Q1 2022 Kohls Corp Earnings Call

May 19, 2022

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Please note that this call will be recorded.

However, replays of this call will not be updated.

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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 <unk> first quarter earnings Conference call.

Before we share details on Q1 results and long term strategy I want to acknowledge the much broader context as this past quarter over.

Over the past three months calls has been at the center of an unusual amount of attention and speculation.

At our annual meeting last week, we were very pleased that our shareholders voted to retain all 13 of our directors.

This board is committed to overseeing the successful transformation of the company and fulfilling its fiduciary responsibility to maximize shareholder value.

Through this process, we have the opportunity to engage frequently and openly with our shareholders.

I want to thank each of them for sharing important feedback to our board and management team, which we take seriously.

On that note shareholders want to ensure that the board will continue to run the sale process with shareholders best interest in mind.

We continue to engage with multiple interested parties.

As we've described they are working to prepare fully financed binding proposals.

At this point, we are formally communicated to the multiple parties in our process. The specific procedures for the submission of actionable bids due in the coming weeks.

We continue with our detailed diligence phase and are pleased with the number of parties, who recognize the value of our business and plan.

We will update the market when it's appropriate to do so.

While these circumstances have put some stress on our team I'm incredibly proud of the resilience and perspective that our associates and leaders have demonstrated during this time.

Throughout all of this we have stayed focused we are financially healthy and we have the right strategies in place.

With that perspective, let me turn to our comments on the quarter and remainder of the year.

Our first quarter results were below our expectations.

While the quarter started off strong with positive low single digit comp growth through late March and April demand considerably weakened as we lapped last year's stimulus and as consumers started to experience inflationary pressures.

Importantly, we have seen trends, notably improve in may as we moved past keys stimulus weeks from last year and as the weather turns favorable which has accelerated demand for our spring seasonal classifications.

In total sales declined 5% for the first quarter, driven by our home and childrens businesses, both being down double digit percent for last year.

There were also some key positives in the quarter, including the 200 stores with Sephora delivering positive low single digit comp store sales growth as well as the continued success of our recent brand introductions.

Let me share a little more color on our Q1 results starting with home.

As you're aware the home category benefited during the pandemic.

The overall industry was up against very difficult year over year comparisons in the first quarter, including our home business up more than 30% last year.

Our home sales declined 17% in the quarter and accounted for 15% of our sales.

While we expect category demand to remain weak we are adjusting to the new normal and continuing to pursue incremental areas such as outdoor furniture expanded decor kid's bedroom furnishings in the pet category.

We will also leverage our pricing elasticity model, ensuring we stay competitive and value, while taking price where it's appropriate.

As I turn to our apparel and footwear performance. It is important to call out that our spring seasonal business was pressured in Q1 due to unseasonably cooler weather, especially in our northern markets.

We saw an 800 basis point difference in sales performance between our northern and southern markets in Q1.

Our children's business, which is heavily influenced by weather saw a 12% decrease in sales with spring seasonal sales accounting for more than half the decline.

The remainder was due primarily to those categories that benefited from the pandemic, including active sleep and toys.

Looking ahead, we're expecting that our children's business will improve through the remainder of the year spring seasonal performance has improved significantly so far in may.

In addition, we are rebalancing the assortment to include more fashion and we're launching new in store licensed entertainment product zones in 400 stores. This month to capitalize on our strong pipeline of upcoming entertainment releases.

We're also positioned for a strong back to school season, with a focus on timely key category availability value and seasonal relevance by climate.

Now, let me turn to the positives in the quarter, starting with our 200 updated stores with Sephora.

The transformation underway in our stores with our partnership with Sephora as a cornerstone is driving impressive results.

The first 200 stores with Sephora at Cold Comped positively overall in Q1 up low single digits, driven by both sephora sales as well as incremental basket growth with categories, such as womens accessories inactive.

From a product perspective, we saw strength across all categories, including skincare makeup and fragrance.

Top selling brands had been the Sephora collection Nars, Fenty beauty, Charlotte Tilbury, all the plaques and toothpaste.

And we continue to attract new younger more diverse customers to kohl's as well as these are for our customers shopping across the broader cold store.

And they are shopping more frequently with sephora customers shopping nearly twice as often as our average customer.

We've said all along that the true incremental benefit from Sephora will occur over multiple periods as awareness and replenishment traffic build.

The Sephora performance during the first quarter indicates that this in fact is taking hold and it gives us great confidence as we rollout another 400 sephora at cole shots by early August .

We opened 48 sephora shops during the last week of April and while there have been only open for a few weeks they are exceeding our plan.

It's again important to note that while the build out of the Sephora shop in shops is at the core of the store Remodels. These 200 stores soon to be 600 by the end of summer or the representation of the future of Coles.

We've taken the opportunity to update refresh and re <unk> stores to deliver against our strategy of leading in the active and casual lifestyle.

We brought our iconic active brands to the front of the store with new and elevated merchandising, we're leveraging the placement of the sephora shops to showcase brands like Calvin Klein and a newly updated premiums sunglass presentation with luxottica.

