Q2 2024 Kohl's Corp Earnings Call
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Aura: Good morning, my name is Aura and I will be your conference operator today.
Speaker Change: At this time, I would like to welcome everyone to the Q2 2021 Coles Corporation earnings conference call. Today's conference is being recorded.
Speaker Change: All lines have been placed on mute to prevent any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key, followed by the number one on your telephone key pad. If you would like to withdraw your question, press star one again.
Mark Rupe: At this time, I would like to turn a conference over to Mark Rupe Senior Vice President and Investor Relations and Treasurer. Please go ahead.
Mark Rupe: Thank you. Certain statements made on this call, including projected financial results.
Speaker Change: and the company's future initiatives are forward-looking statements.
Speaker Change: Such statements are subject to certain risks and uncertainties.
Speaker Change: which could cause coals acts a result to differ materially from those projected in such forward-looking states.
Speaker Change: Such risks and uncertainties include, but are not limited to.
Speaker Change: Those that are described in item 1a in Coles' most recent Anna report on Form 10K.
Speaker Change: and as may be supplemented from time to time and calls other filings with the SEC.
Speaker Change: All of which are expressly incorporated hereby reference.
Speaker Change: Ford-looking statements relate to the date initially made.
Speaker Change: and Cole's undertakes no obligation to update them.
Speaker Change: In addition, during this call, we may make reference to non-gap financial measures.
Speaker Change: Reconciliation of non-gap financial measures can be found in the Investor presentation filed as an exhibit to our Form 8K filed with the SEC and is available on the company's Investor Relations website.
Speaker Change: Please note that this call will be recorded.
Speaker Change: However, replays of this call will not be updated.
Speaker Change: So if you're listening to a replay of this call, it is possible that the information discussed is no longer current.
Speaker Change: and Coles undertakes no obligation to update such information.
Speaker Change: With me this morning at Tom Kingsbury, our chief executive officer and Jill Timm, our chief financial officer.
Speaker Change: I will now turn the call over to Tom.
Tom Kingsbury: Thank you, Mark.
Tom Kingsbury: and good morning everyone.
Tom Kingsbury: We continue to work hard to reposition calls for future growth.
Tom Kingsbury: and have taken significant actions to accomplish this.
Tom Kingsbury: While we recognize efforts of this scale take time.
Tom Kingsbury: We were hopeful that a return to top-line growth would materialize more quickly.
Tom Kingsbury: We are making progress against our strategic priorities.
Tom Kingsbury: However, our performance has been impacted by a continued challenging environment.
Tom Kingsbury: and in softness in our core business.
Tom Kingsbury: During the second quarter, we attracted more new customers to goals and experienced an increase in overall transactions.
Tom Kingsbury: Both of which are positive developments.
Tom Kingsbury: At the same time, however, our customers exhibited more discretion in their spending.
Tom Kingsbury: which pressured overall sales and overshadowed strong performance in our key growth areas, including Sephora.
Speaker Change: Home decor
Speaker Change: Gifting an impulse.
Speaker Change: Although we are disappointed with our second quarter sales, we continue to execute well operationally.
Speaker Change: and Navalny must deliver a 13% increase in earnings driven by gross margin expansion in strong inventory and expense management.
Speaker Change: Looking ahead, we are focused on ensuring that the substantial work that we've done across product.
Speaker Change: Value and Experience is fully recognized by both new and existing customers.
Speaker Change: We'll capitalize on new opportunities such as our partnership with babies, our us, and expect to continue to benefit from our key growth areas.
Speaker Change: and we will evolve our marketing to highlight all of our new product initiatives.
Speaker Change: While also amplifying our focus on value with an emphasis on lower price messaging.
Speaker Change: As Jill will discuss in more detail, our outlook for the balance of the year assumes the macroeconomic environment will remain challenging.
Unknown Executive: At this time, I would like to welcome everyone to the Q2 2024 Kohls Corporation earnings conference call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise.
Speaker Change: Importantly.
Jill Timm: Our Operating Discipline
Unknown Executive: After the speakers remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again.
Jill Timm: are solid cash flow generation.
Jill Timm: and Healthy Balance Sheet.
Jill Timm: will continue to provide meaningful support.
Jill Timm: as we work to return calls to growth.
Mark Rupe: At this time, I would like to turn the conference over to Mark Rupe, Senior Vice President, Investor Relations and Treasurer. Please go ahead. Thank you.
Jill Timm: has demonstrated by our two two operating performance.
Jill Timm: You all of this, we will remain focused.
Mark Rupe: Certain statements made on this call, including projective financial results, and the company's future initiatives are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohls 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 1A in Kohls' most recent annual report on Form 10K, and as may be supplemented from time to time in Kohls' other filings with the SEC, all of which are expressly incorporated to Heron by reference. Forward-looking statements relate to the date initially made, and Kohls undertakes no obligation to update them.
Jill Timm: On executing against our four strategic priorities, which are...
Jill Timm: Enhancing the customer experience
Jill Timm: Accelerating and simplifying our value strategies.
Jill Timm: Managing inventory and expenses with discipline
Jill Timm: and further strengthening our balance sheet.
Jill Timm: As I look at the progress we are making
Jill Timm: We continue to manage inventory and expenses tightly and have strengthened our balance sheet.
Jill Timm: and though we have taken significant action to enhance the customer experience.
Jill Timm: and Simplify our values strategies.
Jill Timm: We simply have more work to do to ensure we are fully capitalizing on our efforts.
Mark Rupe: In addition, during this call, we may make reference to non-gap financial measures. Reconciliation of non-gap financial measures can be found in the investor presentation filed as an exhibit to our Form 8K filed with the SEC and is available on the company's investor relations website.
Speaker Change: Let me start with what's working.
Speaker Change: First, Sephora at Cole's continued to deliver strong growth and Q2 with total beauty sales increasing approximately 45%.
Mark Rupe: 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 Kohls undertakes no obligation to update such information.
Speaker Change: Comparable beauty sales grew in the low teens percent with consistent performance across shops opened in 2021 and 2022.
Speaker Change: and Shops opened in the past year are performing better than expected.
Mark Rupe: With me this morning, our Tom Kingsbury, our Chief Executive Officer, and Jill Tem, our Chief Financial Officer, I will now turn the call over to Tom. Thank you, Mark, and good morning, everyone. We continue to work hard to reposition Kohls for future growth and have taken significant actions to accomplish this.
Speaker Change: We also continue to see solid growth digitally.
Speaker Change: Bragrants, Bath and Body, and Skin Care, were specially strong in the quarter, in brands including Sold Desha Nero, Sephora Collection, and Rare Beauty, and Charlotte Tilbury, Drolvin Pressive Growth.
Thomas Kingsbury: While we recognize efforts of this scale take time, we were hopeful that a return to top-line growth would materialize more quickly. We are making progress against our strategic priorities. However, our performance has been impacted by a continued challenging environment and in softness in our core business. During the second quarter, we attracted more new customers to Kohls and experienced an increase in overall transactions, both of which are positive developments. At the same time, however, our customers exhibited more discretion in their spending, which pressured overall sales and overshadowed strong performance in our key growth areas, including Sephora. Home Decor, Gifting and Impulse.
Speaker Change: Our partnership with Sephora has been incredibly successful.
Speaker Change: Together we have acquired millions of new customers and gain significant market share within the industry.
Speaker Change: Supporting now has a presence in 1,000 and 50 of our stores.
Speaker Change: Following the opening of 140 shops this year.
Speaker Change: Looking ahead, we are confident in our ability to continue driving solid growth.
Speaker Change: We are introducing new brands, such as House Labs by Lady Gaga and Glossier and Makeup and Ariana Grande and Pregrants.
Speaker Change: We're also significantly expanding our holiday gifted assortment.
Speaker Change: Building off a last year's success.
Speaker Change: Second
Speaker Change: Our work in under-penetrated categories continues to gain traction.
Speaker Change: Sales Trends in Home Decor
Speaker Change: Gifting an impulse, accelerated, and Q2.
Thomas Kingsbury: Although we are disappointed with our second quarter sales, we continue to execute well operationally, enabling us to deliver a 13% increase in earnings driven by gross margin expansion and strong inventory and expense management. Looking ahead, we are focused on ensuring that the substantial work that we've done across product, value and experience is fully recognized by both new and existing customers. We will capitalize on new opportunities such as our partnership with babies are us and expect to continue to benefit from our key growth areas and we will evolve our marketing to highlight all of our new product initiatives while also amplifying our focus on value with an emphasis on lower price messaging.
Speaker Change: And earlier this month, we successfully launched our partnership with babies our us.
Speaker Change: These collective areas continue to represent a significant sales growth opportunity in the coming years.
Speaker Change: Let me share a little more on each of these.
Speaker Change: Our efforts to build our home decor business continues to progress.
Speaker Change: benefiting from our expanded assortment and recent investments in marketing.
Speaker Change: and Q2 sales of seasonal and everyday decor increase more than 35% year over year.
Speaker Change: and we also experienced strong growth across many other areas such as storage.
Speaker Change: Wall Art, Glassware, and Pet
Speaker Change: For Back to School, we have highlighted backpacks and dorm room essentials.
Speaker Change: In Gifting, our customers continue to respond well to our assortment and front-of-store positioning.
