Kohl's Corporation (KSS) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2020 Kohl's Corporation Earnings Conference Call. [Operator Instructions] I would now like to hand the conference over to your speaker today, Mark Rupe, Vice President of Investor Relations. Thank you. Please go ahead.

Thank you, operator. Certain statements made on this call, including projected financial results and the company's future initiatives, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl's 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 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 maybe supplemented from time-to-time in Kohl's other filings with the SEC, all of which are expressly incorporate 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 will make reference to adjusted net income and adjusted diluted earnings per share, which are non-GAAP measures. Information necessary to reconcile these non-GAAP measures can be found in our press release and investor presentation, both of which have filed as exhibit to our Form 8-K with the SEC and are available on the company's Investor Relations Web site. 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 So, if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.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 today are Michelle Gass, our Chief Executive Officer; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michelle.

Thank you, Mark. Good morning, and welcome to Kohl's first quarter earnings conference call. A lot has happened since our last earnings call on March 3. The escalation of the COVID-19 pandemic has challenged the world in ways never thought imaginable. It has affected each of us to varying degrees and has had a significant economic toll. I hope you and your families are safe and healthy during this time. As difficult as this unprecedented health crisis has been, I am comforted by the resilience and generosity that's been exhibited by so many. Our sincere gratitude goes out to all of those on the frontline that have worked tirelessly to support the greater good. I'd like to thank our associates for their support and commitment as we have continued to operate portions of our business. I would also like to recognize and thank our many business partners and vendors that have been instrumental in helping us navigate through this crisis. We've had to make difficult decisions to ensure our business continuity, and I am incredibly proud of how our organization has stepped up to the challenge. We've learned a lot, and we'll be sure to leverage these insights into the future. We expect we'll be operating differently for quite some time, but we are pleased that we have now begun the rebuilding process. We have taken our first step in this direction, and it has begun to reopen stores. As we continue to move forward, we will do so with the health and safety of our associates and our customers remaining our top priority. For today's call, I'm going to discuss how we are navigating the current environment, touch on our first quarter results, review our store reopening strategies, and then share with you an update on our strategic initiatives and the opportunities we have to take market share. Jill will then review the financial results and provide details on the actions we've taken to ensure our liquidity and financial flexibility to navigate this crisis, and over time become a stronger company. We entered 2020 with a strong foundation and a healthy financial position. As we shared with you on last quarter's call, we had a record 65 million customers shopping at Kohl's in 2019. This is a testament to Kohl's differentiation and the value proposition we provide our customers. We also entered the year with over $700 million in cash and modest leverage. We have a long history of disciplined and prudent capital management and have reduced our debt in recent years. This has put us in a solid position to navigate this crisis and will continue to serve as well. As COVID-19 escalated, we established two short-term priorities; the first, protecting our associates and customers; and the second, preserving the financial position of the company. Consistent with these priorities, we closed all of our stores on March 20 to do our part in helping to slow the spread of the virus. We also took immediate action to reduce our cash outflow. Essentially, everything was on the table, and we operated swiftly and decisively. We reduced inventory receipts, extended payment terms, and reduced expenses across the business including marketing, technology, and operations. We also made the difficult decision to furlough 85,000 associates, most of whom work in our stores and store distribution centers. These are valued members of the Kohl's family and we supported them through two weeks of pay and continuing their existing health benefits. In addition to expenses, we also increased our liquidity through significantly reducing our capital spend, suspending our dividend and share repurchase program, replacing and upsizing our revolver, and issuing new debt. I will now turn to our first quarter results. As expected, our business has been materially impacted by COVID-19. While we have a fast-growing digital business, it has only replaced a small portion of the sales loss from our entire store base being closed during the second half of the first quarter. Our business was on track entering the crisis with comparable sales trends consistent with our previous guidance at the time of our fourth quarter earnings release. However, shortly thereafter, we began to see the traffic impact to our stores, and then we closed all of our stores on March 20. With our entire store base closed, we responded with speed and agility leaning into our digital business as the only channel to engage with our customers. We amplified our digital marketing and updated digital site content to be relevant to what customers were interested at this time. We also leveraged our large and growing email file of more than 50 million customers to reach them in new and personalized ways. These efforts paid off. Digital sales increased 24% for the quarter and accelerated to 60% in the month of April. All of the key performance metrics were positive, including traffic, conversion, average unit retail, and units per transaction. And we were pleased to see more new customers and younger customers shopping on our digital platform. Importantly, our stores fulfilled a higher percentage of digital orders, which aided our efforts to reduce in-store inventory. More than 40% of digital orders were fulfilled by ship-from-store and customer pickup during the first quarter, and this percentage was much higher in April, following the successful launch of store drive up where we've seen great customer uptake. In fact, in the over 900 stores where it is offered, the percentage of digital demand fulfilled by store drive up was 15%, exceeding that of buy online and pick-up in store before the crisis began. While we have been testing this capability in a couple of stores, it was still very new to us. As the health crisis unfolded, our team swiftly put a strategy together and launched at scale very quickly. This is a great example of the responsiveness and agility of our organization. From a line of business perspective, we achieved positive digital sales growth in all of our categories. Home was the strongest, with digital sales increasing more than 50% for the quarter. The home category has historically penetrated higher digitally for us, and was influenced by stay at home mandates. We saw particularly strong demand for kitchen electrics, vacuums, electronics and gaming. We also saw continued digital strength in areas like active, toys, and beauty. And we saw growth in areas like basics, intimates, and sleepwear. However, apparel and footwear lagged overall digital growth. Now, I'd like to discuss our reopening strategy. Stores are the lifeblood of Kohl's, and more than 90% of our customers have historically shopped them. While the current crisis has had a significant impact to our store business, we continue to see our store portfolio as one of the core assets of our strategy going forward. A key reason for this is that our stores are financially healthy. 