We're also deliberately placing areas of discovery throughout the store to bring excitement to our customers.

And we will continue to be agile and evolve as we learn.

Importantly, these new transformed stores are working they are positively comping and as we hit critical mass later this summer the 600 doors will have a material impact in enabling us to deliver a positive comp in the back half of the year.

Now let me tell you about how some of our other categories are performing in the quarter.

Our men's business had a very strong quarter.

Sales increased 3% driven in part by the successful introduction of several new brands over the past six months, including Tommy Hilfiger, Calvin Klein and Harley.

We also saw significant growth in our tailored and dress business.

Additionally, outdoor apparel, a key strategic area of ours continue to drive outsized sales growth. This gives us confidence as we expand our partnership with brands like Eddie Bauer and under armour outdoor which we're rolling out to more stores later this year.

In women's sales outpaced the company with growth in areas like outerwear, denim inclusive sizing and dresses, including Draper, James which exceeded our plan.

Setting such gains was underperformance in spring seasonal categories like swim tanks shorts, and Tees, which were down double digits, but have shown a strong positive trend in may with warmer weather.

Our juniors business was especially impacted due to the seasonal nature of this category and to a lesser extent the temporary disruption related to store refreshes were juniors was repositioned within the store.

And as it relates to active overall it performed in line with the company.

We saw growth in men's and women's apparel offset by softness enacted footwear and children's apparel.

Of note active was up against extremely strong growth from last year when sales increased more than 90%.

From a profitability perspective, as Joe will discuss in more detail the lower earnings relative to last year is primarily driven by a.

A significant step up in investments in our strategic growth initiatives of the four store openings and store refreshes.

Lower sales.

Increased freight expense and heightened wage costs.

And in addition, we also incurred expenses related to the recently contested proxy situation and ongoing sale process.

Let me now turn to how we're approaching the balance of the year and why we are expecting that our results will improve.

Despite the difficult start to 2022, we expect sequential improvement in Q2 based on quarter to date results followed by positive growth in the second half as our key initiatives take hold.

Sure a few key reasons why we're confident in this outlook.

First as I touched on a moment ago, we expect our business to benefit from the 400 additional sephora store openings. We opened 48. The last week of April and will open nearly 300 more in Q2 with all 400 to be opened by early August .

Second earlier this month, we significantly enhanced our kohl's rewards earned rate by increasing at 50% from 5% to seven 5% for those customers that also have a kohl's credit card.

We piloted it in over 100 stores over the past year and found it to be successful in driving approximately a 1% sales lift.

And third we will adapt our plans going forward as we navigate more volatile and challenging conditions.

We're focused on driving value during the current environment.

Leaning into our value oriented private brand portfolio, which outperformed this quarter and further leveraging our pricing and promotion optimization strategies.

Before I turn it over to Joe Let me address our 8-K filing from yesterday afternoon.

As you may have seen Doug, how and Greg Revelle are leaving kohl's to pursue other opportunities.

Both have made meaningful contribution to coles during their time here and we wish them well in their future endeavors.

As we continue to drive our strategy forward, we will use this opportunity to identify new talented leaders to enhance our capabilities and accelerate our transformation.

Search firms are already engaged in the search process is underway.

In the meantime, we have strong interim plans in place to ensure a seamless transition.

Effective immediately Ron Murray, a long tenured kohl's and retail merchandising executive will now serve as interim chief merchandising officer.

Ron has led many strategic initiatives at the company, including active and digital merchandising and is currently driving the transformation in womens.

Also effective immediately Christy Raymond currently marketing executive Vice President of customer engagement media and analytics will serve as our interim chief marketing officer, Kristy with both our Kohl's and Disney experience brings a deep understanding of the customer and continues to play a key leadership role in our marketing evolution.

Both Christy and Ron are strong leaders with proven track records. We are confident that they will do a great job, leading our highly capable teams and driving our strategy forward.

In summary, while the year has started out below our expectations trends are improving we are making changes and the benefits of our key strategic initiatives are still in front of us.

I want to thank our talented and committed associates across the country. Once again for their ongoing dedication to kohl's and our customers through what has been a challenging few months.

With that let me turn it over to Joe who will give you more details on our financial results.

Thank you Michelle and good morning, everyone.

For today's call I'm going to review, our first quarter results.

Thus our capital allocation actions during the quarter and go forward plan.

And then provide details on our updated 2022 guidance outlook.

Starting with the first quarter.

As Michelle indicated sales started strong with a positive low single digits comp through late March.

<unk> done considerably weakened in April as we encountered macro headwinds related to lapping last year's stimulus and.

And an inflationary consumer environment, which.

Which resulted in a 5% decrease in net sales to last year.

Digital sales slightly outperformed stores and represented 30% of net sales.

Other revenue, which is primarily credit revenue increased 8%.

While our first quarter results did not meet our expectations. We have seen improved trends in may with strength in our spring seasonal categories and continued outperformance in our stores with sephora.

