Q4 2022 Kohls Corp Earnings Call
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.
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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.
But are not limited to those that are described in item <unk> in Kohl's. Most recent annual report on Form 10-K.
Item <unk> of part two of the company's quarterly report on Form 10-Q for the first quarter of fiscal 'twenty two.
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.
Information necessary to reconcile these non-GAAP financial measures.
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With me. This morning are Tom Kingsbury, our CEO and Jill Timm, our CFO I will now turn the call over to Tom.
Thank you Mark.
Thanks to all for joining us this morning.
I wanted to start by saying that I'm excited to be leading calls during this pivotal time.
Causes a solid company, we have a substantial opportunity to make a difference in the retail landscape.
As you'll hear today.
We have a solid foundation.
In a highly motivated team with set of priorities to drive coal sales and earnings growth.
During the past three months.
<unk> had the opportunity to SaaS, our go to market strategies, our operational capabilities and processes and our organizational structure.
I've also visited a number of our stores across the country and engaged with many of our brand partners.
It is clear to me the cold spells an important need in the market.
<unk> highly relevant products at a great value to millions of customers and conveniently located stores.
Across the U S and online.
We are making great strides in beauty through our Sephora partnership.
However, we have lost some ground in other key categories.
Candidly I know, we can do better.
To reach our full potential we will refine our strategy and reestablished merchandize disciplines with a customer centric focus across the organization.
This will sharpen our positioning with customers allow us to capitalize on new opportunities and drive greater efficiency.
Our efforts have already begun.
We took a number of proactive measures in the fourth quarter to clear our inventories.
And we will seek to maintain the discipline by planning inventory down mid single digits percent going forward.
We also implemented several growth initiatives in Q4 that will begin to benefit our results in 2023 and structured the organization to run more efficiently.
One of the early messages I shared with our leadership team was that we must simplify how we work to drive efficiency.
Which in turn will allow for greater time to be spent on executing and driving our strategy.
In late January we realigned parts of the merchandising and marketing departments with the objective of driving efficiency in our operations.
This included consolidating the number of general merchandise managers to four from seven a structure that we had prior to the pandemic as well as transitioning planning and allocation to report directly to me.
And more recently I am pleased with the appointment of two key executive leadership positions.
Yesterday, we announced the hiring of Dave <unk>, as our new President and Chief operating Officer.
Davis, a 30 year retail veteran and will lead our enterprise operations, including a nearly 200 stores.
Global supply chain and distribution Center network real estate portfolio among other functions.
In addition, we appointed Nick Jones, as our new Chief merchandising and digital officer.
Nick has great experience across many of our categories, including apparel home and gift team and will be instrumental in leading our merchandising strategy and functions.
Both Dave and Nick will join us in the coming weeks and I look forward to our partnership.
Through these important actions I am confident that we have the right plans organizational structure and team in place to drive improved more consistent sales and earnings performance over the long term.
That said I want to be realistic and setting expectations.
The full impact of our efforts will take some time.
It won't happen overnight.
And we must acknowledge that we are implementing these actions in a challenging macroeconomic backdrop.
As Joe will discuss in more detail our actions against this backdrop form the basis of our prudent guidance for 2023.
With that context, I will now discuss our path to improved performance and the key priorities that will guide our forward action.
We are focused on four overarching priorities in 2023 that will drive overall sales and profitability.
Our enhanced the customer experience.
Accelerate and simplify our value strategies.
Manage inventory and expenses with discipline and strengthen the balance sheet.
Successful execution across these priorities will unlock considerable long term shareholder value.
Let me walk you through each of these priorities discussing the actions and intended outcomes we are driving towards.
The first priority is enhancing the customer experience.
It is imperative that we continue to provide the best experience for our customers when they shop at our stores and online.
We are focused on ensuring that our customers are finding the product assortment. They are looking for tailored to the way they shop.
Our partnership with Sephora is an excellent example of how we are enhancing the customer experience.
Nearly $8 million of our customers purchase beauty products at Sephora at calls last year and this will continue to grow in the coming years as we further expand our store presence.
In the fourth quarter, our total beauty sales increased 90%.
We achieved high single digits percent comparable beauty sales growth in the 200 supports shops that opened in 2021 and better than expected sales in the 400 shops opened in 2022.
We also continue to see strong digital sales growth.
Our Q4 performance in many ways cemented our positioning as a major player in the beauty industry based on our notable market share gains.
I want to commend the team for successfully capitalizing on the holiday selling period.
We drove value through our expansion in gift sets.
Merchandise, both in the shop and Nio.
With fragrance being a key category.
I am confident that we can build on this momentum in the months and years to come.
I recently met with support leadership and what I can tell you is that one we both are pleased with the partnership we have built and what has been accomplished in such a short period and two we both see immense opportunities to continue to drive sales and profitability in the future.
This summer we will open another 250 sephora shops.
