KOHLS Corp Q1 FY2024 Earnings Call

Good morning, and welcome to the Kohl's Corporation First Quarter 2024 Earnings Conference Call. Please note that today's conference is being recorded. It is now my pleasure to turn today's call over to Mark Rupe, Senior Vice President of Investor Relations and Treasury. Please go ahead.

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 also be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC, which 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 So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 Chief Executive Officer; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Tom.

Thank you, Mark, and good morning, everyone. Our first quarter results did not meet our expectations and are not reflective of the direction we are heading with our strategic initiatives. We knew the first quarter would be our toughest comparison of the year. This was predominantly due to last year's elevated clearance activity, which was more than 600 basis points of drag on comp sales in Q1. That said, we expected our regular price business to offset this headwind. Regular-price sales were strong through the first eight weeks of the quarter. They softened in late March and into April, especially for our spring seasonal product. And while regular-price sales did increase low single digits in the first quarter, their best quarterly comp performance since 2018, they were below our expectations. With the clearance headwind now behind us, we expect our performance will improve, building on our positive regular-price trends driven by our early success in new categories and continued growth in Sephora. We are also effectively managing inventory and controlling our expenses, which resulted in gross margin expansion and an SG&A decline in the quarter. However, there are areas of opportunity that we are actively addressing, including our active and jewelry businesses. We continue to have high conviction in our strategy, supported by the traction we are gaining in our key growth areas as well as the increase we are seeing in the number of new customers. That said, as Jill will discuss in more detail, our updated fiscal year guidance reflects the first quarter underperformance in a more conservative outlook, given the ongoing uncertainty in the consumer environment. As it relates to the consumer backdrop, our customers continue to be pressured by a number of economic factors, including high interest rates and inflation. While spending among our high-income customers has remained steady, our middle-income customer continues to be impacted. In this environment, we are working hard to deliver even more value, recognizing that the discretionary spend of our customers is pressured. Part of this is having a strong private brand portfolio which positions us well as the consumer is looking for value. While navigating what remains a challenging consumer backdrop, we remain focused on executing against our four strategic priorities, which are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. Over the past year, we have implemented a significant amount of change across the organization to reposition our business. Efforts of this scale take time. As I look at our progress against these priorities, we are executing well against two: managing inventory and expenses tightly and strengthening the balance sheet by reducing our long-term debt. When it comes to enhancing the customer experience and simplifying our value strategies, we are making progress but continue to have opportunities in front of us. Taking a step back, let me start with what's working. Sephora at Kohl's continues to deliver exceptional results. In Q1, Sephora sales increased 60%, including greater than 20% comparable beauty sales growth and better-than-expected contribution from shops opened in the past year. We saw especially strong growth in our skin care, bath & body and fragrance offering, driven in part by the continued success of brands such as Sol de Janeiro and Sephora Collection. In 2024, we will open 140 Sephora shops, of which the majority will open in Q2, and we will end the year with Sephora in approximately 1,050 stores. Sephora continues to be an important driver of our new customer acquisition. We are also continuing to attract a younger, more diverse customer who shops more frequently as we have expanded Sephora across our store base. In addition to Sephora, we are also making progress in building our presence in underpenetrated categories, including home, gifting and impulse and look forward to the launch of Babies"R"Us. We outlined these collectively as a $2 billion-plus sales opportunity for us in the coming years. We continue to have confidence in our ability to achieve this target. In home, while the category underperformed the company average, we did deliver incremental sales from our growth initiatives in décor and pet. In home décor, we are seeing the initial benefits from our expanded assortment and marketing investments with sales of seasonal and everyday décor up more than 30% in Q1. New areas like wall art, lighting and glassware have been well received. And in pet, sales increased more than 100% in the quarter, benefiting from last year's assortment expansion. In gifting, sales increased more than 30%, with strong performances across Valentine's Day and Easter. More recently, we were pleased with the performance of our Mother's Day gifting presentation. In impulse, sales grew more than 60% as we introduced queuing lines in nearly 100 stores during Q1. We expect continued growth in gifting and impulse going forward. We have invested in more receipts around key gifting events such as Father's Day as well as Americana merchandise to celebrate Memorial Day and July 4 holidays. In addition, we will add dedicated queuing lines to 250 more stores to reach more than one-third of our store base by year-end. We also continue to be excited about our upcoming partnership with Babies"R"Us. This partnership allows us to serve the family in a more complete way during an important period of their lives by creating a meaningful presence in the baby gear category. Baby gear is a large category that has seen disruption in the competitive landscape in recent years. Kohl's new commitment to this space represents a significant growth opportunity and broadens our reach with younger customers. We will open Babies"R"Us shops in approximately 200 Kohl's stores in Q3, which will coincide with the launch of our online presence. It's also important to mention that we are making progress in some areas of our apparel and footwear business. We have seen the most progress in our efforts to build our polished casual and dress offering across categories. This is most evident in the positive underlying trends we are seeing in our women's business. In Q1, regular-price sales were up 3% in women's, which indicates that the newness we are introducing is resonating with our customers. One example of this is our dress business, where the customer response has been very favorable. Dresses is an area we identified as a large opportunity for Kohl's. For those that have visited our stores recently, you'll likely notice a much greater dress presence. We launched a dedicated in-store dress shop in 700 of our stores and will expand the offering in Q2, supporting continued sales momentum. Our efforts to amplify polished casual more broadly are working; we have leaned into Lauren Conrad and Simply Vera Vera Wang and have seen solid reception with both brands delivering positive growth in the quarter. We are also seeing positive regular-price sales in our juniors business. This is an area where a lot of change is happening and we've introduced market brands to better react to fashion trends. To build our efforts, we are repositioning the juniors offering next to Sephora in stores to better capitalize on cross-shopping opportunities. Overall, we are pleased with the direction of our women's