Q4 2024 Kohl's Corp Earnings Call
Paul Lejuez, Paul Lejuez, Paul Lejuez,
Speaker Change: Good morning and welcome to the Kohls Corporation's Fourth Quarter 2024 Results Conference call.
Speaker Change: All participants are in a listen only mode. After the speakers are marked, so we'll be a question and answer session.
Speaker Change: To ask the question, at this time, you'll need to press star, followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call of a piece Trevor Znobotny, senior manager of investor relations, please go ahead.
Speaker Change: Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives are forward-looking statements.
Speaker Change: Such statements are subject to certain risks and uncertainties which could cause Kohls actual results to differ materially from those projected in such four-looking statements.
Speaker Change: 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 hand-by-reference [inaudible]
Speaker Change: or looking statement relate to the date initially made and Kohls undertakes no obligation to update them.
Speaker Change: In addition, during this call, we may make reference to non-get financial measures, including adjusted net income, adjusted deluded earnings per share, and adjusted free cash flow.
Speaker Change: Please refer to the cautionary statement regarding non-GAAP measures and reconciliation of these measures included investor presentation filed as an exhibit to our form 8K is filed with the SEC and available on our investor relations website.
Speaker Change: Please note that this call will be recorded. However, replays of this call will not be updated.
Speaker Change: So if you are listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohls undertakes no obligation to update such information.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: With me this morning, our Ashley Buchanan, our Chief Executive Officer, and Jill Timm, our Chief Financial Officer.
Ashley Buchanan: I will now turn the call over to Ashley. Good morning everyone, and welcome to the Kohls
Ashley Buchanan: I would like to start today by saying thank you to the Kohls Organization and our Board of Directors for giving me a warm welcome to Kohls.
Ashley Buchanan: I'm very excited to lead this great company and as you will hear today I believe Kohls has a substantial opportunity to build on its solid foundation and position the company for future success.
Ashley Buchanan: I have been in the retail industry for nearly 20 years now. I've held leadership positions at fans club, Walmart, and most recently started the CEO of the Michael's companies for the past five years.
Ashley Buchanan: I love the fast pace of the retail industry when the challenge of meeting changing customer expectations.
During the ongoing retail evolution.
Ashley Buchanan: To stay ahead, we need to take a data informed approach to listen to the customer and meet them where they desire to be met.
Ashley Buchanan: My review of the business is still ongoing, but today I want to share my initial takeaways and discuss a few opportunities that we have identified to reposition ourselves for improvement in 2025 and to lay the groundwork for future progress and issues.
Jill will then address our fourth quarter in your performance.
Ashley Buchanan: This Joining Coal of the mid-January, I have taken time to analyze our current business trends or review our strategic framework and assess our operational structure.
Ashley Buchanan: I've been engaging with teams across the company, visiting numerous stores and most importantly, getting to know our customers' perceptions and expectations of Kohls [inaudible]
Ashley Buchanan: It is very clear to me that Kohls is built on a solid foundation that includes operating more than 1,100 conveniently-located source nationwide.
Ashley Buchanan: serving over 60 million customers with 30 million of those customers being co-loyalty members.
Ashley Buchanan: With this foundation in place, close a tremendous opportunity to build on our strengths, address key areas of opportunities and better serve our customers more consistently every day.
Speaker Change: Kohls customers expect great product, great value and a great experience.
Ashley Buchanan: of the past few years. We have implemented a significant amount of change across our sortment, value strategies, and sort experience in an effort to attract new customers.
Ashley Buchanan: While the intention of the strategy to engage a new customer has been important.
It is also cost friction with our core customer.
Ashley Buchanan: We need to reprioritize our initiatives to deliver on these key tenants to better serve all of our customers, both new and existing.
Ashley Buchanan: When examining recent performance, we have fallen short of fully delivering what our customers want and expect from Kohls.
Ashley Buchanan: Most of what we need to do is in our control and can be achieved by setting a clear vision and holding ourselves accountable to executing in a higher standard.
Ashley Buchanan: As you will see from the financial guidance we're giving today, I want to set the expectations at this turnaround, while very achieval is going to take some time.
Ashley Buchanan: Progress starts with the actions we are taking in 2025 to address opportunities and better serve our customers.
Ashley Buchanan: This marks the initial phase of actions from my ongoing assessment.
Let me now discuss a few areas of focus [inaudible]
Ashley Buchanan: First, offer a curated, more balanced assortment that fulfills needs across all our customers.
Second, re-established Kohls as a leader in value and quality.
and third, Deliver of Frictional Shopping Experience.
Ashley Buchanan: Let it begin with offering a curated, more balanced format that fulfills needs across all our customers.
As we are working through our merchandise strategies,
Ashley Buchanan: Our goal will be to drive improved assortment clarity across all categories, with a purpose behind each brand in each product.
Ashley Buchanan: Recently, our focus has been heavily weighted on new products to attract new customers, and we had de-emphasized the products and categories that our core customers love.
Ashley Buchanan: Kohls began to recognize us in 2024 and immediately began to refocus attention on categories or every a lost traction, including foundjory petite's.
Improfatory Brands [inaudible]
Ashley Buchanan: Now, we are encouraged with the improved transverse scene with the majority that cut recovery still out of us.
Ashley Buchanan: While we are readjust these categories, I want to be clear. We will also continue to prioritize our key growth categories that are resonating with our customers, including Sephora, Home Decor, and Impulse.
Ashley Buchanan: We have built solid momentum in these categories in 2024 and know there's additional growth of potential in each of these areas.
Ashley Buchanan: We're working diligently to find the right balance on that within our assortment and we deliver what our cussers want and expect from Kohls.