Bringing our total to more than 850 stores, featuring the standard 2500 square foot space.
In addition, we are opening 50 smaller formats sephora shops by the end of this year with a plan to rollout to the remainder of the chain by 2025.
Moving beyond beauty, let me now touch on efforts, we have underway in our product and merchandising.
As it relates to our product assortment, we remain highly committed to the active business supporting our key brands.
Though we will re center, our focus on our customers' needs by capitalizing on multiple lifestyles.
We will rebalance portions of our assortment to capture our customers return to more normal purchasing behavior for their wardrobes.
Additionally, we will add more offerings across casual and career, where including for example, further expanding our women's dress business following last year's success.
We also see clear tangible opportunities in other categories in which we are underpenetrated.
Home and gifting or two areas that our customers expect more from us.
I believe kohl's can increase its penetration areas like home decor and become a destination for gifting.
To capitalize on this we are rethinking how we source portions of our assortment.
<unk> that we can find great values.
Increase our speed and broadened our offerings by going into the domestic marketplace regularly.
I now want to highlight the importance of our stores.
We have an incredibly strong physical presence across the U S.
They continue to represent nearly 70% of our annual sales and are critically important to how we engage with our customers.
I have worked with our real estate team in reviewing our portfolio and remain very comfortable that our stores are healthy.
Frankly, though we have to do a better job of driving greater in store productivity.
And I am confident that we can in the fourth quarter. Some of our early efforts began to bear fruit.
Looking ahead, we are rethinking, how we merchandise stores to deliver a better experience for customers to drive greater frequency of visits and capture more share of their wallet.
Let me share a few early examples of actions were taken in areas that simply weren't up to standard.
In early December .
We moved our gifting assortment to the front of the store from the back to better capitalize on peak holiday traffic.
This proved highly effective.
Resulting in sell through significantly higher than the prior year.
We will also showcase more products, including home and gifting near the front of the store to inspire our customers as well as feature more impulse products, which is a largely untapped opportunity for kohl's.
In addition to our stores. We are also highly committed to our digital business, which.
Which represents over 30% of our sales.
Two of our key digital growth initiatives include expanding Kohl's marketplace, and Kohl's media network closed marketplace is broadening our product offering online to capture incremental sales opportunities and Kohl's media network is leveraging our digital platform and site traffic to partner with more of our key brands and <unk>.
<unk> more advertising dollars as you just heard.
We have a lot of initiatives and actions underway to enhance the customer experience.
This will be a continuous focus of ours.
The retail industry is ever evolving.
And we must ensure that our positioning consistently meets the needs of our customers.
Now, let me transition to our second priority, which is accelerating and simplifying our value strategies.
And today's inflationary environment. It is very important that coal stands for value both in our pricing and in our messaging.
We provide great value to our customers through Kohl's cash our rewards loyalty program and our Kohl's card.
That said, we know that our promotional strategy at times can be a disadvantage to calls when compared to our competitors price focused strategies.
We have made progress over the past couple of years and our pricing and promotional optimization efforts, we will build on this progress in 2023.
Accelerating our efforts to reduce our reliance on general promotions.
We will test everyday value pricing with a small percentage of our product assortment and if successful grow it appropriately in subsequent years.
We fully recognize the sensitivities around pricing with our customers and we will approach this with great measure and flexibility.
But part of this will enhance consistency in our marketing messaging to improve the customer experience drive increased customer engagement and make our pricing less complex.
When we stand for something with greater clarity and value our.
Our customers do respond.
This is evident and the customer response, we have experienced in recent weeks related to our clearance effort.
Another way, we will enhance the value we are providing our customers is through our industry leading loyalty program.
Yeah.
In 2023, we will broaden the reach of our credit opportunities through the launch of our co brand card with capital one.
We already have a strong private label Kohl's credit card. So recognize that today's younger customers want greater flexibility in their payment options.
Let me now turn to our third priority for 2023, which is managing inventory and expenses with discipline.
As I mentioned earlier, we took proactive actions during the fourth quarter to clear out excess inventory and slow selling goods.
This is best seen through our inventory progression over the past few quarters.
Inventory was up 48% year over year at the end of Q2 up 34% at the end of Q3 and up just 4% at year end, despite a tougher sales environment.
Inventory is now generally back in line with our sales performance when compared to 2019.
We took markdowns following Christmas, which benefited our sales performance in the quarter.
Q4 comparable sales of down six 6% improved through the quarter with November down low double digits percent December down mid single digits percent, followed by up high single digit percent in January with a positive trend continuing into February .
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Joe will discuss the related impact to margin in more detail in a moment.
But it was important that we took these actions in Q4 to best position the company for 2023.
During the past three months I've spent a significant amount of time focus on merchandising.
Including establishing stronger inventory control processes.
We are putting the spotlight on fresh receipts and on driving turnover.