And as we look to the balance of the year, we expect progressive improvement driven by key initiatives such as the opening of 400, additional sephora stores and enhancing the kohl's rewards earn rate to seven 5% for Kohl's cardholders.

Turning to gross margin.

Q1 gross margin was 38, 3% down 69 basis points from last year, driven primarily by higher freight costs.

That partially by our continued pricing and promotion optimization strategies.

SG&A expenses increased 10, 5% to $1 3 billion driven largely by investments in our key strategic initiatives.

This includes nearly $50 million to support the Sephora store opening store refreshes and repos.

During Q1, we executed 220 store refreshes and constructed approximately 170 sephora shops.

The first of these 48 for a shop opening the last week in April .

In addition, we incurred $17 million of expense related to the proxy contest and ongoing sale process.

And the remainder of the SG&A increase was driven by higher wages and transportation costs.

We expect SG&A expense will remain elevated in Q2 up mid to high single digits as compared to last year as we will invest an additional $40 million in our strategic growth initiatives.

We will execute an additional 95 store refreshes and construct the remaining 2020 to sephora shops.

The plan to open nearly 300 more sephora stores in Q2, and approximately 50 openings in early August .

Depreciation expense of $200 million was $11 million lower than last year due to lower technology capital Fund.

In total our Q1 operating margin was two 2%.

Net income for the quarter was $14 million and earnings per diluted share was <unk> 11.

So to summarize the lower earnings per share relative to last year is primarily driven by a significant step up in investment in our strategic growth initiatives of Sephora store openings and store refreshes.

The lower sales and increased freight expense and heightened wage costs.

In addition, we also incurred expenses related to the recently contested proxy situations and ongoing sale process.

Turning to the balance sheet.

Our inventory balance at quarter end increased 40% compared to Q1 2021.

The increase in inventory was driven by three key factors.

First the investment in beauty inventory to support the 200 Sephora shops opened last fall as well as the sephora openings this year accounted for $332 million.

Second we continued to see heightened in transit inventory due to ongoing supply chain disruptions.

As a result, we have built an additional order lead time to ensure we are meeting customer demands.

For the quarter in transit inventory increased $214 million.

Third we continue to leverage pack and hold for late holiday receipts, such as sleepwear, and fleece, which added $82 million of inventory.

Excluding these three unique factors, our inventory will be up 16, 5% to last year and down 15% to 2019 levels.

We expect inventory to end the year up high single digits as compared to 2021.

Turning to cash flow.

We had planned that use of cash in the first quarter as we rebuilt inventory and invest in our stores through the sephora store openings unrelated refreshes.

In total operating cash flow for the quarter was a use of $460 million.

However for the full year, we expect operating cash flow to be approximately $1 billion.

Capital expenditures for the quarter were $221 million, driven mainly by Sephora Buildout and related store refreshes.

We are still planning for approximately $850 million of capital expenditures in 2022.

Now, let me discuss our capital allocation actions.

We continued to return cash to shareholders in the first quarter through both share repurchases and our dividends.

As it relates to our share repurchase activity, we repurchased more than $2 5 million shares for $158 million during the quarter.

All of which occurred prior to our year end earnings release, as we are unable to transact subsequent to that given the ongoing sale process.

We remain confident in our business and key strategic initiatives and plan on repurchasing at least $1 billion of shares in 2022.

Of which we expect $500 million will be executed with an accelerated share repurchase program in Q2.

As it relates to our dividend, we paid $63 million or <unk> 50 per share to shareholders in the first quarter.

In addition on May 10, the board declared a quarterly cash dividend of <unk> 50 per share payable to shareholders on June 20 <unk>.

Now let me provide some details on our updated outlook for 2022.

We are updating our annual guidance to reflect our first quarter results and incorporate continued uncertainty in the macroeconomic environment, recognizing many headwinds, including inflation are not likely to abate in the near future.

We now expect net sales to be in the range of flat to an increase of 1% versus 2021.

Operating margins to be in the range of 7% to seven 2%.

And EPS to be in the range of $6 45 to.

To $6 85.

As we look to the balance of the year, we expect our sales trends to strengthen as we benefit from more sephora store opening active expansion and the rollout of our enhanced Kohl's rewards program.

We continue to see our sephora stores performance accelerate and a 48 stores that opened at the end of April are off to a great start exceeding plan.

As it relates to gross margin. We currently expect it to be down 100 to 125 basis points for the year driven by elevated freight expense and product cost inflation.

From an expense perspective, we expect SG&A to remain elevated in Q2 up mid to high single digits as compared to last year.

However, we're planning SG&A to improve in the second half as we move past the sephora opening expenses lap wage incentives from last year.

Continue to drive marketing efficiency and further scale self service capabilities in stores.

For the year, we expect SG&A to be up low single digits as compared to 2021.

Last we continue to expect our tax rate for the full year to be approximately 24%.

In summary, while the year started off challenging we are confident that as our strategies continue to roll out our performance will progressively improve through the balance of the year.

With that we're happy to take your questions at this time.

