Q3 2023 Kohls Corp Earnings Call
Good morning, and welcome to the Kohl's Corporation Q3, 2023 earnings conference call.
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I will now turn the call over to Mark Rupe VP of IR and Treasury. Please go ahead.
Thank you certain statements made on this call, including projected financial results and the company's future initiatives are.
Forward looking statements.
Such statements are subject to certain risks and uncertainties.
Which could cause kohl's actual results to differ materially from those projected in such forward looking statements.
Such risks and uncertainties include.
But are not limited to those that are described in item <unk> in Kohl's. Most recent annual report on Form 10-K.
And as may be supplemented from time to time in Kohl's other filings with the SEC.
All of which are expressly incorporated herein by reference.
Forward looking statements relate to the date initially made in.
<unk> undertakes no obligation to update them.
In addition, during this call we may make reference to non-GAAP financial measures.
Reconciliation of non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our form 8-K filed with the SEC.
It's available on the company's Investor Relations website.
Please note that this call will be recorded.
However, replays of this call will not be updated so if you're listening to a replay of this call. It is possible that the information discussed is no longer current.
And Kohl's undertakes no obligation to update such information.
With me. This morning are Tom Kingsbury, our CEO and Jill Timm, our Chief Financial Officer.
I will now turn the call over to Tom.
Yeah.
Thank you Mark and good morning, everyone.
Kohl's third quarter earnings reflect strong gross margin and expense management.
As well as additional progress against our strategic priorities.
We achieved this despite a softer than expected demand environment.
Given by less than ideal weather and persistent macroeconomic pressures on our customer.
Throughout 2023, we are focused on our four strategic priorities, which are enhancing the customer experience accelerating and simplifying our value strategies.
Managing inventory and expenses with discipline.
And further strengthening our balance sheet.
Our actions against these priorities are working and resonating with our customers.
I am pleased with our positive year to date store's performance.
Driven by strong growth in Sephora.
And more recently, our home and gifting initiatives.
In addition, we have furthered our efforts to simplify our value strategies.
Manage expenses tightly and reduced inventory, 13% at the end of the third quarter.
Looking ahead. The work we have done this year, we will continue to build momentum and set us up to be successful in 2024.
As we've said before though it will take some time for the full impact of our efforts to be realized.
Let me now share some additional details on Q3.
Net sales decreased five 2%.
Comparable sales were down five 5%.
Digital sales were down 16, 5% and continued to be impacted in part by our decision to eliminate online only promotions in favor of omnichannel pricing across the enterprise.
While this has pressured our digital performance in 2023.
It remains the right long term strategy for our business.
Store comparable sales were down approximately 1% in Q3.
Taking a closer look at the quarter, we had a solid back to school season and through the first eight weeks sales were tracking above our expectations.
However, warmer weather during the later part of September and into October had a clear impact on demand for our fall seasonal goods, especially in store.
While I don't like blaming weather for performance. The fall transition period has historically proven to be when Kohl's apparel intensive business is most sensitive to weather fluctuations.
We experienced a fairly significant divergence in performance on a regional basis.
Store sales in our Midwest mid Atlantic and northeast regions, where the weather impact was most apparent were down low to mid single digits in Q3.
While all other regions increased low single digits.
We have various initiatives underway to de weather our business as we focus on growing sales and less weather sensitive categories like beauty foam gifting and impulse.
Before sharing an update on our progress against our strategic priorities I really want to emphasize the importance of our stores performance.
In 2023, we havent reestablished our stores as a key focal point of our strategy.
This has come in the form of leadership time and attention meaningful investments and new operational processes.
Our actions have included expanding our gifting assortment and repositioning it to the front of store.
Simplifying our in store signage and graphics.
<unk> the customer checkout area improve.
Improving our overall merchandising, while adding new categories and empowering our stores to capitalize on opportunities to drive sales in their local markets.
I am proud of what we've been able to accomplish so far this year in our stores.
The response from customers has been favorable and this has yielded a return to a brick and mortar sales growth year to date.
Let me now turn to our longer term initiatives and provide more detail on our overarching priorities.
Enhancing the customer experience remains our top priority and represents the largest growth opportunities for our calls.
As I shared on our Q2 call, we believe support gifting impulse and home decor and longer term new stores will be the most significant contributors to our future growth as these are largely white space opportunities for calls.
We're also focused on stabilizing our apparel and footwear businesses.
By optimizing our assortments to reflect our customers' interests.
Let me now share some updates on where we stand in some of these initiatives.
Starting first with Sephora at Kohl's.
We continue to be extremely happy with our partnership with Sephora and with the results that we are achieving.
Based on our success, we have increased confidence that sephora calls, we'll be at $2 billion business by 2025.
