Kohls [KSS] Conference call transcript for 2022 q4
2023-03-01 12:16:05
Fiscal: 2022 q4
Operator: 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 Kohlâs Corporation Q4 2022 Earnings Conference Call. Todayâs conference is being recorded. All lines have been placed on mute to prevent any background noise. After the speakersâ 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 of IR. Please go ahead.
Mark Rupe: Thank you. Certain statements made on this call, including projected financial results and the Companyâs future initiatives, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohlâs intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohlâs 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 Kohlâs most recent annual report on Form 10-K and Item 1A of Part 2 of the Companyâs quarterly report on Form 10-Q for the first quarter of fiscal â22 and as may be supplemented from time to time in Kohlâs other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and Kohlâs undertakes no obligation to update them. In addition, during this call, we will make reference to non-GAAP financial measures. Information necessary to reconcile these 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 Companyâs Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So, if youâre listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohlâs undertakes no obligation to update such information. With me this morning are Tom Kingsbury, our CEO, and Jill Timm, our CFO. I will now turn the call over to Tom.
Tom Kingsbury: Thank you, Mark. Thanks to all for joining us this morning. I want to start by saying that Iâm excited to be leading Kohlâs during this pivotal time. Kohlâs is a solid company. We have a substantial opportunity to make a difference in the retail landscape. As you will hear today, we have a solid foundation and a highly motivated team with a set of priorities to drive Kohlâs sales and earnings growth. During the past three months, I have had the opportunity to assess our go-to-market strategies, our operational capabilities and processes in our organizational structure. I have also visited a number of our stores across the country and engaged with many of our brand partners. It is clear to me that Kohlâs fields an important need in the market offering highly relevant products at a great value to millions of customers in conveniently located stores across the U.S. and online. We are making great strides in beauty through our Sephora partnership. However, we have lost some ground in other key categories. Candidly, I know we can do better. To reach our full potential, we will refine our strategy and reestablish merchandise disciplines with a customer center focus across the organization. This will sharpen our positioning with customers, allow us to capitalize on new opportunities and drive greater efficiency. Our efforts have already begun. We took a number of proactive measures in the fourth quarter to clear our inventories, and we will seek to maintain the discipline by planning inventory down mid-single digits percent going forward. We also implemented several growth initiatives in Q4 that will begin to benefit our results in 2023 and structure the organization to run more efficiently. One of the early messages I shared with our leadership team was that we must simplify how we work to drive efficiency, which in turn will allow for greater time to be spent on executing and driving our strategy. In late January, we realigned parts of the merchandising and marketing departments with the objective of driving efficiency in our operations. This included consolidating the number of general merchandise managers to 4 from 7, a structure that we had prior to the pandemic as well as transitioning, planning and allocation to report directly to me. And more recently, I am pleased with the appointment of two key executive leadership positions. Yesterday, we announced the hiring of Dave Alves as our new President and Chief Operating Officer. Dave is a 30-year retail veteran and will lead our enterprise operations including our nearly 1,200 stores, global supply chain and distribution center network, real estate portfolio, among other functions. In addition, we appointed Nick Jones as our new Chief Merchandising and Digital Officer. Nick has great experience across many of our categories, including apparel, home and gifting and will be instrumental in leading our merchandising strategy and functions. Both Dave and Nick will join us in the coming weeks, and I look forward to our partnership. Through these important actions, I am confident that we have the right plans, organizational structure and team in place to drive improved more consistent sales and earnings performance over the long term. That said, I want to be realistic in setting expectations. The full impact of our efforts will take some time. It wonât happen overnight. And we must acknowledge that we are implementing these actions in a challenging macroeconomic backdrop. As Jill will discuss in more detail, our actions against this backdrop form the basis of our prudent guidance for 2023. With that context, I will now discuss our path to improve performance and the key priorities that will guide our forward action. We are focused on four overarching priorities in 2023 that will drive overall sales and profitability. They are: enhance the customer experience, accelerate and simplify our value strategies, manage inventory and expenses with discipline and strengthen the balance sheet. Successful execution across these priorities will unlock considerable long-term shareholder value. Let me walk you through each of these priorities discussing the actions and intended outcomes we are driving towards. The first priority is enhancing the customer experience. It is imperative that we continue to provide the best experience for our customers when they shop at our stores and online. We are focused on ensuring that our customers are finding the product assortment they are looking for tailored to the way they shop. Our partnership with Sephora is an excellent example of how we are enhancing the customer experience. Nearly 8 million of our customers purchase beauty products at Sephora at Kohlâs last year, and this will continue to grow in the coming years as we further expand our store presence. In the fourth quarter, our total beauty sales increased 90%. We achieved high-single-digits percent comparable beauty sales growth in the 200 Sephora shops that opened in 2021 and better-than-expected