Thank you speakers participants we will now begin the question and answer session. As a reminder to ask a question over the phone you May press. Historically, you followed by the number one from your telephone keypad to withdraw your question you May press the pound key.

Again, Thats star one to ask a question one of the challenge you to draw your request.

Speakers. Your first question is from the line of Bob <unk> of Guggenheim. Your line is now open.

Hi, good morning.

Two questions.

The first one is when you when you look at me updated outlook.

Just in terms of the progression and the improvement can you just elaborate more on the confidence of the outlook and just like the biggest drivers.

The improved fundamentals.

The profitability expectations that you have and then the second question that I have is.

Michelle can you just spend a little more time on the management changes to management departures.

What drove that and.

Really what youre thinking about.

As you do think about distributions going forward. Thanks.

Yes, Thanks, Bob Good morning, So to your first question.

Our expectations surely as we look at as the balance of the year that we will see progressive improvement, yes, I think as we talked about.

This morning on the call that we did face some headwinds this past quarter.

The combination of inflationary pressures lapping the stimulus download pressure on categories like home and kids and then the seasonal weather impact, which as we spoke to we've seen marked improvement as the weather improved in may.

So we expect that trend to continue but I think more importantly in the biggest call out in our first quarter is what we're seeing in our transformed stores with sephora. So those stores. The 200, which are still a very small part of our business comped positively and Thats. The total store not just beauty, but the entire <unk>.

Store, which really speaks to our strategy, yes, before the cornerstone, but we made lots of changes in those stores to reflect our new strategy, putting active in the fraud re flowing categories updating merchandising refreshing the stores et cetera. So this is about scale.

We are in the midst of building out a lot more sephora shops.

We will build another 400 that will take us to 600.

More than half the fleet by the end of summer and <unk>.

That tailwind of that positive comp now will have a material impact to lift to the overall company. So that undoubtedly are their biggest driver and like I said it is beauty, but it's everything before but is everything around that total store, where you're getting the lift in the entire store and it's worth noting as well that in those stores.

We continue to see a lot of new customers, 25% of the customers coming in to shop Sephora are new they're younger they're more diverse we're actually seeing those customers increase their frequency their shopping about two X the rate of the typical customer.

And we're getting a lift to the basket so more than half of the purchases have at least one additional item in their shopping categories like active women's and accessories that is that you know this is a sea change for the company right. That's our future strategy on top of that.

The enhanced loyalty so we piloted this for some time Bob.

And a number of our stores and we got about a one comp point lift we just rolled that out so that's in front of us.

We're encouraged with the tailwind we're seeing on the women's business the core women's business.

Call It core sportswear.

Casual career, where that was down just 1% and and actually that was pressured by the seasonal as well. So we've seen a nice shift as the weather's improved on that business. So we're looking for at that mens, especially strong strong positive comp in the quarter those new brands like Tommy are doing really well.

And then in addition, as we all face kind of this new normal with inflation, we're really focused on driving value and we have very agile model.

Elasticity is key so where we can and should take price.

We are in those less elastic businesses and categories, and where we do need to be even more value oriented like in our private brand more elastic we're taking price. So it's really navigating that process. So I look at all of it and that we expect to see sequential improvement, especially in the back half where we are expecting a positive.

Comp in the back half of the year.

Then shifting to your second question on the executive departures. So, yes, I'd say, both Doug and Greg made a lot of contributions across the company over several years.

But we are going to use this opportunity to identify new talent to enhance our capabilities in and really help us drive the next phase of our growth with some fresh thinking.

We've already engaged search firms, which are underway, but in the interim we have a really strong plan. We have two incredible leaders Ron Murray on the merchandising side, he's a retail industry veteran.

Been around more than 30 years goes at Kohl's in other places he has been instrumental.

Really over the last I would say seven eight years in driving some of our big successful initiatives like in the early days of our digital strategy. He was the chief merchant over digital and then led the entire active strategy, which continues to do really well.

And I would also say we brought Tom Kingsbury on the board last year and he has been terrific and Tom will work with Ron as an advisor and mentor you will as we like I said accelerate our next phase of growth and then on the on the marketing side. Similarly, Christy Raymond.

Very strong leader she's been driving our customer engagement media his deep expertise in analytics. So between both of our coals experienced in prior calls you came from Disney.

So very much looking forward to her stepping into the role and the impacts you will have so we're in great shape and their leading really strong teams that are all driving our strategy forward.

Thank you.

Yeah.

Next question is from the line of Oliver Chen of Cowen. Your line is now open.

Hi, Thank you I am given some of the headwinds that you're seeing how are you feeling about the inventory trends and composition relative to demand and also would love your take on the nature of the promotional environment.

A follow up as you do think about product in women's and kids.

Do you see as the bigger opportunities for improvement as you called out faster than most of the customers.

Rapidly changing in terms of going out and what they're looking for as well within apparel.

Yes.

Sure. So hi, Oliver So I'll start with inventory I think we tried to lay out that although inventory being up 40% a lot of that was due to either investments in key initiatives like beauty and sephora being $300 million.