In Q3 comparable beauty sales in the shops opened in 2021, and 2022 increased more than 38% to last year.
This is an acceleration from greater than 20% growth in Q2.
And mid teens growth in Q1.
We attribute the improving trend.
The increased awareness and shopping frequency.
Total beauty sales increased more than 70% in the quarter driving additional beauty share gains.
We saw strong demand across the entire assortment, including skin care makeup and fragrance.
During the third quarter, nearly a 100 more of our stores receive sephora shops.
There is now a support presence in over 900 of our stores.
With more than 850 large format and 50 smaller shops.
As it relates to our new smaller shops.
We are very pleased with the initial performance.
This supports our plan to expand this format to the remainder of the chain by 2025.
For the holiday season, we are well positioned with Sephora featured 50% more of our stores as compared to last year.
We are building on last year's successes within our beauty assortment Cigna.
Significantly growing the number of holiday gift sets, which also supports our broader gifting efforts.
We want calls to become a gifting destination.
This holiday season, we have significantly expanded our gifting section at the front of the store and 50% of the gifting assortment is new this year.
We have added gift baskets and increase the number of stocking stuffers and personal care gift sets.
In addition, we see impulse products as a white space opportunity for Kohl's.
Many of our competitors has successfully built impulse businesses through merchandising checkout areas.
This holiday season, we are showcasing an expanded assortment of impulse products and in 2024.
We plan to continue installing queuing fixtures and many of our stores.
We will merchandise fixtures with a variety of beauty wellness electronics toys snacks and other products.
Home decor is another important growth opportunity for Kohl's.
Building, a home decor business complements our other businesses.
And fills a void that our customers have historically shopped elsewhere for.
To capitalize on this opportunity we have invested in our merchandising organization and have formed new vendor relationships.
In Q3, we began to flow new products into our stores, including Walmart.
Glassware and ceramic home decor.
Barware botanicals lighting and more.
We will drive significant incremental growth in home and in the coming years as we further expand our assortments and as customers began to see Coles as a destination for a broader set of home goods.
In Q3, our home business outperformed in stores driven by solid initial performance in our new categories, which are featured more prominently in store.
Okay.
We have also discussed our opportunity to grow our business. It is a category that we have invested in through expanding in store space and broadening our assortment of products like dog beds.
Cat and dog apparel and pet toys.
The results have been very positive with Q3 sales increasing more than 40%.
We expect to build on this momentum during the holiday season with plenty of pet related gift options.
As more of our customers recognize our expanded offering of gifting impulse and home decor sales will bill.
We've already seen this was for and I'm optimistic that through our collective product and marketing efforts.
Our customers will respond favorably and allocate more of their spend at Kohl's.
My optimism is supported by strong customer feedback and the positive store sales we've achieved year to date.
Now let me provide you with a quick update on the longer term opportunity to expand our footprint with new stores.
We remain committed to capitalizing on opportunities to open new smaller format <unk> stores.
We recently opened five new stores.
Completing our new store activities for the year.
In total in 2023, we opened six new stores completed one relocation and closed one store.
In the near term, we will follow a similar cadence for new store openings, so continuing to see a significantly larger opportunity longer term.
Turning to our apparel and footwear offerings.
There was obvious weakness in our cold weather businesses during Q3.
However, we continue to see strength in our polished casual and dressy offerings areas, where we have focused our attention in 2023.
Women's dresses and men's suiting dress shirts, and dress pants outperformed in Q3 with solid results across brands like Lauren Conrad Draper James apartment, nine and Hager.
We were also pleased with performance of other key brands, including Nike.
Under armour, and Eddie Bauer as well as our private brands jumping beans, and little inco.
Broadly speaking however, we have more work to do to improve our overall apparel and footwear performance in <unk>.
Lot of this work is already underway.
Let me share one example.
In our juniors business, we are pivoting our strategy by leaning into more domestic market brands for trend oriented items.
While continuing to offer our core basics through our private brands.
In doing so we are reducing lead times and a category where success is dependent upon speed to market.
We currently have some of these market brands in select stores and have seen encouraging sell throughs.
This gives us confidence that we will be more relevant in the juniors category as we further scale this year.
I look forward to sharing more on the progress of our work in the coming quarters.
Now, let me discuss our second priority, which is accelerating and simplifying our value strategies.
<unk> provides great value to our customers.
This is evidenced in the millions of customers that shop at calls on a regular basis.
However for newer customers, we have an opportunity to simplify our offers and pricing to ensure that they too recognize the value of that calls provides.
This is an important effort of ours and one that we believe can drive overall customer engagement and conversion.
During 2023, we have increased the mix of targeted offers and implemented more regular clearance events. While also testing a percentage of our merchandise with clear and consistent price points.
And our key value items initiative.