Speaker Change: and Q2 sales increase more than 30% with solid performances across key events including Mother's Day, Father's Day, and Fourth of July.
Thomas Kingsbury: As Jill will discuss in more detail our outlook for the balance of the year assumes the macro economic environment will remain challenging. Importantly our operating discipline, our solid cash flow generation and healthy balance sheet will continue to provide meaningful support as we work to return Kohls to growth as demonstrated by our Q2 operating performance. Through all of this we will remain focused on executing against 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.
Speaker Change: We will build on our success with an even more robust gift assortment for the upcoming holiday season.
Speaker Change: As it relates to impulse, we drove sales growth of more than 70% as we expanded two lines to 50 more stores in the second quarter.
Speaker Change: In Q3, we will add 200 more Q lines, bringing the total to 435 Q lines in time for the holiday season.
Speaker Change: Now let me provide a brief update on our initial launch of Babies R Us.
Speaker Change: which allows us to broaden our reach with young families.
Speaker Change: We're in the process of opening 200 baby shops featuring thousands of products across baby gear, furniture, and accessories from a number of high quality brands.
Thomas Kingsbury: As I look at the progress we are making we continue to manage inventory and expenses tightly and have strengthened our balance sheet and though we have taken significant action to enhance the customer experience and simplify our value strategies we simply have more work to do to ensure we are fully capitalizing on our efforts.
Speaker Change: We have opened more than 100 of our shops in August and are planning to open the remainder during the next month.
Speaker Change: Our baby offering is also available to customers online.
Speaker Change: We will learn from this initial launch which will inform our plans for future expansion.
Speaker Change: In conjunction with the launch we are introducing motherhood, a leading maternity brand to enhance our offering for expected mothers.
Thomas Kingsbury: Let me start with what's working. First, Sephora at Kohls continued to deliver strong growth in Q2 with total beauty sales increasing approximately 45%. Comparable beauty sales grew in the low teens percent with consistent performance across shops opened in 2021 and 2022 and shops opened in the past year are performing better than We also continue to see solid growth digitally. Bregrance, bath and body, and skin care were especially strong in the quarter, in brands including sold-day genera, Sephora collection, and rare beauty in Charlotte Tilbury drove impressive growth.
Speaker Change: and in two three we will introduce a baby's arrest registry.
Speaker Change: In addition to baby gear and maternity, we'll also see a halo opportunity to grow sales of our infant and newborn apparel.
Speaker Change: Moving beyond product, let me share some of our other initiatives that are working.
Speaker Change: We continue to effectively manage inventory and expenses.
Speaker Change: Inventory in Q2 decline 9% versus last year.
Speaker Change: We continue to operate with greater flexibility and open to buy.
Speaker Change: which has enabled us to manage our inventory effectively despite lower sales.
Speaker Change: Looking ahead, we remain committed to increasing inventory turns, and managing inventory down mid-single digits.
Speaker Change: And from an expense perspective I am pleased with how the organization has remained disciplined in what continues to be a challenging environment.
Thomas Kingsbury: Our partnership with Sephora has been incredibly successful. Together, we have acquired millions of new customers and gained significant market share within the industry. Sephora now has a presence in 1,050 of our stores following the opening of 140 shops this year. Looking ahead, we are confident in our ability to continue driving solid growth. We are introducing new brands such as House Labs by Lady Gaga and Glossier in Makeup and Ariana Grande in Bregrance. We are also significantly expanding our holiday-gifting assortment, building off a last-year success.
Speaker Change: SGNA expenses in Q2 declined over 4% compared to last year.
Speaker Change: And lastly, we continued to strengthen our balance sheet.
Speaker Change: During the second quarter, we reduced our long-term debt by 113 million dollars and reduced our revolver borrowings by 150 million dollars as compared to last year.
Speaker Change: Now let me discuss some of the headwinds our business continues to face in the actions we are taking.
Speaker Change: It's I previously mentioned, our customers exhibited more discretion during the second quarter.
Speaker Change: Inflation and high interest rates continue to pressure spending.
Speaker Change: especially among our middle income consumers.
Thomas Kingsbury: Second, our work in under-penetrated categories continues to gain traction. Sales trends in home decor, gifting and impulse accelerated in Q2. And earlier this month, we successfully launched our partnership with Babies Arroz. These collective areas continue to represent a significant sales growth opportunity in the coming years.
Speaker Change: We are seeing the clearest evidence of this in the performance of our core apparel and footwear offering which experience broad softness in the quarter.
Speaker Change: To better navigate this environment, we are taking a number of actions to ensure that our customers recognize all of the enhancements we have made across product value and experienced during the past year.
Speaker Change: We are evolving our marketing message to increase consideration of calls as a leading destination for value for the entire family.
Thomas Kingsbury: Let me share a little more on each of these. Our efforts to build our home decor business continues to progress, benefiting from our expanded assortment and recent investments in marketing. In Q2, sales of seasonal and everyday decor increase more than 35% year-over-year. And we also experience strong growth across many other areas such as storage, wall art, glassware, and pet. For back to school, we have highlighted backpacks and dorm room essentials. In gifting, our customers continue to respond well to our assortment and front-of-store positioning.
Speaker Change: Our advertising has already begun to include messaging around lower price points across our
Speaker Change: and we will begin leveraging real customers and influencers to showcase not only our great values but also our enhanced product offering and of course we'll continue to lean into cash as a key value differentiator.
Speaker Change: Beyond our marketing efforts, we know we have more work to do in our core apparel and putware business to improve the sales trends which frankly have been disappointing.
Speaker Change: To be clear, we remain confident that the product we are offering today is more relevant to our customers.
Thomas Kingsbury: In Q2, sales increase more than 30% with solid performances across key events, including Mother's Day, Father's Day, and Fourth of July. We will build on our success with an even more robust gift assortment for the upcoming holiday season. As it relates to impulse, we drove sales growth of more than 70% as we expanded Q lines to 50 more stores in the second quarter. In Q3, we will add 200 more Q lines bringing the total to 435 Q lines in time for the holiday season.
Speaker Change: This is supported by a recent customer insight work that indicates more of our customers' field calls resonates with them and by an increase in conversion we experience in the second quarter.
Speaker Change: We are delivering growth in our new products, including dresses, which are benefiting from expanded space in our stores as well as market brands, which are resonating well with our customers.
Speaker Change: and we are seeing promising initial cell-through trends in newly introduced brands, such as Aeropostall and Limititude 2.
Speaker Change: We are also encouraged by trend improvement and active we witness during the quarter.
Thomas Kingsbury: Now, let me provide a brief update on our initial launch of Baby Zaraz. Chris, which allows us to broaden our reach with young families. We are in the process of opening 200 baby shops, featuring thousands of products across baby gear, furniture and accessories from a number of high quality brands. We have opened more than a hundred of our shops in August and are planning to open the remainder during the next month.
Speaker Change: Our private act of brands, which include flex and tech gear, grew load double digits, and we delivered positive growth in several of our national brands including Nike, Sketchers, Columbia, and Eddie Bauer.
Speaker Change: As it relates to back to school, we are pleased with our positioning in backbacks, kids' footwear and boys and girls' apparel.
Speaker Change: Nonetheless, there are several areas of our business that are holding us back.
Speaker Change: Some of which are self-inflicted.
Thomas Kingsbury: Our baby offering is also available to customers online. We will learn from this initial launch, which will inform our plans for future expansion. In conjunction with the launch, we are introducing motherhood, a leading maternity brand to enhance our offering for expectant mothers. And in Q3, we will introduce the baby's arrest registry. In addition to baby gear and maternity, we will also see a halo opportunity to grow sales of our infant and newborn apparel.
Speaker Change: Jewelry is a good example of a category where we fail to retain sales, as we made space for Sephora in stores.
Speaker Change: As we've discussed on last quarter's call, this is a category that was highly valued by our customers and we are committed to reestablishing our positioning.
Speaker Change: This holiday season, we will reintroduce fine jewelry in two understores, as well as expand in IEL placement of Bridge Dury.
Speaker Change: We have also identified opportunities to rebuild our assortment with increased knownness in areas including petites and classic sportswear where we've lost traction in recent years.
Thomas Kingsbury: Moving beyond product, let me share some of our other initiatives that are working. We continue to effectively manage inventory and expenses. Inventory in Q2 decline 9% versus last year. We continue to operate with greater flexibility and open to buy, which has enabled us to manage our inventory effectively despite lower sales. Looking ahead, we remain committed to increasing inventory turn in managing inventory down mid single digits. And from an expense perspective, I am pleased with how the organization has remained disciplined in what continues to be a challenging environment. SGNA expenses in Q2 decline over 4% compared to last year.
Speaker Change: and we continue to see opportunity in growing our juniors and legacy home businesses which candidly under-performs in Q2.
Speaker Change: During Q2, we began to reposition juniors back to the front of the store, which is expected to positively influence sales as fall by capitalizing on to support a traffic.
Speaker Change: We will also continue to leverage market brands to bring in trend right product to better connect with our younger customers.
Speaker Change: As it relates to our legacy home business, sales within kitchen electric, floor care, and betting remained under pressure.
Speaker Change: However, we expect trends to stabilize as we move through fall-based on increased innovation, new brand introductions, and a stronger value messaging.
Thomas Kingsbury: And lastly, we continue to strengthen our balance sheet. During the second quarter, we reduced our long term debt by $113 million and reduced our revolver borrowings by $150 million as compared to last year.
