Q2 2023 Kohls Corp Earnings Call
Speaker 1: Good morning, my name is Rob and I will be your conference operator today. At this time, I would like to welcome everyone to the Coles Corporation second quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad. If you would like to withdraw your question, again press the star 1. Thank you. Mark Rupp, Senior Vice President, Investor Relations and Treasury. You may begin your conference.
Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause COLE's actual results to differ materially from those projected in such forward looking statements.
Such risks and uncertainties include
We feel good about our overall assortment and this fall we will further expand our gifting assortments, which were highly successful last year.
During the second quarter, we opened nearly 200 sephora shops and this month, we are opening approximately 50 shops.
These openings will complete the rollout of our 850 2500 square foot shops.
We are also opening a smaller format 750 square foot support shop in the remainder of the chain.
We opened five of these smaller shops earlier in the year and they continue to drive solid beauty sales.
Exceeding our expectations.
We will open an additional 45 in the third quarter, bringing us to 50 by year end.
In total Sephora will be featured in more than 900 of our stores by the end of 2023.
And we will expand the small format shops to the remainder of the chain over the next couple of years.
Building, our home business represents another major growth opportunity.
We will optimize our existing offering and capitalize on significant opportunities in areas, where coal historically has not had a meaningful presence.
These include gifting.
Pulse to core and Pat.
Many of these new Assortments will begin to set in fall with a larger presence in holiday.
During the second quarter.
The home category showed relatively strong relative improvement as I noted.
This was primarily driven by our existing offering such as housewares and cookware as well as by encouraging early reads from our new growth initiatives.
Yes.
We continue to leverage registered removals.
In additional in aisle space to create a seasonal gifting destination, which supported strong sell throughs during mother's day.
Bothers Day Memorial day, and the fourth of July .
Currently we are showcasing in back to school items, such as backpacks and dorm products and later this fall, we will highlight harvest and holiday products.
In addition, we will expand our offering of impulse products in spring of 2024.
Which will include beauty wellness toys snacks and other items.
In home decor, we are forming new vendor partnerships.
Building inventory with market buys on a weekly basis and enhancing our in store merchandising across areas like Walmart glassware, botanicals storage and lighting to name a few.
And in pad, we have expanded dedicated space to the category across the chain. Following a successful 50 store test last fall.
Our offerings in this space include things like dog beds.
Dog apparel and pet toys.
<unk> delivered a strong second quarter sales performance driven by the additional space and we expect to maintain our momentum moving forward.
We're also committed to capitalizing on new store growth opportunities over the long term.
In 2023, we remain on track to open seven new stores, including one relocation.
Two of these stores opened in the first quarter with the remaining five set to open this fall.
Turning to our apparel and footwear offerings, we remain focused on optimizing our apparel assortments to reflect our customers' interest.
Okay.
Two areas that we have highlighted in recent quarters in response to customer demand, our polished casual and dressy offerings, which continue to resonate with our customers across womens mens and childrens.
We are leaning into these areas and women's through key brands like Lauren Conrad nine west.
And simply Vera Vera Wang while also expanding our dress offerings in both special occasion and casual.
In men's we have seen strong results in areas like <unk> dress shirts, and dress pants and will continue to amplify these areas moving forward.
And then children's we are expanding little and co as well as continue to build on our core jumping beans, and carters businesses.
<unk> also remains an important piece of our business.
While trends in the overall extra space remains soft we are focused on building on our recent success in outdoor and golf apparel.
While also working with our National brand partners to bring in newness.
In the second quarter, we were pleased with the sales trends in our Eddie Bauer offering an outdoor as well as in Nike and under armour footwear.
To summarize our top priority of enhancing the customer experience, we are focused on driving significant growth in sephora.
Shifting impulse home decor and longer term new stores.
We also see several opportunities to improve our core apparel and footwear offerings.
Now, let me discuss our second priority, which is accelerating and simplifying our value strategies.
We have many efforts underway to simplify how we are showing up to the customers as we believe we can drive greater customer engagement and conversion.
Yes.
Yes.
During the second quarter, we continued to work we began in Q1, reducing general promotions and eliminating online only offers in favor of a more targeted offers and clearance events to clear slower selling goods on a more regular basis.
