the year.
During today's call I want to leave you with three things.
First we achieved record Q3 earnings and raised our full year outlook, resulting in an all time high EPS for the company.
Q3 sales increased 16% to last year and our operating margin was a nine year high of eight 4% benefiting from our actions to structurally improve our profitability.
Second.
Our efforts to reposition calls are working.
Active sales growth accelerated in the quarter led by our key active national brands.
And we launched several new transformational brand partnerships across the business, including the rollout of the first 200 Sephora at Kohl's stores.
While having very little impact to this quarter given the timing of the launches. We are pleased with the early results and what this means going forward.
And third we are accelerating our share repurchase activity reinforcing our commitment to driving shareholder value and now expect to repurchase $1 $3 billion for the year.
We see a lot of value in our company and believe repurchases are a great mechanism to return capital to shareholders, given a promising outlook and formidable cash position of $1 9 billion.
All of the pieces of our strategy are coming together and we remain incredibly confident in our future. As we look ahead. We are focused on building on this year's success we.
We are positioned to exceed most of our 2023 cold this year and we look forward to sharing and updated financial framework at our Investor Day on March seven 2022.
Now I'll cover a high level overview of our third quarter performance.
An update on the progress, we're making against our strategy and our approach to the holiday season. Jill will then discuss our Q3 results in more detail and updated 2021 financial outlook.
Let me add a little more color to our Q3 results.
Our 16% sales increase was the result of strong performance across both stores and digital we.
We continue to be encouraged with how the channels reinforce each other together delivering an exceptional customer experience through a seamless omnichannel integration of offerings and conveniences.
Store sales increased double digits and continue to be the principal channel for new customer acquisition.
And we're very excited by the significant growth we are seeing an omnichannel customers, which are the most productive customers.
Digital sales remained strong in the quarter growing 6% to last year and increasing 33% onto your basis.
As a percentage of total sales digital was 29% in the quarter.
From a category perspective, our investments in active continue to pay off.
This is most evident in the broad strength, we're seeing across our differentiated portfolio of national and private brands.
Active sales significantly outpaced the company growing more than 25% to last year and more than 20% on a two year basis.
We're seeing strength across the board men's women's and children's apparel as well as in footwear.
Of note with an active apparel, we are especially pleased with the traction we're gaining in athleisure and inclusive sizing.
From a brand perspective, our key national brands, Nike under armour, Adidas and champion all delivered exceptional growth. In addition, our more value oriented active private brands also continued to perform very well.
<unk> achieved solid double digit growth and we continue to be pleased with the customer response and sales of our new athleisure brand flex, which we expanded to more stores late in the third quarter.
Active is now one of our largest areas of business, representing 26% of our Q3 sales and we remain confident in our ability to maintain our growth momentum.
Looking ahead, we expect active will continue to benefit from increased in store space and it's front of store positioning in locations with Sephora at Kohl's shops.
We also continue to experiment with new merchandising to elevate the active category in our stores.
Some of our other highlights in the quarter include men sales, increasing more than 30% to last year, and footwear and accessories, both up more than 20% and children's up low double digits driven in part by strong demand for toys.
We saw very strong growth on both a one and two year basis for many of our key private brands and national brands across all categories.
For our private brands. These included Sonoma, so apartment nine in jumping beans.
And notable performers beyond active in our National brands include Levis Van CAGR Ninja shark cooler borough Biog and Harley I will now provide an update on the progress we're making against our strategy as I indicated all the pieces of our strategy are coming together.
Our investments to strengthen our product assortment and enhanced the shopping experience have improved our relevancy with core customers and are driving new customer acquisition.
Let me start with Sephora.
As we've said from the beginning this is a game changing partnership for us.
With our strategy so far adds tremendous credibility to calls as a more youthful upscale and modern retailer. We are thrilled with the early response, we're seeing from our initial opening of 200 Sephora at Kohl's shops.
I know many of you are interested in hearing more specifics on how the shops are performing so I am happy to provide you with some preliminary results.
In short Sephora at Kohl's is working.
First sephora is driving extraordinary growth in our beauty business.
Second we're seeing an incremental mid single digit sales lift to the overall store sales, where we have launched.
Third we are bringing in new customers more than 25% of sephora at Kohl's shoppers are nudicaul.
They are younger and more diverse and.
And we are successfully driving loyalty sign ups.
Fourth we're pleased to see customers purchasing across a wide range of beauty categories and price points. The assortment is resonating.
And lastly customers are shopping across the store roughly half of our customers buying sephora are attaching at least one other category in their purchase across all of our lines of business. We've already started to see customers return, which is encouraging and is expected to build as they get to know kohl's.
From the outset. This partnership was structured to drive joint success, and we couldn't be happier with how our teams are collaborating.
Early results are very encouraging and as we build out the fleet. This initiative will have a significant positive impact on our growth trajectory and brand relevance.
Looking ahead, we'll build on our success as we continue the store rollout planning is underway for the additional 400 sephora called openings beginning in late spring 2022.