sales in the 400 shops opened in 2022. We also continue to see strong digital sales growth. Our Q4 performance in many ways cemented our positioning as a major player in the beauty industry based on our notable market share gains. I want to commend the team for successfully capitalizing on the holiday selling period. We drove value through our expansion and gift sets, merchandise both in the shop and in aisle with fragrance being a key category. I am confident that we can build on this momentum in the months and years to come. I recently met with Sephora leadership. And what I can tell you is that, one, we both are pleased with the partnership weâve built and what has been accomplished in such a short period; and two, we both see immense opportunities to continue to drive sales and profitability in the future. This summer, weâll open another 250 Sephora shops, bringing our total to more than 850 stores, featuring the standard 2,500 square foot space. In addition, we are opening 50 smaller formats Sephora shops by the end of this year with a plan to roll out to the remainder of the chain by 2025. Moving beyond beauty. Let me now touch on efforts we have underway in our product and merchandising. As it relates to our product assortment, we remain highly committed to the active business supporting our key brands, though weâll recenter our focus on our customersâ needs by capitalizing on multiple lifestyles. We will rebalance portions of our assortment to capture our customersâ return to more normal purchasing behavior for their wardrobes. Additionally, weâll add more offerings across casual and career wear, including, for example, further expanding our womenâs dress business following last yearâs success. We also see clear tangible opportunities in other categories in which we are underpenetrated. Home and gifting are two areas that our customers expect more from us. I believe Kohlâs can increase its penetration in areas like home décor and become a destination for gifting. To capitalize on this, we are rethinking how we source portions of our assortment, recognizing that we can find great values, increase our speed and broaden our offerings by going into the domestic marketplace regularly. I now want to highlight the importance of our stores. We have an incredibly strong physical presence across the U.S. They continue to represent nearly 70% of our annual sales and are critically important to how we engage with our customers. I have worked with our real estate team in reviewing our portfolio and remain very comfortable that our stores are healthy. Frankly though, we have to do a better job of driving greater in-store productivity, and I am confident that we can. In the fourth quarter, some of our early efforts began to bear fruit. Looking ahead, we are rethinking how we merchandise stores to deliver a better experience for customers to drive greater frequency of visits and capture more share of their wallet. Let me share a few early examples of actions we are taking in areas that simply werenât up to standard. In early December, we moved our gifting assortment to the front of the store from the back to better capitalize on peak holiday traffic. This proved highly effective, resulting in sell-through significantly higher than the prior year. We will also showcase more products, including home and gifting, near the front of the store to inspire our customers as well as feature more impulse products, which is a largely untapped opportunity for Kohlâs. In addition to our stores, we are also highly committed to our digital business, which represents over 30% of our sales. Two of our key digital growth initiatives include expanding Kohlâs Marketplace and Kohlâs Media Network. Kohlâs Marketplace is broadening our product offering online to capture incremental sales opportunities and Kohlâs Media Network is leveraging our digital platform and site traffic to partner with more of our key brands and capture more advertising dollars. As you just heard, we have a lot of initiatives and actions underway to enhance the customer experience. This will be a continuous focus of ours. The retail industry is ever evolving, and we must ensure that our positioning consistently meets the needs of our customers. Now, let me transition to our second priority, which is accelerating and simplifying our value strategies. In todayâs inflationary environment, it is very important that Kohlâs stands for value, both in our pricing and in our messaging. We provide great value to our customers through Kohlâs Cash, our rewards loyalty program and our Kohlâs Card. That said, we know that our promotional strategy at times can be a disadvantage to Kohlâs when compared to our competitorsâ price-focused strategies. We have made progress over the past couple of years in our pricing and promotional optimization efforts. We will build on this progress in 2023, accelerating our efforts to reduce our reliance on general promotions. We will test everyday value pricing with a small percentage of our product assortment and if successful, grow it appropriately in subsequent years. We fully recognize the sensitivities around pricing with our customers, and weâll approach this with great measure and flexibility. A part of this will enhance consistency in our marketing messaging to improve the customer experience, drive increased customer engagement and make our pricing less complex. When we stand for something with greater clarity and value, our customers do respond. This is evident in the customer response we have experienced in recent weeks related to our clearance effort. Another way we will enhance the value we are providing our customers is through our industry-leading loyalty program. In 2023, weâll broaden the reach of our credit opportunities through the launch of a co-brand card with Capital One. We already have a strong private label Kohlâs credit card, so recognize that todayâs younger customers want greater flexibility in their payment options. Let me now turn to our third priority for 2023, which is managing inventory and expenses with discipline. As I mentioned earlier, we took proactive actions during the fourth quarter to clear out excess inventory and slow selling goods. This is best seen through our inventory progression over the past few quarters. Inventory was up 48% year-over-year at the end of Q2, up 34% at the end of Q3 and up just 4% at year-end, despite a tougher sales environment. Inventory is now generally back in line with our sales performance