Everybody, for coming to the Kohl's presentation. I'm Mark Altschwager, Baird's senior analyst covering fashion and wellness, and we're pleased to welcome back to Baird's Consumer Tech and Services Conference, CEO Tom Kingsbury and CFO Jill Timm. Hello. So I wanted to start out, bigger picture with sort of a brand positioning question here. You know, Kohl's one of the largest retailers in the U.S., serving 60+ million customers, 30+ million Loyalty Members, so you're obviously looking to cast a, a very wide net with your appeal. I was hoping you could talk about how the demographics of your typical customer are, are changing in terms of age, average income, and, and how the store and assortment is changing to serve that, that evolving customer base. And maybe just one final, yeah, how do you appeal to younger customers without losing a core, perhaps older customer, that's very value-conscious? Right. Well, you're right, we need to serve many different people overall. One of the things that we've seen recently is the fact that Sephora is bringing in a younger consumer. We feel good about what's happening there. You know, it takes time, though, for your overall customer base to have a big impact, but we're going in the right direction. And we're looking for everything we possibly can in order to connect the Sephora customers coming in the doors with other parts of the company. When we look in the Sephora basket, you know, 35% of the baskets have something else in them from other parts of the company, and number one is the junior sportswear area, the more trendy businesses, also the accessory business, handbags and jewelry, and in the kids' area. So everything we're doing, the Babies "R" Us project that we're working on, the 200 stores we're rolling out, all of those efforts are to, obviously, attract a younger consumer. But to your point, I mean, you have to really, as you're growing the new customers and the younger customers, you know, you have to obviously protect your core base. So, you know, we're trying to, you know, thread the needle as much as we possibly can, but we're really seeing some nice moves in terms of our consumer. And we're going after those businesses that really can connect with the Sephora customer we have coming in. Great. Zooming out for a moment, could you share your views, more broadly on the health of the consumer? Well, I think it's been fairly consistent in terms of the fact that the middle-income customer, $50,000-$100,000 a year, there's, you know, they're squeezed within with, obviously, inflation, interest rates, et cetera. But we've seen this for a while, and that's one reason why we're working really hard on delivering as much value as we can. You know, we entered into February, and we converted a lot of our proprietary brand to key value volume items. And that's working, that's working very well. We see our turns are improving, our margins improved slightly, but, you know, it is, it's critical. I mean, nothing, nothing new, but delivering the value to our customers is something that we work on, every, every single day. It becomes more and more important, you know, as people are stretched. Last week, Kohl's reported first quarter results. Top line came in a bit softer than you expected. You reset your outlook for the year to be a bit more conservative there. What is giving you the confidence that Kohl's can return to growth, and what does that timeline look like? Well, you know, we developed the strategies for the company, and they're working. I mean, you know, obviously, we talked about, you know, Sephora is working. That's working very well. Everything we're doing in home, the Home Decor business, the seasonal and every day was up 30%. The gifting strategies are working very well. The impulse, queuing lines, those are doing well. We opened 100 in the first quarter. We're opening 50 in the second quarter and 200 in the third quarter. So, you know, all the things we've laid out have been good. We've done a good job of really moving in the apparel businesses from primarily active and casual to more, polished casual and dresses and suitings, et cetera. So we're changing, we're changing the mix on our selling floor because the customer they need more clothes for, you know, different occasions. People are going back to work, people have special occasions, et cetera. So the timeline, you know, obviously, you know, our goal, our goal, and it will be to hit the guidance that we've just communicated overall. But I think the strategy we have is good. It's a very good strategy, and we feel that as long as we can continue to execute on that strategy, the more likelihood that we're gonna have growth. You wanna comment at all on that? No, I just think it takes time, and Tom's been enrolled for five quarters. We've really instituted this strategy about a year ago, and the green shoots are working. We just have some pressures that are natural to our business that we need to go back again. So active as a growth, we had, you know, some clearance headwinds to go through there. We have some new innovation happening in the back half of the year. Kitchen Electrics is where Home was penetrated in. We're moving it to Home Decor, so there's more innovation, less reliance on a commodity price. And then Jewelry, which was a business that we hurt when we moved it out of the center pad for Sephora, which was the right thing to do, but we have an opportunity to build back that business. I think when we can continue to lean into the growth drivers that Tom outlined, and then really work on those core areas that have been more of a negative presence. One of the strategies that you implemented last year was really resetting the promotional tactics online, so the stores and the digital business would be better aligned. E-commerce was