In addition, we'll open 250 in 2023.
As we renovate our storage for the Sephora build outs, we are also making investments to elevate the overall store environment.
This includes re flowing our categories to deliver against our new strategy as an active and casual destination better use of space for mannequins and storytelling and overall updates to the store.
As we rolled out this updated experience our first 200 stores the customer feedback has been extremely positive.
As part of this we are injecting more discovery leveraging flexible space behind the sephora shops, which showcases a rotating assortment of emerging brands.
Yummy sweaters are currently positioned in this space for holiday and we are excited to use this space to debut in exclusive Draper James capsule collection. This spring.
<unk> founded by Reese Witherspoon.
I now want to share a quick update on our recent new brand introductions of Calvin Klein, Tommy Hilfiger, and Eddie Bauer.
We introduced Calvin Klein basics and loungewear in 600 stores in mid September and added Tommy Hilfiger men's sportswear in 600 stores in early October.
And in late October we began offering Eddie Bauer in 500 stores expanding our presence in the outdoor category and building on our investments and momentum with Columbia and lands end.
While it's early we are extremely pleased with the initial results of these new brands collectively they are exceeding expectations and customers are delighted to be able to get these iconic brands at kohl's.
I now want to provide a quick update on women's.
As we've discussed on prior calls we are deeply committed to reigniting growth in our women's business and have implemented a number of bold actions, we completely reset the brand portfolio to improve overall clarity and shop ability and strengthened our differentiation by amplifying key private brands like Sonoma, while selectively introducing relevant.
National brands.
We are pleased with the leading indicators and the underlying trends customers are responding very well to our go forward key brands and metrics such as sell through inventory turn and margin are at multiyear highs.
However, receipt delays have impacted the women's business disproportionately hindering our ability to drive overall growth to our expectations. We continue to work aggressively to address the situation, but acknowledged with supply chain challenges will likely continue to present a headwind.
So let me touch on the supply chain challenges and what we are doing to address them.
Like many of our business has been impacted by extended transit times, resulting in inventory receipt delays and significantly higher transportation costs.
The most visible evidence of this can be seen in our inventory level at the end of Q3 down 25% on a two year basis.
The entire family home toys, and discovering and getting are already in high customer demand.
We have also positioned our holiday gifting area at the front of the store and a majority of our chain to better capitalised on traffic.
In addition, we are pleased to offers before and many of our other new brands for our customers.
So the first time this holiday season.
Kohl's is known for providing great holiday value and this year will be no different.
We officially kicked off the holiday season, with our Black Friday preview event in early November.
And we're very pleased with the results.
So we are off to a great start this quarter and we are looking forward to continuing to engage our customers by bringing both product and promotional newness throughout the holiday season.
We will also support anticipated strong digital demand with our best in class omni capabilities, including an expanded number of drive up parking spots for customer pickup and continuing to leverage our stores to help fulfill digital orders over the holiday season.
Before I hand, it off to Joe Let me summarize my comments today.
As you've heard we're making great progress against our strategy and navigating what continues to be a unique operating environment.
Q3 represented another outstanding quarter for the company continuing our momentum from the first half of the year.
And our updated annual guidance positions us to exceed most of our 2023 goals. Two years ahead of plan and achieving an all time record earnings per share.
Over the past 12 months to 18 months, we've executed a major transformation of the <unk> operating model.
Repositioning the business for sustainable future growth and improved profitability.
We're making tremendous progress in enhancing the relevance of the brand we have strengthened our product portfolio with the addition of many highly regarded national brand and have elevated our private brands with more clarity.
We launched an industry renowned beauty partnership with Sephora.
And we improved the overall customer experience through merchandising enhancements and new omni capabilities.
Looking ahead, we are in a very strong financial position and are incredibly confident in our future. This is evident in our actions to continue accelerating share repurchases are.
Our business has momentum and we are focused on building on it as we move through the fourth quarter and into next year.
In closing I want to express my sincere gratitude to all of our associates for their unwavering commitment to our company.
We appreciate all that you've done to prepare us for this key holiday season, and all that you do every day to deliver a great experience for millions of customers who choose calls.
With that I'll now turn the call over to Joe who will provide more details on our financial results and updated guidance.
Thank you Michelle and good morning, everyone.
I want to start by reiterating Michelle sentiment, we delivered another great quarter and continued to gain traction on our strategic initiatives.
I am incredibly proud of our actions to reposition the business for future growth and drive improved profitability.
For today's call I'm going to review third quarter results discuss our capital allocation actions and then provide details on our updated 2021 guidance outlook.
For the third quarter net sales increased 16% to last year and we're slightly ahead of 2019 driven.
Driven by growth in both our stores and digital businesses.
Other revenue, which is primarily credit revenue increased 17% over last year.
Turning to gross margin.
Q3 gross margin was 39, 9% up 408 basis points from last year, driven by our inventory management efforts and our pricing and promotion optimization strategies.
Offset partially by incremental transportation costs related to the constrained global supply chain.
Now, let me discuss SG&A.
