柯爾百貨 (KSS) 2018 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Kohl's Q4 2018 Earnings Release Conference Call.

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 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.

Forward-looking statements relate to the date initially made and Kohl's undertakes no obligation to update them.

Please note that this call will be recorded and be available for replay.

Replays of this call will not be updated, so if you are listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information.

(Operator Instructions)

As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our hosts, Michelle Gass, Chief Executive Officer of Kohl's Department Stores.

Please go ahead.

Good morning, and welcome to Kohl's Fourth Quarter Earnings Conference Call.

With me today is Bruce Besanko, our Chief Financial Officer.

We are very pleased to be reporting another quarter of strong financial results.

Comp sales on a shifted basis increased 1%, our sixth consecutive quarter of positive growth.

The increase was generally consistent with the November, December holiday results that we announced in early January.

We are excited to report the increase in comp sales given the exceptional holiday season that we had in 2017.

On a 2-year basis, our fourth quarter comp sales increased over 7%.

Our strong performance reflects the compelling product offering, great marketing strategy and consistent execution in stores and online.

We are encouraged by the transaction growth in 2018, as our customers continue to embrace the omnichannel investments we are making.

The continued momentum this quarter punctuate the positive performance we've had every quarter in fiscal 2018, resulting in a 1.7% sales increase for the full year.

We are delivering growth while also improving both profitability and margin, reporting our fifth consecutive quarter of margin expansion.

Our long-term strategic initiatives and our commitment to our 2 top priorities of driving traffic and operational excellence are paying off.

We are financially strong, and our overall health in the business affords us the ability to drive the future we want to create.

I'll now turn the call over to Bruce, who'll provide details on our financial results.

After Bruce's remarks, I'll return to add more color on the business and update you on our key initiatives.

Thanks, Michelle.

As Michelle just mentioned, comp sales for the quarter increased 1.0% on a shifted basis, driven by the 1.2% increase for the combined November, December holiday period announced in January.

Consistent with our reporting in prior quarters, this shifted comp adjusts for the 53rd week last year by comparing sales for the 13-week periods ended February 2, 2019 and February 3, 2018.

So our shifted comp sales of 1.0% is a like-for-like comparison.

And as a reminder, additional information on the calendar shift can be found in the appendix of the June 16, 2018 Analyst Meet & Greet presentation, which is available on the Investor Relations pages of our corporate website.

The strong sales performance was driven by positive transactions and a double-digit increase in digital sales, which was on top of the 26% increase in the fourth quarter of last year.

From a line of business perspective, children's and Men's outperformed the company.

Our core Women's business, which excludes juniors, was flat, driven by strength in modern, casual and active categories.

Geographically, we saw strength across the country, except for slight softness in the Northeast.

The Midwest region was the strongest.

We believe our strategic initiatives continue to drive the momentum in our performance.

We also think our Q4 results were positively impacted by competitor store closures.

The impact was especially strong in the Midwest, where we had a significant overlap with Bon-Ton stores and customer base.

Competitor closures will remain a unique opportunity to capture market share.

We'll continue to invest incremental marketing dollars and position inventory to ensure we capture a disproportionate share of sales and customers from these competitor store closings.

Michelle will provide additional comments on the sales results in her remarks.

Moving on to margin and inventory.

Gross margin in the fourth quarter was in line with our expectations and increased 1 basis point over the prior year.

For the fiscal year, our gross margin improved 32 basis points.

Fourth quarter margin reflects increased mix headwinds from strengths in categories, such as electronics and toys, a higher penetration of Digital sales during the holiday period and a continued shift to national brands.

Our inventory per store decreased 2%, slightly less than expected due in large part to West Coast port delays, which impacted the timeliness of seasonal receipts.

The ongoing inventory reductions reflect our continued focus on managing inventory at the omnichannel level.

We continue to leverage on our key initiatives, such as standard to small, localization, choice count reduction and speed to strategically reduce our inventory levels.

Combined, these efforts resulted in our 12th consecutive quarter of lower inventory levels and a 15 basis point increase in fourth quarter inventory turn.