And we are testing key value items, which is more competitive and consistent pricing on select merchandising within our private apparel and home brands.
This is a continuation of our efforts to make our pricing more simplified.
We're also evolving our marketing message with greater clarity around strong price points in our in store graphics and in our digital and broadcast ads.
While it remains early we are very encouraged with the response, we're seeing from customers are key value items are performing positively.
This is a compelling opportunity for our business over the long term and based on initial results. We are now planning to thoughtfully scale. It in 2024.
Lastly, we will continue to leverage our industry, leading loyalty program as a mechanism to deliver even more value to our customers.
Kohl's has a strong loyalty foundation, which includes Kohl's cash <unk> rewards and our private label credit card.
Building on this we launched a co brand credit card with capital one to select customers in the second quarter.
While we expect the co brand card to have only a small benefit to this year's results it will grow and contribute more meaningfully in the years to come and so you offered to a greater number of existing and new credit customers in 2024 and 2025.
I will now transition to our third priority, which is managing inventory and expenses with discipline.
During the second quarter, we reduced inventory by 14% compared to last year.
Exceeding our goal of planning inventory down mid single digits percent.
We operated with greater open to buy which allowed us to stay agile as the demand environment evolve in the second quarter.
As we implement new planning and allocation processes, we're becoming more responsive to the customers demand.
Operating with additional open to buy to chase trends and minimize risk.
Maintaining better in stock levels in core basics and improving inventory flow from our distribution centers to the selling floor.
Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline.
Turning to expenses.
<unk> has a history of managing costs with discipline.
We are continuing to proactively capitalize on opportunities to drive efficiency across all areas of the company.
Couple of examples include our goal of lowering our marketing spend ratios of 4% and embedding more technology into our operations to improve productivity.
Self checkout kiosk in our stores and a higher level of automation to more efficiently flow goods in our newer e-commerce fulfillment centers.
And lastly, our fourth priority is strengthening our balance sheet.
Our focus remains on returning our balance sheet towards the historical strength with a long term objective of managing to a two five times leverage level.
During the second quarter, we generated solid cash flow, which allowed us to reduce our revolver borrowings by $205 million.
And returning capital to shareholders remains a commitment of ours.
Joe will discuss our overall capital allocation priorities, including the dividend, which continues to represent a healthy yield at the current share price.
In closing I am pleased with our second quarter earnings I.
I am confident that the work we have underway is positioning kohl's for long term success.
Our organization is operating with strong discipline and efficiency in many of our growth driving initiatives are just beginning to take shape.
As it relates to our more recent trends our August to date sales are off to a good start driven by back to school and our fall seasonal items.
I want to thank the entire <unk> team and especially our store associates for their hard work and adaptability to position us for improved future performance.
Hope, you'll get a chance to visit our stores and see all the good work underway I will now turn over the call to Jill to discuss our second quarter results and 2023 outlook.
Thanks, Tom and thank you everyone for joining for today's call I will review, our second quarter results and provide details on our fiscal year 2023 guidance.
And Tom shared we made additional progress against our strategic priorities and delivered earnings in line with our expectations.
Turning to our results net sales declined four 8% in the second quarter.
Four 1% year to date.
So our sales were flat to last year in Q2, driven primarily by strong sales growth with sales in home showing the most improvement versus Q1.
Digital sales remained pressured in Q2 down 17% to last year and penetrate that 25%.
So both are up versus pre pandemic levels.
We are seeing customers shift back towards sorry.
<unk> sales were impacted as expected by the elimination of online only promotions as we work to simplify our value strategies.
From a product perspective national brands outperformed private brands in the quarter.
Top performing national brands, including Nike under armour, CAGR Izod currently and Eddie Bauer.
Performing private brands by apartment, nine LC, Lauren Conrad and jumping beans.
Accessories was our best performing category up 25% to last year, driven by so far at call.
The increase in BD sales was partially offset by display sales in jewelry.
Yes.
As it relates to some of our other category as previously noted homes showed the strongest improvement in trend from Q1 with encouraging early reads in our new growth categories.
Footwear also showed a trend improvement driven in part by increased Nike and under armour sales in the category.