when compared to 2019. We took markdowns following Christmas, which benefited our sales performance in the quarter. Q4 comparable sales of down 6.6% improved through the quarter with November down low-double-digits percent, December down mid-single-digits percent followed by up high-single-digit percent in January with a positive trend continuing into February. Jill will discuss the related impact to margin in more detail in a moment, but it was important that we took these actions in Q4 to best position the Company for 2023. During the past three months, I have spent a significant amount of time focused on merchandising, including establishing stronger inventory control processes. We are putting a spotlight on fresh receipts and on driving turnover. We will operate so that we have plenty of room to chase receipts, enabling better management of receipt flow. As part of this, we are committing to plan -- planning inventory down mid-single-digits percent going forward. We will also adjust how we mark our goods, getting rid of excess inventory or slow-selling items on a more even flow throughout the year, instead of waiting until the end of a season. In terms of spring 2023, we feel good about our Q1 inventory position with a steady flow of transitional receipts that arrived during January and February. And considering there are still a lot of macro headwinds for Q2, we have left even greater liquidity and our open to buy with lots of room to chase. I am optimistic that through our new inventory control processes we will be able to increase our sales productivity and inventory efficiency. Now, let me address our focus on expense management. This has been a core strength of Kohlâs over time, but given the ongoing inflationary environment, it must be an even greater priority for the organization. In 2022, our SG&A expense ratio drifted higher on lower sales, increased strategic investments and wage inflation. Growing sales is paramount to easing the expense pressure. However, we must proactively capitalize on other opportunities such as increasing self-service capabilities in our stores, driving improved marketing efficiency and reducing spend across all areas of the company. And lastly, our fourth priority for 2023 is strengthening our balance sheet. Our focus remains on returning our balance sheet to its historical strength after a challenging 2022. Our long-term objective remains to manage our business at 2.5 times leverage. In January, we replaced and upsized our revolver to a $1.5 billion secured facility, which enhanced our liquidity and flexibility. This was the right move given the ongoing macro uncertainty and the actions we are taking to drive Kohlâs sales and earnings growth. While we were only partially utilized at the end of the year, we will increase our borrowings in the first quarter to fund working capital and the recently completed retirement of our February 2023 bond maturities. However, we will work our revolver balance down throughout the year with no borrowings planned at year-end. Jill will discuss our other capital allocation priorities in more detail, including our commitment to the dividend, which represents a healthy yield at the current share price. So to summarize, enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expense with discipline and strengthening the balance sheet are four overarching priorities for 2023. And the broader Kohlâs organization is aligned and focused on executing against each of them. Now, let me frame up how we are thinking about 2023 in the context of the priorities and actions I just discussed as well as the anticipated soft consumer demand outlook. We are prudently planning the year with sales down 2% to 4% and our operating margin and earnings pressured largely as a result. I want to be realistic in setting expectations. The benefits from our actions will take time. However, I am confident that successful execution against our priorities will produce the intended improvement in sales and earnings growth over the long term. While 2023 may be viewed as a transitional year, it is our objective to show progressive improvement against our priorities and actions as we move through the year. We look forward to providing updates on future quarterly calls. In closing, I want to reiterate that Kohlâs has a solid foundation in place. I am excited to lead this company and see immense opportunity to unlock value. I want to thank our loyal associates who are serving our customers every day. I will now turn over the call to Jill to discuss our fourth quarter results and 2023 outlook. Jill?
Jill Timm: Thank you, Tom, and good morning, everyone. I will review our fourth quarter results and then discuss our guidance outlook for 2023, the key takeaways from our Q4 performance and that we took meaningful proactive measures to better position the business for 2023 and that our sales remained pressured by the persistent inflationary environment. Net sales were down 7%, driven largely by reduced traffic with higher average ticket and lower units per transaction offsetting one another. Our middle income customers remain pressured and continued to lean into our value-oriented private brands. As Tom indicated, our sales trends improved throughout the quarter and were especially strong as we transitioned to a clearance focus in late December and January, and this continued into February. From a channel perspective, store sales improved sequentially throughout the quarter and were down 3% to last year. The improved performance was driven by having more Sephora shops open and elevated clearance demand late in the quarter that largely occurred in stores. Digital sales were down 12% to last year and accounted for 37% of sales. From a product perspective, sales of our private brands were relatively flat in the quarter with strong performance in many of our top private brands, including Sonoma, Croft & Barrow, Tek Gear and Lauren Conrad. Sales of our national brands were down high-single-digit percent, mostly due to weaker active home and denim performance. Accessories was our best-performing line of business, up mid-single-digits percent to last year. Strong sales growth in beauty was partially offset by lower sales of jewelry which, as a reminder, is largely driven by in-store displacement associated with removing the fine jewelry counter to make room for Sephora shops. We have an opportunity to do a better job solving for the lost sales in this category. As it relates to some of our other