In Q3, SG&A expenses increased 6% to $1 4 billion driven.
Driven by the double digit topline growth.
As a percentage of revenue SG&A expenses leveraged by 273 basis points to last year as.
As we continued to deliver against our efforts to drive marketing and technology efficiencies.
And improved store labor productivity, which more than offset increased wage pressure across our stores and distribution centers.
Our strong margin and SG&A performance translated into an eight 4% operating margin.
A nine year high for the third quarter and represented an increase of 734 basis points to last year and an increase of 403 basis points to 2019.
Last let me touch on some additional financial items.
Interest expense was $12 million lower than last year due to lower average debt outstanding during the quarter.
Net income for the quarter was $243 million.
And earnings per diluted share with a Q3 record of $1 65.
Turning to the balance sheet, we continue to be in a strong financial position.
In late October we made our final move to return our balance sheet to its pre pandemic structure by migrating back to a $1 billion unsecured cash flow based revolving credit facility.
We ended the quarter with $1 9 billion of cash and cash equivalents.
And no outstanding balance on our revolver.
Inventory at quarter end was 1% higher than the prior year and down 25% to 2019.
However, our available for sale inventory was down more than that given higher in transit inventory with womens disproportionately impacted.
The industry wide supply chain challenges continue to impact our ability to rebuild inventory to desired levels.
On the positive side, our inventory composition remains very clean and turnover remarked a 10 year high.
Turning to cash flow.
Year to date, we have generated operating cash flow of $1 $8 billion.
And free cash flow of $1 3 billion.
Capital expenditures were $426 million year to date driven.
Driven by in store investments related to the Sephora, Buildout refreshes and other customer experience and sales driving enhancements.
As well as our new ecommerce fulfillment center opened earlier this year.
In addition, we continue to expand our small format store concept opening four new stores at the beginning of the fourth quarter.
Based on our current outlook, we now expect Capex spend to come in at the high end of our $600 million to $650 million range.
Now, let me discuss our capital allocation actions.
During the third quarter, we accelerated our share repurchase activity repurchasing more than 10 million shares for $506 million.
Year to date, we have repurchased 15 6 million shares for $807 million.
We plan on continuing our accelerated share repurchase activity with an additional $500 million in Q4.
Our total for the year to $1 3 billion.
As announced last week, our board of directors declared a cash dividend of <unk> 25 per common share.
The dividend is payable on December 20 to shareholders of record at the close of business on December eight.
Taken together, we have returned a total of $921 million to shareholders through share repurchases and our dividend during the first three quarters of 2021.
Turning to our guidance outlook for 2021 based on our strong third quarter performance, we are raising our full year outlook and are guiding as follows.
Net sales to increase in the mid twenties percentage range.
Up from our prior expectation of low twenties percentage increase.
Operating margins to be in the range of $8 four to eight 5% up from our prior expectation of seven four to seven 6%.
This positions us to exceed the high end of our 2023 operating margin goal of 7% to 8% two years ahead of plan.
And EPS to be in the range of $7 10 to $7 30.
Excluding nonrecurring charges.
Up from our prior guidance of $5 80.
To $6 10.
This guidance represents an all time EPS high for our company.
Let me provide some additional context on our implied guidance for fourth quarter.
Or sales at the midpoint of our full year 2021 guidance. It implies a fourth quarter sales increase in the low double digits percent range relative to 2020.
For operating margin, our full year 2021 guidance implies a fourth quarter operating margin of approximately six 6%, which is an increase of 140 basis points compared to five 2% last year.
Embedded in our guidance are incremental headwinds totaling more than 350 basis points as compared to the same period in Q4 2019.
These include higher digital penetration rates and holiday surcharges and higher wages and incentives.
Lastly, as a reminder for comparison purposes last year's fourth quarter 2020, EPS included $1 15 per share of incremental tax benefit driven by the tax planning strategies.
In summary, we're really pleased with our third quarter results and the progress we are making against our strategy.
As you've heard today, our business has clear momentum and we look to build on it as we close 2021 and enter the new year.
As Michelle indicated in our opening remarks, we plan to host an investor day on March seven 2022.
We will review, our overall strategy and update our long term financial framework given that our strong performance in 2021 positions us to exceed many of our current 2023 goals.
We are happy to take your questions at this time.
As a reminder, if you would like to ask a question. Please press Star then the number one on your telephone keypad again that is star then the number one.
And your first question comes from Bob <unk> with Guggenheim Partners.
Hi, good morning congratulations.
Good morning, Thank you.
Got a couple of questions on on the Sephora piece I'm, hoping you can help us.
You talked about strong initial response with an acquisition of younger more diverse customers do you have any idea how many can you quantify like how many new customers you have seen so far.
Part one part two would be.
Can you talk about the.
AUR at Sephora versus your expectation and then part three it would be.
Comps of Sephora stores versus four stores.
Sure Bob So a lot in there first of all.
Super pleased with what we're seeing so far I mean, you have to remember we're literally just weeks into the launch 200 doors.
