KOHLS Corp Q2 FY2023 Earnings Call

Good morning. My name is Rob, and I am your conference operator today. I would like to welcome everyone to the Kohl's Corporation Second Quarter 2023 Earnings Conference Call. All lines have been muted to eliminate background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. Mark Rupe, Senior Vice President, Investor Relations and Treasury, you may begin your conference.

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and Kohl's undertakes no obligation to update them. In addition, during this call, we may make reference to non-GAAP financial measures. Reconciliation of non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC and is available on the company's Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me this morning are Tom Kingsbury, our CEO; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Mark, and good morning everyone. I am pleased to report that we continue to make progress in our efforts to significantly improve Kohl's business over the long-term. Our second quarter earnings were in line with our expectations. We feel good about our performance, given the persistent macroeconomic pressures on our customers and that many of our strategic efforts are just underway. In 2023, we continue to focus on four strategic priorities, which are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. We are confident that our strategies will drive sales and earnings performance. It'll take some time for the full impact of our efforts to be realized. However, our objective is to show incremental improvement in the back half of the year with even more benefit in 2024 and beyond. As it relates to our outlook for 2023, we are reaffirming our guidance. Let me now turn to the second quarter. Net sales decreased 4.8% and comparable sales were down 5%. Restore sales outperforming the total company and flat to last year. Sephora Kohl's continues to exceed our expectations, driving a total beauty sales increase of nearly 90% year-over-year. We opened nearly 200 Sephora shops in the quarter, and momentum in our existing Sephora shops continues to accelerate with greater than 20% comparable beauty sales growth in the Sephora shops opened in 2021 and 2022. And our home business, which we've highlighted as a major long-term opportunity for Kohl's, showed strong relative improvement in the quarter. Beyond the top line, we were able to successfully manage gross margin and expenses to achieve an operating margin of 4.2% and we reduced inventory 14%, both of which were better than plan. I'll now turn to our longer term initiatives and provide more detail on our four overarching priorities, which I just mentioned. Enhancing the customer experience in stores and online through our product and merchandising initiatives is our top priority. Getting back to growth is essential to achieving our goals, so I want to be clear on how we are viewing the building blocks. We have an opportunity to improve the offering in our core business. However, in the coming years, we believe Sephora, gifting, impulse, home decor, and longer term new stores will be the most significant contributors to our growth. Sephora at Kohl's continues to resonate with our existing customer base, while also bringing in new customers that are shopping more frequently. The performance is exceeding our expectations and we are driving considerable beauty share gains. We are seeing solid growth in our Sephora exclusive brands, including the Sephora Collection, Sol de Janeiro, and Rare Beauty, as well as national brands such as Fenty and Charlotte Tilbury. We feel good about our overall assortment, and this fall we will further expand our gifting assortments, which were highly successful last year. During the second quarter, we opened nearly 200 Sephora shops, and this month we are opening approximately 50 shops. These openings will complete the rollout of our 850, 2500 square foot shops. We are also opening a smaller format, 750 square foot Sephora shop in the remainder of the chain. We opened five of these smaller shops earlier in the year, and they continue to drive solid beauty sales, exceeding our expectations. We will open an additional 45 in the third quarter, bringing us to 50 by year-end. In total, Sephora will be featured in more than 900 of our stores by the end of 2023, and we will expand the small format shops to the remainder of the chain over the next couple of years. Building our home business represents another major growth opportunity. We will optimize our existing offering and capitalize on significant opportunities in areas where Kohl's historically has not had a meaningful presence. These include gifting, impulse, decor, and pet. Many of these new assortments will begin to set in fall with a larger presence in holiday. During the second quarter, the home category showed strong relative improvement as I noted. This was primarily driven by our existing offering such as housewares and cookware, as well as by encouraging early reads from our new growth initiatives. We continue to leverage register removals and additional in aisle space to create a seasonal gifting destination, which supported strong sell-throughs during Mother's Day, Father's Day, Memorial Day, and the 4th of July. Currently, we are showcasing back-to-school items such as backpacks and dorm products, and later this fall we will highlight harvest and holiday products. In addition, we will expand our offering of impulse products in spring of 2024, which will include beauty, wellness, toys, snacks, and other items. In home décor, we are forming new vendor partnerships, building inventory with market buy on a weekly basis, and enhancing our in-store merchandising across areas like wall art, glassware, botanicals storage, and lighting to name a few. And in pet, we have expanded dedicated space to the category across the chain following a successful 50-store test last fall. Our offerings in the space include things like dog beds, cat and dog apparel, and pet toys. Pet delivered a strong second quarter sales performance driven by the additional space, and we expect to maintain momentum moving forward. We're also