柯爾百貨 (KSS) 2017 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Kohl's Q1 2017 Earnings Release Conference Call.

Certain statements made on this call, including projected financial results, 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.

Also please note that replays of this recording will not be updated, so if you're listening after May 11, 2017, it is possible that the information discussed is no longer current.

(Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Mr. Kevin Mansell, Chairman, CEO and President of Kohl's Department Stores.

Please go ahead.

Good morning, and thank you for joining us.

With me today is Jill Timm, our Senior Vice President of Finance.

Jill will open the call by covering some of our financial metrics and then I'll add some additional color on our key initiatives.

Jill?

Thanks, Kevin.

Comp sales decreased 2.7% for the quarter.

There was a relatively dramatic improvement in sales trend over the course of the quarter.

February was the most challenging month.

However, we were pleased with the significant sales trend improvement during the combined March and April time period, which was down only 1%.

Average transaction value increased for the quarter.

The increase was driven by a continued increase in average unit retail, which was partially offset by a decrease in units per transaction.

Transactions were down, but improved significantly throughout the quarter, with March and April improving almost 600 basis points from February.

From a line of business perspective, we saw strength across our active businesses due, in large part, to the launch of Under Armour, which has exceeded our expectations.

Footwear, home and men's outperformed the company, while our women's and accessories businesses continued to be challenging.

Kevin will provide more details on the sales results in a few minutes.

By region, the warm weather regions, the Southeast, South Central and West, outperformed the cold weather regions, with California being relatively strong.

Our gross margin rate improved 83 basis points for the quarter, driven by improved inventory management and much lower levels of seasonal carryover.

Margin was also positively impacted by improved promotional markdown levels over last year.

SG&A decreased 3% to $975 million for the quarter.

More importantly, we were able to leverage expenses by 2 basis points on a 3% decrease in sales.

The largest contributors to the expense reduction were marketing and store expenses.

Marketing spend was positively impacted by not repeating an unproductive event and through efficiencies gained in our noncustomer-facing spend.

Stores did an excellent job on productivity and managed all through the quarter very well.

Depreciation expense was $238 million for the quarter, up $4 million from last year.

The increase was driven by higher IT amortization, which was only partially offset by lower store-related depreciation due to store closures.

Interest expense decreased $3 million for the quarter.

Most of the decrease was due to lower interest on capitalized leases as the portfolio matures.

Our income tax rate was 39.2% for the quarter, an increase of 160 basis points over last year.

During the quarter, we adopted the new share-based compensation rules as required.

These rules require us to recognize income tax benefits and tax deficiencies related to share-based awards as income tax expense, rather than as equity in our balance sheet.

Given our stock price, the new rules resulted in a higher tax expense.

This increase was partially offset by an increase in favorable tax settlement this quarter.

We do still expect our annual tax rate to be 37.5% as indicated at the beginning of the year.

For the quarter, net income was $66 million.

The diluted earnings per share were $0.39.

We ended the quarter with $625 million of cash and cash equivalents, an increase of $202 million over last year.

The increase reflects conservative cash management and continued inventory discipline.

We made additional progress on our inventory reduction initiatives during the quarter.

Inventory per store decreased 1%, while units per store were 5% lower.

Our AP as a percent of inventory increased 400 basis points to 37.1% as a result of lower inventory levels and timing of Easter receipts.

We continue to believe that inventory will be down low to mid-single digits for the year.

Capital expenditures were $216 million, almost $40 million higher than last year.

Most of the increase was due to spending on our fifth e-commerce fulfillment center, which will open later this year.

Weighted average diluted shares and shares outstanding at quarter end were both 171 million.

We repurchased 4 million shares of our stock during the quarter.

On Wednesday, our board declared a quarterly cash dividend of $0.55 per share.

The dividend is payable on June 21 to shareholders of record at the close of business on June 7.

At this time, I will turn the call back over to Kevin, who'll provide additional details on our results for the quarter and an update on our key initiatives.

Thanks, Jill.

I want to start with a few comments on the overall results of the quarter and then move on to some more specifics on individual initiatives.

Overall, while sales results for the quarter in total didn't meet our expectations, there was notable improvement in the March/April combined period compared to the February period in both sales and in traffic.

Sales in February were down high single digits and improved to down 1% in the March/April combined period.

April sales and traffic metrics were both positive mid-single digits, and traffic metrics actually led sales during that month.

In addition, the launch of Under Armour exceeded our expectations, and the launch accelerated our rate of growth in the important active category.

Improved inventory management had a significant positive impact on merchandise margin.

We entered the first quarter with far less aged and seasonal inventory and, as a result, were able to improve profitability.

At the end of the first quarter, inventory dollars were down 2% and units were down 5%.

Our inventory effectiveness initiatives, including standard to small fixturization, our supply chain speed initiative, our localization efforts and the strategy to leverage our store inventories for online demand fulfillment, all helped inventory and gross margin results.