business as it is instrumental in driving business across other categories. In addition to women's, we have seen solid demand for men's suiting, dress shirts and dress pants as well as kids, dresses and suiting. We've also seen casual and dress footwear perform well in these areas. Moving beyond product, let me share some of our other initiatives that are working. First, our efforts to simplify our value strategies have shown early signs of success. We are seeing positive signals through our customer insight work, with more customers agreeing that Kohl's is delivering great value. In February, we scaled high-volume pricing across our private brand offering which has been received positively by customers. Also during Q1, we increased the number of targeted offers to our loyalty customers and continue to leverage Kohl's Cash as a key differentiator and we amplified the messaging around rewards for our loyalty program and Kohl's credit card to drive greater enrollment. Collectively, these actions helped us drive an increase in new customer acquisition in the first quarter and higher enrollment and redemption rates in our loyalty program, all of which are positive indicators of future engagement. With that said, we know our most loyal customers are most sensitive to our promotions and therefore, we will ensure that we continue to bring value to these customers with targeted promotions and personalized offers while we continue forward with our strategy to simplify value. Second, we are successfully managing inventory and expenses with discipline. Inventory in Q1 was down 13% as we continue to benefit from our disciplines where we operate with greater flexibility and open-to-buy. This led to an increase in the inventory turn despite the lower sales. We will continue to target inventory declines in the mid-single digits percent range with a focus on driving inventory turns. And we controlled expenses tightly across the organization resulting in a slight decline as compared to last year, even as we invest in marketing and our new growth initiatives, including new Sephora shops and impulse queuing lines. Third, we are further strengthening the balance sheet. In Q1, our revolver borrowings of $355 million were down significantly from $765 million in the prior year. This level was in line with our expectations despite lower-than-anticipated sales as strong inventory management benefited cash flow. In Q2, we will reduce long-term debt by $113 million by executing a make-whole call on our May 2025 notes, which Jill will discuss in more detail. So we are making solid progress across several of our initiatives. We are delivering incremental growth in new underpenetrated categories in Sephora as well as in portions of our apparel and footwear offerings. In addition, we are managing inventory and expenses with discipline, further strengthening the balance sheet. Now let me discuss some of the headwinds we faced in the quarter and areas of opportunity for us going forward. As I mentioned at the outset of this call, clearance is a major drag on our comp sales performance in Q1 as we lapped last year's elevated activity. This was a unique headwind that weighed heavily on results across our apparel and footwear businesses and especially in active, juniors and kids. Importantly, this headwind is now behind us as our clearance sales normalize following the first quarter of 2023. In addition, we experienced softer demand in spring seasonal product, dampening what otherwise was a strong positive trend in our regular-price sales through the first eight weeks of the quarter. Categories including tees, shorts and tanks were uniquely challenged, impacting our men's and kids businesses which have historically been sensitive to seasonal transitions. In addition to these headwinds, we also identified areas of opportunity for us going forward. The first area is active, which accounted for the majority of the overall sales decline in the quarter. Clearance is a major factor in the active decline and was felt most significantly in our men's and kids businesses. We continue to work with our brand partners to increase newness in the back half of the year, and we are leaning into our value-oriented private brands, FLX and Tek Gear, which performed well in the first quarter. FLX apparel was especially strong, growing in excess of 50% as we further expanded the brand to all stores. We see a long runway of growth for FLX as we build awareness for this very affordable athleisure brand that is building a solid reputation with customers. The second area is accessories. Over the past two years, as we made space for Sephora in our stores, we did not do a good job of retaining our jewelry sales, which have been on a consistent sales decline. We know there is still an opportunity to offer jewelry to our customers, especially during key events and holidays in the year. We are currently working to reestablish our presence, which will include expanding our in-store assortment and improving its in-store positioning by placing it near Sephora. We will also have a stronger presence in jewelry during the holiday season. The third area is our legacy home offering. During the first quarter, select areas within our home business underperformed with softness in the kitchen electrics, floor care and bedding. To improve results, we are increasing newness in kitchen electrics as well as introducing new brands and ensuring we are providing excellent value to our customers across bedding and floor care. And lastly, it's important that we continue to drive traffic across our omnichannel platform. In Q1, store sales slightly outperformed digital sales, though both declined given the headwinds I discussed. However, transactions in each channel improved as we moved past the clearance headwind. Looking ahead, we expect store performance to benefit from our growth initiatives, which are highlighted in stores. And in digital, we will continue to reinforce our value simplification in all communication and scale new targeting initiatives while also improving the search and product recommendation capabilities of our site to drive increased traffic and higher conversion. I will now summarize my comments today, and I want to leave you with three things. First, our Q1 results were not up to our expectations. Clearance was a major headwind to overall comparable sales and demand softened in late March and into April, especially for our spring seasonal product. However, regular-price sales increased low single digits, and we are actively addressing the areas of opportunity identified in the quarter. Importantly, the clearance headwind is now behind us and we have confidence in our ability to address the opportunities we laid out. Second, many key areas of our strategy are working. Sephora at Kohl's has maintained a strong growth momentum, and we are driving incremental sales in home décor, gifting and impulse and we are seeing positive underlying trends in our women's business. During the balance of the year, we will open more than 100 additional Sephora shops, expand impulse queuing lines to an additional 250 stores, and launch our Babies"R"Us partnership in 200 stores and online. For these reasons, we remain confident in our strategic initiatives. And third, the underlying structure of our business remains sound. While we work to drive top-line sales growth, we are managing inventory effectively, expanding gross margin and tightly controlling expenses. We are also demonstrating our commitment to returning capital to shareholders through the dividend and strengthening the balance sheet by reducing long-term debt. Repositioning a business of this size is not a simple task, and I want to recognize our associates across stores, distribution centers, and corporate for their continued resilience and dedication to improving Kohl's results. I will now turn the call over to Jill to discuss our first-quarter results and outlook for 2024.

