Q3 2024 Kohl's Corp Earnings Call
Thank you for standing by. My name is Brianna and I'll be your conference operator today. At this time I'd like to welcome everyone to the Coles Corporation 3rd quarter 2024 earnings conference call.
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I'll now turn the conference over to Mark group. Please go ahead, sir.
Thank you. Certain statements made on this call, including projected financial results in the company's future initiatives are forward looking statements.
Such statements are subject to certain risks and uncertainties.
Which could cause cold's actual results to differ materially from those projected in such forward-looking statements.
Such risks and uncertainties include but are not limited to.
Those that are described in item 1A in Cole's most recent annual report on Form 10K.
And as may be supplemented from time to time in Cole's other filings with the SEC.
All of which are expressly incorporated herein by reference.
Forward-looking statements relate to the date initially made and Coles undertakes no obligation to update them.
In addition during this call we make make reference to non-GAAP financial measures.
Reconciliation of non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our form 8K filed with the SEC and is available on the company's investor relations website.
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With me this morning are Michael Bender, our independent chair of the board.
Tom Kingsbury, our CEO, and Jill Tem our chief financial officer.
I will now turn the call over to Michael.
Thank you, Mark.
And thank you for joining us this morning.
I'm going to provide some brief introductory remarks and then I'll turn it over to Tom and Jill to review our 3rd quarter results.
We will then take some Q&A.
As we shared last night, Tom Kingsbury will step down as CEO effective January 15, 2025.
And will stay on in an advisory role to the new CEO and retain his position on the board through his retirement in May of 2025.
On behalf of the board, management, and all our associates, I want to thank Tom for his leadership and ongoing service to Coles. Tom has a lot of history with coals, as many of you know, and we are grateful for him stepping in to lead us through our transformation over the past couple of years.
I'm excited to share that the board has appointed retail veteran Ashleigh Buchanan as CEO, effective January 15th. Ashley has been CEO of Michael's Companies since 2020 and prior to that held a variety of senior executive roles at Walmart and Sam's Club during his 13 years at the company.
His vast retail experience leading operations, merchandizing, and e-commerce will bring a steady, proven leader to cos as we continue to transform the business and drive future growth.
Ashley has driven change by setting a clear vision, empowering teams and practicing organizational accountability for results. We know he will be a great leader and bring a new perspective in our next chapter. I'll now turn over the call to Tom to discuss our 3rd quarter results.
Thank you, Michael, and good morning everyone.
I would first like to thank Michael.
The broader board and management team and our associates for the opportunity to lead this great company during the past couple of years.
Cos long term opportunity is significant, and I look forward to supporting Ashley.
Through the transition.
Turning to our 3rd quarter results. They did not meet our expectations and we're frankly disappointing.
Sales have been a challenge for us throughout 2024.
And we can further in Q3.
Over the last several quarters we have implemented a significant amount of change across our assortment.
Value strategies and in-store experience.
We believe these actions will make us more competitive over the long term.
However, we undervalued the short term impact this change could have.
On our sales performance.
Comparable sales in the 3rd quarter declined 9% as sales remain soft in our apparel and footwear businesses.
Although we have a strong collective performance across our key growth areas including Sephora.
Home decor
Gifting an impulse and also benefited from the opening of Babies R Us shops in 200 of our stores.
These are unable to offset the declines in our core business.
We are not satisfied with our performance and are taking aggressive action to reverse the sales declines.
We must execute at a higher level and ensure we are putting the customer first.
In everything we do.
As Joel discussed later in the call.
We updated fiscal year 2024 guidance reflects the continuation of the sales pressure we have seen this year in our expectation for a highly competitive holiday.
My main focus today will be discussing the key drivers of our sales weakness in the actions we are taking to stabilize the sales trend now and going forward.
And assessing our business during the 3rd quarter we identified three areas that led to our underperformance.
They include a decline in traffic, especially early in the quarter during the back to school season.
A reduction in receipts in our private apparel brands which impacted our ability to drive sales and our key value items and categories where we have lost traction that represented opportunities for us going forward such as fine jewelry, petites.
And in some apparel and legacy home products.
Let's start with the first area which is the decline in traffic.
In Q3 transactions declined approximately 3% after increasing the approximately 2% in Q2.
This change represented the entire deceleration in comparable sales in Q3 versus Q2.
Softness and transactions was most notable early in the quarter during the back to school season with August being the weakest month.
Our children's business was especially challenged in apparel during this time.
So improved late in the quarter.
We are highly focused on driving traffic.
In response to the softer trends experienced in Q3, we are increasing our touch points with our most engaged customers through more targeted offers and direct mail as they have shown a greater responsiveness to this form of marketing.
In addition, given that our customer continues to be pressured, we are showcasing the great value we are offering this holiday across our merchandise assortment in our marketing message.
We'll also lean into social and digital marketing to continue to drive new customer acquisition and see a significant opportunity to capitalize on the nearly 4 million new Kohl's rewards members added in 2024 with targeted rewards only events during the holiday season.
The second area is a reduction in receipts in our private apparel brands which impacted our ability to drive sales in our key value items.
Over the past 18 months we have managed inventory very tightly.
Largely driven by new processes implemented by operating with more open to buy liquidity and clearing goods on a more regular basis.