Which is high volume pricing on key items in our private apparel and home brands, we continue to see encouraging results with positive sales growth.
Customers see these items in our marketing as must have pricing.
The account purchase a small portion of our assortment currently.
But we plan to scale them more meaningfully in 2024.
Our approach has been thoughtful.
Recognizing the risks of moving too quickly.
I am pleased with the progress that we've made to date.
Another important component of the great value, we provide our customers is our leading loyalty program.
This includes Kohl's cash Kohl's rewards are caused private label credit card and most recently, our newly launched co brand credit card, which gives customers more ways to earn Kohl's rewards.
Yes.
I will now transition to our third priority, which is managing inventory and expenses with discipline.
During the third quarter, we had strong inventory and expense management.
We have reduced inventory by 13% compared to last year.
Head of our goal of planning inventory down.
Mid single digits percent.
The new disciplines, we implemented earlier this year, where.
Where we operate with greater open Dubai proved beneficial in Q3, as we were able to stay agile as the demand environment softened.
For holiday.
We are well positioned from an inventory perspective with better in stock levels in core basics as compared to last year as well as increased investments in gifting and home decor.
Our goal remains to increase inventory turns over the long term.
And from an expense perspective, we are able to manage expenses slightly better than our expectation due to our disciplined focus in a tougher demand environment. We continue.
To focus on driving expense sufficiency across all areas of the company, including reducing our marketing spend and embedding more technology into our operations to drive productivity.
And lastly, our fourth priority is strengthening our balance sheet, we remain committed to returning our balance sheet towards historical strength with our long term objective of managing to a two five times leverage level.
Our near term focus is significantly reducing our revolver borrowings and rebuilding our cash position.
We also remain committed to returning capital to shareholders.
Joe will discuss our overall capital allocation priorities in a moment.
Summarize my comments today.
I want to leave you with three things first we.
Our repositioning calls.
We are executing several important strategic initiatives that will better position the company to drive improved sales and profitability growth over the long term.
It includes efforts across the products and categories we carry.
The value we offer the experiences we provide.
The operational processes and disciplines, we leverage to manage our business.
Second we remain in the early innings of our growth initiatives.
I have said many times that it takes time to build businesses.
Our focus has been twofold one.
Optimizing our current assortments, and embedding new disciplines and processes and to adding new relevant products.
While aspects of our future vision will be evident this holiday season.
They will be even more visible in 2024.
I am proud of the work we've accomplished this year.
And I'm anxious to see more of our efforts come to fruition in 2024 and beyond.
And third the holidays have always been an important time for calls and this year. They carry even more significance given that our new strategies will be seen for the very first time by many of our customers.
I want to thank all of our calls associates across the organization for their efforts to set us up for success. This holiday season.
I hope those listening today, we'll get a chance to visit our stores over the coming weeks.
I will now turn over the call to Jill to discuss our third quarter results and 2023 outlook.
No.
Thanks, Tom and good morning, everyone I.
I will provide additional details on our third quarter results and then discuss our updated fiscal year 2023 guidance.
As you heard from Tom we made additional progress against our strategic priorities.
<unk> gross margin and expense management in the quarter.
Turning to our results net sales declined five 2% in Q3 were down four 5% year to date.
So our comparable sales were down approximately 1% to last year.
Continued strong performance from so far at clause.
Ethylene Tom's comments earlier stores are incredibly important for our business.
Key focus of ours this year.
We're encouraged with the year to date store sales up slightly compared to last year.
Digital sales declined 16, 5% in Q3 with digital penetration of 26%.
Digital continues to be impacted by our efforts to simplify our value strategy.
Other revenue, which is primarily our credit business declined 6% in Q3, which was relatively in line with our expectations.
As we discussed on last quarters call, we are seeing payment trends decline and loss rate increased as expected.
For Q4, we expect other revenue to perform in line to slightly better than net sales as we start to benefit from our co brand card.
I will touch more on our credit business in a moment.
Moving down the P&L.
Gross margin in Q3 was 38, 9% an increase of 158 basis points to last year.
Over year increase was driven by lower freight costs reduce digital related cost of shipping and further progress against simplifying our value strategies.
This was partially offset by product cost inflation.
Hello shrink remains elevated it was in line with our expectations during the quarter.
Year to date gross margin was 39% up 56 basis points to last year.
SG&A expenses increased one 9% to $1 4 billion.
Slightly better than our expectation as we managed expenses tightly given the softer sales environment.
Increase to last year was driven by continued investments in sephora shop opening wages and other store related expenses.
Partially offsetting these for efficiencies in marketing and distribution costs.
Year to date SG&A expenses have decreased 2% compared to last year.
Depreciation expense of $188 million was $14 million lower than last year due to reduced technology capital fund.