The Sephora site on our website and to me. This was introduced as flawlessly as it could be.
So to your specific question. The results are really positive. So first off if we look at our sephora doors versus the non sephora doors, we're seeing about a mid single digit call. It comp lift for those stores. So we are seeing that incremental lift to the overall stores, which is really encouraging again given that were in the <unk>.
Early days and we expect it to build over time I think not unlike when Youre building, a new store and you have a couple years of growth ahead of you I'd.
I'd say, we Enzo fora, both expect that this will grow over time.
Customers, whether existing or new really discover the shop. So that's point number one as it relates to new customers now more than 25% of Sephora shoppers are new.
They are younger they're more diverse and it's meaningful it is meaningful and again you have to keep this in context.
The only 200 doors. So when we're up over 600 next year, you can only imagine the millions of millions of customers that we're going to be introducing so it's already a meaningful and that will only grow.
In terms of your question on AUR on the Sephora assortment I mean, it's really strong as you'd expect I mean, this is prestige beauty into categories that we've really never offered to this level I think really the encouraging thing is that we are seeing our customers, whether it's existing or a new shop across the assortment and sephora has done a phenomenal job.
Curating, a real breadth across categories and within categories. So I think some noteworthy ones on the makeup side would be brands like <unk> in two phase <unk>, and then Sephora collection, which is more of your.
More entry price point skincare kind of a real noteworthy one for me is Todd I think it's just such a great brand is doing really well hair care Ola flex has been phenomenal and then even on the fragrance side I mean, we are seeing on brands like Gucci and.
Our money really resonate so really I mean on every level, Bob we couldnt be more pleased with the launch.
Great.
If I could just ask one more question.
In terms of like co labs like one of the one.
Thanks seems to have a big opportunity as the Lauren Lee.
Ex Sonoma Co lab I was just wondering if you could talk about how thats gone for you and sort of.
The opportunity that you see with that thanks, Yeah, Great question actually I Love I love that capsule for us and where you're hitting on is you know Sonoma being a key go forward brand for us, it's performing exceptionally well in the women's business in its offering those core essentials and that bit of discovery I happen to own.
The red sweater dress and the collection, Bob So again the products phenomenon and I think this is just the early indication of what you can expect to see on the women's business going forward.
Great. Thank you very much.
Yeah.
Your next question is from Blake Anderson with Jefferies.
Hi, good morning, Thanks for taking the question.
A quick housekeeping, one and maybe I missed it but for your <unk> guidance did you give any.
Breakdown on below the line assumptions like interest.
So if that includes any buyback as well.
Sure we didn't give specificity in Q4, but I would say is for interest DNA just accept the fact that run rate you saw in Q3, and then obviously the buyback we announced we would be doing another $500 million in Q4 to bring our total for the year to $1 3 billion.
Okay.
Got it okay. Thanks, and then I appreciate all those sephora commentary that's really helpful. I was curious on the mid single digit sales uplift can you talk about how thats skewing between national and private label and then.
How much of that is from the 25% of new customers versus existing.
Yeah. So I can take that I mean first of all again I'll Echo what I, just said a moment ago I think out of the gate thing that kind of incremental lift is incredible.
As you'd expect I mean, we're seeing beauty sales as I was speaking to earlier question, we're seeing that across a range of categories and brands. So I would just say stay tuned.
Wanted to share some of this really exciting data with you data with you right out of the gate.
But I'd say stay tuned yeah, I would just add I think the basket outside of Sephora to Michelle's point is beauty is very strong, but we're seeing that across really all of our lines of business are benefiting obviously with sephora. We also did the repo of active to the front of the store and as you heard I mean that was up.
25% in the quarter, so obviously really resonate with the customer, but even more so when we give it that prominent positioning so we're seeing them really shop across all brands.
And all lines of the business, which has been great for us and again I think just to reiterate Michelle's point, it's really only been opened 200 doors for like a couple of week few weeks just about a month in total so I'm really pleased with the initial results and expect to build on that especially as we move into the holiday season.
That's really helpful. One last one I was wondering if you could maybe size up at all though the women's revenue headwind from out of stocks I don't know if you'd be able to quantify that at all how much that's impacting.
I would say we are down 25% as an organization and women's is down notably more than that so just really when you start looking at how you can drive that benefit until you know take us back we're in midst of a transformation here and so when we exited 10 brands that took a lot of inventory out of ecosystem. The newness as we had talked about.
When we did our Investor day was supposed to start in fall and that was really hard to chase back into given the supply chain disruptions, although I can't quantify it I would definitely say it was a notable impact to their business just given the fact that they were down so much more than the company.
Yeah, No I would I would just add to that and echo that women's is clearly very important to us we embarked in the biggest boldest transformation as Joe was just saying we plan the year down so inventory being down 25% for the entire business.
Womens more so than that.
With the strategy to chase as we saw you know really what we're going to be the outstanding winters. We've had lots of them as I was mentioning Sonoma. So Lauren Conrad the newness is working whether thats within brands like collaborations or certainly the additions we brought in like land, then which has had some time to really settle in.