down about 15% last year, while your stores were flat. Is that reset complete? And how should investors think about sort of the channel dynamics, channel growth moving forward? Yeah, that's that transformation is complete. We took care of all that in 2023. So the spread last year, you said it's 15 versus flat. They're getting closer together in terms of that spread. So digital is performing similarly to the stores' performance, and we see that continuing to narrow in terms of that gap. And it really falls within the guidance that we gave last week. So we think both areas, digital and brick-and-mortar, will be closer together. And along the same vein here, the company has been reducing the levels of clearance inventory in the stores as you increase your inventory turns. Is this, are these strategies together driving away any segment of Kohl's core customer base, or what are you doing to better appeal to customers that are really going to Kohl's, seeking that deep, deep value? Well, first of all, the clearance that we're up against in the first quarter of 2023, that's an aberration. I mean, when I took over at Kohl's, we spent a lot of markdown money cleaning up a lot of oversights that we had in 2022. So that really can't really base a lot on what we're up against just because, you know, it was something that was a one-time thing. But, you know, our goal is, as I said earlier, our goal is to continue to add as much value as we possibly can, but I don't think it needs to be driven by clearance. It needs to be delivering by having the right product at the right time, at the right price. That's more important. You know, Clearance is a mistake, you know, something that you had to mark it down to, to really get rid of it, or it's a seasonal product that you don't want in your inventory as you progress from one season to the next. But we're always gonna be delivering, you know, a strong value equation at Kohl's. Switching gears, credit. Jill, there's been a lot of focus on the credit business over the past year. You've guided that part of your business down mid-teens this year, partly due to higher charge off in the portfolio, but then also the expectation that these new late fee rules will go into effect. To help offset this, you're ramping up a new co-branded credit offering, which represents this incremental revenue stream. So I think there's been some skepticism in the investment community that there's enough incremental revenue out there to offset what's viewed as this material headwind from the late fee change. If there is that opportunity, you know, why didn't you go at it until now? So maybe talk us through the puts and takes on credit and how you're thinking about the various scenarios that could unfold over the next year or two here? Sure. So I think credit, as you guys know, is really important to our portfolio in terms of loyalty and customer base. Our credit customers give us their biggest share of wallet, they shop us most frequently, and they get a lot of extra value that they love in form of the coupon. So as we've done our value strategy, we're protecting that core, but then trying to grow new through KVIs, for example. In the credit portfolio, we've always looked at a co-brand opportunity on the long range plan. This didn't happen because of the CFPB legislation. It was always on the roadmap, but it was kind of in the right time. How do you maximize a great private label credit card without impacting it by adding a co-brand card? And so working with Capital One, we've been working to launch this. We put it in the hands of 700,000 customers last June, and we really watched what those customers were doing in terms of inside spend, outside spend, how many of them revolve, what's the write-off rates in terms of losses, et cetera. And so we got very comfortable with that data, and now we'll be rolling it out to 5 million customers in September of this year, as well as taking applications. So today, you can't actually apply for a co-brand card with Kohl's yet, but that will become available in September. So that didn't really... It wasn't reactionary. It was very planful and strategic in why we did it, and the timing was based on when we thought that opportunity would be incremental versus really cannibalizing our existing opportunity. In terms of the loss rates, we did see elevated loss rates. We talked about that down to Q1. As expected, our numbers came in where we expected them to. We do have the legislation going into effect in August 1st. Obviously, there's been a lot of change that's happened out there, and we're waiting and looking at what's gonna happen in the courts with the injunction, so we could have an update in August if that doesn't happen. But what we're looking at with a co-brand card is, if we do lose the late fee income, co-brand card has bigger balances, which means it's much more interest-driven and not as late fee-driven. It also gives you another revenue stream and interchange fees that you get as well. With that, we think we can definitely offset the losses over time from if a late fee legislation comes in, and if not, then it's completely accretive to our credit portfolio. Great, thank you. Getting back to merchandising, Tom, the company has identified about $2 billion of incremental revenue opportunity in the next few years, really four key areas: home, gifting, impulse, baby. So another big number to unpack with that $2 billion. So I guess first, why those categories? And second, how do you see that revenue building over the next couple of years? And then, what's assumed in terms of incremental for the back half of this year? Okay. Yeah, we identified four areas that will represent $2 billion worth of growth. It's a combination of businesses we really haven't been in. I mean, within the home, you