Q1 2025 Kohl's Corp Earnings Call
[music].
Good morning, My name is Audrey and I will be your conference operator today.
At this time I would like to welcome everyone to the first quarter 'twenty twenty-five Kohl's Corporation earnings Conference call.
Today's conference is being recorded all.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press the star key followed by the number one on your telephone keypad. If he would like to withdraw your question Press Star one again.
Speaker Change: At this time I would like to turn the conference over to Trevor Novotny Senior manager of Investor Relations. Please go ahead.
Trevor Novotny: Thank you.
Speaker Change: Certain statements made on this call, including projected financial results and the company's future initiatives are forward looking statements.
Such statements are subject to certain risks and uncertainties, which could cause actual results to differ materially from those projected in such forward looking statements.
The risks and uncertainties include but are not limited to those that are described in item. One in Kohl's. Most recent annual report on Form 10-K, and as may be supplemented from time to time in Kohl's other filings with the SEC.
Trevor Novotny: All of which are expressly incorporated herein by reference.
Trevor Novotny: Forward looking statements relate to the date initially made and Kohl's undertakes no obligation to update them.
Trevor Novotny: In addition, during this call we may make reference to non-GAAP financial measures. Please refer to the cautionary statement regarding non-GAAP measures and a reconciliation of these measures included in the Investor presentation filed as an exhibit to our form 8-K as filed with the SEC and available on our Investor Relations website.
Trevor Novotny: Please note that this call will be recorded however, replays of this call will not be updated so if you're listening to a replay of this call. It is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information.
Trevor Novotny: With me. This morning are Michael Bender, our interim Chief Executive Officer, and Jill Timm, our Chief Financial Officer.
Speaker Change: I will now turn the call over to Michael.
Michael Bender: Thank you Trevor and good morning, everyone.
Michael Bender: Thank you for joining Kohl's first quarter conference call I'm honored to assume the role of interim Chief Executive officer at such an important time for our company.
Michael Bender: Kohl's has a substantial opportunity to better serve our customers every day.
Michael Bender: Build long term financial health and deliver shareholder value.
Speaker Change: While I'm no stranger to Kohl's, having served as a board member since 2019, I'm also very familiar with the consumer retail industry.
Speaker Change: I have over 30 years of experience in the industry holding leadership positions at Walmart L brands, Pepsico and most recently I served as CEO of I might express.
Speaker Change: I am excited to leverage my Kohl's board in past leadership experience to lead and support calls through the CEO transition.
Speaker Change: I do want to recognize that there has been a lot of change for calls this past year, especially the last few weeks.
Speaker Change: While change can be difficult. It also represents an opportunity to reassess and commit to a path forward.
Speaker Change: The good news is we already have that plan in place for 2025, and we're making good progress against this plan.
Speaker Change: Our plans, which are centered on customer priorities.
Speaker Change: Working more collaboratively across the business staying more accountable for incremental progress and communicating more transparently to effectively drive the work.
Speaker Change: As we navigate through this period of change we're committed to moving forward and showing up for our customers each day.
Speaker Change: It has been a busy few weeks and I've enjoyed the opportunity to dive into our business.
Speaker Change: After visiting several stores and engaging in meaningful conversations with key partners vendors and investors.
Speaker Change: More energized than ever about the road ahead.
Speaker Change: Seeing firsthand the dedication of our teams the strength of our operational network and the passion of our partners has only deepened my confidence and the incredible potential of this business.
Speaker Change: Insights gained from these interactions have reinforced the scale of the opportunity before us and the impact we can make by working together with focused innovation and a relentless commitment to excellence and execution.
Speaker Change: Last quarter, we identified key priorities focused on the Kohl's customer, which Joe will speak to shortly.
Joe: These areas of focus are all designed with the customer in mind and will help us provide the products and shopping experience. We know our customers want from Kohl's. Our work is underway and we have cross functional teams that are working with urgency and care to deliver on these actions.
Joe: Our first quarter performance was ahead of our expectations and the actions, we're taking are making progress with early signs of positive impact.
Joe: <unk> has a strong foundation of 1100 conveniently located stores and over 60 million customers, including a strong loyal customer base that continues to grow.
Speaker Change: We have a tremendous opportunity to build on this foundation and I'm truly excited to lead this next chapter and build on the momentum we've already begun to generate.
Speaker Change: Lastly, I would like to give a heartfelt thanks to our Kohl's team I greatly appreciate all your hard work dedication and commitment to coal and I look forward to working closely with you to lead Kohl's to a successful future.
Speaker Change: I'll now hand, the call over to Jill to speak to our first quarter performance and give an update on the progress we're making against our 2025 actions.
Jill: Thank you Michael and good morning, everyone.
Speaker Change: Our first quarter results came in ahead of our expectations.
Speaker Change: While we are in the early stages of our initiatives. It is clear that the actions. We are taking are beginning to resonate with our customers and we are starting to build momentum in key areas.
Speaker Change: However, I want to level set that this is a turnaround and will continue to take time and lots of the work remains ahead of us.
Speaker Change: Progress starts with the actions we are taking in 2025 to address opportunities and better serve our customers.
Speaker Change: These efforts are centered on three key areas of focus.
Speaker Change: First off our corrected more balanced assortment that fulfills needs across all customers.
Speaker Change: Second reestablish calls as a leader in value and quality.
Speaker Change: And third deliver a frictionless shopping experience.
Speaker Change: Let me begin with our first area of focus offering a curated more balanced assortment that fulfills needs across all customers with a goal to drive improved assortment clarity.
Speaker Change: Behind each brands.
Speaker Change: Our focus over the last couple of years, it's been heavily weighted on new products to attract new customers.
Speaker Change: And we have de emphasized product categories that are important to our loyal customers.