Speaker Change: Lastly, it's important that we continue to drive traffic across our Omni Channel platform.
Speaker Change: and Q2 digital sales outperform store sales with transactions increasing in both channels.
Speaker Change: To support future growth, we are investing to enhance our omnipotent experience.
Thomas Kingsbury: Now, let me discuss some of the headwinds our business continues to face in the actions we are taking. As I previously mentioned, our customers exhibited more discretion during the second quarter. Inflation and high interest rates continue to pressure spending, especially among our middle income consumers. We are seeing the clearest evidence of this in the performance of our core apparel and footwear offering, which experienced broad softness in the quarter.
Speaker Change: In stores, we are strengthening our leadership structure.
Speaker Change: Adding an additional layer of management closer to stores to ensure we are driving a consistent experience across the chain. And digitally, we continue to increase personalization while also leaning into social commerce to reach a younger audience.
Speaker Change: So, as you heard, we have a number of actions underway to stabilize and improve our sales trend.
Speaker Change: Collectively, we believe our strategic initiatives will help us reach new customers and increase engagement with existing customers.
Thomas Kingsbury: To better navigate this environment, we are taking a number of actions to ensure that our customers recognize all of the enhancements we have made across product value and experienced during the past year. We are evolving our marketing message to increase consideration of goals as a leading destination for value for the entire family. Our advertising has already begun to include messaging around lower price points across our store. Department. And we will begin leveraging real customers and influencers to showcase not only our great values, but also our enhanced product offering. And of course, we'll continue to lean into Kohls Cash as a key value differentiator.
Speaker Change: I will now summarize my comments today and I want to leave you with three things.
Speaker Change: First, we continue to operate in a difficult consumer environment.
Speaker Change: Our customers are feeling the burden of the higher cost of living.
Speaker Change: This is evident in smaller basket sizes in Q2.
Speaker Change: Recognizing this, we have amplified our focus on value, especially in our marketing messaging.
Speaker Change: Second, we continue to execute well operationally and remain in a sound financial position.
Speaker Change: Despite the decline in sales, we increased Q2 earnings by 13%.
Thomas Kingsbury: Beyond our marketing efforts, we know we have more work to do in our core apparel and footwear business to improve the sales trends, which, frankly, have been disappointing. To be clear, we remain confident that the product we are offering today is more relevant to our customers. This is supported by a recent customer insight work that indicates more of our customers' field, Kohls resonates with them, and by an increase in conversion, we experience in the second quarter.
Speaker Change: We are expanding our gross margin.
Speaker Change: Managing inventory and expenses with discipline and strengthening our balance sheet by reducing long-term debt.
Speaker Change: We also remain committed to returning capital to shareholders to the dividend, which is supported by our solid cash flow generation.
Speaker Change: And third, our investments in key growth theories are building momentum.
Speaker Change: Supported Cole's continues to drive strong sales growth and will benefit in the back half of the year from the additional 140 shops opened.
Thomas Kingsbury: We are delivering growth in our new products, including dresses, which are benefiting from expanded space in our stores, as well as market brands, which are resonating well with our customers. And we are seeing promising initial sell-through trends and newly introduced brands, such as Aeropostol and Limited2. We are also encouraged by trend improvement in active, we witnessed during the quarter. Our private active brands, which include Flex and Tech Gear, grew low double digits, and we delivered positive growth in several of our national brands, including Nike, Skechers, Columbia, and Eddie Bauer. As it relates to back to school, we are pleased with our positioning and back backs, kids footwear, and boys and girls apparel.
Speaker Change: We're also getting a traction in home decor.
Speaker Change: Significantly expanding our holiday gifting offering and adding impulse cue in lines to 200 more stores in cue 3
Speaker Change: All of which are positioned to deliver incrementally this holiday season, and we are optimistic that our babies are restaurant will bring in new customers as awareness builds.
Speaker Change: As I said at the outset, we are working hard to reposition calls for future growth and we are taking significant action to accomplish this against a difficult economic backdrop.
Speaker Change: That said, our confidence in our strategy remains strong. We continue to believe that we are making the right strategic decisions to set goals up for the long-term success. And in time, I look forward to the liver and results that reflect this.
Thomas Kingsbury: Nonetheless, there are several areas of our business that are holding us back, some of which are self-inflicted. Jewelry is a good example of a category where we failed to retain sales as we made space for Sephora in stores. As we've discussed on last quarter's call, this is a category that was highly valued by our customers, and we are committed to reestablishing our positioning. This holiday season, we will reintroduce fine jewelry in two understores, as well as expand in aisle placement of bridge jewelry.
Speaker Change: I want to thank all of our socials for their dedication to coals in support of our strategic efforts. I will now turn over the call to Jill to discuss our second quarter results in outlook for 2024.
Speaker Change: Jill?
Jill Timm: Thank you, Tom, and good morning everyone. For today's call, I will provide additional details on our second quarter results, as well as an update on our fiscal year 2024 guidance.
Speaker Change: That sales decreased 4.2% in Q2 and are down 4.7% here today.
Thomas Kingsbury: We have also identified opportunities to rebuild our assortment with increased newness in areas including petite and classic sportswear, where we've lost traction in recent years. And we continue to see opportunity in growing our juniors and legacy home businesses, which candidly underperformed in Q2. During Q2, we began to reposition juniors back to the front of the store, which is expected to positively influence sales this fall by capitalizing on the Sephora traffic. We will also continue to leverage market brands to bring and trend right product to better connect with our younger customers. As it relates to our legacy home business, sales within kitchen electrics, floor care, and betting remained under pressure.
Speaker Change: Comparable fields declined 5.1% in Q2 and declined 4.8% year today.
Speaker Change: As time indicated, in Q2, we attracted more new customers to cold and experienced an increase in overall transactions.
Speaker Change: Both of which are positive development.
Speaker Change: However, customers exhibited more discretion on their spending, which led to a smaller average basket size.
Speaker Change: Digital sales outperform stores sales in the quarter, so both were down to last year.
Speaker Change: All the revenue, which is primarily our credit business, decreased five percent in the quarter and year-to-date, in line with our expectations.
Speaker Change: Moving down the piano, second quarter gross margin with 39.6% up 59 basis points versus last year.
Thomas Kingsbury: However, we expect trends to stabilize as we move through fall-based on increased innovation, new brand introductions, and a stronger value, and messaging.
Speaker Change: This increase was driven by inventory management and law-raight expense.
Speaker Change: Here today, gross margin was 39.6% and increase of 54 basis points.
Thomas Kingsbury: Lastly, it's important that we continue to drive traffic across our Omni channel platform. In Q2, digital sales outperform store sales with transactions increasing in both channels. To support future growth, we are investing to enhance our Omni experience. In stores, we are strengthening our leadership structure, adding an additional layer of management closer to stores to ensure we are driving a consistent experience across the chain. And digitally, we continue to increase personalization while also leaning into social commerce to reach a younger audience.
Speaker Change: SUNA expenses declined 4.2% to $1.2 billion in Q2.
Speaker Change: benefiting from lower, store-related expenses, even as we invested in marketing and technology to support our growth initiatives.
Speaker Change: That a client and store-related expenses was driven by fewer Sephora openings.
Speaker Change: The Ours Store refreshes and tightly managing expenses with the decline in sales.
Speaker Change: Here to date, SNA expenses have decreased 2.5% compared to last year.
Speaker Change: To appreciate an expense in the quarter was $188 million.
Speaker Change: and $376 million year date, both up $2 million to last year.
Thomas Kingsbury: So, as you heard, we have a number of actions underway to stabilize and improve our sales trend. Collectively, we believe our strategic initiatives will help us reach new customers and increase engagement with existing customers.
Speaker Change: Interference of $86 million in the quarter, down $3 million from last year.
Speaker Change: As a reminder, Q2 Intersex Defense included a $4.6 million pre-tax charge, related to the
Thomas Kingsbury: I will now summarize my comments today and I want to leave you with three things. First, we continue to operate in a difficult consumer environment. Our customers are feeling the burden of the higher cost of living. This is evident in smaller basket sizes in Q2. Recognizing this, we have amplified our focus on value, especially in our marketing messaging.
Speaker Change: The year to date, interest expense decreased $4 million to $169 million.
Speaker Change: That income for the quarter was $66 million and earnings per looted share with 59 cents.
Speaker Change: here today at income of $39 million and earnings per diluted share with 35 cents.
Speaker Change: Moving on to the balance sheet and cash flow.
Speaker Change: We ended Q2 with $231 million of cash in cash equivalents.
Thomas Kingsbury: Second, we continue to execute well operationally and remain in a sound financial position. Despite the decline in sales, we increase Q2 earnings by 13%. We are expanding our gross margin, managing inventory and expenses with discipline and strengthening our balance sheet by reducing long-term debt. We also remain committed to returning capital to shareholders to the dividend, which is supported by our solid cash flow generation.
Speaker Change: Aventory at quarter-end was down 9% compared to last year. Once again, exceeding our commitment of mid-single digits decline.
Speaker Change: A mentoring management remains a key focus of ours with the goal of increasing turn, which increase 7% in Q2.
Speaker Change: Looking ahead, we feel good about how we are positioned and turning the fall season.