At the same time we increased our inventory investments in our key growth categories such as Sephora.
Home decor gifting and impulse.
And we have also brought in a significant number of new market brands to capitalize on trend right merchandise.
Together these investments led to a meaningfully lower receipt levels in the private apparel brands which are customers rely on.
In Q3, private brand inventory decreased more than 20% as compared to the prior year and for several of our key brands, it decreased even more.
Given the importance of opening price points in the current environment, not having the appropriate level of private brands hurt our ability to serve our customers.
This had an outsized impact in our women's business where we have the highest private brand penetration.
It was also evident in our men's and children's businesses.
And although we are pleased with the positive sell throughs we are seeing as newness in our private brands hits the selling floor.
We simply did not have enough private grants inventory given our investments in market brands and our key growth categories.
key growth categories are the right long term strategic moves.
We simply must do a better job of balancing these initiatives while managing the core business.
Let me now share the immediate actions we are taking to regain balance across our assortment.
Number one
We have already begun to balance our buys in the near term to ensure we have the proper inventory support for key private brands.
This is evident in our in transit inventory levels which consists primarily of our private brands increasing 40% when compared to the prior year.
These goods are now hitting the selling floor in time for holiday.
Additionally, we are ensuring that we are leveraging market brands opportunistically through a chase approach as we build our presence rather than a replacement for a private brats which have been taking place.
While it'll take some time to reposition our inventory we do expect our actions to deliver improved relative trends in Q4 with greater benefit in early 2025.
And the third area is categories where we have lost traction that represent opportunities for us going forward.
The most notable example of this was our exit from the fine jewelry business, a category that had been highly valued by our customers.
As we introduce Sephora shops into our stores, the fine jewelry business was largely displaced, which resulted in a persistent headwind to our sales performance for many periods.
On a positive note, we're excited to reintroduce fine jewelry to our customers as holiday season in 200 of our stores.
We'll also have an expanded in aisle placement, a bridge jury in all stores.
Which will build up the positive sales growth we saw in Q3 for fashion and bridge jewelry.
Overall, we expect much stronger performance in the jury category in Q4 based on our initiatives.
In addition to jewelry, we also see opportunities in petites.
Intimate in our legacy home business.
In we meaningfully reduced our presence in 2022, a move that at the time was in conjunction with actions to reduce inventory.
This was a short-sighted decision that we are committed to resolving.
In 2024 we increased our petites offering and expanded the absorbments to all stores this quarter.
Based on this, we expect our petites business to build in Q4 and into 2025, continuing the initial momentum, we began to see in Q3.
In intimates, we continue to see sales pressure in Q3.
As I touched on last quarter, we have struggled with some of the key brands in our assortments due in part to lack of inventory debt, which is important in this highly sized intensive category.
During Q3 we accelerated newness and enhanced up across all brands which led to better results as we moved through the quarter, including a 500 basis point trend improvement in October.
We expect rent to further build in Q4 driven by better inventory support in incremental newness supported in key marketing events.
And in our legacy home business sales within kitchen electrics, floor care, and bedding remained challenging. However, we are optimistic that our efforts will gain traction this holiday season, driven by increased innovation.
New brand introductions and a stronger value messaging.
Our efforts include launching Hotelier, our new private bedding and bat brand in all stores.
New assortments in floor care and compelling promotions targeted at kitchen electrics, which is a highly priced sensitive category.
So to summarize, we've identified the key areas of our business that have pressured our performance, and we are taking aggressive action to reverse the sales declines.
We expect that fixing these areas while continuing to benefit from our key growth initiatives will improve the overall sales trend starting in Q4 with full benefit accruing in 2025.
Now let me provide an update on the progress we have made in our key growth categories that are going to drive the business in Q4.
And serve as a foundation for growth going forward.
Starting first with Sephora.
Which continued to deliver strong growth in Q3.
With total beauty sales increasing 15%.
Compare comparable duty sales increased 9%, which was an acceleration on a 2 year basis as compared to the 2nd quarter.
Fragrance
Bath and body and skin care were especially strong in the quarter.
And brands including YSL, Lina, and Sephoric Collection drove solid growth.
Looking ahead, we're confident in our ability to continue driving strong Sephoric growth.
For holiday, we have significantly expanded our gifting assortment.
Building off of last year's success, and we see cross shopping as a key opportunity to capitalize on as Sephora will be in more than 1050 of our stores this holiday. 15% more than last year.
Now let me provide an update on our progress in building our business in the under penetrated categories of home decor.
15 impulse can be here.
In Q3 sales from these categories continue to build.
Let me highlight a few of the key takeaways.
In our home business.
Sales of seasonal and everyday decor increased more than 50% year over year.
And we also experience solid growth across many other areas such as storage while our glassware and et.
In impulse, we drove sales growth of more than 40% as we expanded 2 lines to 200 more stores in the 3rd quarter.
We expect strong growth to continue as we enter the holiday season with queue lines and 435 of our stores.
And I'm happy to share that we successfully launched BBRS shops in 200 of our stores and online during Q3.
We are broadening our reach with young families acquiring new younger customers to Kohl's that are shopping multiple categories including children's accessories, and women's.
We also introduced a Babies R Us registry in early October.
And are already seeing thousands of expectant others register.