SG&A decreased 2% or $32 million to $1.7 billion for the quarter.

Approximately $40 million of the decrease was due to the 53rd-week in 2017.

Once again, our stores organization did an amazing job managing their expenses as they offset wage pressures with expense savings from operational excellence initiatives.

IT expenses increased due to continued investments in the cloud and other technology initiatives to drive future efficiencies and growth.

Marketing expenses were also slightly higher as we shifted our spending from earlier in the year to the holiday to drive sales and to capture market share from competitor store closures.

Depreciation expense of $239 million was $28 million lower than last year.

The decrease was due to a $22 million IT impairment last year as well as the maturity of our store portfolio.

Net interest expense was $16 million better for the quarter due to the benefit of this year's debt reductions.

Higher interest on our investments also contributed to the decrease.

Moving on to taxes.

Our tax rate was 24.8% for the quarter, slightly higher than last year but generally consistent with previous quarters and our own expectations.

As a reminder, last year's 5% rate was a result of tax reform and a onetime state tax settlement.

Operational excellence continues to be a key priority for the organization.

We've made tremendous progress over the last 2 years and have now achieved our goal of saving $250 million within the first 2 years compared to the original goal of 3 years.

This effort has allowed us to maintain our expense leverage point of 1.5% to 2%.

As part of these efforts, we took several actions in the fourth quarter that are expected to generate annual SG&A savings of approximately $20 million and the annual depreciation savings of approximately $5 million.

As we disclosed in our 8-K filing in early January, we'll close 4 underperforming stores in April, but we'll open 4 new smaller-format stores later in the year.

We're consolidating call center locations, which support both our Kohl's Charge and our online customers.

Additionally, we offered a voluntary retirement program to qualified hourly associates and impaired certain assets.

We incurred $104 million in charges in the fourth quarter as a result of these actions and estimate that approximately $50 million to $55 million of additional charges will be recorded in 2019.

Most of the 2019 charges will be related to future lease commitments at the 4 stores that we'll be closing.

Additionally, we retired $413 million of debt in the fourth quarter, and as a result, we reported a $21 million loss on extinguishment of debt.

Combined with the tender offer in the first quarter and additional open-market debt repurchases, we reduced our outstanding debt by over $900 million and extended the remaining maturity of the portfolio an additional 2 years.

The debt reduction is expected to decrease annual interest expense by approximately $45 million.

On a GAAP basis for the quarter, net income was $272 million, and diluted earnings per share were $1.67.

For the year, GAAP net income was $801 million, and diluted EPS was $4.84.

Excluding the nonrecurring charges that I just mentioned, for the quarter, net income was $366 million, and diluted earnings per share increased 20% to $2.24.

For the year, excluding the nonrecurring charges, net income was $927 million, and diluted earnings per share increased 34% to $5.60, which is $0.05 higher than the high end of our guidance.

Looking at the store portfolio, we ended the year with 1,159 Kohl's stores, including one store, which is temporarily closed due to the hurricane damage.

Gross footage was 99 million square feet, and selling footage was 83 million square feet.

During 2018, we relocated a store in Wisconsin, we opened a new store format -- a new small-store format in North Carolina.

And we reopened a store in Texas, which was damaged by Hurricane Harvey.

Now turning to the balance sheet.

We ended the year with $934 million of cash and cash equivalents.

This amount was a decrease of only $374 million from last year-end as strong cash flows from operations largely offset $943 million used for debt reductions.

As I mentioned earlier on a per share basis -- sorry, on a per store basis, our inventory decreased 2%, and our units decreased 3%.

In 2019, we expect a mid-single digit percentage decrease in our inventory levels in dollars.

Our accounts payable to inventory decreased 170 basis points to 34.2%, driven by the timeliness of seasonal receipts driven by West Coast port delays as I mentioned just a second ago.

Moving on to capital management.

Capital expenditures were $578 million for 2018, $94 million lower than 2017 and lower than our own expectations due to the timing of e-commerce fulfillment and IT payments.

We expect 2019 capital expenditures of approximately $850 million.