categories, menâs and womenâs apparel outperformed the Company average. In menâs, we saw solid results in tailored dress, young menâs and outdoor. While womenâs benefited from higher demand for elevated casual and dress wear and a sequential improvement in intimates. Juniors continued to be a headwind within womenâs, and active was challenged across all lines of the business. Home, footwear and children underperformed the Company average. Other revenue, which is primarily our credit business, declined 13% in the fourth quarter. Performance of our credit business continues to be pressured by a lower overall accounts receivable balances and normalizing loss rates. Now let me turn to the rest of the income statement. Q4 gross margin was 23%, down from last yearâs 33.2%. The decline was driven primarily by two items: clearance markdowns of approximately 750 basis points and product cost inflation of approximately 200 basis points. We also saw headwinds from higher shrink and higher-than-expected freight expenses in the quarter. SG&A expenses declined 0.6% to $1.7 billion, reduced spending across marketing and distribution were mostly offset by higher store expenses driven by wage headwinds in the quarter. Depreciation expense of $200 million was $7 million lower than last year due to reduced technology capital spend. Interest expense of $78 million was $13 million higher than last year due to Sephora related lease amendments and increased revolver borrowings. Net loss for the quarter was $273 million and loss per share was $2.49. Turning to the balance sheet and cash flow. Our inventory at quarter-end increased 4% compared to last year, yet declined 10% against the fourth quarter of 2019, which is generally in line with the sales decline over the same period. As Tom indicated, we are committing to plan inventory down mid-single digits percent going forward. Operating cash flow was $707 million in the fourth quarter. Capital expenditures for the quarter were and for the year were $826 million. As a reminder, CapEx in 2022 was driven primarily by the 400 Sephora openings, store refreshes and 5 new stores and 4 relocations. In 2023, we are planning to invest $600 million to $650 million, including 250 Sephora openings, an additional 50 small format Sephora shops, store refreshes as well as 7 new stores, one of which is a relocation. 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 is important that we rebuild our cash position and it remains our longer-term goal to manage this business at a leverage target of 2.5 times. We will make progress on both cash and leverage as we move through 2023. We will be utilizing the revolver to fund both, working capital and $164 million bond retirement in the first quarter, and weâll sequentially work it down through the year with no anticipated borrowings at year-end. In addition to the February bond retirement, we will also retire $111 million of bonds in December of 2023. As it relates to returning capital to shareholders, we will continue to prioritize our current dividend, which represents a healthy yield for our shareholders. During the fourth quarter, we paid $55 million or $0.50 per share in dividends to shareholders. In addition, as previously disclosed, on February 21st, the Board declared a quarterly cash dividend of $0.50 per share payable to shareholders on March 29th. And as it relates to share repurchases, as we stated on our Q3 earnings call, we are not planning any additional repurchase activity until our balance sheet is strengthened. Now, let me provide details on our outlook for 2023. As youâve heard today, we are highly focused on four key priorities to drive improved sales and earnings performance. This, coupled with the still challenging macroeconomic environment supports a prudent stance on planning the upcoming year. As Tom indicated, it is important that we establish realistic expectations of our performance given the actions we have underway, allowing us the flexibility to take additional actions, if appropriate, and to build on our progress through the year. For the full year, we currently expect net sales to decrease 2% to 4% versus 2022 and includes the 53rd week, which is worth approximately 1 percentage point of growth, operating margin to be approximately 4% and EPS to be in the range of $2.10 to $2.70, excluding any nonrecurring charges. Let me share some additional guidance details. We are planning other revenue to be down in line with our overall net sales in 2023. We expect D&A to be approximately $770 million, interest expense of $350 million and our tax rate to be approximately 23%. And from a margin and cost perspective, we expect gross margin to stabilize in 2023 and be in the 36% to 36.5% range. Freight expense is expected to be a tailwind with progressive benefits through the year, and we expect product cost inflation to remain a headwind in the first half of the year. As it relates to the promotional environment, we expect it to remain competitive. We expect SG&A dollars to deleverage slightly. Wage inflation will continue to be a headwind, offset by benefits from a more efficient organization structure and fewer Sephora openings this year. Lastly, I want to highlight a couple of items about how we are thinking about the year. As it relates to Q1, we have seen sales trends quarter-to-date above our annual guidance. However, much of this upside has been driven by elevated clearance activity that has a lower margin. As we work through the clearance inventory, we expect trends to moderate. We expect both our sales and earnings to build through the year. Our guidance assumes that EPS will be lower in the first half of the year as compared to last year, with the second half benefiting from easing freight and product cost inflation as well as lapping of the inventory actions taken in the fourth quarter. With that, Tom and I are happy to take your questions at this time.
Operator: Weâll go first to Bob Drbul at Guggenheim Securities.
Bob Drbul: Hi. Good morning. And Tom, welcome. I guess just two questions that I have. The first one really for Tom, can you elaborate some more just on the opportunities that you do see now at Kohlâs and what excites you about the opportunities? And the second question is really for Jill. When you look at the guidance that youâve given us, can you just elaborate a little more as how you have approached the guidance and how you think about it? Just how we should be expecting things to play a little more, that would be great. Thanks.