99% of them generated positive four wall cash flow in 2019. Another reason is that they're located off mall in suburban neighborhoods where our customers live and work. We see this as an advantage as the majority of our stores are located next to high traffic areas where our customers are already shopping. We also believe the size of our store provides us unique advantage to facilitate social distancing as customers begin to journey away from home. Our goal is to operate the cleanest and safest environment in retail, where our associates feel comfortable providing excellent customer service and where our customers feel confident to shop. And we are investing to ensure this happens. Since the day we close all of our stores, our team has been working on a thoughtful and comprehensive plan to adopt the latest health and safety measures as we reopen our stores. These include operating with limited store hours, social distancing signage, elevated cleaning procedures, a new returns process among many others. We will continue to offer store drive ups as a convenient offering for our customers. We will also resume our Amazon returns program as stores reopen, and we expect to see traffic build as customers return items purchased over the last several months. We are implementing health and safety best practices for our store associates as they return to work. Associates will undergo training on the new procedures, as well as take part in mandatory wellness and temperature checks before each shift. We will also provide many of the things like masks and gloves that are becoming standard in this new environment, and we are adjusting workspaces to enable social distancing. We believe that all of these elements create the right environment for our associates and customers, as they're welcomed back to stores. Since May 4th, we have reopened about 50% of our stores across the country. We have followed a set of criteria, including state guidelines, health data, store readiness and field insights to help us determine the timing of store reopening. We have been reopening stores on a state-by-state basis. However, we will continue to be agile in our approach as conditions are still evolving. As you can appreciate, as we reopen stores, there's a great sense of pride for the entire organization. It's been a difficult road over the past two months, but we've made the right decisions and strategic moves to put us in a position to begin rebuilding. We are very excited to commence this process, knowing that we can build a stronger Kohl’s in the future. That said, we will remain present to the situation and be prudent in our planning, recognizing that COVID-19 will present challenges for some time. Let me now discuss how we're thinking about the rebuilding process. As we look forward, we are planning our business based on the assumptions that sales will rebuild gradually during the remainder of the year as people get more comfortable living in this new normal. Based on this, we are planning the business conservatively. Our company has a long history of operating with great discipline and we believe prudence dictates caution in the near term. To be clear though, the decisions we are making in the short term related to COVID-19 will not alter our conviction about growing this business over the long term. To that end, our primary focus continues to be navigating the current crisis. Though, we are beginning to look towards the future ensuring that Kohl's is as relevant, if not more so, based on expected changes in the competitive and consumer landscape. We were looking forward to presenting a thorough strategic update at an Investor Day in March. Given that we were unable to do so, I thought it would be helpful to share the overarching themes that remain relevant post COVID-19. Though, we will continue to take advantage of new insights presented during this dynamic time. Let me remind you that Kohl's is a leading omnichannel retailer with a strong foundation, and a loyal base of 65 million customers. Over the last five years, we have enhanced our very healthy store portfolio with a thriving and growing digital business. We view these two channels as not distinct but highly connected to present a unified experience to the customer. In addition, we've also been able to leverage the operations of both our stores and digital platform to deliver easy and seamless experiences. Kohl's has a differentiated position in the market anchored in three important characteristics; an unmatched brand portfolio at the best value, easy and inspiring experiences and an industry leading loyalty program. As we look forward, we will leverage our strong foundation and differentiation against the following focus areas; strengthening our product leadership, elevating the experience, leading the next generation of loyalty and operating with excellence. Let me share a little on each of these. First, as it relates to strengthening our product leadership, we are focused on modernizing our women's business, continuing to lead and active for the family, building a much larger beauty business and enhancing our position in our other core categories. As we discussed on last quarter's call, improving our women's performance is a top priority. While the current environment will pose challenges, we are moving forward with several bold moves. We will exit eight downtrending women's private brands. These include Dana Buchman, Jennifer Lopez, Mud, Candies, Rock & Republic, PopSugar, ELLE and Juicy Couture. This will create space to introduce a more compelling and current offering to our customers, while improving the overall clarity to reduce choice counts. We are also committed to growing the active category. We've nearly doubled our active sales since 2013, and we see continued momentum in this category as customers focus on staying healthy. And we continue to be very committed to building a large beauty business and are investing to make that happen. Last year, we added many new brands and expanded our elevated beauty experience to 12 stores. This year, we will add 50 more stores with the elevated experience. Lastly, we will continue to bring new relevant brands to Kohl's. As we know that constant newness and discovery is absolutely key to engaging our existing customers, as well as to attract new younger customers. In 2020, we will introduce several new brands, including Lands’ End and Toms. Lands’ End is an iconic brand and a market leader in the classic casual lifestyle. Beginning this fall, we will offer the full Lands’ End assortment on kohl.com, as well as feature a shop-in-shop experience in 150 of our stores. And we expect Toms will resonate with our millennial target. Our team here is continuing to seek out other relevant brands to offer to our Kohl's customers. We look forward to sharing more in the future. Next, let me talk about how we were elevating the experience. When we think about experience, we think broadly on every touch point and interaction we have with our customers across all channels. We see many areas of opportunity to elevate the experience, including refreshing the existing store experience, driving localization and accelerating our digital growth. A few examples include investing to create more compelling merchandising, leveraging in-store technology to drive better customer experience and efficiency and implementing a more tailored approach to local markets. In addition, we will continue to invest in supporting the growth of our digital business, which has more than doubled in sales since 2014. Our next priority is leading the next generation of loyalty. We have an incredibly strong foundation and loyalty with 30 million members, and we don't take this for granted. We have three key differentiating elements of our loyalty program; our iconic Kohl's cash, our rewards program and the Kohl's Charge private label card. We know that as we move customers up the loyalty ladder, sales productivity significantly increases. To enhance our efforts on this front, we are integrating our loyalty assets and leveraging personalization. We look forward to sharing more details on our progress in the future. And lastly, let me talk about operating with excellence. Operating with excellence and enhancing our profitability has been one of our strategic priorities for several years, and it is deeply ingrained in every corner of our organization. It's also a concept that underpins all of our initiatives and has been particularly useful as we've navigated through the COVID-19 crisis. Before I hand it off to Jill, let me summarize my comments today. Our financial performance like many other retailers will be materially impacted by COVID-19 in 2020. Our focus will remain on striking a balance between the short-term and the long-term, recognizing the decisions we make today to influence our long-term opportunity. We are confident that our strong fundamentals and financial discipline will enable us to not only navigate the short-term uncertainty, but also position us to take advantage of unique market and customer opportunities in a post COVID environment. Much of what has made Kohl's the vibrant and resilient retailer it is today will make Kohl's a stronger company in the future. We will maintain a clear and unwavering focus on providing families an unmatched brand portfolio at a great value and an easy and convenient experience. And we will leverage our strong foundation that has been built through significant and consistent capital investments and omnichannel technology in our stores. In closing, I want to thank our associates for their incredible commitment and resilience for stepping up in the face of this unprecedented challenge. Each of you has given me great inspiration. I said last quarter's call the strength of our company is rooted in our people and our innovative culture, and that has certainly proven to be the case at this time. I also want to express gratitude to our business partners and vendors that have provided tremendous support in helping us enhance our short term financial flexibility. We look forward to rebuilding our business with you in the months and years ahead. This has been an extraordinary period of time and we've learned a great deal through this process, about our business, our team, our agility and our perseverance. While we still face challenges ahead, we are a strong company and well positioned financially to emerge from this. To everyone listening on the call, we wish you and your family's health and safety as we begin to resume some level of normalcy in our lives. I'll now turn the call over to Jill, who will provide details on our first quarter results and financial positions?

