KOHLS Corp Q2 FY2024 Earnings Call

Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 2024 Kohl's Corporation Earnings Conference Call. Today's conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. At this time, I would like to turn the conference over to Mark Rupe, Senior Vice President, Investor Relations and Treasurer. 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 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 So, if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 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. We continue to work hard to reposition Kohl's for future growth and have taken significant actions to accomplish this. While we recognize that efforts of this scale take time, we were hopeful that a return to top-line growth would materialize more quickly. We are making progress against our strategic priorities. However, our performance has been impacted by a continued challenging environment and softness in our core business. During the second quarter, we attracted more new customers to Kohl's and experienced an increase in overall transactions, both of which are positive developments. At the same time, however, our customers exhibited more discretion in their spending, which pressured overall sales and overshadowed strong performance in our key growth areas, including Sephora, home decor, gifting, and impulse. Although we are disappointed with our second quarter sales, we continue to execute well operationally, enabling us to deliver a 13% increase in earnings, driven by gross margin expansion and strong inventory and expense management. Looking ahead, we are focused on ensuring that the substantial work that we've done across product, value, and experience is fully recognized by both new and existing customers. We will capitalize on new opportunities such as our partnership with Babies 'R' Us and expect to continue to benefit from our key growth areas. And we will evolve our marketing to highlight all of our new product initiatives while also amplifying our focus on value with an emphasis on lower price messaging. As Jill will discuss in more detail, our outlook for the balance of the year assumes the macroeconomic environment will remain challenging. Importantly, our operating discipline, our solid cash flow generation, and our healthy balance sheet will continue to provide meaningful support as we work to return Kohl's to growth as demonstrated by our Q2 operating performance. Through all of this, we will 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. As I look at the progress we are making, we continue to manage inventory and expenses tightly and have strengthened our balance sheet. And though we have taken significant action to enhance the customer experience and simplify our value strategies, we simply have more work to do to ensure we are fully capitalizing on our efforts. Let me start with what's working. First, Sephora at Kohl's continued to deliver strong growth in Q2, with total beauty sales increasing approximately 45%. Comparable beauty sales grew in the low-teens percent, with consistent performance across shops opened in 2021 and 2022, and shops opened in the past year are performing better than expected. We also continue to see solid growth digitally. Fragrance, bath and body, and skin care were especially strong in the quarter, and brands including Sol de Janeiro, Sephora Collection, Rare Beauty, and Charlotte Tilbury drove impressive growth. Our partnership with Sephora has been incredibly successful. Together, we have acquired millions of new customers and gained significant market share within the industry. Sephora now has a presence in 1,050 of our stores following the opening of 140 shops this year. Looking ahead, we are confident in our ability to continue driving solid growth. We are introducing new brands such as Haus Labs by Lady Gaga, and Glossier in makeup, and Ariana Grande in fragrance. We are also significantly expanding our holiday gifting assortment building off of last year's success. Second, our work in underpenetrated categories continues to gain traction. Sales trends in home decor, gifting, and impulse accelerated in Q2. And earlier this month, we successfully launched our partnership with Babies 'R' Us. These collective areas continue to represent a significant sales growth opportunity in the coming years. Let me share a little more on each of these. Our efforts to build our home decor business continue to progress, benefiting from our expanded assortment and recent investments in marketing. In Q2, sales of seasonal and everyday decor increased more than 35% year-over-year. We also experienced strong growth across many other areas, such as storage, wall art, glassware, and pet. For back to school, we have highlighted backpacks and dorm room essentials. In gifting, our customers continue to respond well to our assortment and front of store positioning. In Q2, we saw sales increase more than 30%, with solid performances across key events, including Mother's Day, Father's Day, and the Fourth of July. We will build on our success with an even more robust gift assortment for the upcoming holiday season. As it relates to impulse, we drove sales growth of more than 70%, as we expanded queue lines to 50 more stores in the second quarter. In Q3, we will add 200 more queue lines, bringing the total to 435 queue lines in time for the holiday season. Now, let me provide a brief update on our initial launch of Babies 'R' Us, which allows us to broaden our reach with young families. We're in the process of opening 200 baby shops featuring thousands of products across baby gear, furniture, and accessories from a number of high-quality brands. We have opened more than 100 of our shops in August and are planning to open the remainder during the next month. Our baby offering is also available to customers online. We will learn from this initial launch, which will inform our plans for future expansion. In conjunction with the launch, we are introducing Motherhood, a leading maternity brand to enhance our offering for expectant mothers. In Q3, we will introduce a Babies 'R' Us registry. In addition to baby gear and maternity, we will also see a halo opportunity to grow sales of our infant and newborn apparel. Moving beyond product, let me share some of our other initiatives that are working. We continue to effectively manage inventory and expenses. Inventory in Q2 declined 9% versus last year. We continue to operate with greater flexibility and openness to buy, which has enabled us to manage our inventory effectively despite lower sales. Looking ahead, we remain committed to increasing inventory turn and managing inventory down