Ashley Buchanan: Second, reestablish ourselves a leader in quality and value by offering great product at great price and enhancing our promotions to drive even more value.
Ashley Buchanan: We will start by rebalancing our silver into match cusser and ease by elevating our focus on our proprietary brands.
Ashley Buchanan: These brands provide quality, value, and exclusive reason to shop at Kohls
Ashley Buchanan: They resonate with our core loyal customers and we have an opportunity to re-engage this customer by unlocking the full potential of our proprietary brand.
Ashley Buchanan: Both have amazing proprietary brands such as the No Man Flex, their customers love. They serve an important purpose in our value proposition offering lower price points on great products for our customers.
Straighting out for proprietary brand offering is key to our success.
Ashley Buchanan: We will build on brands like Sonoma Flex, enhancing our current brand portfolio to become a destination for affordable, quality products that you can only get at Kohl's.
Ashley Buchanan: We'll also look for opportunities to introduce new products that fill a purpose for our customer and drive productivity with our merchandise portfolio.
Ashley Buchanan: Our National Brands also play an integral role in our commitment to quality and value.
Ashley Buchanan: Key National Brands bring a note of the quality of their swordsmen.
Ashley Buchanan: We know our customers love national brands and they trust to buy these brands at Kohls, knowing they got a great deal [inaudible]
Ashley Buchanan: Colt has historically delivered additional via inter-accessual promotions, keep on in Kohls' cash.
Ashley Buchanan: Promotions have always been a key part of our variety proposition.
Ashley Buchanan: Over the years, our list of excluded brands on our coupon has grown too large, with the percentile sales that are excluded from your coupon reaching an all-time high in 2024.
This is creating a fusion of frustration with our loyalist customer.
Ashley Buchanan: We're in the process of reversing some of these exclusions to simplify the experience and allow our customers to shop with our promotional coupons more consistently.
Ashley Buchanan: In addition to promotions, our customers want more clarity in our pricing value messages.
Ashley Buchanan: We will continue to work to simplify our messaging by reducing the complexity of our offers as well as amplify our great prices as we have seen the start to resonate with our customers.
Ashley Buchanan: Our goal is to offer quality products at great prices across our entire brand portfolio so our customers can more clearly see the value they're getting with their purchase.
Ashley Buchanan: Making the exhibits will allow us to simplify our promotion and clarify our value messaging to create a better shopping experience.
Ashley Buchanan: which leads us to our third priority, enhancing our omnichannel platform to deliver a experience to our customers.
Ashley Buchanan: We want our customers to have a consistent experience across all channels.
Ashley Buchanan: Restoring trip insurance for key items, increasing inspiration in-store and online, and providing more consistent store and digital experience so our customers can easily shop, Kohls at any store or online and any platform.
Ashley Buchanan: We can improve the customer experience from more consistent insults for high volume items, particularly our basic and essentials.
Ashley Buchanan: We will continue to manage inventory highly, but need to restore trip insurance for our customers through greater by depth and supply chain agility.
Ashley Buchanan: The optimization on a store layout will be done through a combination of productivity and adjacent to the analysis.
Ashley Buchanan: This will provide clarity to the customer of the purpose of each brand.
Ashley Buchanan: We will often thoughtfully improve category placement to create an easier shopping experience for customers to find their frequently purchased items and discover new and relevant choices.
Ashley Buchanan: Achieving a successful Army Channel platform requires both a store and digital business to work together in tandem.
All our store and digital businesses do have some synergies [inaudible]
Ashley Buchanan: There are many aspects on how we operate that we can do better.
Ashley Buchanan: We have identified opportunities in our omnichannel business and some of the initial work is already underway.
Ashley Buchanan: Paul is too early to share any details. We're excited about the opportunity to leverage technology. We'll have more to share later in the years we developed these plans. [inaudible]
Ashley Buchanan: The goal of all this work is to make shopping at Kohls a more enjoyable and reliable experience.
Ashley Buchanan: Importantly, while these areas will be the focus in our near term, it is also my expectation that every association in our organization has a commitment and a role in driving operational excellence.
Ashley Buchanan: Simply put, we will work to create a more efficient organization that will focus on reducing costs that allow us to invest in our future growth.
Ashley Buchanan: We know that part of setting up the business refuses theft is to have a high level of this one a managing cost.
Ashley Buchanan: To summarize my comments today, I'd like to reiterate my takeaways.
Ashley Buchanan: First, cold is a strong company, both on a very solid foundation.
Ashley Buchanan: with over a 100 stores serving more than 60 million customers. The opportunity that a lot of the kind of us is essential.
Ashley Buchanan: Cole serves an important role in the retail landscape, and we have the ability to better execute and serve our customers.
Ashley Buchanan: Second, we have identified areas that are repositioning us for improved results as they better align with our customers what and expect from Kohls, including offering a curated, more balanced assortment that fulfills needs across all customers.
Reestablishing Kohls as a leader in value and quality.
Enhancing our Army Channel platform to deliver a frictional experience.
Ashley Buchanan: And last, this will take some time. I want to be realistic in how we are setting our expectations.
Ashley Buchanan: My full review to business and go for a strategy is still ongoing. The actions we are taking in 2025 are step in the right direction, but there's more work to be done to unlock the full potential of this company. [inaudible]
Ashley Buchanan: We will have the details on additional initiatives later in the year.
and I'll hand over the call to Jill. [inaudible]
Thank you, Ashley, and good morning everyone.
Jill: I'll provide details on our fourth quarter performance and then discuss our guidance for 2025.
Jill: Net sales to climb 9.4% in Q4, and 7.2% for the year.
Jill: Comparable sales decreased 6.7% in Q4 and 6.5% for the year.