Thank you, Michelle and good morning everyone. I will start by providing some additional context on the actions we've taken in response to COVID-19. I will then discuss our first quarter results and share some high-level thoughts on our business for the remainder of the year. From the outset of this health crisis, preserving our strong financial position has been a top priority. We leveraged our operational excellence strengths to swiftly and aggressively manage our cash outflow. Our first action was to address inventory given the anticipated COVID-19 sales impacts. We immediately pulled back in March and April orders, which allowed us to reduce first quarter receipts by over 30% and helped us manage inventory down 3% to last year. We expect to further reduce inventory in the second quarter as we lowered our receipts by more than 60%. We also partnered with our vendors to extend payment terms. Our quick and aggressive response to address our inventory receipts significantly enhanced our financial flexibility. Next, we reduce expenses across all areas of the company. Our largest declines came in store payroll due to the store closures and marketing where we significantly reduced all of our media, while continuing to invest in digital. We acted promptly and given the timing of the crisis, we realized most of the benefit in April. Another important measure we took to improve our financial position was to adjust our capital allocation priorities. We've been very consistent in messaging our approach to the deployment of cash. First, we invest in the business. Second has been our commitment to the dividends. Third, is opportunistic and complimentary M&A. And fourth has been funding share repurchases with excess cash flow. Importantly, each of these four are supported by and evaluated through the lens of maintaining a strong balance sheet. In response to COVID-19, we unwound these priorities in reverse order. We started by suspending share purchases and then suspended our quarterly dividend beginning in the second quarter. These two actions will enhance our flexibility by more than $650 million this year. Next, we lowered our capital spending forecast to $250 million for the year, a decrease of $500 million, including reducing technologies spend, delaying the opening of our six e-commerce fulfillment center and executing fewer store refreshes and right sizes. That said, we are still investing in important long-term growth initiatives like beauty. And lastly, we increased our financial liquidity during the quarter. We replaced our previous $1 billion revolver with $1.5 billion secured revolver of which $1 billion was drawn at quarter-end. In addition, we issued $600 million in new debt. Importantly, our debt remains investment grade and we have no maturities until 2023. The collective financial impact of these efforts has been significant. We generated positive operating cash flow and we ended the quarter with over $2 billion in cash and $500 million available under the revolver. Now let me briefly discuss our first quarter results. As you saw on the earnings release, our results were materially impacted by COVID-19. Net sales declined 43% as our entire store base was closed for half the quarter. Digital sales increased 24% and improved progressively during the quarter as we took action. We're especially pleased with the solid growth from non-Kohl's Charge customers, which is a result of our new customer acquisition efforts. Other revenue, which consists primarily of net credit revenue, was up slightly. Net credit revenue was not materially impacted by the crisis in the first quarter. However, we do expect pressure in future periods driven by the lower sales due to the store closures. Turning to gross margin. Gross margin was materially impacted by COVID-19. The decline of 1,950 basis points was driven by three primary items; approximately 1,500 basis points related to inventory action, 250 basis points related to costs of shipping due to increased digital sales penetration and 200 basis points related to mix as home outperformed and due to increased promotional activity. We took two inventory actions during the quarter. First, we took our usual clearance permanent mark downs in February. As a reminder, we account for inventory on the retail inventory method. When we take a permanent markdown, it results in a downward adjustment of both the expected retail value and our costs, which has an immediate impact on our margin. This impact is typically recovered when the inventory is subsequently sold. However, given the timing of COVID-19, our store closures and the related pressure to sales, the permanent markdown had an unusually large impact to margin during the first quarter despite our markdowns being lower relative to last year. The second inventory action was the establishment of a reserve for excess seasonal inventory, recognizing the need to markdown inventory given the expected lower sales demand. Let me be clear, this highly unusual pressure on our margin was driven by the significant decline in sales due to the COVID-19 crisis and related store closures. As it relates to cost to shipping, the 250 basis point impact to margin is inline with our past commentary of 20 basis point to 30 basis point annual headwind to margin as digital sales penetration increases. Over the past five years, digital penetration has increased approximately 200 basis points to 300 basis points annually. During the first quarter, both the shipped and digital sales penetration and the cost of shipping headwinds were 10 times higher than normal as digital sales represented 45% of sales versus 21% in the prior year. Looking ahead, we continue to expect gross margin to be pressured due to lower sales volume as we reopened stores, increased costs of shipping as we expect digital penetration to remain elevated, and last we're planning for a heightened promotional environment as the industry addresses repercussions of closed stores during the crisis. Now let me discuss SG&A. In Q1, SG&A expenses decreased 16% to $1.1 billion, driven primarily by lower store payroll, marketing and credit expenses. Of note SG&A would have been down 19.5% have we not incurred approximately $40 million of expenses related to COVID-19. And it's important to mention again that given the timing of the crisis, the full impact of our expense actions was not realized until April. As we look forward, we are planning SG&A to continue to decline for the rest of the year. However, the savings will be balanced as we move into the rebuild phase and reopen stores with new safety measures. We have a long history of focusing on operational excellence and we will continue to leverage this cost discipline strength. Last let me touch on some additional financial items. Depreciation was $3 million lower versus last year, and we expect this to continue due to reduced capital spend. Non-recurring charges of $66 million include technology impairment and brand exits and interest expense increased in Q1 due to accessing our revolver, and will continue to be higher in future periods as a result of last month bond issuance. On a GAAP basis for the quarter, net loss was $541 million or a loss of $3.50 per share. Excluding the non-recurring items that I just mentioned for the quarter, net loss was $495 million or a loss of $3.20 per share. We are happy to take your questions at this time.