The combination of these efforts gives us confidence that our goal of achieving consistent reductions in inventory levels each period for the next several years is achievable.

Finally, the team did a great job of reducing expenses in the face of softer-than-planned sales.

We're continuing our effort to identify long-term sustainable expense reductions to permanently lower our level of annualized spend.

We're focused on organizational structural changes and operational efficiency efforts.

We do expect to share the size of the savings and the scale of that effort in the second quarter earnings report in August.

Looking at some of our individual key initiatives and our focus around product.

With the help of the Under Armour launch, national brand penetration climbed to 55% of total sales.

Under Armour exceeded a very aggressive launch sales plan with strong results across all categories, including men's, women's and children's apparel as well as footwear.

Importantly, Nike continued their growth trajectory, and their business grew high single digits in the first quarter.

As a result, our objective to accelerate the growth of our active business by broadening and deepening our brand offering was achieved.

Overall, active sales delivered a mid-teen growth rate for the first quarter compared to the mid-single-digit growth rate of last year.

We continue to believe strongly that there'll be more opportunities for additional new brands in additional areas of the stores.

The home and footwear categories both had positive comp sales for the quarter.

Home had broad success across all classifications, while footwear was driven by athletic footwear.

Men's also outperformed the company.

Children's, women's and accessories underperformed the company.

Women's and children's performance was impacted by soft private brand results, most notably in the February period as we annualized heavy carryover inventories from last year.

Those private brands and the speed initiative outperformed the total; and speed brands reached 40% of our total private brand receipts.

In our focus on easy experience, our efforts to provide a best-in-class omnichannel experience continued to gain traction.

Online fulfilled sales grew 13% in the quarter.

Our stores fulfilled 24% of the units in total, a significant increase from last year.

Buy Online, Pick Up In Store demand reached 13% of all digital demand orders, up from 8% last year.

And importantly, from a cost perspective, while we increased fulfillment levels from our stores, our overall fulfillment cost remained nearly constant as a percent of digital sales.

[The team] was able to accomplish this by using machine learning to improve the algorithms that determine how to optimally fill orders with our network of stores and EFCs.

We have greater conviction than ever that leveraging our store assets as a longer-term strategy to provide best-in-class omnichannel experience is on target.

Mobile traffic accounted for 66% of total digital traffic and almost 40% of digital sales.

Smartphone and smartphone app conversion both increased substantially, which is very important, because this is where traffic is going.

In our focus on personalization and marketing, we had a major improvement in marketing expenses.

We didn't annualize an unproductive event last year.

There were also a number of other tactics that helped results and improved productivity in marketing.

Our loyalty efforts had a positive impact as new tactics in loyalty drove redemption rates on our Yes2You Rewards program up 900 basis points from last year.

We continue to evolve our media allocation plan with a focus on digital and, in particular, personalization as a tactic to improve productivity.

In April, we tested a new component of personalization on our desktop platform around pricing, which has -- allows us to show your price.

Your prices is the personalized price of individual items based on your own specific offers.

This new application had very positive impact on conversion and sales, and we're planning to roll it out to all of our online platforms in the third quarter.

Generally, more tailored offers, whether on product or around value, are generating very positive results.

We're also pleased to announce our new Chief Marketing Officer, Greg Revelle, joined us in April.

Greg comes with a strong background in analytics and personalization and marketing and is charged with accelerating our progress to improve performance in our over $1 billion in marketing spend.

In addition to the efforts on personalization, simplification and clarity in our marketing strategy are also key objectives of his.

And finally, we'll be launching a very targeted effort to capture more than our share of sales from competitor stores that are closing in our trade areas.

We do believe there's a significant sales opportunity for us to capture in several hundred stores.

In our focus on store optimization, our results in the first quarter have given us greater conviction that our store optimization strategy is the right one.

As you know, we believe stores are an important and critical component of our future success, and we're committed to leverage them to their full extent.

Our standard to small store strategy involves remerchandising and refixturing full-sized lower-volume stores.

This has allowed an improvement in both profitability and customer experience, and it has now been rolled out to 200 stores as of the end of the first quarter.

We expect that number to reach over 300 stores by the end of the second quarter.

Our new 35,000 square foot prototype continue to improve from an operating basis, but we now plan to open 4 new 35,000 square foot stores this fall in very dense existing markets.

Given the operational experience from the first 8 stores we opened last year, we're confident that these smaller-sized stores will now allow us to -- access to trade areas that are denser in population, but wouldn't support the economics of a full-sized store.

Rightsizing other full-sized stores continues to also be a priority.

We've always known that our real estate strategy, which is non-mall based, would always be a positive for us to leverage in an omnichannel world.

The fact that over 90% of our stores are free-standing or in strip centers is providing much more flexibility in the choices we have as we consider this part of our store optimization strategy.

Finally, I mentioned earlier in the review of our results, leveraging our stores for fulfillment continues to increase in importance and is accelerating our speed to the customer as a result of the proximity of our locations to our customer base.