Speaker Change: We know our customers come to Kohl's with an expectation that we will deliver the products they need for themselves.
Speaker Change: Their families and their home.
Speaker Change: We are working to rebalance our full product assortment across all categories.
Speaker Change: Or more curated balanced assortment will ensure a more consistent and inspirational shopping experience every time.
Speaker Change: The most notable area, we are correcting as our jewelry business, which we displaced as we rolled out sephora in our stores.
Speaker Change: This was a category that was highly penetrated by our most loyal Kohl's card customers.
Speaker Change: This fall, we reintroduced jewelry and rolled out 200 fine jewelry shops in select Kohl's stores.
Speaker Change: In Q1, we saw strong response to our jewelry business with jewelry sales up 10% in the quarter driven mainly by our Kohl's card customer.
Speaker Change: We see more opportunity with this category as we continue to work through our assortment and staffing of our fine jewelry business.
Speaker Change: In womens we over assorted new brands over the last couple of years, which led to womens underperforming the business.
Speaker Change: We are working diligently to find the right balance within our apparel assortment and we believe rebalancing assortment will better deliver to our customer expectations and improve the category performance.
Speaker Change: As we move forward women's is focused on delivering more that's an essential.
Speaker Change: Improving assortment clarity and sportswear and making significant choice reduction as a diverse from the market brands and invest into proprietary brands.
Speaker Change: We also completed the rollout of our purchase business to all stores at the end of last year.
Speaker Change: <unk> business also had solid performance in Q1 up high teens, driven by the introduction of simply Vera Vera Wang and Lauren Conrad.
Speaker Change: It's an outsized performance in stores and positive performance from both our core and new customers.
Speaker Change: In addition, we will continue to invest in key growth categories, specifically sephora and impulse.
Speaker Change: This spring, we'll open 105, sephora small format shops.
Speaker Change: Which completes the full chain rollout of Sephora at call.
Speaker Change: Before it has been a huge success for calls and in just four years, we successfully launched over 1100 Sephora at Kohl's shops, and built nearly a $2 billion beauty business.
Speaker Change: In Q1, Sephora delivered another quarter of positive sales with net sales up 6% and comparable sales up 1%.
Speaker Change: In Q1, we made the decision to expedite the rollout of the impulse queue lines in 2025 to an additional 613 stores.
Speaker Change: <unk> in an impulse to line in nearly all of our stores by Q3.
Speaker Change: The impulse business has been a great success, specifically in stores as it is highly incremental and drives additional units in the basket.
Speaker Change: Moving to our next area of focus.
Speaker Change: Establishing calls as a leader in value and quality.
Speaker Change: Our goal is to offer great products at a great price and enhance our promotions to deliver more value to our customers.
Speaker Change: This work begins with elevating our proprietary brands, which offer lower price points and quality products and give customers an exclusive reason to shop at Kohl's.
Speaker Change: Proprietary brands play an instrumental role in our value proposition and highly resonate with our core loyal customers.
Speaker Change: We believe there's a substantial opportunity for us to lean into our value oriented proprietary brands to offer more relevant value and quality to our customers.
Speaker Change: As we've begun to invest back in our proprietary brands, we have seen sequential improvement in the quarter over quarter performance.
Speaker Change: With Q1, approximately 400 basis points better than Q4.
Speaker Change: This improvement was driven by strong performance in key existing proprietary brands to tech gear and flex and active.
Speaker Change: And Lauren Conrad in women.
Speaker Change: We will also look for opportunities to introduce new proprietary brands that fill a purpose for our customer and drive productivity within our merchandise portfolio.
Speaker Change: We have recently introduced three new home brands, Marianna, Vitale, Anne and mingle and Cao and have seen a strong initial response, resulting in improved performance in our bedding bath and tabletop categories.
Speaker Change: While this progress is reassuring our proprietary brands are still underperforming the company average we expect to continue to show improvement in our proprietary brands as we increase the flow of new goods as the year progresses.
Speaker Change: Another way, we are delivering value to our customers is by hand, enhancing our promotions.
Speaker Change: Our national brands also play an integral role in delivering quality and value.
Speaker Change: Our customers buy these brand at Kohl's is they know they've got a great deal through exceptional promotions coupons and Kohl's cash.
Speaker Change: However over the years, our promotions have become less impactful as a result of a growing list of brands are excluded from the coupons.
Speaker Change: At the end of April we began our initial phase to move more brands to be included in our coupons.
Speaker Change: We're being thoughtful and actions are taking a phased approach to read how the customer is reacting to the change.
Speaker Change: Early read so our customers are responding positively to the change, especially in our digital business and we expect to roll up Mark coupon eligible brands throughout the year with the majority of the changes completed by mid August to ensure our customers can use their promotional coupons to unlock more value on more brands for back to school and Khalid.
Speaker Change: Shopping.
Speaker Change: The changes, we are making to simplify our promotions and invest in our proprietary brands allow us to drive more value, which is especially important as consumers remain pressured.
Speaker Change: Our last area of focus is enhancing our omni channel platform to deliver a frictionless shopping experience.
Speaker Change: Our customers desire and easier and more reliable shopping experience both in stores and online.
Speaker Change: To deliver this elevated experience we are focused on optimizing our store layout.
Speaker Change: Storing trip assurance and increasing inspiration in stores and online.
Speaker Change: Following the completion of some preliminary productivity and adjacency analysis.
Speaker Change: We began to make added store store lay out specifically with our accessories and juniors businesses.
Speaker Change: We created an accessories shopping experience behind us for a shop.
Speaker Change: And moved the juniors business to the front of the store across from Sephora as both of these businesses over penetrate and cross shopping with Sephora.
Speaker Change: While these moves are recent we are very encouraged with the results we saw in both categories in Q1.