Speaker Change: You're good at operating cash flow with $247 million and increase of $228 million last year.
Thomas Kingsbury: And third, our investments in key growth areas are building momentum. Sephora at cost continues to drive strong sales growth and will benefit in the back half of the year from the additional 140 shops opened. We are also gaining traction in home decor, significantly expanding our holiday gifting offering, and adding impulse queuing lines to 200 more stores in Q3, all of which are positioned to deliver incrementally this holiday season. And we are optimistic that our babies' arrest launch will bring in new customers as awareness builds.
Speaker Change: and you're today adjusted free cash flow with a use of $34 million and improvement from a use of $140 million in the prior year.
Speaker Change: Now let me touch on our Capital Allocation Priorities.
Speaker Change: Capital Expenditures Year-to-date for $239 million.
Speaker Change: Significantly Lessons, $338 million last year, driven by fewer Sephora openings.
Speaker Change: We are still planning 24 catbacks of approximately $500 million.
Speaker Change: Consisting of Investment in 350 impulse-curing lines
Speaker Change: A 140 Sephora Small Shop Opening
Thomas Kingsbury: As I said at the outset, we are working hard to reposition calls for future growth, and we are taking significant action to accomplish this against a difficult economic backdrop. That said, our confidence in our strategy remains strong.
Speaker Change: The launch of 200 babies are uschaps.
Speaker Change: and six new store openings, including one relocation.
Speaker Change: After investing in the business, strengthening the balance sheet and returning capital to shareholders also remains a top priority.
Speaker Change: We ended Q2 with $410 million on a revolver, down from $560 million at the end of Q2 last year.
Thomas Kingsbury: We continue to believe that we are making the right strategic decisions to set calls up for the long-term success, and in time, I look forward to the delivery results that reflect this.
Speaker Change: During the second quarter, we redeemed the remaining $113 million of our 9.5% notes due May 2025. Lowering our long term debt.
Thomas Kingsbury: I want to thank all of our associates for their dedication to calls and support of our strategic efforts.
Speaker Change: For the remainder of the year, our focus will be on paying down our revolver balance and rebuilding our cash position.
Jill Timm: I will now turn over the call to Jill to discuss our second quarter results and I'll look for 2024. Jill? Thank you Timm and good morning everyone. For today's call I will provide additional details on our second quarter results as well as an update on our fiscal year 2024 guidance. It's time indicated in Q2 we attracted more new customers to Kohls and experienced an increase in overall transactions, both of which are positive developments.
Speaker Change: Looking ahead, we will continue to monitor our options with respect to the July 2025 notes, and we'll likely address some closer maturity given the favorable coupon rates.
Speaker Change: As for Sherholder Returns, we continue to prioritize the payment of our dividend at current levels.
Speaker Change: and Q2, we distributed $56 million in dividend to our shareholders.
Speaker Change: and as previously disclosed the board, on August 13th declare a quarterly cash dividend of 50 cents per share, payable to shareholders on September 25th.
Speaker Change: Now let me share some details on our updated outlook for 2024.
Speaker Change: As you've heard this morning, we continue to have strong confidence in our strategy and are working hard to reap position cold for future growth.
Jill Timm: However, customers exhibited more discretion on their spending, which led to a smaller average basket size. Digital sales outperformed store sales in the quarter, so both were down to last year. Other revenue, which is primarily our credit business, decreased 5% in the quarter and year to date in line with our expectations. Moving down the P&L, second quarter growth margin was 39.6% up 59 basis points versus last year. This increase was driven by inventory management and lower freight expense.
Speaker Change: We are approaching our financial outlook for the year, currently, taking into account our first half performance and ongoing uncertainty in the consumer environment.
Speaker Change: For the full year, we currently expect net sales to be in the range of a 4% decrease to a 6% decrease versus 2023.
Speaker Change: As compared to our previous guidance range of a decrease of 2% to 4%
Speaker Change: Comparable sales to be in the range of a 3% decrease to a 5% decrease.
Speaker Change: Our previous Bull York comparable sales guidance range was a 1% decrease to a 3% decrease.
Jill Timm: Year to date, growth margin was 39.6% an increase of 54 basis points. SNA expenses declined 4.2% to 1.2 billion dollars in Q2, benefiting from lower store-related expenses, even as we invested in marketing and technology to support our growth initiatives. The decline in store-related expenses was driven by fewer Sephora openings, fewer store refreshes, and tightly managing expenses with the decline in sales. Year to date, SNA expenses have decreased 2.5% compared to last year.
Speaker Change: Other revenue is expected to be down mid-single digits for the full year.
Speaker Change: Given the uncertainty surrounding the timing of the implementation of the CFPB Late Fee Rule, which is currently being challenged in litigation, we have excluded any potential impacts from our updated guidance.
Speaker Change: We will continue to monitor development and will provide an update when appropriate in the future.
Speaker Change: We expect Rose Margin to expand 40 to 50 basis points and SNA dollars to be down 2 to 3% for the year.
Speaker Change: We expect operating margins to be in the range of 3.4% to 3.8% as compared to our prior guidance range of 3% to 3.5%.
Jill Timm: Depreciation expense in the quarter was $188 million, and $376 million year to date, both up $2 million to last year. Interest expense was $86 million in the quarter, down $3 million from last year. As a reminder, Q2 interest expense included a $4.6 million pre-tax charge related to the make-hole call we executed on our May 2025 note during the quarter. Year to date, interest expense decreased $4 million to $169 million. Not income for the quarter was $66 million, and earnings per looted share was $59 cents.
Speaker Change: and EPS to be in the range of $1.75 to $2.25.
Speaker Change: This compares to our prior guidance of $1.25 to $1.85.
Speaker Change: In closing, I want to reiterate that we remain financially strong and are prepared to navigate this environment.
Speaker Change: As we've demonstrated in Q2, our operating discipline, solid cash flow generation, and healthy balance sheet will continue to provide meaningful support as we continue our work to return cold to growth.
Speaker Change: With that, Tom and I are happy to take questions at this time.
Jill Timm: Year to date, that income was $39 million, and earnings per looted share was $35 cents. Moving on to the balance sheet and cash flow, we ended Q2 with $231 million of cash and cash equivalents. Inventory at quarter end was down 9% compared to last year, once again exceeding our commitment of mid-single digits decline. Inventory management remains a key focus of ours with the goal of increasing turn, which increased 7% in Q2.
Speaker Change: Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your questions, simply press star 1 again.
Speaker Change: We ask that you please limit yourself to one question and one follow up to allow everyone the opportunity to ask the questions.
Speaker Change: and we'll take our first question from Bob Durbowl at Gutenheim.
Jill Timm: Looking ahead, we feel good about how we are positioned entering the fall season. Year to date, operating cash flow was $247 million, an increase of $228 million last year, last year. And year-to-date, adjusted free cash flow with a use of $34 million, and improvement from a use of $140 million in the prior year.
Speaker Change: Hi, I'm Good Morning.
Speaker Change: and Thomas Kingsbury, Thomas Kingsbury.
Thomas Kingsbury: I guess if I could get two questions and you know the first one is just Tom on the core business you know with
Speaker Change: You know what you're doing in women's and dresses and the shops, can you just expand more and like how how those businesses with shops are doing versus non in the stores that don't have the shops in them and just wondering if you could just talk a little bit more on the expectations for promotional and the promotional environment for the rest of the year.
Jill Timm: Now let me touch on our capital allocation priorities. Capital expenditures year-to-date were $239 million. Significantly less than $338 million last year, driven by fewer Sephora openings. We are still planning 2024 cat-backs of approximately $500 million, consisting of investment in 350 impulse queuing lines, 140 Sephora small shop openings, the launch of 200 babies or us shops, and six new store openings including one relocation. After investing in the business, strengthening the balance sheet, and returning capital to shareholders, also remains a top priority.
Speaker Change: Why do you think it's God?
Speaker Change: and the answer the last question first.
Speaker Change: It's going to be very promotional, you know, we're really focused on that, you know, the customer's squeezed and we think it's really important that we deliver as much value and the selling floor as we possibly can, you know.
Speaker Change: You know, the fourth quarter is always promotional, but we think it's going to be even more promotional, just based on what we're currently experiencing right now. Overall, the customer that...
Speaker Change: you know, the middle income customer, you know, that's...
Jill Timm: We ended Q2 with $410 million on our revolver, down from $516 million at the end of Q2 last year. During the second quarter, we redeemed the remaining $113 million of our 9.5% notes due May 2025, lowering our long-term debt. For the remainder of the year, our focus will be on paying down a revolver balance and rebuilding our cash position. Looking ahead, we will continue to monitor our options with respect to the July 2025 notes, and will likely address some closer maturity given the favorable coupon rates.
Speaker Change: They're really stressed in terms of, in terms of what they're dealing with right now. So we're going to try to deliver as much value as possible, as I said. As far as, you know, women in terms of...
Speaker Change: Shops versus non-shops.
Speaker Change: Obviously, if they have dresses, they're performing better because dresses are performing very well. We're very pleased with our performance in that category. We're expanding to wall stores based on our current performance overall.
Speaker Change: You know, the women's business is one of the businesses in the second quarter that from the first quarter went backwards.
Jill Timm: As for shareholder returns, we continue to prioritize the payment of our dividend at current levels. In Q2, we distributed $56 million in dividends to our shareholders, and as previously disclosed the board, on August 13 declared a quarterly cash dividend of $0.50 per share payable to shareholders on September 25.
