Kohl's Corporation (KSS) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Q1 2021 Kohl’s Corporation Earnings Conference Call. At this time, all participants’ lines are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. [Operator Instructions] I would now like to hand the conference over to Mark Rupe. Thank you. Please go ahead.

Thank you. Certain statements made on this call, including projected financial results and the company’s future initiatives are forward-looking statements 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 may be supplemented from time to time in Kohl’s other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made, and Kohl’s undertakes no obligation to update them. In addition, during this call, we will make reference to non-GAAP financial measures, including adjusted net income, adjusted earnings per share and free cash flow. 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 company’s Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated. So if you’re listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl’s undertakes no obligation to update such information. With me 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. We are very pleased with our strong start to 2021 with both sales and earnings materially exceeding expectations. Our key strategic initiatives continue to gain traction and resonate with customers, and we capitalized on a favorable consumer spending backdrop during the period. Adjusted earnings per share were $1.05, driven by strong net sales growth of 69%, significant gross margin expansion and disciplined expense management. We also further strengthened our financial position, reducing our overall debt and improving our leverage profile, and we resumed returning capital to shareholders. We are making significant progress on our vision of becoming the most trusted retailer of choice for the active and casual lifestyle. Since launching our strategy last October, we have shown strong sequential improvement in our performance and have announced several important new strategic partnerships that will accelerate our momentum. We remained firmly on track to achieving our 2023 strategic goals, and we’ll take a big step forward in our pursuit this year. As we will discuss later in the call, based on our first quarter results, we are raising our full year 2021 guidance. For today’s call, I’ll give you color around our first quarter performance and then talk about the confidence we have in our strategy, given the synergy our plans have with evolving consumer behaviors, favoring a more casual and active lifestyle. Jill will then discuss our Q1 results in more detail and updated 2021 financial outlook. Let me start by touching on our first quarter performance. As I indicated, our results exceeded expectations across the board. Sales strengthened as we move through the period with March and April combined sales positive as compared to the same period in 2019. Store sales more than doubled year-over-year due to continued traction against our strategy and lapping last year’s store closures. We experienced an acceleration in customer visits as the quarter progressed, which contributed a majority of our total Q1 sales upside. Our digital business also had a great quarter with sales increasing 14% to last year and up more than 40% to 2019. Digital accounted for 30% of sales with stores continuing to support growth by fulfilling nearly 40% of digital sales. From a product perspective, all of our lines of business exceeded plan and increased significantly year-on-year, with the best performing areas being those most impacted by the pandemic, namely men’s and women’s apparel, and many areas of our business have returned to or are exceeding pre-pandemic sales levels. Active sales showed the most significant growth in the first quarter and increased at a mid-teens percentage rate relative to the first quarter of 2019. We also maintained momentum in our home business, which was up low-double digits on a two-year basis. We are making great progress in our efforts to improve profitability. We delivered a 7% operating margin, the highest Q1 rate in eight years. This performance was driven by continuing to execute against our strategy, including strong inventory management, our pricing and promotional initiatives and expense discipline. In addition, we capitalized on a favorable industry backdrop that provided for greater full price selling. So in summary, we had a great first quarter and have clear business momentum as we look ahead. Let me now discuss the confidence we have in our strategy, which will uniquely position Kohl’s to drive strong growth in the years to come. As we have all seen recently, the U.S. consumer is in a stronger position. Spending has picked up driven by stimulus, easing COVID restrictions and people resuming more normalcy in their daily lives. These factors are helping to reignite growth for the retail industry, and we are positioned extremely well to capitalize on this acceleration. Last October, we debuted a new strategy with an even more significant pivot towards the active and casual lifestyle. And as we sit here today, that strategy has never been more relevant. At Kohl’s, everything starts with the customer. And our research analytics and sales trends validate that three key consumer behaviors will only grow in importance. Consumers are looking for a more active and casual lifestyle, an even easier and more convenient shopping experience and clear and compelling value. First, we expect that consumers will continue to live more actively and casually as normalcy returns. As more people return to work, resume travel and attend events and gatherings, they are seeking out new and updated apparel, while maintaining the preference for casual comfort, which fits squarely into the product categories we are taking a leadership position in. Against this backdrop, Kohl’s is positioned really well. Our commitment to the active category is differentiated in the marketplace, and our strategies continue to benefit our business. With a goal of growing the category to more than 30% of our sales, we are increasing dedicated space in store, expanding our product assortment and aggressively addressing white space opportunities in athleisure and in inclusive sizing. We are making progress as evidenced by active sales nearly doubling year-over-year in the first quarter, growing to 23% of sales, up 300 basis points from last year. From a brand perspective, our key national brands: Nike, Under Armour and Adidas, continue to perform very well, driven by the ongoing expansion of the assortment delivering innovative and relevant product to our customers. We also continue to be pleased with the performance of the Champion brand, which grew multiples from a small base in the first quarter. As it relates to our new private athleisure brand, FLX, we are very encouraged by the customer reaction we’ve seen to date and initial sell-through. We will build on the early success by broadening the assortment this fall and we’ll expand it to 500 stores. And as we’ve previously discussed, we are excited to be expanding Lands’ End to 300 stores and introducing Eddie Bauer into 500 stores this fall, each of which addresses sizable white space opportunities in our outdoor offering. We’re really encouraged with the ongoing strength in active across all product areas, and we are equally excited about being a destination for iconic casual brands like Levi’s, soon Tommy Hilfiger and Calvin Klein and value-oriented private brands like Sonoma and SO. We have significant market share opportunities across many casual