We will operate so that we have plenty of room to chase receipts, enabling better management of receipt flow.
As part of this we are committing to plan planning inventory down mid single digits percent going forward.
We will also adjust how we mark our goods.
Getting rid of excess inventory or slow selling items on a more even flow throughout the year instead of waiting until the end of the season.
In terms of spring 2023, we feel good about our Q1 inventory position.
With a steady flow of transitional receipts that arrived during January and February .
And considering there are still a lot of macro headwinds for Q2, we have left even greater liquidity and are open to buy with lots of room to chase.
I am optimistic that through our new inventory control processes, we will be able to increase our sales productivity and inventory efficiency.
Now, let me address our focus on expense management.
This has been a core strength of calls over time, but given the ongoing inflationary environment. It must be an even greater priority for the organization.
In 2022, our SG&A expense ratio drifted higher on lower sales.
Increased strategic investments and wage inflation.
Growing sales is paramount to easing the expense pressure, however, we must proactively capitalize on other opportunities.
Such as increasing self service capabilities in our stores.
Driving improved marketing efficiency and reducing spend across all areas of the company.
And lastly, our fourth priority for 2023 is strengthening our balance sheet.
Our focus remains on returning our balance sheet to its historical strength.
After a challenging 2022.
Our long term objective remains to manage our business at two five times leverage.
In January we replaced and Upsized, our revolver to $1 5 billion secured facility.
Which enhanced our liquidity and flexibility.
This was the right move given the ongoing macro uncertainty and the actions we are taking to drive coal sales and earnings growth.
While we were only partially utilized at the end of the year, we will increase our borrowings in the first quarter to fund working capital and the recently completed retirement of our February 2023 bond maturities.
However, we will work our revolver balance down throughout the year with no borrowings planned at year end.
Joe will discuss our other capital allocation priorities in more detail, including our commitment to the dividend, which represents a healthy yield at the current share price.
So to summarize enhancing the customer experience.
Accelerated and simplifying our value strategies.
Managing inventory and expense with discipline and strengthening the balance sheet or four overarching priorities for 2023 and the broader calls organization is aligned and focused on executing against each of them.
Now, let me frame up how we're thinking about 2023 in the context of the priorities and actions I just discussed.
As well as the anticipated soft consumer demand outlook.
We are prudently planning the year with sales down 2% to 4% and our operating margin and earnings pressured largely as a result.
Want to be realistic in setting expectations.
The benefits from our actions will take time, however, I am confident that successful execution against our priorities will produce the intended improvement in sales and earnings growth over the long term.
While 2023 may be viewed as a transitional year.
It is our objective to show progressive improvement against our priorities and actions as we move through the year.
We look forward to providing updates on future quarterly calls.
In closing I want to reiterate that Coles has a solid foundation in place.
I am excited to lead this company and see immense opportunity to unlock value.
I want to thank our loyal associates are serving our customers every day.
I will now turn over the call to Jill to discuss our fourth quarter results and 2023 outlook Joe.
Thank you Tom and good morning, everyone.
I will review our fourth quarter results and then discuss our guidance outlook for 2023.
The key takeaways from our Q4 performance and that we took meaningful proactive measures to better position the business for 2023.
And that our sales remained pressured by the persistent inflationary environment.
Net sales were down 7% driven largely by reduced traffic with.
With higher average ticket and lower units per transaction offsetting one another.
Our middle income customers remained pressured and continue to lean into our value oriented private brands.
As Tom indicated our sales trends improved throughout the quarter and were especially strong as we transition to a clearance focus in late December and January and this continued into February .
From a channel perspective store sales improved sequentially throughout the quarter, our down 3% to last year.
The improved performance was driven by having more sephora shops open and elevated clearance demand late in the quarter that largely occurred in stars.
Digital sales were down 12% to last year and accounting for 37% of sales.
From a product perspective sales of our private brands are relatively flat in the quarter.
With strong performance in many of our top private brands, including Sonoma Croft, <unk> Barrow Tech gear and Lauren Conrad.
Sales of our National brands were down high single digit percent, mostly due to weaker active home and denim performance.
Accessories was our best performing line of business up mid single digits percent to last year.
John sales growth in beauty with partially offset by lower sales of jewelry.
As a reminder is largely driven by in startup placement associated with removing the fine jewelry counter to make room for sephora shops.
We have an opportunity to do a better job solving for the lost sales in this category.
As it relates to some of our other categories men's and women's apparel outperformed the company average.
And then we saw solid results in Taylor draw young men's and outdoor.
While womens benefited from higher demand for elevated casual and dressy wear and a sequential improvement in internet.
<unk> continued to be a headwind within women.
The active was challenged across all lines of the business.
Home footwear and children's underperformed the company average.
Other revenue, which is primarily our credit business declined 13% in the fourth quarter.
Performance of our credit business continues to be pressured by a lower overall accounts receivable balances and normalizing loss rates.