Other revenue, which is primarily our credit business declined 3% in the second quarter, an improvement in trend versus Q1.
Moving down the P&L Q2, gross margin was 39% a decline of 61 basis points to last year, driven by product cost inflation and higher strength.
Partially by lower freight expense and digital related cost of shipping.
Year to date gross margin was 39% flat to last year.
SG&A expenses increased one 6% to $1 3 billion.
The increase is primarily due to higher store expenses, driven by sephora openings wage pressure and store experience investments.
This was partially offset by lower marketing and distribution costs.
Year to date SG&A expenses have decreased one 3% compared to last year.
Depreciation expense of $186 million was.
It was $20 million lower than last year due to reduced technology capital spend.
Year to date as compared to last year depreciation expense decreased $32 million to $374 million.
Interest expense of $89 million was $12 million higher than last year due primarily to increased revolver borrowings.
Year to date interest expense increased $28 million to $173 million.
Net income for the quarter was $58 million and earnings per diluted share was <unk> 52 cents.
Year to date net income was $72 million and earnings.
Per diluted share was <unk> 65.
Turning to the balance sheet and cash flow.
We ended the quarter with $204 million of cash and cash equivalents.
Inventory at quarter end was down 14% compared to last year.
Leading our commitment of a mid single digit decline.
As Tom shared we feel good about how we manage inventory in the quarter now how we are positioned entering the fall season.
Operating cash flow was $430 million in the second quarter and free cash flow was $176 million.
We continue to expect inventory to be a source of cash during the remainder of the year, which will drive strong positive cash flow generation in Q3 and Q4.
Capital expenditures for the quarter with $244 million.
We are still planning for approximately 600 million to $650 million of capital expenditures in 2023.
Now, let me provide an update on our capital structure and capital allocation priority.
Strengthening our balance sheet is one of our top priorities in 2023.
It is important that we continue to rebuild our cash position and are in and our longer term goal to manage this business at a leverage target of two five times.
In the second quarter and plan for a reduced our revolver borrowings by $205 million.
Looking ahead, we will continue to utilize the revolver in Q3 for seasonal working capital build related to holiday receipt.
However, we continue to plan to be out of the revolver by year end inclusive are retiring $111 million of bond in December 2023.
As it relates to returning capital to shareholders will continue to prioritize our current dividend, which represents a healthy yield for our shareholders.
During the second quarter, we paid $55 million or <unk> 50 per share in dividends to shareholders.
In addition, as previously disclosed on August eight the board declared a quarterly cash dividend of <unk> 50 per share payable to shareholders on September 20th.
Now let me provide details on our outlook for 2023.
As you've heard today, we are pleased with the progress we are making against our priorities.
Our second quarter earnings were in line with our expectation and as Tom indicated August sales today are off to a good start.
Based on this we are reaffirming our full year financial guidance.
For the full year, we currently expect net sales decreased 2% to 4% versus 2022.
Includes the 50, <unk> week, which is worth approximately one percentage point of growth.
Operating margin to be approximately 4% and diluted earnings per share to be in the range of $2 10.
To $2 70.
Excluding any nonrecurring charges.
Lastly, I want to highlight a couple of items about how we are thinking about the third quarter.
We continue to expect our full year gross margin of 36 to 36, 5% range for Q3, we expect it will be approximately 38%.
Our full year SG&A expense outlook is also unchanged with slight deleverage expected.
For Q3, we're planning SG&A expense to increase approximately 3% as compared to last year, driven by additional store related investments and 45, Sephora small shop openings.
With that Tom and I are happy to take your questions at this time.
At this time I would like to remind everyone in order to ask a question Press Star then the number one on your telephone keypad.
And your first question comes from the line of Bob <unk> from Guggenheim Securities. Your line is open.
Hi.
Good morning couple of questions first Tom for you.
When you think about the <unk>.
Progress that you're making can you just talk a little bit more around the learnings the opportunity that you see now that youre sort of into it a few quarters in.
In terms of the business and where you're taking it and the second question.
Jill can you give us some insight on credit just in terms of the.
The relationship to the <unk>.