Weighted average diluted shares for the quarter were 163 million, and shares outstanding at year-end were 164 million.

We repurchased 1.8 million shares of our stock during the quarter, bringing our total for the year to 5.7 million shares.

Last week, our Board of Directors increased our dividend by 10% to $0.67 per common share.

We've increased the dividend every year since first paying a dividend in 2011.

The dividend is payable on April 3 to shareholders of record at the close of business on March 20.

Looking forward to 2019, our initial guidance is for earnings per diluted share of $5.80 to $6.15 for fiscal 2019.

This excludes approximately $50 million to $55 million or $0.23 to $0.25 per share in nonrecurring charges that we expect to incur principally in the first half of the year related to the store closures and other actions I discussed earlier.

Our guidance includes an estimated $0.05 increase in diluted earnings per share resulting from the impact of the new lease accounting standard that we're required to adopt in Q1.

We'll adopt the new standard prospectively and won't restate prior periods.

We're finalizing our accounting procedures but currently expect the new standard will increase SG&A expense by approximately $25 million or approximately 40 basis points, decrease depreciation and amortization expense by approximately $25 million as well as decrease interest expense by approximately $10 million.

Substantially, all of the charges are due to leases, the changed classification under the new standard.

Our guidance is based on the following expectations, which includes the impact of the new lease standard but excludes any nonrecurring charges: First, comp sales of flat to 2% higher for the year with the first quarter at the low end of the range due to softness seen in February; we expect our gross margin rate to increase up to 10 basis points for the year with the first quarter flat to down slightly; SG&A dollars are expected to increase 1% to 2% for the year, excluding the impact of lease accounting, SG&A dollars are expected to increase 0.5% to 1.5%; depreciation expense will be $930 million, which includes a $25 million benefit from lease accounting; and interest expense is expected to be $210 million, including the $10 million benefit from lease accounting; we believe our effective tax rate will be approximately 24% to 25%; and finally, our guidance assumes share repurchases of $400 million to $500 million.

And with that, I'll turn the call back to Michelle, she'll provide additional details on our results and an update on key initiatives.

Thank you, Bruce.

I'll now provide more color on our Q4 sales performance and discuss our outlook for 2019.

We're excited that the positive momentum we've seen all year long carried through into the holiday season.

The key strategic initiatives in our Greatness Agenda around product, experience and savings continue to create new opportunity for growth.

Our 2 key priorities on driving traffic and operational excellence keep us focused on the most important drivers to create a growing profitable business.

These initiatives and priorities are even more important and beneficial to our business during the holiday season, when sales opportunities and competitive pressures are both at their highest.

It is in Q4 that all pieces of the equation from product to marketing to operations across the stores and digital channels must be working at optimal levels.

Everything came together as expected in Q4, resulting in a 1% comp sales increase this year and more than 7% growth on a 2-year stack basis.

I'll now give you a little more color on our Q4 merchandising, marketing and omnichannel results.

First, I'll discuss the merchandise strategy we had in place to drive our business across all categories and take advantage of real opportunities in the market.

I'll start with active, which continues to be a key growth driver for the company.

We continue to gain market share as we saw mid-single-digit growth in active in Q4 and high single-digit growth for the year.

Our active business, which penetrates now nearly 20% of our total business has accelerated every year since we launched the Greatness Agenda in 2014, and we see even more potential ahead.

In Q4, we had success across all apparel and footwear classifications in active.

Our key active national brands, Nike, Under Armour and Adidas, all reported positive growth.

It's also worth noting that Fitness trackers, particularly Fitbit, continue to perform really well.

With the continued success we see in active, we will be extending the in-store active expansion strategy to approximately 160 of our highest-performing active stores in 2019.

Next, I'll call out a few merchandising highlights by category.

Our children's business led the company with strength across all categories.

The introduction of LEGO and FAO Schwarz, along with enhanced in-store and digital toy experiences, drove a significant increase in our toy business.

We knew there was an opportunity to gain share this season due to competitor closings, and we are pleased with our progress.

On the apparel side, we saw strength in active categories, national brands, such as Carter's, and our own proprietary Jumping Beans brand.