committed to capitalizing on new store growth opportunities over the long-term. In 2023, we remain on track to open seven new stores, including one relocation. Two of these stores opened in the first quarter with the remaining five set to open this fall. Turning to our apparel and footwear offerings. We remain focused on optimizing our apparel assortment to reflect our customer's interests. Two areas that we have highlighted in recent quarters in response to customer demand, our polished casual and dressy offerings which continue to resonate with our customers across women's, men's, and children's. We are leaning into these areas in women's through key brands like Lauren Conrad, Nine West, and Simply Vera Vera Wang, while also expanding our dress offerings in both special occasion and casual. In men's, we have seen strong results in areas like suiting, dress shirts, and dress pants, and we'll continue to amplify these areas moving forward. And in children's, we are expanding Little and Co, as well as continue to build on our core Jumping Beans and Carter's businesses. Active also remains an important piece of our business. While trends in the overall active space remain soft, we are focused on building on our recent success in outdoor and golf apparel, while also working with our national brand partners to bring in newness. In the second quarter, we were pleased with the sales trends in our Eddie Bauer offering in outdoor, as well as in Nike and Under Armour footwear. To summarize our top priority of enhancing the customer experience, we are focused on driving significant growth in Sephora, gifting, impulse, home décor, and longer-term new stores. We also see several opportunities to improve our core apparel and footwear offerings. Now let me discuss our second priority, which is accelerating and simplifying our value strategies. We have many efforts underway to simplify how we are showing up to the customers as we believe we can drive greater customer engagement and conversion. During the second quarter, we continued the work we began in Q1, reducing general promotions and eliminating online-only offers in favor of more targeted offers and clearance events to clear slower selling goods on a more regular basis. We are also testing key value items, which are more competitive and consistent pricing on select merchandise within our private apparel and home brands. This is a continuation of our efforts to make our pricing more simplified. We're also evolving our marketing message with greater clarity around strong price points in our in-store graphics and in our digital and broadcast ads. While it remains early, we are very encouraged by the response we are seeing from customers. Our key value items are performing positively. This is a compelling opportunity for our business over the long-term and based on initial results, we are now planning to thoughtfully scale it in 2024. Lastly, we will continue to leverage our industry-leading loyalty program as a mechanism to deliver even more value to our customers. Kohl's has a strong loyalty foundation, which includes Kohl's Cash, Kohl's Rewards, and our private label credit card. Building on this, we launched a co-brand credit card with Capital One to select customers in the second quarter. While we expect the co-brand card to have only a small benefit to this year's results, it will grow and contribute more meaningfully in the years to come as we offer to a greater number of existing and new credit customers in 2024 and 2025. I will now transition to our third priority, which is managing inventory and expenses with discipline. During the second quarter, we reduced inventory by 14% compared to last year, exceeding our goal of planning inventory down mid-single digits. We operated with greater open-to-buy, which allowed us to stay agile as the demand environment evolved in the second quarter. As we implement new planning and allocation processes, we're becoming more responsive to the customer's demand, operating with additional open-to-buy to chase trends, and minimize risk, maintaining better in-stock levels in core basics, and improving inventory flow from our distribution centers to the selling floor. Looking to the fall season, we feel good about our current inventory levels and our ability to continue to manage inventory with discipline. Turning to expenses. Kohl's has a history of managing costs with discipline. We are continuing to proactively capitalize on opportunities to drive efficiency across all areas of the company. A couple of examples include our goal of lowering our marketing spend ratio to 4% and embedding more technology into our operations to improve productivity such as self-checkout kiosks in our stores and a higher level of automation to more efficiently flow goods in our newer e-commerce fulfillment centers. And lastly, our fourth priority is strengthening our balance sheet. Our focus remains in returning our balance sheet to its historical strength with a long-term objective of managing to a 2.5 times leverage level. During the second quarter, we generated solid cash flow, which allowed us to reduce our revolver borrowings by $205 million, and returning capital to shareholders remains a commitment of ours. Jill will discuss our overall capital allocation priorities, including the dividend, which continues to represent a healthy yield at the current share price. In closing, I am pleased with our second quarter earnings. I'm confident that the work we have underway is positioning Kohl's for long-term success. Our organization is operating with strong discipline and efficiency, and many of our growth-driving initiatives are just beginning to take shape. As it relates to our more recent trends, our August to date sales are off to a good start, driven by back-to-school and our fall seasonal items. I want to thank the entire Kohl's team and especially our store associates for their hard work and adaptability to position us for improved future performance. I hope you'll get a chance to visit our stores to see all the good work underway. I'll now turn over the call to Jill to discuss our second quarter results and 2023 outlook.