Tom Kingsbury: I think Kohlâs has a lot of opportunities. Itâs really a solid company with things in place already. I mean, I think Kohlâs has done a really nice job to set things up, such as the Sephora business. I think thatâs -- will continue to be a big opportunity for us. Itâs bringing in a different consumer, a younger consumer, a more diverse consumer. So, I think thatâs all very good. We just need to improve some of the disciplines that we have -- the inventory discipline. We got out of control in 2022. We did a good job in â21. But â22, obviously, we have a big spike in the inventory. So, we need to improve those disciplines and need to be more agile in terms of having open to buy, to spend every single quarter so that we can chase the business. Itâs better to understand what the customer wants and go after it than to buy it all upfront and hope it sells, okay? So, weâre doing a lot of that. We already took significant actions in the fourth quarter as we -- Jill and I both said. We also want to -- weâre looking at our store operations. We think thatâs a big opportunity for us. Weâre working on changing some of the flow of product, not tremendously, but we feel that we need to have more gifting upfront. We did that in the fourth quarter, and it did very well. So, we continued it for Valentineâs Day. Weâre going to do it in Motherâs Day, all the true gift-giving periods. Just to have the store look a little bit different, weâre working on sidelines. Weâre working on reducing the amount of graphics and signs we have in the store, just to have a more modern feel in our stores overall. But, we want to obviously have higher productivity in stores and thatâs what weâre working on, as well as we want to continue to grow our digital business overall. So -- but I think in general, I think thereâs a lot of opportunities. The reason why I came back to Kohlâs is because I see those opportunities, and I see that we can take advantage of those opportunities in the future.
Jill Timm: And then, Bob, in regards to our guidance, I think what we did is we took a cautious plan as we look to the year. We wanted to be appropriate with our guide, given the environment, itâs high inflation, interest rates are rising, and we know that has a large impact to particularly our middle income customer. So, as we are navigating them in certain times, we have a lot of change that Tom had outlined not only in the script, but obviously just in his remarks as well in terms of what we see ahead of us. So, we do expect the sales to build throughout the year. Particularly as these initiatives roll out, weâre going to have more Sephora stores open. Weâre going to work more on the gifting, impulse, home décor really seeing that build throughout the year. And then I think as well with gross margin, weâll see that build throughout the year as well with the freight moderating. Weâre going to see commodity costs come down, starting with our back-to-school receipts. And then weâre going to start taking more timely clearance markdowns throughout the year. And this will actually have a bigger impact to Q2 margin because weâve typically taken these seasonally. Youâll see a negative impact in Q2, but a positive impact in Q3 as we move those marks up and take them much more timely, particularly on our spring and summer goods from that perspective. And then, in SG&A, weâll expect Q2 and Q3 to have more costs associated with them just due to the timing of when weâre opening up our Sephora shops. Last year, we started that construction earlier in the year and this year, youâll see it more in Q2 and Q3 with the 250 stores and then those 50 new shop stores. So, thatâs kind of how I would make the model work and your build work from a guidance perspective.
Operator: Weâll move next to Gaby Carbone at Deutsche Bank.
Gaby Carbone: Tom, so previously, Kohlâs is targeted a 7% to 8% long-term operating margin. Youâre guiding to 4% for FY23. I was wondering if your confidence still in that 7% to 8% goal over time. And what does the bridge look like to get there? Thank you.
Tom Kingsbury: Well, Iâll talk for a few minutes, and then Iâll have Jill. Overall, weâre still confident in the 7% to 8% target that we have. A lot has to do with rebuilding our sales to obviously get to those levels again. But weâre not changing. Weâre not changing our long-term guide at all because we feel we can get there. But Iâll let Jill talk about it.
Jill Timm: Yes. I think the framework that we gave you with the 7% to 8% still exists today. And as Tom mentioned, it really starts with sales growth. And if you recall in that framework, it was a low-single-digit sales growth that was the beginning of that framework. So I think we feel confident in the initiatives that weâve outlined today, like I mentioned, that weâre going to get back to that growth pattern. But as Tom suggested, it takes time to do this. So, weâre moving things in the right direction. So, we look at this as a long-term framework that still exists. You go into the margin side of things, our guide this year is at the low end of that, itâs a 36% to 36.5%. But we do think weâre going to continue to see benefits, particularly around the strong inventory management that Tom spoke about. Weâre going to have better inventory control processes, this will drive turn, weâll have better reg selling. So, we do see that we can continue to get to that higher end there. And then from expenses, weâve always had a very strong focus on expense discipline at Kohlâs. We know we can leverage at about a 1.5 comp. This continues to be a focus for us. Weâre looking for efficiencies across the business. But particularly, youâre going to see that around like automation, the self-service in our stores, automation in our distribution centers. Weâve done a lot of organizational optimization. Weâre looking at marketing efficiencies, all places that we can continue to lean into to bring down our SG&A run rate as well. So I think overall, hopefully, you heard from both Tom and I, weâre very confident in the long term framework for op margin, getting back to 7% to 8%.