As well as we're excited about some of these new outdoor initiatives, we're bringing in like Eddie Bauer. So the turns are really strong multiyear high margin multi year high.
And as we look forward, we have a lot of aggressive strategies in place.
To fill in the inventory.
Our customers really liking this new assortment that we have in front of her we need more of it as the bottom line.
Got it very helpful. Thank you.
Thanks.
Your next question is from Mark <unk> with Baird.
Good morning, Thanks for taking my question and congrats on the momentum here that profitability is.
Thanks.
Good morning, Joe.
The new EBIT margin guide for this year.
Ahead of your prior.
Longer term goals someday, we will be hearing more of the early part of next year, but just any high level thoughts you can share on that.
2021 is sort of a new base case from which you could grow or is it fair to assume that there is perhaps some moderation in some of the consumer spending tailwind moderates into into next year. Thank you.
So mark I mean, we couldn't be more pleased with the progress that we made against our strategy. This year. Obviously this performance in 2021 exceeded our expectations and as you pointed out our guidance really puts us in a place that we're going to exceed our 2023 goals this year.
We believe our business has momentum we have a lot of really great new initiatives at just literally said at the end of Q3, and we're going to continue to build on that which gives us really great confidence on us being able to continue on the strategic mission of repositioning our valves to grow more profitably going forward. So you have our commitment for growth you have our commitment to driving.
A holder value, which hopefully you saw was reinforced with our share repurchase actions, but as we look to 2022 and beyond I guess I'm going to just ask for your patience and we really want to be able to share that with you in the Investor day that we just announced that will happen in March of.
<unk> early next year, and we'll give you a big update on what that long term framework looks like.
In light of the fact that obviously, we just got some really great numbers this year.
Thank you and then following up on me on the supply chain.
Give us a lot of detail on the women's piece I guess as we look into spring, what's your level of visibility on loans for for some of your larger national brands.
Yeah. So great question I mean, the team has I will tell you. The team has been all over this both on the proprietary brand and to your point on the National brand.
First I'd start off with active so we shared on the you know earlier in our comments that our active business was up 25% for last year more than 20% to last year and our inventory is in great shape. I mean, it's one of the categories Thats actually in the best position, we have phenomenal national brand partners.
With active and beyond and so but if I just take active given it's such a strategic priority for us.
They've been terrific to helping us navigate and again you see that reflected both in the inventory numbers, but more importantly in the sales and active and we're working closely with them.
Like I said, we have a great partnership we are certainly looking into planning as we look ahead for 2022 and beyond as we grow this business together. So I will just say that we will do everything we can to make sure that we can protect as many receipts as we can.
And I think overall to the question. It's I mean this has been a disruption for most retailers and we've and part of that has been talking about the most dramatic impact in our women's business, but the teams are are aggressively planning as we look ahead into 2022, we'd do it is expected to improve sometime over the course of the next.
Sure.
We have front loaded orders, we have moved production around we're expediting delivery really doing everything we can to where we have pockets where were just too lean to get back into stock.
Thank you and best of luck over holiday.
Thanks, Mark Thanks, Mark.
Your next question is from Gabby Carbone with Deutsche Bank.
Hi, good morning, congratulations on the nice results.
So one of them says yeah. So one of the offsets in the supply chain pressure has been lower promotions, which has been the case across the industry and I was wondering if you could talk to us a little bit more about how youre thinking about pricing and promotion in the holiday and maybe into early 'twenty two.
Yeah, you bet. So I would say, it's not just been about holiday, but how we price and promote has been one of the key tenants of our overall strategy over the last year and we've built a lot of new muscles as it relates to capability and it's really this blend of how we price our goods compare.
And what level of promotion, we do have and that's worked and I think a good testament to that is the amount of new customers, we're getting driving a more clear price strategy and again, you never want to swing the pendulum, one way or the other too hard and I feel like we're really getting a good rhythm in place with our customers.
So as we look ahead for holiday I mean that how many are is always promotional but we expect our key strategies on pricing and promotion to carry through and.
The effectiveness of that and how the team has been driving it now it's really as you look at Q3 reflected in our very strong margin performance. We saw that in Q2, and Q3 and a direct contributor it was around this pricing and promotion strategy.
Got it thanks, and just a quick follow up on your comments around the supply chain. Just was wondering how much pressure you expect our gross margin in the fourth quarter versus what you've kind of experienced here in the third.
Sure Gerry I think I called out in the guidance for Q4, as we have about 350 basis points of pressure I'd say the majority of that is going to hit in your gross margin.
You know you look at your digital penetration digital always out penetrates in Q4, when you look at our penetration versus 2019, that's up significantly and usually that's the high end of the range that we gave in terms of the pressures we see for cost specifics such as more expensive. When you have more going through the ecosystem freight surcharges. We saw them in 2020, obviously, we didn't have them in 2009.