mid-single-digits. From an expense perspective, I am pleased with how the organization has remained disciplined in what continues to be a challenging environment. SG&A expenses in Q2 declined over 4% compared to last year. Lastly, we continue to strengthen our balance sheet. During the second quarter, we reduced our long-term debt by $113 million and reduced our revolver borrowings by $150 million as compared to last year. Now, let me discuss some of the headwinds our business continues to face and the actions we are taking. As I previously mentioned, our customers exhibited more discretion during the second quarter. Inflation and high interest rates continue to pressure spending, especially among our middle-income consumers. We are seeing the clearest evidence of this in the performance of our core apparel and footwear offering, which experienced broad softness in the quarter. To better navigate this environment, we are taking a number of actions to ensure that our customers recognize all of the enhancements we have made across product value. Our advertising has already begun to include messaging around lower price points across our assortment, and we will begin leveraging real customers and influencers to showcase not only our great values, but also our enhanced product offering. And of course, we will continue to lean into Kohl's cash as a key value differentiator. Beyond our marketing efforts, we know we have more work to do in our core apparel and footwear business to improve the sales trends, which frankly have been disappointing. To be clear, we remain confident that the product we are offering today is more relevant to our customers. This is supported by a recent customer insight study that indicates more of our customers feel Kohl's resonates with them and by an increase in conversion we experienced in the second quarter. We are delivering growth in our new products, including dresses, which are benefiting from expanded space in our stores, as well as market brands, which are resonating well with our customers. We are also seeing promising initial sell-through trends in newly introduced brands, such as Aéropostale and Limited Too. We are also encouraged by the trend improvement in active we witnessed during the quarter. Our private active brands, which include FLX and Tek Gear, grew low-double-digits, and we delivered positive growth in several of our national brands, including Nike, Skechers, Columbia, and Eddie Bauer. As it relates to back to school, we are pleased with our positioning in backpacks, kids' footwear, and boys' and girls' apparel. Nonetheless, there are several areas of our business that are holding us back, some of which are self-inflicted. Jewelry is a good example of a category where we failed to retain sales as we made space for Sephora in stores. As we've discussed on last quarter's call, this is a category that was highly valued by our customers and we are committed to reestablishing our positioning. This holiday season, we will reintroduce fine jewelry in 200 stores, as well as expand in-aisle placement of bridge jewelry. We have also identified opportunities to rebuild our assortment with increased newness in areas including petites and classic sportswear where we've lost traction in recent years. And we continue to see opportunity in growing our juniors and legacy home businesses, which underperformed in Q2. During Q2, we began to reposition juniors back to the front of the store, expected to positively influence sales this fall by capitalizing on the Sephora traffic. We will also continue to leverage market brands to bring in trend-right products to better connect with our younger customers. As it relates to our legacy home business, sales within kitchen electrics, floor care, and bedding remained under pressure. However, we expect trends to stabilize as we move through fall based on increased innovation, new brand introductions, and a stronger value messaging. Lastly, it's important that we continue to drive traffic across our omnichannel platform. In Q2, digital sales outperformed store sales with transactions increasing in both channels. To support future growth, we are investing to enhance our omni experience. In stores, we are strengthening our leadership structure, adding an additional layer of management closer to stores to ensure we are driving a consistent experience across the chain. Digitally, we continue to increase personalization while also leaning into social commerce to reach a younger audience. So, as you heard, we have a number of actions underway to stabilize and improve our sales trend. Collectively, we believe our strategic initiatives will help us reach new customers and increase engagement with existing customers. I will now summarize my comments today and I want to leave you with three things. First, we continue to operate in a difficult consumer environment. Our customers are feeling the burden of the higher cost of living. This was evident in smaller basket sizes in Q2. Recognizing this, we have amplified our focus on value, especially in our marketing messaging. Second, we continue to execute well operationally and remain in a sound financial position. Despite the decline in sales, we increased Q2 earnings by 13%. We are expanding our gross margin, managing inventory and expenses with discipline, and strengthening our balance sheet by reducing long-term debt. We also remain committed to returning capital to shareholders through the dividend, which is supported by our solid cash flow generation. And third, our investments in key growth areas are building momentum. Sephora at Kohl's continues to drive strong sales growth and will benefit in the back half of the year from the additional 140 shops opened. We're also gaining traction in home decor, significantly expanding our holiday gifting offering, and adding impulse queuing lines to 200 more stores in Q3, all of which are positioned to deliver incrementally this holiday season, and we are optimistic that our Babies 'R' Us launch will bring in new customers as awareness builds. As I said at the outset, we are working hard to reposition Kohl's for future growth and we are taking significant action to accomplish this against a difficult economic backdrop. That said, our confidence in our strategy remains strong. We continue to believe that we are making the right strategic decisions to set Kohl's up for long-term success, and in time, I look forward to delivering results that reflect this. I want to thank all of our associates for their dedication to Kohl's in support of our strategic efforts. I will now turn over the call to Jill to discuss our second quarter results and outlook for 2024.