Year to date depreciation expense decreased $46 million to $562 million.
Interest.
<unk> of $89 million was $8 million higher than last year, primarily increased revolver borrowings.
Year to date interest expense increased $36 million to $262 million.
Our tax rate was 13% in Q3 and year to date is 16%.
Net income for the quarter was $59 million and earnings per diluted share was <unk> 53.
Year to date net income was $131 million and earnings per diluted share was $1 18.
Now moving on to the balance sheet and cash flow.
We ended the quarter with $190 million of cash and cash equivalents.
Inventory at quarter end was down 13% compared to last year.
Leading our commitment of a mid single digit decline.
As Tom shared earlier, we feel good about the level and composition of our inventory for the holiday season.
Operating cash flow was $151 million in the third quarter and $379 million year to date.
In Q4, we expect to drive strong operating cash flow as we move through inventory during the holiday season.
Capital expenditures for the quarter were $157 million. This included investments of five new stores, which opened earlier this month and nearly 100 sephora openings.
Based on our year to date spending outlook for the remainder of the year. We now expect full year capital expenditures to be towards the lower end of our $600 million to $650 million guidance range.
Looking ahead to 2020 for our initial view of that capital spending will be lower than 2023 levels given that much of the <unk> build out is now behind us.
We will provide more details on our fourth quarter earnings call.
Now, let me provide an update on our capital structure and capital allocation priorities.
We remain committed to strengthening our balance sheet.
<unk> focus in the near term is to pay down our revolver borrowings and rebuild our cash position.
Over the longer term our objective is to manage to a two five times leverage level.
During the third quarter, we utilized our revolver to fund seasonal working capital build ahead of the holiday season as expected.
At quarter end, our revolver balance was $625 million.
Looking ahead in the fourth quarter, we will take another step to strengthen our balance sheet, returning $111 million of bond maturities.
In addition, we expect to significantly reduce our revolver borrowings.
As it relates to shareholder returns our current dividend remains a priority to pay $55 million or <unk> 50 per share in dividends to shareholders in Q3.
And on November seven as previously disclosed the board declared a quarterly cash dividend of <unk> 50 per share payable to shareholders on December 20th.
Now, let me share some color on our updated outlook for 2023.
As you've heard today, we continue to feel good about the progress we are making against our strategic priorities.
Based on our performance to date and our outlook for the remainder of the year, we are updating our fiscal year guidance range.
We currently expect net sales for the full year to decrease between two 8% and 4% versus 2022 as compared to our previous guidance range of a decrease of 2% to 4%.
As a reminder, this outlook include sales from the 50, <unk> week, which is worth approximately one percentage point of growth.
Operating margin for the full year to be approximately 4%, which is unchanged from our prior guidance.
For EPS, we currently expect full year earnings per diluted share to be in the range of $2 32.
<unk> 70 cents, excluding a nonrecurring charges.
This compares to our prior guidance of $2 10 to $2 77.
Before turning it over for Q&A I would like to discuss our credit business in the context of recent regulatory developments surrounding credit card late fees.
As many of you are aware the consumer financial Protection Bureau, or CFPB has proposed lowering the late fees credit card companies can charge.
If enacted as proposed it would have an impact on credit card revenue is on mitigated.
We are actively pursuing various initiatives to mitigate the effects of this potential ruling.
One thing unique to Kohl's that we just launched our co brand credit card, which is more reliant on revolving interest fees.
Our co brand card is off to a good start and as we scale over the next couple of years. It will serve as a key opportunity to drive credit revenue.
In addition to scaling our co brand card. We are also working on various other initiatives with capital one our credit partners to mitigate the potential loss of late fee revenue.
Through these efforts we feel good about our ability to quickly offset any potential impact within a couple of years.
We are closely monitoring developments on this issue and as you can appreciate there are a lot of unknowns at this time.
We like everyone else are waiting on the final rule.
I want to make it clear that we believe in our ability to offset this regulatory headwind to our credit business over time.
In the meantime, we are not going to speculate on this topic and the scale and timing of our mitigation efforts will depend on the final ruling.
To the extent appropriate we will provide an update on our fourth quarter earnings call.
With that Tom and I are happy to take your questions at this time.
We will now open the line for questions. As a reminder, if you would like to ask a question. Please press star one.
Our first question comes from Mark Swagger with Baird. Please go ahead.
Good morning, Thanks for taking my question I guess to start out Tom.
How are you currently thinking about the path back to positive comps.
Given the longer lead times have been somewhat constrained through 2023, what is the timing of some of the bigger changes you expect to take hold in 2024 to drive improved sales momentum.
Okay.
Good question Mark.
We're working hard to really see much more progress in 2024.
<unk> said all along that.
In 2023 is really rebuilding the company repositioning the company.
As you know it can't be done.