categories, whether it be in key essentials for the entire family and in categories like Denim, where we already have a leading market share position and where there is a clear resurgence underway. Let me share with you an update on our efforts across our other key lines of business. In Women’s, our bold actions during 2020 have positioned us for improved performance this fall when all of our efforts around clarity and merchandising come together. On last quarter’s call, we discussed our optimism around the initial progress we have been seeing in our Sonoma and SO brands. And I’m happy to share that these brands further accelerated in the first quarter. We’re also seeing strong customer response to other key private brands, including Croft & Barrow, Lauren Conrad and Nine West. From a product perspective, our women’s business was led by strong growth in active, increased demand for shorts and denim and our intimates business that continues to show resilience. We also saw improving trends in casual dresses. Men’s has also been an area that have undergone transformation during the past year. Similar to women’s, we’ve exited brands and have allocated more space to active and Big & Tall, while shrinking the men’s dress pad. These moves have improved overall clarity, increased category productivity and made room for new brands. In 2021, we will deliver a significant amount of newness with the introductions of Calvin Klein, Eddie Bauer, Hurley and Tommy Hilfiger, where we will offer men’s sportswear styles with the brand’s iconic classic American cool designs. The addition of each of these brands further our pursuit of becoming the leading destination for the active and casual lifestyle, and we look forward to their contribution beginning this fall. Turning to our children’s business, demand returned to 2019 sales levels driven by strong growth in active and toys as well as increased demand for boys and girls apparel as more kids return to school this spring. We’ve simplified our private brand strategy around Jumping Beans, SO and Sonoma and are expanding our active presence through Converse, Hurley, Under Armour, Outdoor and Vans. Looking ahead, we are well positioned for the important back-to-school season with inventory building well ahead of peak week. We anticipate a more normal back-to-school season this year following last year’s season that was materially impacted by the pandemic. In summary, regarding our apparel business, we are seeing a nice recovery and we will fuel the customer demand by driving relevancy as consumers return to more normalcy in their daily lives. I’d like to now transition to our upcoming launch of Sephora at Kohl’s, which we couldn’t be more excited about. This partnership will transform Kohl’s into a leading beauty destination and is expected to drive significant incremental sales and new customer acquisition. As we shared last month, we will offer more than 125 prestige beauty brands, many of which will be exclusive to Sephora and Sephora at Kohl’s. We are in the midst of preparing for the August 1 launch online and subsequent rollout to the first 200 stores this year. Beauty associate recruitment has begun with staffing and training to be complete by the end of July. Customers will see construction in stores in the weeks leading up to the fall store openings. This will be about a six-week process for each store, and we are working hard to minimize any disruption. We are also positioning certain brands such as Calvin Klein in categories like active around the Sephora at Kohl’s shop to capitalize on cross-selling opportunities. We look forward to sharing more on the launch during our next earnings call in August. Now let me discuss how we are providing our customers an even easier and more convenient shopping experience. Starting first with stores. Our off-mall locations will be even more relevant in a post-COVID era as customers have appreciated the safety and convenience over the last year, and our customers will encounter an updated and elevated shopping experience. In addition to the new Sephora at Kohl’s shop, we are refreshing stores and re-flowing categories to provide a more compelling shopping environment with the most relevant brands and categories positioned at the front of the store. Some of our other efforts include improving the clarity and merchandising presentation. During the first quarter, we executed against our dedensification strategy by removing fixtures off the floor in each store. We also just recently reopened fitting rooms in our stores to improve the shopping experience as more and more customers return to stores. And as the country more fully reopens, we expect our convenient off-mall presence to continue to be a competitive advantage. We are also enhancing the digital experience. We continued to improve the overall site experience while further embedding personalization. We have been especially pleased with the momentum we’re seeing with customers use of the Kohl’s app. During the first quarter, the app accounted for one-third of digital sales, driven by strong double-digit user growth and improved conversion rates. And we continue to provide an industry-leading omnichannel experience. During the first quarter, our stores provided foundational support to our digital sales growth, fulfilling nearly 40% of sales, which was up slightly to last year as customer pickup increased with stores opened for the full period. Our leading omnichannel platform will continue to enable us to create an inviting experience tailored to deliver ease and convenience, while also providing inspiration and discovery to shoppers. The final thing I want to touch on is the importance of providing clear and compelling value. Kohl’s is recognized as a leader in delivering compelling value, whether that’s through our iconic Kohl’s Cash, our Kohl’s Rewards loyalty program or our Kohl’s Card credit program. In past quarters we shared that through customer research, we discovered that we had an opportunity to improve how our value is understood by customers, especially new customers. Over the past year, we have made big strides to improve the value communication and delivery to our customers. Last fall, we launched our Kohl’s Rewards loyalty program, simplifying and leveraging Kohl’s Cash as a reward anchor and more fully integrating the program across our digital, omnichannel and store capabilities. And we have improved and simplified our value equation by continuing to scale our pricing and promotional strategies, allowing customers to more quickly get to the end price and see the value. These initiatives are working and we look forward to further traction as we scale our efforts. Before I hand it off to Jill, let me summarize my comments today. As evident in today’s results, we are pleased to see our business continue to build momentum. And with the impact we are seeing from our initiatives, I’m even more optimistic about what the future presents. Much of our strategic work is still underway with significant benefits ahead of us. We continue to believe we are set up for a multi-year improvement in sales and profits and remain firmly on track with our 2023 strategic goals. In closing, our strong results and promising outlook wouldn’t be possible without the incredible efforts of our associates across the country. Your ongoing commitment to Kohl’s, our strategy and our customers has further differentiated and strengthened our positioning in the marketplace and has paved the way for an exciting and bright future. With that, I’ll now turn the call over to Jill who will provide details on our financial results and updated guidance.

