Kohl’s Corporation (NYSE:KSS) Q3 2022 Earnings Call Transcript

Kohl’s Corporation (NYSE:KSS) Q3 2022 Earnings Call Transcript November 17, 2022

Kohl’s Corporation beats earnings expectations. Reported EPS is $0.82, expectations were $0.78.

Operator: Good morning. My name is Dennis, and I will be your conference operator today. At this time, I would like to welcome everyone to Kohl’s Corporation Third Quarter 2022 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. I would now like to turn the conference over to Mark Rupe, Senior Vice President, Investor Relations. Please go ahead.

Mark Rupe: 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 Item 1A of Part 2 of the Company’s quarterly report on Form 10-Q for the first quarter of fiscal 2022 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.

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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. 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 So, if you’re listening to a replay of this call, it is possible that the information discussed is no longer current.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. Today’s call will be abbreviated as compared to past earnings calls.

We are planning the call to last approximately 40 minutes. With me this morning are Peter Boneparth, our Independent Chair of the Board; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Peter.

Peter Boneparth: Thank you, Mark, and thank you for joining us this morning. I’m going to provide some brief introductory remarks, and then I’ll turn it over to Jill to review our third quarter results. We will then take some Q&A. As we shared last week, Michelle Gass decided to step down as CEO to become the successor CEO at Levi’s, a valued brand partner of ours. On behalf of the Board, management and all of our associates, I want to thank Michelle for her contribution to Kohl’s during the past nine years. Her efforts to strategically transform Kohl’s through brand introductions and partnerships like Sephora and her focus on building an inclusive and collaborative culture will benefit the Company for years to come. Michelle is an outstanding leader, and we look forward to continuing to work with her in the future.

We have plans in place to facilitate a smooth transition. The Board appointed Tom Kingsbury as interim CEO. Many of you know Tom from his leadership and success at Burlington. He’s highly regarded as an exceptional operator with a keen focus on inventory management. I knew Tom from his early days at Filene’s, and I personally have always had a great deal of respect for his professionalism, retail acumen and integrity. Tom is no stranger to Kohl’s. He calls Milwaukee home. He’s been on the board since 2021 and has been intimately involved in working with Michelle and the team. He is the perfect fit to lead the Company during this interim period, and we greatly appreciate his willingness to serve in this capacity. We expect him to hit the ground running.

Given the recent volatility in our business and consumer behavior, the significant macroeconomic headwinds, along with the unexpected CEO transition, we will not be giving guidance for the fourth quarter and are withdrawing our prior outlook for the year. We also want to make sure that the Company has the flexibility to take the actions necessary in the fourth quarter to best position the business for 2023. We continue to have strong conviction in our strategies and it is our intent to resume providing guidance on our Q4 call in late February for the new fiscal year 2023. Now, let me spend a few minutes on our next steps. The Board last week formed a committee to oversee the search for a new CEO. Michael Bender, our current Chair of the Nominating and ESG Committee will be leading our efforts with help from Christine Day, Margaret Jenkins as well as Tom and I.

Kohl’s is a great company with bright prospects, and this is an attractive role and opportunity in the retail industry. We are excited to engage with candidates. Let me share with you some of the key characteristics we are looking for in a new CEO. Kohl’s has always been known for brands, value and convenience. So, it’s important that we land a candidate that has great brand-building experience, understands our go-to-market value proposition and has deep omnichannel expertise. In addition, we are looking for a leader that can build great teams and drive stellar results while furthering the innovative spirit and conclusive and collaborative culture. We don’t have a time line for you on how long it will take, but we know that the process is underway, and that Tom has agreed to remain interim CEO until a permanent successor is named.

This company has been through a lot over the last couple of years. I want to thank our shareholders for the time you’ve invested in engaging with us as well as thank you for your continued support during this transition period. We are committed to finding the next great CEO to successfully position Kohl’s to drive sales, grow earnings and create shareholder value. This Board is also committed to supporting Tom, the management team and the entire associate base during this interim period. I will now turn over the call to Jill to discuss our third quarter results.