We expect our baby gear business to continue to grow as awareness builds.
As we recognize the benefits from registry signups as we open more shops in the coming years.
Collectively we continue to see these under penetrated categories representing a significant opportunity in the coming years.
Together with Sephora, the key growth categories represent high teens of our business today, and they are growing rapidly and are expected to have a long runway of growth.
Now I'd like to share how we are approaching the holiday season.
Coles is known for providing great holiday value, and this year will be no different.
We will continue to establish ourselves as a key gifting destination with an expanded selection of products across apparel such as sweaters, sleeves, and holiday outfitting.
Stocking stoppers and toys that compelling price points.
Sephora gift sets.
Fox jewelry.
In cold weather bedding from brands like Cuddle Dogs.
Importantly, our key growth categories as well as seasonally relevant businesses like toys, jewelry, and home increased by approximately 1000 basis points in penetration and will benefit.
Our results in Q4 as compared to Q3.
From a marketing perspective we will amplify coal's cash and rewards.
Deliver targeted offers to drive engagement.
And leverage influencers and social media engagement.
We expect this holiday will be highly competitive.
Given the late Thanksgiving.
Our focus will be on maximizing the big shopping days.
As it relates to our more recent performance, November sales are off to a marked improvement relative to Q3 coms.
We have seen solid fall seasonal demand as well as the initial benefit from the investments we have made in our private brand inventory.
In addition, we have seen heightened customer engagement during the start to the holiday.
That said, there's still remains a lot of holiday shopping in front of us.
And we are focused on executing a great customer experience.
Before turning it over to Jill. I also want to highlight that we remain highly focused on expense management.
In Q3, we manage expenses down 5% compared to last year and it will remain a priority of ours as we work to stabilize our sales performance.
In addition
Our balance sheet remains in a solid position, and we expect to drive significant cash flow generation in Q4.
Which will reduce our revolver balance meaningfully by year end.
Jill will share more on this in a moment.
To summarize my comments today.
I want to leave you with three things.
First
We continue to have strong conviction in our ability to reposition coals for future growth.
So recognize that we move too quickly in some areas.
We are focused on improving sales through driving traffic.
Increasing receipts in our private apparel brands and regaining momentum in categories where we've lost traction.
Second, our investments in key growth areas continue to deliver solid results.
Sephora calls continues to drive strong sales growth and bring in new customers.
And we continue to build our business and home decor, Impulse gifting and baby gear.
All of which are positioned to deliver incrementally this holiday season if they grow in penetration.
And 3rd, the holidays have always been an important time for coal.
And this year we will deliver even more value through our expanded gifting assortment.
While we expect the holiday to be highlighted competitive we are well positioned from a product and marketing perspective to improve our sales trend.
I want to thank all of our close associates across the organization for their efforts to position us for a successful holiday season.
I hope those listening today will get a chance to visit our stores over the coming weeks.
Sure.
Thank you, Tom and good morning everyone.
For today's call, I will provide additional details on our 3rd quarter results.
As well as an update on our fiscal year 2024 guidance.
Net sales decreased 8.8% in Q3 and are down 6.1% year to date.
Comparable sales declined 9.3% in Q3.
And to climb 6.4% year to date.
In Q3 transactions were down while conversion improved.
And our average basket size has remained lower as compared to last year.
Digital sales outperformed store sales in the quarter, so both were down to last year.
Other revenue which is primarily our credit business decrease 3.6% in the quarter.
Which was slightly better than our expectations.
Year to date, other revenue declined 4.6%.
Moving down the P&L.
Third quarter gross margin was 39.1%, up 20 basis points versus last year.
The increase was driven by inventory management and lower freight expense.
Partially offset by higher digital penetration and increased promotional activity.
Here today, gross margin was 39.4%, an increase of 42 basis points.
SUA expenses declined 5.1% to $1.3 billion in Q3.
Benefiting from tightly managed expenses across the organization given the sales decline.
Especially in corporate and store related expenses.
Peter asked expenses have decreased 3.4% compared to last year.
Depreciation expense in the quarter was $184 million.
Down $4 million from last year.
On a year to day basis, depreciation of $560 million down $2 million to the prior year.
Interest expense was $76 million in the quarter, down $13 million from last year.
The decline is primarily related to lower long-term debt outstanding.
Here today, interest expense decreased $17 million to $245 million.
And income for the quarter was $22 million and earnings per dudded share was 20 cents.
Year to date, net income of $61 million and earnings per diluted share was 55 cents.
Moving on to the balance sheet and cash flow.
We ended Q3 with $174 million of cash and cash equivalents.
Inventory at quarter end was down 3% compared to last year.
With on-hand inventory down 7% at the end of the quarter.
As Tom indicated, we are focused on better balancing our inventory levels with a renewed emphasis in our private brands, which is reflected in the 40% increase in in transit inventory at quarter end.
We're in highly focused on managing inventory efficiently with the goal of increasing turn.
Here to date operating cash flow is $52 million.
Well, year to date adjusted free cash flow with the use of $376 million.
Now let me touch on a couple of our capital allocation priorities.
Capital expenditures year to date for $367 million.
Significantly less than the $495 million last year driven by fewer Sephora openings.
We're still planning 2024 cap backs of approximately $500 million.