Thanks Tom and thank you everyone for joining. For today's call, I will review our second quarter results and provide details on our fiscal year 2023 guidance. As Tom shared, we made additional progress against our strategic priorities and delivered earnings in line with our expectations. Turning to our results. Net sales declined 4.8% in the second quarter and are down 4.1% year-to-date. Store sales were flat to last year in Q2, driven primarily by strong Sephora sales growth with sales in home showing the most improvement versus Q1. Digital sales remained pressured in Q2 down 17% to last year and penetrated at 25%, so both are up versus pre-pandemic levels. We are seeing customers shift back towards stores and sales were impacted as expected by the elimination of online-only promotions as we work to simplify our value strategies. From a product perspective, national brands outperformed private brands in the quarter. Our top performing national brands included Nike, Under Armour, Hager, Izod, Hurley, and Eddie Bauer. While our top-performing private brands were Apartment 9, LC Lauren Conrad, and Jumping Beans. Accessories was our best performing category, up 25% to last year, driven by Sephora Kohl's. The increase in beauty sales was partially offset by displaced sales in jewelry. As it relates to some of our other categories, as previously noted, home showed the strongest improvement in trend from Q1 with encouraging early reads in our new growth categories. Footwear also showed trend improvement driven in part by increased Nike and Under Armour sales in the category. Other revenue, which is primarily our credit business, declined 3% in the second quarter, an improvement in trend versus Q1. Moving down the P&L. Q2 gross margin was 39%, a decline of 61 basis points to last year, driven by product cost inflation and higher shrink, offset partially by lower freight expense and digital-related cost of shipping. Year-to-date, gross margin was 39% flat to last year. SG&A expenses increased 1.6% to $1.3 billion. The increase was primarily due to higher store expenses driven by Sephora openings, wage pressure, and store experience investments. This was partially offset by lower marketing and distribution costs. Year-to-date, SG&A expenses have decreased 1.3% compared to last year. Depreciation expense of $186 million was $20 million lower than last year due to reduced technology capital spend. Year-to-date, as compared to last year, depreciation expense decreased $32 million to $374 million. Interest expense of $89 million was $12 million higher than last year due primarily to increased revolver borrowings. Year-to-date, interest expense increased $28 million to $173 million. Net income for the quarter was $58 million, and earnings per diluted share was $0.52. Year-to-date, net income was $72 million, and earnings per diluted share was $0.65. Turning to the balance sheet and cash flow. We ended the quarter with $204 million of cash and cash equivalents. Inventory at quarter end was down 14% compared to last year, exceeding our commitment of a mid single digits decline. As Tom shared, we feel good about how we manage inventory in the quarter and how we are positioned entering the fall season. Operating cash flow was $430 million in the second quarter, and free cash flow was $176 million. We continue to expect inventory to be a source of cash during the remainder of the year, which will drive strong positive cash flow generation in Q3 and Q4. Capital expenditures for the quarter were $244 million. We are still planning for approximately $600 million to $650 million of capital expenditures in 2023. Now let me provide an update on our capital structure and capital allocation priorities. Strengthening our balance sheet is one of our top priorities in 2023. It's important that we continue to rebuild our cash position and it remains our longer term goal to manage this business at a leverage target of 2.5 times. In the second quarter, as planned, we reduced our revolver borrowings by $205 million. Looking ahead, we'll continue to utilize the revolver in Q3 for seasonal working capital build related to holiday receipts. However, we continue to plan to be out of the revolver by year-end, inclusive of retiring $111 million of bonds in December of 2023. As it relates to returning capital to shareholders, we'll continue to prioritize our current dividend, which represents healthy yields for our shareholders. During the second quarter, we paid $55 million or $0.50 per share in dividends to shareholders. In addition, as previously disclosed on August 8th, the Board declared a quarterly cash dividend of $0.50 per share payable to shareholders on September 20th. Now let me provide details on our outlook for 2023. As you've heard today, we are pleased with the progress we are making against our priorities. Our second quarter earnings were in line with our expectations, and as Tom indicated, August sales to date are off to a good start. Based on this, we are reaffirming our full year financial guidance. For the full year, we currently expect net sales to decrease 2% to 4% versus 2022, which includes the 53rd week, worth approximately one percentage point of growth. Operating margin to be approximately 4% and diluted earnings per share to be in the range of $2.10 to $2.70, excluding any non-recurring charges. Lastly, I want to highlight a couple of items about how we are thinking about the third quarter. We continue to expect our full year gross margin in a 36% to 36.5% range. For Q3, we expect it to be approximately 38%. Our full year SG&A expense outlook is also unchanged with slight deleverage expected. For Q3, we are planning SG&A expense to increase approximately 3% as compared to last year, driven by additional store related investments and 45 Sephora small shop openings. With that, Tom and I are happy to take your questions at this time.