In summary, I believe we continue to make progress across the company in embracing speed and agility as the path to improve performance.

We have 2 priorities we're focused on.

Driving an improvement in traffic is our single most important priority.

We did appear to get traction in the March/April period on that effort.

Our second priority is driving down our expense structure on a permanent basis.

This needs to be done through innovative thinking around organizational structure and a focus on operational excellence.

The entire company is focused on those 2 priorities.

And with that, we'll be happy to take your questions.

(Operator Instructions) And first, we'll go to the line of Lorraine Hutchinson from Bank of America Merrill Lynch.

I guess, as we look -- given the first quarter results, are you still comfortable with your full year guidance and all the metrics that underlie that?

We haven't updated guidance at all, Lorraine, and I don't anticipate to.

We gave guidance at the beginning of the year and that's the guidance we have as of now.

And then as you look at gross margin for the rest of the year, obviously a big jump in 1Q on top of last year's seasonal clearance.

How do you think about the puts and takes for the remaining quarters of the year?

Well, we always knew and I think we indicated on the fourth quarter call for 2017 that margin opportunity was probably greater in the first quarter than the rest of the year -- would be more modest the rest of the year.

So I certainly wouldn't expect that a major improvement of over 80 basis points in the first quarter would occur on an ongoing basis.

But we do expect to see improvement during the course of the rest of the year.

From a puts and takes standpoint, I mean, Jill can probably add color here, but the focus on the inventory reduction is an important aspect.

I would also say the improvement that we've had in our promotional markdowns strategies, which have a lot to do with media allocation and allocation of our marketing efforts, along with the personalization of our offers has a big positive for us.

I don't know if there's anything we're missing there, Jill.

No.

I think those are the 2 things we saw benefits in Q1.

Obviously, the clearance won't benefit us as much as going forward, but we'll contribute to the promotional benefit.

And like I said, we're committed to continue to reduce our inventories throughout the rest of the year, so we'll have that benefit as well.

On the guidance thing, the other thing, Lorraine, is just the first quarter is just not a time that we would ever really consider updating guidance positively or negatively.

You can tell that we're really happy with a lot of the performance metrics we had in the first quarter.

But it's just -- it's not the right time to do that.

Our next question is from Matthew Boss with JPMorgan.

So on the same-store sales, so I guess, Kevin, do you believe March/April same-store sales down 1%?

is that a good sustainable run rate for the company going forward?

Or I guess, my question is really how best for us to think about 2Q through 4Q as we consider the negative 2.7% for the quarter versus negative 1% for March/April.

Just any puts and takes would be helpful.

Sure.

Well, I mean, I think the way I would consider it is, February to me is definitely an outlier.

I think for us, uniquely, the massive impact of heavy inventories last year really had a significant impact on our sales results.

Anecdotally, I know there's been lot of discussion around things like late arrival of tax refunds and a little bit maybe of a holiday hangover and colder weather in February.

So I'm sort of putting February to the side.

And I think March/April is probably the way we're considering our business trend.

I mean, as we indicated in the call, Matt, April was exceptionally strong.

And -- but as you also know, it was positively impacted by an Easter shift as well.

So we guided at the beginning of the year flat to negative 2%, and we basically were down negative 1% in March/April.

And I think that gives us further confidence that we're getting traction in some of the initiatives that we talked about at the beginning of the year.

And I know there was a lot of focus and attention on our launch of Under Armour and as to what level of success that would have.

And I can only tell you it exceeded our expectations from every perspective, in every single category in which we launched it.

More importantly to us, as well, is the impact it had on our overall active business, because as you know we've made a huge bet on active and wellness as a key strategy for future growth.

And the fact that deepening our brand offering with Under Armour accelerated the rest of our active business is really important.

That's great.

And then just a follow-up on the expense front.

Can you just talk a little bit about some of the areas of flexibility that you are finding today?

And then as we think about that profit improvement plan that you've outlined, any potential opportunity to think about for the back half of the year?

Or is this more of a 2018 consideration?

Well, let me take it in two parts.

Just a brief statement overall, and I think Jill's got some specifics that she could probably talk about.

I mean, generally, the way we're thinking about expense reduction is an approach that permanently and sustainably would lower our general expense structure.

And so naturally, our focus has turned to looking at organizational structures throughout the company in order to make better, but more importantly, faster decision-making and then also looking at operational efficiencies.

And those two things, in many cases, go together.

So to me, a couple big high-level examples would be, as Sona rolled into -- Sona Chawla rolled into her new role, the combining of our supply chain team with our store team with our technology team has created and made for way better decision-making on how we invest and how we get productive results out of that investment.

I think we're getting a ton of traction there as a result.

And in Michelle's world, as you know, we just finished a complete merchandise team transformation, which combined our online and brick-and-mortar buying and planning organizations into one, and I expect we're going to get the same kind of improved decision-making and faster and speedier decision-making.

Both of them are definitely saving money, too.