<unk>, that's an added pressure that want to get them done there in Q3 at all and then of course, continuing with freight we saw some of the freight pressure in Q3, but I would say that accelerates as we move into Q4, and we're really bringing a lot of these holiday receipts more real time than we have in the past so that would accelerate the other piece of it is obviously the wages.
Which is probably the the lesser part of that 350 points and that would hit SG&A I would say, we still expect to leverage our SG&A in Q4, if that's helpful. Despite the wage headwinds just given the focus that we've had on the efficiency both in our marketing Ada as as well as our store productivity continues to increase to help us offset some of those wage increases.
<unk>.
Great. Thank you Super helpful.
Your next question is from Chuck Grom with Gordon Haskett.
Hey, Thank you very much good.
Good quarter on Sephora.
Joe or Michelle you talked about the 5% or mid single digit comp lift I'm curious.
<unk> built over the past couple of months over to the start maybe in the low single digits and it's now exceeding that.
Recall Amazon that so it took a little bit of time for that the bill just curious if it's if it is improving and I guess going forward do you expect that to build higher than that level.
Yes, so Chuck Michelle here great.
Great question again, just as we said earlier, we're certainly still in the very early days of this but to come out of the gate and see that kind of result, we're encouraged but we do expect that to build over time.
And if you look at any example, you brought up Amazon Youll get new stores et cetera.
Have a very nice tailwind with that and we'll get the tailwind because we're going to be opening up more stores upwards of 850 <unk> over the next couple of years and then be the call. It comp lift that you have associated with that.
Okay, Yeah that makes sense.
I'm, sorry did you want to go too.
It's really about traffic drivers. So if you think about us only being open for really a full month in all of these stores is getting that recurring trip. So I think as we've introduced this to customers existing and new and we talked about a lot of new customers coming in through the Sephora partnership then we build on that so I think that's really where we get excited about that next.
Trip and you know we've had this conversation in the past, it's a replenishable item in calls so thats why we expect you to kind of see that build happening over time and you know just to reiterate when Michelle.
We have comp stores, we know they build in comps over years. So that's always a benefit that we expect to see as we continue and then as we get more mass and have those 400 doors starting to open early next year, and then finishing that out in 2023 will only build on that awareness as well and that will give you a benefit not only to the store, but also to the digital channel as we've talked.
What about in the past.
Yes that makes a lot of sense.
A lot of opportunity for people to crossover here, So I guess thinking up Glenn.
The business of women's inventory levels gets back to normal pretty critical. So are you guys thinking about timing with the next batch of support the 400, but youre going to be opening.
Yeah, So I'd say a couple of things to that first of all.
We are working as aggressively as possible to get back in stock on key brands items et cetera on the women overall, but in the women's business in particular, so we are expecting that we will see improvement in 2022.
As we mentioned earlier, we're looking to be built while we'll be building out our stores throughout the year next year, but like call. It late spring on the 400 doors beginning there.
And so I think the timing will be good as we see improvement with women's but I think the second point I guess more importantly is as we build out. These sephora shops. We're also taking the opportunity to refresh and redo the entire store.
We've done a lot on our entire store base over the last year as you've seen in terms of just kind of new merchandising more mannequins more storytelling more discovery open aisles more shop ability more inspiration overall and we are getting nice marks from our customers on that in the Sephora doors. We're also taking it a step further and re flying the stores are putting.
<unk> kind of our key strategies, such as active right at the front.
And we were expecting there's going to be a nice synergy between those brands and of course, Sephora the discovery and <unk>.
Discovery area, if you will adjacent to the Sephora shops, So that's where we'll be merchandising Draper James the Reese Witherspoon collaboration that we're really excited about and then I think kind of like we were talking about this far and we expect that to build I think the momentum of women's.
Absolutely build like I said, the supply chain disruption really hurt us there because we penetrate 70% on private brand. So it's been most acute and we plan that business conservatively given we're going through this massive transformation, where we see the winners were leaning in we're chasing and we are building inventory up so we.
We're anticipating that to improve in 2022 as we open these doors to your question.
Okay, Great and then one last one for me more near term focused.
It makes it just said that they thought they saw a little bit of a pull forward into the month of October curious if you guys.
You saw that maybe there was some lift in the 15% come from some pull forward and then any thoughts on the past couple of weeks as we start up amongst multiple bummer.
Well first I'd say for holiday calls, we're off to a great start and we launch officially if you will holiday with our Black Friday preview event, which was in this quarter, which was at the beginning of November and we got terrific response from our customers.
And we saw it across the board, but in particular, we're excited that a lot of our key strategies, where we leaned in especially on inventory like active.
They're really responding so I guess you can buy it for yourself and you buy it as a gift, but fleece works all the time, so active doing well cosy doing well kids, and notably toys doing well, which that business has been a small business for calls historically, but we've been growing it and we have great brands like <unk>, which is doing terrific. The home category is really resonate.
Adding whether its anything for the kitchen or like I said, cozy and the gifting areas. So we're encouraged.
You know, we still have a lot of holiday ahead of us but to come out of the gate strong with our product and our pricing really resonating next weekend Black Friday, so kind of what just happened at the earlier the month, a little bit of a teaser for that.