Thank you, Tom, and good morning, everyone. For today's call, I will provide additional details on our first-quarter results as well as an update on our fiscal year 2024 guidance. Net sales decreased 5.3% in Q1. Comparable sales declined 4.4%. As Tom indicated, clearance was a significant headwind in the first quarter, representing more than a 600 basis point drag on comp sales. Stores slightly outperformed digital in the quarter, with both down versus last year. Other revenue, which is primarily our credit business, decreased 5.7% in the quarter as loss rates increased year-over-year in line with our expectations. Now let me turn to the rest of the P&L. Gross margin in Q1 was 39.5%, an increase of 48 basis points. The improvement year-over-year was driven primarily by strong inventory management and lower freight expense. SG&A expenses declined approximately 1% to $1.2 billion in the first quarter as we continued to control expenses tightly across the organization, while also investing in marketing and our new growth initiatives, including new Sephora shops and impulse queuing lines. Depreciation expense in the first quarter was $188 million, flat to last year. Interest expense was $83 million in the quarter, down $1 million from last year. Net loss for the quarter was $27 million, and loss per diluted share was $0.24. Now on to the balance sheet and cash flow. We ended Q1 with $228 million of cash and cash equivalents. Inventory at quarter end declined 13% compared to last year. As we have discussed in past quarters, inventory management has been a key focus of ours, with the goal of increasing churn, which we were able to do in the first quarter. Our new disciplines once again allowed us to operate with greater flexibility and manage inventory more efficiently. Operating cash flow was a use of $7 million, significantly better than last year's use of $202 million driven by effective inventory management. Adjusted free cash flow was negative $154 million in the first quarter. Now let me provide an update on our capital allocation priorities. Capital expenditures for the quarter were $126 million. For the full year 2024, we continue to expect CapEx to be approximately $500 million, which includes investment in impulse queuing lines, Sephora small shop openings, the launch of the Babies"R"Us partnership and new store openings. Strengthening the balance sheet and returning capital to shareholders also remain top priorities. We ended the first quarter with $355 million on our revolver, down from $765 million last year. Our goal in 2024 remains paying down our revolver balance, rebuilding our cash position and capitalizing on opportunities to reduce debt. Earlier this month, we provided notice to the holders of our May 2025 notes that we would be executing a make-whole call on them in mid-June. As a result, we will take out the 10.75% note totaling $113 million, which will result in an approximate $4.5 million pre-tax charge, or $0.03 per diluted share, in Q2 with subsequent interest savings going forward. This action not only lowers the average interest rate on our outstanding debt but also reduces the amount of maturities coming due in 2025. We expect to end the year with $1.5 billion in total debt. Looking ahead, we will continue to monitor our options with respect to the July 2025 notes and will likely address them closer to maturity given the favorable coupon rates. As for shareholder returns, maintaining our dividend at its current level remains a priority. In Q1, we distributed $55 million in dividends to our shareholders. As previously disclosed, the Board on May 15 declared a quarterly cash dividend of $0.50 per share payable to shareholders on June 26. Now, let me share some detail on our updated outlook for 2024. As you've heard this morning, we are making progress against many of our key strategic initiatives. We are also working to address several opportunities identified in Q1. We are approaching our financial outlook for the year more conservatively given the first quarter underperformance and the ongoing uncertainty in the consumer environment. For the full year, we currently expect net sales to be in the range of a 2% decrease to a 4% decrease versus 2023. Comparable sales to be in the range of a 1% decrease to a 3% decrease. This implies a comp of flat to down 2% for the balance of the year. We continue to expect gross margin to expand 40 to 50 basis points, and SG&A dollars to be down 1% to 1.5% for the year. We expect operating margins to be in the range of 3% to 3.5%, and EPS to be in the range of $1.25 to $1.85. As a reminder, our guidance includes the potential impact from the CFPB late fee rule, assuming it's effective August 1st. While this rule is currently being challenged, we will continue to monitor developments and will provide an update when appropriate in the future. In closing, I want to reiterate that our underlying financial structure remains solid. We are expanding gross margin through effective inventory management and managing expenses with discipline. And we continue to strengthen our balance sheet by reducing long-term debt. With that, Tom and I are happy to take your questions at this time.