Jill: The variance between net sales and comparable sales in Q4 is primarily due to the 53rd week last year, which we previously stated was worth $164 million.
Jill: From a channel perspective, our store comparable sales declined 3.1% in Q4, and we're down 5.6% for the year.
Jill: George Stills benefited from strong average transaction value and saw improvement throughout the quarter with January having the strongest performance.
Jill: We experienced underperformance in our digital business during Q4 with comparable sales to the planning, 13.4% in the quarter, and down 8.7% for the year.
Jill: Digital sales were pressured from softness and home, particularly in legacy home, which overpenetrates into our online business.
We also saw headwinds in our digital conversion in Q4. We also saw headwinds in Q4.
Jill: Part of the conversion headwind was due to an online inventory suppression issue that impacted our availability.
Jill: We have corrected this issue and are seeing an improved conversion and performance quarter to date.
Jill: Turning to line of business results. Nearly all lines of business improve their comparable sales performance versus Q3.
Jill: Sephora continued to be a strong sales driver with comparable beauty sales increasing 13% and acceleration from the third quarter.
Jill: Bregrant, fastened body, and skin care continued their outperformance in the quarter
Jill: Our expanded offerings of gift sets resonated extremely well with our customers.
Jill: and we continue to see brands such as Soldiers and Arrow, Laneige, YSL, and Summer Fridays perform especially well in the quarter.
Jill: In addition, our accessories business, excluding Sephora, had a flat comp for the quarter.
Jill: This was driven by our investment back into jewelry with strong performance in fashion and bridge jewelry, as well as fashion accessories and our impulse business.
Jill: As we received fresh receipts in our proprietary brand, we saw a relative sales lift throughout the quarter. This helped deliver a notable comparable sales improvement in our payroll businesses, one compared to Q3.
Jill: We expect these businesses to continue to improve in 2025 as we rebalance our inventory.
Jill: Last, we continue to see collective outperformance in our key growth categories, including impulse, gifting home decor and baby gear.
Jill: However, this outperformance was not enough to offset our legacy home business, which remained challenged in the fourth quarter. Our kitchen electrics, floor care and bedding continue to underperform.
Jill: Moving down the P&O, other revenue with $222 million in Q4, a $24 million decrease versus last year.
Jill: The decrease was driven by a decline in credit revenue due to lower revolving credit balances and lower flight fees.
Jill: Gross Margin and Q4 was 32.9%, an increase of 49 basis points.
Jill: The year-over-year increase was driven primarily by optimizing our promotional events, as well as lower digital penetration.
Jill: For the full fiscal year 2024, growth margin increased 50 basis points to 37.2%.
Jill: As Dana expenses in Q4 decreased 4.5% to $1.5 billion, de-leveraging approximately 148 basis points
Jill: The decrease to last year was driven primarily by lower spending in stores, marketing and supply chain.
For the full year, Sunei decreased 3.7%
Jill: Depreciation expense with $183 million in Q4 and with $743 million for the full year.
Jill: As compared to last year, depreciation expense declined $4 million and $6 million respectively driven by reduced technology capital funds.
Jill: Interest Expensing Q4 with $74 million as $319 million for the full year.
Jill: Relative to last year, interest expense decreased $8 million in Q4 and $25 million for the year, driven by the retirement of $113 million of debt in Q2 this year.
Jill: Our tax rate was 17% in Q4 and was 12% for the fiscal year.
Jill: Adjusted net income for the quarter was $106 million dollars and adjusted earnings for a looted share was $95.
Jill: For the year, adjusted that income was $167 million and adjusted earnings per deluded share with $1.50.
Jill: During the fourth quarter, the company announced the closure of 27 underperforming stores and one e-commerce fulfillment center. These measures are part of the company's ongoing effort to increase efficiency and support the health and future of its business.
Jill: The impact of this decision resulted in a one-time charge of $76 million, and earnings per deluded share of 52 cents, and have been excluded from the numbers discussed.
Jill: Moving to our balance sheet and cash flow, we ended the year with $134 million of cash and cash equivalents.
Jill: Inventory was up 2% compared to last year, driven by our investments to rebuild our proprietary brand inventory.
Jill: Operating cashflow with $596 million in Q4 and $648 million for the full year.
Jill: Capital expenditures for the quarter were $99 million and $466 million for the year.
Jill: We ended the year with $290 million outstanding honor revolver.
Now let me provide details on our outlook for 2025.
Speaker Change: As you heard from Ashley this morning, Kohls is a solid company with substantial opportunity, but this will take time.
Jill: We have undergone a lot of change over the last couple of years. Some changes were positive, while other changes led to some misstep.
Jill: As we approach 2025, our guidance outlook recognizes both the time needed to make the necessary changes, as well as the uncertainty in the macro environment.
Jill: For the full year, we currently expect net sales to be in the range of a 5% decrease to a 7% decrease versus 2024.
Jill: Comparable fails to be in the range of a 4% decrease to a 6% decrease [inaudible]
Jill: Tom Stales will have an approximately 90 basis point benefit from net sales due to store closures.
Jill: Operating margins to be in the range of 2.2% to 2.6% and earnings per share to be in the range of 10 cents per deluded share to 60 cents per deluded share.
Jill: Now let me share some additional guidance details. We expect other revenue to be down 12%. The decrease is due to an accounting change that requires us to move a portion of our credit expenses from S.V.A. to net against credit revenue.
Jill: As well as lower accounts receivable balances driven by sales under performance in 2024, especially by our credit customer.
Jill: Gross Margin to expand 30 basis points to 50 basis points driven by continued inventory management, increased proprietary brand sales, and optimizing promotional offers.