Thank you, Tom, and good morning, everyone. For today's call, I will provide additional details on our second quarter results, as well as an update on our fiscal year 2024 guidance. Net sales decreased 4.2% in Q2 and are down 4.7% year-to-date. Comparable sales declined 5.1% in Q2 and declined 4.8% year-to-date. As Tom indicated, in Q2, we attracted more new customers to Kohl's and experienced an increase in overall transactions, both of which are positive developments. However, customers exhibited more discretion in their spending, which led to a smaller average basket size. Digital sales outperformed store sales in the quarter, so both were down compared to last year. Other revenue, which is primarily our credit business, decreased 5% in the quarter and year-to-date, in line with our expectations. Moving down the P&L: second quarter gross margin was 39.6%, up 59 basis points versus last year. This increase was driven by inventory management and lower freight expense. Year-to-date, gross margin was 39.6%, an increase of 54 basis points. SG&A expenses declined 4.2% to $1.2 billion in Q2, benefiting from lower store-related expenses even as we invested in marketing and technology to support our growth initiatives. The decline in store-related expenses was driven by fewer Sephora openings, fewer store refreshes, and tightly managing expenses with the decline in sales. Year-to-date, SG&A expenses have decreased 2.5% compared to last year. Depreciation expense in the quarter was $188 million, and $376 million year-to-date, both up $2 million compared to last year. Interest expense was $86 million in the quarter, down $3 million from last year. As a reminder, Q2 interest expense included a $4.6 million pre-tax charge related to the make-whole call we executed on our May 2025 notes during the quarter. Year-to-date, interest expense decreased $4 million to $169 million. Net income for the quarter was $66 million and earnings per diluted share was $0.59. Year-to-date, net income was $39 million and earnings per diluted share was $0.35. Moving on to the balance sheet and cash flow. We ended Q2 with $231 million of cash and cash equivalents. Inventory at quarter-end was down 9% compared to last year, once again exceeding our commitment of mid-single digits decline. Inventory management remains a key focus of ours with the goal of increasing churn, which increased 7% in Q2. Looking ahead, we feel good about how we are positioned entering the fall season. Year-to-date, operating cash flow was $247 million, an increase of $228 million over last year. Year-to-date, adjusted free cash flow was a use of $34 million, an improvement from a use of $140 million in the prior year. Now, let me touch on our capital allocation priorities. Capital expenditures year-to-date were $239 million, significantly less than the $338 million last year, driven by fewer Sephora openings. We are still planning 2024 CapEx of approximately $500 million, consisting of investments in 350 impulse queuing lines, 140 Sephora small shop openings, the launch of 200 Babies 'R' Us shops, and six new store openings, including one relocation. After investing in the business, strengthening the balance sheet and returning capital to shareholders remain a top priority. We ended Q2 with $410 million on our revolver, down from $560 million at the end of Q2 last year. During the second quarter, we redeemed the remaining $113 million of our 9.5% notes due May 2025, lowering our long-term debt. For the remainder of the year, our focus will be on paying down our revolver balance and rebuilding our cash position. Looking ahead, we will continue to monitor our options regarding the July 2025 notes and will likely address them closer to maturity given the favorable coupon rate. As for shareholder returns, we continue to prioritize the payment of our dividend at current levels. In Q2, we distributed $56 million in dividends to our shareholders. As previously disclosed, the Board, on August 13, declared a quarterly cash dividend of $0.50 per share payable to shareholders on September 25. Now, let me share some details on our updated outlook for 2024. As you've heard this morning, we continue to have strong confidence in our strategy and are working hard to reposition Kohl's for future growth. We are approaching our financial outlook for the year prudently, taking into account our first-half performance and ongoing uncertainty in the consumer environment. For the full year, we currently expect net sales to be in the range of a 4% decrease to a 6% decrease versus 2023, as compared to our previous guidance range of a decrease of 2% to 4%. Comparable sales are expected to be in the range of a 3% decrease to a 5% decrease. Our previous full-year comparable sales guidance range was a 1% decrease to a 3% decrease. Other revenue is expected to be down mid-single digits for the full year. Given the uncertainty surrounding the timing of the implementation of the CFPB late fee rule, which is currently being challenged in litigation, we have excluded any potential impact from our updated guidance. We will continue to monitor developments and will provide an update when appropriate in the future. We expect gross margin to expand 40 basis points to 50 basis points, and SG&A dollars to be down 2% to 3% for the year. We expect the operating margin to be in the range of 3.4% to 3.8% as compared to our prior guidance range of 3% to 3.5%. And EPS is expected to be in the range of $1.75 to $2.25. This compares to our prior guidance of $1.25 to $1.85. In closing, I want to reiterate that we remain financially strong and are prepared to navigate this environment. As we've demonstrated in Q2, our operating discipline, solid cash flow generation, and healthy balance sheet will continue to provide meaningful support as we continue our work to return Kohl's to growth. With that, Tom and I are happy to take questions at this time.