Overnight, but we have a lot of really good things in place right now but.
But I always go back to is the fact that we do have a positive comp for the year in our stores.
And our stores really reflect.
A lot of the new strategies in our home business is doing well in.
In stores.
Right now.
Obviously, the beauty business is doing very well in stores right now.
So.
I think.
Think that's evidence that.
No.
In 2024 potentially.
Can we can have a positive comp and.
The digital business.
It's really what's bringing us down in.
As I've mentioned before we had some things we were doing online that was really not reflective of what an omni company would be doing.
A lot of online only promotions et cetera online pricing and we felt that for our customers. It was important that we have one view on pricing and obviously in 2023.
That hurt our digital business, but again.
You know.
A lot of the actions we've taken.
We will be behind us as we go into 2024, so again I'm confident.
How about the fact that we are doing well in stores.
And I think it's going to be.
A good setup for two.
2024.
Okay. Thank you for that I appreciate the color, maybe just a follow up as well Tom.
Tom could you give us any.
Additional color on the leadership changes that were announced this week.
Sure.
Over the past year, I've had an opportunity to evaluate and better understand what the best leadership structure was for the organization moving forward to best execute against our strategic priorities.
Some of this organizational structure that was in place a really was developed.
Early in early.
In my time at calls.
I've been very very involved in the move to reestablish our stores as a focal point of the company's strategy and.
And based on this one at a closer reporting relationship to the stores organization.
Similarly, I felt it was important to have the supply chain organization reporting directly to me.
Okay.
Fred hand, who.
Is now leading the stores he and I have worked together for over 20 years.
We know what each other.
Needs in order to really run the stores organization.
So just being closer to closer to the Ham and closer to adjust the overall stores organization is key.
We are removing this layer there will be no backfill for this position.
Stores and supply chain will now report to me.
With other executive leaders, assuming oversight of other functions real estate purchasing risk management strategy.
We are confident that we have the right leadership team going forward and the right structure in place to best execute against our strategy.
And I think it will give us more speed.
In terms of doing the things that we want to accomplish in.
If we want to get back to positive in 2024, we have to we have to move with.
You know with a lot of speed.
So I just feel that now that I've been on the job for a year.
Understand what we need as a company.
And I decided to execute it.
Thank you best of luck and happy Thanksgiving.
Thank you happy Thanksgiving to you as well.
Sure.
Our next question comes from Bob <unk> with Guggenheim. Please go ahead.
Hi, good morning.
Just a couple of questions.
Hi, good morning.
First one just on beauty and can you give us a little bit more data just maybe around some of the older stores and newer stores cross shopping however.
They are performing and then.
<unk> the key item strategy.
Just in terms of the traction that youre getting like how big do you think that could become in the next few years. Thanks.
Okay.
Okay well.
We're performing very well and obviously.
And.
The anniversary stores overall.
Overall.
We have a 30% comp which is obviously a significantly good in our overall beauty business is up 70 per cent. If you include the.
Obviously, the newer stores as well.
But right now we have like we have 900 plus stores shops gives me and Sephora, which is.
It's very exciting it's exciting in many different ways, one of which is the fact that.
Going into holiday now.
We will have 50 more support shops.
And we had last year and.
As you know.
Is that beauty is a really important category.
In the fourth quarter. So we really feel good about that overall, we really we really expect to hit the $2 billion Mark by 2025.
Very confident about that based on what we're currently doing.
Good news also it's accretive to operating margin.
40% of the support baskets have an additional category purchase.
In the basket.
Yes.
Customers returning for additional purchases for support.
Two times more often than the coal space.
Our return on investment all the capital that was spent obviously is very significant.
Overall.
And what's interesting is.
It's really across.
The performance is doing well across all the categories.
Specially the fragrance business, but we're still doing well with skin care.
Okay.
In makeup.
And as I mentioned on last the last call.
Excuse me.
30% of the.
The customers that shop support calls are Nudicaul medicines significant number.
Sure.
And obviously, it's a newer new customer obviously, it's younger.
More diverse.
Really.
It's really.
Sure.
Very important to <unk>.
Bring a new customer into the store overall and there is some ancillary businesses that are performing better than they have or our junior business.
Is doing better than it has before so we're capturing some additional sales there overall, but.
The partnership with Sephora is phenomenal.
And we really feel that.
The numbers, we put out there will be it will be achievable in the near future.
So <unk> your second question.
Yes.
So far we've done very well with <unk>, it's a small subset of our private brands.
And in home.
But we've seen we've seen a positive comp on that so.
We plan to.
In 2024, we plan to rollout.
More high volume price and priced items kpis.
And it'll be.
It'll be.
Primarily.
From our private and proprietary brands overall, but so far so good and but we're going to be watching it we're going to be watching it very very closely.