But the focus was on speed and agility and the expense savings, I think, were sort of secondary.

Right.

And from an operational effectiveness, I think it's leveraging technology.

We continue to make a big investment into IT.

We're making a $350 million commitment this year.

And that technology is going to help us become more efficient, specifically as we continue to leverage stores, whether it be for the in-store service, for the Ship from Store, for Buy Online, Pick Up In Store, but how do we make that process most efficient, as it is our biggest expense line on the P&L.

Second, we talked about opening up our fifth e-commerce fulfillment center, which is going to be about 3x as productive as our current fleet.

So we do expect efficiencies to come out of that building; and clearly, applying those learnings to our existing fleet as well to continue to get productivity as we grow that side of the business.

I mean, overall, Matt, though, I think the message we're trying to send is, as you know, on a quarter-by-quarter basis, there's always puts and takes on things like expenses.

There are things that move in the right direction for you as a company or in the wrong direction.

But we're more focused on how do we permanently and sustainably just simply reduce our overall expense structure.

And that's why there's high priority being put on organizational structure and on identifying the areas of operational efficiency that can get us excellence.

Our next question is from Bob Drbul with Guggenheim.

So Kev, as you focus on the operational efficiencies, would that mean that you might consider some additional store closures throughout the fleet, whether it's the Kohl's stores or the outlet stores?

I mean, is there any update around the outlet store Off/Aisle concepts you could share with us?

Sure.

I mean, generally, we tried to lay out the perspective we had on what we're referring to as store optimization, which is -- the way we think about it, Bob, is how do we optimally use the biggest asset we have, which is our store fleet.

We broke that down, I think, pretty well for you at the beginning of the year to say, "Here's how we're thinking about our store fleet." But it's driven by a strong belief that in an omnichannel world, having convenient and flexible store formats puts us in the best position to win in the long term.

And so all of our thinking is, let's look at how we maximize the stores we have.

Fulfillment for online demand is a clear way to do that.

I love the idea that the team has put together, taking stores we currently have and refixturing and remerchandising them in order to give a better customer experience and carry less inventory in those stores, recognizing that we don't do as much business in those stores as we might have done 5 or 10 years ago.

Rightsizing is another, as you know, big idea.

And yes, at the end of the day, we're always going to look at store metrics individually and make decisions on how an individual store fits into our portfolio.

And so at any time, we could be considering an individual store future in our mix.

I would say that the retention on the stores that we closed last year is continuing to run at about the same rate.

Jill probably knows the actual number, but it's in the low 30% retention rate.

And so that influences our decision, too, because having availability for the customer, we just think is really, really important for the future.

And I think the other thing, Bob, is on efficiencies, by doing the standard to small, it is allowing us to be more profitable within those 4-walls.

We're putting less labor in.

We're putting less units in.

We have better margin through the results.

So that is definitely a way to do it.

And as we continue to have opportunistic store close -- or store resizings, we're doing that as well, so we're able to become efficient in those boxes.

But having a presence also allows us to have speed to customer, so it gives us the advantage from that perspective, because we can be within 2 days of about 90% of the U.S. through using our store base.

On the specific question on Off/Aisle and outlet, I mean, the Off/Aisle strategy is definitely working.

And we're continuing to experiment in terms of what we offer in those stores and how we offer it.

On the outlet business, I think we're not even finished a year yet.

I think we're coming up on the first year in Memorial Day or just after Memorial Day, so I would say we'd probably be in a better position on that one to give you some feedback as we get into the second quarter earnings.

Got it.

And Kevin, could you spend a little time on -- within the active pad, like the competitive response of the various brands with the entry of Under Armour, the promotional response, the cooperation that you're seeing, can you just talk about what's really unfolding there within that specific area of the store?

I mean, I think generally, all of our partners understand the focus and commitment that we have to be the destination for active and wellness.

They totally get that, and they see it coming through in terms of category dominance throughout the store, regardless whether it might be technology related, like things like Apple Watch or Fitbit, or it might be apparel or it might be footwear.

And as a result of that, I think they're almost all leaning in to finding ways to grow the business.

And I just think the first quarter to me shows that in spades.

I mean, here we added a major brand, that was the biggest brand launch we've ever had.

It was hugely successful in every single category, and yet the largest player in that category, Nike, still grew high single digits in the quarter.

So it just tells me that customers are recognizing what's happening at Kohl's in active and wellness and they're leaning into it, and as they lean into it, you know what happens, suppliers lean into it as well.

Okay.

And then Kevin, just one last question.

In the men's business, within dress shirts, there's a pretty good Van Heusen presentation for the flex collar.

And I was just wondering, does that continue to drive growth for you within the men's?

Or how is that category or brand performing?

I was waiting for your question on product, Bob.

That actually sounds like a reasonable one.

I thought it was going to be Cold Shoulders for sure, Bob.

I'm disappointed.