Speaker Change: Accessories comparable sales, excluding our sephora business were up 4%.
Speaker Change: And juniors comparable sales were down 1%.
Speaker Change: It's well ahead of the company performance.
Speaker Change: In addition to the sales performance, we experienced heightened cross shopping in both categories from our Sephora at Kohl's customers during the quarter.
Speaker Change: As we were refining our buying strategies, we are determined to restore the trip assurance, our customer expects by providing greater depth in key items.
Speaker Change: This is especially important in our basics and essential apparel businesses.
Speaker Change: We improved our in stock rates on core basics and saw those businesses outperformed the company specifically in men's and kids.
Speaker Change: We expect to make continued progress throughout the year as we realign our buying disciplines to provide better jobs and clarity to our customers.
Speaker Change: All while tightly managing our inventory receipts down throughout the year.
Speaker Change: The goal of all of this work is to make shopping at Kohl's, a more enjoyable and reliable experience.
Speaker Change: We are encouraged with the initial results from these efforts and we expect to continue this momentum throughout the year as we reposition our business for future success.
Speaker Change: In addition to these priorities our organization will carry forward our commitment to driving operational excellence.
Speaker Change: We know that part of setting up the company for future success is operating with a high level of discipline in managing our costs.
Speaker Change: Every day, we are working to create a more efficient organization that is focused on reducing costs to allow us to invest into our growth initiatives.
Speaker Change: You see the benefits of this effort through the 5% reduction in our SG&A costs. This quarter on top of a three 7% decline in Q4 of last year.
Speaker Change: Now let me provide additional details on our first quarter performance.
Speaker Change: Net sales declined four 1% and comparable sales decreased three 9% in the quarter.
Speaker Change: The variance between net sales and comparable sales was due to the closure of 24 stores in the quarter, which was completed in late March.
Speaker Change: From a channel perspective, our stores continue to outperform the company, but a comparable sales decline of two 6% in the quarter.
Speaker Change: We have a strong store base that continues to generate both four wall operating profit and four wall cash flow.
Speaker Change: And although we have seen an improvement in our digital business. It continues to underperform with sales declining seven 7% in the quarter.
Speaker Change: The digital business over penetrates in the home category as well as our core credit customer both of which underperformed in the quarter.
Speaker Change: However, we are seeing the digital business respond well to the investment we made in adding brands back into the coupons.
Speaker Change: We continue to see strong sales of our new and non Kohl's card customers.
Speaker Change: However, our Kohl's card customer performance continues to lag the company.
Speaker Change: Our decisions related to downsizing our in store jewelry business.
Speaker Change: Exiting the pizza business.
Speaker Change: Decreasing inventory and proprietary brands and increase in coupon exclusions had an outsized impact to kohl's charge customer performance.
Speaker Change: As we have made investments back into these categories and reduce coupon exclusions, we have seen an improvement in the sales trend of these customers.
Speaker Change: In addition, our middle and low income customers remain the most pressured these.
Speaker Change: These customers are prioritizing value and our trading down into lower price point products.
Speaker Change: The work we are doing to deliver value will help better serve these customers as they continue to be more choice well with their purchases.
Speaker Change: Moving down the P&L.
Speaker Change: Other revenue was $184 million in Q1, a 10% decrease versus last year.
Speaker Change: The decrease was primarily driven by a portion of our credit expenses shifting against other revenue as.
Speaker Change: As part of our account servicing to a third party that owns the account.
Speaker Change: Gross margin in Q1 was 39, 9% an increase of 37 basis points.
Speaker Change: The year over year increase was driven by category mix benefits and continued inventory management.
Speaker Change: SG&A expenses in Q1 decreased five 2% to $1.2 billion.
Speaker Change: Leveraging approximately 32 basis points versus last year.
Speaker Change: The decrease to last year was driven primarily by lower spending in stores.
Speaker Change: Marketing as well as the benefit of a portion of credit expenses shifting into other revenue.
Speaker Change: Depreciation expense was $175 million in the quarter, a decrease of $13 million versus last year.
Speaker Change: The decrease was driven by lower capital expenditures and the impacts from closed locations.
Speaker Change: Interest expense in Q1 was $76 million.
Speaker Change: Relative to last year interest expense decreased $7 million.
Speaker Change: Primarily due to lower lease interest expense following the closure of 27 stores.
Speaker Change: Our tax rate was 10% in Q1. This resulted in a net loss for the quarter of $15 million and earnings per diluted share of negative <unk> 13 cents, a 46% improvement from last year.
Speaker Change: Moving to our balance sheet and cash flow.
Speaker Change: We ended the quarter with $153 million of cash and cash equivalents.
Speaker Change: Inventory was up one 7% compared to last year.
Speaker Change: By inventory strategies implemented to navigate the tariff pressure, including the pull forward of receipts and pack and holding seasonal inventory to be sold in the back half of the year.
Speaker Change: We continue to expect our inventory to be down high single digits by the end of the year.
Speaker Change: Operating cash flow in Q1 was a use of cash of $92 million.
Speaker Change: Capital expenditures for the quarter were $110 million.
Speaker Change: We continue to expect to spend $400 million to $425 million of Capex. This year related to the completion of the sephora rollout.
Speaker Change: The impulse queue line rollout to 613 stores and the expansion of our ecommerce fulfillment center in Indiana.
Speaker Change: In Q1, we returned $14 million to shareholders through the dividends.
Speaker Change: We ended the quarter with $545 million outstanding on the revolver.
Speaker Change: Now, let me provide an update on the refinancing of our July 2025 maturities.
Speaker Change: Earlier this month, we completed a private offering of $360 million aggregate principal amount of 10% senior secured notes due in 2030.
Speaker Change: The notes are secured by 11 of our distribution and e-commerce fulfillment centers, which will be held by our newly formed holding company.