know, growing the home business through home decor, as I mentioned before, you know, the pet business. Businesses that are just white spaces for us that other retailers have done well with. So we plan to, you know, take advantage of that. The entire gifting thing is incredibly important, and we've done very well with it. Between Valentine's Day, Mother's Day, Father's Day, but now we're developing a big Americana presentation. Obviously, as we go into July 4th holiday, you know, they have the Olympics. So, gifting is just really an important part of this strategy as well as Impulse. Like I said, I mean, the impulse business is doing very well now, and it's gonna continue as we roll out queuing lines to all of our stores within the next probably 3 years. And then the Babies "R" Us strategy, which starts in, obviously in July, in 200 stores, that is-- that's all incremental business as well. You know, we've had a small amount of baby gear, all in online, so now we're gonna have a big presentation of baby gear, and other baby products. So, as far as we see, you know, how much will come into the third and fourth quarter, while the Babies "R" Us, I mean, that's gonna be all plus, because we weren't in that business. The Impulse, new Impulse lines, those will be obviously important. But we really haven't broken it out by quarter. But we should see, you know, really starting in Q2, and for the balance of the year, those areas kicking in, and they actually already have, so we feel good about that. Sticking with the merchandising, since you've joined, I think, well, when you first joined, one of the first opportunities you identified was the need to better balance active apparel with, let's call it non-active, more polished, casual assortments. This quarter, you just reported, the first time I've heard you talk about the need to now focus more on improving active itself. So maybe expand upon, you know, what you're seeing in that category and the path forward? Yeah. Active is an incredibly important business for us. You know, our attempt was really just to broaden our offering to include more than just active and casual, because we're just fixated on growing the active business and gave up a lot of business in, you know, polished, casual, and, and dress-up product, overall. You know, one of the biggest headwinds in the first quarter was active because we had a lot of residual inventory as we exited 2022 going into 2023, because the active business was one of the most overstocked areas in the company. And so we had to address a lot of that, clean it all up, but unfortunately, we were up against it then in 2023. But we're gonna continue to work diligently on elevating, improving the assortments that we have in the active area. So it's definitely a work in progress. We'll make some progress in Q2. Most of the progress will happen in Q3 and Q4. We also have our own proprietary brands that are doing very well. Tek Gear is very good. FLX is very good. We just rolled Flex out to the entire chain, so that's been performing very well. So, you know, we needed to expand our assortments to cater to more customers, but we're gonna work hard on active to turn that business around. How much of the pressure you're seeing right now is related to Kohl's assortment, specifically, versus just the broader downdraft we're seeing in that category, which we're hearing from, you know, other brands and retailers today? I always look at it from a merchant perspective. You know, it's really up to us to really turn the business around. We need to look at our assortments. We need to be self-critical as to what we're delivering on the selling floor, and we need to continue to improve the offering. We got too basic in active, candidly. You know, we were doing you know big fleece programs, big T-shirt programs, and we just need to be more of a treat it more of a lifestyle brand, so that's what we've been working on. Getting beyond some of the specific product initiatives, Tom, it'd be great to get some insight on how the organization has been changing operationally under your leadership. Most of the senior team is new to Kohl's, I think, within the last- Mm-hmm ... two years. Well, first of all, we started in the merchandising area. You know, we're changing how we operate there, you know, based on what happened in 2022 and other years. You know, we're really working hard to manage our inventories. And we ended the first quarter with 13% less inventory than the prior year. We're working really hard to have Open to Buy at any point in time. You know, we're trying to react it in real time to the business. It's a new muscle. Kohl's never really had that kind of setup in the merchandising area, so that required, you know, a lot of change to how we were buying product. So that was the biggest thing. But I think the entire team, you know, is coming along very nicely. You know, we have a new stores leader, who's making a big difference in how the stores are organized, how things are prioritized, and we see continuous improvement in terms of how our stores are looking. Want to touch on Sephora. You talked about it a little bit at the start. Been a really nice win for the company. You've scaled Sephora from nothing to over $1.4 billion in sales last year. Now that the initial benefit of ramping to the 900+ stores is sort of in the base, how are you thinking about comping the comp? And, you know, what level of like-for-like sales is really needed to hit your $2+ billion goal over the next couple of years? I think we're well on our way to the $2 billion, and we feel really confident in hitting that earlier than we expected. You know, we just talked about we're up 60% in beauty sales, but 20% comp, and that comp actually happens in all cohorts. So it wasn't just the stores we had recently