In all seriousness, I think if Michelle were here, she would tell you that comfort and flexibility, which is, of course, one of the reasons why active is so big, beyond the wellness aspect of it, it's comfort and flexibility.

But that feature in product is growing in importance in men's.

And it doesn't matter whether it's in the casual part of the business or the dress part of the business.

So the actual item you're talking about is doing exceptionally well.

Next, we'll go to Dan Binder with Jefferies.

I had a few questions.

First on brands, you mentioned you thought there was an opportunity to add more over time.

I'm just curious if you can give us a little bit more color on -- not necessarily which brands -- obviously you're not going to comment on that, but the types of brands and which parts of the store.

Are you looking at brands that would consider a segmentation for the middle part of the market?

How many are you talking to right now?

And your best guess on timing.

Well, I mean, I can only tell you, Dan, that it's a extremely high priority for Michelle.

I mean, we didn't include it in the call, but for instance, we're going to launch Clarks in footwear at back-to-school, which I think is going to definitely be a big additional positive for us in the footwear area.

I think Michelle would tell you she's looking throughout the store.

There's not any particular area, I think, that there's a unique focus on.

But we just feel like the position that we've taken as a retailer highly committed, from an omnichannel perspective, and committed to our store fleet, gives us a lot of leverage with brands who are in search of distribution that is solid, will have potential growth over time and gives them really strong access to the customer.

And so certainly, as part of that, as other companies close stores or as other companies close, our opportunity there, I think, just increases.

So I can't really get into the detail of it from a category perspective and obviously not from a brand perspective.

It's just a high priority for us, because I think being the destination for important brands is a critical component of our success.

And I think the environment that we're operating in, which is why we're putting such a big focus on having such a great balance sheet and strong capital structure, strong cash flow makes us uniquely appealing to brands.

Okay.

And then two other questions.

Second, you talked about Under Armour's success.

I was just curious if you can give us a sense of what the contribution to comps was from that brand launch.

And then lastly, can you give us a little bit of color on how the Capital One credit card portfolio for the co-branded Kohl's Card is performing in terms of delinquencies, losses, et cetera?

Sure.

I mean, on the Under Armour thing, the truth is I don't think we could provide that on a quarter basis.

Most importantly, I don't know that it would be directionally meaningful.

The truth is, that it was the launch and so it could be uniquely outsized in terms of its impact or not.

We didn't launch it until March, so it didn't have any real impact in February and really didn't get any traction, I would say, till mid-March and beyond, to be fair.

I think, by the time we get through the second quarter and into the third quarter, we'll have a much better vision on the positive impact that, that brand has on our comps.

I know that at the beginning of the year, we gave you a general sense that we think it had the possibility of lifting comps...

75 to 100.

75 to 100 basis points, and certainly nothing has occurred in the launch that would lead us to believe that it would be anything less than that.

I think Jill can probably touch on the Cap One.

Yes.

I think, from a credit standpoint, we continue to see the portfolio perform.

I don't think you're going to see it be as big of an increase as you have in the past years.

It's kind of leveling out as we're approaching 60% penetration on the card.

But from a loss perspective, I think you're referencing others have indicated some deterioration.

We haven't seen that.

We've actually seen a really healthy portfolio performance from that perspective, so we feel good with where our credit continues to perform.

Our next question is from Paul Lejuez with Citi.

Just a couple of questions.

How did the 200 optimized stores perform in the first quarter versus the rest of the fleet?

Also curious, Jill, if you can maybe give -- quantify some of the comp metrics -- traffic, ticket.

And then I'm just curious who the Under Armour customer was.

Are you seeing a new customer come into Kohl's stores that you didn't previously see?

This is Kevin, Paul.

On the optimized stores, the truth is that we added, I guess, about 80 or so stores to the group of stores that we had previously in the standard to small package.

But it happened during the quarter, so I don't think it'd even be relevant for us to compare or contrast the performance of those stores on a relative basis.

We -- they need to kind of get running.

Secondly, I don't think we actually have that number anyway sitting in front of us.

The -- on the second question, I'll let Jill take that.

So for the comp metrics, I think I had talked about, in the scripted part, that we did see our ATV continue to be up, really driven off of AUR being up pretty consistently to what you'd seen in the past, and UPT offsetting that slightly.

And then we talked about traffic is down, but seeing a pretty good improvement in that trajectory.

We saw, between February and the March/ April time frame, over a 600 basis point improvement.

So we're not giving specifics on the metrics, but I think you can kind of see where they've consistently been.

But we're seeing that improvement in traffic over March/April, and that's what we're feeling good about as we continue to look for the comps to move into that down 1% range.

I think the other piece in optimized stores is we did test these stores and we did see that we pulled out the inventory, got a nice margin gain, got SG&A savings, but we had no sales change from it.

So it was really a flat sales impact, because we're just taking out the unproductive inventory from the stores but getting that efficiency from an expense perspective and getting the margin lifts from not having the markdown liability.