Now, let me turn to the rest of the income statement.
Q4, gross margin was 23% down from last year's 33, 2%.
The decline was driven primarily by two items clearance markdowns of approximately 750 basis points.
And product cost inflation of approximately 200 basis points.
We also saw headwinds from higher shrink and higher than expected freight expenses in the quarter.
SG&A expenses declined 6% to $1 $7 billion.
Are you spending across marketing and distribution for mostly offset by higher store expenses driven by wage headwinds in the quarter.
Depreciation expense of $200 million was $7 million lower than last year due to reduced technology capital spend.
Interest expense of $78 million $13 million higher than last year due to supplier related lease amendments and increased revolver borrowings.
Net loss for the quarter was $273 million and loss per share was $2.49.
Turning to the balance sheet and cash flow.
Our inventory at quarter end increased 4% compared to last year, yet declined 10% against the fourth quarter of 2019, which is generally in line with the sales decline over the same period.
As Tom indicated we are committing to plan inventory down mid single digits percent, calling fireeye.
Operating cash flow was $707 million in the fourth quarter.
Capital expenditures for the quarter were nine.
And for the year were $826 million.
As a reminder, capex in 2022 was driven primarily by the 400 Sephora openings store refreshes and five new stores and four relocations.
In 2023, we are planning to invest $600 million to $650 million, including 250, Sephora openings and additional 50 small format for a shop.
So our refreshes as well as seven new stores, one of which is a relocation.
Now, let me provide an update on our capital structure and capital allocation priorities.
Strengthening our balance sheet is one of our top priorities in 2023.
It is important that we rebuild our cash position and it remains our longer term goal to manage this business at a leverage target of two five times.
We will make progress on both cash and leverage as we move through 2023.
We will be utilizing the revolver to fund both working capital and $164 million bond retirement in the first quarter and while sequentially work it down through the year with no anticipated borrowings at year end.
In addition to the February bond retirement will also retire $111 million of bonds in December of 2023.
As it relates to returning capital to shareholders. We will continue to prioritize our current dividend, which represents a healthy yield for our shareholders.
During the fourth quarter, we paid $55 million or <unk> 50 per share in dividends to shareholders.
In addition, as previously disclosed on February 20, <unk>, Our board declared a quarterly cash dividend of <unk> 50 per share payable to shareholders on March 29th.
And as it relates to share repurchases as we stated on our Q3 earnings call. We are not planning any additional repurchase activity entire balance sheet strengthened.
Now let me provide details on our outlook for 2023.
As you've heard today, we are highly focused on four key priorities to drive improved sales and earnings performance.
This coupled with a still challenging macroeconomic environment support the prudent stance on planning the upcoming year.
As Tom indicated is important that we establish realistic expectations of our performance given the actions we have underway.
Has the flexibility to take additional action, if appropriate and to build on our progress through the year.
For the full year, we currently expect net sales to decrease 2% to 4% versus 2022.
And includes the 50, <unk> week, which is worth approximately one percentage point of growth.
Operating margin to be approximately 4%.
And EPS to be in the range of $2 10 to $2 70, excluding any nonrecurring charges.
Let me share some additional guidance details.
We are planning other revenue to be down in line with our overall net sales in 2023.
We expect D&A to be approximately $770 million.
Interest expense of $350 million.
And our tax rate to be approximately 23%.
And from a margin and cost perspective.
We expect gross margin to stabilize in 2023 and be in the 36% to 36, 5% range.
Freight expense is expected to be a tailwind with progressive benefits through the year and.
And we expect product cost inflation to remain a headwind in the first half of the year.
As it relates to the promotional environment, we expect it to remain competitive.
We expect SG&A dollars to deleverage slightly.
Wage inflation will continue to be a headwind offset by benefits from a more efficient organization structure and fewer sephora openings this year.
Lastly, I want to highlight a couple of items about how we are thinking about the year.
As it relates to Q1, we have seen sales trends quarter to date above our annual guidance.
However, much of this upside has been driven by elevated clearance activity that has a lower margin.
As we work through the clearance inventory, we expect trends to moderate.
We expect both our sales and earnings to build through the year.
Our guidance assumes that EPS will be lower in the first half of the year as compared to last year with the second half benefiting from easy freight and product cost inflation as well as lapping of the inventory actions taken in the fourth quarter.
With that Tom and I are happy to take your questions at this time.
Yeah.
Thank you as a reminder, I would like to let everyone know to press Star then the number one on your telephone keypad to ask a question.
We will go first to Bob Gerbil at good go ahead of Securities.
Hi, good morning, and Tom welcome.
I guess just two questions that I have the first one really for Tom can you elaborate some more just on the opportunities that you do see now at Kohl's and what excites you about the opportunities and the second question is really for Jill.
When you look at the guidance that you've given us.
Can you just.