Speaker Change: We're not happy with that, you know, the team's work can really hard.
Speaker Change: to turn it around. We have a really good team there.
Speaker Change: The intimate apparel business really hurt us there.
Jill Timm: Now let me share some details on our updated outlook for 2024. As you've heard this morning, we continue to have strong confidence in our strategy and are working hard to reposition colds for future growth. We are approaching our financial outlook for the year prudently, taking into account our first half-performance and ongoing uncertainty in the consumer environment.
Speaker Change: We struggled with some of the key brands in our assortment there. It made up a lot of the decrease that we had overall. We haven't really turned the corner in the act of business.
Speaker Change: Active Improves in the other areas, very, very nicely. The junior business, it's really in the middle of a trip.
Jill Timm: For the full year, we currently expect net sales to be in the range of a 4% decrease to a 6% decrease versus 2023, as compared to our previous guidance range of a decrease of 2% to 4%. Comparable sales will be in the range of a 3% decrease to a 5% decrease. Our previous bull year comparable sales guidance range was a 1% decrease to a 3% decrease.
Speaker Change: Transformation, we're moving that product from the middle of the women's sportswear business to the front of the store. We saw real nice lift.
Speaker Change: and those stores that have been able to accomplish that.
Speaker Change: that should be done in the third quarter.
Jill Timm: Other revenue is expected to be down mid-single digits for the full year, given the uncertainty surrounding the timing of the implementation of the CFPB late fee rule, which is currently being challenged in litigation, we have excluded any potential impacts from our updated guidance. We will continue to monitor development and will provide an update when appropriate in the future. We expect gross margin to expand 40 to 50 basis points, and S-T&A dollars to be down 2% to 3% for the year.
Speaker Change: Overall, but...
Speaker Change: We're putting the women's business under the microscope then.
Speaker Change: You know, we really are trying to work hard too.
Speaker Change: The Turn That Business Around, as soon as we can.
Speaker Change: Great, thank you very much, good luck.
Speaker Change: Thank you.
Speaker Change: We'll move next to Mark Altzwager at Beard.
Speaker Change: Hi, good morning. This is Amy Tasky on the Mark this morning. Can you speak to the cadence of demand through the corridor and if there were any material differences between regular price and clearance?
Jill Timm: We expect operating margin to be in the range of 3.4% to 3.8%, as compared to our prior guidance range of 3% to 3.5% 100%. An EPS to be in the range of $1.75 to $2.25. This compares to a prior guidance of $1.25 to $1.85.
Speaker Change: and then amid the ongoing macro challenges, what is giving you the confidence that core merchandise initiatives are on track.
Speaker Change: I can start with this.
Speaker Change: Kate in for the Compton. We really don't speak in her months. What I would say is we had a pretty consistent quarter from that perspective. Nothing to call this quarter unreg and clearance. You know, we had a unique event in Q1 when we were camping a very large mark down from the year before. And so we're really back to normal business and Q2 isn't a huge clearance.
Jill Timm: In closing, I want to reiterate that we remain financially strong and are prepared to navigate this environment. As we've demonstrated in Q2, our operating discipline, solid cash flow generation, and healthy balance sheet will continue to provide meaningful support as we continue our work to return cold to growth.
Speaker Change: Order for us, I would say Q1 is much more impactful because of the seasonal change, and then Q3 is another time that we have a big clearance, so we really didn't much to talk about from that perspective, and I think we said we had started out on the call and may a little softer, so we saw some ads in the load, but obviously down at the...
Unknown Executive: With that, Tom and I are happy to take questions at this time. Thank you.
Unknown Executive: We will now begin the question in answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again.
Unknown Executive: We ask that you please limit yourself to one question and one follow-up to allow everyone the opportunity to ask a question.
Speaker Change: where we were in Q1, so down five was well below our expectations. We're for the quarter and I think in the big things, the newness is working and you heard that from time on the call. But it does to your second question, really come back to some of these core items. Particularly as time just talked about in women's, we saw that not only in intimate.
Bob Derbhol: And we'll take our first question from Bob Derbohl at Googhenheim. Hi, good morning.
Speaker Change: We saw in their seasonal assortment as well, so swim and some of their other summer assortment had not really resonated as much, but the units with dresses is doing incredibly well. So as we look ahead, we're looking at what we can do to continue to bring in that newness and really leveraging the market and that's the strategy that Thomas brought to the table. So you should see a lot more newness on the floor, which has been resonating with the customer.
Thomas Kingsbury: I guess if I get two questions in, the first one is just, Tom, on the core business with what you're doing in women's and dresses and the shops, can you just expand more and how those businesses with shops are doing versus non-industries that don't have the shops in them. Just wondering if you could just talk a little bit more in the expectations for the promotional environment for the rest of the year.
Speaker Change: and then it's time to mention the Junior's Business.
Speaker Change: with soft in those areas that we left it in the middle. But as we move to the front, right across from Sephora, we saw that this is picked up and we think we're really taking advantage of that Sephora customer bringing it to the Sephora front so they can see the newness that we're bringing in, particularly around brands like ARAPAS DAL.
Thomas Kingsbury: I think the answer, the last question first, it's going to be very promotional. We're thinking it's really important that we deliver as much value in the selling floor as we possibly can. The fourth quarter is always promotional but we think it's going to be even more promotional just based on what we're currently experiencing right now. Overall, the customer that the middle in terms of what they're dealing with right now, so we're going to try to deliver as much value as possible, as I said.
Speaker Change: Limited to a Madden Girl, have done well as we've launched them as well.
Chuck Grom: Next, we'll move to check Grom at Gordon Haskett.
Chuck Grom: Good morning, thanks very much. I'm so forward. Can you hear us?
Chuck Grom: Can you speak about the percentage of customers that are cross shopping the store when they make a Sephora purchase today and how that compares to, say, you know, maybe earlier in the year or maybe 12 months ago. And then zooming out, you talked about revisiting juniors, I guess, how can you take advantage of Sephora in a better way going forward?
Thomas Kingsbury: As far as, you know, women's in terms of shops versus non-shops, obviously, if they have dresses, they're performing better because dresses are performing very well. We're very pleased with our performance in that category. We're expanding to wall stores based on our current performance overall. You know, the women's business is one of the businesses in the second quarter from the first quarter went backwards. We're not happy with that. You know, the team's working really hard to turn it around.
Speaker Change: Well, we've seen a nice crossover in terms of...
Speaker Change: Customers that are shopping at Sephora.
Speaker Change: You know, primarily it's around...
Speaker Change: 35% of the Sephora baskets have another product.
Speaker Change: from Coles in their basket. It's primarily there's women's in the basket, juniors is in the basket. Impulse and accessories overall, we're trying to take advantage of that. That's one reason why we're moving juniors to the front.
Speaker Change: of the store, because we think there's a lot of crossover from the Sephora customer.
Thomas Kingsbury: We have a really good team there. The intimate apparel business really hurt us there. We struggled with some of the key brands in our assortments there. It made up a lot of the decrease that we had overall. We haven't really turned the corner in the active business. Active improves in the other areas, very nicely. The junior business, it's really in the middle of a transformation, we're moving that product from the middle of the women's sportswear business to the front of the store.
Speaker Change: and to juniors because of the fact that, you know, it's a trend.
Speaker Change: is a support of the trend product.
Speaker Change: Jr. is a trend product overall. We feel that's true with accessories as well. So we're trying to connect those categories as much as possible.
Speaker Change: We feel that over time, the more and more we do that, the more we're going to have repeat customers.
Speaker Change: Overall, it's been sort of stable, I think it was initially.
Speaker Change: It was a little bit higher, but it hasn't changed.
Thomas Kingsbury: We saw a real nice lift in those stores that have been able to accomplish that. That should be done, obviously, in the third quarter overall. But, you know, we're putting the women's business under the microscope. We're trying to work hard to turn that business around as soon as we can.
Speaker Change: Dramaticly, I don't know, Jill, Jill, Jill, do you have anything you want to add to that?
Jill Timm: I think we've seen it very consistent in terms of the cross-shop that we have. We also see that those customers do stop us like one and a half times more frequently. So that, I think, one of the calls we had on the quarter was that our transactions were up and I think, you know, we haven't seen that for a while. So we are seeing that customer shop and buy more frequently. And the conversion was also up so the new product that we're bringing resonating. I think the only thing I would add is,
Unknown Executive: Great. Thank you very much. Good luck. Thank you.
Jill Timm: Kids was also seen in the basket, so as we now can complement that with our babies, our us initiative that will be launching to really all the areas that we've seen in the basket, really trying to have some enhancements around that, to take advantage of the fact that we're seeing it over a third of the baskets, but really how can we continue to grow that, and then even get more trips out of that customer knowing that beauty is the replenishable item.
Mark Altschwager: We'll move next to Mark Altschwager at Baird. Hi. Good morning.
Amy Tuske: This is Amy Tuske on the mark this morning. Can you speak to the cadence of demand through the quarter? And if there were any material differences between regular price and clearance, and then amid the ongoing macro challenges, what is giving you the confidence that core and merchandise initiatives are on track?
Speaker Change: Yeah, the other thing that's exciting about the Sephora, and we've said this multiple times before is that
Speaker Change: 40% of customers that are shopping.