We will now open the call to questions. Our first question comes from Bob Drbul from Guggenheim. Please go ahead. Your line is open.

Hi, good morning. Tom, I was just wondering if you could talk some more around the general confidence in the strategy on a go-forward basis. When you think of some of the challenges that you're seeing within your own business and even within the industry?

Okay. As the prepared remarks indicated, we feel very good about what we have in terms of our overall strategy. We're going to tweak things along the way. I think when you look at the first quarter results the clearance headwind really hurt us, 600 basis points. So we had a strong performance in our regular-price business, which obviously is important, especially for go forward. But fundamentally, things that are working as part of our strategies are still working very well, with Sephora still working very well, with a 60% total growth and 20% comp. And we've done very well in categories in the home, which are part of our major strategies, like seasonal and everyday décor. Our pet business is good, our gifting business is good, impulse is good. We've made a lot of progress in our apparel businesses by growing the polished casual and dress business really across the board. Our value strategies are working; our high-volume pricing has worked very nicely. We've gotten a lot of positive feedback from our customers. And we're doing a good job of managing our inventories and expense. And so those fundamentals are still in place. And Jill talked about reducing our long-term debt. But we have work to do though, candidly, even though we feel our strategy is a good one, we need to do a better job in rebuilding our active business. That's one of our priorities overall. The accessory business, our jewelry business, is a huge opportunity for us. We've lost a lot of business with the Sephora rollout overall. Some of the legacy businesses in home, such as floor care and bedding and kitchen electrics, underperformed, so we're working hard on that to bring in more newness in those areas. And then we're working hard to drive traffic in stores and in digital. So long answer, but we feel good. We feel good about what's happening. And we feel good that the clearance headwinds, we took a ton of markdowns in the fourth quarter of 2022 to clean all the inventory up. So obviously that was a huge headwind for us in the first quarter.