Speaker Change: Offering is expected to close on may 30th.
Speaker Change: We intend to use the net proceeds from the sale of the notes and a series of transactions, resulting in the repayment of borrowings under its revolving credit facility.
Speaker Change: <unk> expects to borrow under its revolving credit facility to repay all of it for two 5% notes due in July of 2025 at maturity.
Speaker Change: Following this refinancing Kohl's nearest debt maturity is not due until 2029 and our long term debt remained at a 10 year low.
Speaker Change: This provides us with ample liquidity to navigate the macro economic uncertainty and invest in strategic initiatives of the company and build a stronger cash position.
Speaker Change: Next I would like to provide context around how we are navigating tariffs and the impact they have on our 2025 outlook.
Speaker Change: Over the last several years, our talented and experienced global sourcing team has done an incredible job diversifying our country of production to ensure that we are not overly reliant on any one country.
Speaker Change: Although tariffs remain a fluid and uncertain situation. The teams continue to work to reduce our exposure to high tariff countries by leveraging our diverse factory network to move production.
Speaker Change: Adjusting orders based on pricing elasticity analysis, and working closely with their supplier and vendor base to proactively manage any impacts with the goal of continuing to drive value to our customers.
Speaker Change: As we look to the remainder of 2025, we remain focused on three key initiatives to better serve our customers.
Speaker Change: Given what we know today and the current actions we are taking to mitigate tariffs. We believe we can achieve our financial guidance for the year of comparable sales down four to down 6%.
Speaker Change: Operating margin of 2.2 to two 6%.
Speaker Change: And diluted EPS of 10 cents to 60 cents.
Speaker Change: Lastly, I would like to take a moment to acknowledge the amazing team at Kohl's.
Speaker Change: We are navigating through a lot of change in your loyalty dedication and hard work has been unwavering.
Speaker Change: Thank you for all that you do for coal and the millions of customers we serve each day.
Speaker Change: With that we're happy to take your questions at this time.
Speaker Change: Thank you we will now begin the question and answer session. If you have dialed in and we'd like to ask a question. Please press star one on your telephone keypad to raise your hand and joined the queue. If he would like to withdraw your question simply press Star one again.
Speaker Change: And we'll go first to Mark off Swager from Baird.
Mark Swager: Good morning, Thank you for taking my question.
Mark Swager: Maybe to start off for Michael here, the strategic priorities outlined today fairly consistent with what we've heard on the last call.
Mark Swager: The adjustments you're planning in the near term and what do you think it will take to return to Congress.
Mark Swager: Thanks for the question Mark and good morning.
Mark Swager: I am 30 days in so it's early days, but the evaluation of the plan is not something that we're considering major changes too.
Mark Swager: As a board member before I stepped into this.
Speaker Change: I am CEO role, we're very aligned with the management team on the strategy that we're executing so I don't see us, making major shifts or changes to what's been.
Speaker Change: Calculated in terms of the strategy going forward as it relates to your second part of your question with respect to what it's going to take to restore growth as Joe mentioned, we are in the middle of a transformation in the early days honestly of it and so it's going to take some time for us to get back to that but the bottom line is that we're trying to align that.
Speaker Change: Business.
Speaker Change: To meet the needs of our customers and right now our customers some of them are stressed and so we're trying to focus on value.
Speaker Change: And restoring that confidence that the customer needs to be able to come to kohl's and find what they're looking for at a great price. So that they can stretch their dollars have been looking for.
Speaker Change: I look at it almost mark is.
Speaker Change: When I break it down.
Speaker Change: Your kitchen table conversations going on across America every day.
Speaker Change: People are trying to figure out how to make sense of the dollars that they have to spend.
Speaker Change: They are prioritizing where they want to put it in so for put those dollars and so for US what's important is making sure that we are as close to being inside their heads and understanding what their needs are in meeting those needs at the time they need I mean, that's that's what it will take for us to get back to growth over time.
Speaker Change: Thank you and Jill just with respect to the guide.
Speaker Change: First any color you can share on quarter to date trends would be great and then youre holding the full year guide even with Q1 ahead of expectations and then obviously, there's the tariff piece.
Speaker Change: I was hoping you could just walk us through some of the puts and takes there in terms of your thought process for the year.
Speaker Change: And what specifically are you doing to offset the tariff costs on your direct imports. Thank you.
Speaker Change: Sure. So I think from a guidance perspective, clearly we were happy with the performance. We saw in Q1, but I think we all know we're working in a very uncertain and what I would call fluid environment and so as we thought about the pressures that we're seeing in particularly our middle income customer.
Speaker Change: Uncertainty that we're navigating for the rest of the year. We just thought it was the right thing to do to hold the guidance. Despite the beat in Q1, which helps us have the room to navigate through that uncertainty for the rest of the year in terms of the quarter to date trends I would say our quarter really was a pretty consistent performance, we did see a reg price sell.
Speaker Change: <unk> improve as the quarter progressed, and we saw that actually into May I'll call. It one exception last week it was pretty cold across the country. So we did see a little bit of a step back in our spring seasonal business.
Speaker Change: But I would say very much attributed to weather one week and we felt really good with the momentum that we had been building in our regular price business and a lot of that was driven with the newness that were flowing in and we talked about on the call he needs to be back into that proprietary brand and we are seeing that the customer is reacting as we slow and that newness to our proprietary brand that.
Speaker Change: Is it opening price point, so as we talk about value is one key way that we can continue to deliver value to the customer.
Speaker Change: From a tariff perspective, we kind of tried to outline in the call. What we are looking at but back in I think 2017, when we were talking about a border tax we had started diversifying our countries our production and our sourcing team has done a really nice job ensuring that we have a very diverse portfolio of countries that we leverage.