Elaborate a little more is how you have approached the guidance how you think about it.
Just how we should be expecting things to play a little more that would be great. Thanks.
Hi, Bob.
How're you doing.
Good.
Thanks, Paul.
I think <unk> has a lot of opportunities.
So really a solid company.
With.
Things in place already I mean I think.
<unk> done a really nice job to set things up such as the support business I think thats.
We will continue to be a big opportunity for us, it's bringing in a different consumer.
A younger consumer and more diverse consumer so I think thats all very good.
We just need to improve some of the disciplines that we have the inventory discipline, we got out of control.
In 2022, we did a good job in 'twenty, one 'twenty two.
Obviously, we have big Spike spike and the inventories so we need to improve those disciplines, we need to be more agile in terms of having open to buy to spend every single quarter. So that we can chase the business.
It's better to to.
To understand what the customer wants and go after it.
Then to buy it all upfront and hope itself okay.
We're doing a lot of a lot of that we already took.
<unk> actions in the fourth quarter as Joe and I both said.
We also want to look we're looking at our store operations.
We think that's a big opportunity for us.
We're working on.
Changing some of the flow of product not tremendously, but we feel that we need to have more gifting upfront, we did that in the fourth quarter and it did.
It very well so we've continued it for Valentine's day from we're going to do it and mother's day.
True gift, giving periods just to have the store look a little bit different we're working on sidelines, we're working on reducing the amount of of graphics and science. We have in the store just to have a more modern feel.
In our in our stores overall, but.
We want to obviously.
Have higher productivity in stores and Thats, what were working on as well as we want to continue to grow our digital business overall.
So, but I think in general.
I think theres a lot of opportunities. The reason why I came back to calls.
Is because I see those.
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And I see that we can take advantage of those opportunities in the future.
And then Bob go.
So our guidance I think what we did is we took a cautious plan as we look to the year, we wanted to be appropriate with our guide given the environment as high inflation interest rates are rising and we know that has a large impact to particularly our middle income customer. So as we are navigating the uncertain times, we have a lot of change that time.
Had outlined not only in his script, but obviously just in his remarks as well in terms of what we see ahead of US. So we do expect the sales to build throughout the year, particularly as these initiatives roll out we're going to have more sephora stores open we're going to work more on the gifting and Paul on the core really seeing that build throughout the year and then.
As well with gross margin, we'll see that build throughout the year as well with the freight moderating we're gonna see commodity costs coming down starting with our back to school receipts and then we're going to start taking more timely clearance Mark downs throughout the year and this will actually have a bigger impact to Q2 margin because we are.
Typically taken these seasonally you will see a negative impact in Q2, but a positive impact in Q3 as they move those marks up and take them much more timely, particularly on our spring and summer goods from that perspective, and then an SG&A well expect Q2 and Q3 to have more costs associated with them just due to the timing of when we're opening up.
Our sephora shops.
Last year, we started that construction earlier in the year and this year, you'll see it more in Q2 and Q3 with the 250 stores and almost 50, new chapter. So that's kind of how I would make the model work in your belt work from a guidance perspective.
Thank you.
We'll move next to Gabby Carbone at Deutsche Bank.
Hi, Good morning, Thanks for taking my question Tom. So previously Kohl's is targeted at a 7% to 8% long term operating margin you're guiding to 4% for FY 'twenty. Three was wondering if your confidence still in that 7% to 8% goal over time and what does the coverage look like to get there. Thank you.
Well I'll talk for a few minutes and then I'll have Joe.
But overall.
We're still confident in the 7% to 8% target that we have a.
A lot has to do with rebuilding our sales.
The obviously get to get to those levels again.
But we're not changing we're not changing our.
Long term guide at all because we feel we can get there.
But I'll, let Joe talk about it yet.
I think the framework that we gave you with the 78% still exists today and as Tom mentioned, it really starts with sales growth and if you recall in that framework. It was a low single digit sales growth that was the beginning of that framework. So I think we feel confident in the initiatives that we've outlined today like I mentioned that we're going to get back to that growth pattern, but as Tom suggested it takes.
Time to do that so we're moving things in the right direction. So we look at this as a long term framework that still exist you go into the margin side of things. Our guide this year that the low end of that at the 36 to 36 and a half, but we do think we're going to continue to see benefits, particularly around the strong inventory management that Tom spoke about we're going to have better inventory control processes.
This will drive turn we'll have better Reg selling so we do see that we can continue to get to that higher end, there and then from expenses.
We've always had a very strong focus on expense discipline at calls we know we can leverage at about a one and a half comp. This continues to be a focus for us we're looking for efficiencies across the business, but particularly youre going to see that around like automation and self service in our stores automation in our distribution centers, we've done a lot of organizational optimization.
We're looking at marketing efficiencies all places that we can continue to lean into to bring down our SG&A run rate as well. So I think overall hopefully you heard from both Tom and I were very confident in the long term framework for op margin getting back to 70%.