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Jill Timm: Thank you, Peter, and good morning, everyone. Before I get started, I too want to thank Michelle for her leadership and partnership over the past decade. Let me now review our third quarter results and business performance. As we shared last week, sales were down approximately 7%. Our operating margin was 4.7% and diluted EPS was $0.82. Our performance during the third quarter was relatively in line with our expectations as the organization continued to manage the business effectively in a challenging macroeconomic environment. Persistently high inflation continues to dampen consumer spending and our business, given our exposure to discretionary categories, like apparel and home goods, which are facing disproportionate pressure.

During the quarter, we saw our middle income customers continue to purchase fewer items per trip and trade down to our value-oriented private brands. From a channel perspective, store sales outperformed digital and improved sequentially in Q3 due in part to having more Sephora shops open and our investment in labor to enhance execution across the store. Digital sales were down 8% to last year, but still up nearly 20% to the third quarter of 2019. Digital accounted for 29% of sales. From a product perspective, sales of our private brands increased slightly to last year, with strong performance in our top private brands, including Sonoma, Croft & Barrow, Jumping Beans, Nine West, Tek Gear and Lauren Conrad. Accessories with our best-performing line of business up mid-teens percent, driven by strong performance from Sephora Beauty sales.

We continue to see mid- to high-single-digit percent sales lifts in stores with Sephora relative to the balance of the chain. This was partially offset by lower sales of jewelry, driven by in-store displacements. Our core women’s business outperformed the Company average and excluding juniors was flat to last year. We maintain momentum in dresses though experienced weakness in juniors and intimates, which we are working to improve. As it relates to some of our other categories, active underperformed in Q3 versus the Company driven by continued softness in active footwear. Our outdoor business continues to outperform with growth from Eddie Bauer and Land’s End. In footwear, we are pleased with the growth achieved in our dress casual business, especially in boots.

And lastly, men’s performed in line when home and children’s underperformed the Company average. Now let me turn to the rest of the income statement. Q3 gross margin was 37.3%, down 263 basis points from last year. The decline was driven by an ongoing increase in freight costs, which pressured margin by 150 basis points, product cost inflation, which was a 50 basis-point headwind as well as elevated shrink levels. Our margin continued to benefit from our pricing and promotional optimization strategies. SG&A expenses decreased 3.3% to $1.3 billion, benefiting primarily from the lack of holiday-based retention incentives this year and lapping last year’s Sephora roll out expenses. And through disciplined expense management, we were able to offset some of the continued wage headwinds.

Depreciation expense of $202 million was $8 million lower than last year, due to reduced technology capital spend. Interest expense of $81 million was $15 million higher than last year due to Sephora-related lease amendments and increased borrowings Net income for the quarter was $97 million. And as previously reported, earnings per diluted share was $0.82. Turning to the balance sheet and cash flow. Our inventory at quarter-end increased 34% to last year with our Sephora at Kohl’s beauty investments contributing 5 percentage points of the increase. When compared to third quarter of 2019, inventory was flat. During Q3, we set the pack-and-hold merchandise on the sales floor and in transit normalized. We feel good about the progress we are making to reduce inventory and continue to expect further improvement by year-end, remaining agile and responsive to the demand environment.

Operating cash flow was $121 million in the third quarter. Capital expenditures for the quarter were $185 million, driven mainly by Sephora and new stores. We opened 5 new stores in 2022, 4 of which occurred in early November, and relocated another 4 stores. During the quarter, we paid $57 million or $0.50 per share in dividends to shareholders. In addition, as previously disclosed on November 9, the Board declared another quarterly cash dividend of $0.50 per share payable to shareholders on December 21st. Subsequent to the end of the quarter, we completed our $500 million accelerated share repurchase program. In total, we received 17.9 million shares, which resulted in an average price of approximately $28 per share. From an accounting perspective, we recognized 11.8 million shares in Q3 and we’ll recognize the remaining 6.1 million shares in Q4.

Now, let me provide an update on our capital structure and capital allocation priorities. Starting first with our revolving credit facility. As expected, we increased our usage of the revolver during the third quarter, driven by our seasonal inventory build ahead of holiday and to execute the $500 million accelerated share repurchase program. At the end of the third quarter, our outstanding revolver balance was $668 million. Importantly, we expect to fully repay our revolver borrowings in early December, as we move through the key parts of the holiday selling season. We have consistently communicated that our long-term objective is to maintain our investment-grade rating, supported by prudent balance sheet management, and a leverage target of 2.5 times.