Speaker Change: And so we're not overly reliant on any one country. So they have been working tirelessly with our buyers to move our production to different countries to the lower tariff countries to help mitigate against those costs. We also have adjusted order so where we know we have high elastic categories like a small electrics that may be taking price increases from our national.
Speaker Change: Brian vendor well adjust our orders down knowing that the velocity of that demand just won't be there and so we're making those choices real time and working very closely with our supplier and vendor base to correctly off that any imports because if they ended the day. Our goal is really to continue to drive incredible value to consumers during the uncertainty that we're navigating.
Speaker Change: Thank you.
Speaker Change: Well move next to Oliver Chen at TD Securities.
Speaker Change: Yeah.
Speaker Change: Hi, Michael and Joe This is Joey on for Oliver Chen could you. Please break down the year over year increase to gross margin. We saw this quarter in terms of how much came from markdowns first category mix and proprietary brands and then any color you could provide on private label penetration and AUR and gross margin Delta versus national brands within private label. Thank you.
Speaker Change: <unk>.
Speaker Change: Yeah, I mean I.
Speaker Change: Margin. The biggest pieces is we're seeing a mix benefit and I think we've talked a lot about our proprietary brands have a better margin structure and so as we move more into that we'll see improvement kind of a rule of thumb. We use is for every 100 basis points of penetration, we improve our proprietary brands Youll get about a <unk> 10 to 15 <unk>.
Speaker Change: At this point.
Speaker Change: And our marriage and I think the other big thing is and this is pretty consistent internal and external isn't my passion around inventory management.
Speaker Change: The more we can manage the inventory the butter rang selling as I indicated we have a better margin structure.
Speaker Change: I assume you just see that as a key enabler for us to continue to grow margin and so I would say those are the two big drivers that we outlined because that's really where we see the benefit coming through from a margin perspective anything as the year progresses, and our strategy really is aligned around the proprietary penetration and what are the goals for that we're always going to let the customer <unk>.
Speaker Change: We're proprietary brand penetration needs to be but what I would tell you as we're probably at an all time low and what our penetration wise I think whereas you're averaging around 30% penetration there we've.
Speaker Change: Been up and down over the course of the last decade, I will say that we never will hit back to the high as you would have seen when we are closer to 50 50, because so far is obviously a national brand and has a large penetration being close to $2 billion business, but we do have a lot of room here to have back enterprise Terry brand penetration and I think it's very timely given.
Speaker Change: And the value that those brands bring to our customers and we're really missing that opening price point opportunity for our customers to shop us and we know that they especially our core customers look for that opening price point, they've grown to love the quality and size and fit of those brands and they were just really weekend. So as we brought those back in we've seen.
Speaker Change: Good momentum, particularly with our core customers from that perspective, and then from an AUR perspective, I think all in our ATV is really what we've got.
Speaker Change: For the quarter and that is based on consumers trading down so theyre trading down into lower AUR goods. We saw you could tee up a little bit, but they're still looking for that value. So I think everything that we're seeing in the way that our bodies are going to go forward are going to really be a driver of opening price point. So I do expect we're going to have some AUR pressures.
Speaker Change: Given those choices, but they are making up for some of that in <unk>. The other piece of your P. T. As we did talk about expanding our impulse and we do see our impulse lines add about item to the basket. So that's the <unk> driver so getting that into 600 more stores by Q3, I think will be a way for us to continue to balance out that basket.
Speaker Change: Thank you so much.
Dana Telsey: We'll move next to Dana Telsey Telsey Advisory group.
Dana Telsey: Hi, Good morning, everyone. As you think about the store footprint and I know a lot of the stores are profitable how are you assessing what what the right number should be should there be any additional closings and also the size of the format and then just lastly is just unpacking the tariffs just one more.
Dana Telsey: More time with the latest news on tariffs how are you thinking about.
Dana Telsey: Inventory levels and pricing as we get to the fourth quarter. Thank you.
Speaker Change: So yeah, I mean, Dana you know like I take on stores, we have an incredibly healthy store base in terms of they make four wall operating profit they make four wall cash we do an exercise every year to really look at our store base and understand where potentially there can be some edits. So we closed 27 stores.
Speaker Change: As I look at that as hygiene, it's like 2% of our fleet. So we'll always be looking at understanding what does that mean, we also look at the fleet to say as leases come due which you know I think we have about 80, plus leases coming due a year, which gives us incredible flexibility are there opportunities to relocate them given just the shift of population where competition.
Speaker Change: Resides et cetera, or downsize them as well given what sizes make most sense given community population I would say we've learned a lot. We've tried many different sizes. We have a 64000 square foot store of 55000 or 35000 outside of our normal prototype and so we've really learned like what makes the most.
Speaker Change: For coal is to be able to deliver the right assortment to the community and I would say, maybe the 35 K, we're finding it's a little too small.
Speaker Change: And so we're kind of really focusing in centering ourselves on a 55 K and I think that's the way for us to reach more communities that we're not serving today and potentially as we make a downsize opportunity on some of our 88000 square feet just to heightened the productivity of those stores. So I think there's always going to be at its around the store portfolio to continue.
Speaker Change: <unk> to elevate its productivity, but I don't see that there's going be a ton of closures there outside of the normal hygiene that we'll do every year as we look at that store base in terms of tariffs I would say it is a fluid situation and given the news last night and this morning. So obviously everything that we're talking about with what we had.
Speaker Change: Known going into today's call I would say if there is a pause from a tariff perspective of course that can be a positive, particularly around the consumer if I Plaza, where Michael's comments, where we have a consumer who has stretched our middle income customer that we're serving is definitely a stretch customer and so if they don't have to.