Hi. Good morning.

Good morning.

A couple of questions. First, Tom for you, when you think about the progress that you're making, can you just talk a little bit more around the learnings, the opportunity that you see now that you're sort of into it a few quarters in terms of the business and where you're taking it? And the second question, Jill, can you give us some insight on credit just in terms of the relationship, the bad debt, the delinquency rate, and I think the launch of the new program that you're doing this year. Just sort of how we should be thinking about trends in credit right now, and as you look into the back half of the year. Thanks.

So, Bob, regarding our strategy, we feel positive about our progress. When we evaluate the stores business, we see a favorable trend that reflects our efforts. Most of the decline was in digital, which we somewhat caused ourselves by reducing online-only general public offerings. We're shifting to an omnichannel approach and simplifying our pricing strategy. Having two pricing strategies was ineffective. We're also encouraged by the performance in August. One significant takeaway has been the success of the Sephora business, showing a 20% comparable store sales increase from 2021 to 2022, which is impressive. It's attracting a younger and more diverse customer base. We're making strides to expand this across all stores in the coming years, as well as increasing our home décor product offerings. We are actively collaborating with the marketplace to secure goods in real time, which we believe will yield long-term benefits as we enhance our inventory in these categories. The impulse business is performing well and is expected to improve further as we approach the holiday season. Looking ahead, we plan to consider new store openings, although we have limited expansion this year. However, we may explore that in the future. Overall, we feel optimistic as we see products entering our company effectively, particularly in areas where we have room for growth. If we can sustain our Sephora business growth and continue progressing in home products, we believe we will be positioned well.

In terms of credit, it has long been a key part of our value proposition, and our credit portfolio remains very stable. We have a partnership with Capital One, and I can say that other revenue closely reflects what we see with credit. We anticipated it would align with sales, and we still expect that as we move through the year. We did observe a decrease in payment rates as expected, but those levels are still above what we saw in 2019. Additionally, we've noticed a normalization in our credit losses. While credit losses did increase from last year, which was unexpectedly low, we were proactive by taking early measures in anticipation of a deteriorating economic landscape and a decrease in cash availability for people. Working with our partner, we decided to mitigate some of those risks by retracting certain risk cells. Overall, the performance aligns with our expectations, with lower payment rates and increased losses, yet we feel confident about our portfolio, which is performing as we anticipated and continues to align with sales. Regarding co-branding, we are excited to present a new option for customers who may not have been interested in a private label credit card. This allows us to extend our value proposition to younger, more diverse customers. For Sephora, this could mean introducing them to credit cards without pushing a private label credit card. We have transitioned about 700,000 of our credit card customers to the co-brand card, and we will monitor this migration closely before deciding to roll it out further, with plans for expansion in 2024 based on the results.