Thank you [Operator instructions]. The first question is from Bob Drbul with Guggenheim Partners. Your line is open.

I have just a couple of questions. I think first, I think largely for Jill, on the payables line, can you just give us a little bit more color in terms of how the payables are structured given the cash balance and sort of some of the terms that you have in place on your payables? And then the second question is on the reserve for excess seasonal inventory, can you maybe just elaborate a little more in terms of how big that reserve is or just especially how that's going to flow through especially given to where the inventory levels are on the books at this point? Thanks.

So obviously, Bob, this quarter, we took a lot of actions to preserve our financial position and minimize our cash outflow. One of those actions was to work hand-in-hand with our vendor partners to extend our payment term. So, we did extend our term with all of our vendors. The merchandise vendors we extended up to 100 days, which obviously helped us bridge the store closures and maintaining that cash flow to the point in which we could open stores. So, the timing worked out really well as we now have stores opening as a source of cash inflow and now as we'll go back to a normalized payable structure going forward. In terms of the reserve for inventory, obviously, this is atypical for us because of the retail inventory method that we're on. But recognizing that the stores were closed, we did have excess inventory, so we did a cost adjustment to that inventory. So, you would see it as an impact to both gross margin and a reduction of inventory recognizing that it was accessed during the quarter. And so that is essentially going to stay with us as a reduction of inventory.

The next question is from Mark Altschwager with Baird. Your line is open.

I was hoping you could talk about what you're seeing thus far in May overall, and just any early takeaways from the stores that have reopened? And overall, just can you give us a sense of the various scenarios you're planning for, for the remainder of the year? And then understanding that there's a lot of uncertainty and what the demand backdrop will look like, just thinking ahead to 2021. Do you think it's possible for EBIT margins to get back to 2019 levels without sales fully recovering? Thanks.

