Kohl's Corporation (KSS) Earnings Call Transcript

Good morning, and thank you for joining us for this next session as part of the Goldman Sachs Global Retailing Conference. My name is Alexandra Walvis. I cover the discretionary brands and apparel and accessories retailers here at Goldman Sachs, and I'm thrilled to be welcoming the management team from Kohl's for our next session. Kohl's, as you all know, is a leading off-the-mall department store with over 1,000 stores across the U.S. And over the last few years, the company has been focused on an agenda to drive operational excellence in increasingly volatile environment. Here to walk us through the details of this and many other things are Michelle Gass, CEO; and Jill Timm, CFO. Welcome both. And with that, I'm going to pass over to the team for a few introductory remarks. Jill, would you like to take off?

Great. Thank you so much. Good morning, Alex. We are both so happy to be here with you today. Michelle is going to just start out with some opening comments and remarks, and we'll turn it over to you for Q&A. So with that, I'm going to turn it over to Michelle.

Thanks, Alex. Thanks, Jill. Really happy to be here, Alex, to share our kind of recent trends, what we're seeing and importantly, as we look to the future, just to take a step back, Alex, as you know, this has been an extraordinary time for us and for everyone else. As we entered the pandemic, we took a lot of decisive actions to, number one, ensure and protect the health and well-being of our people and our customers and, importantly, to protect our financial viability as we navigated this. I think Jill and I are pleased. We're obviously still in it but we're pleased as we've been navigating. Our balance sheet is strong. We've got a lot of cash on the balance sheet, and we've taken a lot of actions. And of course, we're still in it. I think importantly, we've taken this time to really take a step back and study our own consumer data, the trends we're seeing as well as macro trends, which sort of leads to me to my third point, and I'll address this in a moment, that we're really taking advantage of this time to accelerate and aggressively pivot our strategy to make sure that we can capture market share and grow the business as we're on the other side of that. So let me just touch on the macro trends. You're seeing these, we're seeing these. I'd start with, first, the importance of digital and omnichannel. I mean that has been critical during this period. Obviously, in the second quarter, our digital sales were up 60%, and importantly, our omnichannel capabilities were critical as we drove demand across multiple channels, including standing up our curbside drive up really within a couple of weeks. And we expect that to be a long-lasting customer service as we look to the future. And then as well as fulfilling that demand across our fleet of stores and our fulfillment centers. So I'd say that's the first point. And we're going to continue to do all we can to not only maximize demands within our store base as they're now open. And just as a reminder, our stores were closed for 7 weeks. Some portion of them, over 17 weeks, but as we're here today, all our stores are, in fact, open. So again, continue to lean into digital. We expect that's going to be an ongoing trend, especially if you look at the back half of the year and beyond. I'd say, secondly, is the importance of value. And it's always been a core strength of the company. We're going to lean into this. It's really important from both the quality and price and getting that equation right and rewards and loyalty has been a strength of the company. And just yesterday, we relaunched our loyalty program. We're thrilled to do that. It's, again, a core capability. We have over 30 million members in our loyalty program. We've been piloting this for some time because it's so critical to get it right. We believe we've gotten it right, and we're out of the gates now. And then the third point, and I'd say this leads to pretty significant pivot for the company, is the trends we're seeing around active and casualization. I know, Alex, you commented on that as well. Again, I'd say this has been a strength. We've always been seen as a casual apparel destination. In the last 5 years, we've really leaned into the active opportunity. And just as a reminder, we've doubled that business. It's now 20% of our business. And we think there's more opportunity. So as we look ahead, we believe active can be at least 30% of our business. And we see ourselves and the actions we can take over the next few years to really be a true leader and a destination for all things, active, casual and wellness for the entire family. And if I speak to active for a moment, I mean, as you know, we've got great partnerships with 3 leading national active brands and Nike, Under Armour, adidas. They've been critical as we, over the last 5 years, have grown our business. And we believe there's more opportunity with these brands, both in terms of innovation, expanding the space, et cetera, again, capturing up to that 30%. Second is the outdoor opportunity. We also see that as a tremendous opportunity, not just for people who are doing activities outdoor but just in their casual lifestyle, when we see this, people wearing outdoor gear on the street. So you'll see more from us on that front, again, great partnership with Colombia. And then third is athleisure. And we see opportunities within our existing brands, both those national brands I just spoke to as well as our private brands, but we've also identified a white space there. So for some time, we've been working on a new private brand to fully address this athleisure opportunity, which you can work out, but importantly, streetwear, you can wear it to work, a very robust assortment, and we'll be launching that in spring of '21. So it's the first time we're talking about it. Like I said, it's been in the works for some time. So tremendous opportunity. And so if I were to kind of summarize why Kohl's and why can we be a leader in this space? I think there's a few points that make us unique and differentiated. First, I'd say that we're thinking about active casual and wellness for the entire family. And we cut across so many categories. Strength in men, women, kids, home, areas like beauty, et cetera. So just a really broad base that we can drive assortment and innovation across. I'd say, secondly is the accessibility, both in terms of accessibility on our footprint, so our omnichannel footprint. As you mentioned, over 1,000 stores, our digital capabilities, et cetera. So that we see as a tremendous asset as well as accessibility from the range of brands from our private brands all the way to aspirational national brands. And then back to that omnichannel platform, we serve 65 million customers. It's a great way to grow the brands we have as well as to debut more innovation, expanded categories and new partnerships. And we've got a lot in the works on that front. So we're really pleased. So just to summarize kind of what we're seeing, Alex. I mean, number one, we fully understand the environment is changing. We're still navigating this pandemic, but we feel good about where we are, and we have a very solid foundation, both on the financial standpoint and the strength of our customer base. Believe we're uniquely positioned, given the trends I just talked about. And lastly, we're using this opportunity to pivot our strategies. And like I said, really lean into this leadership position on active and casual for the family. So I'll pause there. But thanks for that opportunity, and I look forward to the Q&A now.