Thank you.

Hi, Tom and Jill. As we look ahead, what are some of the major catalysts for holiday in terms of your plans and inventory planning as well as flow, just highlights we would love there? Also, as we think about the online business, the comparisons will get easier. What should be the path ahead for a resumption of growth there? And finally, on the stores and traffic, would love your thoughts on traffic and transactions, and if you've seen a lot of volatility in what your forecast assumes for how traffic may move. Thank you.

The main focus for the holiday season is to maximize our gift sales. Last year, we successfully highlighted our gifting products by placing them at the front of the store, and we plan to do it again this year with an even bigger emphasis. We've also adjusted our layout by removing some register space to make room for gifting. I believe that by making a strong emphasis on gifting, we will have a successful holiday season. As for our digital efforts, we are seeing improvements as the year progresses, and we expect to return to growth in 2024 once we cycle through the online-only promotions we previously offered.

And then from a store's perspective, obviously we're really excited about it. We're actually positive on the year of flat performance in Q2. A lot of the efforts that Tom had talked about are really happening in our stores as we speak. It's the increased presence of home where we at least got rid of the registers. It's having a stronger presence of gifting. We saw great sell-throughs through Mother's Day, Father's Day, and 4th of July. So we're excited as we move into back-to-school and especially the all-important holiday period there. And then, of course, clearly Sephora continues to work for us as we open another 200 doors. We have 50 more doors going in August and 45 small in October. So I think from a store's perspective, we're excited to continue to see that business do well and being an outperformance, which you haven't heard from us in some time. And just to reiterate on digital. I think we're seeing similar performances out of categories. It's just that the promotions are having an outweighted impact there. And so we know we have to get through that, but it's really the right thing to do. As Tom said, just to reiterate, we want to have an omnichannel experience, so having specific offers online was counter to that. So we think this is the right thing to do from a long-term perspective, which is why we believe we'll get back to growth in 2024.

Okay. Great. Tom, a follow-up on the merchandising brands around Sephora. What are the leading strategies to synergize and get the pickup from the tremendous growth you're seeing at Sephora? And related to that, women's and younger women's clothing and apparel, would love your thoughts on rebalancing and the brands and the strategy there about what will it take to get sustainable growth with that younger customer?

We are exploring various brands that could enhance the Sephora offering. Nick Jones and I have been traveling to New York weekly to search for these options. While we haven't made any definitive choices yet, we see opportunities to expand. We believe we can grow the Sephora business using our current brands while adjusting the mix to include more prints and colors. We don’t need to drastically change our vendor selection to achieve this. We see the young women's market as a significant opportunity, as well as our plans to expand into home decor and gifting, which aligns well with our customers.

Thank you. Best regards.

Good morning. Thanks for taking the question. Tom, any change to your views on the macro consumer backdrop versus a few months ago? You're reiterating the guide, the environment's obviously pretty dynamic and the guide allows for a range of outcomes. So just curious if you can share any additional thoughts there. And then Jill, gross margin, I noticed you didn't call out the clearance shift as a factor impacting gross margin this quarter. That was a little bit surprising. Just I guess any color you have there would be helpful as well. Thank you.

The macro environment remains challenging for our customers, which I mentioned in my prepared remarks. This is why we are focused on providing as much value as possible, as customers have less money to spend. We are bringing in key value items at competitive high volume pricing to enhance the value on the selling floor. We are committed to maximizing the value we offer, and this effort will continue through the third and fourth quarters. It is essential that we deliver this value to them.