Jill: S&A dollars to be in the range of down 3.5% to down 5% [inaudible]
Jill: These stavings will be driven by our Q4 actions, resulting in lower store payroll and supply chain costs, as well as lower marketing expenses and a benefit from a portion of the credit expenses moving into other revenue as I previously mentioned.
Jill: depreciation and amortization of $730 million, interest expense of $315 million, and a tax rate of 18%.
Jill: As we anticipate the new initiative to take time to have an impact, we expect a failed build throughout the year.
Jill: And although we are pleased with our start to key one, there's a lot of quarters still ahead of us.
Jill: Given the uncertainty in the macro environment, we will stay prudent and expect Q1 comparable sales to get the low end of our sales guidance range for the year, with the remaining metrics balanced by quarter.
Jill: Next, I would like to discuss how we are prioritizing our capital allocation for 2025.
Jill: In 2025, our focus will be rebuilding our cash balance, reducing our reliance on the revolver and capitalizing on opportunities to further reduce our debt and overall leverage.
Jill: We will be addressing our July 2025 maternity's this spring with the intention to refinance the debt.
Jill: We expect capital expenditures to be in the range of 400 million to 425 million.
Jill: CapEx in 2025 will include investments to complete the role of Sephora, expand impulse queueing fixtures and omnichannel enhancements.
Jill: Additionally, we'll be opening two small stores in the first quarter.
Jill: We have in our priority to rebuild our cash balance, the board has made the decision to reduce the dividends. Although we remain committed to returning capital to shareholders, this reduction allows for greater balance to flexibility.
Jill: This morning, the board declared a quarterly cash dividend of 12 and a half cents per share, payable to shareholders on April 2nd.
Ashley Buchanan: With that, Ashley and I are happy to take your questions at this time.
Ashley Buchanan: As a reminder to ask a question, please press star, follow by the number one on your telephone keypad.
Ashley Buchanan: Our first question comes from Mark Altschwager from Baird. Please go ahead, your line is open.
Good morning, thanks for taking my question and Ashley, welcome.
Thank you.
Ashley Buchanan: Ashley, could you talk us through your assessment of what has been working, what hasn't been working with the merchandising strategy, where you believe you can affect the most change in the near term, what might take take longer to implement and just bigger picture, what gives you confidence that Kohls can return to growth?
Paul Lejuez, Paul Lejuez, Paul Lejuez, Paul Lejuez
Yeah, thanks for the question.
Ashley Buchanan: Yeah, you know what I saw obviously before I took the job was
Ashley Buchanan: You know, when I assess the entire business, this all opportunity, right, I saw an opportunity around the products we offer, the value that we're offering and the quality of the product, how we allocate, how we run the stores, and most importantly, how we...
Ashley Buchanan: I'm doing an army channel experience, we had a lot of friction to the customer piece, and I thought, you know, a lot of the...
Ashley Buchanan: What I realized is that we're kind of making it hard for them to love us a little bit right and with that being said you could just see the opportunity in front of us as far as how we how how we offer the customer value and product and I just knew that we could do better and I think the the customer is expected to do better. And I'm just.
Ashley Buchanan: And then I think the last thing that really kind of got me was, I was amazed at...
Our associates in the field.
Ashley Buchanan: How committed they were and how they were just truly customer focused.
Ashley Buchanan: So that's actually very hard to create, I think it retails some poms, it's very dedicated.
Ashley Buchanan: Associate Base that really wants to serve customers. And so I knew if you have that and you can often write value proposition.
Ashley Buchanan: I knew it could turn. It's going to take a little time. The things are laid out.
Ashley Buchanan: They're really short-term and tactical in that sense. I'm still creating the long-term strategy and the greater value proposition, but if you look at the three things we played out, they're kind of no regret moves. I mean...
really leaning in to upper proprietary brands, which...
Our customers come to expect from us.
Reimplementing some of the categories we got out of.
Ashley Buchanan: The category we put in were the right ones. They attracted new customers. It was really I think in the execution of how we did it. We took away really productive space and products which I think we could have done it probably a little bit differently and done both. I think it was a little bit different.
Ashley Buchanan: So, and then if you look at, you know, how we do Army Channel, it's clear in our results that, you know, there's a bifurcation between us and our peers and our particular e-commerce business is performing.
Ashley Buchanan: I was really pleased actually in the fourth quarter. We saw pretty good trends in our store base, which is kind of an anomaly in the retail landscape. That being said, we saw a bifurcation in the e-commerce business, which given my experience, I feel the very confident over time that we can adjust that trend and get it back in line with what we expect.
Speaker Change: Thank you for that. And follow up, I guess either for Ashley or Jill.
Ashley Buchanan: What are the implications from a margin perspective as you aim to elevate the quality of the private brand, while also broadening the brand inclusion with the promotional offers and on the promotional offer side. So what has been the feedback from your brand partners? Initially, thank you.
Ashley Buchanan: Well, I mean, if you look at how we're going to, I mean, we started the proprietary, you know, private brand and you've really been Q4 before I got here in the customer.
Ashley Buchanan: was resonating. We kind of lost trip insurance on basically the key basics. So it's not really private versus national. It's really just reserving I think from an inventory level.
Ashley Buchanan: on our accessories, our core cussers, around our proprietary brands. So, and how do we get there from a from a discounting perspective?
Ashley Buchanan: How do we do promotions and where do we put our markdowns? I think there's a lot of opportunity and particularly how we allocate product and
Ashley Buchanan: Where we send product, there's a lot of opportunity on the efficiency of that.
Ashley Buchanan: and we could take a lot of costs out of that and put that into the price point. But over time, if you just look at it.
Ashley Buchanan: Our mix of what has been excluded from the coupon.