Thank you so much, Michelle sharing those opening remarks, you highlighted a number of strategic initiatives there, which I'd like to address during this Q&A.

But first, can we talk for a moment on some of the recent trends you're seeing in the business. You noted on your recent earnings call, store productivity was around 75%. You've seen in the second quarter, very, very strong e-commerce sales growth almost 60%. But you did also call out a slower start to the back-to-school season. So I wonder if you could comment on that sort of stuff back-to-school season and drivers of that across stores and e-commerce. And how we should think about, in particular, the penetration in the e-comm part of the business going forward?

Well, thanks, Alex. There's a lot in that question, but let me start first with your comment around back-to-school. And as we did mentioned in our last call, I mean, clearly, back-to-school has been impacted dramatically from COVID. I think at the time, there's a lot of uncertainty out there in terms of how kids were going to go back-to-school and would they be at home, would they be back in the classroom. As there's been more clarity around back-to-school, we have seen some recovery on back-to-school business. So we are seeing that. But I think it's fair to say that this is not going to be a gangbuster back-to-school time because of the headwinds we're facing. But that being said, in recent weeks, we have seen some recovery. I think, importantly, we're using this time to continue to lean into those core strategies that will set us up for the future. So you mentioned digital as an example, and we continue to fuel that business through the agility of our marketing team, driving demand. It's been a strong channel for us, that continues. And we look at that as being critical through the back half of the year. From a category standpoint, again, given the long-term strategy that I was just speaking to, we're continuing to see health in our active business. We mentioned on the call, home, that continues to be a key driver for us. And I think what we're seeing in home is broad-based in terms of the success and the results we're seeing. And we have the team chasing opportunities, chasing receipts to fuel that. I also think home is a great category as we think about fulfilling that leadership in all things, active, wellness and casual, whether it's outfitting your home casually or your wellness lifestyle, healthy sleep, healthy cooking, and we're seeing good results there. And then as we think about the back half, we've seen great strength in our toy category. That historically has been a smaller business for Kohl's, but it has really accelerated, especially as we brought in new brands like LEGO, for example, which was a recent introduction. So we're going to continue to lean into that. But clearly, both channels are important to us, both our stores and digital. There continues to be, I think, a lot of uncertainty out there in terms of the comfort of people being out and about shopping. We've been very pleased with the customer feedback we're getting in terms of cleanliness and the safety of our stores. And we're getting good feedback on that, like I said, from our people and our customers. And I think as it relates to digital, it's both driving -- it's really driving digital however the customer wants it, but leaning into those opportunities where we can drive people into the stores like Buy Online, Pick Up In Store and curbside.