Bad debt delinquency rate and I think the launch of the new program that Youre Youre doing this year, just sort of how we should be thinking about trends in credit right now and as you look to the back half of the year.
Okay.
So Bob to talk about what's going on with the strategy.
We feel pretty good about whats been going on here.
We really look at the business when we look at the stores business, we have a positive trend in stores.
Just really represents a lot of the work that we've been doing overall most of our decrease came from digital and that was somewhat self inflicted because.
We have reduced the amount of online only.
General public offerings, we obviously moving more to omni.
Having this more simplified.
<unk> strategy.
They have two different pricing strategies.
Wasn't good.
So.
And we're encouraged by August .
The Argus business as well, but.
One of the things we've learned.
The Sephora business has been incredibly good.
You have a 20% comp.
In the stores.
'twenty one.
And 'twenty two.
Pretty remarkable.
Bringing in a younger.
More diverse consumer.
As well so.
But it's been really really a driver and we're moving right along.
Over the next couple of years it'll be in all stores.
We're merely moving on bringing in.
More home product in the home decor category.
And we've been working with that we've been working with the marketplace to secure goods and real time.
And.
And we really feel that thats going to pay dividends in the long run as more and more product comes into the company.
In those categories.
The impulse business is good it's going to get even better as we get closer to holiday.
Very good.
The other thing that.
We're going to look at down the road as well.
Obviously new stores.
We have we have not.
Not a whole lot this year, but maybe.
Maybe going forward, we'll be looking at expanding that that effort, but that work is still underway, but.
We just we're just really.
So good about we see the product coming into the company that the stuff that we're underpenetrated with then it's working well and so.
We feel that.
If we can if we can continue to grow the support business. If we can continue to make progress in AUM.
Yes.
I think we'll be in a pretty good position.
And then in terms of credit Bob you know credit is obviously been a core component of our value equation over a long period of time, and we have a very stable portfolio and our credit.
Have a partnership with cap one what I would say is other revenue is a good proxy for what you thought with credit. We said it was going to be in line with sales. We still continue to expect that as we look to the out of the year. We did see payment rate drop as we expected the payment levels are still actually above 2019 levels and then we did see more of a normalization of our call.
Losses, so those credit losses did increase over what was obviously, a really low year last year, but as anticipated.
You spoke to the fact that we did take early actions as we did anticipate the macroeconomic environment to worsen and people to have less cash in their banking happen. So as we looked and worked with our partner at the risks we did take back some of those results that continue to offer that so I think we were very proactive as we approached us So I would say it is.
Performing as we anticipated with payment rate down losses up, but really we feel good with that portfolio and its coming in just as expected and we continue to expect it to really go with sales in terms of co brand. We're excited to be able to offer a new vehicle to customers, who maybe didn't want a private label credit card.
It's really affords us the opportunity to ride that value equation to customers that we think are younger and more diverse really hitting on that customer that we're driving and for suppliers that can we bring them into a credit card, but not necessarily that they're open to a plc card. So we've brought in about 700000 of our credit card customers are migrated them.
<unk> the co brand card and we will just kind of watch that and learn from that migration before we extend that out but then we'll be expanding that out in 2024 based on those results.
Yeah.
Thank you.
And your next question comes from the line of Oliver Chen from TD Cowen Your line is open.
Hi, Tom and Joel as we look ahead, what are some of the major catalyst for holiday in terms of your plans and inventory planning as well as slow just highlights that we would love. There also as we think about the online business the comparisons will get easier with what should be the path ahead.
For a resumption of growth there.
And finally on the stores and traffic would love your thoughts on on traffic and transactions.
<unk> seen a lot of volatility and what your forecast assumes for how traffic may move. Thank you.
Well the big catalyst for <unk>.
For holiday is really maximizing the gift business.
We did some of that last year.
By moving the gifting product to the front of the store.
And it did very well, we're going to be doing it.
Again, this year and making a major statement in the front.
We do have some extra square footage because we removed.
Some registered base for gifting as well, but.
I really feel that by making a strong gifting statement, we're going to we're going to have.
Good holiday.
Susan.
Digital is as far as.
Digital goes we see it improving as we progress through.
This year.
And then obviously we anticipate.