Our philosophy and objectives have not changed on this front. Looking forward, our capital allocation actions will prioritize the dividend, followed by returning our balance sheet to its historical strength. We plan to pay down our two bond maturities totaling $275 million in 2023. We are not planning on repurchasing any additional shares until our balance sheet is strengthened on a path towards our leverage target of 2.5 times. We used the recently completed $500 million ASR as a pull forward from 2023. And we recently completed a robust process where we engaged with dozens of industry participants to assess potential asset monetization opportunities for our owned real estate. This included robust engagements with large, fully integrated real estate service firms, specialty real estate advisory and brokerage firms, large institutional real estate investors and specialty real estate investment and private equity firms.

Given the market volatility and current rate environment, we have concluded that it’s best to stay the course and continue with our existing process of regularly evaluating our real estate to maximize asset value, drive long-term profitability and optimize the portfolio with a focus on maintaining balance sheet health and financial flexibility. We will continue to take advantage of favorable opportunities as they arise, but not engage in a transformative sales-leaseback transaction at this time. Let me share a few comments on our forward outlook. For holiday, knowing how important value is to customers this year, we are amplifying our value messaging through our holiday brand campaign as well as by featuring our private brands more prominently in our marketing and leaning into our iconic Kohl’s Cash and Kohl’s Rewards programs across key promotional events.

Our key product focus areas include an expanded support gifting assortment, increased newness and greater exclusivity in toys, tech and pet, active and cozy apparel and special occasion outfitting such as holiday dresses. Gifting is an important theme in our messaging, and we look forward to serving our customers once again this holiday season, both online and in-store, including our now over 600 stores with Sephora at Kohl’s shops. As it relates to our financial outlook, as Peter stated in his opening remarks, we remain committed to and confident in our strategy. However, we are not providing fourth quarter sales and earnings guidance at this time. It is the prudent thing to do given the recent unpredictable trends in our business, the significant macroeconomic headwinds, along with the unexpected CEO transition.

We also want to make sure that we have the flexibility to take the actions necessary to best position the business for 2023. Let me share a few qualitative comments on recent trends and select financial commentary. In recent weeks, the environment has become more unpredictable to forecast. Following fairly stable trends in August and September, sales decelerated in late October with softness continuing into November as compared to last year. We believe this is primarily a function of a later start to holiday shopping as compared to 2021 when customers were concerned about scarcity of inventory. Given our expectation that the challenging environment will continue in the short term, we’re taking actions across multiple fronts to ensure that we are best positioned.

We are planning inventory commitments conservatively, executing expense savings opportunities and reducing capital expenditures. We will do this while continuing to invest in our key future growth initiatives. Our partnership with Sephora remains extremely strong, and we are both incredibly focused on building support at Kohl’s to $2 billion in sales. In 2023, we’ll open 250 additional Sephora at Kohl’s shops, bringing the total to 850 as well as make progress on developing a smaller footprint concept for our remaining 300 stores. In closing, I want to extend a special thank you to all of our associates. I admire your commitment to putting our customers first each and every day and I greatly value your dedication to Kohl’s. The holiday season is a special time for so many reasons, both personally and for our business.

I’m excited to see more and more of our customers experience the elevated store environment with Sephora and benefit from our value-driven holiday promotional strategies. With that, Peter and I are happy to take your questions at this time.

Q&A Session

Operator: And your first question is from the line of Mark Altschwager with Baird. Please go ahead.

Mark Altschwager: First, Peter, with respect to the CEO search, could you expand on the key attributes the Board is looking for? Are you looking for an individual who can execute on the current strategy the Company has outlined or perhaps looking to shake things up a bit? And finally, is there a scenario where Tom continues in the role for more than an interim basis?