Thank you, Michelle, and good morning, everyone. This morning, I’m going to review our first quarter results, discuss our capital allocation actions during the quarter and then provide details on our updated 2021 guidance outlook. Let me start with our first quarter results. As Michelle touched on, we are off to a strong start in 2021 with Q1 results exceeding our expectations across the Board. Net sales increased 69% with store sales more than doubling and digital sales up 14%. Sales accelerated during the quarter with combined March and April sales increasing low-single digits relative to 2019, driven mainly by the momentum in our store sales. Other revenue, which is primarily credit revenue, declined 16%, which was slightly better than we expected. Turning to gross margin. Q1 gross margin was 39%, up materially from last year’s COVID-impacted 17.3% and up over 220 basis points from the first quarter of 2019. Our efforts to drive margin expansion continued to pay off. We managed inventories tightly, resulting in less clearance as a percentage of sales and further scaled our pricing and promotion optimization strategies during the quarter. We also benefited from a favorable industry backdrop, which provided for a greater percentage of full price selling. While we expect some of the tailwinds to ease as inventory rebuilds across the industry, we remain confident in our ability to further enhance our margin structure through our strategic initiatives. We are also monitoring cost headwinds related to industry-wide supply chain disruptions. We have navigated the challenges very well to-date, but acknowledge there still remains a lot of uncertainty as we look to the balance of the year. Now let me discuss SG&A. In Q1, SG&A expenses increased 9.8% to $1.2 billion, driven by significant top line growth. As a percentage of revenue, SG&A expenses leveraged against both 2020 and 2019, as we made strong progress against our marketing and technology efficiency efforts. We reduced our marketing-to-sales ratio to 4.2% and lowered technology spend by more than 15% versus last year. In addition, relative to last year, improved store labor productivity was a key driver of the improvement. As we look ahead, we expect wage inflations remain a headwind. However, we will continue to drive efficiencies through increased store productivity and lower marketing and technology spends. Our strong gross margin and SG&A expense efforts during the quarter translated into a 7% operating margin, an increase of 295 basis points to 2019. These results give us confidence that our strategies are working and we will hit our stated annual goal of 7% to 8% operating margin by 2023. Last, let me touch on some additional financial items. Non-recurring items were $201 million related to the completion of our $1 billion debt tender offer during the quarter. Depreciation was $16 million lower than last year due to reduced capital spend in 2020. Interest expense increased $9 million versus last year due to higher average debt outstanding during the quarter. On a GAAP basis for the quarter, our net income was $14 million and earnings per share was $0.09. Excluding non-recurring items, for the quarter, adjusted net income was $165 million and adjusted earnings per share was $1.05. Turning to the balance sheet. We ended the quarter with more than $1.6 billion of cash and cash equivalents. Inventory at the end of the quarter was 25% lower than the prior year and down 28% to 2019. This marked another 10 year high in inventory turnover. Like other retailers, we are currently facing some industry-wide supply chain challenges. However, we continue to feel good about our ability to manage through these headwinds and are closely monitoring the sourcing of our private brands. Turning to cash flow. We generated positive operating cash flow of $278 million in the first quarter, driven by strong inventory and expense management. Free cash flow was $186 million. Capital expenditures were $59 million in the first quarter, and we continue to expect to spend $550 million to $600 million in 2021, driven by our Sephora partnership, store refresh activity and our new e-commerce fulfillment center. Now let me provide you an update on our recent capital allocation actions. During the first quarter, we optimized our debt structure by issuing $500 million of new bonds and tendering over $1 billion of higher rate shorter-term bonds. Through these efforts, we reduced our weighted average interest rate by more than 100 basis points and improved our leverage profile, supporting our long-term commitment to maintaining our investment grade rating. We also resumed our share repurchase program during the first quarter, repurchasing 784,000 shares for $46 million. We continue to plan to repurchase $200 million to $300 million of shares for 2021. And last week, our Board of Directors declared a quarterly cash dividend of $0.25 per common share. The dividend is payable on June 23 to shareholders of record at the close of business on June 9. Turning to our guidance outlook for 2021. We are off to a very strong start to the year, and based on our Q1 results we are raising our full year outlook. That said, we are approaching our updated financial outlook prudently. It’s still early in the year and there remains uncertainty around how the recovery unfolds, duration of the stimulus tailwinds for the retail industry and supply chain headwinds. Based on this, we are guiding the year as follows. Net sales to increase in the mid-to-high-teens percentage range, up from our prior expectation of a mid-teens increase, operating margins to be in the range of 5.7% to 6.1%, up from our prior expectation of 4.5% to 5%. And EPS to be in the range of $3.80 to $4.20, excluding non-recurring charges, up from our prior guidance of $2.45 to $2.95. This guidance now assumes interest expense of $270 million, which is lower than our previous expectations due to our debt reductions. We continue to expect our full year tax rate to be approximately 25%. I would also like to call out one additional item embedded within this guidance. For the second quarter, we are planning SG&A expense to be higher than the Q1 rate as we invest in the Sephora partnership launch and incur expenses associated with our store refresh activity. In summary, we are very pleased with our strong start to 2021 and remain confident in our outlook for the balance of the year. Our efforts to drive top line growth and improve our profitability are gaining traction and we remain on pace to achieve our 2023 strategic goals. We are happy to take your questions at this time.