Great. Thanks for that and just a quick follow up. So you mentioned your private brands are flat for the quarter, which is encouraging just curious how you're thinking about leveraging our private brands portfolio moving ahead, especially our consumers are continuously seeking more value.
Yeah, I think obviously this is you said it value and I think in this environment value is very important to the customer and theyre seeking that out and we've seen for the last several quarters, they've leaned more into our proprietary brand portfolio because it brings to them that value, but we've also seen great performance by the.
Flora and some of our new brands like Tommy Hilfiger, and Eddie Bauer and outdoors. So I think value goes across the chain and bringing them a quality product for a price. They think is good and I think that's where you can see them, making those tradeoffs. Some time given the wallet in the middle income customer is being more stretched and of course, we sell discretionary items.
So I think having that dual portfolio of private brands with the National brands has worked well for our consumer channel to make that pivot given the constraints on their wallet today. So we're taking advantage of that and we'll lean into it again based on what Todd mentioned being much more in a chase model. So really working on how we can bring a faster.
Your model through those proprietary brands to life and we have a lot of people working on that right now by using more west coast suppliers and doing more direct to our direct vendors as well. So I think theres ways that youll see us continue to feed into that private brand portfolio and doing that with the inventory discipline.
<unk> indicated.
Yes, I think great proprietary.
I think that the private brands are a really important part of our business.
But we're going to spend a lot of time.
In 2023.
Proving our performance in the national brands as well, we need to do both.
Yes.
<unk>.
We stumbled a little bit.
The national brands in 'twenty two but.
Our goal is to have both.
National brands.
In private brands perform at a high level.
Great. Thank you best of luck.
Thank you.
We will go next to Mark <unk> at Baird.
Good morning, Thanks for taking my question and welcome Tom.
Thank you.
Your commentary about utilizing the domestic marketplace is interesting is that strategy, primarily focused on home decor, and gifting or do you see an opportunity in apparel and other categories as well and I am curious if there are if you need to make incremental investments in merchandising of the buying teams in order to.
Build that muscle within the organization.
We're really looking at chasing goods across all categories of business to be honest with you.
Sure.
There is you know.
Theres always ample product that we can we can chase.
I've experienced that before.
And another place where I work that.
You can do that pretty readily we.
We do have the right structure in place to do that.
We have the right buying teams the right.
GM structure.
Structure to do that.
There's nothing really I think that could prevent us from from doing that.
But managing our inventories that's the key I mean, we have to make sure that we have opened a spend that's the only thing that could hurt us in that pursuit, but in general I think it's across the board that we can do it.
Thank you quick follow up for Joe just with gross margin any more color you can give us on the first quarter I guess, specifically the clearance headwind was.
Obviously very large for the fourth quarter. It sounds like that activity continued into the early first quarter. So just relative to that 750 basis points, how should we be thinking about.
The headwind early in the year here. Thank you.
Yes, I think what we're seeing is afraid of moderating that's going to happen throughout the year, we're going to get some product cost benefits starting with our back to school and obviously, we took a lot of clearance into Q4, the selling is continuing to benefit us into February like I had indicated but the mark happen.
And in the fourth quarter. So it's not as punitive into Q1 I think the thing with the clearance markdowns that were looking for is just taking a much more timely when there are more relevant to get better sell throughs and so the one quarter that I would say will look different will be Q2, because we typically havent done clearance in Q2, we wait until Q3, so we're going to move those up CLC.
Q2 be a little more margin pressure because of that change and then that will offset into Q3 and of course Q4, we don't expect to have a repeat of this year. So youll see a large benefit into Q4.
Great. Thank you best of luck.
Alright, thank you.
We will go next to Matthew boss with JP Morgan.
Great Thanks, and welcome aboard Tom.
Thanks, Matt.
So Tom maybe help us to think about the timeline needed for in the release and what you've talked about is refining the strategy <unk>.
Stablish ing the merchandize disciplines.
Maybe larger picture, how do you view this turnaround opportunity relative to your past retail experience.
At a micro level, how should we think about the market share opportunity as we think about spend from existing customers relative to new customer acquisition that might be needed.
Okay.
Hi, Matt.
Timeline.
We.
It doesn't happen overnight.
Really doesn't happen overnight.
But we've already made some progress.
Obviously, we've got our inventories at the level they should be.
And were planning our inventories for the first and second quarter.
Appropriately.
But it's going to.
We're going to make progress in 2023, but.
We feel.
As any any business. It takes it takes a while for it to really.
Get traction.
Hum.
But.
A lot of our lot has already.
Got it.
We've already done a lot of things so far excuse me so.
Even in my previous experience.
It took us a while to get things going in the right direction.
And but it's just something you can do overnight, but I wanted to make something very clear.
It's not the cause is.