Gaby Carbone: And just a quick follow-up. So you mentioned your private brands a flat for the quarter, which is encouraging. Just curious how youâre thinking about leveraging your private brands portfolio moving ahead, especially as consumers are continuously seeking more value.
Jill Timm: Yes. I think, obviously, this is -- you said it value. And I think in this environment, value is very important to the customer, and theyâre seeking that out. And weâve seen for the last several quarters, theyâve leaned more into our proprietary brand portfolio because it brings to them that value. But weâve also seen great performance by Sephora and some of our new brands like Tommy Hilfiger and Eddie Bauer in outdoor. So I think value goes across the chain and bringing them a quality product for a price they think is good. And I think thatâs where you can see them making those trade-offs sometimes given the wallet in the middle income customer is being more stretched. And of course, we sell discretionary items. So I think having that dual portfolio of the private brands with the national brands has worked well for our consumers to be able to make that pivot given the constraints on their wallet today. So, weâre taking advantage of that. And weâll lean into it, again, based on what Tom has mentioned, being much more in a chase model. So really working on how we can bring a faster model through those proprietary brands to life, and we have a lot of people working on that right now by using more West Coast suppliers and doing more direct to -- or direct vendors as well. So I think thereâs ways that youâll see us continue to feed into that private brand portfolio and doing that with the inventory discipline Tom indicated.
Tom Kingsbury: Yes. I think that the -- I think that the private brands are really important part of our business. But weâre going to spend a lot of time in 2023 improving our performance in the national brands as well. We need to do both. We stumbled a little bit in the national brands in â22. But our goal is to have both national brands and private brands perform at a high level.
Operator: Weâll go next to Mark Altschwager at Baird.
Mark Altschwager: So, Tom, your commentary about utilizing the domestic marketplace is interesting. Is that strategy primarily focused on home décor and gifting, or do you see an opportunity in apparel and other categories as well? And Iâm curious if there are -- if you need to make incremental investments in merchandising or the buying teams in order to build that muscle within the organization.
Tom Kingsbury: Weâre really looking at chasing goods across all categories of business, to be honest with you. Thereâs always ample product that we can chase. Iâve experienced that before in another place where I work that you can do that pretty readily. We do have the right structure in place to do that. We have the right buying teams, the right GMM structure to do that. Thereâs nothing really, I think, that could prevent us from doing that. But managing our inventories, thatâs the key. I mean, we have to make sure that we have open to spend. Thatâs the only thing that could hurt us in that pursuit. But in general, I think itâs across the board that we can do it.
Mark Altschwager: Thank you. A quick follow-up for Jill. Just with gross margin, any more color you can give us on the first quarter? I guess, specifically, the clearance headwind was obviously very large for the fourth quarter. It sounds like that activity continued into the early first quarter. So just relative to that 750 basis points, how should we be thinking about the headwind early in the year here? Thank you.
Jill Timm: Yes. I think what weâre seeing is freight is moderating. Thatâs going to happen throughout the year. Weâre going to get some product cost benefits starting with our back-to-school. Obviously, we took a lot of clearance into Q4. The selling is continuing to benefit us into February, like I had indicated, but the marks happened in the fourth quarter. So itâs not as punitive into Q1. I think the thing with the clearance markdowns that weâre looking for is just taking them much more timely when theyâre more relevant to get better sell-throughs. And so the one quarter that I would say will look different will be Q2 because we typically havenât done clearance in Q2. We waited till Q3. So, weâre going to move those up. So youâll see Q2 be a little more margin pressured because of that change, and then that will offset into Q3. And of course, Q4, we donât expect to have a repeat of this year. So, youâll see a large benefit into Q4.
Operator: Weâll go next to Matthew Boss at JP Morgan.
Matthew Boss: So Tom, maybe help us to think about the time line needed for -- in the release and what youâve talked about is refining the strategy, reestablishing the merchandise disciplines. Maybe larger picture, how do you view this turnaround opportunity relative to your past retail experience? And then at a micro level, how should we think about the market share opportunity as we think about spend from existing customers relative to new customer acquisition that might be needed?
Tom Kingsbury: Time line, we -- it doesnât happen overnight. It really doesnât happen overnight. But weâve already made some progress. Obviously, weâve got our inventories at the level they should be. And weâre planning our inventories for the first and second quarter appropriately. But itâs going to -- weâre going to make progress in 2023, but we feel -- as any business, it takes a while for it to really get traction. But a lot of our -- a lot has already gotten -- weâve already done a lot of things so far. Excuse me. So even in my previous experience, we -- it took us a while to get things going in the right direction. But itâs just something you canât do overnight. But I want to make something very clear. Itâs not -- the Kohlâs is a different company than my previous company. And we have a lot of really good things already in place in the strategy, so itâs not an overhaul. There are some things that we need to be doing, and weâve already started working on it, but itâs not a total overhaul. I just want to make sure that people understand it. I think thereâs a lot of good things in place already today. As far as market share, I think that if we can execute, we can gain market share from many different places.