Super clear. The other shift that you called out on your recent call, you made some comments about holiday and the anticipated shift in holiday demand. You're planning to be close to Thanksgiving Day. You're planning to ship more demand into October. Can you talk about what you're seeing driving that expectation? And how you're changing your holiday assortment in order to capitalize on that shift? And then perhaps, Jill, if you could come in on comment on how you're thinking about pricing and promotions into holiday on the back of that answer as well, that would be great.

Okay. So Alex, as you said, holiday is going to be very different this year. And I think we're all expecting that given COVID will still be with us. I think the important thing for us is we'll continue to operate in a very agile manner and flex as we need to as we see the customer behaviors flex. That being said, I would say, this has always been a strength of ours. I mean people think of Kohl's as a holiday destination. We're a top-of-mind retailer, and we're going to put our best foot forward. And I would say the customer trends that we've identified and we mentioned on the call is we are expecting for customers to start their holiday shopping earlier, as early as October. And I think this could be driven by both do they want to shop, call it, in the crowds, whatever that looks like this holiday or they also might just want certainty, those coveted gifts they want, et cetera. So we're ready, both from a product standpoint as well as from a promotion, et cetera. And we expect that we'll start seeing customers prepare for their holidays as early as October. So that's how we're thinking about it, both from a product promotion standpoint. One of the things we're feeling good about is that the types of categories that become even more important during the holiday period are ones that we're seeing strengthen right now. So just to go back to categories like active, home, toys, et cetera. On the apparel side as well, what we've seen during this COVID time is talked about customers gravitating more casual, but they're also gravitating to comfort. And again, a strength of Kohl's even last holiday, I mean we sold so much fleece and cozy and whether that's pajamas or it's stuff you're just wearing loungewear around the house. We're selling lots of slippers. And so again, those only become much more important. So I'd say planning from a timing standpoint early and fueling that throughout product standpoint, whether that's home, toys, casual as well as practical gifts. I mean we're kind of a practical destination, and our customer research would say that's becoming more important. And then, of course, omnichannel and that ease and convenience, and we're set up to serve the customer across all channels.

Great. And then from a promotional perspective, Alex, I think we know holiday is always very promotional, and we don't really expect this holiday to be very different. It actually plays into one of Kohl's core competency. As you know, we've been a high-low retailer. We know value like no other. So we're very thoughtful on how we approach going after these promotions into the holiday period to drive consumer behavior. So we have a ton of data, as you're aware, around our 65 million customers. So we're going to leverage that and our data analytics capability to really be thoughtful on how we go after that market share in the holiday period to drive consumer behavior. For example, we know home is really a price-led category, so you're going to see us really go after price in home, but then deliver that extra value through our iconic Kohl's Cash. So that's one example. Second, we just want loyalty. It happened to come right in front of holiday. So it's another level of value for those 30 million customers that Michelle had referenced as well. And then from an omnichannel perspective, one of the benefits we've seen from COVID is our customer has become more omnichannel. They're not just store-only or digital-only. And when they move to the omnichannel, we see their 6x more productive than a digital-only customer and 4x as productive as a store-only customer. So we see that as a large opportunity as we move into the back half of the year to capitalize on that during our peak holiday shopping period.

Okay. You guys mentioned in those answers, and Jill, you just talked a little bit about it for holiday, but the big opportunity you see to gain market share. That's not just a holiday phenomenon, but that will also likely to continue into next year and beyond. Perhaps you can talk holistically about the position that Kohl's has, which enables it to take market share and then the specific strategies that you're employing in order to do that, not just for holiday, but also beyond.

So Alex, the way I would answer that question is both in a more macro or global point of view as well as a local standpoint. So from a broad perspective, and we are expecting that there will be market share to be gained, given the significant disruption that's happening in the industry right now. So from our standpoint, financially, a strong balance sheet, which affords us the opportunity to invest to go after that demand both in the short and the long term. We're a disciplined operator. I think you've seen that over the time of COVID, and that continues again. I believe that gives us a great opportunity, I think, especially given our omnichannel presence, both in terms of the investments we weighed digitally. And we are, even during this time, capturing new customers during COVID, especially digitally. So that is encouraging as well as our store footprint, which is 95% off-mall, which we believe that's going to even be more important during this time as customers are looking for safe shopping experiences. So I think that strong foundation, both in terms of our footprint off-mall as well as our very strong customer base positions us well. And then importantly, how we're going to show up. And as I was talking about earlier in my opening remarks, aggressively accelerating our strategies against active and casual, wellness, home, we see that those are going to be lasting for some time and really resonate with customers, both with our existing customers and with new customers. Then on a local level, as we see the disruption happening and as perhaps stores close, et cetera, it's really using our local market knowledge, even down to the store level based on the analytics we have, knowing where the customers are, looking at what the cross-pollination is of ZIP codes to target those customers based on the insights we've had, and we've used that playbook in the past. We have gained market share in the past. If we look at disruption that took place a couple of years ago, our capabilities around data and targeting has only gotten more robust. So as we speak, we're leveraging that playbook. And we look to the back half of the year and into next year to really target those local opportunities to capture market share.