So Mark, Michelle here. I'll take the front end of your question, and then I'll have Jill comment on the EBIT margin piece. So first of all, in terms of May, let me add a little context color on both of our channels. Let me start with digital actually. So, as you heard in our remarks for the quarter, we were up 24% but we really saw the acceleration towards the end of March and into April with April at plus 60%. I also do want to add a little color to that as well. Some of our categories really did phenomenally well. Our home business, our kids business and our active business, were all north of plus 100% during this time. We've continued to see that momentum actually accelerate into May. So, we are feeling very good about our digital channel, and that's been a result of a combination of really leaning into our digital marketing efforts, adapting our site to be addressing relevant categories, and then the introduction of our curbside drive up, which we introduced on April 2, which we do plan to continue even as we open up stores, so that’s on the digital side. On the store side, we started opening up stores in early May. So on May 4, we opened about 50 stores, about 5% of our base. We opened about 25% of our stores last week and we just got to 50% yesterday. So, it's very early days. What I can tell you is that as the stores have been opening, they've been doing 50% to 60% of productivity that we would typically see at this point in time. So, there are customers in our stores, and we're happy about that. And we're encouraged by seeing the progressive improvement of the stores that have now been open two weeks. So, where they started at 50% to 60%, we've actually seen them ramp up in their second week. Now, I will caveat and say that 5% is only 50 stores. But like I said, we are encouraged, and we know that that’s going to take some time. As it relates to the balance of the year, I mean we are planning the business very conservatively. We are in a very uncertain time. There's a lot that could unfold in the coming month. So, we're taking a very prudent approach to how we're planning inventory, how we're planning expenses to navigate through the balance of the year, and we will do everything we can to be fluid in response to demand. So, if our demand is actually higher than we expect, we've demonstrated our ability to chase goods, even when our inventory is suppressed. So, I think again the theme on this would be prudence, but our ability to chase into goods and to also amplify things like marketing as we see where the customer goes through the balance of the year. And then I'll let Joe address the margins.

Yes, what I would say is right now obviously, we're in uncertain times for planning the business incredibly conservatively. It's why we haven't given guidance and to look out to 2021, Mark. We're going to run several different scenarios. But I think as Michelle said, they're all going to be incredibly conservative. We're going to manage down our inventory. We're going to continue to leverage our cost discipline to manage down expenses. And then as we indicated, we do expect there will be some pressure to our gross margin line as digital continues to out penetrate. But as we look across the organization leveraging operational excellence, we're going to find ways to offset those costs throughout the organization, including deployment of technology to make us much more efficient on how we fulfill orders and how we allocate inventory. And then as well we expect a heightened promotional environment, which will weigh on our sales. It is a strength of ours. We will lean into that strength. We've done this well. As we've watched other disruption in the retail market we've taken advantage of that through strategies of marketing and we'll deploy those strategies today as well. So we continue to grab market share. But I think it's just too early to tell what we will see in 2021 from a margin perspective.

If I could just ask a quick follow-up. To the extent we see a step function change in digital mix. How do you see the store operating model changing, such that it can remain 99% four wall free cash flow positive in the new normal?

I think first we use our stores, as Michelle mentioned in her comments, to fulfill over 40% of our orders. We just launched drive up, which you've seen was very much adopted by our customer at 15% and the eligible stores, so it's surpassed BOPIS. So, we'll continue to market for pickup, whether it be with BOPIS, costs and now our drive up mentality. So we leverage our stores, I think not just for the experience component but also for fulfillment. But I do think we're encouraged by the adoption we've seen in the progressive improvement just in the first two weeks of our stores opening that they are still highly relevant to the customer. As we look out, we do an annual review of all of our stores, Mark. So, we will continue to do that review. And if we see that the customer behavior is changing and those stores don't stay 99% positive cash flow, we will then look at opportunity to close, which we've shown you doing in the past. We've just done it on a minimal basis because of the health of our store base.

The only thing I would add to that is, as we over time have reviewed our business looking at our stores, proximity and digital sales, they've actually strengthened each other. And so, we actually look at that as an asset. And our omni-channel customers, those customers who shop online and stores are our best customers. And we're actually seeing those omni customers buying more during this period, obviously online and we'll be studying that as we look to more stores opening.

The next question is from Oliver Chen with Cowen. Your line is open.

What would you highlight as some of the permanent changes that will happen as a result of this? And any big surprises along that line? You've also been really agile with planning across many disciplines. Given the reality of the promotional environment ahead, how do you prepare for that in advance as best you can. And also, when thinking about inventories, it's been a challenging environment as consumer demands have shifted rapidly as well. What are your thoughts for Q4 inventory planning and some of the challenges and opportunities as it's not easy for the vendor community as well? Thank you.