Thank you. We will now begin the question-and-answer session. And we'll take our first question from Bob Drbul at Guggenheim.

Hi, good morning. I guess, if I could get two questions in. The first one is just, Tom, on the core business with what you're doing in women's and dresses and the shops. Can you just expand more on how those businesses with shops are doing versus non-stores that don't have the shops in them? And just wondering if you could just talk a little bit more on the expectations for the promotional environment for the rest of the year?

To address the last question first, we expect it to be highly promotional. We're focused on delivering maximum value on the selling floor as customers are feeling squeezed. The fourth quarter is typically promotional, but we anticipate even more promotions this year based on current trends. Our middle-income customers are facing significant stress, so providing value is essential. Regarding women's sales, shops featuring dresses are performing better since dresses are doing well, and we're pleased with that category's performance. We plan to expand dress offerings to all stores based on our current success. However, the women's business did decline in the second quarter compared to the first, which is disappointing. The team is working diligently to rectify this. The intimate apparel segment was particularly challenging for us, contributing significantly to our overall decline. We're still struggling to improve in the active wear sector, even though other areas are doing well. The junior business is undergoing a transformation as we move products to the front of the store, which has already shown positive results in some locations, and we aim to complete this by the third quarter. We're scrutinizing the women's business closely and are committed to reversing its fortunes as quickly as possible.

Great. Thank you very much. Good luck.

We'll move next to Mark Altschwager at Baird.

Hi, good morning. This is Amy Teske on for Mark this morning. Can you speak to the cadence of demand through the quarter and if there were any material differences between regular pricing and clearance? And then, amid the ongoing macro challenges, what is giving you the confidence that core merchandise initiatives are on track?