[Operator Instructions] Your first question comes from the line of Bob Drbul with Guggenheim Partners.

Just got a couple of questions. Can you talk a little bit about just the trends in store traffic? I don’t know if you want to go monthly or the last few weeks, just love to understand, what you’re seeing, and it sounds like stores have definitely come back and sort of how you feel about that progress? And Michelle, I was just wondering if you could talk a little bit about the denim category. I think there is a lot of talk around the denim resurgence and if you feel like you’re getting your fair share and how you think you’re positioned in that category as we reopened here? Thanks.

You bet. Thanks, Bob, for the question. Michelle here. So to your first question around stores and traffic, that accounts for a lot of the upside in the build that we saw throughout the quarter. And as Jill mentioned, our comps were positive to 2019 for the March, April time period combined. February was a little tough weather disruption and the like, but as both spring arrived, vaccine distribution, clearly, the stimulus, but candidly, our own strategy really working and working a lot harder. So we felt good about that momentum. And like we said, a lot of that was driven by the store’s acceleration and that has continued into May, so we feel good. And it’s worth noting as well that our sales were, call it, 70%, close to 70% for the quarter and our apparel business in aggregate across men’s, women’s and kids exceeded that. So we feel really good about the customer being ready to spend and they are spending on the apparel categories. And then related to your question on denim, we also feel quite optimistic about that category. Kohl’s is a leading retailer of denim. And I think what really sets us apart, Bob, is that we have a great portfolio of both sought-after denim national brands, in particular, Levi’s and then complemented with great private brands in the denim category. We’re investing more in brands like Sonoma and SO, even Lauren Conrad and Sonoma and SO were positive to 2019 in the women’s category and denim was a part of that. And then Levi’s really accelerated through the quarter and we’re seeing strength across the Board, especially in women’s denim. So all that being said, I think that sets us up extremely well as we head into the back-to-school season, where denim plays a key role and that will be complemented with the strength in our active categories that also will play a significant role in the back-to-school season.

Great. Thanks, Michelle.

You bet. Thanks, Bob.

Your next question comes from the line of Paul Trussell with Deutsche Bank.

Good morning, and congrats on a really strong start to the year. I wanted to dig a bit into the guidance provided. You just mentioned and reiterated that the March, April period was up versus 2019. It sounds like, there is some strength that’s continuing into May. Maybe you can elaborate on that. But more importantly, better understanding you may or may not sustain over the balance of the year. I believe the full guidance still suggests that the top line will remain below 2019, more or less, for the balance of the year. And then, similarly, as we look at the guidance – updated guidance for margins, I’d just be curious in terms of kind of order of impact, what is contributing to the better-than-expected performance, as we think about some of the full price selling or pricing and promotional strategies, et cetera, that you all have implemented? Thank you.