Our Men's business also had another very strong quarter, outperforming the company.

It's worth calling out that Men's reported its fifth consecutive year of positive sales and have consistently been a top company performer driven by a great balance of national and proprietary brands, fabric innovations, pursuing opportunities, such as active, Golf and Big & Tall and smart inventory management.

We expect the strength in the Men's business to continue.

Our footwear business ran in line with the company for another quarter of positive comps, driven by strength in active brands, fashion boots, and casual national brands, such as Vans, Koolaburra by UGG and Clarks.

Home also ran a positive comp coming off of an exceptionally strong Q4 in 2017.

Drivers in Home this quarter included key holiday items in electronics, in kitchen electrics, such as the Instant Pot, and in core categories, including bedding and luggage.

Accessories was essentially flat for the quarter, with strength in beauty and fashion accessories, offset by underperformance in handbags and jewelry.

Our core Women's business continues to be a key priority for the company.

During the holidays, we saw strength in modern apparel, active, intimates and sleep, while juniors and Women's classics underperformed.

Next, let me move on to speak about our marketing efforts.

Driving traffic is our #1 priority, and it starts with how we engage our customers.

During the holiday season, the team put in place a comprehensive and compelling marketing strategy, including an increased investment, shifting some of our spend from earlier in the year into Q4.

About half of our spend was in Digital, allowing us to be more agile throughout the season and to deliver more personalized marketing messages direct to our customers.

We had strong positive comp sales during 3 of our key events in the season, our November 1 holiday kickoff, Black Friday and Cyber Monday.

We believe this strategy for the season drove our sales performance and increased customer acquisition.

We continue to pilot our next-generation loyalty program, Kohl's Rewards.

We've learned that customers love the simplicity of the program and the rewards offering, all centered on Kohl's Cash.

However, we also learned that we do not need to be as generous with customer rewards.

Therefore, we'll modify the program to optimize the rewards offerings to create the greatest impact.

We will create these -- we will take these learnings into the next phase of testing, expanding the Kohl's Rewards program into additional stores this summer.

We're planning a full chain rollout in 2020.

We continue to make great progress in our marketing personalization efforts as we believe having more personalized touch points with our customers in the future will be a real advantage for us and a great benefit for our customers.

We already see the personalization efforts generating more spend and higher conversion rates.

In our marketing, we have increased the number of personalized impressions across media channels by 35%, led by e-mail personalization, which has increased 65% over last year.

We have also been increasing the personalization of our website experiences.

100% of our site visits are now touched by personalization in some way, via Personalized Search, machine learning and product recommendations.

We will continue to expand and improve our capabilities across all customer touch points.

Now let me give you an update on our omnichannel strategies, including both Digital and in-store.

As Bruce mentioned, we reported a double-digit increase in digital sales, which is especially impressive given the 26% increase we reported in the fourth quarter last year.

These strong results reflect the positive impact that our investments are having on customer engagement.

Investments in the mobile app, Your Price, Personalized Search, Smart Cart and fulfillment options, such as BOPUS and BOSS, are resonating with our customers and driving increased traffic and higher sales.

Mobile, again, represented the majority of our traffic growth at over 70% of digital traffic and more than half of digital sales.

A key focus of our omnichannel strategy has been and will continue to be amplifying the role and relevancy of our stores.

Our stores are a key asset and differentiator for Kohl's, and we continue to innovate to make them more relevant and compelling for our customers.

We continue to benefit from omni's fulfillment capabilities with stores able to fulfill as much as 40% of digital orders.

This is especially critical during peak season.

In particular, we saw accelerated adoption in BOPUS, reflecting our greater focus in marketing, site experience and Smart Cart.

We are especially encouraged by BOPUS as it drives traffic into our stores and results in savings on shipping.

We also introduced new mobile checkout functionality at 150 stores to ensure we can check out customers in an easy and timely manner.

And finally, we piloted an enhanced ship-from-store capability called omni power centers inside of our stores.

These locations were equipped with technology and process enhancements that allow them to be more efficient in fulfilling digital orders.