Ashley Buchanan: As it got into high, I mean, that's clear. I mean, without it, there's really little doubt from the customer perspective particular core loyal customer that we've excluded too many brands from that, which then, you know, has an impact on obviously.
Ashley Buchanan: How they view value from us. And I don't think, I don't, I think we can do both. And we've done it in the past. If you look at the mix of dream proprietary and
I guess create a lot of fuel for her.
Projective Young Price.
Ashley Buchanan: It's going to take a lot of time to get there because I mean if you think about it we've already bought you know pretty much through Q3 [inaudible]
Ashley Buchanan: So I'm not saying this is an overnight piece but I'll know how we get there over time as the mix changes and we can drive national brands while we increase the upper proprietary brands.
Thank you, and best of luck.
Thank you.
Speaker Change: Our next question comes from Dana Telsey from Telsey Group. Please go ahead, your line is open.
Hi. Good morning, everyone.
Speaker Change: Um, Ashley, welcome to Kohls. And as you think about the store profile, we just turned about the 27 store clothesings that was announced like a month or so ago. How do you think of the store base? What are you looking for? We always knew that they had that they were profitable stores. What's the right mix to be both size and number. And then as you look at the merchandise assortment, given the reset that's going on.
Speaker Change: And we've been through active, we've been through members of different things. What do you want the mix to look like and what kind of margins do you think is sustainable for the business? Thank you.
Speaker Change: As we look at, so I don't really see, you know, obviously we always do a healthy evaluation every year of our store base, but going into the very very few that are they're not profitable at this point. So, um,
Speaker Change: But that being said, if you look at inside the box, right, how we allocate space among categories and products and adjacencies.
Speaker Change: I think we lost a little bit of dismal on that part and there's a lot of opportunity. I mean this is a simple thing we've done just recently before I got here.
Speaker Change: Realigning your casual pants next to the dress pants and you saw an increase, right? It's just the traditional how the customer shops and the agency piece. [inaudible]
Speaker Change: As far as the margin piece, I'm not going to give you the forecast portion, but like I said, it's a very productive box. I mean we're still thinking through the smaller format piece. [inaudible]
Speaker Change: and how we build out costs and to put it to be of that. Obviously, we built several last few years. I think it's still a work in progress on the 33,000. The 55s, actually, you're...
Speaker Change: are doing pretty well. I still have a lot of opportunity, I think, on how we do to build out in the return. But we're still learning, but our workhorse is still the 80,000, and it's a highly productive. For the type.
Speaker Change: Got it, thanks. And just any comments on your customer, what you're seeing from the customer, how they performed, visiting the fourth quarter and what you're looking for them going forward. Thank you.
Speaker Change: I mean, if you break down the customer, I think, you know, from a macro perspective.
Speaker Change: You see a pretty decent fabrication among income level, we don't see it.
Speaker Change: Too much geographically per se, but when you look at income level, you're making less than 50.
Speaker Change: That consumer is pretty constrained from a discretionary standpoint. If you're making less than a hundred, it's awesome.
Pretty, pretty challenging.
Speaker Change: and you see that very clearly in numbers and obviously you know here at the inflation numbers they're coming down or two to three percent but they're still pretty elevated from a particular from a grocery training and a retrospective of the last few years because they haven't actually deflated so and I'm not sure what you just kept up with that so in that if you're in that income cohort. [inaudible]
Speaker Change: which we do have a decent portion of our...
Speaker Change: Custer Base in that. It's a headwind from a macro perspective. You definitely see that in them. They're seeking out value. You see it in the mix of the product we're selling. You see it in the promotions that we are doing. They're definitely seeking value. I don't think we're an anomaly in that if you listen to the other retailers that have. You see it. You see it. You see it.
Speaker Change: Come before us and Alts, they keep talking about people looking for value and...
Speaker Change: And that will probably expand, probably, across income cohorts over the next probably three or four months, I would assume And I think, you know, that's really how we're positioning ourselves, which I'll let off the quality and value, which I think will resonate with our customers, particularly in this time.
Thank you.
Paul Lejuez, Paul Lejuez, Paul Lejuez,
Speaker Change: Our next question comes from Oliver Chen from PD Cowan, Pico Head, at Yolanda Delphin.
Oliver Ten: Thanks so much. Hi, Ashley. We were curious about which initiatives would be earlier versus later. And what's your take on what might be more difficult to achieve, you know, versus longer, lower hanging fruit. And Jill, you've, you've had the. Thanks so much.
Speaker Change: experience of many changes at Kohls over the years, as well as management. What are your thoughts about how this may be different and comparing and contrasting it to aspects of the past? And Jill, as we model free cash flow it?
Speaker Change: It's certainly less than last year. Are there puts and takes and networking capital and cap back that we should know about to help inform the decline we're modeling like less than half of the free cash flow this year versus last. Thank you.
Speaker Change: I mean, like I referenced, it's going to take some time, obviously, the three things I laid out in 2025 or I call them almost tactical.
Speaker Change: that short-term, no regret moves. I mean, it's a long, lead time business. If anybody's been around, you know, we're looking at, you know, nine months, in some cases, to get product in. So the things that we have, the changes that we are implementing.
Speaker Change: We'll take a little bit of time, right? We probably won't even see the initial thing until next year. Obviously, there are a lot of things around how we operate the store from a cost perspective, how we do promotions, how we do some of our pricing and the proprietary mix.
Speaker Change: Armore Short-term, the longer-term piece around the value proposition and how we go to market. We're still developing, but like I said, this is a long lead time business and so it takes a little bit of time to turn the ship, just the nature of how the product flows in it works.