Just because we want to make sure whatever we do.
Okay.
It's the right thing to do.
For the long run so but it is good so far.
We feel good about it.
Thank you.
Okay.
Thank you.
Our next question comes from Oliver Chen with TD Cowen. Please go ahead.
Hi, Tom and Joe within guidance, what's assumed in terms of promotions and merchandize margins and do you expect traffic to continue to be fairly volatile.
And Tom you made some nice strides in footwear and apparel what might be the timing of that impact with the initiatives you are taking.
Youre, putting forward and also how they may interplay with what's happening at Sephora, which is quite remarkable and successful. Thank you.
Sure. Good morning, Oliver I'll start with guidance I think overall as we head into holiday, we always know it's going to be promotional promotion that are required by law causes Don and even though I think we've done some great editing throughout the year youre going to see Israeli lean and promotions in the fourth quarter I think we've talked about it we aren't going to leave ourselves.
And Keith from a promotion perspective argued with many cuts that we've seen in the first three quarters of the year, because we know how important is in holiday, particularly with the uncertainty in the macro environment, we're going to definitely make sure we're delivering the value our customers has known cause for that all contemplated in the guidance and I think when you kind of work through getting our present EBIT we are expecting.
Now I'll be at the high end of the 36% to 36, 5% range that we did give from a guidance perspective, so even with the promotional environment. We've been anticipating this we know we're going to be competitive and thats definitely contemplated from a guidance perspective in terms of traffic I think we've seen our traffic improved in both channels as the year has progressed obvious.
A lot of the effort that Tom has outlined particularly sephora being a traffic driving initiatives has helped us build that dropped back back from a start perspective, we're also seeing a basket expansion as well as that customers willing to spend a little bit more on that product. So I think it's really a balance for us, but as we've seen a little bit of volatility like you mentioned.
And by weather patterns and as we go into holiday that becomes less of a factor as people really get into that gift giving.
Yes, I just want to piggyback on <unk>.
Gil said.
We are we are coming out on holiday.
Aggressively in terms of.
Promotions.
Obviously, it's really important time its important time too.
To gain market share and.
We're working really hard on it.
We did eliminate a lot of layered events in the first three quarters of the year. This year, we're keeping our primarily intact in terms of our promotional efforts overall, so we're well positioned I talked about in the prepared remarks in terms of everything we're doing for holiday.
Not only promotions, but also in gifting and impulse and four et cetera. So.
We're working really hard to.
Two two well in the fourth quarter overall.
As far as apparel and footwear it goes Oliver.
I would say in apparel and men's and ladies' Youll continue to see more and more polished casual it's doing very well.
Ladies youll see a much bigger presence of dresses.
Starting really in the month of March moving through the spring season.
It's a category that we've always been under.
Underdeveloped and so we're really making a conscious effort to grow that business.
But.
It's beyond dresses.
We really feel important to drive the jackup business et cetera continue to get the balance right between.
The casual piece and the.
Casualties.
And the dress up piece, but we spent a lot of progress feel good what the team has done so far.
We just need to.
Obviously continue to push on that and mens.
We've done well with.
Tailored separates and dress shirts.
And.
We see that continuing as well as well as.
Also.
We feel that not only in mens and ladies we fill that.
The polished casual is going to be important in and in.
In the children's business as well Youll see a much stronger.
To address presentation, soothing presentations et cetera.
And one thing to connect the Sephora business with as Mike. Mike example, in my prepared remarks about.
The junior business.
Were we.
We know that customer wants trends historically, we've gone out and use our proprietary and private brands to go out and buy goods in juniors and what happened was we didn't have enough knowledge about what was going to work.
So we would go out and we had by a lot of goods and.
It would come in 12 to 14 months later.
It didn't perform very well now we're going to be using the marketplace. So that we can react to the business quickly getting into trends.
And.
We know there is a connection between the trend product and the support our customers. So.
Again, I mentioned in the prepared remarks, but.
It's something we're really we're really working on.
As far as footwear it goes.
We still need to work on footwear to be honest with you.
We do have a good we do we do have a pretty good position in the active footwear business, but we really need to broaden our assortment we need more in both men's and ladies who we need more dress shoes.
Overall.
And more and more casual shoes, we need to we need a broader assortment of shoes for our customers overall.
Yes.
Thanks, Happy holidays and best regards.
Thank you.
Okay.
Our next question comes from Gabby Carbone with Deutsche Bank. Please go ahead.
Oh good morning, Thanks for taking my question so with gross margin for 2019. This year I was wondering if you can dig into the structural gross margin opportunities you have.
Kind of moving ahead, and where you kind of see the biggest bucket.