The successful pilot will lead to 135 store -- 135 store expansion in 2019 to further leverage stores and meet peak digital demand.

Now let's look ahead to 2019.

We are confident that we can continue to drive sales and improve profitability, given the deep pipeline of innovation and the focus we have across all areas of the company.

First, let me talk about some of the exciting merchandising initiatives underway.

I'll start with the opportunity in the plus-size Women's category.

With 67% of women being size 14 or larger, we have a significant opportunity in the Women's plus business.

Later this month, we'll launch, EVRI, a new Women's private label-plus brand that offers a broad assortment of modern wardrobe essentials and relevant fashion.

We'll also expand our plus-size offerings in Nike this spring, further positioning ourselves as an active and wellness destination for the entire family.

This summer, we'll be launching the iconic Nine West brand at Kohl's.

The introduction of Nine West elevates our overall fashion offering for women and millennial customers.

Customers will be able to shop Nine West shoes, handbags and an exclusive line of apparel in all of our stores with an expanded assortment online.

Moving to Home, in the fall, we'll launch our strategic partnership with the Property Brothers, Drew and Jonathan Scott, with an exclusive Home lifestyle collection, Scott Living at Kohl's.

The introduction of Scott Living at Kohl's strengthens the company's offerings in modern home basics and decor, including furniture, bedding and bath, kitchen decor and more.

Next, I'd like to share some of the marketing innovations that we have planned for 2019.

Running a world-class marketing function is essential in our ability to execute against our top priority in driving traffic.

We know our future is about reaching new and existing customers in more personalized and relevant ways, and we're building out our current capabilities to be even more agile.

Earlier in the call, I shared some of the progress we've already made in our marketing efforts to become highly personalized, and that work will continue.

We are investing heavily in customer analytics and machine learning to automate customer engagement at scale.

While we will always focus on connecting in meaningful ways with our existing customers, we know we have a particular opportunity to gain share among millennials, especially millennial moms.

We have launched a millennial initiative inside of the company to be more direct in reaching this customer and create new experience that could compel them to come to Kohl's.

As an example, we will be testing an outfit bar concept in approximately 50 stores in Chicago and Philadelphia.

The bars will include a curated assortment of millennial-loved brands, such as LC Lauren Conrad, Levi's, POPSUGAR, Nike and Adidas, which is updated every 30 days.

The in-store experience will be mirrored on our Digital landing page, and it will be fully supported with digital and social media.

Now let me move on to innovation in our channels, both digitally and in-store.

Our growth in our Digital business over the last several years has been a strength of ours.

And while we're pleased with the ongoing momentum, we believe there's even a bigger opportunity.

As such, we are investing to deliver a new site experience with improvements in customer engagement, enhanced capability and personalization.

We are also continuing to invest in optimizing our fulfillment network, leveraging predictive analytics and inventory deployment as well as the buildout of our sixth EFC.

We also believe we have tremendous opportunity to expand our online assortment.

Our merchants are currently pursuing untapped opportunities across our online assortments, including extensions to existing businesses, adding new categories and offering new products to excite our customers.

And last, I want to mention several planned innovations designed to enhance the store experience for our customers, with the goal of driving more traffic to our stores and even greater relevancy.

First, we continue to see our rightsizing strategy as an important initiative to not only leverage our real estate assets but also drive traffic to our stores through key partnerships.

We currently see an opportunity with grocers, such as Aldi, smaller specialty shops, such as total line and fitness companies.

And today, I'm excited to announce our new partnership with Planet Fitness, which will initially include up to 10 Planet Fitness locations.

We see the rightsizing strategy as a large opportunity for Kohl's with tremendous runway.

Next, as I mentioned earlier, we will extend our active and wellness expansion to approximately 160 of our highest-performing active stores, significantly increasing the amount of space allocated to active in 2019.

Third, we recently announced a new strategic collaboration with WW, the new Weight Watchers global wellness company.

I'm excited to see where this partnership will take us on our journey to be the destination for active and wellness for the family.

Fourth, we've been piloting a new beauty concept in one store.