Part of that is in transit and if you recall last year in the back half we talked a lot about a higher in transit amount of inventory, we're seeing that persist. So we'll expect that to continue in the front half of this year, but clearly we had said we wanted to go after that inventory to make sure. We had it so we werent sitting in a liability of not having the sales in meeting customer customer demand and then the third big piece.

And as pack and hold you know as we did have late fall receipts, specifically in sleep and fleece for holding that and we'll put that back out for sale. So still good inventory still resonates with the customer and the fall size the remainder of that core balance up 16% because it really seeding a lot into both womens and active and if you think of women's.

Last year that was our most disrupted category. We are exiting out brands, we are bringing a new brand that we called it out as probably the most disadvantaged from their inventory position. So we made that investment we feel very good with its positioning specifically you know Michelle had called out the key categories dresses doing incredibly while denim being up as well so that places and strategies.

That we've talked about for a while with womens are really resonating and then the other piece of it is active and as we made that re flow of active to the front of the store. We did give it more space. We are getting more products from our key vendors and that's really working in terms of one of our key strategies. So where we have the inventory is in those key initiatives that we want to continue to grow.

And the other piece of it I think of these unique factors such as the investment in Sephora and the in transit and supply chain disruption that we've had.

In terms of the promotional environment I think you saw our margin was down about 69 point a lot of that was freight. So we continue to leverage our pricing and promotional strategy, which is actually benefited and continues to benefit our margin into Q1, and we expect that to continue to benefit margin, obviously guiding down 100 to 125 basis points the majority of it.

That obviously anticipated in our original guide for freight and in the back half of the year cost inflation. So as Michel mentioned, we are taking price causes known for value as a core tenant of who we are and will continue to leverage our pricing promotional strategies to make sure that we're delivering the right value, but doing it for things that really drive and motivate the customer's behavior.

We had a lot of offers that just werent driving that behavior. So we're cleaning that up we're standing for price and a lot of different categories such as today. We're in an Lps event Theres no coupons, it's just about pricing and our customers really like that especially the new customers that we're seeing come in from Sephora.

And in terms of women and kids and fashion I'll, let Michelle answer that yeah. You bet. So first what I'd say Oliver is that we continue to absolutely believe our strategy is the right one in serving this active and casual lifestyle.

A very broad umbrella and truly reflects how people are living in how they are addressing today and we're seeing that even if people are going out or returning to the workplace, maybe even up a bit of a hybrid hybrid way they still want to dress comfortably.

Comfortably and so yeah, we are seeing some of call it the more fashion, a Polish looks but.

What we're doing is we're innovating in those spaces open men's blade lasers or women's tops maybe.

Maybe a bit in some cases more fashion, a more elevated but we're using technical fabrics and the like and that that's resonating. So I think first of all we are certainly not taking our foot off the gas on active active.

Up versus last year significantly as I mentioned in my remarks, but even going back to 2019 were still up in the active category double digits. So over the long term and we have lots of data and insight that this is again how people are are intending to live their life.

And also important to note that when we talk about active is in its broadest sense. It's active it's athleisure and outdoor were seeing a lot of momentum on the outdoor brands that we brought in whether that Eddie Bauer, we've got under armour outdoor and even lands' end, but it's important to offer choice to our customers and you specifically called out.

And kids I'd say on the women's side really encouraged in that kind of core women's business and brands like nine west that do have a bit more fashion do you have a bit more career, we're doing really well our dress business is incredible I mean, we went big into dresses across a range of styles gave it.

A lot more merchandising in the store and it's well over double digits in terms of its growth and we're just going to build from there.

I'd say on the women's side, where we are pivoting a bit is on the junior side, where we did see some fashion opportunities that category by the way was really impacted by seasonal and by the disruption and the Buildout and sephora, but there's there's definitely tweaks that we're making around the edges.

Saying in Juniors, we actually went a little too heavy fashion and we left some opportunity with some of the core basics. So the team is adjusting that but overall the women's business is really healthy and a lot of opportunity as we go forward. So the changes that the team has made on the bat around dresses.

And denim categories like swim outerwear in plus size those things are working.

And then on kids, Yeah, I would say, what we see as an opportunity to bring in more balance.

Jumping beans had a great quarter positively comping I think around the edges, though there's clearly kid very seasonally driven so I think a lot of the headwinds we did see as we shared no down about 12%.

A big part of the Miss was the seasonal piece and we're seeing that bounce back in may.

So hopefully we can make up for some of the demand we didn't get in the first quarter, but also as we look to back to school. The team sees an opportunity for a better blend of some of the more casual or fashion side of kids, especially in call. It that <unk> side of things and we're also really excited about what's happening on the entertainment.

<unk> side of things. So there are some big releases coming up we typically see great strength and we have some incremental merchandising dedicated to that so all in I'd say core of our strategies are working the casual and active umbrella is broad and then.

Where we're expecting our seasonal business to improve and we will make like I said, some tweaks around the edges as it relates to what the customers responding to you, but I'd say overall, we feel we feel really good and that's all reflected in our guide as we look to improvement over the back half of the year and especially those positive positive comp performance in the second half of the year.