Thanks, Paul, for the question. Why don’t I kick it off and then I’ll hand it over to Jill to speak to the margin piece. So, first of all, to your question on guidance. I mean, what I would say to that is, we clearly have had a very strong start to the year with Q1 results exceeding expectations across the Board. And we’re pleased to see the top line momentum, as well as the flow through to the bottom line hitting a 7% operating margin. As you know, we put out there the longer-term goal 2023 to be in that 7% to 8%. So that does give us great confidence. We did raise our financial guidance as you know, and a lot of that is driven off of our strategies that we see working. So I was just in the prior question, speaking to the strength of apparel, our active category being up double digits to 2019, we’re seeing active strength across the Board across all lines of business, et cetera, and we’re continuing to see even categories like home play out. Candidly, the reason why we got it as we did was that there is just still uncertainty out there. I mean, yes, we’re optimistic on emerging out of the pandemic and vaccine distribution and what’s happened with stimulus and more money in people’s pockets. But there continues to be uncertainty as we approach the back half of the year. I will say we are leaning into every opportunity to chase demand. And I would say consumer behaviors quite lend themselves to our new strategy. But as it relates to headwinds and Jill speak to this in a moment related to possible margin headwinds or cost headwinds, we’re just being prudent. But let me assure you that when you’re going after every and all top and bottom line opportunities for the company as we look to the remainder of the year. And I’ll have Jill add more commentary as it relates to your questions around margin.

Sure. And, Paul, I just want to echo, we do feel really pleased with the strong start. As you know, it’s early. Q1 is the smallest quarter of the year. So although we feel optimistic with the strategies and the consumer backdrop, we also know a lot of uncertainty persists. Our margin expansion, we tightly managed inventories. This is the third quarter in a row you saw us improving our churn; second quarter in a row, it went to a 10-year high. And obviously, this lends to a lot less clearance selling. That’s definitely in the wheelhouse of our strategy. It gives us confidence. We’re going to hit that 4x turn, as we mentioned to you, by 2023. In addition to that, you know we’ve been working on the pricing and promotional optimization strategies. And I would say there’s a mix here. Some of this is just our strategy. As you saw a lot less stackable offers, we’re leading more into pricing events, we’re simplifying that value equation, and we’re really seeing that resonate with the customer. But we’re also taking advantage of the macroeconomic backdrop that there is less inventory, there is more full-price selling that is available to us. So we’re taking advantage of that now. We do believe as the year progresses, people are going to build back into some of the inventories and some of those tailwinds could ease. And then as well, we know we’re monitoring supply chain disruptions, which we feel like we’ve managed very well, but we’re not sure how long that will persist as we move into the balance of the year. And then last, we do know digital will become a bigger portion of our business as the year progresses as well and that with the cost of shipping will be a headwind. So those are the reasons we took a prudent approach to the rest of the year, but I do want to underscore Michelle and my confidence in the strategy that we have outlined and the fact that we do believe we’ll continue to further enhance our margin structure.

Thank you for the color. Best of luck.

Your next question comes from the line of Steph Wissink with Jefferies.

Thank you. Good morning, everyone. We have two questions as well, if we could. The first, Michelle, is for you. Just on the overall SKU optimization strategy and inventories being down 20-plus percent at the end of the quarter, I’m wondering if you can just connect those two. Where are you at on the rationalization of SKUs?

Sure, Steph. Thanks for the question. We’ve been on this mission for the last year really across the company. And we’ve shared that driving clarity -- brand clarity, choice clarity is a key strategy for Women’s. We’ve also made great progress for Men’s. I would say, by this fall, we will be near complete of that process. But even as we sit here today, we have made great clarity. And our choice counts -- as an example to your question on SKUS, our choice counts are down significantly across the board. And that is enabling the kind of inventory reduction, but I think really more importantly, Steph, the record levels, 10-year highs of inventory turn that we’re seeing. So we’ve done -- the teams have done a ton of work to make sure that, as it relates to brands, each brand has a real purpose in terms of what it stands for, and we have eliminated redundancies. Across the company, we’ve eliminated 25 brands -- 25 significant brands. And then we are driving that choice count down. That has allowed us just further to de-densify. If we think about the store environment, remove fixtures, de-densify and create a more inviting, more clear shopping experience and the customer is giving us credit for that.

That’s very helpful. And my next question is just on your loyalty members. If you could talk a little bit about what you’ve seen over the course of the last several months. As people have become more comfortable getting back into store, experiencing the store environment, are you starting to see some loyalty member engagement increases or even new loyalty members that you’re converting from incremental traffic? Thank you.

Yes, Steph. I’ll take that one, too. Yes, we are. We have been very pleased to continue to see our new customer acquisition efforts pay off. So we continue to bring in a lot of new customers in the first quarter, and that’s been exciting to see really across both channels, both as people shop more in stores and then complement it with customer acquisition digitally. And as you know, last fall, we updated and evolved our Kohl’s Rewards program to make it more simple, more engaging, everything focused on Kohl’s Cash. And we have seen increased redemption, increased enrollment. We’re leveraging all the data we get on these customers to drive greater focus on personalization, and I’m very pleased on that, too. Jill was speaking earlier about pricing and promotion. We think about targeted offers continuing to build that customer file and really tailor and target customers in a way that gives us great efficiencies on content -- product content on offers under the key part of our marketing strategy. And loyalty is a big unlock to that. So net-net, very happy with where we are.