Our next question comes from Oliver Chen from TD Cowen. Please go ahead, your line is open.

Hi, Tom and Jill, a lot of helpful comments. Why do you think the clearance impact was worse than you had originally guided to? And as you think about the biggest needle movers going forward, it sounded like juniors, active, apparel, jewelry. What will really drive the comp better, as we think about guidance and what should happen sequentially in the back half? And a follow-up with your comp guidance for the quarter, what's assumed for June and July relative to May? And are you thinking that traffic will be negative, positive or flattish? Thank you.

Sure, I'll start. And just for clarification, it wasn't clearance that I think we got wrong on the guide. It was that it was a big headwind in the quarter. I think that was unique to us. What we did is we started the quarter well with our regular-price business incredibly strong, offsetting the clearance headwind. As we came out of the market, we felt really good about initiatives and the momentum behind those to help offset clearance as we moved into the latter part of March and into April, we saw a slowdown there in regular-price selling, particularly around our spring seasonal goods. That became the headwind that we couldn't overcome to get back into that flattish comp that we had guided to enter. So that really is what happened in the quarter. Fundamentally the company still did well: we managed inventory with a lot of new discipline, and being down 13% in inventory when we saw the sales decline really is a testament to that new muscle that we have that obviously helped drive our margin and we were able to hit our margin. And then we pulled back on expenses. So our expenses actually came in better than we had anticipated because we were able to react. I think that just goes to the testament of this organization and the agility we have when we do have some businesses on the top line that really came under pressure from that regular-price slowdown. If I were to comment on Q2, obviously we're not going to speak to monthly guidance. But what I would say is when we saw improvement in our business once we got through the clearance impact, a lot of that comes through traffic and transactions, and that was actually relatively flat as we went into March and April. So we do see that we are gaining those steps and the momentum, but we also know the customer is a little bit more discerning out there and we have to make sure we are putting our first-best step forward with that value Kohl's is known for, and that's what we're going to do. May did start out a little slow like April ended, but what I will say is that we are progressing. We're seeing ourselves pick up, particularly in spring seasonal that is coming a little bit later. We can continue to see the momentum in the strategic initiatives that Tom has outlined, and that's what's really helping us drive back to the rest of the year being flat to down two, but we're still being mindful of the uncertainty in the consumer and the macro environment.

Yes. And to answer the question about what's going to drive the comps, as I mentioned before, Sephora will help us a lot on the balance of the year; 140 shops will be rolled out by the end of the second quarter. Building our underpenetrated categories as I mentioned before, the core businesses like décor, pet and gifting have been strong. Our impulse initiative has been performing very well—we opened 100 impulse queuing lines in the first quarter, we have another 50 that we're rolling out in the second quarter and more planned in the third quarter. Juniors is showing positive regular-price signs with the market brands and the repositioning near Sephora should drive cross-shopping. The women's dress business has been very strong, and men's suiting is doing well. One of the things we're working diligently on is how to rebuild our active business to the level we want; it was negatively impacted by significant clearance in the first quarter. We have a lot of things that are working that will help the comp overall, and we're working diligently on the areas that need attention.

Our next question comes from Mark Altschwager from Baird. Please go ahead. Your line is open.

Good morning. Thank you for taking my questions. So the 600 basis point headwind on the lower clearance, how much of that would you categorize as somewhat one-time as you cycled last year's actions? How should we think about that moving forward? You continue to manage inventory very lean. So would it be fair to think that reduced clearance product availability would be a headwind moving forward? And bigger picture, do you think you're losing a cohort of your customer base to other retailers as you manage to this much lower level of clearance product? What are you doing to engage that customer and make sure they still see value in the overall assortment, given that clearance product is no longer there to such an extent?