And I think this is also where our omnichannel strength comes into play you may have folks digitally maybe ordering a little bit now I mean don't can't really declare that per se, but I will tell you is shipping cutoff happened in December that's where the strength of our 200 stores comes into play and conveniences like curbside and <unk>.
<unk>. So I'm excited we've only just begun but we're off to a great start.
Awesome. Good luck. Thank you.
Thank you.
Your next question is from Paul Lajoie with Citigroup.
Thanks, It's Tracy Kogan filling in for Paul I was hoping you guys could talk about what you're hearing from your customer and whether the customer is starting to feel the effects you see the effects of inflation and higher gas prices.
And then what is kind of your view on your ability to pass through.
You were higher cost as we move through the year next year. Thanks.
Hey, Tracy I'll start and let Michelle add in but I think we're all started you know value of the core tenant for coal. So we are always going to ensure that we're delivering that to our customers. We've talked a lot about the fact that we have a simplified pricing and promotional strategy underway and we've taken an incredibly thoughtful approach as we price and promote and I think.
I worked for us in the back this year as you'd see that through margin and we're going to continue to leverage this ability as we move into next year as well and really work through what these pricing items can look like also as a reminder, we have a sourcing initiative underway that we talked about that we look to save about 125 to 107.
$5 million with this is really helping us manage through those inflationary pressures as well. So I think we feel great with the ability that we've really worked through this year and we're going to continue to leverage that muscle as we move into next year with how we price and how we promote to our customers to make sure that we continue to always deliver them value.
Thank you.
Your next question is from Dana Telsey with Telsey Advisory group.
Good morning, everyone and congratulations on the progress.
With me in a good morning.
With the uptick in before that you've been seeing in the new customers any way to frame it as to compared to what you saw from Amazon. It seems like this is giving all higher uptick than when you put in the Amazon returns from what I remember I think that was low single digits is that fair and how do you see that progressing thank you.
Sure well first I'd say with Amazon I'm not sure that we I know we gave you a number around how many new the total number of new customers. We acquired I think it was earlier in this year. If we look back at last year. We didn't give you a I don't think a specific on the percent uptick.
To say that with Amazon, we continue to be pleased with that partnership as well and we continue to see new customers from that program. So yeah.
Yeah, we saw that build.
I think it's a little apples and oranges I mean, sephora is a whole new piece of business for us and so while I guess arguably they both drive traffic and you can both get that the tailwind of the attach purchases I mean, this is fundamentally transforming our brand and our business. We're finally in the beauty business is.
Prestige.
It's making us an even more relevant youthful retailer and then on top of that we're going to build a very big beauty business. So there's a lot to like with this partnership the traffic getting into beauty and relevancy the attached that we're already starting to see as Joe was mentioning.
And then that traffic coming in we're seeing a high number of new customers.
And they're younger and more diverse so it's it's it's all good.
Got it and then just any follow up on the active business given the strength of that business are there new brands coming in or is it the strength of the existing brands that you are seeing and do you expect that square footage to remain or do you continue to expand it.
Yeah, you bet.
So in terms of overall active we expect that we will continue to expand that space and that is one of the moves we made in the 200 doors with sephora. When we did the re flow so that will roll out across upwards of 850 or more stores as we build out those shots. So so that that plan is.
<unk> is going it's working really well the.
The growth is coming off of today as we spoke about earlier the growth is really coming off of our key national brand sourcing great resolved with Nike and under armour Adidas champion added to the mix and then even on our private brands. So you have more value added oriented private brands like Tech gear, which has been doing really really well.
We'll always look for a new brand opportunities if it makes sense, we have a process there, but I will tell you the level of innovation and thinking of newness that these core brands are bringing has never been stronger. So we're looking forward to that continuing it's central to our strategy going forward.
Thank you.
Great. Thanks Dana.
Your next question is from Omar Saad with Evercore.
Good morning, Great quarter, Thanks for taking my question.
Apologize if you answered this but I was wondering if you guys could share with us the in transit how big of a drag in transit was on that on that comp number in the quarter.
As we think about maybe how the comps could trend with that supply chain those supply chain bottlenecks open up and also as we think about and transit delayed deliveries and things like that should we be concerned about promotional risk if inventories arrive too late.
That'd be greater need to markdown goods as you transition transitioning from season to season. Thanks.
Sure.
I'd say from an in transit perspective, it was up quite substantially relative to what we had seen historically so.
And multiples of where we have seen it it just really due to the delay. The good news is it's fresh it's clean and what's coming but obviously the 25% is a little bit of a misnomer just because we were down more than that with this in transit and then of course, it's happening in women. So when we talk about women's being notably down more they were also most hit by the in transit does.
Given their exposure as Michel had mentioned earlier to the fact that they are much more of our proprietary brand portfolio than the rest of the businesses. So that is definitely having an impact in terms of having a promotional risk I think theres a couple of things. One is some of these items our fleet so they might be coming in late but they sell well in the spring because up here in Wisconsin.
