Release Date: August 28, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sephora at Kohl's continued to deliver strong growth in Q2 with total beauty sales increasing approximately 45%.
- Kohl's Corp (KSS, Financial) experienced an increase in overall transactions and attracted more new customers during the second quarter.
- The company delivered a 13% increase in earnings driven by gross margin expansion and strong inventory and expense management.
- Kohl's Corp (KSS) reduced its long-term debt by $113 million and revolver borrowings by $150 million compared to last year.
- The company is optimistic about new initiatives such as the partnership with Babies R Us and the expansion of impulse queuing lines to 200 more stores in Q3.
Negative Points
- Net sales decreased by 4.2% in Q2 and are down 4.7% year to date, with comparable sales declining 5.1% in Q2.
- Customers exhibited more discretion in their spending, leading to a smaller average basket size and pressuring overall sales.
- Core apparel and footwear offerings experienced broad softness in the quarter, impacting overall performance.
- The company faces a challenging macro-economic environment with inflation and high interest rates continuing to pressure spending among middle-income consumers.
- Certain areas of the business, such as jewelry and legacy home businesses, underperformed in Q2 and require further improvement.
Q & A Highlights
Q: Can you expand on how businesses with shops are performing versus non-shop stores, and what are your expectations for the promotional environment for the rest of the year?
A: The promotional environment is expected to be very intense, especially in the fourth quarter. Middle-income customers are feeling financial pressure, so delivering value is crucial. Stores with dress shops are performing better, and we are expanding dress offerings to all stores. However, the women's business overall has been challenging, particularly in intimate apparel and activewear. We are working hard to turn these areas around.
Q: Can you speak to the cadence of demand through the quarter and if there were any material differences between regular pricing and clearance?
A: The quarter was consistent with no significant differences between regular pricing and clearance. The newness in products is working, particularly in dresses and juniors, which have been repositioned to the front of the store. However, core items in women's, such as intimates and seasonal assortments, have not resonated as well.
Q: What percentage of customers are cross-shopping the store when they make a Sephora purchase, and how can you take better advantage of Sephora going forward?
A: Approximately 35% of Sephora baskets include another Kohl's product, primarily women's, juniors, impulse, and accessories. We are moving juniors to the front of the store to capitalize on Sephora traffic. Sephora continues to attract new customers, with 40% being new to Kohl's.
Q: Any early reads on the impact of Babies R Us, and what should we consider for the back half outlook?
A: It's early, but initial results are promising, particularly in baby gear and furniture. We expect Babies R Us to bring in new customers and have a halo effect on other categories like kids. For the back half, we anticipate a build in sales from initiatives like Sephora, impulse lines, and new brand launches.
Q: What's driving the increased margin leverage in the guidance for the second half despite lower sales, and how durable is this?
A: The margin leverage is driven by strong inventory management and cost discipline. We have room to be competitive in promotions during the holiday season. The exclusion of the CFPB impact from the guidance also contributes to the margin outlook.
Q: On the core apparel and footwear categories, which issues will be easier to fix in the near term versus longer term?
A: The juniors business will be easier to turn around due to quick-turn products and leveraging the marketplace. Intimate apparel and classic brands will take longer to improve. Rebuilding the petites business should be quicker.
Q: Are you more concerned about units per transaction (UPTs) or traffic, and how does this relate to the health of the consumer?
A: We are seeing positive transactions and conversion, indicating that newness is resonating with customers. However, the middle-income customer is still squeezed, leading to smaller basket sizes. We are introducing lower AUR items to address this.
Q: Where do you expect the biggest impact from new partnerships like Babies R Us, and what are the opportunities in the home category?
A: Babies R Us is expected to have a significant impact, especially with the upcoming registry launch. In the home category, home decor and pet businesses are strong, but we need to improve in electrics and bedding. The holiday decor presentation is also expected to drive growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