Consisting of investment in 350 impulse queuing lines.
140 Sephora small shop openings.
The launch of 200 Babies R Us shops.
And 6 new store openings, including one relocation.
After investing in the business, strengthening the balance sheet, and returning capital to shareholders also remain top priorities.
We ended 23 with $749 million on a revolver. This is higher than last year's revolval balance of $625 million with the increase largely attributable to the retirement of the May 2025 bonds earlier this year.
We remain focused on paying down our revolver balance and rebuilding our casts position and expects significant cash flow generation in Q4 to further our efforts on this front.
Looking ahead, we'll continue to monitor our options with respect to the July 2025 notes. I will likely address them closer to maturity, given the favorable coupon rates.
As for shareholder returns, we continue to prioritize the payment of our dividends at current levels.
In Q3 we distributed $55 million in dividends to our shareholders.
And as previously disclosed the board on November 13th declared a quarterly cash dividend of 50 cents per share payable to shareholders on December 24th.
Now let me share some detail on our updated outlook for 2024.
As you've heard this morning, we are taking aggressive actions to stabilize our sales trend as we reposition calls for future growth.
As a result, we are approaching our financial outlook for the year prudently.
Taking into account our year to date performance and it will take time for our actions to deliver the intended outcome.
For the full year we currently expect net sales to be in the range of a 7% decrease.
To an 8% decrease versus 2023.
As compared to our previous guiding range of a decrease of 4% to 6%.
Comparable sales to a range of a 6% decrease to a 7% decrease.
Our previous full year comparable sales guidance range was a 3% decrease to a 5% decrease.
For the 4th quarter, a guidance implies comparable sales in the range of 5% decrease to an 8% decrease.
Other revenue is expected to be down mid single digits for the full year.
We expect gross margins to be at the high end of our previous guidance of 40 to 50 basis points expansion as compared to last year.
And for Sinna, we now expect Astina dollars to be down 3.2 to 3.5% for the year.
As compared to our previous guidance of a 2 to 3% decline for the year.
We expect operating margins to be in the range of 3% to 3.2%.
As compared to our prior guidance range of 3.4% to 3.8%.
An EPS to be in the range of $1.20 to $1.50.
This compares to a prior guidance of $1.75 to $2.25.
With that, Tom and I are happy to take your questions at this time.
Thank you. As a reminder, if you have dialed in and would like to ask a question, please press star, followed by the number one on your telephone keypad to raise your hand and join the queue and to withdraw your question, please press star one again.
We kindly ask that you limit yourself to one question and one follow up question.
Our first question comes from the line of Bob Durble with Guggenheim.
Please go ahead.
Hi, um, good morning.
Thanks for taking the question. Tom and Tom, you know, best of luck on your retirement and uh you know, thanks for all the
The help over the last few years and actually many years we go back.
Um, thanks Bob.
Two questions for you. The first one just when you look at the traffic trends, you know, I think the aggressive actions that you, you lay out, which ones do you think, you know, will.
Be the biggest impact, you know, to your traffic, you know, I guess in Q4, but also in the 25 and then the second question is, Joe, on the credit card, can you just give us an update just in terms of the trends in terms of some of the conversions and and and if it's actually playing to the, the way that you thought it would, um, you know, this fall and heading into the holiday. Thanks.
Uh, well, first of all, I think the key for driving increased traffic and uh
We're, we're seeing that already um in November is really uh showcasing the great values that we have, um, on the selling floor today, you know, the merchants really went out there and uh bought some really, really great product.
At great values, so really showcasing that we do that every year, but we really have a heightened approach this year based on what happened in the 3rd quarter we've gone over it multiple times also really targeting our our most engaged customers.
I think that's really important, um, we probably, um, uh, didn't do enough of that in the 3rd quarter, so we distorted it in
Our efforts in the 4th quarter.
Uh, through more targeted offers and more direct mail, so um.
Uh, really think that's going to be important, really leading into social and digital marketing.
Uh, to drive new customer acquisition as well trying to leverage the 4 million new rewards members that we have.
So I really think that those 3 things, um,
Uh, have and will drive increased traffic in the 4th quarter.
Sure. Yeah, and but in terms of credit, I think overall credit kind of performing where we expected obviously weighed down by the softer sales that we saw for the quarter, um, we are seeing, you know, payment rates are starting to drop, um, but all of which we anticipated, which I think you saw our other revenue line come in a little bit better than how we set expectations as you know we go into the 4th quarter um we'll start benefiting a little bit from co-brands we did launch our co-brand in mid September, so those cards were just getting a mailboxes.
Um, as we were kind of looking in October, so by the time they spend and you see that revolving interest coming into the portfolio. It's really gonna be a Q4, but much more predominantly a 2025 benefit for us as the customer continues to use it we see those balances revolve and we get the benefit of those interest income numbers, but I think you know we're expecting it to be in that mid single digit range, um, as we close out the year so really performing the way we expected it to this year.
Thank you
Thanks Bob. Thanks, Bob.
Our next question comes from the line of Mark Altschwager with Baird. Please go ahead.