Michelle here, I'll answer and add color to your question. So first of all, you sort of asked the question around permanent changes to our business coming into or emerging from this COVID period. I think the obvious one is clearly how our stores operate and whether or not this is for a year or forever, but all the safety precautions that we've put in place, those have been really embraced well by our associates and our customers. Feedback has been very positive. I'm obviously interacting a lot with our field. I've been in some of our open stores and everything from the plexis to the use of masks to right now, it's reduced hours that could be fluid as we see things unfold. And we're doing a lot around our associates as well, making sure that they're safe and well when they come into work, things like temperature checks. We are taking the opportunity to take a step back and look at our business as you would expect. I think there's some tactical changes we're making. So, if you go and visit the store, you'll see we've cleared out spaces like our racetrack design where we removed a lot of the impulse areas to create more space and we actually believe it's creating a better shopping experience for the customer. So, that's one. But I think importantly, it's really understanding where the consumer is going in this kind of post COVID environment. What -- from an economic standpoint, what that looks, I’d say the good news there is we stand for value, so we expect to be as if not more relevant during this period. We will obviously lean into categories that the customer is responding to. So, again, I’d say the good news there is we've been on this active and at leisure journey for quite some time as you know, and we're just seeing that accelerate further. And then there are new areas for us that were part of our original strategic plan like beauty. And so as we look to categories that are perhaps less relevant, downsizing those and creating space for a category like beauty and even during this COVID period digitally our beauty business, albeit we're not as penetrated as highly as others but we're seeing really, really strong growth. Then as we look to how we navigate through the balance of the year, I think you used the word agile. So, that is absolutely our approach. And I've been really pleased to see how the organization has operated in a very nimble and agile way through this period. I think the drive up is a good example. And while we certainly aren't the first to bring it to the market and we had been testing it in just a couple stores, they were able to scale this very quickly in a matter of two weeks. And so also related to permanent changes and then culturally the expectation and how we can innovate and try things and be a lot faster that is certainly the expectation going forward. So, similarly as we planned for couple of seasons coming up back to school and holiday, we are planning, as I mentioned earlier, very prudently and cautiously. But we have great vendors and business partners. They have been outstanding during this process. We worked with them side-by-side. So, we are bringing in fresh receipts for back to school and holiday of course. We'll chase into goods as we see what the customer demand is, and I’d say the same with marketing. Right now like in the month of April, we were 100% digital in marketing. Now we will bring back some of the more mass media in the June timeframe as our stores come back up in line, but what that affords us is to be really nimble as it relates to messaging and flexing media up and down. So I think you can expect really through the balance of the year and I don't think it ends at the end of the year, just a very nimble approach to be responsive to where the customer is going.

And on the promotions front and customers looking for value. What is the best way to manage that, and a lot will be out of your control with the competitive landscape and how this manifests as well?

We're fully anticipating it will be a promotional environment, given the inventory that's out there. As you know, we did take our markdowns, as Jill spoke to earlier, and she also said, we're expecting a promotional environment. And so we're planning for that to create margin pressure as we look ahead, and I think the same thing goes. We're going to be very present to it. Wwe're going to see how our customers are responding. I would say, the good news here is we know how to do promotions, we know how to leverage our Kohl's cash, we know how to do great sales, friends and family events, the list goes on. So, we will flex those promotional muscles as we see fit to make sure that we are driving the kind of demand and traffic that we need to.

The next question is from Lorraine Hutchinson with Bank of America. Your line is open.

You mentioned that you lowered second quarter receipts by about 60%. Is that the way you're thinking about sales for the quarter? And then are you ordering down similarly for the second half receipts?

We obviously have not put guidance out in terms of sales. What I would tell you is we're taking an even more cautious approach to receipts than our sales. I mean, our expectation in terms of as we kind of emerge and open up our stores is that we're expecting greater returns on inventory, that's been part of our strategy. I think this is a forcing function to enable that. So really we don't know how sales are going to unfold. Like I said, we're cautiously encouraged by what we've seen in the first couple weeks but it's a very small set. And we know that this entire crisis is a very uncertain time. So while we haven't provided specific sales expectations, know that we can drive more sales if the demand is there. And like I said earlier, we can chase product as we see the demand come forth.

And then as you think about opening each store, what's the level of sales that you need to offset the cash burn you faced initially to get that store open?

Yes, it's very low in which we need to offset the cash burn in terms of what we have to open. First, obviously any dollar we get does help us at a fixed cost that's there anyway. So we look at it that way. But we run a really lean model, as you know, Lorraine. I mean, the biggest variable costs for us right now is store payroll and we have shown that we run a very lean model for store payroll. We've flexed it incredibly well when it comes to sales. So as you look at how we're opening up our stores, we're opening up one entrance, so not all of our cash registers will even be open. We're not including fitting rooms. Obviously, the receipt reduction is incredible. We don't have to staff labor there. So there are a lot of ways that we're able to cut labor out to run it lean. So it's a very low hurdle for us to look at and suggest can we or can't we open up those stores. Also it comes from a very healthy base. So remember, 99% of our stores were cash flow positive last year. So that goes through a large gain. As you know, we have large stores and small stores. So it does show we know how to operate that model on the big ends on their big volume stores, as well as the small volume stores. So we're deploying all of those lessons as we open stores today.

The next question is from Dana Telsey from Telsey Advisory Group. Your line is open.

As you think about the exit of the eight brands that you have. What kind of volume are you exiting from those eight brands? And how do you think of positioning of new brands that you had talked about, like Vylette for juniors? Does that still move forward or does that extend to next year? And then given payroll costs given that now you bring stores back online, now with the new initiatives cleaning and what maybe. How do you think of the costs? And is there a higher breakeven on sales that you need in order to leverage some of those higher costs of the new ways of doing business? And just lastly, how did the women's business do anything that you saw there? Thank you.