Thank you.

Thanks, Steph.

Your next question comes from the line of Lorraine Hutchinson with Bank of America.

Thanks. Good morning. Just following up on Paul’s question around the margin guidance. It seems like you’ve built in some level of conservatism to the gross margin line based on inventory levels building and delivery expenses. Can you maybe talk about areas of opportunity for upside to that target? And then also, if there were any other SG&A buckets, 2Q with Sephora, but anything else we should be thinking about to factor into our model for the rest of the year?

Sure, Lorraine. So obviously, we will continue to manage our inventory tightly. We won’t continue to be down to the degree you saw in first quarter, and I think most retailers will have a build back. So some of the full-price selling that came really just from, if you will, scarcity, especially in the home goods area, will maybe we think ease. As we move into the back half of the year, we do feel really great with the apparel selling. And our ongoing proprietary brands, specifically in Women’s, are incredibly strong as well. So those are really all upside. As we look across the landscape, we’ll continue to use our pricing promotional strategy, as Michelle mentioned, being much more targeted, which we see as a huge benefit for both top line because it drives consumer behavior, but obviously then flowing to the bottom line from a profit perspective. But with that being said, I think just the uncertainty that remains is why we just took a prudent approach. Our goal is clearly to continue to beat this guidance that we have out there and really drive it through our strategies. We do see the consumer backdrop in our favor at this point. But obviously, given the year that we just navigated, we thought it was definitely prudent to be aware of the uncertainties that prevail and supply chain is one of those. As we do try to build back into inventory, we’ve taken a lot of actions to offset that disruption, but we don’t think that that’s going to ease in the short run. So that’s definitely something we’re keeping our eye on as well. So what I would say is we’re going to continue to look to enhance the margin, but until we feel better coming out of Q1, one quarter, smallest quarter of the year for retail, as you’re aware, we thought it would be best to take a conservative approach to the guidance as we look forward. So SG&A wise, I would say we feel very good with how SG&A came in. The marketing efforts that you started seeing take hold last year continued with our A to S tone. I think almost 100 points to what you have seen in 2019. That will continue in the year. That team has done a great job really optimizing that spend. You’re going to see us much more in the social areas. In fact, we use a lot of social media to launch our new athleisure brand, FLX. And that works incredibly well for us with that launch exceeding our expectations. And then technology spend, we just made a really step-change in how we approach technology with our new leader. That was down about 15% in the quarter, and you’re going to continue to see us optimizing down in technology. The wage rate pressure is something we’ll continue to watch. We’ve taken that on a market-by-market basis. Our productivity in the stores has continued to increase to help us mitigate that, but that’s definitely a risk we’re watching depending on how the wage rate plays out. As well as the labor market, obviously, there’s definitely been some concerns on labor mainly for us in the distribution centers. So we’re addressing that appropriately as well to make sure that we’re attracting the high amount of talent that we’ve consistently had in those areas. So Sephora will launch in fall. A lot of those costs happened in Q2, which is why we wanted to call it out. And obviously, we’re pairing that with our refresh program, which has some expenses with as well. But when we unveil Sephora, you’ll see in those 200 doors a really new refreshed Kohl’s. And we’re really excited about that just given the momentum we’ve seen in our stores over the last several months.

Thank you.

Your next question comes from the line of Mark Altschwager with Baird.

Good morning. Thanks for taking my question. I guess, first, just following up on the customer topic. Hoping you could give us a sense of what your active customer count looks like kind of currently at the end of Q1 relative to the end of Q1 2019. And along those lines, maybe talk about your progress with reactivation efforts and really your ability to target customers that may have had to shift to other retailers amid the pandemic in early last year.

Sure. Mark, Michelle here. I’ll take the question. So as we’ve shared in the past, 2019 serving 65 million customers. And clearly, last year, it’s a challenging year to measure that, and we’re still emerging from that. So – and again, quarter-by-quarter, it’s a tricky number to answer. But what I would say is that we are seeing a – we’ve seen customers come back. And we’re – especially if we look at our customer acquisition efforts in stores, we are seeing those customers come back in store. So that’s been a big contributor to, as we talked about earlier, stores delivering a lot of the momentum and upside as we looked across the quarter. So we’re feeling good. We’re seeing reactivated customers. We’re seeing new customers. And that is what has given us the optimism to update our guidance, like we talked about. But as Jill did a great job just elaborating on, we see the upside, we see the momentum, but we’re also taking a thoughtful and prudent approach to run our business in a way that we continue to manage it tightly just like we’ve demonstrated the last few quarters.