A different company than my previous company.
We have a lot of really good things already in place and the strategy. So it's not it's not a overhaul.
There are there are some things that we need to be doing.
And we've already started working on it but it's not a total overhaul I just wanted to make sure that people people understand it I think theres a lot of good things in place are already today.
As far as.
Market share.
I think that if we can execute we can gain market share from many different places.
Great Best of luck.
We'll go next to Dana Telsey.
At Telsey Advisory group.
Hi, Good morning, everyone and welcome Tom as you think about the merchandise mix Com Kohls active has always been a big portion of where they were driving to what is your ultimate goal in merchandise mix and what do you think would be most effective and then also Joe in terms of.
Omnichannel in delivery expense and some of the headwinds there how do you see that impact on margin in 2023 in the framework of whatever is happening with freight expense and supply chain. Thank you.
Well, we're going to let the customer tell us what they want.
I think establishing targets in terms of.
<unk> I don't think Thats in the best interest of our customers overall, so over time, our mix will evolve to two.
To what the customers looking for.
Right now we feel that the active business is really important but we also feel like outdoor is important as well.
So we're going to integrate into some of the presentations.
Some of the outdoor product that we've already we've already done that but I'm.
I'm not going to set targets in general because.
We have to be.
Agile and we have to do.
We have to build the assortments relative to what the customer wants not what targets we set.
You will see more.
In the home store more gifting product more impulse product going forward.
<unk> that.
I believe in a lot in the customers already telling us that's what they want based on the sell throughs, we had in the fourth quarter and gifting in our valentines.
Assortments.
It did very well because it was repositioned in the front.
So.
Thats just following what the customer wants and that's where we're going to continue to do.
Hey, good morning, Dana in terms of Omnichannel, what I would say, it's obviously digital is always an incremental pressure when it does come to that cost of ship. We are seeing obviously for a cross like we mentioned moderating so not seeing as much of an increase there that we have in the past, but it will always as we increase that penetration of digital B E.
<unk> I think so if you heard today, we think there's substantial opportunity to grow our store productivity and so that is definitely a place that helps us offset some of those headwinds because of the penetration won't be growing as much. If we can grow both channels and I think that's something we've heard a lot about our focus is how do we bring back the productivity into our stores.
And whether that's through the presentation changes through the new categories that Tom has mentioned and really just a focus to drive and new customers through initiatives such as the for US. So I think we see it as always a extra headwind, but it isn't quite as predominant as it's been in the past and I think the third piece of it is we're also seeing a lot more efficiency out of that.
In fulfillment centers and they as we continue to put more products through those centers, we are getting more efficient to how we can get it to the customer and then of course, we continue to utilize our stores, which gets us with and.
A couple of days of our customers as well so we're able to do that in a really efficient manner. So our stores continue to play a key role in our digital delivery, which actually makes our inventory even work harder. So as we talk about that inventory discipline and turning inventory. That's another lever that we can utilize as well. So I look at we have a huge opportunity to grow stores, which will help us kind of.
Some of the headwinds we've seen on the cost of shipping that in the past.
Thank you.
Our next question comes from Oliver Chen at TD Cowen.
Hi, Tom and Joe regarding the new strategy had a bigger picture question as the younger customer and capturing the traffic of the younger customer womens apparel in particular has been an opportunity.
And would love your thoughts on as you think about homeland gifting what percentage mix do you see as an opportunity or a hypothesis there and as we think about gross margin return on inventory Jim Marias.
The turns in margin profile differ and I assume the opportunity will outweigh any of those factors Joe I'd Love your thoughts on inventory control processes, and what specifically do you see as lower lower hanging fruit.
And as we think about this inflation and inflation.
What does your forecast include in terms of average unit retail. Thank you very much.
So I'll take the first part and then I'll, let Jill take.
The second piece of this.
Well you know having sephora.
Bringing sephora and he is already bringing in a younger consumer.
One of the other things that we're working on is.
Ancillary products, such as such as womens.
That when the younger customers coming in to buy Sephora.
Want to make sure that they can also buy women's apparel women's accessories women's footwear.
Et cetera, so we really feel that.
We are started we have something that's bringing in a younger consumer now we need to expand it to other categories within the store as far as the mix goes in terms of what percent.
As I just mentioned before we're not going to win we're going to let the customer tell us what level.
The mix should be an in home decor and gifting.
Sure sure and I think from an inventory control perspective, I, just think the processes and the disciplines. We have in place in terms of the taste model and really letting yourself have some liquidity and not making all the buys upfront like Tom mentioned is a core fundamental that we just really need to reinstate instead of allocating all of our goods ahead of time I think in this.
Way, we can chase into the right items. It helps us sell throughs. It helps the margins because you're buying the right. Good. So you don't have to take as many marks at the end of season. So I think that is really a core discipline that really needs to get re instilled into the organization and then quite honestly the liquidity is going to go where the demand is so even though <unk> plant at the beginning of the year.