Thank you very much best regards thank.

Thank you.

Next question is from the line of Mark Seger of Baird. Your line is now open.

Okay.

Thank you good morning.

Hoping you could give a little bit more detail on the April and may to date trends.

I'm trying to get a better sense of it.

As we look at some softness in late Q1.

It was tough comparisons unfavorable weather, which may be transitory versus perhaps the broader a broader slowdown in demand given some of the macro pressure on the consumer.

And then a related question there curious what youre seeing in terms of credit trends penetration, increasing or decreasing relative to last year seeing any changes in the health of the portfolio.

In the context of where the consumer is curious if you're seeing any signs of strain as you look at the credit trends are in your portfolio.

Great. Thanks, Mark why don't I take the first one and then Joe can answer your credit question. So.

I think you said it well like there are parts of Q1, especially in April where we had I'd say three primary pressures one was lapping the stimulus and we saw that especially in a couple of categories I mentioned like home.

Second is what happened almost simultaneously was the very rapid escalation of inflationary pressures as consumers are spending a lot more on basics and fundamentals like food and gas.

And then and then third we had this weather thing that just amplified all of it.

As I look forward I think and I think we'd probably all agree that the inflationary piece is going to be here with us for a while I do believe that the stimulus lap was a bit of a bubble the weather piece as we alluded to as whether it was almost like a switches we saw especially in our northern markets, where we saw more of a headwind.

It was about an 800 basis point Delta we.

We saw a big shift in early May So to me two of the three were much more pronounced in that April timeframe, and we were seeing that in our business. So as we have moved past the stimulus lap in the big weather headwind, we've seen a dramatic improvement.

And then on the inflation side, we're adapting our plans so I.

Again, I'll go bad before but a lot of other changes even despite these.

These three headwinds they still comped positively overall, so as we see inflation continue.

The success of those new stores is more than offsetting the consumer pressure, which to me is really really encouraging but.

But yes, so to answer your question I think two of the three.

We're largely passed and then as it relates to the inflation, we're making we're making changes, but our core strategies are working up against even those pressures.

And then Joe too and on.

Kohl's charge card I would say, we're still seeing it.

Over half of our sales. So the penetration continues to be consistent actually we have seen a heightened payment rate over the last year or so as the customers and really healthy we are starting to see that subside obviously in light of the change in the macroeconomic headwinds and lapping the stimulus is something that we're watching but we have an incredibly healthy.

Portfolio as we look at it today, but as those payment rates to subside, we do see it revolves more which is good from revenue, but then we have to watch from a delinquency perspective. So at this point, there's nothing to indicate that we don't continue to see healthy portfolio, but we are watching it ticked down in that payment rate, which could lead to more delinquencies, but I think you said.

Our other revenue was up about 8% in the quarter. So we feel good about the health of our credit portfolio at this point.

Thank you and then Jill the change in the operating margin guidance does look fairly modest in relation to the sales adjustment and some of the gross margin commentary it really seems like SG&A savings in the back half of the year, it's key to hitting that outlook.

Hoping you can provide a little bit more color on your visibility your confidence there.

We all see the inflationary pressures out there in distribution and labor and otherwise thank you.

Yeah, I would say, we did anticipate higher expenses in the front half of the year given the strategic investments, we are making with sephora the repo and the refresh.

Then look at next year or the second half of the year and we're lapping those same sephora reef low refresh investments we were making in Q3. So there are savings. There. We're also lapping significant hiring incentives that we made last year that we're not anticipating to need this year, we feel good with where our levels of hiring or at this point we made.

Significant wage adjustments in fall that were now still up against in spring, but lap and fall as well and so all of those things will be I think easier compares to what you have seen in the front half of this year. When you add in that investment and then secondly, marketing investments, we're continuing to leverage our marketing Ada asked to get to our goal of four.

Percent when you actually look at first quarter, we made more marketing investments and we didn't leverage R&D to us because as we look at our media mix modeling, we were able to move some spending out of Q4 into Q1, which helped us from an optimization and efficiency perspective. So we'll get further leverage in marketing in the back half of the year that we didn't see in.

Q1 of this year as well and then third we'll continue to leverage our automation in the stores for sure.

About testing on self checkout.

So those are definite waves that we will be addressing the tap expenses that we're seeing as well as having some easier comparisons fall based on the investments. We made last year that were not having to make this year such as in incentives.

Great. Thank you for all the detail.

Next question is from the line of Chuck Grom of Gordon Haskett. Your line is now open.

Hey, good morning, guys hope you're well.

You talk about the second half comps being positive, but I didn't hear what you expect for the second quarter. It sounds like me has.

It has improved a lot, but I'm just wondering if you could just help us with our modeling.

Yeah, I think we expect me <unk> has gotten notably better we expect Q2 to be better, but we're also being cognizant of the environment that we're working on so I would say, we're going to expect it to be down maybe in that low single digit range in Q2, especially as were still ramping up and opening up those shops will have all of our shops open I think by the first week.