Speaker Change: And in terms of free cash flow, Oliver, I think what we're going to see this year is obviously we came to the year with our inventory up a little bit as we're building back into our proprietary brands. You know, we talked on the call that January was actually our strongest month, we said we had a strong start to February , so as we build back into that brand portfolio, we're seeing it really resonate with customers because it does give them value.
Speaker Change: So as we're doing that, we're not going to get as much benefit out of inventory particularly in the front half of the year. We'll continue to work that down and I'll expect by you know for the full year inventory turn will be flat, which does mean our receipts will have to be down, but you'll see that the aggressive decline and receipts of the year moves on. So you won't get as much of a working capital benefit from inventory in 25 feet dead in 24. [inaudible]
Speaker Change: Okay, Jill, what's your context for the nature of what needs to be done now, you know, relative to your experience?
Jill: Yeah, I think that how Ashley's outlined it, you know, some of the steps we took were probably a little too far and we really...
Jill: Polarized our core customer and they're the one who took some of the brunt from it. You see that a little bit on the credit side particularly in the credit revenue that customer really came to look for value.
Jill: I wanted to use their coupon, one of the familiarity of brands that we actually took away from them, they over-penetrated in jewelry or petite. So, you know, it's some of those actions, I think we're harmful to that core customer. So we need to move back and build that brand love with them again. What I would say we did bring in a lot of new customers. I mean, obviously, support was helpful from that perspective. And we're driving those customers into our loyalty program. But we really just really need to establish that we have a great experience when it comes . . . . . . .
Jill: store. We have trip insurance so that we have that depth of inventory. When you come to the store, you can get what you're looking for. And we have the brand that you've come to love and look at for Kohls from a value perspective. So I think, you know, again, just some of the basics, but I think as we moved farther away from that, that was what really became harmful and it really became that core customer from our perspective that we have to bring back in.
Speaker Change: Okay, and finally just to follow up, Ashley, as you think about value intensely, what's the interplay between supply chain speed and agility relative to value? I think we're in a permanent phase of like unprecedented levels of volatility.
Jill: Um, you know, which may require shorter lead times, but I know you're often balancing that against price and transport costs. Thank you.
Yeah, I mean, it's a really good question. Obviously, um...
Jill: Wait, what I've noticed over the last, you know, I've got three to four years. [inaudible]
Jill: Kind of on the forefront of supply chain diversity and product assurance. I mean, they started really back in 18 Diverse by their supply base
Jill: which I would say is probably two to three years ahead of most people that I'm aware of. So, I'll very please that there was a really strategic plan, they all went back probably to 18 of having
kind of a diverse ad job supply chain. And...
Jill: One of the biggest, I guess, impressive parts is how well our supply chain actually worked here at Kohls.
Jill: It is a well old machine. There's a lot of opportunity on the allocation part from the corporate side as far as the supply chain. I've been very pleased with how this part of the company operates. And like I said, I think it was. Thank you very much.
Jill: They saw the dominoes falling well in advance and around how getting supply chain diversity around the security of supply so not really over index any individual country which has been quite helpful.
Thank you, best regards.
Speaker Change: Our next question comes from Michael Benetti from Evercore. Please go ahead, your line is open.
Michael Benetti: And you guys, thanks for taking our question. Just a couple of tactical ones. Could you maybe help us? Can you speak to the expectations going forward for Sephora this year and both, you know, maybe same store sales or store additions? Yeah, I think so.
Michael Benetti: I guess secondly, could you explain the comment that the changes the last few years have caused some friction with the legacy existing core, Kohls customer, maybe your answer was embedded in a couple of the other answers that I just wanted to ask specifically.
Michael Benetti: What you saw with that comment, and then also elaborate a little bit on the comment of how you're addressing promotions where there's a lot of efficiency that you can take costs out, but push those savings into the price point. Just so we understand a little bit more tactically what you mean by that. Thanks.
Michael Benetti: Yeah, so I think this year we will complete, we opened 140 stores in 2024, we'll complete our rollout this year in 2025 for their remaining stores. Those will all be small shops though because they're going to go into our smaller format stores.
Michael Benetti: So the contribution from Sephora will become less. Now we're excited that we actually saw a 13% comp in the quarter. It actually accelerated from Q3. So we continue to see it really resonate with our customer, particularly the trip driver for that customer. It's a new customer coming in and we see that customer about 35% of the time buying something else that while they're at coal. So we have a big opportunity to continue to expand that basket. And I think that's where a lot of that opportunity lands. Thanks.
Michael Benetti: The newness continues to resonate. We called out a lot of great brands, and I know we have new ness as we come into 2025 as well. That will help continue to drive that, but obviously we won't have the continued contribution of having new store openings. So you'll see a little bit less of that contribution to the overall comp in 2025 just because you have less new stores opening this year than you did last year.
Michael Benetti: on the core customer piece. If you look at, so when we added these initiatives over time.
Thank you.
Michael Benetti: We took away, I would call it, you know, highly productive, highly incremental product. I mean, Sephora went in, it was actually...
You know, wildly successful, brought in a new cutler of Ace.
Michael Benetti: Did all the metrics that you would expect it to do and they've been a fantastic partner. It went into the jewelry section, right?
Michael Benetti: Which if you look at the way jewelry works, there really is no substitute. You come in for it. It's not like you're going to go buy a well. I'm going to go buy a shirt now. It was highly incremental and actually highly productive labor intensive but highly productive.
Michael Benetti: Instead of just moving that and I would say removing duplicative or duplicated product elsewhere or less productive space in the floor, it was just gotten rid of right. Well that's a core customer that really
Michael Benetti: You know, there's no other place for it to go. And then you replicate that among the teats.
Big and tall, and you have this?
kind of the rolling.