As you know, today, the beauty business is small for us.

However, we see this as a significant opportunity going forward.

Over the last year, we've brought in many prestige brands, including Polo Ralph Lauren, philosophy and DOLCE & GABBANA.

And we are creating an environment to capture even more great brands to build this business.

Next, Your Store.

We continue to utilize the Your Store learning lab to quickly test new concepts while building a longer-term roadmap to refresh and evolve our stores.

A good example of a Your Store test is the new service center we are piloting at 2 stores.

This centralized customer experience at the front of the store is designed to address key friction points, including findability, purchase time, pickup and return.

Your Store labs allows to test and scale ideas like this that elevate and improve the store experience.

Last, I want to give you an update on our ongoing relationship with Amazon.

We continue to be encouraged and learn a great deal through our returns pilot that we have now in approximately 100 stores.

We have also been partnering with Amazon and selling devices within our stores, both in our traditional wholesale relationship as well as in 30 store-within-a-store concepts.

Going forward, and in partnership with Amazon, we have made the decision to transition from the store-within-a-store concept to a more robust wholesale relationship with Amazon as we've found it a better way to serve our customers.

As a result, we'll be extending our assortment of Amazon-branded product into over 200 stores.

As excited as we are about the amount of innovation in the company, we are equally excited about the progress we've made on our operational excellence initiative.

This initiative is a critical enabler for us to find efficiencies across the business in order to fund the investments we want to make across technology, our people and in our stores to drive relevancy and growth.

Bruce spoke to the progress we have already made.

And I can assure you this will be a significant focus as we look ahead.

So as we wrap up 2018 and head into 2019, let me pause and reflect on the progress the organization has made.

Over the last 2 years, in addition to growing earnings, we've reported 2 consecutive years of positive sales growth, which is our largest increase since 2010.

We've improved gross margin by 45 basis points.

We've decreased average inventory per store by 10%.

We've bought back over $900 million of debt.

We've completed $700 million in share buybacks.

We've paid out over $700 million in dividends.

And finally, our free cash flow in 2018 was the highest it's been since 2009.

We are working from a position of strength, and as we look ahead, we are guiding to another year of positive sales growth and improved profitability.

We will continue to work with speed and agility while also remaining disciplined and thoughtful in our efforts to drive shareholder value.

In closing, I'd like to thank our amazing associates that are committed to Kohl's and who helped make 2018 a great one.

We are happy to take your questions at this time.

(Operator Instructions) And our first question is from Bob Drbul with Guggenheim Securities.

I guess, the first question.

Michelle, can you elaborate a little more on the Amazon, the relationship?

Just curious in terms of the returns piece and the dedicated space and the -- there's a change going there.

But just -- are there any metrics in terms of traffic or the benefits that you've seen from that relationship that you could share with us on the pilot and the test?

Sure.

As I mentioned in my comments, Bob, we continue to be really pleased with the relationship of Amazon.

We're working on multiple things with them.

I'll start with the device side of things.

It was an experiment, and one of the things we're really driving in the culture these days is trying lots of things.

So we tried the shop-in-the-shop idea.

And what we're seeing is we're actually seeing great results through a wholesale relationship.

We had a great Black Friday with Amazon devices.

And so the learnings that we're taking in terms of how customers engage in the shop-in-shop, we're actually going to bring it into a dedicated space in over 200 stores as I mentioned, with a broader assortment of Amazon devices.

But it'll be more in a self-serve environment, which is how our customers are used to shopping us.

This was determined by both us and Amazon.

And again, we believe the products will be fantastic and the experience will be great for our customers.

And then as it relates to returns, we've been at this now for about a year.

We extended the returns pilot into Wisconsin mid to late last year, so we're now at 100 stores.

I think the most important thing that we're seeing is how excited our customers and the Amazon customers are about this service.

It's really unique, takes a lot of the hassle out of returning items.

It's free.

They don't have to package it.

The big question, of course, at hand is how will we go forward.

And we continue to be in conversations with Amazon.

It really needs to be a win-win for both.

So I'd say, stay tuned on that front.