<unk> of August so having that big benefit in the back half of the year from having that disruption on the shops open and benefiting from those initiatives. So I would say I would model a low single digit in Q2.

Okay. Thank you and then you called out a low single digit lift in stores with Sephora told on the fourth quarter call you guys called out a mid single digit lift could be completely wrong, there, but I didn't know if it changed at all in terms of there'll be improvement that youre seeing from Sephora.

Yeah. So I think there's two different compares what we had said was the sephora by mid single digits now, we're actually just telling you that comps in the sephora stores.

Is a low single digit positive comp so and historically.

Historically, we were making a compare versus sephora versus non before US now we're actually it is giving you the performance isn't that they've been open for a longer period of time.

Okay. Okay. Thanks, a lot. So I just wanted to clarify a couple of questions for you on that and then just bigger picture on the consumer.

That's very good.

Also if you look at it they're up a low single digit.

The company was down five so you can see that it's accelerated on it.

Itself apart from the non tourist stores as well so that mid single digit would actually be better. If we gave you that compare but we just thought it'd be easier to give you a low single digit from a modeling perspective.

Yes, Okay, I'm, sorry to cut you off there.

On the consumer.

Inflationary pressures, but everybody is talking about I was wondering if you guys could just maybe go a little bit.

Layer deeper on any insights on that front are you seeing certain demographic cohorts behaving differently, particularly maybe at the lower income customer that you serve are seeing trade down in certain private brands.

I'll have to get our portfolio on that comment.

Yes, you bet Chuck Thanks for the question. So I'll take that one yeah, I mean, if you're if you Peel. It back I think what we're seeing is a bit of a bifurcation. So we are seeing some customers who are trading up into those more premium brand and a lot of newness, we brought in like Calvin and Tommy in brands like currently et cetera Levi's.

And then you also see though a lot of customers going to the private brands. So Sonoma jumping beans, those two brands had especially strong comps this past quarter, but I think as it relates to you know as we go deeper around the consumer dynamics I mean, one thing we are seeing is like as customers are coming in we're still keeping our customers, but we.

We're actually seeing the average spend go down a little bit or another way to look at it as our units per transaction have come under a bit more pressure this quarter, which also says to us says to us that customers their wallets are being squeezed and so they're coming into the store and they're being a bit more mindful of the brands are buying and what's ongoing in their basket.

But we were just having that conversation on so far side, we're actually seeing the opposite in those stores, where the U P teams in those stores and the sephora shops are higher than the average.

And those customers are coming in more frequently so we continue to say as those scale and by the way to Joe's point on the low single digit total comp. That's what we saw in Q1 that doesn't mean, it's not going to accelerate in the back half because those stores also had some of the pressures like home and what have you. It overcame so I wouldn't necessarily say, that's the definitive and all.

We're actually expecting that over time, we will continue to see an acceleration in performance, but yeah as it relates to the overall kind of dynamics around the in place and like I said I think we're more seeing it in a little bit pressure to the basket.

We are encouraged with customers continuing to shop us and for us going forward. It's just that much more refined on how we're pricing our goods. So we've built over time. These elasticity models and we're actually seeing good response, so where we are going deeper on price in those highly elastic categories and products.

Like I'm jumping beans, I go back to that kids were actually going deeper in price are offering more value and we see a commensurate lift in unit on the flip side in categories like dress apparel or even dresses men's and women's dress apparel, we can take more price.

You of course have national brands, where they set their pricing. So we're often navigating that dynamic, but a lot of a lot of flexibility a lot of agility in our model to change prices quickly as well, which we are doing to be could be responsive, but yes. Hopefully that gives you a sense of both what we're seeing as well as what we're doing about it.

No that's very helpful. Michelle Thank you great.

Alright. Thanks.

Next question is from the line of Stephanie Wissink of Jefferies. Your line is now open.

Okay.

Hi, This is Blake on for Steph, Thanks for taking our question.

To ask a little bit more on supply chain and apologize if I missed this earlier, but I'm wondering if you talked about.

Kind of what are you expecting for the rest of the year for supply chain. It sounds like that was an impact on gross margin in the Q1.

Do we think about what you're embedding for the rest of the quarters for the rest of the year and then maybe if you could hone in a little bit.

John .

Your ability to source private label and fuel cost side of it.

Alright, So I think we have acknowledged obviously freight is going to be a headwind for us. It was a headwind in Q1, we expect it to continue to be a headwind throughout the year, we do lap some of that in Q4, so we'd expect to see a little bit less in Q4, but we gave our margin guidance to be down 100 to 125 points and really that.

To account for the freight piece.

Piece and then we're offsetting that through our strategic initiatives that we've talked about over the last year, which has helped us mitigate against some of the inflation earlier into this year. So I think we expect it to continue.

Need to persist we expect you know the freight cost to be a headwind for us this year and planned accordingly from that perspective from a sourcing perspective, a lot of diversification from our factories and so we haven't had a sourcing who has continued to navigate this incredibly well.

We have added more lead times into our transit accounts.