I will take your question on women's, both the brands and what we're seeing in the women's business and I'll let Jill add to the other one. So as it relates to women's, I’d say overall we're still highly committed to the women's business. Obviously, in the short term we're facing some challenges here but we -- as part of just the overall COVID-19 challenges. But that being said, we are seeing some bright spots on the women's business. Our contemporary women's businesses performing well. And as I mentioned earlier, our overall active business is doing really well, north of 100% in the month of April, and that includes our women's active business as well. So, highly relevant to this time period and areas like our basics, intimates, sleepwear, all doing well. So we're encouraged to see that kind of momentum online. Obviously, we'll be monitoring that as we now open stores, but we remain really highly committed. As it relates to the exit, there's a couple of objectives. One is overarching really the need to drive greater focus and clarity with our women customer. So these eight brands were down-trending. They were our least productive. And we think exiting them will create focus and clarity on the brands that will continue. So not only the new brands but our existing very strong brands, like Sonoma as an example or simply Vera Vera Wang or Lauren Conrad. We obviously are also using the space on some of the newer brands that we've either just recently launched or that plan to launch. So that includes Nine West that we launched last year, which we're highly committed to. We're in the process of launching Vylette, as you mentioned. We just in the spring introduce Elizabeth & James. And then of course we have the Lands End launch that's coming up later this year that we think is really going to be a great addition to our classic customer. So we think the combination of clarity, reducing choice count, fewer brands, really elevating our existing strong brands and then bringing in some newness that is highly relevant to our new customers, especially the millennial customer, we feel like we're on a good pack there. And I'll pass it over to Jill.

And Dana just to step back, and you know we have an incredible strength when it comes to cost. Our SG&A has only increased 1.5% over the last five years on a compounded basis. So we've found ways to offset incremental costs like wage pressures that we've increased over the last several years. Clearly, our number one priority is the health and safety of our associates and customers. So we're going to invest in ensuring we have an clean environment and that we have the right safety measures in place, and we're providing our associates with the PPE that they deserve, the mask, the gloves, et cetera. So, those are costs that we will make an investment in. But we will leverage our operational excellence initiative to find ways to offset that. So we can continue to drive down SG&A cost for the remainder of the year like I indicated in our comments.

The next question is from Matthew Boss with JP Morgan. Your line is open.

Michelle, as we think through lateral store closures and the bankruptcies that are happening in the space, and we think about that relative to the merchandising changes that you're making in women's and active. How do you see Kohl's position to potentially take market share out of the pandemic? Aand any offensive initiatives that you're specifically focused on to take advantage of all of the disruption that's currently in the space?

I mean, clearly, we're in this unprecedented period of change and consumers changing their expectation, and as you just said, the marketplace is changing. We're staying very close and making sure that we can lean into those market share opportunities and take advantage, and we do feel like we're in a strong position to capture market share. I’d say first is our store base. 95% of our stores are off-mall. And we believe that this is really an advantage, especially in a kind of COVID or post-COVID environment where customers are not only looking for the convenience that that always offers, but also a really safe environment. And as we've been talking about, we've taken above and beyond measures to ensure that our customers really feel safe as they walk in the door. And we think our stores are, they're spaces, they're big, they're kind of naturally built for social distancing and we've enhanced that further. We take a lot of pride in how clean we show up every day. So, we do think that as customers are making choices of where they want to go, now we're adding this layer of where am I going to feel safe. And we believe Kohl's is showing-up really, really well on that standpoint. As you know, we've talked a lot about innovating within our stores, innovating and investing in the experience, bringing in new concepts like Amazon returns, which as we open stores, we're bringing that back and that will continue to be a priority. So that customers again are looking at Kohl's as top of choice in terms of where they want to shop. So, stores just for a second I would point to value. I mean, we know we're going to be an environment where value is really critical. When we were in the recession in 2008, Kohl's performed well because that was high on the list and we're known for value. I think our Kohl's cash program, our loyalty program, will only further enhance that. And then third is our brand portfolio. So this really unique mix of our proprietary brands that do offer that great value, whether it's a jumping beans for kids, as an example, which have been doing phenomenally well as we sit here right now in our online business, but then complemented with our assortment of really trusted national brands. And to your point in terms of market share opportunities. I mean, today we're the number one retailer of Levi's as an example. We're one of the leading retailers in the active space, as you're familiar with Nike, Adidas, Under Armour, and the like Carter's. So, we feel like this combination of the trusted national brands and trust clearly being a key component looking forward as well as value brands. And then fourth, has been the acceleration of our digital business and our omni capability. So, we've pointed to a number of things on those fronts. But in terms of really connecting with customers, both existing and new customers, leveraging our digital capability, our personalization capability, driving new customer acquisition. We have seen new customer shopping polls during this period online. So, we’re encouraged by that. Last year, we achieved a record number 65 million new customers -- 65 million customers, and the highest level of new customer acquisition. So, we think all of these things really set us up as we emerge from this crisis to take advantage of market share opportunities.

Jill, maybe as a follow up. So overall what percentage of your expense base is variable today? And I guess, could you just expand on the comment that you made about continued SG&A reductions through the year, as we think about maybe the cadence for 2Q and the opportunity on SG&A versus the back half of the year, because I think you've talked about the rebuild process.