Michael Benetti: piece of work, the ideas that were put in were right. I think it goes back to how you reallocate the space from a data perspective and making sure you're looking at any profit and incrementality. Because petite, again, it's 100% incremental because you can't really find that product anywhere else because of the size fit piece.
Michael Benetti: So the ideas were good. I think we could have done both if you look in retrospect obviously easily when you're sitting here my chair Years later but it definitely caused friction over time with our core customer that was used to that product even though we attracted different customers [inaudible]
and then the promotion comment.
and your question of promotion comment it was.
Michael Benetti: I just wanted to see if you could elaborate on the comment that you see an opportunity to make the promotions efficient, to take some of the costs out and push those savings into the price point just for us.
Michael Benetti: Fred Sheep, folks, what does that actually mean? A little bit more tactically on a retail floor. Thanks.
Speaker Change: Probably, my comment probably won't help you with your spreadsheet, but from philosophically though, if you look at...
Michael Benetti: Holy Smoot, Holy Smoot it, the Dept, the Lewis Smoot it, and the efficiency and the incrementality of it.
Michael Benetti: You get a little bit of a peanut butter spreading across many categories where some are actually way more elastic than others too.
Michael Benetti: We tend to give away a lot of, I'll call it markdowns at the register. If you look at tactically how we do it, you know the customer comes in, is not asking for that, Matthew and we tend to give it to him. And so if you think about those two components. [inaudible]
Michael Benetti: You're spending a lot of money at the point where the customer really doesn't, is not asking for that as opposed to then putting it into things or highly elastic that the customer is really looking for. So there's some interesting way that we operate and it's just a legacy way of doing it.
Michael Benetti: It's pretty tippable sometimes when you see a retail, but you can take that money and probably get a higher return that the customers recognize more versus probably just at the register.
Michael Benetti: Okay. All right. Thanks a lot, guys. I appreciate the help.
Ashley Helgens: Our next question comes from Ashley Helgens from Jeffries. Please go ahead, your line is open.
Speaker Change: Hi, thanks for taking our questions. So to start, maybe you could just talk about what sort of kind of consumer health level is embedded in the guide for this upcoming year. And then Ashley for you, how are you thinking about the right mix of private label versus national brands? Thanks.
Speaker Change: I think, you know, overall, we know that there's a lot of uncertainty with the customer, and, you know, we try to definitely take a prudent approach with our guidance. So really, our outlook.
Speaker Change: Both recognizes the time needed that we have to make the necessary changes that we've outlined today, as well as the uncertainty that consumers facing in the macro environment. And I think that's why we came out a little bit lower to make sure that we were addressing that uncertainty and the time needed. So I would say it's incorporated in everything we gave you today. Thank you very much.
Paul Lejuez, Paul Lejuez, Paul Lejuez,
Speaker Change: You know, it's a very common question. You know, what's the right mix and what is your target? Am I 20 plus years? I have found that to be a very
Speaker Change: Dangerous thing to throw out, particularly to merchandisers here in retail because you can tell them to hit a target and they will hit a target What I would say would be the customer will decide the mix and the end [inaudible]
Speaker Change: I think there will always be a place for high-quality high-value proprietary brands and then putting that in front of the customer.
Speaker Change: along with a quality national brand that people recognize, and then you let the customer decide. Historically, when you set kind of artificial targets that this category is going to be 20% or 30%.
Speaker Change: I think it kind of takes the customer lens out and you're kind of forcing that upon the customer a little bit, but also I think the customer decided, I get the question, I get the question all the time, what does your e-commerce want to want it to be, what your store makes want it to be, whatever the customer, our job is to meet the customer wherever they want to be met.
Speaker Change: and we can do a better job of that, but I won't give a target because then they'll just hit it. What I want them to do is offer great products and great values and then let the customer decide and then tell them effectively. That's I know that sounds like probably not what you're looking for but that's. [inaudible]
Speaker Change: really the answer that it deserves for this organization, for sure.
Great, thanks so much.
Speaker Change: Our next question comes from Chuck Grom from Gordon Hasket. Please go ahead, your line is open.
Chuck Grom: Okay, thanks very much. Re-gaining traction with lost customers can be hard and often time.
and Pick a Long Time.
Chuck Grom: I'm curious about what steps you're taking to improve on this front when you talked about.
Chuck Grom: Rebuilding the private brand mix. I'm just curious what else you can do to go back to those customers. You have a big file. How are you attacking that? Is there a cost associated with that as well? [inaudible]
Chuck Grom: Yeah, it's good. I mean, obviously it's easier to keep the customer regained it historically, right in retail.
Chuck Grom: First, we actually have to make the changes. When we start with that, we actually have to fill back to the park right where we have to put the categories back.
Chuck Grom: Effectively in the store base. We have to get the brands that that customers want back on the coupon and then we have to effectively tell them. [inaudible]
The Great News is of a large, very large sum.
customer file that's still existing.
Chuck Grom: We have a large database of active and deactivated customers that we so reach out to. That part will take a little time. I don't think there's that much incremental cost associated with it, giving our marketing budget, but that part will take a little bit of time. You have to do the first part before you can tell them. I think the worst thing you could do is...
Chuck Grom: Tell them there's something different when it hasn't changed yet, which you can see that in history we tell the be very precarious situation. So for us it's about getting the proposition right and then bringing them back, not in the reverse order.