<unk> called for a while so we know we can sell lease longer into the season and it's not just ending with January and then anything from a really relevant I think when it goes into holiday motif type items, if we're not getting them. We actually learned in 2020, how do you use pack and hold and so there is a place that if we don't have an opportunity to set it and really get a good sell through season.
Then we will do a pack and hold on that given the fact that you know.
We don't see a lot of change in that holiday motif type items. So we will look at what that looks like and packed away versus taking a per markdown right away. So I just think we're going to be really smart in what we put through based on what we expect to sell through.
Well to be versus what we pack away and hold to really help us continue to protect the margin.
Got it that's actually really helpful. Thank you and then a quick follow up.
Thank you said men's plus 30, maybe you could dive into that a bit what's going on there that's a pretty big number is it.
People are getting.
Going back to work in that type of activity or is it all in the sports and activewear side.
Maybe talk about that customer a little bit too. Thanks, sure I'll take that one.
With men's and we're really seeing it across the board.
<unk> been talking a lot about active but this the go back to work and really in the casual styles. That's been resonating we've talked a lot about the brand at it.
The women's team did but the men's seem to that as well so that more focused assortments working and then a lot of newness you know we're in.
Still the early days of some of our most recent but I'd say most powerful newness that we're offering the customer so Tommy Hilfiger, just that Eddie Bauer really just that so that's all in front of us, but really on kind of the core private brands like Sonoma land, then in mens brands like Hagar Columbia apartment nine.
We have a great tight assortment in it and also worth mentioning is Levi's Levi's is a terrific brand and business for us across all categories and especially for men.
Got it thanks, Michele Thanks, Joe Thank.
Thank you. Thank you.
Your last question is from Michael Binetti with credit Suisse.
Oh, Hey, guys. Thanks for taking me on.
Thanks for all the detail here today.
I'm curious what you think as you look I know, we will get a bigger update on the longer term for me in March but I'm curious what you think as we look at.
Lapping stimulus and very very low levels of promotions across the industry. This year as you get into early next year do you see the combination of all the noise, Joe with inventory shortages, hopefully getting better and the tough laps you see gross margins is something that.
No need to need to.
Hold onto or do they start.
Best to think about them coming down a little bit of nearly year at beginning of the year just due to the compares.
And then.
I was curious I know you said that the sephora stores that are giving you mid single digit lift but was there any was there any hold back to the total comp for the quarter as you thought and think about some of the construction.
Perhaps being a disruption in the stores.
And maybe I know you said, you're updating some of the adjacencies and other parts of the stores as well alongside before.
And then finally, Joe just that the buyback obviously very big number I'm curious, how you're thinking about that going forward and the leverage you want to run it.
Okay, Michael that with a lot I'm going to really try to him.
From a margin perspective.
We actually went into the year last year fact, we said we had a strategy in around that strategy with simplifying our pricing and promotions and a lot of the benefit. We saw this year was leveraging that strategy. We knew our new customer got confused by the stacking of offers we were able to really drive a simplistic offering which helped us drive margin and at resin.
It resonated with that new customer they really saw keen value and what we are offering them. We've also heightened the offerings through this time, we brought in Sephora and Tommy Hilfiger, and Calvin Klein. So our brand portfolio has also been elevated so values not just in the price, but also the offerings that you see in the store. So I think as we move into next year I'm just excited because we just thought these like this is.
So new at the end of Q3, we have all of that momentum as we move into next year, but I think we really reset what our margin needs to look like by being able to take out. Some of these stackable offers talk to all these new customers that we're driving into our store with these new brand.
So they could keenly see the value easily so I feel good with some with our margin as we move forward, but obviously, we'll give you a lot more around that strategy at our Investor Day next year, Yeah. I think you hit it on we did have disruption I think if you go back you know you've been following us for a long time, Michael when we did Remodels, we know what the customer when you see disruption it does have an impact.
You will move to Sephora stores to the Middle in center core jewelry moved out we brought <unk> to the front moving our young women's over so there was a lot of movement. So I would say that there was some disruption that had an impact to our quarter with that being said, we're incredibly pleased with the mid single digit lift we're seeing these sephora stores and like.
We talked about that we expect physical build.
As we continue to bring that customer into the store and as we add more stores into the portfolio. So that there and then in terms of buyback.
But I would say is we just see a really long term value opportunity in our stock and with that being said that gives us confidence to accelerate it into this year, you're going to see the $1. Three we couldn't be more committed to investment grade, but we generated $1 8 billion of.
Operating cash flow. So we want to return that back to our shareholders through three quarters, we returned over $900 million and obviously that will grow substantially when we finish up the buyback this quarter as well so I would say as long as we continue to see that values as Michelle and I and the leadership team have incredible confidence in our strategy and the momentum we're going to drive over the long term.
Thanks, a lot Joe.
Thank you everyone for listening on the call today, we wish you a healthy and wonderful holiday season, and look forward to speaking with you in early March.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.