<unk> back to growth.
24, once we <unk>.
Anniversary all of these.
Online only promotions that we had.
And then from a stores perspective, obviously, we're really excited that we're actually positive on the year a flat performance in Q2 and a lot of the efforts that you know Tom It talked about are really happening in our stores as we speak. It's the increased presence of home, where we were at least got rid of the registered as having a stronger presence of <unk>.
Gifting, we saw great sell throughs through mother's day father's day fourth of July . So we're excited as we move into back to school and especially the all important holiday period. There and then of course clearly Sephora continues to work for US as we open another 200 doors, we have 50 more doors going in August through 45 small in October so I think from a stores perspective.
We're excited to continue to see that business do well and being an outperformance, which you haven't heard from us in some time and just to reiterate on digital I think we're seeing similar performance as other categories. It's just that the promotions is having an out weighted impact there and so we know we have to get through that but it's really the right thing to do as Tom said this.
To reiterate we want to have an omnichannel experience. So having specific offers online was counter to that so we think that's the right thing to do from a long term perspective, which is why we believe we'll get back to growth in 2024.
Okay, Great, Tom and a follow up on the merchandise and brands around before what are the leading strategies too.
Jonathan and get the pickup from the tremendous growth Youre seeing thats before related to that womens and younger women's clothing, and apparel I'd love your thoughts on on rebalancing and the brands and the strategy there about what will it take to get sustainable growth with that younger customer.
As far as brands go we've been looking at.
A lot of different brands that would complement the swift.
Sure.
Offering.
We've been going.
Nick Jones, Chief merchandising go into New York pretty much every week now.
Looking for this and we haven't made any decisions yet but.
There is opportunities out there to bring other things in but.
We think we can we can.
Get some of the support business with the.
The brands that currently have and we can.
Change.
The offering.
We can add more prints more more color.
In the Assortments. So we don't have to radically change the vendor mix.
To capture this.
But.
We are.
We are looking at the young women's business, we really feel that that could be an opportunity for us as well as you just mentioned.
So there's plenty of.
Are things that we can we can work with and our current brand portfolio and then we're going to we're looking for other brands.
Add overtime.
I think the other thing that could be very good.
For the support customer is our expansion of home decor and gifting.
We really think Thats in line with.
That customer as well.
Thank you best regards.
Okay.
And your next question comes from the line of Mark <unk> from Baird. Your line is open.
Good morning, Thanks for taking the question.
Any change to your views on the macro consumer backdrop versus a few months ago Youre reiterating the guide.
<unk>, obviously, a pretty dynamic in the guide allows for a range of outcomes. So just curious if you can share any additional thoughts there and then Jill.
Gross margin I noticed you didn't call out the clearance shift as a factor impacting gross margin this quarter.
It's a little bit surprising just I guess any color you.
You have there would be helpful as well thank you.
Well I think the macro environment continues to be challenging for our customer as I mentioned in prepared remarks.
No.
That's the reason why we're really we're really focused on delivering as much value as possible.
Because obviously that customers.
<unk> is.
There's less money to spend.
Yes, we're doing that.
Key value items.
Bringing goods in at competitive.
High volume pricing to deliver more value to the selling floor as well, but we're going to just.
Really work hard on making sure that.
We have as much value as we.
We can have.
We've already started that and just continued through the third and fourth quarter and but it's critical that we deliver the value for them.
And then in terms of gross margin I think we did actually take all the clearance racks that we anticipated I think a couple of things that helped us that that one is as we talked about we are able to take out the promotions.
The ones that were really the stackable ones the ones that we didn't see have a lot of impact to our topline. There was you were able to benefit from less promotions that helped us offset some of the clearance and I think the bigger factor is our inventory was down 14%. So as we look at the content and the currency of the inventory, we feel very well positioned as we move into the back half of the year.
And so we were able to clean up what we needed to but I think a lot of the efforts and disciplines that Thomas instilled in the merchant organization really took hold quicker than we anticipated and the discipline around inventory management receipt management and just the agility to chase really benefit us more than we anticipated into Q2, and we expect that to continue to benefit us the rest.
For the year, which is why we're expecting our margin to grow both in Q3 and Q4.