Speaker Change: The price increases from tariffs and they have more discretionary income that of course always would help our business. So we can see that as a positive, but it's really not actually changing a lot from how we're managing inventory, we expect our inventory to be down high single digits by the end of the year, we expect our receipts to be tighter we have an opportunity to turn this business faster and that's really.
Speaker Change: What we're doing but we're trying to do it on a paced approach because we don't want to pull too much out we know flow of freshness of receipts is important and so that's really the way that we're continuing to navigate this situation, but obviously, if there's different costs or price increases the elasticity would change on some of those so it could it could change our buys slightly but I would say overall.
Speaker Change: Positive more from a consumer perspective.
Speaker Change: David just to follow on on what Joe was mentioning on the tariff question I think.
Speaker Change: Aside from National brands, which we have to follow.
Speaker Change: <unk> on certain brands.
Speaker Change: We think that within the guidance that we've given we can manage through the tariff issue I know you have said.
Speaker Change: Based on what we know today, that's what we're that's what we're saying.
Speaker Change: As we continue to move through it in last nights. The example in the court ruling I think is just an illustration of how fluid. The situation is we will continue to monitor it and make sure that that we are taking the right steps but.
Speaker Change: We've already done that in.
Speaker Change: Many cases, we're not overly reliant on any one country that.
Speaker Change: Causing us any challenges at this point.
Speaker Change: Thank you.
Speaker Change: Next we'll move to Michael Binetti at Evercore ISI.
Speaker Change: Hi, This is Jeff anymore on behalf of Michael. Thank you for taking our question maybe just on Sephora home age before I can close right now and how many stores do you expect for the expand or deepen this collaboration maybe a little bit more color on the operating environment in the first quarter, we've come growth being at 1%. Thank you.
Speaker Change: Sure. So from a supplier perspective, we just finished the rollout. So I think it's been all of our stores at this point in time I think a 103 stores went or are in the process of finishing up as we're speaking. So we now have a presence in all the stores that will have a sephora the last ones that went where a smaller shop. So as we.
Speaker Change: Went into the smaller square footage stores, we put in a 750 square foot shop versus our larger stores have a 2500 square foot shop.
Speaker Change: We actually are pleased with the performance we saw from Sephora, although the comps stepped down we expected that obviously this is a relationship that anything now or in our fourth 10 year. So we're going to expect these comps not to be as robust as we have less new stores opening we are continuing to see market share gains in the beauty space.
Speaker Change: And we did see I think in Q1, and fragrance and hair and makeup or really the ones that stood out for us I think we had some opportunity more in the skin care categories. As we go into Q2, we do have some newness coming in around hair care and then also makeup with glass.
Speaker Change: And then we also have an opportunity with father's day, so men's fragrance actually outperformed in Q1, we're going to give it more exposure as we go into father's day. So we think that's a big moment as well that we can take advantage of that so as we think about the remainder of the year I think we're pleased with where we saw the flora.
Speaker Change: And it's on pace for our expectations.
Speaker Change: Got it thanks guys.
Speaker Change: We'll take our next question from Paul Lajoie Pet.
Speaker Change: At Citigroup.
Speaker Change: It's Tracy Kogan filling in for Paul I had a question on your E. Com performance in the quarter. I know you mentioned the sales decline I was wondering if you could talk about the profitability there and when you think we might be able to see improved sales performance and then I just had a quick follow up on tariffs.
Speaker Change: Sure. So digital obviously improved Tracey from Q4 pretty substantially we obviously had some self inflicted issues in Q4 that we corrected for I think a couple of things that weigh on digital is it's highly penetrated in our kohl's charge core customer, which is the area that has been underperforming.
Speaker Change: For us given some of the decisions we've made over the last couple of years. So when we continue to see improvement in the core customer wrote we'll see some continued improvement in the digital business as well second it over penetrates and our home businesses and home underperformed for the category or for the quarter. So we did have a little better pressure from that perspective.
Speaker Change: I would say that.
Speaker Change: We should continue to see progressive improvement from digital.
Speaker Change: And a lot of the changes that we're making I think theres some opportunities in some of our new businesses like we know babies R. US, particularly hasn't go digital business and how can we capitalize and take care of that so there's some fixes that we're putting in but I would say, it's going to be a progressive improvement and it's really going to be around that core kohl's customer coming in.
Speaker Change: To be able to drive that business forward from that perspective, I mean from a profit I would say, we always say stores a little bit more profitable because I don't have a cost of shipping, but we're very pleased with the digital business and obviously across the organization. We've managed our expenses incredibly well I think you know, we're very disciplined and we continue to see margin expansion in that.
Speaker Change: Both channels. So I think as we've continued to see below that sales line continuing to improve that has a benefit on both sides. So from a profit perspective, I still think I'm pleased with where we're moving it obviously when you have a cost of shipping component, it's going to be a little less profitable than your stores, it's really going to get that top line backend.
Speaker Change: And I think it's going to be progress not an overnight improvement.
Speaker Change: Got it thank you and just a follow up on tariffs I was wondering how much merch margin pressure you're building into guidance or are you assuming that you can mitigate.
Speaker Change: All of it thanks.
Speaker Change: So we do think we can mitigate a vast majority of the tariff pressures based on everything we outlined earlier in the call.
Speaker Change: But everything that I just gave you from a guidance that has been taken into consideration of any of the tariff exposure that we do have so we feel very good obviously coming out strong in Q1, but then what that means for the rest of the year, we felt good and confident based on what we know today that we will be able to hit that guidance.
Speaker Change: Great. Thanks very much.
Speaker Change: Yeah.
Speaker Change: Next we'll move to Blake Anderson at Jefferies.
Speaker Change: Okay.
Blake Anderson: Hi, Thanks for taking our questions. So first one was you have a large and loyal customer base, especially with your private label offering was thinking about.
Blake Anderson: As you think about the path forward back to sales growth how are you.