Peter Boneparth: Yes. Thanks, Mark, and good morning. As regard to your first question, just to elaborate, the Board and the current management team and Tom are fully aligned that the strategy that we’ve embarked upon is the right one. So, we’re not looking for a CEO who’s coming in to change the strategy that we’ve embarked on. What we are looking for is a very strong operator, as I said, somebody who can drive sales, somebody who can drive earnings per share and somebody who understands the basic tenets behind the Kohl’s value proposition and the brand strategy. So, what we are confident in is that this is amongst the top grade jobs in retail and that the search firm is going to lead to us to somebody who can run this business for a long time.

As it relates to Tom’s ongoing involvement, Tom has committed to us that he will be interim CEO until we find one. So — while there’s no end in date that it’s very clear that his assignment at this point is interim. We couldn’t be asking for a better leader at this time given his background and his support of Kohl’s along the way.

Mark Altschwager: And Jill, I know you don’t like to provide a lot of monthly detail, but given the decision to withdraw the guide, any more color you can give us on the volatility in late October and early November, would be helpful just as we try to get a sense of what the run rate is kind of exiting the quarter and into early Q4. And then on gross margin, you called out some of the puts and takes in Q3 on freight and costs and shrink. Just any thoughts on what those factors look like in Q4 relative to Q3 based on what you see today? Thank you.

Jill Timm: Sure. Good morning, Mark. I think for sales, we mentioned in the call, we saw stable sales in August and September. It was a late part of October that we really saw softness. You can read that into it actually underperformed the quarter. We saw softness continue in November. What I would say is it’s moderately better. So we are seeing some improvement. Like we mentioned, we are looking to see that shopper reverting back to more of that pre-pandemic 2019 shopping period because last year, we did see an acceleration due to the scarcity of inventory. But given the volatility and really the uncertainty in the macro environment, we just don’t have a lot of visibility into that, which led us to partially withdraw — or why we wanted to withdraw the guidance today.

In terms of margin, we had talked a lot about freight being a headwind all year. We knew we would start lapping that as a headwind in Q4. So, that will actually moderate. But what does come back in Q4, as you saw, we called out, is that cost inflation. So, where freight will moderate, cost inflation actually elevates. So, we’ll see a similar pressure there. And then shrink is just really ongoing. I think you’ve heard about that more macro. So, we’ve continued to see shrink as a headwind for us. We’re doing a lot of things to try to manage that with, of course, the first and foremost priority of us keeping our associates and our customers safe as we go through from that perspective. So, I think that’s kind of the color I can give you as we move into the fourth quarter.

But I would say just overall, it’s the uncertainty and the lack of visibility we have, not that we don’t have a conviction and confidence in the strategy that we’re employing.

Operator: Your next question is from the line of Bob Drbul with Guggenheim.

Bob Drbul: I just want to sort of follow up on Mark’s questions. But I don’t know if this is Peter or Jill or both. But, can you just talk about the decision to actually withdraw the guidance versus maybe a wider range? Any framework that you can give us around Q4, but even into €˜23, as you think about how you want to position the business to €˜23? I think that would be pretty helpful. And then, I do have a follow-up.

Peter Boneparth: Yes. Bob, maybe I’ll start and toss it over to Jill. First of all good morning and nice to talk to you. So, as you know, I’ve been doing this a long time, as have many members of our Board as has Jill, and I would say that the visibility for the fourth quarter has been as difficult as any period I could remember. So what you have, as we’ve said, is on the one hand, you had last year a situation where nobody had an inventory. Everybody, as a result, all customers were inclined to buy early and so you had these big numbers early in the quarter, so people had a lot of conviction. Of course, by the end of the quarter, people had inventory problems, had issues and we had that as well. Now, you flip over, everybody has a lot of inventory, the customers, obviously, we’re anticipating a highly promotional calendar.

And then, we saw this pronounced slowdown in October going into November was that consumer behavior? Was that weather? Was that the elections? I don’t think anybody really knows. It’s probably a combination of all those 3 factors. You then combine that in our minds, with obviously an unexpected CEO transition and our judgment call, which frankly is a 51-49 call. Our judgment that it was very important to give Tom and the team the latitude in the fourth quarter to execute on our basic strategy, which is to drive value and sales during a very promotional environment. You’ve heard from other competitors, I think it’s consistent with what everybody is saying out there. I think everybody believes that Christmas will come but I don’t think anybody out there today knows for sure exactly what’s going to happen.