And I think, Mark, as you know, getting new customers is incredibly important. And Sephora is a huge opportunity for us in the fall to attract that younger customers. We mentioned we have very little overlap with their customers. So we feel great with the new customer acquisition we’ve had, the reactivation of the store, customers start coming back in and then obviously, as we move to the fall, having that large opportunity with Sephora.

Thank you. And then Jill, the high end of the updated EBIT margin guidance is now in line with fiscal 2019 levels, which is just nice to see, and I think over a 100-basis point rate versus what you were thinking just a few months ago. So I guess the question is, are you feeling more confident in the 7% to 8% for 2023? Could we potentially see upside to that based on what you’ve learned so far this year? Just any comment there would be great.

Clearly, I feel great with a 7% operating margin in Q1, but it’s one quarter. So we definitely make – it makes us feel good that our strategies are working, and we feel confident in achieving our 2023 7% to 8% goal that we’ve stated. I just think it’s very early to suggest that we would make any changes to that at this point because one quarter, obviously, as you know, is great, but it doesn’t make that trend. So obviously, we’ll continue to manage that, Mark, but we just think it gives us all more confidence that our strategies are working and we will hit those goals.

Great. Thanks for all the details.

Your next question comes from the line of Paul Lejuez with Citigroup.

Thanks. It’s Tracy Kogan filling in for Paul. Michelle, I was wondering if maybe you could talk about some of your plans to improve conversion from some of the partnerships you have, especially Sephora, I know you mentioned you’re probably moving some brands closer to Sephora. But maybe if you could just talk about some of the other plans you have for improving conversion? Thanks.

Sure, Tracy. Well, to speak specifically to your question on Sephora, we couldn’t be more excited about that launch. We’re now literally just a few months away. As you know, this has been a massive effort across the company, 200 doors opening this fall, 850 by 2023 and then all things digital file up on August 1. So everything – all systems go. We’re feeling very confident about the launch. And we also feel very confident about the halo effect that we’ll see. We think about not only new customers, but also with existing customers. And so we are going to do a lot to enable that both through our marketing efforts and our merchandising efforts. So if we talk about the 200 doors specifically – well, first, to take a step back. Given our strategies, our key strategies around the plan we announced last October being a leading destination for the active and casual lifestyle, we are reflowing all stores in the company to reflect this strategy. And as we expand and amplify categories in active, in casual, downsize other categories that we’re seeing less traction on these days like men’s dress and fine jewelry, still have those categories but just in a different way. We think across the board that reflow and that merchandising coupled with inventory management, reduced choice counts, faster turns, overall is going to be a great customer experience, not limited to the 200 doors. But on the 200 doors, which will quickly grow to 850, it’s a tremendous opportunity, lots of new customers, younger customers coming in. So all the brand – first of all, all the brand moves we’re making really speak right to this newer, fresher, more modernized Kohl’s. So as you know, Calvin Klein, Tommy Hilfiger coming in, even Eddie Bauer, the outdoor lifestyle, et cetera, that will benefit all outdoors, but I think as it relates to the new customer, Sephora, in particular. And then we are – as we go into the stores and invest and put that big beautiful shop at the front of the store, we will even do further evolutions of the store experience to create, for example, like Calvin Klein, we’re doing an outsized, shop-in-shop right adjacent to the Sephora shop to give an even more elevated experience. We’re doing things with the Levi’s brand, one of our core brands we’ve had for some time, but are going to do some unique merchandising there. And I’d say the list goes on. There’s just a ton of opportunity. It’s a huge focus for the team. And it’s a unique opportunity. So we’ve got to seize it and take advantage of the great opportunity that the Sephora brand brings and welcoming out these great new customers.

Thanks. Good luck, guys.

Thank you.

Your next question comes from the line of Oliver Chen with Cowen.

Hi. All the progress at Sephora and your plans sound quite exciting. What are your thoughts about how that may interplay with back-to-school and holiday? And as we think about our models, how might sales per square foot be at – in Sephora? And what kind of lifts might you see? There’s a lot of new and younger customers given little overlap. Would also love your take on the supply chain challenges and what’s in your control and what’s not in your control and which categories are most impacted. Thanks.