Good morning. Uh, thank you for taking my question first, Tom, uh, just why is now the right time to be passing the torch, just a lot of balls in the air right now with some of the strategic changes you've you've been making, I guess, what, what are the guardrails, um, you have in place to limit disruption through the transition and uh is, is your successor aligned in terms of um a lot of this, uh, the elements on the strategic agenda or uh should investors be bracing for some um bigger changes in the periods ahead.
Well, the answer the uh the last part first, um, Ashley is very much aligned.
Um, with the strategy that we have in place right now.
Um, he's spent a lot of time with our board of directors, uh, time with me, um, obviously they're, you know.
As always, there will be some changes and modifications and you know he'll he'll wanna obviously put his um you know, you fingerprints on on the strategies and which would, what you would expect.
Uh, for my timing, uh, I signed up for 2 years, um, and 2 years would be up in uh May of 2025, um, you know, I came in to, you know, help out the company, um, in the ran in the transition and um, you know, it uh
It's not an exact science, um, in terms of hiring somebody we're fortunate to, um,
Have, um,
Actually come in and decide to join us, um, and this is the way the timing timing, uh, work, worked out, um.
Overall, so, um, you know, the, the team is, um, in a good place and we have significant guard rails in terms of making sure that there isn't any big issues, but that's how the timing came about and we just felt that uh
Um, that, you know, it was best to do it now. I think, uh, Michael, you want to weigh in on this? Yes, sure, yeah, Mark, it's uh it's Michael Bender here and um just to add on to Tom's comments, both about his tenure here. So first of all, I, I want to reinforce the um what we've said in all of our announcements about how grateful we are about what Tom has done over the past couple of years or so in in his role he's brought a number of really positive things to the business inventory.
discipline, merchant discipline. He's brought new brands to the business, so we're excited about uh the impact that Tom has had.
As far as the transition goes, um, you know, we knew that we had as Tom mentioned, a time-based agreement with him starting in May of 2023, uh, that would expire, um, next year and so as we talked about it with Tom and the board, uh, we engaged in uh what we felt was a very robust succession planning process and as you know, um, really strong CEOs are not hard or, or, or, or hard to find and so when we were able to um um to
Ashley to the business and identified him as the ideal candidate, um, with an availability date of mid-January that made sense to us to um continue to to move.
Process. We're pleased that he can start um in the January time frame that will allow actually for an orderly transition with Tom staying on as an advisor, as we've said, and a board member until until May so uh we're excited about that, uh, specifically around uh the question about the change in strategy as Tom mentioned, you know, we feel like we've got a plan in place that we are executing against what actually brings and what the board sees in him, um.
that we like and, and what, what the brought him to uh close out the agreement to bring him on board, several things that I'll mention. He knows customers. He follows the data, um, and he follows what customers want and then bring solutions to them.
He's, um, there's evidence of that in both his experience, um, uh, running Michaels as well as Walmart, um, Ashley is a merchant, so he knows product, um, he's got deep digital chops and has demonstrated expertise and how to integrate um digital into physical settings, um, which is an important part of the Coles business. He's obsessed with the customer experience and understands how to drive that positively from an efficiency standpoint and making sure that customers have a
great experience. He knows how to operate at scale. You know, Kohl's is a big business, and it's over 1000 stores, so it's important for us to have someone sitting in the, in the chair that understands how to operate at scale.
Um, and then lastly I would say that um from a character standpoint, uh Ashley is a principal inspiring leader of people, um, and our culture here at Kohl's is really important for us to um to continue to maintain and grow and evolve and actually we feel um all of, all of the board members and, and the team have felt really comfortable with that. Um, he's excited about getting started and already has a number of requests for information about the business, although he doesn't start until mid January, um, he's been in a number of our stores.
been developing a point of view on our digital business, uh, by ordering items online and and checking that out. So, um, we have someone who's excited about stepping into the role, um, and with Tom's support in the transition we feel good about um the progress that we'll be able to continue to make, um, while we focus on making sure that these next 6 to 8 weeks as we move through the balance of holiday period, um, we'll, we'll be strong.
Thank you for all of that detail.
Jill, if, if I could follow up on credit, um, you, you spoke briefly about the cold brand rollout. I know initially when we thought the late fee change could result in a pretty significant change to the existing credit revenue stream. The, the cobra was thought to be a, a.
An offset to that which would imply pretty material revenue contribution as we look into 2025. Can you just walk us through the current thoughts there like if, if the late fee change doesn't happen, um, I guess, why wouldn't that be significant upside to the current run rate of of credit revenue. Thank you.
Sure, so
benefits to that was it's much more driven off of interest versus late fees because you run a bigger balance, um, off of a card that you can use outside the four walls of poles and obviously then we also benefited from some of the interchange fees, so if we do not end up having any risk from the CFPB legislation, there would be that benefit that we've outlined in regards to the cobra, of course the bulk of that, as we stated would be more in 2025 there will be some benefits coming through in Q4, but really need to get that card.
in the customer's hands, get them shopping with it and having those balances revolve before you're gonna start seeing a lot of that revenue flow through, so as we approach 2025, you know, we'll look at really kind of where that legislation lies and give you guidance that would include, I think a nice benefit from our co-brand launch and that would build throughout the year.
Excellent thank you and best of luck over holiday.
Great thanks Mark.
Our next question comes from the line of Oliver Chen with TD Cowan. Please go ahead.