Blake Anderson: Prioritizing growth with existing customers versus gaining new customers.
Blake Anderson: Okay.
Speaker Change: I would say first.
Speaker Change: Our new customer growth has been great our performance with our new customers and what I would say I'll call. It a non kohl's charge customer has actually been positive. So we're feeling really good with the initiatives that we had to attract a new customer to retain that new customer and actually even to see them shop more widely, particularly we've seen that in our <unk>.
Speaker Change: <unk> and juniors businesses.
Speaker Change: It's the core customer that we're very focused on and what we need to do to get back to growth is to move that customer in the right direction. The good news is this customer has still shocked us. So they haven't stopped shopping us, they're just giving us less of their wallet share and a lot of this is self inflicted so we laid out some of the things that we did when.
Speaker Change: We brought in Sephora, we took away jewelry, while jewelry was something they came to Kohl's board and it wasn't really substitutable. So if I wanted to find a necklace and earrings I didn't come to Kohl's and settle bio sweaters. So we lost that trip, we lost that basket as we've brought jewelry back in we've seen it grow both in Q4 and again in Q1.
Speaker Change: One being that positivity come through in the whole accessories pad, just given that accessories pad at home behind Sephora, which does have a nice cross shopping.
Speaker Change: For comp and accessories for the quarter. They also shopped a lot of the teeth. So we had exited out of Petite we brought <unk> back in for the.
Speaker Change: Customer again, not substitutable, if youre, a petite youre not going to buy regular so we lost that trip, we lost that basket. So as we brought it back and we've seen it really resonate with that customer.
Speaker Change: Business up in the teens for the quarter.
Speaker Change: Additionally, they were a proprietary brand lover, they knew the brand they like the quality they like the value that it brought and it was coupon eligible and we instead when we moved to market brand we replaced it with brands they didn't know.
Speaker Change: At a higher price point without a coupon so we really needed to make that correction and we started doing that last year, we called that out in Q3, we saw it again in Q4, we're doing it in Q1 as we're bringing those goods and it's an opening price point. So it's squarely in the value center and what Theyre looking for and.
Speaker Change: And they're finding their brands that they had come to love. So we just need to continue to flow that inventory thoughtfully. So that's where we feel like there'll be some progressive improvement as those receipts and the newness. That's I think the last thing I would call out is we had a lot of brands that became excluded in fact, we earn more excluded then included or right at the 50.
Mark Swager: 50, Mark and so when we did that it really polarized from our core customer who came in with a coupon and felt disappointed they couldn't use it on some things.
Mark Swager: In April 28, we brought a lot of new brands back into the coupon. It's early but we did see this is a place I guess if I go back to <unk> question digital really reacted well to the coupons, it's very price sensitive.
Mark Swager: We can bring items back into the coupon. We also think that will bolster our digital business, but also plays very much to this core customer. So a lot of the strategies that we're outlining is really getting back to talking to that core customer and gaining back their trust and getting back the wallet share that we lost but again theres still shopping us so that's a little bit.
Speaker Change: Easier.
Speaker Change: A challenge for our marketing team. They don't have to go find them, we just have to get them to come in more.
Speaker Change: Mark I would just add on top of what Joe said, a couple of things to note.
Speaker Change: We're doing a lot of work right now with our marketing organization to figure out who that is.
Speaker Change: Hoover Kohl's customers, we know who they are but to the extent that we can understand how to reach them even more effectively.
Speaker Change: Thats, one area and the store experience itself, Joe mentioned earlier in your opening remarks about the Isle Adjacencies and moving products like junior dresses outside of Sephora. So that when you talk about cross shopping and conversion.
Speaker Change: Those are the types of things that will help enhance the experience that the customer has once they decide to come to our locations there or on the website.
Speaker Change: And then strip assurance is one of the things Thats really important for both customers, new and existing and making sure that that balance between having choice on the floor and on the site, but also depth. So that when a customer does choose to come to a close location that they can actually find what they're looking for and the right sizes and colors et cetera.
Speaker Change: Those are the things that we're all working through right now as well to make sure that we fine tune the business again and make sure that once the customer decides that this is where I want to go to shop, but they can be satisfied with the experience that they have.
Speaker Change: At the end of the day, a customer asks for questions when they decide to come to anywhere.
Speaker Change: You all have on as a customer whether youre going to the restaurant.
Speaker Change: Full store.
Speaker Change: What do you have how much does it cost where can I get it.
Speaker Change: And we're working through.
Speaker Change: Through the answers to all four of those questions with a lot of work that's going on inside of our business right now to really quantify what it is we need to do both online and in store to make sure that we're satisfying the needs of customers when they ask those four questions.
Speaker Change: That's very helpful. I appreciate all the detail and then I wanted to ask a follow up.
Michael Bender: This was for you Michael on that.
Michael Bender: <unk> brand just curious at a high level you can share any color on conversations recently, you've had with your key vendor partners.
Speaker Change: Maybe expanding we're changing the assortment and then how do you think about the need.
Speaker Change: National brands over time.
Speaker Change: Yes, maybe I'll take the second part of that question first and I think as we have mentioned we are on this journey right now, making sure that we provide the appropriate balance between our proprietary and private label brands and the national brands.
Speaker Change: Think candidly we've added a lot of national brands over the past several years or so and so.
Speaker Change: Our customers are actually asking for and as Joe mentioned, the Kohl's credit customer in particular is asking.
Speaker Change: Much more for proprietary brands at this point and so we're trying to achieve that type of a balance that doesn't mean that we won't consider adding national brands and tuning the assortment there.
Speaker Change: Conversations that we've had so far have been positive in terms of the focus that we have on continuing to.
Speaker Change: Provide national brands, we know we need to that's what.