Sure I think good morning, Gabby I would say our biggest thing is we continue to work on our promotional lines and provide value, which has been a key contributor, but we've done that on a pretty thoughtful pace and approach and we continue to look at how we can use targeted offers clearly our key value items and using pricing more strategic.
Equally we will all be key contributors second and probably I should have said. This first is inventory management, our big passion around inventory, obviously with inventory being down 13% really focusing on increasing our turn is going to be a key contributor to that as well. So I think we have a goal of getting to four.
<unk> turns at this point and right now we're sub that we have a big opportunity to really make our inventory work harder for us from that perspective as well. So if you compare to 2019, although freight has been a tailwind for us. This year. It's still is ahead of 2019 levels. So we'll continue to monitor that and take advantage of it.
Great benefits that we're seeing in the marketplace and see that as hopefully continuing into 2024, as well and getting back to those 2019 levels.
Those are the three biggest contributors inventory management, our simplified pricing and then obviously continuing to look at the market for freight.
Got it and I just have a quick follow up on the digital business. I was wondering if you expect trends to Navy normalize there and what kind of initiatives you have in place to help drive growth.
As I mentioned earlier.
We really feel with having a lot of the online only promotions.
Behind us as we go into 'twenty four we should see we should see growth.
The digital business.
But.
Other things, we're working we're working on the site or functionality of the site overall.
We're also working on other things behind the scenes to improve the customer experience overall I don't know if you want to weigh in at all on this yes.
Joe I would agree with you I think once we can get past lapping the big moves we've made particularly on the online offers that we've eliminated and make everything Ami, but even just the clarity of pricing. So we show up better and starts. So we continue to work on ways that we can show up better in search and I think not having the complicated pricing that we've had will definitely.
Help us with those algorithms, we continue to work with technology in terms of what those algorithm look like how we are using those search terms. So we can be much more productive in driving productive traffic to our site I think just that experience like Ron just.
Sorry to relevant better recommendations personalization will continue we have a leading loyalty program. We know a lot about our customers to continuing to capitalize on that and bring a much more personalized experience to our website and then just really using the product assortment and curating and much more.
Assortment that is personalized to you and what you've offered so we can give you a better recommendations on what you've searched for what you bought in the past et cetera. So those are all things that are continuing to be in flight, but will help us really drive that productivity, both on Capex and conversion and I think those will play as we go into next year as well, but although it.
It hasnt been great we have.
Benefits at each quarter, our digital business has gotten.
<unk> benefits.
These efforts, though I think as we get through Q4 Youll start seeing into next year, it will not be as big of a headwind.
This year.
Got it thank you so much.
Got it.
Okay.
Our next question comes from Matthew Boss with Jpmorgan. Please go ahead.
Great. Thanks.
So Tom as we think about your key outlined initiatives gifting.
Shifting home beauty and impulse.
How best to think about these opportunities for holiday and what do you see as the sweet spot for P&L results in 2024 as these initiatives scale just given the associated lead times.
So.
Obviously for the.
For the fourth quarter as I mentioned earlier beauty is really key.
One of the obviously key businesses for holiday.
But for the holiday season and beyond.
The.
All elements of it especially gift sets.
Also our entire gifting business.
I came in here.
A year ago.
The first thing I did was move gifting to the front of the store was in the back of the store, but we did it like we did it.
Mid December I mean, it was like very closed.
Close to Christmas because obviously I started.
Full time on December 2nd so.
By the time, we got it organized.
I think it's really close to Christmas and we Didnt buy into it I mean, we just pulled together what we had this year, we actually we bought into it.
As a strategy we also removed the.
The register banks, so that we had additional square footage in order to put gifting.
In the front of the store. We've also expanded we've also expanded.
<unk>.
The presentation into some of the apparel areas et cetera. So.
Hopefully when you go into our stores you see just a really really strong presentation of gifting. So that's really key.
Its key not only I mean, not only now, but obviously as we get closer and closer and closer to two Christmas. So that's really key impulse.
It's something that impulse is something we've we've had a little bit of that but this year we have.
We have a lot more but we're just starting the impulse business to be honest with you.
Right now we have about 80 Q in line setup in the company.
For 2024, we're expanding the queuing line presentations considerably.
Considerably.
So that we have a.
More structured approach to.
So the impulse.
We have a captain.
Kind of help us run the impulse business really looking really looking at the Assortments make sure that they're balanced.
Overall, youre going to see it in the if youre going to see improvement obviously in the fourth quarter, but.
A big improvement.
As we go into 2024, so the other thing is that.
We're we're doing well and again if you go into our stores, we have a very strong presentation.
In.
And holiday product.
Our Saint Nicholas square product and it really hits you as you come into the store.
By the impactful presentation, we have so.
Yes, so to answer your questions really.
It's all about beauty, it's all about gifting and it's all about impulse.