That's helpful color and then just a quick follow up August to date off to a good start should we read that it's tracking ahead of the down 5% Q2 comp rate.
I would say we're pleased obviously if you look at the quarters, we had talked to you in may and we used the word slightly below you can see that June and July obviously, we're better than that and I would say we feel good about the start we have in August so yeah, I would say, we're definitely trending above that.
Great. Thanks again.
Yeah.
Your next question comes from the line of Matthew Boss from Jpmorgan. Your line is open.
Great. Thanks.
Tom maybe given progress that you've made with inventory and the balance sheet, how best to think about category opportunities or the timeline you see from here to reach an optimal assortment or maybe said differently do you see the opportunity to return to topline growth in 2024 as you just consider that the macro versus.
All of these micro initiatives that youre putting in place.
Okay.
I would think that 2024.
We could potentially.
Get back to positive Thats, obviously, our objective overall.
And the categories I've really touched on a lot of the categories before but.
The one thing about it which makes which makes it exciting is the fact that.
There are some categories, where just underdeveloped in.
And if we can just capture those opportunities.
It should help position us for growth.
In the future again.
Home decor.
Pat.
Gifting impulse.
All that things that we've been talking about will really help us.
Get there you know if every business was.
In the right penetration.
It would be a lot harder, but we just have these really low hanging.
Fruit in terms of business business that we can we can capitalize on and really help us move it forward quicker.
Okay.
Great and then maybe a follow up for Joe So with first half of the year gross margin I think more than 100 basis points above 2019, I guess, how best to think about gross margin structurally from here. If we think relative to 2019 levels or maybe asked differently is there a ceiling to the 36% to 37% gross.
<unk> target longer term.
I think right now, we just feel very comfortable working with the 36% to 37% range, obviously, depending on where we see our assortment moving in and out obviously sephora is a gross margin driver, we think home decor and impulse can definitely be benefits as well from an assortment perspective so.
So there's definitely a mix component to it as well as then the digital growth we've been getting some tailwind as digital has softened, but if we can continue to grow that business, you'll see cost discipline come out. So I think we feel great that we're operating within the 36 to 37 that was really the long term plan that we outlined and I think that's really where we feel most comfortable that we're able to still deliver the <unk>.
Value that our customer is used to getting from calls in.
In that margin range, and then also bringing in some of these new white space opportunities that Tom has outlined to get the topline growing. So I think you know our model works from a long term operating margin with a small amount of topline growth. That's really the big focus I think we feel great with the margin that we're putting out this year, our SG&A discipline.
Are there and will great gain great leverage off of just a small amount of top line growth. So that's really the focus I think from a long term perspective.
Great Best of luck.
Yep.
And your next question comes from the line of Dana Telsey from Telsey Group. Your line is open.
Hi, good morning, everyone.
Do you think about hi, as you think about the what's.
What's happening with shrink out there.
What are you seeing in your stores.
Is there what investments are you, making to deter shrink and then Tom you mentioned about potential new stores. What are you thinking about new stores, whether its size location and how you're thinking about that in a store opening or closing program and lastly, you talked about the home category in that opportunity.
Do you see that opportunity with branded versus private label and the impact on margins. Thank you.
Okay, I'll start with strength I mean, I think Dana you know shrink has definitely a retail industry problem and it's definitely something that we you know we've called out in the last two quarters has weighed in on our margins and we expect it to continue to remain a headwind in the second half, but we have put a lot of efforts in place really to prioritize the safety of.
Our associates and our customers, but we have taken different measures. We are cabling product to fixtures, we're going to just testers and in beauty, we have more attendance in the fitting room, we have more presence in the front of store. So we're doing everything we can to mitigate shrank, but really prioritizing the safety of our associates and customers.
But I think until you know, it's really it's going to be a retail problem I'm until we see a bigger step up I think legislatively. So it's something we planned for and have put in our expectations.
I'll talk about the stores.
We're looking at it very very thoughtfully in terms of how we should expand.
We're really just.
<unk> begun the analysis.
And obviously in later earnings calls we will share more.
But one thing we know.
We're going to do is we're going to open smaller stores.