We need to be agile and moving through those based on what the consumer is looking for and then giving that open to buy to the right areas. So I think that's fundamental I have always been really focused as you know on inventory control. So I love the new disciplines that Tom has brought to the organization and then in terms of kind of expense excuse me just one SEC.
We're just going to spend and we already have and we're just going to spend a lot of time on inventory.
That area is going to report directly to me.
The importance.
That inventory control is in terms of everything we wanted to accomplish.
In 2023 and beyond.
Alright, no problem and I think just on the inflation deflation from an AUR perspective, I think that isn't anything we saw a lot of inflation in our AUR. This year in terms of.
Or in a discretionary spend it wasn't the same as you know if you're buying or selling things people need. So we haven't been able to really expand on the EUR. Our AUR growth has really been more of the mix of the goods that were bringing to the table and again with all with the lens of value, but you bring in Sephora, obviously, a higher ticket item, it's something that we have.
Seeing continually perform for us.
Despite the ups and downs in the inflationary environment, we've brought in different item product like Tommy Hilfiger, and Calvin Klein had higher ticket. So we're really going to be I think managing through this in a very easy manner, because we didnt bring tickets up and then 65% of our sales are national brands, who are really going to be ticketed based on what those brands are seeing.
Across the landscape and then we'll move with them as well. So I think one thing is we didn't take things up because of inflation. So theres not a lot of room to have to take things down either from my perspective.
Okay, and Tom one follow up on making pricing less complex.
What's the timing in which you will execute on that.
Kohl's cash is pretty iconic and the company has been on a journey to simplify and amplify.
<unk> can be more so what's different about what you think needs to be done.
What kind of guardrails might be.
Good ideas around making these kinds of changes.
Well, whatever we do we're going to be very thoughtful.
And do everything at the appropriate pace.
One of the things that we're doing.
Chart around the back to school period, we're going to bring in some product.
That have everyday low prices.
It's small.
Single digits as a percent to total and we're going to learn from that and then determine.
Determine how big it's going to be or maybe it won't be big at all.
But it's in test mode overall.
We have a lot of layering of promotions and stuff like that and we're just going to try to simplify a lot of that we're not going to back off of Kohl's cash.
That's very important component to the value equation.
<unk>, but we're just going to we're going to test other things we want to focus on.
Spending more markdowns on clearance because as Joe said, we're going to take clearance at the appropriate time, we will.
To allocate markdowns monthly.
To address our clearance inventories, which is really important.
We're going to be more targeted and a lot of our promotions as well.
Right now we have a lot of general.
Promotions general audience promotions.
Which.
We're going to look at that we've already we've already.
Reviewed.
The first and second quarter figure out, where we could do that but and spend more of our markdowns on targeting certain areas, where we feel that we have an opportunity.
But everything we do.
It's going to be at the right pace.
Best regards thank you.
And we will take our final question from Paul <unk> at Citi.
Okay. Thanks, guys, it's Tracy Kogan filling in for Paul.
Two questions on Capex it looks like.
Reducing your Capex this year, which is understandable, but just wondering if that's a good run rate.
And you are no longer expecting that $2 5 billion over three years and then secondly, I was hoping you could update us on the Amazon partnership and how do you assess the traffic driving.
Results of the rich our Amazon returns in stores and how Youre doing converting as you look back at this year overall thanks.
Sure. So I think for Capex, obviously trace that we've talked about one of our core strategy of being the strengths and back to the balance sheet. So we did make that reduction this year in terms of really focusing on the return projects. So of course still going to invest back in sephora.
And then adding those 50 small stores now that we have a solution to hit all of our stores from our sephora perspective, but really being able to pull back into those more meaningful areas. Just given the fact that we are trying to build back our cash so given what we spent this year and next year is obviously hitting two $2 5 billion is probably not where we're going to be at this.
But we will continue to assess what that capex needs to be really based on a return model, but just to get to the math, we won't be making up that difference over the next couple of years I think are really really thoughtful and as we've said through this whole call is this going to be long term. So we're going to build back to that position and strengthen our balance sheet perspective, but thats going to also take some time, because we need to make the right investments for <unk>.
Growth for our business as well and then in terms of Amazon I think Amazon is one of many hopefully you've heard today initiatives that we're looking to drive traffic with so along with Sephora and even home decor gifting impulse all things that we'll have customers coming in more to see the changes it's more impulse driven.
We're really going to just continue to be focused in all of our initiatives to drive traffic and Amazon is obviously one of those key items before I being another one in terms of driving new customers and traffic into the store from a replenishment perspective, and then just really the whole store experience to drive.
More newness.
Our exploration so I think Amazon is just the key to that strategy in total.
Great. Thank you.
Thanks for joining us today.
And this concludes today's conference call you may now disconnect.
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