I can begin by discussing the performance of our comparable sales. We maintain a consistent approach throughout the quarter, with nothing significant to note regarding regular pricing and clearance. In Q1, we experienced a notable markdown from the previous year, but we have reverted to normal operations. Q2 is typically not a major clearance period for us, while Q1 has a more pronounced impact due to seasonal changes, and we see another significant clearance in Q3. There's not much to elaborate on in this area. At the start of the call in May, we indicated a somewhat softer beginning, with variations in performance observed. However, our Q1 results showed a 5% decline, which fell short of our expectations for the quarter. The introduction of new products is proving effective, as Tom mentioned, and there is a particular focus on core items, especially in women's apparel. We noticed success not just in intimates but also in seasonal offerings. Although swimwear and other summer categories did not perform as strongly, our new dress collection is excelling. Moving forward, we aim to enhance our product lineup with fresh items to better engage the market, in line with Tom's strategy. Customers have responded positively to increased newness in our offerings. Additionally, while our juniors segment faced challenges, we saw improvement after relocating it near Sephora, tapping into their customer base and showcasing our fresh brands such as Aéropostale, Limited Too, and Madden Girl, which have performed well since their launch.

Great. Thank you.

Next, we'll move to Chuck Grom at Gordon Haskett.

Good morning. Thanks very much. On Sephora, can you guys speak about the percentage of customers that are cross-shopping the store when they make a Sephora purchase today and how that compares to, say, maybe earlier in the year or maybe 12 months ago? And then zooming out, you talked about revisiting juniors. I guess, how can you take advantage of Sephora in a better way going forward?

We've noticed a significant crossover with customers shopping at Sephora. About 35% of Sephora baskets include products from Kohl's. This primarily includes women's items, juniors, impulse buys, and accessories. We're aiming to leverage this trend by moving juniors to the front of the store, as we believe there is considerable overlap between Sephora customers and juniors, given that both are associated with trends. We feel similarly about accessories. By connecting these categories, we expect to encourage repeat customers over time. The crossover rate has remained stable; it was slightly higher initially, but it hasn’t changed dramatically. Jill, do you have anything to add?

No, I think we've seen consistent cross-shopping patterns. Customers shop with us approximately 1.5 times more frequently. One of the highlights from this quarter was that our transactions were up, which we haven't seen for a while. Customers are shopping and buying more often, and conversion rates have also increased. The new products we're introducing are resonating well. Additionally, we noticed that children's items are part of the shopping basket. We are looking forward to complementing this with our Babies 'R' Us initiative that we will be launching. Overall, we're focusing on enhancing the areas we've observed in the basket to capitalize on the fact that child-related items are present in over a third of the baskets. We aim to grow this and encourage more customer visits, especially since beauty items are refillable products.

Yeah, the other thing that's exciting about Sephora and we've said this multiple times before is that 40% of the customers that are shopping Sephora at Kohl's are new to Kohl's. So that's a pretty phenomenal number overall. And we're still on target to hit the numbers that we've been saying all along.

That's great. It seems like a big opportunity. And then just on Babies 'R' Us, any early reads thus far? How impactful do you think it could be to comps? And then just, Jill, just on the back half outlook, anything on the phasing of comps or gross margins that we should be thinking about in our models? Thank you.

I'll let Jill answer that, but I'll discuss Babies 'R' Us. It’s still early; we have it in 100 stores now, and by the end of September, it will be in 200 stores. So far, the leading category is baby gear, including car seats and strollers, which is encouraging because that's what we were hoping for. The second category is furniture, which is another positive sign as customers are actively shopping for it. If it were items like feeding products or gifts, we wouldn't be quite as enthusiastic, but honestly, it’s still very early. We don’t want to promote it too much just yet; please give us some time and we will update you as it develops. Jill?

Yeah. And in terms of the guidance, I guess, what I would say is a lot of our initiatives for the back half are starting. So, we do expect there to be a build from that perspective. Obviously, we just talked about 100 stores for BRU opening in August and another 100 coming in September. The impulse lines, we're opening up an additional 200 in the back half of the year as well. And that's been a real positive for us, really getting that extra item, a little extra dollars from that customer. So, we're looking to bring that into 350 stores this year. So that will happen in the back half as well. And then, a lot of these brand launches that we're talking about are just sitting in the store, so the newness that you'll see. As we go into holiday, I think what we're excited about is building off some of the successes from last year, particularly around gifting. So, we're going to have a stronger presence in gifting across the store. I think almost double what we saw last year. We're going to have big Sephora gift shops if we think about how we can bring those gift boxes out onto the floor as well really around fragrance and skincare, learning from what we saw last year. I would just say that it probably is going to be a build from a sales perspective as those initiatives continue to build for us. And then, from a margin perspective, I think it's probably going to be pretty similar. I mean, Q3 has more of a clearance, but I think with the inventory management that we've had, we've been able to benefit off of that strength. I would say a pretty clear, between the two, a pretty even margin increase for the year.