Thomas Kingsbury: I can start with the cadence for the comp. And we really don't speak in or month what I would say is we had a pretty consistent quarter from that perspective. Nothing to call this quarter unreg in clearance. We had a unique event in Q1 when we were comping a very large markdown from the year before. And so we're really back to normal business. And Q2 isn't a huge clearance quarter for us.
Speaker Change: Support Coals are new to Coals. So, you know, that's a pretty phenomenal number overall. And, you know, the, the, we're still on target to hit the numbers that we've been saying all along.
Speaker Change: That's great, seems like a big opportunity and then just on babies are us, you know, any early reads thus far, you know, how impactful do you think it could be to comps and then.
Thomas Kingsbury: Obviously, Q1 is much more impactful because of the seasonal change. And then Q3 is another time that we have a big clearance. So there really isn't much to talk about from that perspective. I think, you know, we said we had started out on the call in May a little softer. So we saw some adds and flows. But obviously down at the where we were in Q1, so down 5 was well below our expectations were for the quarter.
Speaker Change: just on the back cap and outlook anything on the phasing of comps or gross margins that we should be thinking about in our models. Thank you.
Speaker Change: I'll let Jill in answer that, I'll just see, but I'll talk about babies or us.
Thomas Kingsbury: And I think the big things is the newness is working. And you heard that from Tom on the call. But it does to your second question really come back to some of these core items, particularly as Tom just talked about in women's. We saw that not only an intimate, we saw in their seasonal assortment as well. So swim and some of their other summer assortment had not really resonated as much. But the newness with dresses is doing incredibly well.
Jill Timm: You know it's early. I mean we haven't in a hundred stores and it's just really got into a hundred stores and it's obviously by the end of September it'll be in the 200 stores.
Jill Timm: Just some color on it. The number one category so far is baby gear.
Jill Timm: Car seats and strollers, etc. Which is really good, because that's what you really want to see. The second category really is furniture that's another positive.
Thomas Kingsbury: So as we look ahead, you know, we're looking at what we can do to continue to bring in that newness and really leveraging the market. And that's the strategy that Tom has brought to the table. So you should see a lot more newness on the floor, which has been resonating with the customer. And then as Tom mentioned, the junior business was soft in those areas that we left it in the middle.
Jill Timm: that they're really shopping us. I mean, if it was feeding or something like that or gifts, it wouldn't be as excited about it, but...
Thomas Kingsbury: But as we moved to the front right across from Sephora, we saw that business pick up. And we think we're really taking advantage of that Sephora customer, bring it to the forefront so they can see the newness that we're bringing in, particularly around brands like Arapastel. So that's what we're going to look at in the middle, limited to a madden girl, have done well as we've launched them as well. Great.
Speaker Change: Candidly though, it's so early, you know, you hate to really tout it too much because give us some time and we'll be giving you a color on that as it emerges.
Unknown Executive: Thank you.
Speaker Change: Yeah, and in terms of guidance, I guess what I would say is a lot of our initiatives for the back-half are starting, so we do expect there to be a build from that perspective. I would say we just talked about 100 stores for beer you opening in August and another 100 coming in September.
Charles Grom: Next we'll move to check Grom at Gordon Haskett.
Charles Grom: Good morning. Thanks very much. I'm Sephora. Can you guys can you guys speak about the percentage of customers that are cross-hopping the store when they make a Sephora purchase today and how that compares to say, you know, maybe earlier in the year or maybe 12 months ago. And then zooming out, you talked about re-busicing juniors. I guess how can how can you take advantage of Sephora in a better way going forward?
Speaker Change: The impulse lines were opening up an additional 200 in the back half of the year as well. And that's been a real positive for us, really getting that extra item, a little extra dollars from that customer. So we're looking to bring that into 350 stores this year. So that'll happen in the back half as well. And then a lot of these brand launches that we're talking about are just setting on the store. So the newness that you'll see.
Charles Grom: Well, we've seen a nice crossover in terms of customers that are shopping at Sephora. You know, primarily it's around 35% of the Sephora baskets have another product from Coles and their basket. It's primarily there's there's women's in the basket. Juniors is in the basket. Impulse and accessories, overall. We're trying to take advantage of that. That's one reason why we're moving juniors to the front of the store because we think there's a great there's a lot of crossover from the Sephora customer into into juniors because of the fact that, you know, it's a trend.
Speaker Change: And then as we go on to holiday, I think what we're excited about is building off some of the success of the past year, particularly around gifting. So we're going to have a stronger presence than gifting across the store, I think, almost two acts that we saw last year. We're going to have big support gift sets if we think about how we can bring those gift boxes out onto the floor as well. Really around fragrance and skin care, so learning from what we saw last year. So I would just say that it probably is going to be a build from the sales perspective as those initiatives continue to build for us.
Speaker Change: and then from a margin perspective, I think it's probably going to be pretty similar. I mean, Q3 has more of a clearance, but I think with the inventory management that we've had, we've really been able to benefit off of that strength, so I would say a pretty...
Claire: Claire, between the two, a pretty even margin increase for the year.
Charles Grom: It's a Sephora is a trend product juniors is a trend product overall. We feel that's true with accessories as well. So we're trying to connect those those categories as much as possible. We feel that over time the more and more we do that, the more, you know, we're going to have repeat customers overall. It's been sort of stable. I think it was initially. It was a little bit higher, but it hasn't changed dramatically.
Claire: Great, thanks for your time.
Speaker Change: We'll take our final question from Michael Benetti at Evercore.
Speaker Change: Hi, this is Jacqueline Wong on behalf of Michael. I'm just on the guidance.
Jacqueline Wong: What's driving the increased margin leverage in the guidance in the second half despite the lower sales and how durable it is?
Jacqueline Wong: Also, what's the impact of excluding the CFPB from the 2020 Format and I know it would include the Investance Quarter.
Speaker Change: I think from the back half of the year, the way we looked at the guidance is the little one is really the trend that we have seen in the front half of the year, so down by. And then the down three really is about the initiatives that we just talked about in the build in which we think that they can bring in. So really around the newness and babies are us, the completion of 140 support shop.
Charles Grom: I don't know, Jill, do you have anything you want to add to that? I think we've seen it very consistent in terms of the cross shop that we have. We also see that those customers do shop as like one and a half times more frequently so that I think, you know, one of the college we had on the quarter was that our transactions were up. And I think, you know, we haven't seen that for a while.
Charles Grom: So we are seeing that customer shop and buy more frequently and the conversion was also up so the new product that we're bringing resonating. I think the only thing I would add is kids have also seen in the basket. So as we now can complement that with our babies, our initiatives that will be launching through really all the areas that we've seen in the basket, really trying to have some enhancements around that to take advantage of the fact that we're seeing it over a third of the baskets.
Speaker Change: having new brands launching in the business having impulse. So that's really how we see the build. In terms of margin, obviously 40 to 50, we just completed the first half of the year up over 50. So we will see some great moderation that did benefit us in the front half. We won't have that same benefit into the back half. And then I think that also gives us room to really lean in from promotions where, you know, Tom started this call. We do expect to be highly promotional in the holidays. So we give ourselves some room from that perspective as well. So that's how the margin plays out. And then from an SNA perspective, obviously showed some really good disciplines in the front half of the year. I think we've proven we have a pretty cost discipline culture from an expense management perspective. So we'll continue to lean in and that, particularly if we have those softer sales.
Charles Grom: But really how can we continue to grow that and then even get more trips out of that customer knowing that beauty is a replenishable item? Yeah, the other thing that's exciting about the Sephora and we've said this multiple times before is that, you know, 40% of the customers that are shopping Sephora calls are new to calls. So, you know, that's a pretty phenomenal number overall. And, you know, we're still on target to get the numbers that we've been seeing all along.
Speaker Change: It will have a blow.
Speaker Change: From the CFPB perspective, I think the way I would contextualize it for you is when we originally guided, we said that our other revenue line would be down mid-Kins for the year, and it would be down mid-Single digits in the front half of the year. Well, we just completed the front half of the year, and it was down five, and now we said for the full year, it would be down mid-Single digits. So, really, that differential in the back half, it'll be much more in line with the front half. And I think if you do that math, you'll get kind of the impact for the CFPB and the guide that we just updated. So,
Unknown Executive: That's great. It seems a good big opportunity.
Thomas Kingsbury: And then just on babies are us, you know, any early reads thus far, you know, how impactful do you think it could be to comps. And then just Jill, just on the on the back half and outlook, anything on the phasing of comps or gross margins that we should be thinking about in our models. Thank you. I'll let Jill answer that obviously, but I'll talk about babies are us. You know, it's early.
Speaker Change: Hopefully that hits on your three points.
Speaker Change: Yeah, thank you.
Speaker Change: and we do have another question. We'll go to Oliver Chen at TD Cowan.
Thomas Kingsbury: I mean, we we have it in a hundred stores and it just really got into a hundred stores and it's obviously by the end of September, it'll be in the 200 stores, just some color on it. The number one category so far is baby gear, you know, car, you know, car seats and strollers, et cetera, which is really good, you know, because that's what you really want to see. The second category really is furniture.
Oliver Chen: Hi, thanks a lot, Tom and Jill, I'm the core apparel footwear and the microscope that you're taking, which issues will be easier to fix in the nearer versus longer term. And on the guidance still, on the race, what happened regarding the top line and just the mechanics of the guidance in terms of...