On the part of that question, Paul, relative to the components of the comp, I think that while we provided, I think, the detail -- the more specific detail of our comp components in the past, I just think it makes more sense for us to more directionally indicate that performance as opposed to specific number of each one, because it's not really valuable to analyzing the business.

And I think, fundamentally, our job is to give you the direction of things to help you understand the business.

But often, when we provide specificity around components -- specific components, they send people off in the wrong direction.

So we'll continue to always tell you which way transactions are going and which way average transactions are going, but it'll be more directionally up or down.

But Kevin, it is kind of helpful to us.

Is there maybe -- is there an in between?

Or maybe you can talk down low single, down mid-single as opposed to giving a point estimate.

Is there any more specifics you can give just to kind of help us further on those -- on the breakdown there?

We'll give that some thought.

I think, generally what I would say is that, when you look at those things on a quarter-by-quarter basis, we just find they're actually not that valuable and they often -- even internally, they will often push us to consider or make a conclusion that turns out to be wrong.

And so we'll give that some more thought.

But generally, what you're going to probably hear is directionally which way they're going.

But I understand your question.

Was there a third part, too, Paul, or did we miss that?

Yes.

Under Armour customers.

Are you seeing a new customer come in the store?

Yes.

I mean, I think the short answer is, when you look at the components of the business -- I think Jill may have included it or may not have, but our non-Kohl's Charge business improved quite dramatically in the March/April period.

So it's probably too early for us to have gone through and made the conclusion that you might be getting at, which is, "Hey, did it provide a whole bunch of new customers that you hadn't seen before?" I wouldn't want to go there yet, though we probably will be able to get there by the time we finish the second quarter.

But that is a really important metric for us because, as you know, that's really been the headwind when you think about our comp.

The Kohl's Charge business has been pretty consistently better, but the non-Kohl's Charge business has struggled.

And that had a huge improvement.

I don't remember what it was, Jill.

Yes, it was between February and March and April, almost a 900 basis point improvement.

So we saw that change.

And I think was -- we had launched Under Armour; and Kevin also spoke to tactics around loyalty and different promotional marketing and media investments that we made.

So I think a lot of that contributed, but seeing that health happen in the non-Kohl's Charge and not just out of the loyalty customer was definitely a positive for the quarter.

Our next question is from Mark Altschwager with Robert W. Baird.

Can you talk a little bit more about localization and how you've been able to leverage that during the spring transition period?

Just wondering if it had a measurable impact on the comp performance as you entered the March/April period?

I know you talked about stronger performance in the warm weather markets, but I don't know if you have a way to break that out versus all the other moving pieces over the last couple of months.

I mean, Jill may have a different point of view on this, but I think, generally, it would be tough for us to break that out in a specific period, like first quarter.

Definitely, more broadly and consistently, we see the positive results of localization.

And as you well know, it's not just about the top line, though that's an important aspect.

It's also about the productivity of the inventory we put into the stores, because having the right inventory, the more relevant inventory at the right time definitely leads to a better result from profitability perspective.

I think, generally, the colder start to the first quarter had an impact on our spring transitional sales in February more negatively.

You could see that.

So even though we made this huge shift from last year where we came into the quarter with way less aged and seasonal carryover and therefore were able to have a higher level of new spring transitional merchandise available, we sort of run into cold weather, I think, in February, which sort of negatively impacted that on a sales line.

But then it dramatically improved in March and April.

I think it's a key enabler of our inventory initiatives as well, so as we continue to bring inventories down, it's through the lens of the localization, so we're ensuring the productivity of it.

As this is now essentially over 80% of our inventory receipts are coming in localized, it's hard to measure, to be honest with you, to say what the list of localization is.

So I think it's just really a key strategy that's an enabler of how we're going to reduce inventory and grow margins.

But I don't know we're going to be able to give you, like, here's the lift from it, just because it's so widespread at this point.

Fair enough.

That's helpful.

And maybe just a follow-up.

Kevin, could you elaborate a bit on the Your Price initiative you mentioned earlier?

I know there have been a number of initiatives to help with that pricing dilemma.

I know that Kohl's Wallet helps digest the layered offers; you've had success with the Low Price of the Season sale.

It sounds like this might be the next generation of that.

And maybe just talk about how this is going to be rolled out and perhaps doing so without confusing the core customer that's used to those layered offers.

Any color there would be great.

Yes.

I mean, I don't think it's -- we haven't made a secret of the fact that one of the challenges for us -- in fact I alluded to in the script: one of Greg Revelle's challenges and tasks is to work on simplification and more clarity in our pricing.

And that's driven by the natural case that we're a highly promotional retailer and we do provide amazing value.

But occasionally, customers can get a little confused about what the real price is that they will pay when they check out.

And so Your Price was a concept tested in April that had phenomenal results.

It was tested, of course, online, on desktop platforms.

And it simply translates the sale price of the item that we're offering to a discounted sale price based on the individual general public offer that might be available.

So if we were running a 20% Off Friends and Family event, then we were promoting an item at $20, it will show the customer Your Price is really $16.