Well, first of all, the clearance levels going into 2023 were totally unique. It was a once-in-a-lifetime clearance level because of trying to clean everything up as we went into 2023. So it's highly distorted. As a percentage of our total business it was larger than ever. We never want to get to that level. We want to sell the appropriate amount of clearance, but we're focused on regular-price as well. The situation going into 2023 was totally unique and we're never going to get to those levels. Clearance will always be part of our business, but reducing our inventories overall—inventory was down 13% at the end of the first quarter—we're not going to have as much clearance. We're going to go after the customer by building our Sephora business and building our underdeveloped categories in home, gifting and impulse. We'll continue to broaden our mix in apparel to include even more polished casual and dress. So we have a lot more than clearance. You don't want to have a business that has an underlying huge clearance position because that just shows mistakes. We want to focus on the regular-price business.

Yes, to summarize, I would assess the whole 600 basis points as coming off what I would say is a highly unique, one-time situation where we cleared out inventory. We'll have the regular balances of clearance going forward. So I think it's not a headwind or a tailwind; it's part of the business. That's how we looked at it when we gave the guidance. The newness we're bringing in is working and that's the discovery element we're bringing with market brands and faster turns, which allowed us to improve our inventory turnover significantly in the quarter. We're moving to a healthier model that will deliver better margins and more frequent newness while still providing value to customers—you're still going to find value in our assortment without relying on excessive clearance.

Thank you. And Jill, with the reduced comp outlook for the year, can you speak to any incremental opportunities you see on the cost side of the equation? And then is the 7% to 8% longer-term operating margin target still the right way to think about it? Any help in bridging that 400 basis point expansion versus what you're planning for this year?

Absolutely. We held our margin guide of gross margin expansion of 40 to 50 basis points which puts us around the levels we've discussed historically and supports the longer-term 7% to 8% operating margin framework. The gross margin improvement is being driven by inventory discipline and regular-price selling. From an SG&A perspective, Q1 came in better and we still expect SG&A dollars to be down in the 1% to 1.5% range for the year. We maintain a strong cost-disciplined culture and continue to look for operational efficiencies across the organization. We will continue to invest in high-return growth initiatives like impulse queuing lines, Babies"R"Us and Sephora, putting expenses where we expect the best returns. The biggest piece of getting back to 7% to 8% is growth—once we achieve sustained top-line growth, the margin expansion will follow, but that will take time.

Our next question comes from Matthew Boss from J.P. Morgan. Please go ahead. Your line is open.

Great, thanks. Hi, so Tom, could you elaborate on first quarter trends that you saw at stores versus digital? And how best to think about the sequential cadence across channels that you're expecting in the second quarter versus the back half of the year? And then Jill, I just wanted to circle back on trends that you cited in May relative to what you saw in March and April with regular-price selling.

As far as stores versus digital, we're closing the gap. Stores slightly outperformed digital last year, and in the first quarter they were much closer together. Going forward, and incorporated in our guidance, we see digital and stores performing at similar levels in terms of comp. The heavy promotional activity of prior periods is behind us and things are normalizing, so we expect the channels to converge.

In February into early March we got past much of the clearance component. When we saw the softening in late March and April, that was really on the regular-price business. Clearance becomes a small percentage after the beginning part of the quarter. As I mentioned, we saw progress into May; improvement picked up as the month went on, particularly in spring seasonal which is coming a little later. The momentum we’ve called out in Sephora, décor, gifting and impulse remains productive. We're making corrections in areas like small electrics and bedding and leaning into value in home. We have 140 Sephora shops opening in Q2 and Babies"R"Us launching in Q3 which gives us confidence for the back half. Overall, these initiatives help support the flat to down-2% comp assumption for the rest of the year.

Great. And then, Jill, just on the operating margin set back for this year's guide, is there any change to the longer-term 7% to 8% target or do you see today's changes as more transitory?

I would say there's no change to the longer-term target. We believe we can get to 7% to 8%. The CFPB potential legislation is included in our numbers as an assumption beginning August 1, and we'll provide updates as we have clarity. The discipline is in place on margins; our SG&A has not grown over recent years despite inflationary pressures. Growth is the key driver to reach the longer-term margins. When we see sustained top-line growth, the operating margin expansion will follow.