I don’t know, Jill, if you have anything to add to that?

Jill Timm: No, I would echo sentiment. I think it’s really about the unpredictability and the volatility and the trends that we’ve seen over the last several weeks. It’s not that we’re not confident in the strategy. As we enter into the holiday season, we know it’s going to be very focused on value. It’s a core tenet for Kohl’s. So this affords us the opportunity to make sure that we can compete, go after the market share, we’re set up really well. We have 600 Sephora shops. We have a lot of newness across the store, including smart home, pet, leaning into successful areas like outdoor and dress. So, we have confidence in the strategy. I think it’s much more about the uncertainty and the unpredictability of the macro environment that Peter had mentioned.

Bob Drbul: Got it. And Jill, I just — I have a follow-up question. So, I think one of the brands that you called out was Lauren Conrad brand, one of the products that seems to be creating a lot of chatter is the women’s LC Lauren Conrad mid-rise leggings. And I was just wondering if that’s enough to really sort of carry the brand, if any comments around how that is performing in stock, or how important it will be to you in the fourth quarter?

Jill Timm: Well, Lauren, we did call out — I think we have called out has been a successful brand for us and is really resonating with our customer. I personally am a Lauren Conrad shopper, as everyone knows, and who doesn’t love a great pair of legging. So I think it’s just really indicative of the success of — her leggings are doing well, but really just of the brand in general. And we talked about women, the core women’s business was flat on the quarter. So, when you take out juniors, which we’ve talked about, we’re working through some of the issues we have there. So, we feel really happy with how women’s is performing. And overall, Lauren is just a great brand. We’re happy with the partnership. And I’m really happy that you actually know about the Lauren Conrad leggings. So apparently, our special marketing is broad reaching.

Bob Drbul: Thank you.

Operator: Your next question is from the line of Gaby Carbone with Deutsche Bank. Please go ahead.

Gaby Carbone: So on inventory, last quarter, you mentioned it would likely be at maybe high-teens at the end of the year, which kind of brings you back in line with 2019 levels. Curious if that’s kind of how you’re still thinking about it. I understand you aren’t providing guidance. And then just on the promotional front. Just curious of your activity and kind of how you’re thinking about the holiday maybe is still going to be better than what you saw in 2019.

Jill Timm: Sure. In terms of inventory, I think inventory is actually right where we expect it to be. I think we talked we knew we weren’t going — we were going to make improvement, but it wouldn’t be a large amount of improvement because we wanted to protect holiday. We wanted to make sure we were flowing those fresh receipts, which we did. So, a lot of that benefit would come to us after we flowed the holiday receipts. We’re still very focused on inventory. I know just talking with Tom, it’s a key focus of his as well. So you will see that we are positioning ourselves with the flexibility to make sure that we enter 2023 clean and ready to be successful in that year. So, I would say we’re going to continue to focus and bring that down.

I’m happy with the fact that we’re flat to €˜19 from an inventory perspective, even with the investments we’re making into beauty. So, the progress is right where we expected it to be. In terms of the holiday period, I mean, holiday is always unique. And we know there’s a lot of business still in front of us for holiday. We know it’s going to be promotional. When Peter started this call, he talked about the core values of Kohl’s and value, convenience and brands. And so, we’re going to really lean into that. We have the iconic Kohl’s Cash. We have our Kohl’s Rewards program. We’re going to use our Kohl’s credit value offering as well to really drive that business through the holiday season and make sure that we’re competitive. And I think that’s another portion of what the actions we took.

This is really going to give us the flexibility to compete and make sure we’re getting that market share.

Operator: Our next question comes from the line of Oliver Chen with Cowen. Please go ahead.

Oliver Chen: Hi Peter and Jill, nice to talk to you, and nice job on Lauren Conrad as well. As we look ahead in this uncertain environment, which categories do you think might have more promotional intensity? And would love your general views on what’s happening with the consumer with these cross currents because there’s still as low unemployment and some savings, but the consumer is just becoming much more price conscious.