And then in terms of gross margin, I think we did actually take all the clearance mark that we anticipated. I think a couple of things that helped us set that. One is, as we talked about we were able to take out the promotions. The ones that were really the stackable ones, the ones that we didn't see have a lot of impact on our top line. So as we were able to benefit from less promotions, that helped us offset some of the clearance. I think the bigger factor is our inventory was down 14%. So as we look at the content and the currency of the inventory, we feel very well positioned as we move into the back half of the year. And so we were able to clean up what we needed to. But I think a lot of the efforts and disciplines that Tom has instilled in the merchant organization really took hold quicker than we anticipated. The discipline around inventory management, receipt management, and just the agility to chase really benefited us more than we anticipated into Q2. And we expect that to continue to benefit us for the rest of the year, which is why we're expecting our margin to grow both in Q3 and Q4.

That's helpful color. And then just a quick follow up, August to date off to a good start, should we read that as tracking ahead of the down 5% Q2 comp rate?

I would say we're pleased. Obviously, if you look at the quarters, we had talked Q2 in May and we used the word slightly below. You can see that June and July obviously were better than that. And I would say we feel good with the start we have in August. So yeah, I would say we're definitely trending above that.

Great. Thanks. So Tom, maybe given the progress that you've made with inventory and the balance sheet, how best to think about category opportunities or the timeline you see from here to reach an optimal assortment? Or maybe said differently, do you see the opportunity to return to top line growth in 2024 as you just consider the macro versus all of these micro initiatives that you're putting in place?

I believe that in 2024 we could possibly return to a positive position, which is our primary goal. I've mentioned many of the categories previously, but what's exciting is that we have several categories where we are just beginning to develop. If we can seize these opportunities, it should help us achieve growth in the future. Categories like home decor, pet products, gifting, and impulse purchases are all areas I've discussed that will contribute to this goal. If every business were performing optimally, it would be more challenging, but we have some easy opportunities available that we can take advantage of to help us advance more quickly.

Great. And then maybe a follow up for Jill. So with the first half of the year gross margin, I think more than 100 basis points above 2019. I guess how best to think about gross margin structurally from here if we think relative to 2019 levels? Or maybe asked differently, is there a ceiling to the 36% to 37% gross margin target longer term?

I think right now we just feel very comfortable working within a 36% to 37% range. Obviously, depending on where we see assortment moving in and out. Obviously, Sephora is a gross margin driver. We think home decor and impulse can definitely be benefits as well from an assortment perspective. So there's definitely a mixed component to it as well as then the digital growth. We've been getting some tailwinds as digital has softened, but if we can continue to grow that business, you'll see cost of shipping come out. So I think we feel great that we're operating within the 36% to 37%. That was really the long-term plan that we outlined, and I think that's really where we feel most comfortable, that we're able to still deliver the value that our customer is used to getting from Kohl's in that margin range. And then also bringing in some of these new white space opportunities that Tom has outlined to get the top line growing. So I think our model works from a long-term operating margin with a small amount of top line growth. That's really the big focus. I think we feel great with the margin that we're putting out this year. Our SG&A disciplines are there and will gain great leverage off of just a small amount of top line growth. So that's really the focus, I think, from a long-term perspective.

Hi. Good morning, everyone.

Good morning.

As you consider the issue of shrink, what trends are you observing in your stores and what investments are you making to mitigate shrink? Additionally, Tom, you mentioned potential new stores. What are your thoughts on new store size and location, and how do you approach store openings and closings? Finally, you discussed opportunities in the home category. How do you evaluate that potential with respect to branded versus private label products and their impact on margins? Thank you.

I'll begin with shrink. I believe shrink is certainly a challenge facing the retail sector. We have highlighted it in the past two quarters as a factor affecting our margins. We anticipate it will continue to be a challenge in the second half of the year, but we are making significant efforts to ensure the safety of both our associates and customers. We are implementing various measures such as securing products to fixtures, using testers in beauty, increasing attendance in fitting rooms, and enhancing our presence at the front of the store. We are doing everything possible to reduce shrink while prioritizing safety. However, it remains a retail issue that may only improve with stronger legislative action, and we have prepared for this in our expectations.