Speaker Change: Okay, Dana. And then on the on the store fleet, you're closing 27 stores. You know, a lot of your peers are more aggressive on that front. I'm curious. Like, what was, you know, what was the logic behind the 27 and I guess why not close more stores and I guess are you prohibited because of the Sephora deal the closing stores? That's why you're not getting more aggressive on that front. [inaudible]
Ashley Helgens: Who's coming to do? Which son of four do an opportunity to relocate so we be relocating that store, you know, downsizing that store, closing that store, but typically because we're generating profit and cash in these stores, it's a pretty easy decision to continue moving forward. As you know Ashley mentioned, we could make the four walls more productive inside them, but as it's today, there's just not a reason to have to make a lot of closures.
Ashley Helgens: In fact, I think as you look forward, we're testing into these small four formats. We've talked a lot about the 55 and 35K. So it's more about where and how can we expand once we figure out the four walls of our backs, to say how can we get into some of these more rural markets that we know we have opportunities to serve with our format. [inaudible]
Great. Thank you.
Matthew Boss: Our next question comes from Matthew Boss from JP Morgan. Just go ahead, your line is open.
Speaker Change: Great, thanks. So, Jill, could you speak to the overall health and composition of inventories exiting the fourth quarter? And then just with the cost structure, maybe if you could speak to further areas of rationalization or is one to two percent, still the comp required for SGNA leverage in the model.
Jill: Sure, I think from an inventory perspective, I feel really good with the health. Although it was up 2% as we mentioned, we made that investment back into our proprietary brands. And also actually into some of the brands we exited like jewelry, we did have a strong presence of that in the fourth quarter. We thought resonate with our customers and as we talked about, we saw a flat comp and accessories without Sephora by going back to that category. So I think as we move into the first quarter, we have an opportunity both with Valentine's Day and Mother's Day to take advantage of that category.
Jill: Opportunities, we continue to close an EFC, we close the 27 stores, we've done some head count rationalization as well, so we continue to look for big ways to optimize as we move into 2025, we have some other areas such as lowering our marketing costs, we've talked about moving that A to S goal down year on year to become more efficient there, so we'll continue to lean into that, and always looking for ways to optimize our store payroll, we still have 250 stores with self checkout, so as we test and learn there, how can we-
Jill: We become more efficient from that labor pool as well. And that as we have been rationalizing down the inventory that also alleviates labor both inner distribution and in our stores. And so those type of items will continue as we move into 2025. So I think. And so I think that as we have been rationalizing down the inventory that also alleviates labor both inner distribution and in our stores.
Jill: You know, the point that I like looking at is one and one half comp but we've clearly done better than that in 24 and the guidance for date for 25 five.
Topical Caller, Best of Lot [inaudible]
Speaker Change: Our last quite year today will come from Brooke Roach, from Goldman Sachs. Please go ahead, your line is open.
Good morning and thank you for taking our question.
Speaker Change: Ashley, I was hoping we could follow up on Mark's question and speak to the process of reversing the brand exclusions on the coupon program. What does that look like in practice?
Speaker Change: and are you seeing any headway on brand conversations in getting those exclusions removed?
Speaker Change: and then for Jill, I was hoping you could provide some additional color on what you're seeing in your credit business, excluding the accounting change, how is the co-branded partnership scaling, and how should we be thinking about the contribution from balances and your credit customer health. Thank you.
That's a great question.
Speaker Change: I mean, we're currently in the process of evaluating every brand, obviously.
Speaker Change: Some brands that we've carried have always been excluded. I'm not going to sit here and say that we're taking them all off. Actually, they'll always be very large astro brands. They'll always be excluded. I won't name them, but those are, but they were over the last. [inaudible]
Speaker Change: I don't know, several years. There have been many, many brands that didn't ask to be excluded. We excluded them unilaterally, if that makes sense.
Speaker Change: and you do a little bit, you know, every year over the last three to four or five years.
Speaker Change: and it adds up pretty quickly. And those are really the brands I'm talking about. Our larger, you know, from the large brands that's always been excluded, I don't really see a change in that value proposition.
Speaker Change: But there's hundreds upon hundreds of brands that we, you know, you know, laterally did that our customers overtime added up and say, well, this is becoming too excluded when you add up all the product and those are the ones we're actually looking at. It doesn't really require that much of a conversation because. [inaudible]
Speaker Change: They didn't ask for it and sometimes they actually have asked us to repeal it. So those are the easier ones. Obviously we'll have strategic conversations and join business planning with our much larger national brands and see where they are strategically. I don't see that those worlds will change that much in the short term.
Speaker Change: But those are between, they're really on the joint business planning together how we drive our brand and their brand together.
Speaker Change: But over time, we've just excluded a ladder to a lot of brands. And those are the ones that I will actively look at on a more immediate basis.
Speaker Change: And then terms of credit, you know, as we called out with our sales being softer, we saw that softens more in our core customer particularly in our credit customer
Speaker Change: So that has been the softness that we've talked about in our credit revenue line is that AR balance has kind of continued to be reduced as the sales of down we have less revolving balances. So that I think as we projected we go back into 2025. The SNHF obviously makes that revenue look lower in 25 without that <expletive> . Our credit revenue would be better than the sales comp guide that we had given from a decrease perspective. In terms of the co brand, we actually just fully completed the co brand.
Speaker Change: and Conversion to Cap 1 in February . So that's been successfully completed from that perspective. We did see, though, that we gave a little bit less line increases with this last cohort, then we had done with the original cohort we had done. And when we do that, we still a little bit less spend as the, I think macro environment gets better that provides us an opportunity to have a line increase, which will help generate more sales from that perspective. But I would say right now we have an opportunity in front of us to really generate
Speaker Change: More sales for that core customer in general, which would then help lift our total credit revenue as we move forward. But obviously in the guide, we're looking at this being a little bit better than what we had seen from a total sales perspective, X, the Estonia shift.
Great. Thanks so much.
Speaker Change: We are out of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect to the next.