And so it just provides a lot more clarity and it makes the process of customers understanding the value exceedingly better.

And so, maybe not surprisingly, but it's, of course, why we test and pilot.

It had an incredibly positive impact on both conversion, but also on sales lift as well.

And so in the spirit of -- speed and agility is our mantra; we have to move fast.

We're continuing to test that, but our plan is to roll it out to all of our platforms in the third quarter.

And so I think that's going to be a great addition to our value equation.

Next, we'll go to Oliver Chen with Cowen and Company.

Amazon's on everyone's mind in terms of it's where all -- the majority of customers begin their shopping journey now in the United States.

So just from a bigger picture perspective, it would be helpful if you could articulate your thoughts on long-term competitive factors.

The machine learning and big data leverage was really interesting.

What do you see ahead for that in terms of your opportunities to leverage artificial intelligence as you engage in fulfillment and personalization?

I'm just curious as we think about making decisions for the long term.

And a more specific question is just on traffic in women's.

How would you kind of delineate, under your traffic priority, which aspects we should focus on in order to make the linkage towards better momentum in traffic?

Sure.

I'll try to make some comments on it, Oliver.

And then I'm sure Jill can add as well.

I mean, position-wise, I think we've staked out our space, and we're all-in on being a meaningful omnichannel retailer.

We have a massive brick-and-mortar presence.

It's uniquely positioned as an apparel store in freestanding and strip centers across the country, which gives us unbelievable flexibility and amazing convenience to our core customer.

And as such, our challenge is, of course, on the product side, to make the product offering in those stores more relevant and more effective.

And then to leverage, as an omnichannel retailer, those store assets: our people, our inventory, our physical facilities for customers who prefer to buy online.

And so every single metric that we covered in the first quarter, I think is giving us renewed conviction that, that strategy is the right one and that strategy is working.

We talked about the percentage of fulfillment that was achieved by our store portfolio, which I think was 24% units in the first quarter.

We talked about the impact of Buy Online, Pick Up In Store, which is, as you know, provides great profitability improvement for us, because it's inventory we already have and it allows customers to buy online but visit a Kohl's store; it also exposes them to the possibility of adding on sales when they're in that store.

That grew from, I think, 8% or so to 13%.

We did it.

I know one of the concerns investors have had is, hey, fulfillment -- as more fulfillment occurs in stores, is that going to have a negative impact on expense, on costs?

And in the first quarter, Sona and her team were able to leverage a lot of the things that we've talked about to, for the most part, hold fulfillment costs constant as a percent of digital sales.

That is a huge accomplishment.

I think that could have a really meaningful impact in the future.

On the technology issues that we've been focused on, we clearly don't have time to cover them all in an individual quarter call.

But they definitely have 2 different aspects.

One is clearly on expense strategies.

There are things that make the experience faster and easier and therefore less expensive and more efficient for us.

But the other is definitely on top line.

And I pointed that Your Price is a great example of that.

Something that Sona's team has done an incredible job on is to use machine learning to make the exposure of our offering more effective to customers.

And so using those triggers on what we call safety stock; exposing the amount of inventory that might be available is really -- has been really effective for us.

And she's gotten great results on that from a lift standpoint.

And that just, of course, makes the store portfolio that much more important.

So I think all these things are driving both ways.

Jill, I don't know what you want to add to that?

Yes.

I think, just In terms of personalization, I think we're in the early innings of it, but what we have from an advantage perspective is the loyalty of our customers.

60% of our sales on the card with the Yes2You Rewards, we have another 30 million members, so we have a lot of data.

So I think as we continue to refine the learnings -- the machine learnings, the analytics behind it, that's going to really help us enable personalization in making that investment, which I think is going to be a key differentiator for us as we continue to move forward.

The last item you brought up, which is the women's apparel business, which was a laggard again in the first quarter, even though there were clear areas of success.

That is -- it may be the most important thing that we need to see improvement on, because it's such a significant part of our business.

As you know, unlike some other areas in the store, the penetration of our private brand business in women's is much higher.

And so on the negative side, they were more impacted in the first quarter, obviously, by annualizing the heavy carryover inventory, and they were hurt by that, certainly, particularly early in the quarter.

As we moved into March/April, their trend line improved a lot, and we're continuing to see that happen.

So our expectation is that the speed supply chain initiatives that Michelle is sponsoring and driving is going to be a big differentiator there.

Now we have to see that in our results.

We certainly saw massive improvement in March/April for sure; we can point to that.

But we have to see it on a more consistent basis.

But we do believe that that's really the big driver.

So Kevin, is it speed leading to more appropriate trend-right products?

Or do you feel like that portfolio needs new brands or just renovation within the existing brands within women's?

I just wanted to get clarity on that as we think ahead and look forward to progress in women's.

Sure.

I mean, I think both of those are definitely a priority.

Speed, overall, #1.