I'll talk about the stores. We're carefully considering how we should expand, and we have just begun our analysis. We'll share more details in future earnings calls. One thing we are certain about is that we will be opening smaller stores, with the largest being 55,000 square feet. We anticipate many stores will be around 35,000 square feet. We are still identifying locations for additional stores, and that analysis is currently underway. Our primary focus is on the size and cost of the stores, and we are looking at how we can effectively add more locations, all while ensuring thorough analysis. Regarding home products, there are opportunities in both branded and private label items, with a slightly stronger focus on brands as we aim to pursue products actively. We are already engaged in real-time purchasing. In terms of margins, home decor could be a higher margin segment, so increasing our efforts in that area might positively affect overall gross margins. However, we anticipate that there will be considerable pursuit in this business as we strive to respond promptly.

Thank you.

Hi. Good morning. Wanted to dig in a bit on Sephora. You had an impressive result there. Can you talk about the acceleration in the comp up to greater than 20%? What's driving that in terms of new customers versus transactions or basket? And then for the newer stores, are they still performing on a similar trajectory? And lastly, any beauty categories to call out that were stronger? Thank you.

So I think, obviously, Sephora has been a great performance for us. We continue to see it accelerate and I think it's just the fact that we're now getting those customers to come back repeatedly in terms of their replenishment. So we continue to see an acceleration in that. I would say newer stores are performing actually better. We're smarter I think on the assortment as we open these stores. So when we opened our first 200, we learned what our customer wanted, maybe relative to what Sephora had opened their stores with. So now we're getting smarter on how we're actually bringing those forward and really being able to be smarter on opening. But then even with replenishment, we're getting better in terms of how we're replenishing. So I think we feel great with how the new stores are opening and the existing stores are performing. So you can see they continue to accelerate on that. We do continue to bring new customers in. They're younger, they're more diverse. So I think that's a big opportunity that we talked about in terms of getting them to cross-shop through the store. I think a lot of the areas that we indicated were white space for us, particularly impulse, gifting, and home decor, it's a quick add into the basket. So as we're able to have a stronger presence of that in our store, we can take advantage of that new store and those extra steps coming in, in terms of that. Top selling brands, we talked about it, were Sol de Janeiro as well as the Sephora Collection, which is an opening price point, but then Charlotte Tilbury, which is a really high price point. So we're seeing that customer shop across all of the areas. And then I'd be remiss not to talk about, we have men's brands, which is something you don't see in a Sephora store, and we're seeing Clinique for men. Jack Black performing incredibly well there as well. So I just think we continue to learn. We continue to bring in new customers, and we just have an opportunity to convert those customers into our loyalty program and getting them to shop. We are seeing those customers shop two times more often than our existing customer. So really, we're going to have an opportunity to build on that as we build the assortment that Tom has indicated throughout this call.

Yeah. And I think the other thing that's pretty exciting about it is the smaller format store, which we brought in five, where we set up five and they've done very well. So it gives us the confidence that we can have Sephora in all of our stores.

That's super helpful. And Jill, could you remind us how much expense is in each of the quarters this year for the new Sephora stores? I was just trying to figure out the impact to quarterly SG&A. The main highlight for Q3 is the opening of 50 full-size stores in August and 45 smaller shops in October. Compared to Q2 last year, there wasn't a significant increase in numbers, so the growth in Q3 will largely stem from these expansions. Additionally, we are implementing self-checkout in 250 stores, which will also incur expenses. We have been facing wage pressures throughout the year, which adds to our costs. In Q2, we unexpectedly benefited from a reduction in inventory, which fell by 14%. We had originally targeted a mid-single-digit reduction, so this decrease helped lower our SG&A expenses due to reduced store payroll and logistics costs. For the remainder of the year, our goal is to maintain inventory management around that mid-single-digit range, possibly a bit better, while ensuring we are prepared for the holiday season. We will also adjust our strategy based on the demand we experience.

Thank you. Best of luck with the second half.

Thank you.

Thank you to everyone listening on the call today.

This concludes today's conference call. Thank you for your participation. You may now disconnect.