Hi, Tom, uh, you brought a lot of constructive things organization including speed agility and new categories. Um, how would you diagnose the issues around the unintended consequences of, of some of these changes relative to the highly competitive promotional environment, um, and then second as we look forward um fixing the core. It's been a multi-year issue in terms of
Apparel and, and embracing younger customers and also trying to get sustainably positive comps, but what's your take on what may need to be done, uh, to fix, fix the core, um, in terms of, of new, the new CEO coming uh and, and lastly, um, Chase versus Replacement. I didn't quite understand that comment in terms of that strategy, um, that you're undertaking, looking for it as well. Thanks a lot.
Uh, first of all, obviously one of the unintended consequences was the fact that uh we under placed um our private and exclusive brands that I would say that was one of the.
The biggest, biggest issues that we had, you know, we obviously, um, need to make sure that we're more realistic in terms of of our approach to um how we're, how we're placing goods that we have the right balance between the market brands, the private brands we.
But um
Again, put too much pressure on on the turn of the private brands we thought we could do, um, we can do more with, uh, a lot less and that didn't work out for us. It's just.
You know, we're in the learning mode, um, and that was a big lesson for us, um, which, you know, obviously was big unintended consequence, I think all of us have learned from that, uh, over, overall, um, so.
Um, that's important, um, we've already gone through and um.
For 2025 we've gone through the vendor matrixes, um.
Uh, very, very carefully to ensure that we have.
The right receipt, um.
Receipt reduction ratios that making sure that
We are putting too much pressure.
On any of the brands that were being much more realistic in terms of how, how we're approaching it.
As far as Chase versus um
Um, you know, replacement, um.
Making sure that you know we're we're utilizing our open to buy.
To go after goods
When they're checking much more aggressively.
Uh, versus using our open to buy.
To replace things like our.
are, um, private and exclusive brands. We just need to buy it up front correctly.
Uh, which obviously we failed to do that.
Which resulted in the issue that we had with uh.
With our private and exclusive brands. I know you want to weigh in on any of that, I think the biggest thing you saw Oliver was we got excited about some of the market brands, but we're also trying to really tightly manage inventory and so there became a trade off there and unfortunately the unintended consequence was that we were down over 20% in our private exclusive brands, and those are brands that really are opening price point and so when we're looking to drive value for our customer we disappointed in not having brands they wanted at this opening price point.
And so that became a big headwind that we needed to overtake. You saw in our inventory numbers we were down 3 but we're actually saying we're down 7 on hand and the difference of that is really our proprietary brand they were in transit which we take ownership of and they're studying as we speak. So as we saw those first couple of weeks in November plan out we saw some of the newness in our proprietary brands hit we're seeing great sell throughs and I think this those are one of the actions that we took that led to the market improvement that we reference to our November.
results, so it was something that just takes a while to get back into, given the length of time in terms of the import process, but now that we're in it, we're definitely seeing a benefit from that. So I think it's just really continuing the discipline we think managing our inventory domin in single digits is the right answer to drive turn, but we just have to have a little bit more discipline and staying close to those core brands our customers want and using the market brands um to really bring in that element of fashion and staying true more to that that pyramid than we did.
During Q3.
OK, Jill, on the guidance, what did you say this soon for the inventory growth relative to sales in, in light of um what you need to do the inventories and final question on promos, um, what's embedded in guidance for merchandise margins and promotions and that some of that relate to uh what, what you're seeing.
quarter to date, etc. Thank you.
Yeah, I think for inventory we're gonna still expect it down mid single digit that's where, you know, we think it's the best to run the business. We're getting back into the proprietary brands like we spoke to, but you know we'll balance that with less of the market brands on the table, so we feel like that's the right place to be as we end the year, um, and that's what I would expect us to be running the business going forward. We have a large opportunity to improve our turn as we spoke to, but we're gonna do that in a paced approach so we don't um do things too quickly as if we learned our.
this year in doing that.
In terms of margin, um, we are expecting it to be promotional. It always is promotional during Q4, um, so we're set to do that I think a couple of things that we found worked well for us through the last couple years is doing more targeted offers so as Tom just mentioned, we did that in Q3. It definitely drives our behavior, particularly around our most loyal customers so we know that that's a way for us to drive their behavior and have them see value. We do expect our proprietary.
brands to do much better than we thought in Q3 with the inventory investments that we're making which obviously carry a better merch margin, so as we think about our margin for Q4, you know, that's why we think we can get to the high end of the guide for the year which will imply Q4 has a little bit of a step up in terms of what we saw in Q3 and then last just we're in a clean position from an inventory perspective and you know Q4 is typically a big quarter from a clearance so we do expect that will be a benefit for us as well so.
Those are the kind of the pieces of the puzzle we put together to be feel confident in giving the high end of the guide on the margin for the year.
OK. Happy holidays. Thanks.
You as well thanks, Oliver.
Our next question comes from the line of Chuck Gram with Gordon Haskett. Please go ahead.
Hey, uh, thanks, uh, good morning and, and good luck, Tom, with everything, um, can you guys just talk about the steps to recapture some of the lost customers that you may have alienated over the past couple of years by deemphasizing the private brands and the jewelry counters, you know, I guess on one hand it's a, it's a big opportunity on the other hand, it's, it's sometimes very hard to do.