Jill Timm: Yes. I can definitely start on this one. Well, I’ll start with the consumer because you talked about it. We mentioned on the call in Q2 and now again, we’re seeing it as our lower income customers and higher income customers are growing. We’re really seeing that squeeze and who is our core customer, which is the middle income. And that continues into this quarter as well as we watch that customer move. So, we know value is important. We also thought Oliver and how they voted in the quarter. They’ve migrated both in Q2 and Q3 to our proprietary brands. So, they’ve outperformed national brands for the last two quarters, which is really the first time that we’ve seen that in a long time. So, we know value is definitely going to win this holiday season, and we need to lean into that.

We talked a lot about newness, but even in our Sephora shops, we know that we have an opportunity to elevate gifting. So we’ll be doing that. But we’re going to have gifts that even start at $35. So, really leaning into the fact that we’re bringing in a little bit lower income customer and how can we make sure that we’re fulfilling their needs across the store. In terms of the promotional intensity, I mean, I definitely think it’s going to be widespread. I don’t know if there’s any particular category that’s going to have more promotional intensity than others. I just want you to know that is a core fundamental of who Kohl’s is, and we’re prepared to compete this holiday.

Operator: Your next question is from the line of Omar Saad with Evercore Partners. Please go ahead.

Omar Saad: Jill, could you do a deeper dive on the inventory balance, how you feel about the positioning, especially kind of COVID winning categories versus kind of recovery and occasion-driven categories? Do you feel like you’re well positioned from an inventory standpoint as consumers return to some of their pre-pandemic shopping behaviors and categories they’re shopping in, or are you comfortable where you’re at? Thank you.

Jill Timm: Sure. I think from an inventory perspective, last year, as we called out, we were low on inventory. So, we really needed to build back. And I think the two big places that we’ve built back in first and foremost was women’s. So, if we go back over time, we took a transition in women’s. We did a lot of exiting out of underperforming brands and then we’re trying to bring back in that newness. And it was tough to do last year, given the supply chain disruption. So, we were definitely under-inventoried. I think we feel well positioned from an inventory perspective for women’s. We’re seeing that resonate with the customer, dresses specifically has been a new category for us, right? We haven’t always participated in it, but we know that dresses and dress casual are more important.

So, we funded into that inventory, and it’s definitely been performing for us. You’ll see even into the holiday period, we’re going to have more dresses really around that holiday occasional dressing as well. So, feel good and well positioned from that perspective. In home, we’re actually moving back into some of our electronics smart home, TVs, things that we haven’t necessarily participated in, but we know are big Black Friday deal drivers for people to come to the store. So I think the newness that they’re bringing in, in electronics is great. And then we’re also expanding our outdoor business. And so, you’re going to see things like tents and coolers and seating. So that’s really going to build off the strength that we’ve had over the past quarter.

And then, I think last is active is a place that you’ve seen softness. But on the apparel side, we’re still trending well. So you’re going to see that we move that to the front of the store with Sephora, you’re going to see that we’re going to have a great array of product, but really going to see more on our FLX and Tek Gear because of the value orientation of those products, which are going to be much more important during the holiday season. So I think as I look across inventory, I feel like the progress we made is where we expect it to be, we feel good with the content that we have as we head into holiday, and then we will have the flexible to make any moves that we need to, to make sure we enter 2023 from a strong position.

Omar Saad: Got it. Thank you. And then maybe any quick thoughts on what’s going on in the active footwear side of the business? And any levers you can pull to get that going again?

Jill Timm: Yes. I think right now, it’s about the supply chain and just getting the newness in. When we do get newness, it sells well. We just don’t have enough of it. From my understanding, we should start seeing a flow happen more in Q1. So we expect spring €˜23, we’ll start pushing that back into a positive zone. But I would say what I’m excited about in footwear, Omar, is the dress side of the business is really coming through. We actually ran positive comps there, and we have a great boot business happening as well, which is a good statement as we move into the holiday period. So, I think active footwear will lag a little bit, but really excited about the dress side of the business.

Operator: Your next question is from the line of Ashley Helgans with Jefferies.