Right. You've referenced some of the category opportunities you're seeing out there in the prepared remarks and weaved into some of those questions. Let's focus in on those for a moment. Three areas that I'd love to hear your comments on, one, the athletic opportunity, how are you going to get that to 30% of the business; two, home what merchandising activities are you doing to really tackle that opportunity; and then three, beauty is a small part of the business today, but an opportunity for you. So I wonder if you could talk about some of the initiatives in each of those areas.

You bet. So let's start with active, and I referenced some of the ways we're going to approach it, but we really see active athleisure in its broadest sense. And as I said, that we see as a tremendous opportunity for Kohl's, especially as we think about our point of difference in serving the entire family. And we've seen growth over the last few years really across all lines of business. So our Men's business, Women's business, Kids active. I mean think about our Kids active business, that breadth we have, both in the national brands as well as private brands, I think, really positions us uniquely, like I said, across that entire family. We see opportunity, Alex, in special sizes. So big and tall plus petite. I think we're in the early chapters of that. And then working with our key partners. I mean I can't say enough about the partnerships we have with Nike, adidas, Under Armour and really the co-authoring of these strategies, whether it's around product, innovation, experimentation and then space and merchandising. So our plan, sort of happening as we speak, but importantly, as we look to 2021, is to expand space. We've got experience with that. We've been on that journey the last couple of years, we're going to take that even further. And then I mentioned the outdoor opportunity. So we're going to be leaning into that. And then importantly, athleisure, both within our brand partners, partnerships and what we can do there, but importantly, launching this new brand, we'll be talking to you more in detail about that in the coming months but launching that in spring of '21. As I said, it's been in the works for some time. We've done sort of deep analytics around what's the right way to serve our customers, both existing and new, and we're really excited to launch that. So there's a lot under that active athleisure umbrella. Second point would be home. That has been a core category competency for the company for quite some time, as you know. We see -- I mean during this COVID time, how customers are -- they're evolving their home needs, whether that's the practical side on things like cooking, cookware, small electrics, but we're also seeing it on decor side. Even in recent times, we're already seeing the uptick of things around harvest and Halloween and what have you, and we expect even with holiday. But we have a great assortment on the home front, both again in terms of balancing of national brands and private brands and look towards our brand partners to bring those new innovations for our customers. But we expect, again, that this trend is going to continue for some time as people are spending more time in there. And then you do mention beauty. And as I think about us being, over time, a destination for active, casual, wellness, I think beauty fits right in there. As you mentioned, it's a small business for us today. It has been growing. Over the last few years, that business has grown 40% off a small base. But new introductions we brought in, customers have been excited. We've been experimenting with new merchandising, and we think this is a tremendous opportunity for the company as we look over the horizon. And one thing to just mention is 70% of our customers are female. So whether it's a traffic driver or a basket builder, we think there's great opportunity. And to date, our customers are indicating they're very interested.

We've gone through a number of your strategic initiatives, both in terms of categories, omnichannel and elsewhere. I wonder if we could tie those all together for a moment. I know that you're not giving longer-term guidance at this stage. But Jill, perhaps I could bring you in here. And as we think about all of those initiatives, the opportunities that you have for market share gains, but also some of the challenges facing the industry, how should we think about the rebuild of sales and margins perhaps with reference to 2019? And I'll just say here that some of the questions that we're asking every one of the companies at the conference this year are when they expect sales to get back to 2019 levels, when they get -- expect margins to get back to 2019 levels. Again, we don't need specifics, but you could share your thought process on how we should think about that trajectory. That would be really helpful.