But I suspect that you're going to continue to hear from us this year that we will be editing down the number of private and proprietary brands that we offer in women's in order to be more meaningful in the important ones.

And so the big brands like SONOMA, Croft & Barrow and Apartment 9, which are all billion-dollar businesses, they need to get better results based on the speed initiative.

But we have to help that by eliminating and editing out other brands.

And I think you'll hear from Michelle as we move through the year that will be happening.

So you're going to see fewer brand offerings in some of these areas.

Our next question is from Paul Trussell with Deutsche Bank.

I wanted to continue the conversation on the sales line.

Specifically, what was the private label performance versus your branded comps?

Also, if you can just maybe gave a little bit more details around your e-commerce trends versus the in-store performance and how you're thinking about these factors going forward.

And then just lastly, just help us understand your focus on the March trends being more sustainable, the March/April kind of down 1% comps.

Just my understanding from some of your comments earlier seems to be a focus on the lousy weather in February, the success of the Under Armour launch and some of the digital and loyalty initiatives that you think can carry forward.

I don't want to put words in your mouth, I just want to make sure we walk away from the call with a understanding of why the down 1% comp is how we should be thinking about the business over the balance of the year.

Sure.

On the private brand trend, I think Jill probably knows that number.

Jill?

Yes.

It went down like mid-single digits in the private proprietary brands.

Yes.

And probably, we were down a little more than that in February and less than that in March/April combined.

Is that, right?

That's correct.

Yes.

On the March/April trend line, as you know, it would be difficult for us to point to March or April, right, because it was so impacted by the Easter shift.

We just -- if you look at the quarter in total, we're kind of saying, February, I think there were a lot of headwinds outside of Kohl's for sure.

But also, we knew, uniquely, in February, we were going to have a big headwind offsetting last year's level of clearance in aged inventory.

So we were prepared for that.

We expected February to be weaker.

Frankly, it was weaker than we thought it would be.

And I think that has to do with some other headwinds.

And hey, I don't want to point as the weather factor is a big thing.

I'm not suggesting that at all.

I just think there were a number of things environmentally that impacted February sales.

So naturally, from our perspective, we're kind of looking to the larger March/April period as a more sustainable period.

And that was down 1%.

You could -- if you want to be a strong bull case on it, you can say, "Hey, they were up mid-single digits in April with really incredibly strong sales." But I think we're kind of saying, hey, that had a lot to do with Easter and March/April combined, negative 1% is probably a good trend for us.

Our trend improvement has continued into this quarter, so I think that also gives us some more sustainable confidence that it's not short term.

It's more long term.

What else were -- what else...

Just the digital trends versus in-store performance.

Yes.

I think digital kind of followed exactly what Kevin talked about.

We were a little bit softer in that February time frame, but really strong March and April.

So we continue to see that business grow.

I think we said in the mid-teens on the call, so we'll continue to see that move up.

And then the stores also did well.

Obviously, the non-Kohl's Charge, like we talked about earlier, trend was a big contributor to that.

So as we continue to invest, as we talked about loyalty, I think that was one of your questions.

And on digital, digital is our #1 marketing investment.

We see that as very critical to continue to grow.

And we'll continue to make those investments.

And then loyalty initiatives, we did a lot of testing and we feel like, as we continue to leverage those test results into the balance of the year, we should continue to see momentum through that as well.

So we feel excited about the non-KC trend improvement that we saw throughout the quarter as we continue to see performance out of our Kohl's Charge.

And so as we continue to see that move forward, we feel pretty good with those results moving forward as well.

And then just lastly, inventory last year, you executed very well with levels well below your sales trends.

Just help me understand why the goals are different this year.

And from a category standpoint, where perhaps are you most confident in current inventory levels versus where there may be some categories where you're elevated?

I mean, overall, there isn't an amazing amount of science behind the guidance that we gave at the beginning of the year, which was to try to consistently manage our inventory down in the low single digits or so, period-on-period over the next few years.

It was more just a view that, look, if we're talking about all these improvements and investments we're making in managing inventory, if we're talking about the impact of store optimization positively impacting our inventory turnover on a practical basis, a reasonable goal is to be down in that 2%, 3% range consistently.

We certainly would love to do better, but we also want to make sure we're funding those areas of the company that are showing great performance.

And so I don't know if there was anything more you can add there, Jill, but I think it was just a general perspective that, that's achievable and it would be -- it's sort of like the expense thing, to be honest with you, Paul.

We're kind of saying, "Okay, let's not get all hung up in a particular point in time.

Let's talk about how do we sustainably improve our inventory turnover." And this is the path to do that.

I think the cuts we're making are in the areas that aren't performing and we're funding into the areas that are performing.

So clearly, our inventory active is way up, because we're going to fund into that.

So protecting sales is always the forefront of those cuts, but then we're reacting to where the business is or isn't appropriately.

And that will conclude today's Q&A session.

Mr. Mansell, any closing comments?

No.

Thanks very much for joining us today.

All the best.

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