Great. Thanks, Jill. Thanks, Tom.

We'll take our final question from Michael Binetti at Evercore.

Hi. This is Jacquelyn Wang on behalf of Michael. Regarding the guidance, what is contributing to the increased margin leverage in the second half despite lower sales, and how sustainable is this? Additionally, what is the effect of leaving the CFPB out of the 2024 guidance? I understand it was included in the first quarter.

Sure. I think, from the back half of the year, the way we looked at the guidance is the low end is really the trend that we have seen in the front half of the year, so down 5%. And then, the down 3% really is about the initiatives that we just talked about in the build in which we think that they can bring in. So, really around the newness in Babies 'R' Us, the completion of 140 Sephora shops, having new brands launching into the business, and having impulse. So, that's really how we see the build. In terms of margin, obviously 40 basis points to 50 basis points, we just completed the first half of the year, up over 50 basis points. So, we will see some freight moderation that did benefit us in the front half. We won't have that same benefit in the back half. I think that also gives us room to lean in from promotions where Tom started this call; we do expect it to be highly promotional in the holiday. So, we did give ourselves some room from that perspective as well. So, that's how the margin plays out. And then, from a SG&A perspective, we showed some really good disciplines in the front half of the year. I think we've proven we have a pretty cost discipline culture from an expense management perspective. We'll continue to lean in on that, particularly if we have those softer sales, it will ebb and flow. From a CFPB perspective, I think the way I would contextualize it for you is when we originally guided we said that our other revenue line would be down mid-teens for the year, and it would be down mid-single-digits in the front half of the year. Well, we just completed the front half of the year, and it was down 5%. Now we've said for the full year, it would be down mid-single digits. So really, that differential in the back half will be much more in line with the front half. If you do that math, you'll get the impact for the CFPB on the guide that we just updated. So hopefully that hits on your three points.

Yeah. Thank you.

And we do have another question. We'll go to Oliver Chen at TD Cowen.

Hi, thanks a lot, Tom and Jill. On the core apparel footwear and the microscope that you're taking, which issues will be easier to fix in the nearer versus longer term? And on the guidance, Jill, on the raise, what happened regarding the top-line and just the mechanics of the guidance in terms of having a softer revenue? Thanks.

Well, as far as the women's business, I think the junior business will be an easier business to turn around because we can really leverage the marketplace in order to turn it around, because there's a lot of product out there, and it's quick turn. So, I think the trend business will be the easier piece of it. Some things like intimate apparel will be harder just because it's a more traditional business and it's driven by the brands overall. I think that'll be harder; trying to integrate more of the classic brands into the assortment will also take a little bit more time. Rebuilding our petite business, I think that will be something that we can react to fairly quickly because we really went out of that business. So, I think just rebuilding the inventories, we'll be able to do that. But I think that we'll see progress quicker, as I mentioned in juniors, plus moving it back and putting it in the front of the store. I think that'll help a lot overall. Jill?

I view our guidance from a top-line perspective, centering the low end on the actual results from the first half of the year, indicating no change in that trend. The upside comes from the development of various initiatives we've outlined, which gives us confidence. We're pleased to see Sephora exceeding our expectations and performing exceptionally well. We added another 140 stores, introducing many new offerings and learning from our previous holiday season about gifting to enhance that experience. The recent launch of Babies 'R' Us aligns well with a younger customer demographic, creating a significant opportunity for us. Additionally, our impulse strategy has been successful, bringing extra products that may lower average unit retail but encourage customers to add more items to their baskets. We plan to implement this in another 200 stores. We'll also be enhancing our fashion offerings, with a more significant emphasis on dresses and holiday attire, which we haven't typically focused on, along with new brand introductions in juniors, young men's, and women's categories. I feel positive about our top-line projections. Since Tom joined us, we have effectively managed our inventory levels, reducing them more than mid-single digits, which has positively impacted our margins while ensuring we remain competitive during a highly promotional holiday season. Our disciplined approach to SG&A over the past few years has also contributed to reaching our operating margin for the year. In terms of guidance, I see the low end as a reflection of maintaining our current trend, which feels secure, while the initiatives we’re introducing can help us reach the top end.