Speaker Change: A large portion of our customers are interested in as well and we'll continue to do that.
Speaker Change: Okay.
Speaker Change: Great. Thank you Bill.
Speaker Change: We'll go next to Chuck Grom at Gordon has it.
Chuck Grom: Hey, good morning, Thanks very much.
Speaker Change: On the guide Joe you reiterated the two four to two 6% operating margin.
Speaker Change: For the year.
Speaker Change: I hopped on late so I don't I don't know if you spoke to the gross margin.
Speaker Change: Oh God I think you had formally thought up 30 to 50, and then SG&A dollars can you just hold our hand on that front and then on the gross margin front, just any thoughts on the phasing throughout the year.
Chuck Grom: Okay.
Chuck Grom: Sure. So we talked briefly just about margin I feel good with the guide Chuck a lot of the pressure for tariffs, we were able to offset.
Chuck Grom: What we are absorbing in the guide so we feel comfortable with the fact that we'll hit that for guide I would say on the cadence for the year, maybe look at Q2 on a two year stack. The same way that you looked at Q1.
Chuck Grom: The back half, we think we have some some room to do some things we're going to still be incredibly focused on value. We are going to get benefits Chuck on our proprietary brands. So as that newness flows when we get that throughout the year, that's why I feel like back halfway or a little bit more room.
Chuck Grom: That's margin accretive for us So we'll continue to look at that.
Chuck Grom: We are bringing products back into the coupons. So we do think being more promotional and being that having value orientation throughout the year is going to be important, particularly because there's middle income customer that we serve is pretty stretched in today's environment. So I feel like the 35 to 30 to 50 points that we gave for margin is definitely still some.
Chuck Grom: Thing that we can achieve given all the efforts that our teams have put forth to mitigate tariffs. Knowing we had these strategies to go back into proprietary brand and have more coupon eligibility and so what I would just say maybe on the two year stack for Q2 look at it like you did for Q1 and otherwise I'd say the back half we have some additional benefits up of penetration for <unk>.
Chuck Grom: <unk>.
Chuck Grom: Yeah.
Chuck Grom: Yeah.
Chuck Grom: And we'll take our final question today from Brooke Roach at Goldman Sachs.
Brooke Roach: Good morning, and thank you for taking our question I was hoping you could dive a little bit deeper into the progress that you've made in the women's business. It sounds like you do have some green shoots emerging in Petite.
Chuck Grom: Look at the women's business as a whole when do you expect to return to sustainable growth in that business and how should we be thinking about that cadence throughout the year.
Chuck Grom: Yeah I can start on women what I'd say is women's is one of the I think fast adapters and moving into market brand.
Chuck Grom: And so we definitely moves out of our proprietary portfolio more in the market brands and I think you know our choices were up double digits and our depth was down relatively down double digits as well because we are still managing inventory well in that in that area.
Chuck Grom: So given the fact, if you look at historically women's had an outsized penetration of proprietary brands I think they are like 60% to 70% penetrated in proprietary brands. This move had a pretty big impact to their business.
Chuck Grom: So as they're moving back into proprietary brands, we're seeing that momentum build and I'll use juniors I mean, that's our fastest fashion business. It's our fastest business that we can correct. It was only down one in the quarter I think if you look at brands like so in Sonoma, We're moving back into those brands are starting to see some more.
Chuck Grom: Mentioned, there Lauren Conrad we called out as a positive so as we brought more of that and it has helped the women's business. So I would say this will continue to be a progressive improvement in terms of getting womens back to positive growth dress is still a great category for us. It was a white space category, we moved into so really continuing to.
Chuck Grom: To build momentum behind some of that newness, but making sure that we still deliver the depths on key basics, and especially making sure that we have the proprietary brands that those customers have come to love and they're looking for I think are going to be key areas for us I think one other place that rolls into women's.
Chuck Grom: Has been intimates and that's been a little bit of a laggard in terms of softness from sales. So I know that that's another place that as a lot of SKU intensity. There so really looking at building some clarity.
Chuck Grom: And kind of producing some choice count and having some more depth in those categories as well. So I would say, we'll see improvement in womens throughout the year, but I don't know I can't tell you when it gets back to positive growth, but I think everything that the efforts they have a foot are making the right movement.
Chuck Grom: For us to have progress in that category.
Chuck Grom: Yeah.
Chuck Grom: Great and then just one quick follow up are there any updates you can share on your credit business for the rest of the year, how youre thinking about that from a cadence perspective, but also.
Chuck Grom: How to get that back to a more flattish or growth figure in the future.
Chuck Grom: Yeah, I think don't forget we made the move up to from SG&A into other revenue. So a big portion when we guide I think we guided that line down 12% and I had said without that move we'd actually better than our sales. So I just wanted to make sure that that's understood that there's a one time.
Chuck Grom: Adjustment, that's showing a drain on that line that has nothing to do with the actual portfolio itself.
Chuck Grom: It's a lot about our core customer brook being down that weighs in on our credit rate. So as those sales are down you build less of your AAR and therefore, you have less revolving balances.
Chuck Grom: That is kind of weighing down on what we're seeing there so as those credit customer sales that were very focused on continuing to make positive improvement we will see that obviously transfer into that revenue line, but I would say its still leading from a sales perspective.
Chuck Grom: It's just that change in terms of SG&A, that's really showing the weight down.
Speaker Change: Great. Thanks, so much best of luck I'll pass it on.
Speaker Change: Thank you.
Speaker Change: And that concludes the question and answer session and today's conference call.
Speaker Change: You for your participation you may now disconnect.
Speaker Change: Yeah.
Chuck Grom: Yeah.
Chuck Grom: Yeah.
Chuck Grom: Okay.
Chuck Grom: Yeah.
Chuck Grom: Yeah.
Chuck Grom: Okay.