Yeah, I think this is gonna come down to our investment in marketing stuff and I think you know you saw we've run a pretty tight SDNA for the year in Q4 you're seeing maybe a little bit to do the math up of what we guided the year a little bit more of an investment in SDNA and that SDNA is gonna come into marketing so we know the holidays when we attract the most new customers to our store it's when our loyalists see the best value that we have, so you're gonna see that we're gonna lean into cold cash. I think right now you're seeing our iconic 15 off 50 cold cash. It's really red.
And it's particularly with that most loyal customer, so leaning into those type of events so we can bring them in and so that we have value targeted offers has been something that we continue to lean into and we see work to drive that consumer behavior and then we're gonna not only be in broadcast and digital and social from a new customer perspective, but we're gonna lean back into direct mail, um, and really go back to attract those customers who we know react to direct mail flyer and tell them, guess what, we do have your jewelry it.
Back in stock, particularly around the 200 stores that we're gonna have us buying jewelry counters in to make sure they know we have it and we're not gonna disappoint them and we've heard them and their feedback and we're reacting to it thinking you know we mentioned on the call in our bridge and fashion jewelry in Q3. We actually had a positive comp so we are starting to get that message out and the consumers reacting to it and we think we can build on that in Q4 as well, um, and then petites, I think you know that's another area that was just unfortunately a mess, um.
I petite. It's not a substitute product, so we need to bring that back in and so how we can market it and make sure that now that we have it in Q4 and really ensure that when they come in they have that trip assurance that they're gonna be to find that assortment back in our stores is a big deal and that's gonna be to a customer who was more loyal to us so we know we can bring them back into these targeted offers and through the reach of marketing that we're gonna make a big investment in in Q4.
OK, great, uh thanks very much and then I guess on on the new product um offerings particularly Sephora, which remains strong, like you said, a 2 year stack improvement and there's concerns in the marketplace that that Comtail and could moderate, so I guess how how what I guess what's the game plan to offset that potential deceleration and can you discuss um any improvement you've made on cross selling across the store when somebody purchases a Sephora product.
Sure, I think first
We're so excited about Sephora, so I think that's why we did the 2 year stack that was just for you, Chuck, because I know you like those metrics. I actually liked this one a lot. Our customer loves it and you know they keep coming back in for gifting fragrance was an outperforming Q3 and as you can imagine as we go into Q4, it's a large gifting opportunity for us and we're gonna really lean lean into that we had great success with our gift boxes last year, you know, we're doubling down on that this year, so everything before I think is definitely continuing to work, but as we have less new stores open.
opening, you know, the comps will moderate and you have it exactly right. Our biggest opportunity is continue to drive that cross shop. And I think, you know, we continue to see the crash shop. There's not a lot of change there, but that remains the biggest opportunity. I think some of it being we disrupted with juniors moving that to the front of the store and then not having some of the product, particularly like our so product which is our opening price point is a.
Rates, um, fashion brand that Juniors has loved. We didn't have that product for them. Women's we probably saw the biggest step change is that was much more impacted than other areas through our proprietary brand, so we need to bring the product in um and then invite them in to shop again. I think the third thing is Babies R Us is that continues to roll out. It's a younger customer, you know, we're coming in with, um, serving their families at a much earlier time in that moment, and we're seeing that really resonate younger customers, more diverse in the stores that we've brought.
them into and we're really excited about the amount of registries that we've seen it just launched in October, um, and the amount of registries has surpassed their expectations, so we know that's all sales coming in front of us as well so I think you hit it on the head. We have a big opportunity on the cross shop, but we're definitely focused on it, but we have to get back in stock on the things that they've come to know us for and things that they want before we will probably see that metric move.
OK, great. And what and what last one for me just we've got 53 minutes and and and nobody's talked about the weather, which is pretty remarkable, um, but your business historically has always been very weather sensitive. So is there any, is there any way to handicap how much you're your sales were held back from the warmer attempts over the past couple of months. Thanks.
Uh, yeah, weather it's always been a like a huge impact in Q3 for us. It's the number one correlated sales driver in Q3. Our fall seasonals were well below our company average we had a significant drop in fault related product in the 3rd quarter.
Uh, you know, we haven't, we haven't really talked about it.
Um, but we, it, it did, it did, um, negatively impact us.
Um, the good news is, um, looking at the 4th quarter, um.
Whether, um, you know, knock on wood, um, it can, it, it, uh, continues to be as it is, uh, colder than last year, um, but yeah, it, it, it, uh, it, it hurt us in the 3rd quarter, you know, when you have such a high penetration of apparel.
And footwear, it, you know, as we do.
Uh, it hurts us. That's one reason why we're trying to build.
Uh, you know, our beauty business and while we're trying to build our home business and all the things that are not so negatively impacted.
Uh, by the weather.
Yeah, and I would just say that part of the marked improvement is fall seasonal started selling when it cooled off and, and that has definitely been a positive.
Tailwind into Q4 and the other thing is Tom mentioned apparel becomes less of a focus in Q4, so really a lot of our initiatives around home gifting Sephora become a bigger portion of our penetration as we go into the holiday period as well.
Great, thanks Joe. Good luck to.
Thanks you.
Our next question comes from the line of Dana Telsey with Telsey Group. Please go ahead.