Calendar, knowing that there has been a slowdown and given the disruption we wanted to make sure that we were receiving this good timely and meeting consumer demand and in some cases, we have to bring those goods in a little early because it comes faster we'd rather err on.

On that side than last year, when we didn't have the goods to serve our customers. So we've been working through the supply chain disruption. We expect that that will continue we don't expect that to abate. This year and we'll continue to watch that into 2023, but I think we've made the adjustments accordingly, and our head of sourcing.

<unk> to work with our factories in our countries of production.

That's very helpful. Thank you and then.

Follow up would be on that you talked about a promotion simplification.

If you could talk about maybe how the traction has been with the consumer.

And just really your rewards programs in general as inflation has gotten higher.

Didn't know if that's been doing.

Higher adoption by consumers.

You have seen recently, maybe you could talk about what gotcha. Thank you.

Sure. So we just rolled out our seven 5% rewards program for our Kohl's charge customer, which allows them to earn about 50% more than the normal rewards customers.

When we tested that we saw about a point comp lift when we did that so we just rolled that out in may which is a portion of the way that we can continue to add value in a simplified manner, where they can earn back for every purchase they have use that kohl's rewards on any items in our store. So that's done.

Something that we've used to help us in the simplification perspective, the mainly to the.

The promotions that we've eliminated weren't resonating with the customer. So they were just general coupons or stackable coupons, and we werent seeing it really drive consumer behavior. Our strategy now is to be much more targeted in how we talk to those customers. So that we're talking.

Talking to them in a manner, that's going to drive their behavior back into the store. If we know that they really like to earn rewards. We can do certain things like a roundup because they will feel fulfilled and that if we really know that they love shopping Lauren Conrad we can be much more targeted to give them a coupon to buy Lauren Conrad so that continues.

To evolve obviously very data driven we have a lot of data on our customers both through our rewards program and our Kohl's charge program and that continues to inform and really refine the strategy as we move forward also pricing becomes really important as we continue to drive in all of these new customers. They may not have gotten some of the coupons are understand.

How you can earn rewards at that point, but how can we drive them in so they can just be really clear great value and with the four are driving and all these new customers. We are seeing them come back and we're seeing the lift across the store through accessories, adding to their basket women's and active so they're really seeing that true value and it allows us the opportunity to continue.

That's very helpful. Thanks again.

Next question is from the line of Paul <unk> of Citigroup. Your line is now open.

Thanks, It's Tracy Kogan filling in for Paul I first had a follow up on gross margin I was wondering if you could quantify the freight pressure in this quarter and whether it was higher than your plan and then where you guys hurt by higher markdowns in the quarter.

Is that a dynamic you're building in for second quarter is maybe you get your inventories right sized and then I have a second question. Thanks.

Sure. So I would say freight came in a little bit higher than we anticipated this quarter, but not meaningful you know obviously, we had extended our margin down 100 to 125 points to account for just a little bit of the heightened frame.

Freight cost in terms of markdowns, we came into this year pretty fresh from an inventory perspective, obviously, we were really light as we exited holiday and that's why we use the pack and hold to be honest Tracy as there was a lot of goods that came late that werent available, but we didn't want to have to mark them down they were.

Holiday sleep, our fleets that really still have a life and we will have a licensed ball so not really seeing a heightened amount of markdown and quite honestly, we haven't really fresh level of inventory as we're bringing these new receipts. Obviously when you look at the balance sheet up 40% for inventory seems like a lot, but when you break it down a lot of that in Sephora that's not.

Mark down that's really investing in inventory in the shops. The in transit piece isn't even an available for sale. So clearly not going to be a markdown liability and then like I mentioned the investments, we're making are in women's and a ton of it.

The newness really the dresses denim inclusive sizing and then active which is clearly a corridor strategy and bringing in an expanded amount of offerings. There specifically in outdoor we continue to expand with anybody I know it seems heightened when you look underneath it there's not a <unk>.

Lot of liability there from my perspective.

Okay, Thanks and actually.

So we have filed the follow up with on the women's business in the women's inventory I know you've been working to build that piece.

Piece of the business and I was wondering if that's kind of where you want it to be now as we enter two Q and do you still have the aged inventory in women's it's kind of an overhang are you through all of that with the older brands.

I think we're through all of the older brands, we exited those last year in Q1, obviously, we took the mark down so those that have been out of the building. So that's where a lot of is if you walk the core pad for women I feel really good with where the inventory is positioned.

Russ shop looks great. We were able to really have a big impression for dresses, which for us hasn't been a category that we participated in so that's all upside which is really helps from a women's perspective, I think they look at that obviously the spring seasonal selling was slow as Michel had mentioned, which weighed a little bit more on our apparel categories like a women and kids.

Now that the weather has shifted we've seen a notable shift in that business as well. So I think we feel well positioned with the investments we've made in the inventory in women's at this point.

Thanks very much so.

From a line of Omar Saad Evercore. Your line is now open.

Thank you thanks for all the information it would be helpful.

I Wonder if you could maybe dive in a little bit.

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