opened, but from the first quarter stores to the last, they're all up. And I think attribute that a lot to the curation that Sephora brings to us from a brand perspective. There's so much newness. We continue to see, I think there's over 10 new brands that are always setting, and they're great at creating and finding these new brands that are really exclusive to Sephora and really resonate specifically with that younger customer. So I think we're feeling great about what that can do. The biggest opportunity for us is to get the 35% of baskets with Sephora having something else in it and continuing to grow that. And a lot of what we spoke about today, between juniors, kids, and accessories, we're making store moves to ensure that we can capitalize on those baskets and making sure there's more in them. So I feel great about Sephora. We are gonna have them rolled out to all stores by 2025. With the comps that we're seeing, we're feeling that it's not going to be something that is gonna moderate and will be well beyond our goal by 2025. Got it. Jill, also on margin, you know, the company has a 7%-8% Mm-hmm. Longer term goal on, on EBIT margin. That's about 2x, where you're operating, today. Could you maybe help us, help us bridge the gap from kind of the current, roughly 3%-4% level to that 7%-8%, especially considering gross margins are already sort of above- Mm-hmm where they were the last time the business was operating at that level of margin. So it really comes down to growth, which is exactly what we just spent this whole conversation on, are the places that you can see growth through the organization. The financial structure beyond that is incredibly strong. You mentioned margins are above the 37%, which is at the high end of the range. And SG&A is gonna be down this year, and it's not leveraging at this point, because we typically leverage at a 1.5-2 comp, but when you start getting growth, then we can leverage off of SG&A, that's where the model really comes into play. So I think between margin expansion, SG&A declines, inventory reductions with turn increasing, that all aligns to more cash generation. So when you get the top line growth, it's really the completion of that model, and that's really what we've focused on, and why we've focused on the majority of this conversation there, because that's what we need to get to 7%-8%. Maybe one more for you, Jill, just on capital allocation, dividend yielding, I think, high single digits, as we sit here today, yet leverage is a bit above your long-term target. Maybe just talk us through how you're thinking about that. Yeah, I think we're always gonna invest in the business. This year, we're spending $500 million. A lot of those initiatives are growth initiatives, so it's completing Sephora. It's the impulse lines that Tom just spoke about. It's rolling out Babies "R" Us to the organization. It's continuing to invest in technology, specifically around our digital platform, but also leveraging our data science. So that's a place you're gonna see us continue to lean into, and it'll be- Yeah. But it'll be less than we have seen in the past. I think we've averaged $700 million previously. $500 million probably feels like a good run rate. And although our dividend yield is, is high and the payout ratio is high today, we feel very confident in continuing the dividend. We know it's an important return to our shareholders, and so our goal is to make those ratios more in line through share price expansion and EPS expansion, but we feel committed to the dividend. And then we're also looking at debt reduction, so although we're higher in leverage, we are gonna take out $113 million of debt that would have come due in 2025. We have another tranche in 2025, and then we're really clear for several years from a debt perspective. The leverage ratio will come back in line as we see that EBIT growth that we've discussed. ... Great. Maybe to wrap up, maybe one last one for Tom here. Yeah, a lot of what we've seen from your strategy since you joined, I think I would characterize as sort of going after what you view as some obvious opportunities in the assortment and within the store experience. Consumer preference is always evolving, the competitive set is evolving. Can you talk about what you're doing to set up the organization to be successful, maintain relevance, not just over the next couple of years as you implement all these items of the strategy that we talked about, but really well beyond whatever your tenure with the company may be? Well, first of all, we've been working diligently on how our stores look. You know, we're really, we're really focusing on the customer overall, but in terms of, and we're also emulating some of this on the digital side as well. But what we're trying to emphasize is having the what the customer sees when they walk in the door. When they walk in the door, they're gonna see something very interesting because we've, we've moved gifting to the front of the store. They're also gonna see a new way of that you can check out at Kohl's, you know, with, with the queuing lines, the impulse items overall. They're gonna see more of a robust presentation in home in general. We really feel that's one of our, our biggest opportunities for a long period of time. But we're gonna continue to work on the customer experience, making sure that we continue to deliver value, as I said before. We also wanna continue to manage our inventories, manage our expenses, to you know obviously keep us more agile in terms of how we approach the business, overall. But I think that we have the right strategies in place, really confident that as we execute it, we're gonna come back to growth. Great. I think that's a great place to end it. So please join me in thanking Tom and Jill for their presentation today.