Operator: Next to Dana Telsey at Telsey Advisory Group.
Dana Telsey: As you think about the merchandise mix, Tom of Kohlâs, active has always been a big portion of where they were driving to. What is your ultimate goal in the merchandise mix? And what do you think would be most effective? And then also, Jill, in terms of omnichannel and delivery expense and some of the headwinds there, how do you see that impact on margin in 2023 and the framework of whatever is happening with freight expense and supply chain? Thank you.
Tom Kingsbury: Well, weâre going to let the customer tell us what they want. I think establishing targets in terms of businesses, I donât think thatâs in the best interest of our customers, overall. So, over time, our mix will evolve to what the customer is looking for. Right now, we feel that the active business is really important, but we also feel like outdoor is important as well. So weâre going to integrate into some of the presentations, some of the outdoor products. Weâve already done that. But Iâm not going to set targets in general, because we have to be agile. We have to do -- we have to build the assortments relative to what the customer wants, not what targets we set. You will see more -- in the home store, more gifting product, more impulse product going forward, itâs something that I believe in a lot and the customer is already telling us, thatâs what they want based on the sell-throughs, we had in the fourth quarter in gifting and our Valentineâs assortments did very well because it was repositioned in the front. So -- but thatâs just following what the customer wants, and thatâs what weâre going to continue to do.
Jill Timm: In terms of omnichannel, what I would say is, obviously, digital is always an incremental pressure when it does come to that cost of ship. We are seeing, obviously, for a cost, like we mentioned, moderating, so not seeing as much of an increase there that we have in the past. But it will always as we increase that penetration of digital be a headwind. I think so, if you heard today, we think thereâs substantial opportunity to grow our store productivity. And so that is definitely a place that helps us offset some of those headwinds because the penetration wonât be growing as much if we can grow both channels. And I think thatâs something weâve heard a lot about. Our focus is how do we bring back the productivity into our stores, and whether thatâs through presentation changes, through the new categories that Tom has mentioned and really just the focus to drive in new customers through initiatives such as Sephora. So, I think we see it as always an extra headwind, but it isnât quite as predominant as itâs been in the past. And I think the third piece of it is weâre also seeing a lot more efficiency out of our new fulfillment centers. And they -- as we continue to put more products through those centers, we are getting more efficient to how we can get it to the customer. And then, of course, we continue to utilize our stores, which gets us with -- in a couple of days of our customers as well. So weâre able to do that in a really efficient manner. So our stores continue to play a key role in our digital delivery, which actually makes our inventory even work harder. So as we talk about that inventory discipline and turning inventory, thatâs another lever that we can utilize as well. So, I look at -- we have a huge opportunity to grow stores, which will help us kind of mitigate some of the headwinds weâve seen on the cost of shipping side in the past.
Operator: Our next question comes from Oliver Chen at TD Cowen.
Oliver Chen: Regarding whatâs the new strategy, I had a bigger picture question is the younger customer and capturing the traffic of the younger customer, womenâs apparel, in particular, has been an opportunity. And would love your thoughts on -- as you think about home and gifting, what percentage mix do you see as an opportunity or a hypothesis there? And as we think about gross margin, return on inventory, will the terms and margin profile differ? And I assume the opportunity will outweigh any of those factors. Jill, I would love your thoughts on inventory control processes and what specifically do you see as lower-hanging fruit. And as we think about this inflation and inflation, what does your forecast include in terms of average unit retail? Thank you very much.
Tom Kingsbury: So Iâll take the first part, and then Iâll let Jill take the second piece of this. Well, having Sephora, bringing Sephora in is already bringing in a younger consumer. One of the other things that weâre working on is ancillary products such as womenâs, that when the younger customers coming in to buy Sephora, we want to make sure that they can also buy womenâs apparel, womenâs accessories, womenâs footwear, et cetera. So, we really feel that weâre started. We have something thatâs bringing in a younger consumer. Now we need to expand it to other categories within the store. As far as the mix goes in terms of what percent, as I just mentioned before, weâre not -- weâre going to let the customer tell us what level the mix should be in home décor and gifting. Jill?
Jill Timm: And I think from an inventory control perspective, I just think the processes and the disciplines we have in place in terms of the chase model and really letting ourselves have some liquidity and not making all the buys upfront, like Tom has mentioned is a core fundamental that we just really need to reinstate, instead of allocating all our goods ahead of time. I think this way, we can chase them to the right items. It helps the sell-throughs. It helps the margins because youâre buying the right goods, so you donât have to take as many marks at the end of season. So I think thatâs just really a core discipline that really needs to get reinstilled into the organization. And then quite honestly, the liquidity is going to go where the demand is. So, even though bustle plants at the beginning of the year, we need to be agile in moving through those based on what the consumer is looking for and then giving that open to buy to the right areas. So I think thatâs fundamental Iâve always been really focused, as you know, on inventory control. So I love the new disciplines that Tom has brought to the organization. And then in terms of...