Blake Anderson: It’s Blake on for Ashley. Good morning. I wanted to ask two questions. One on the promotions and just the impact to gross margins. So, I think you mentioned freight is a headwind in Q3 and then product cost inflation. I don’t know if you could hone in a little bit more on the gross margin impact from promotions? And then, maybe any directional read how we should be thinking about Q4 or promotions.

Jill Timm: I think, as you know, we have had a strategy around our pricing and promotion and really optimizing that. So, we actually called that out as a benefit to our margin in the third quarter, really helping offset some of these headwinds as well as helping us when we had to clear through some inventory to offset that. What I’d actually say is we’re optimizing those promotions to be much more effective as well. So much more targeted offers, much more personalized offers, eliminating a lot of stackability, which was confusing for the customer because they had to do math. So, really making sure that the offers that we’re putting in are meaningful to the customer to drive their behavior. So that strategy is still being employed.

Pricing being really important during this holiday season to make sure that we’re being competitive and then underlying where is that extra benefit we can get from Kohl’s Cash specifically and then of course, all offers. As we move into holiday, it’s always promotional. It’s something that Kohl’s has thrived in over the years as we know how to be promotional. We know how to lean in and out. And I think the agility that we have today is a new muscle that you haven’t seen in years past. So, we’re going to be able to make those moves much more quickly, dependent on what we’re seeing from a consumer perspective. So, we’re able to promote to be competitive, promote to see where the product is moving and promote much more in a targeted manner to move consumer behavior.

So, I feel that this actually plays to a strength of Kohl’s, and we’re set up to take advantage of that in the fourth quarter.

Blake Anderson: That’s great to hear. Thank you. And then also on Sephora, just wondering, you’ve had some of those stores now for about a year or year plus. So just wondering if you could comment a little more broadly on how those stores are comping. And then, how do you expect that customer to hold up under inflation versus your chain average? Thank you.

Jill Timm: Sure. What I would say is, one, we’re still seeing great performance from Sephora. They’re up mid- to high-single digits, so outperforming the balance of the chain. So we feel good. The stores obviously just count for one month of the quarter but it is positive. So, we feel great that they are comping. I think that we’re seeing in beauty sales. I think that we’re seeing across is that beauty people need it. They see this as a need. We’ve always said this is a traffic driver for us. It’s why they come back. Even during inflationary times, they need to replenish their lipstick or makeup for cosmetics and skin care. So, we feel like this is definitely a thing that can continue to drive our business during the holiday period.

Like I mentioned on the call, we know last year, gifting was something that outperformed for us. So, you’re going to see a much more expanded gifting assortment this year. We’re going to have some very good value price points to really take into accountability of the uncertainty and the inflationary environment that we’re in. And we’re going to do this all with a much more elevated marketing support and partnership with Sephora. So, I think we feel great with the strategy as it unfolds. We feel great as those first 200 stores start hitting their comp year, and we feel really well set up for the holiday period.

Operator: Your next question is from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom: Good to see the progress on inventory, Jill. Last quarter, you guys provided a really nice slide on packing that across different buckets, core in transit, Sephora, pack-and-hold. I was wondering if you could maybe frame out those buckets for us, this go around.

Jill Timm: Yes, so, made it a lot easier on us, Chuck. Honestly, the pack-and-hold is on the floor. So, it is literally not a difference to last year. Obviously, we didn’t buy into that inventory. So, that went away in third quarter. And then we mentioned on the call, our in-transits really just kind of came back in line. I think you saw across the supply chain disruption, we had written in a lot of extra time. That wasn’t needed because the ports are pretty clear. There’s capacity in that — in the shipping lanes. So, we were able to really normalize that. So, we didn’t have to call it out. The one thing we did call out is about 500 basis points for beauty. So, as we now have the 600 stores open, we made that investment into inventory.

So, that was the only reconciling item. So really trying to simplify what we’re looking at. But even with beauty flat to 2019, so we do feel good the progress, but more progress to come, as we mentioned, going through Q4. All right. I think that was our last question. So, I just want to thank you, everyone, for listening on the call today, and wish you a wonderful holiday season.

Operator: Thank you all for joining Kohl’s Corporation third quarter 2022 earnings conference call. This does conclude today’s call. You may now disconnect.