Speaker Change: and having a softer revenue. Thanks.
Speaker Change: Well, as far as the women's business, I think...
Thomas Kingsbury: That's another positive that they're really shopping us. I mean, if it was if it was feeding or something like that or gifts, it wouldn't be as excited about it, but candidly though, it's so it's so early, you know, you hate to really tout it too much because give it some time and we'll be we'll be giving you color on that as it emerges, Jill. Yeah. And in terms of guidance, I guess what I would say is a lot of our initiatives for the back half are starting so we do expect there to be a build from that perspective.
Speaker Change: I think the junior business will be an easier business to turn around because we can really leverage the marketplace in order to turn it around because there's a lot of product out there and it's quick turn.
Speaker Change: So I think the trend business will be the easier piece of it. I think some things like Intimate Apparel will be harder just because it's more traditional business.
Thomas Kingsbury: Obviously, we just talked about a hundred stores for BRU opening in August and another hundred coming in September. The impulse lines were opening up an additional 200 in the back half of the year as well. And that's been a real positive for us really getting that extra item, a little extra dollars from that customer. So we're looking to bring that into 350 stores this year. So that'll happen in the back half as well.
Speaker Change: and it's really driven by, you know, the brands overall. So I think that'll be harder.
Speaker Change: You know, trying to integrate more of the classic brands into the assortment will also take a little bit more time, you know.
Speaker Change: Rebuilding our petite business, I think that will be something that we can react to fairly quickly, because we really went out of that business, so I think just rebuilding the inventories.
Thomas Kingsbury: And then a lot of these brand launches that we're talking about are just setting on the store. So the newness that you'll see. And then as we go into holiday, I think what we're excited about is building off some of the success of the last year, particularly around gifting. So we're going to have a stronger presence of gifting across the store. I think almost two acts that we saw last year, we're going to have big support gift shops if we think about how we can bring those gift boxes out onto the floor as well.
Speaker Change: will be able to do that. But, you know, I think that I think we'll see progress, you know, quicker or less I mentioned in June, you're as close moving a back and put it in the front of the store. I think that'll help a lot overall, Jill.
Thomas Kingsbury: Really around fragrance and skin care. So learning from what we saw last year. So I would just say that it probably is going to be a build from a sales perspective as those initiatives continue to build for us. And then from a margin perspective, I think it's probably going to be pretty similar. I mean Q3 has more of a clearance, but I think with the inventory management that we've had, we've really been able to benefit off of that strength. So I would say a pretty clear between the two, a pretty even margin increase for the year.
Jill Timm: Great.
Jill Timm: Yeah, I think it's from the guidance all over the way I look at it is my top line perspective.
Unknown Executive: Thanks, Cheryl.
Speaker Change: really settering the low end at the actual that we just produced in the front half of the year, so I'm saying that that would have no trend change from that. And then the upside is really about the build of all the initiatives that we laid out, which is where we do have, you know, confidence. We continue to see Sephora outperform our expectations.
Unknown Executive: Thanks, Tom.
Unknown Executive: Thank you.
Speaker Change: is doing incredibly well. We added another 140 stores. We have a lot of new news happening there as well as learning from our last holiday around gifting and how we can lean into that more to make it even bigger. We have babies there us, it's just literally set this month and it really compliments that younger customer, they're coming in for products that complete white space for us, so it is a big opportunity for us. And then impulse, we've seen used success with just bringing in those extra products. It does, you know, have a lower A-bar dream, but it does have them coming in and add that extra item into the basket, which has been a success for us as well, so that'll go to another 200 stores.
Michael Benetti: We'll take our final question from Michael Benetti at Evercore. Hi, this is just a long on behalf of Michael.
Unknown Executive: Just on the guidance, what's driving the increased margin leverage in the guidance in the second half, despite the lower sales and how durable this is?
Jill Timm: Also, what's the impact of excluding the CFPB from the 2024 I know it was included in the fifth quarter. I think from the back half of the year, the way we look at the guidance is the low end is really the trend that we have seen in the front half of the year, so down five. And then the down three really is about the initiatives that we just talked about in the build in which we think that they can bring in so really around the newness and babies are us, the completion of 140 support shots, having new brands launching into the business, having impulse.
Speaker Change: and then just really hitting in some of those areas like convention around the fashion elements. We're going to have a bigger dress presentation in all stores, really even hitting on holiday dress, which wasn't something that we have typically done in the past, so really helping from a women's perspective.
Speaker Change: and then new brain introductions across, you know, juniors, young men.
Speaker Change: Women. So, I think that's how I feel good about the top line of it. And then, I think, you know, we've proven with inventory management since times come in. We've been able to run the inventory down even more than in single digits, which has really helped me into the margin. We're giving ourselves room to make sure we can be competitive during a very promotional holiday season. And then I think the cost is playing an estimated, you know, we've definitely done that over the last several years, which helps us get to the the app margin for the year. So, I think that's kind of how I looked at from a guidance perspective, really the low end, just saying we do nothing different, and it stays on trend. So, it kind of feels like the risks from that perspective, and then the initiatives can build us back up to this happen.
Jill Timm: So that's really how we see the build. In terms of margin, obviously 40 to 50. We just completed the first half of the year up over 50. So we will see some great moderation that did benefit us in the front half. We won't have that same benefit into the back half. And then I think that also gives us room to really lean in from promotions where, you know, Tom started this call.
Jill Timm: We do expect to be highly promotional in the holiday. So we did give ourselves some room from that perspective as well. So that's how the margin plays out. And then from an estimated perspective, obviously showed some really good disciplines in the front half of the year. I think we've proven we have a pretty cost discipline culture from an expense management perspective. So we'll continue to lean in on that, particularly if we have those softer sales, it will up and flow from a CFPB perspective.
Speaker Change: Thanks for the follow-up.
Speaker Change: Are you more concerned on U.P.T. or traffic and how might that relate to what you're seeing? And second, what changes the most in terms of the help of the consumer? Because we've had this choiceful, considered mix consumer when we last spoke as well. Thanks.
Jill Timm: I think the way I would contact to contextualize it for you is when we originally guided, we said that our other revenue line would be down mid teens for the year. And it would be down mid single digits in the front half of the year. Well, we just completed the front half of the year and it was down five. And now we said for the full year, it would be down mid single digits.
Speaker Change: Yeah, I think the biggest thing we saw wanted what makes me happy is I actually talked about positive transactions and I'll ever think that's right The first time we talked about that in several years, so
Jill Timm: So really, that differential in the back half, it'll be much more in line with the front half. And I think if you do that math, you'll get kind of the impact for the CFPB on the guide that we just updated. So hopefully that that hits on your three points. Yeah. Thank you.
Speaker Change: We're seeing transactions go up and we're seeing conversion go up and that gives us indication that the newness for bringing in is really resonating with the customer.
Speaker Change: What we're seeing is that middle income customer that is our poor customer continues to be squeezed, and I think we've seen that they're being more discerning with what they're purchasing, and that has been either less items because of the fact that they're spending some more money on a higher ticket item like this, or they're spending less in general. So I think the pressure from an AUR perspective, some of the AUR, we introduce lower AUR items home to core, lower AUR, impulse, lower AUR. So some of it was just as the news came in, it was in that poor front. If we think of what we're introducing in the back half of the year, bringing back fine jewelry into 200 stores,
Oliver Chen: And we do have another question. We'll go to Oliver Chen at TD Cowan. Hi. Thanks a lot. Tom and Jill. On the core apparel. But where?
Thomas Kingsbury: And the microscope that you're taking, which which issues will be easier to fix in the near versus longer term. And on the guidance, Jill, on the raise, what happened regarding the top line and just the mechanics of the guidance in terms of having a softer revenue. Thanks. Well, as far as the women's business, I think I think the junior business will be an easier business to turn around because we can we can really leverage the marketplace in order to turn it to turn it around.
Thomas Kingsbury: Because there's a lot of there's a lot of product out there and it's quick turn. So I think the trend business will be the easier piece of it. I think some things like intimate apparel will be harder just because it's a more traditional business and it's really driven by the brands overall. So I think I think that'll be harder, you know, trying to integrate more of the more of the classic brands into the assortment will also take a little bit more time.
Tom Kingsbury: Bringing in these are us, like Tom mentioned year being a number one seller. Those are all going to be higher ticket items. And we're seeing that resonate with the customer. We know fine jewelry is something our customer misses. So we just have to really deliver that back for her. So I think that's how we can get back from a AR perspective. But also expecting that that wall is going to be continue to be pressured. And that's why we included the guide that we did for the back half of the year.
Tom Kingsbury: Thank you for watching!
Tom Kingsbury: Okay, thank you best regards. Thanks Oliver.
Speaker Change: We'll take a question from Dana tell see it tells the advisory group.
Dana: Hi, good morning, everyone!
Dana: Jill, as you mentioned, the conversion and traffic, which is obviously something new. As you think about the babies, our us and some of the other new partnerships, where do you expect some of the biggest impact to come from and in time on the category of home, what are you seeing there as opportunities going forward? Thank you.