The biggest store will open going forward is 55000 square feet will be adding probably a lot of 35000 square feet.
And.
But we're still developing the feed points, where we can have additional stores.
Again.
That analysis is being done.
No.
But mostly.
We.
We're really looking at the size of the stores and we're looking at the cost of the stores and we're looking at.
Yeah, how we effectively can.
Add some additional stores, but we're going to do it.
Yeah.
With a lot of analysis behind it.
As far as the Homegoods I think theres opportunities bolt in.
Brands and private label.
Maybe a little bit more in brands because of the fact that we want to chase product and we've already we're already doing that and going into the market and buying.
Buying the product in real time.
As far as margin goes I think it could be.
Home decor.
Higher margin business. So the more we go after that I think it could be a positive to the gross margin.
Overall, but.
Again, it's.
It's.
A lot of chase is going to happen in this business, because we don't want to be able to react in real time.
Thank you.
And your next question comes from the line of Blake Anderson from Jefferies. Your line is open.
Okay.
Hi, Good morning wanted to dig in a bit on Sephora you had an impressive result, there can you talk about the acceleration in the call up to greater than 20%, what's driving that in terms of new customers versus transactions or basket and then for the newer stores.
They still performing on a similar trajectory and lastly, any beauty categories to call out.
That were stronger thank you.
Okay.
So I think obviously sephora has been a great performance for US we continue to see it accelerating I think it is just the fact that we're now getting those customers to come back repeatedly in terms of their replenishment.
We continue to see an acceleration in that I would say newer stores are performing actually better and worse smarter I think on the assortment as we open these stores and we opened our first 200, we learned what our customer wanted maybe relative to what the forehead open their stores with so now we're getting smarter at how we're actually bringing those forward and really being able to be smarter.
On opening but uneven with replenishment, we're getting better in terms of how we're replenishing. So I think we feel great with how the new stores are opening and the existing stores are performing as you can see they continue to accelerate on that we do continue to bring new customers and they're younger they're more diverse. So I think that's a big opportunity that we talked about in <unk>.
<unk> of getting them to cross shop through the store I think a lot of the areas that we indicated were white space for us, particularly impulse gifting at home decor. It's a quick add into the basket. So as we're able to have a stronger presence of that in our store. We can take advantage of that new store in those extra start coming in in terms of that top selling.
Brands, we talked about it.
Were filled as narrow as well as the Sephora collection, which is an opening price point, but then Charlotte Tilbury, which is a really high price point. So we're seeing that customer shop across all of the areas and then I'd be remiss to talk not talk about we have men's brands, which is something you don't see and as far as store and we're seeing Clinique Furman Jack Black performing in <unk>.
Well there as well so I just think we continue to learn we continue to bring in new customers and we just have an opportunity to convert those customers into our loyalty program and getting them to shop, we are seeing those customer shop, two times more often than our existing customer. So really we're going to have an opportunity to build on that as we build the assortment that Thomas indicate.
Throughout this call.
Yeah, and I think the other thing Thats pretty exciting about it is the smaller format store.
Which we brought in five where we set up five and they've done very well so it gives us the confidence.
We can have sephora in all of our stores.
That's super helpful and Joe could you remind us how much expenses in each of the quarters. This year for the new <unk> stores I was just trying to figure out the impact to quarterly SG&A, yes.
Yes, I think really the biggest thing in Q3, the increase is going to be we have 50 stores opening in August that are full size shops in 45 small shops that are opening in October .
The Q2 numbers are up against the Q2 numbers last year. So there wasn't a huge amount of increase from that perspective. So I would just say the step up in Q3 will be mainly those investments. We're also putting in our self checkout in Q3, which has expense related to it and about 250 stores.
Continue to see wage pressure, which you would have seen throughout the year, which is a build on that as well and then I think we benefited in Q2.
More than we had expected with the inventory reductions of inventory being down 14%. We had said we're going to work in the mid single digit range. So obviously that benefit our SG&A, because we had less store payroll unless logistics costs to move those units I would tell you that in the rest of the year, we're still planning to be managing inventory in that mid single digit range in fact.
We want to make sure we're protecting ourselves and holiday. So I would say mid single digits, maybe a little bit better than that obviously, we're going to react and chase appropriately given the demand that we're seeing.