Tom Kingsbury: Weâre going to spend -- excuse me, just one second. Weâre just going to spend and we already have -- weâre just going to spend a lot of time on inventory. And that area is going to report directly to me because of the importance that inventory control is in terms of everything we want to accomplish in 2023 and beyond. Sorry Jill.
Jill Timm: No problem. And I think just on the inflation, deflation from an AUR perspective, I think that isnât anything we saw a lot of inflation in our AURs this year in terms of -- we are in a discretionary spend. It wasnât the same as if youâre buying or selling things people need. So we havenât been able to really expand on the AUR. Our AUR growth has really been more of the mix of the goods that weâre bringing to the table. And again, itâs all with the lens of value. But you bring in Sephora, obviously, a higher ticket item. Itâs something that weâve seen continually perform for us, despite the ups and downs in the inflationary environment. Weâve brought in different items of products like Tommy Hilfiger and Calvin Klein had had higher tickets. So, weâre really going to be I think managing through this in a very easy manner because we didnât bring tickets up. And then 65% of our sales are national brands. So weâre really going to be ticketed based on what those brands are seeing across the landscape and then weâll move with them as well. So, I think one thing is we didnât take things up because of inflation. So thereâs not a lot of room to have to take things down either from my perspective.
Oliver Chen: Okay. And Tom, one follow-up on making pricing less complex. Whatâs the timing at which youâll execute on that? And Kohlâs Cash is pretty iconic and the Company has been on a journey to simplify and amplify, less can be more. So, whatâs different about what you think needs to be done? And what kind of guardrails might be good ideas around making these kinds of changes?
Tom Kingsbury: Well, whatever we do, weâre going to be very thoughtful and do everything at the appropriate pace. One of the things that weâre doing, and it will start around the back-to-school period, weâre going to bring in some product that have everyday low prices. Itâs small. Itâs single digits as a percent to total, and weâre going to learn from that and then determine how big itâs going to be or maybe it wonât be big at all. But itâs in test mode overall. We have a lot of layering of promotions and stuff like that. And weâre just going to try to simplify a lot of that. Weâre not going to back off of Kohlâs Cash. Thatâs a very important component to the value equation overall. But weâre just going to -- weâre going to test other things. We want to focus on spending more markdowns on clearance because as Jill said, weâre going to take clearance at the appropriate time. We want to allocate markdowns monthly to address our clearance inventories, which is really important. Weâre going to be more targeted in a lot of our promotions as well. Right now, we have a lot of general promotions, general audience promotions, which weâre going to look at that. Weâve already -- weâve already reviewed the first and second quarter to figure out where we could do that but -- and spend more of our markdowns on targeting certain areas where we feel that we have an opportunity. But everything we do, itâs going to be at the right pace.
Operator: And weâll take our final question from Paul Lejuez at Citi.
Tracy Kogan: Thank, guys. Itâs Tracy Kogan filling in for Paul. Just two questions. On CapEx, it looks like youâre reducing your CapEx this year, which is understandable, but just wondering if thatâs a good run rate and youâre no longer expecting the $2.5 billion over three years? And then secondly, I was hoping you could update us on the Amazon partnership and how do you assess the traffic driving results of the Amazon Returns in stores and how youâre doing converting as you look back at this year overall? Thanks.
Jill Timm: Sure. I think for CapEx, obviously, Tracy, weâve talked about one of our core strategies being to strengthen back to the balance sheet. So, we did make that reduction this year in terms of really focusing on the return projects. So, of course, still going to invest back in Sephora and then adding those 50 small stores now that we have a solution to hit all of our stores from a Sephora perspective, but really being able to pull back into those more meaningful areas just given the fact that we are trying to build back our cash. So given what we spent this year and next year is obviously hitting $2.5 billion is probably not where weâre going to be at this point. But weâll continue to assess what that CapEx needs to be really based on a return model. But just to get to the math, we wonât be making up that difference over the next couple of years. I think weâre really thoughtful. And as weâve said through this whole call, itâs just going to be long term. So weâre going to build back to that position of strength from a balance sheet perspective, but thatâs going to also take some time because we need to make the right investments for growth for our business as well. And then, in terms of Amazon, I think Amazon is one of many, hopefully, youâve heard today, initiatives that weâre looking to drive traffic with. So along with Sephora and even home décor, gifting, impulse, all things that will have customers coming in more to see the changes, itâs more impulse driven. So, weâre really going to just continue to be focused on all of our initiatives to drive topic, and Amazon is obviously one of those key items, Sephora being another one in terms of driving new customers and traffic into the store from a replenishment perspective, and then just really the whole store experience to drive more newness, ore exploration. So I think Amazon is just a key to that strategy in total.
Tom Kingsbury: Thanks for joining us today.
Operator: And this concludes todayâs conference call. You may now disconnect.