Hi, good morning, everyone. As you think about a big picture I, if you think about a big picture view of what's happening and where we are now. How much of it would you say, Tom, is internal that can be corrected over time. How it, how much of it was the macro factors.
And if you could push one button to accelerate something, what, what would that, what would that be?
One button.
Um
Well, I think that the macro did impact us, um.
You know, obviously the customer, um, as we've been saying all along has been squeezed, um.
You know, we, we had uh tough sales with our uh lower income consumer overall with.
You know, everything that was impacting them in terms of
You know, inflation, etc. um, and, um, you know that hurt us. I don't know to put numbers to it overall, you know, we think that most of things that um has happened they're fixable, um, in general, um.
You know, we should be able to offset any kind of macro issues in terms of
You know, a product assortments and improving our marketing, you know, we think that we, we can, we can work to fix, uh, everything. I don't know if there's a total total easy fix, but I think if we can continue to to um.
You know, uh, work on our execution, um, uh, we should, we should be able to capture, uh, the business that we really feel, uh, we can, we can have, um.
You know, but I, you know, it, it's up to us to fix it, and, you know, we're always gonna have some sort of.
Macro type issue.
Um, you know, we feel, we feel we're in a good place right now for 4th quarter because of all the effort we put into gifting.
Um, in terms of, uh, all the things we've done in terms of in our home business to try to to build that business our impulse business, etc. our seasonal business, but um, you know, we feel that um
That, you know, if, if we can continue good execution.
Um, we'll be in a good place.
Thank you. Andi, anything on the puts and takes of expenses given that you're managing so carefully how you're thinking about labor costs this year compared to last year as we go through the season.
Sure, I think you saw we called out stores have done a phenomenal job managing expenses and we really have a great variable model based on when we see our sales coming in obviously also benefiting from our inventory management having less units to touch to that process as well as the clean inventory, not having to take as many markdowns, so I would say we wanna make sure that we have a great experience for our customers during the holiday so you will see, you know, that we're going to invest in that labor in the store, but we also have a model that we can pull back um when we don't have details there.
So I think that's been a key contributor to our expense management, but I would just say across all lines um of this area everyone's really shown up to pull back in terms of hey the sales weren't there we need to pull back from an expense perspective, the one place that we will lean into in Q4 like I mentioned will be marketing, so I think that's the one step change that you'll see from the beginning part of the year into Q4 we know we have an opportunity to reengage with some of the customers that we disappointed with the exits of fine jewelry.
petite, etc. so we need to make them aware that we have it. We need to make them aware that they can find that value back and then continuing to drive that new customer growth that we've seen all year as well as bring people into our loyalty program and we're really proud of the 4 million signups we've had, but we know we can build on that tremendously during Q4 as well.
Thank you.
Our final question today comes from the line of Paul Legeway with Citigroup. Please go ahead.
A just a couple of quick ones, curious where you think you might be losing customers to what other retailers might be taking share, uh, second, as you get into private brands again in a little bit of a bigger way, fatigue, jewelry. What, what are you giving up in terms of floor space? What might feel the pressure and then I curious if you're thinking any differently about closing stores.
OK, I'm gonna start with um the store closures I think you know we've always talked a lot about the health of our store base we generate a lot of cash from our stores, you know, we have the luxury of being in convenient locations and off mall, which has always been helpful with that said, we're always evaluating our fleet to optimize it, and I think you're, you know, we're always gonna have moves that I would consider more from a hygiene perspective, Paul, but I would definitely say that there are places that, you know, we'll look at but over 90% of our stores are still for all cash positive, so it's
difficult financial decision to make it, but obviously on the periphery from a hygiene perspective, there's gonna be some opportunities for us to address those underperformers which we will do, um, in terms of giving up floor space when we make the investment back in private brands. I think we've also talked about we have a lot of space. Our average store is over 80,000 square feet, you know, we've been able to bring in um Babies R Us, uh, and some other brands without having to really give up floor space. I think this is where we were saying we replaced a lot of our private brands instead.
of doing a chase with the market brands um and so we're gonna just come back into having floor space dedicated to our private brands, but there isn't anything we really have to give up. We'll still have market brands. It'll just be much more in a fashion bringing in, get it out faster versus a replacement of a proprietary brand, but I don't think we ever feel like we have been making choices because the floor space is really there in the box that we own today.
And then in terms of um customer share loss, I think you know we continue to monitor it obviously being down I think it it's going to a lot of the winners that you've seen put their numbers out there. I think it gets pretty spread so you know you can see it across whether it be Amazon off price, etc. I think there's a trade down that typically happens as well so we know from a customer demographic our upper income customers are doing and faring well better than our lower income customers so they become much more discerning in their purchases either.
not buying as much because they can't afford to, or they're finding um an alternative and that's where obviously when we didn't have that proprietary brand opening price point value, they found other options of quarter, which is why again I'll double down on the marketing that we're gonna go after them to bring them back in, particularly once we have that inventory in place which hopefully possibly get out to the store you'll see is that there are already and um you can find yourself a great sweater.
Thanks to everyone listening on the call today.
We wish you a wonderful holiday season.
Thank you.
This will conclude today's conference call. Thank you all for your participation. You may now disconnect.