Thank you best of luck with the second half thank you.
Your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open.
Hey, Thanks, good morning, guys.
Talk about the success you are having and so for getting those shoppers to cross shop into other parts of the store and I guess over the past couple of years, how that's evolved.
Sure I think we talked about I think around.
40% of our customers to 50% of our shopping around the store. So we continue to see that that's an opportunity I think like I mentioned, the big opportunity is going to be around these white space pieces. Its home decor. It's impulse gifting those are easy add to the basket, particularly in home decor or youre going to see that in a much.
Better opening price point, and so it's gonna be easier for them to put into the basket and I think the bigger opportunity in time and spend some time talking about that is really getting the woman to shop into the women's pad and I think we know we have some opportunities there in terms of brands and fashion, we're working through that so I think we feel great that we're in that 40% to 50%.
Sharp rate, but we think we can do more with that given the white space opportunities without.
Outlined as well as women's and moving that into the right direction and getting her to shop.
Across that pad.
Okay and is there any way to think about how that 40% to 50% has evolved over the past couple of years is continuing to improve or has it been that way and just just been stable.
I think it's been pretty stable in that range for since we've opened up the stores, let's say in some of the more mature stores.
Customers coming in maybe more for a replenishment trips. So we don't get as much in that basket and the newer stores. They are excited to see what <unk> has to bring because there are no customer, but I would say that it's been a pretty stable range in totality.
Overall, but maybe the more aged stores I think hopefully when we introduce some of this newness will gain that excitement back.
Okay, Great and then another one for you Joe just on the cadence and phasing of.
The back half of the year is there any way you can hold our hands on.
The comp as well as the credit line comp on a one year basis is pretty similar last year the cycle in <unk>, but on a multiyear it's it's a little bit more more choppy. So if you could maybe help us on that would be helpful. Yes.
Yes, I think overall.
Let's not talk about the 50 <unk> week, obviously, you get the 50 <unk> week benefit in Q4, I think if you look at it on a two year stack for you Chuck because I know how much you like Sac I think youre going to see a pretty consistent two year stack is what we're really outlining ex the 50 <unk> week.
You saw if we looked at it the tiers DAC would've fallen a little bit in Q2 from Q1, but we did see that stack improve as the quarter went on so I would say the exit rate was actually better than the two year stack in Q1, and I would expect to be around that level in Q3, and Q4 ex the 50 <unk> week if that helps you.
Okay, great. Thanks, Joe appreciate it apart.
And your last question for today comes from the line of Paul <unk> from Citi. Your line is open.
Thanks, It's Tracy filling in for Paul I had two questions. The first is I was wondering what your AUR and traffic looked like.
In the second quarter, and what Youre expecting for AUR in the second half and then I was wondering if you could tell us what the overall comp where in stores that had sephora locations opened in 'twenty one 'twenty two.
Yes, I would tell you Tracy on the components AUR has been a driver for us for some time I think we've talked a lot about we've seen AUR growth and that's really going to be a function of the fact of the brands that we're bringing in obviously sephora has a higher ticket, which you would expect which is driving our AUR up but then on top of that.
You think of Tommy Hilfiger, Eddie Bauer, we're seeing our Nike and under armour businesses do well so that all drives ticket and I would say that's been pretty consistent over the last.
Probably four or five years that we've seen are our AUR is moving up and I would say we're going to expect.
That increase to continue but I think more moderately now that we're comping. Some of these brand introductions and obviously continuing to be focused more on value. So we talked a little bit about our key value items really focusing on driving the best most competitive out the door price and focusing on those in our private label, which we think could be really important to us.
Customer in this uncertain constrained macroeconomic environment. So that's really where I would say, we continue to look and see and in terms of four I think we just feel good its up 20% as you can imagine it's definitely driving a benefit our stores were flat in the quarter were up one on the season in our stores. So obviously it is driving.
Much more productivity out of the box, which we're very very pleased with.
Thank you.
Yeah.
Thank you to everyone listening on the call today.
This concludes today's conference call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
Paul today.
This concludes today's conference call. Thank you for your participation you may now just.