And growing and growing categories.
Especially in the home that we we've really we've neglected over time and one of those is pad as well I mean, we had a 40% increase in the third quarter. So feel good about that so.
I will let.
I'll, let Joe talk about P&L.
Honestly all of these things are definitely going to be key drivers, but we're not going to be talking a lot about 2024, obviously in the next call. We'll give you guidance for that Matt, but I hope the message that you heard today. This is a build it we're obviously repositioning the company and we're building in all of these initiatives that are really just getting started and we've seen some SaaS from gifting.
About the year and obviously, we have a lot of that in front of us the biggest holiday of the year as we speak but we'll continue to learn from that and take advantage of that as we move into next year as Tom mentioned, we have 50% more sephora as well be able to take advantage of that not only from a gifting perspective, but the traffic the new customers that it brings and and those <unk>.
You need a constant credibly well, so I think a lot of the areas that we're talking about our white space, which will only help us as we move through 'twenty three into 'twenty, four but more color to come on our Q4 call from that perspective.
Great and then Joe just maybe a follow up could you elaborate on the structural changes that you've made with inventory management as we think about inventory levels on hand, moving forward just relative to the pre pandemic, maybe 2019 operating model.
I think the biggest thing is we have a case mentality, we're holding back with Steve Smart from a reserve perspective, instead of placing all of our orders upfront. So it allows us really to be much more agile and reacting I think in the last two quarters you saw that our inventory was down more than the mid single digits that we had told you we are going.
This business was because we saw we had a little bit softer topline. So we reacted appropriately we didn't see the need to go and then Ron and chase after that inventory we feel good that we supported all of the key initiatives that Tom has outlined we were able to pull back on some of the other areas. We're seeing those trends and that would not have been something we would've been able to do as well.
<unk> because we just didn't have that reserve mentality that we feel that in case. The other thing that Tom has brought to the table is really just leveraging the market brands and we tried to illustrate that through the juniors commentary that Tom had explained but really being able to use those brands. It allows you to bring it in a lot more quickly so not being so relying on laundry.
Lead times are really taking what in the market and getting it into the store and not having as much depth, but knowing that you have a much broader assortment of goods that the customer can come in for particularly around fashion, because we know that that can be in and in an hour and then that does not only raises sales that also helps your margin structure. So a lot of really good fun foundational changes that have.
<unk> made that were starting to take the benefit of and Youre seeing that through the margin expansion in the tight inventory management our results today.
Yes, Joe just mentioned we've been buying.
So deep in each SKU.
And that's important in basics, but it's not important in fashion do you want to sell through the product so.
Going forward in 'twenty four youll see.
A reduction in.
The units per SKU, when you walk the stores.
Give us an opportunity to have more brands more variety.
That will also help the business and help us turn faster.
Great Best of luck.
Thank you.
Our final question comes from Dana Telsey with Telsey Group. Please go ahead.
Hi, Good morning, everyone. As you think about National Hi, Tom Hi, Joe Hi.
Hi.
Do you think about national and private label penetration what are you seeing and how is it changing especially with what's going on with the update of the chase mentality.
And then Jim just on the other revenue side on credit revenue any updates to the health of the consumer.
How bad debt or delinquencies are trending thank you.
Well, we're going to change the mix.
Slightly in terms of having more national brands.
Versus our private label and proprietary product.
And a lot is going to come from.
Market market buys.
Nick and I have been in.
New York frequently.
And really looking for.
Different different brands that.
That we can that we can carry.
A lot of it has to do with obviously, we were proud of our brand portfolio and we want to build upon that.
But also we want to leverage the marketplace more often.
Really looking looking for really more interesting product.
On our selling floor than we had.
Previously.
So that'll that'll change the mix.
We still feel are private and proprietary brands are are important.
But we also feel that we need to integrate into our assortments on the selling floor.
Things that are in the marketplace. So we're working on that.
And then in terms of credit Dana I think the biggest thing is we do know the consumers under pressure, particularly we serve the middle income customer, which we see is definitely pressured we did take steps I think over a year ago.
Understanding where the market was moving and really taking on less risk in our portfolio anticipating that we were going to start to see loss rates move up which we have seen but they've been in line with our expectations. So losses are moving up payment rates are coming down the payment rates, though are still ahead of 2019 that does say that the customer is so healthy enough to make their paint.
And so we're not seeing a loss rates above what we had anticipated but they are definitely deteriorating from what we had seen historically all of which we have embedded into our guidance and our outlook for the rest of the year.
Yes.
Thank you.
Yeah.
Thank you.
For everyone that was listening on the call today.
Have a great Thanksgiving go shopping thanks.
Yes.
This concludes today's conference call you may now disconnect.
Yeah.
Okay.
Yeah.