Our next question comes from Chuck Grom from Gordon Haskett. Please go ahead. Your line is open.

Hi, thanks very much. Good morning. I wanted to talk about the health of your customer today across income cohorts. Then maybe talk about trends across apparel and footwear in the quarter relative to down 4% overall, regular versus clearance, or if there's a way to split it out just to assess the health of those two parts of your business? Thanks.

We know customers are feeling pressure; that has been a consistent theme across retail. For Kohl's, the middle-income customer has been the most impacted, which is why we are leaning into value for that customer—through private brands and targeted pricing at opening price points like Jumping Beans and Tek Gear. We're getting credit from customers for delivering value, and our proprietary brands and regular-price business being flat in the quarter shows the approach is resonating. So we'll continue to focus on delivering value to the middle-income customer.

On trends, we're seeing great movement in apparel as we expand assortments toward polished casual and dress. Customers are returning to dress occasions and workwear, and we're seeing good performance in footwear as well. The one area dragging results is active, which was heavily impacted by clearance in the quarter. Our private brands like Tek Gear and FLX did well—FLX grew over 50%—and we see a long runway for that brand. Home and gifting initiatives are working; our Mother's Day business was strong, and impulse is up roughly 60%. Beauty is a very strong driver as well. Overall, many parts of the business are trending well but active needs work.

That's helpful. One follow-up for Jill on the model: how should we think about the cadence and phasing of comps over the balance of the year? Should we think about the down 1% to 3% range by quarter? Or are you anticipating fourth quarter to be a little bit lower because of the five fewer days? And on credit, do you still anticipate mid-teens dollar decline in 2024?

On credit, there's no change from our prior expectations; the results came in line. The guidance assumes the CFPB legislation impact starting August 1, which affects the back half and contributes to the mid-teens decline for the year. We’re not providing quarter-by-quarter comp cadence, but we do expect the initiatives—140 Sephora shops in Q2, Babies"R"Us in Q3, and additional impulse lines—to benefit Q2 and the back half. Gift-related initiatives have been productive through holidays and events which should also help the back half. Women's regular-price strength and the expansion of dress shops into more stores should also contribute. We have those growth-driving initiatives in front of us, but we're not disclosing a specific monthly or quarterly split.

Our last question today will come from Dana Telsey from Telsey Group. Please go ahead. Your line is open.

Hi. Good morning, everyone. Tom, a while ago you had talked about enhancements being made in stores, whether it's the queuing lines—anything you're seeing in stores with these strategic initiatives that you expect to help as we go through the balance of the year? Can you talk about the difference in performance of the digital channel versus the stores channel and what you're seeing? And I think you were thinking about either some remodels or downsizing or new stores; how should we be thinking of that in light of the current environment? Thank you.

Hi.

To answer the store question on new stores, we're doing regular maintenance on our stores this year, but we're not planning any major remodels or large-scale resets at this time; we're focused on the core business. On digital versus stores, we expect them to run at parity more than we've seen historically. The spread narrowed in the first quarter and we expect the channels to perform similarly going forward. Regarding in-store enhancements, the impulse initiative has been impactful—impulse is up 60% and we opened 100 queuing lines in Q1, with more planned in Q2 and Q3. We've built out gifting centers and repositioned juniors to better capitalize on cross-shopping next to Sephora. Stores are being improved and we feel good about the progress.

In addition to store enhancements, we are investing in digital improvements which will help parity between channels. We're doing better personalization and targeting, improving search and product recommendations, and using AI to provide next-best recommendations when items are out of stock. We're also moving to a new digital platform to improve conversion. On new stores, we have five openings this year, but you shouldn't expect a lot of new store square footage in the near term; we believe there is more to be done within our current 1,200 stores to get the formula right. Over time there may be opportunities for smaller-format stores, but that is a longer-term initiative.

To add, in-store changes like the impulse queuing lines and repositioning of categories have been well received. The juniors repositioning near Sephora and the enhanced gifting presentations are helping. We're focused on initiatives that drive traffic and conversion in stores and across digital together. I think that's it. Thank you to everyone for listening on the call today. Have a good day. Bye.

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