Thomas Kingsbury: You know, rebuilding our petite business. I think that will be something that we can react to thoroughly quickly because we, you know, we really went out of that business. So I think just rebuilding the inventories will will be able to do that. But you know, I think that I think we'll see progress, you know, quicker, as I mentioned in in juniors, plus moving it back and put it in the front of the store. I think that'll help a lot overall.
Speaker Change: I think for babies that are us, it did just launch and we are going to be launching a registry to complement that and I think that happens at the beginning of October. So I do think there's a large opportunity for us really first on that younger customer. And then as we have a registry really having that beginning part of their life cycle from a family perspective, having them come in. And early years, we are seeing a nice halo effect to the kids business so I think that really just helps us bring extra items into their basket as well from a how can we more relevant to that customer. And not only do we have gear, we have all of the feeding and toys and accessories as well. So I think those are quick add-ons that we can see come into the basket. So I do.
Jill Timm: Jill. Yeah, I think in terms of guidance all over the way I look at it is from a top line perspective. Really settering the low end at the actual that we just produced in the front half of the year, so saying that that would have no trend change from that. And then the upside is really about the build of all the initiatives that we laid out, which is where we do have, you know, confidence we continue to see Sephora outperform our expectations.
Speaker Change: Thinks, babies are us could be a larger impact, not just for the sale of that product, but for the halo that it does for the store, but also really, as we talked about earlier, that support customer was buying kids, so really had to expand them to buy even more across the store, and it continued to increase that 35% of attachment, hot, higher. I think babies are us can be a key place to do that. I also think some of the newness data that we talked about in terms of relevancy of brands and fashion, and is going to the market in being much more relevant from that perspective on chasing, so we're really chasing in a reactive way for things that the customer likes.
Jill Timm: It's doing incredibly well. We added another 140 stores. We have a lot of newness happening there as well as learning from our last holiday around gifting and how we can lean into that. More to make it even bigger. We have babies are us. It's just literally set this month and it really compliments that younger customer. They're coming in for product that's complete white space for us. So it is a big opportunity for us.
Jill Timm: And then in fall, we've seen you success with just bringing in those extra products. It says, you know, have a lower 8 to our dream, but it does have them come in and add that extra item into the basket, which has been a success for us as well. And also that'll go to another 200 stores. And then just really hitting on some of those areas like Tom mentioned around the fast and elements.
Speaker Change: is going to be something that continues to benefit us, and it's a mustable for building, so when we do it...
Speaker Change: It works really well, we just have to do it more.
Jill Timm: You know, we're going to have a bigger dress presentation and all stores really been hitting on holiday dress, which wasn't something that we have typically done in the past. So really helping from a women's perspective. And then new brain introductions across, you know, juniors, young men, women. So I think that's how I feel good about the top line of it. And then I think, you know, we've proven with inventory management since Tom come in.
Speaker Change: Broadly and more I think deep in some of the areas that are just getting started and I think that could be a large benefit for us as well And I would just say I think there's a lot of partnerships that time and the merchant teams are out there looking for that work cited about as well So I think there's going to be a lot more news Confucius store, which I think is important for our customer
Speaker Change: Yeah, as far as the home difference goes.
Jill Timm: We'll be able to run the inventory down even more than in single digits, which is really helps me into the margin. We're giving ourselves room to make sure we can be competitive during a very promotional holiday season. And then I think the cost is put on us to make me, you know, we've confidently done that over the last several years, which helps us get to the app margin for the year. So I think that's kind of how I looked at from a guidance perspective, really the low end is saying we do nothing different and it stays on trend. So it kind of feels like de-risk from that perspective. And then the initiatives can build us back up to the top end.
Speaker Change: I feel very good about the home in terms of the progress the team has made.
Speaker Change: They're overall home to course, but very good, not only in the season of the core, but also in every day to core.
Speaker Change: Yeah, I'm looking forward to the holiday season. Timm is put together an incredible holiday.
Speaker Change: The core presentation, which will be right in the front of the store, as it was last year, but you'll see a significant build in terms of the presentation there overall.
Oliver Chen: Okay, thanks, and a follow-up. Are you more concerned on UPTs or traffic and how might that relate to what you're seeing? And second, what changed the most in terms of the help of the consumer because we've had this choiceful, considered mixed consumer when we last spoke as well? Thanks. I think the biggest thing we saw, what makes me happy is I actually talked about positive transactions and Oliver, I think that's right.
Speaker Change: of the pet business has been extremely strong.
Speaker Change: and we see that building as well. The biggest we have there is, we're, we're, we have a very large electric business, which is hurting us, that, that, that, that, that, that, that, that, that, that.
Speaker Change: needs to be turned around overall. The wall art business has been good, and obviously that's part of the core business.
Oliver Chen: The first time we talked about that in several years. So we're seeing transactions go up and we're seeing conversion go up and that gives us indication that the newness we're bringing in is really resonating with the customer. What we're seeing is that middle income customer that is our core customer continues to be squeezed and I think we've seen that they're being more discerning with what they're purchasing and that has been either less items because of the fact that they're spending some more money on a higher ticket item like a Sephora, or they're spending less in general.
Speaker Change: But we're seeing a lot of progress there. I feel very good about that. We just have to get over the hurdle.
Speaker Change: of the electric spittance and...
Speaker Change: and we have to rebuild the bedding distance but in general.
Speaker Change: I think the team is on a very nice job of repositioning the home business for growth. The other thing that we're excited about is our entire 15 presentation there as well. But again, we look forward to...
Oliver Chen: So I think the pressure from an AUR perspective, some of the AUR, we introduced lower AUR items, home decor, lower AUR, impulse, lower AUR. So some of it was just as the news came in, it was in that forefront. If we think of what we're introducing in the back half of the year, bringing back fine jewelry into 200 stores, bringing in BBs or us like Tom mentioned year being a number one seller, those are all going to be higher ticket items.
Speaker Change: and the back half of the year to see some growth there.
Oliver Chen: And we're seeing that resonate with a customer and we know fine jewelry is something our customer misses. So we just have to really deliver that back for her. So I think that's how we can get back from a AUR perspective, but also expecting that that wall is going to be continued to be pressured. And that's why we included the guide that we did for the back half of the year. Okay, thank you best regards. Thanks, Oliver.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: [inaudible]
Speaker Change: Well, I want to thank everyone for listening on the call today. Have a good day.
Speaker Change: and this concludes today's conference call. Thank you for your participation. You may now disconnect.
Dana Telsey: We'll take a question from Dana Telsey, a Telsey advisory group.
Jill Timm: Hi, good morning everyone. Jill, as you mentioned the conversion and traffic, which is obviously something new, as you think about the babies are us and some of the other new partnerships, where do you expect some of the biggest impact to come from? And then Tom on the category of home, what are you seeing there as opportunities going forward? Thank you. Sure, I think for, you know, babies are us, it did just launch and we are going to be launching a registry to complement that.
Speaker Change: The National Health Organization, Mark Rupe, Thomas Kingsbury The National Health Organization, Mark Rupe, Thomas Kingsbury
Jill Timm: And I think that happens at the beginning of October. So I do think there's a large opportunity for us really first on that younger customer. And then as we have a registry, really having that beginning part of their life cycle from a family perspective, having them come in. And early, we are seeing an ITALO effect to the kids business. So I think that really just helps us bring extra items into their basket as well from a how can be more relevant to that customer.
Jill Timm: And not only do we have gear, we have all of the feeding and toys and accessories as well. So I think those are quick add-ons that we can see come into the basket. So I do think babies are us, could be a larger impact, not just for the sale of that product, but for the halo that it does for the store. But also really, as we talked about earlier, that before a customer was buying kids, so really had to expand them to buy even more across the store.
Jill Timm: And then continue to increase that 35% of attachment up higher. And I think babies are us can be a key place to do that. I also think some of the new thing that we talked about in terms of relevancy of brands and fashion and is going to the market in being much more relevant from that perspective on chasing. So we're really chasing in a reactive way for things that the customer likes is going to be something that continues to benefit us.
Jill Timm: And it's a muscle we're building. So when we do it, it works really well. We just have to do it more broadly and more, I think, deep in some of the areas that are just getting started. And I think that could be a large benefit for us as well. And I would just say I think there's a lot of partnerships that Tom and the merchant teams are out there looking for that we're excited about as well. So I think there's going to be a lot more news continuing in the store, which I think is important for our customer.
Thomas Kingsbury: Yeah, as far as the home business goes, I feel very good about the home in terms of the progress the team has made there overall. Home decor has been very good, not only in the seasonal decor, but also in everyday decor. I'm looking forward to the holiday season. The team has put together an incredible holiday decor presentation, which will be right in the front of the store as it was last year, but you'll see a significant build in terms of the presentation there overall.
Thomas Kingsbury: The pet business has been extremely strong overall, and we see that building as well. The big issue we have there is we have a very large electric business, which is hurting us. Our petting business needs to be turned around overall. The wall art business has been good, and obviously that's part of the decor business, but we're seeing a lot of progress there. I feel very good about that. We just have to get over the hurdle of the electric business, and we have to rebuild the petting business.
Thomas Kingsbury: But in general, I think the team is on a very nice job of repositioning the home business for growth. The other thing that we're excited about is our entire 15 presentations there as well. But again, we look forward to the back half of the year to see some growth there.
Unknown Executive: Thank you. Well, I want to thank everyone for listening on the call today. Have a good day. And this concludes today's conference call. Thank you for your participation. You may not.