Well, obviously we expect our SG&A to be down the rest of the year. It'll obviously flex on a couple things; one, will be sales; two, we will make an investment back into the safety and cleaning for the associates. But given the prudent approach and the conservative approach that we're taking, we do see it being down the remainder of the year. Obviously, we’re not giving guidance at this point. As I indicated in my remarks, we expect it to be balanced. So, we saw a huge decrease in April as our stores closed. Now, as we're reopening we’ll expect the SG&A follow as well. In terms of variable versus fixed, Matt, I would say that we broke the mold on that. We aren't looking at anything as a fixed cost this time around. We went after every cost to take it out of the business. And the two examples I would give you is one, marketing. Typically in the past, if we would see sales lagging, we’ve leaned into marketing to drive more sales. In this case, as Michelle indicated, we cut all of our marketing with the exception of digital. So we weren't trying to create sales demand, we knew there wasn't any and we stuck to the digital channel and obviously that worked well for us. We saw that progressive improvement in our digital business up 60% in April. Second, we used it in technology. We exited our third party contractors. We went back and looked at contracts to see if we could actually renegotiate them to cut costs out of that space as well. And those are two places I would suggest in the past would have been more in the fixed realm. And the third example I'll give and although this wasn't necessarily an expense cut, but we did addressed rent. And we worked in partnership with all of our landlords to come to a deferral solution. And in the cases that we didn't defer rent, we did make the payment but we were actually in a really good place. Our property development team did a great job in working with them proactively, so we were able to make those referrals and preserve the cash flow. So in light of what we just went through, I would say we kind of broke out of the fixed versus variable and put everything on the table and went after that, and you’ll continue to see that mentality the rest of the year.

The next question is from Omar Saad with Evercore. Your line is open. Omar Saad with Evercore. Your line is open. Please go ahead.

I have a couple follow ups. In terms of the run rate you're seeing in the stores that have been opened recently, I appreciate that color. Are you seeing 50% to 60% and building from there? Are you seeing any impact on the e-commerce side in those markets eating into the e-commerce business as the stores reopen? And then also, any color on what you're seeing in conversion versus traffic as stores reopen? Are you seeing customers coming in with big orders and the traffic is below that level or is it kind of the go out there? Thanks, guys.

So on your second question, such early days. It's really hard to gauge at this point the traffic and conversion. So we'll make sure to follow up with you as we have more data detail in the coming quarters. Back to your first question on run rate, we're actually encouraged to see that there's been very little fall off in our digital business as these stores have opened. We're watching that closely. We're continuing to see the adoption of drive up, our associates are really excited about that, our customers are excited about it. And the digital business continues to be very strong. Overall, May has accelerated even further from April’s level of 60%. And like I said, in the markets that we're now open, which has been about 25% up until yesterday. So it's very early days but our digital business has remained very strong.

And then one follow up. As one of the upshots here, I know there's a lot of unpredictability but just kind of step function acceleration in digital omnichannel, especially with the new options for consumers to pick up from the store, or drive thru or drive by pickup. Are you guys happy where you are on IT, logistics inventory visibility, inventory logistics capabilities, to really kind of meet that step function change? Or are there some incremental investments and skill sets that need to be built there? Thanks.

So I would say yes and yes. I’d say we are very pleased with the level of innovation and agility that is coming out of our teams right now. And that's been strengthening over the last couple years, but I would say over the last couple months that has been a step change. And really across all levels of operation, our ESCs have continued to operate. Our stores, as we mentioned in our remarks, 40% was fulfilled from our stores that's helping us on many fronts, including leveraging our inventory there and then rapidly scaling within a matter of weeks just drive up that we see as a continuation. But to your point, we expect this higher penetration of digital to continue. So I’d say on two fronts. One from an innovation standpoint, making sure that we're offering great experiences to our customer, really leveraging our entire kind of omnichannel capability, driving innovation. And then secondly, also through our operational excellence recognizing that there's going to be opportunities to reduce costs and reinvest from a customer facing standpoint. So, we have efforts really on both fronts. But I'm very encouraged, I think the team has been doing a great job and more to come on that front.

The next question is from Chuck Grom from Gordon Haskett. Your line is open.

This is actually Garrett Greenblatt on for Chuck. Thanks for taking my question. I just have a one quick one regarding your credit revenue. You mentioned that it was primarily coming down for the rest of the year as sales slow and JCPenney kind of guided to that 6% reduction this year for FY20. I was wondering if that's kind of like a high number for what you guys are expecting or if you could provide more color on that front?

So obviously we didn't see any impact to credit revenue in Q1, but our stores did close in the quarter and you saw a significant impact to our top-line from that perspective, given that we do expect there to be some pressure to credit revenue as the year persists. They are our best customer, so we do see them coming in shopping the most with us as well as the basket. So I don't think it's a one-for-one with the top-line. But at this point, I think it's just too early to give you any type of guidance on what we expect for the rest of the year. Also, as we emerge from this crisis, depending on what economic crisis persists, we'll have to be looking at what those type of pressures also lend to. If we go back to 2008, our portfolio did incredibly well. I think we outperformed the market. We take a lot of care working with Cap One and who we extend credit to, which does help us mitigate some of the risks on the portfolio as well. So, I would expect that with sales down, we're going to see some pressure to credit revenue, but I don't have an estimate that I'm going to share at this point.

Our final question for today is from Paul Trussell with Deutsche Bank. Your line is open. Paul Trussell with Deutsche Bank, your line is open. Please go ahead. It looks like Mr. Trussell is unresponsive.

Okay, we'll close it here. Thank you to everyone listening on the call today. Please be safe and stay. And we look forward to updating you on our progress in August.

Ladies and gentlemen, this concludes today's conference call and you may now disconnect. Thank you.