Sure, Oliver. Well, I can kick it off, and then I’ll have Jill chime in here, especially on the supply chain issues. Well, I would say, to your question on as we think about all of our strategies leading into back-to-school and holiday, I think we’ve never been as well positioned. I think the timing of Sephora related to the online launch and that affects everybody, our entire digital business, which, as you know, is growing, is strong, our omnichannel capabilities. So for example, in the 200 doors, we’ll obviously enable things like buy online, pick up in-store and curbside, but we will enable buy online ship to store to all of our stores. I think that’s a good example of the power of our omni platform. So if a customer wants to order at Sephora and pick it up in their local store, but there’s not yet a Sephora store, we will enable that free shipping, et cetera. So we’re super excited. I think we and Sephora are excited about what this – what our omnichannel platform will do for Sephora at Kohl’s. But yes, I think the timing is absolutely perfect. In back-to-school, we’ll sort of hit the tail end as we launch Sephora, but a lot of our new initiatives are right in there as we’ll be launching them, back-to-school will be kicking off and then right into holiday. I think we’re set up for a great holiday. All the trends we’re seeing around customers living a more active and casual lifestyle, we don’t see that letting up. We saw strength in active last holiday. We expect that to continue, whether that’s purchases for self or gifting, all the casual brands that will be fully launched by that point, Calvin and Tommy and Eddie Bauer, further expansion of Lands’ End, which has been terrific for us to date, and list goes on. So you take all of that, which is going to be across the system. Now a lot of these brands are in 300, 400, 500 doors, if you will, but everything online for sure. And then the halo effect of the Sephora launch. And these other brands, I mean we fully expect a lot of these other brands will bring in new customers as well. And as we were speaking earlier, while we continue to stay very close to our business and make sure we’re managing with discipline, I can assure you that we will chase all the demand that’s out there. Jill will speak in a moment about supply chain disruption and what we’re seeing. But our partners, our brand partners, our suppliers have been really terrific as we navigate this and lean into opportunities. I mean we use Home as a good example, which Home has been great for the industry, great for us, and we’ve been able to chase in and maintain strong positive comps for multiple quarters now. I’ll hand it over to Jill to speak to – further on the supply chain question.

Sure. Thanks, Michelle. So obviously, everyone is right now looking at the supply chain challenges. We continue to monitor those headwinds, and I think we’ve navigated it very well. I’ll kind of talk about five things we’ve done. One is we prioritized RPOs. So we make sure that we’re bringing in those critical POs for ads and events, so we’ll expedite them if needed. We’ve added more drivers to increase our pickups from the port. We are increasing the frequency of store deliveries to make sure that we’re flowing the goods timely and making sure we’re hitting those in-store days. We’ve added carriers as well to reduce transit time. And then we are moving a lot of containers on shorter transit times from Asia, and we’re prioritizing specifically our Women’s business. As you know, that’s our main proprietary brand business. So ensuring that we continue to prioritize that, especially as that’s a big transition for us, and we expect that all their strategies, although they’re unfolding now and we’re seeing that momentum build that we’re set for fall. So we continue to watch it, but we continue to deploy a lot of strategies at this point to ensure that we’re bringing in the right POs and getting those in a timely manner.

Okay. And lastly, outdoor, you called out in your comments. I mean you’ve been in a solid destination for this in the past. I guess what’s different? And how big is this as a percentage of mix? And how might you manage weather sensitivity as that can be a risk factor? Thanks.

Sure. So outdoor is also a category that we see a lot of growth for the industry, how people are living. I mean they’re wearing outdoor not just to go hiking and serious outdoor adventures, but they’re wearing it on the streets, kind of like what we’ve seen with active. And I think for us, if we look historically, our outdoor brand portfolio has largely centered on Columbia, great brand, has grown. We love Columbia. But to be a true destination, it’s also about having a suite of brands, not unlike what we’ve done with active. So if you look at active where now we have strength in an incredible portfolio of Nike and Under Armour and Adidas, our own private brands, the recent introduction of FLX brands in the more athleisure category of Champion, we’re a true destination. I mean a customer can come in and they see incredible, amazing brands and they can choose for whatever suits their taste and their needs. Similarly as we look ahead to outdoor, it’s both, yes, we will sell outerwear. Also we think swim is a big opportunity for Kohl’s, a small business today, but we’re working hard as we look to the years ahead to build that business out, but now you’ve got Columbia and Lands’ End and Eddie Bauer and the like. So we just see tremendous opportunity and the more we can expand that portfolio very thoughtfully. I mean, we’ve ended a lot of brands, too, to make room for going after this active outdoor athleisure category so that we can double down on this business and these brands. So I think by rounding out the portfolio, it makes us more of an authority to be a destination for this category. The last thing I would say is we do see all of these lifestyle needs, active, athleisure, outdoor, even casual working together. And even the active brands are going after the outdoor opportunity, too, Oliver. So more to come. We look forward to sharing more and our customers are seeing what we’re doing in this business.

Thank you very much.

Thanks, Oliver.

Thank you. Your next question comes from the line of Chuck Grom with Gordon Haskett. Chuck, your line is open. Chuck, your line is open. Your next question comes from the line of Jenna Giannelli with Goldman Sachs. Your next question comes from the line of Jenna Giannelli with Goldman Sachs. Jenna, your line is open.

Okay. It sounds like we don’t have Jenna. So I think this is probably a good time to close it out. Thanks, everyone, for listening on the call today. We look forward to speaking with you in August.

Ladies and gentlemen, that does conclude today’s conference. We thank you for participating. You may now disconnect.