Okay. Thanks. And a follow-up. Are you more concerned about UPTs or traffic and how might that relate to what you're seeing? And second, what changed the most in terms of the health of the consumer, because we've had this choiceful-considered mixed consumer when we last spoke as well? Thanks.

I’m really pleased to report that we are seeing positive transactions for the first time in several years. Transactions and conversions are both on the rise, indicating that our new offerings are resonating with customers. However, our core middle-income customers are still facing challenges and are becoming more selective with their purchases. They seem to be buying fewer items as they focus on higher-ticket items, or they are generally spending less. While we have introduced lower average unit retail (AUR) items in categories like home décor and impulse buys, the recent new offerings have reflected this trend. Looking ahead to the second half of the year, we plan to reintroduce fine jewelry in 200 stores and expand our Babies 'R' Us offerings, which are expected to be popular since higher-ticket items are resonating well with our customers. We recognize that our customers miss fine jewelry, so it's important for us to bring that back. This strategy should help improve our AUR, but we anticipate ongoing pressure in this area, which is why we've provided specific guidance for the upcoming months.

Okay. Thank you. Best regards.

Thanks, Oliver.

Thank you.

We'll take a question from Dana Telsey at Telsey Advisory Group.

Hi, good morning, everyone. Jill, as you mentioned, the conversion and traffic, which is obviously something new. As you think about the Babies 'R' Us and some of the other new partnerships, where do you expect some of the biggest impact to come from? And then, Tom, on the category of home, what are you seeing there as opportunities going forward? Thank you.

Sure. I think for Babies 'R' Us, it did just launch and we are going to be launching a registry to complement that and I think that happens at the beginning of October. So, I do think there's a large opportunity for us really first on that younger customer. I think as we have a registry, we really have that beginning part of their lifecycle from a family perspective having them come in. Early days, we are seeing a nice halo effect to the kids' business. So, I think that really just helps us bring extra items into their basket as well from how can we be more relevant to that customer. Not only do we have gear, but we have all of the feeding and toys and accessories as well. I think those are quick add-ons that we can see come into the basket. I do think Babies 'R' Us could be a larger impact not just from the sale of that product, but for the halo effect that it has for the store. Also, really as we talked about earlier that Sephora customer is buying kids. So, really how to expand them to buy even more across the store and then continue to increase that 35% of attachment up higher. I think Babies 'R' Us can be a key place to do that. I also think some of the newness that we've talked about in terms of the relevancy of brands and fashion and just going to the market and being much more relevant from that perspective on chasing. We're really chasing in a reactive way for things that the customer likes, and it's going to be something that continues to benefit us and it's a muscle we're building. When we do it, it works really well. We just have to do it more broadly and deeper in some of the areas that are just getting started, and I think that could be a large benefit for us as well. I would just say there are a lot of partnerships that Tom and the merchant teams are out there looking for that we're excited about as well. So, I think there's going to be a lot more newness coming into the store, which I think is important to our customer.

Yeah, as far as the home business goes, I feel very good about the home in terms of the progress the team has made there overall. Home decor has been very good, not only in the seasonal decor but also in everyday decor. Yeah, I'm looking forward to the holiday season. The team has put together an incredible holiday decor presentation, which will be right in the front of the store as it was last year, but you'll see a significant build in terms of the presentation there overall. The pet business has been extremely strong overall, and we see that building as well. The big issue we have there is we have a very large electrics business, which is hurting us. Our bedding business needs to be turned around overall. The wall art business has been good, and obviously, that's part of the core business, but we are seeing a lot of progress there. I feel very good about that. We just have to get over the hurdle of the electrics business and we have to rebuild the bedding business. In general, I think the team has done a very nice job of repositioning the home business for growth. The other thing that we're excited about is our entire gifting presentation there as well. But again, we look forward to the back half of the year to see some growth there.

Thank you.

Thank you. Well, I want to thank everyone for listening on the call today. Have a good day.

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