Got it.

And Michelle, just a question on the Women's business.

In terms of what's in the stores, I guess, you talked about February, but jumpsuits seemed to be pretty prevalent.

I'm just wondering if you could comment on that as a potential driver and whether it's strapped jumpsuits that you see as the way to go this spring season.

Thanks, Bob.

Very specific on the strapless versus strapped detail.

Jumpsuits are in, been trending now for the last year.

And we have a very broad assortment this spring.

We think it's going to be a big hit this year.

In terms of strap versus strapless, I don't know, let the customer be the judge.

And we've got plenty of both.

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

Congrats on the deal with Planet Fitness.

Sounds really innovative.

On the topic of Women's classics and juniors, what are your thoughts as that integrates to millennial moms?

And what percentage of mix is that business?

And what is -- what are the main points for strategy there just to reinvigorate traffic?

And then a modeling question, just in terms of February, how did February help inform the guidance?

You had such good momentum into Q4, would love your thoughts on what's happening with February and also your thoughts on the year ahead.

Thanks, Oliver.

I'll start with the Women's business, and then I'll have Bruce talk a little more about February.

In terms of Women's, as you know, Women's is a very important business for us.

It's about 30% of our business.

And I'd say, on the whole for the year, we're really pleased.

The Women's business in total for the year was positive.

In Q4, basically, we saw certain businesses as really strong, and then we had a couple of opportunity areas.

So in terms of what was really strong and where we've put a lot of focus and investment, our modern contemporary business, so brands like LC Lauren Conrad, Simply Vera Vera Wang, the L Brand, those are all doing really well.

They're all on the speed platform.

They're resonating.

We've got the right balance of basics and fashion.

So we feel very pleased about that.

Our active business continues and our intimates and sleep business had also a great quarter and a great year.

And like I said, in total for the year, our totality of our Women's business did well.

The Q4 soft spots, if you will, really isolated to 2 areas, which is our Women's classic and to juniors.

Women's classic, I think Croft & Barrow is an opportunity for us.

It's worth noting that in our private brands, all of our top private brands for the year were positive outside of Croft & Barrow.

And we had opportunities.

We had opportunities to bring more newness to that customer.

And the team is on it, and they're course correcting.

And then with juniors, we had some hit and -- hits and misses on that business.

I'd say the good news about juniors is it's one of the fastest businesses we have.

So again, the team is on it, course correcting.

And we anticipate improvement this coming year.

You also mentioned a question around millennials.

And like we're doing really across everything, the millennial opportunity will be a localized opportunity.

We're starting in this 50-store test.

We today have great brands that resonate with millennials.

Our national brands that I mentioned, like Levi's and our active brands and then coupled with some great proprietary brands, the whole idea around carving out space for the millennial customer is to give them a destination where it's all in one place and importantly, to kind of mix up the brand so we help them kind of solve their wardrobing challenges, so giving sort of outfitting solutions.

So it's a test.

We'll see how this works.

But our commitment to millennials is significant.

We expect to make a lot of progress on that front.

Oliver, let me comment on the month of February and how that is informing on our guidance.

So first of all, we're very confident in the full year guide of flat to up 2% from -- for a comp, on top of the 1.7% comp this year.

February is off to a slow start.

We believe it's primarily weather-driven, but it is starting below our plan.

The weather impact, from our vantage point, we believe, is a combination of both cold temperatures across large portions of the country and significant precipitation in the form of rain but principally snow.

And both of those things are keeping customers at home.

So we're off to a slow start, which is why we guided the way we did in the first quarter, but we are confident in the full year guide.

And as it relates to margin, we think the margin impact -- again, we're, first of all, confident in the guide for the full year, but we also think that this weather impact is affecting gross margin.

And the way that it affects gross margin is that we're selling more of our fall inventory levels, which is on clearance or being more promoted.

And so that's the effect we see.

And I would just add one thing to Bruce's comment as well.

This is -- well, certainly not unique to us and we've seen this before in terms of the volatility with weather, particularly, as it relates to the first quarter and the third quarter.

And typically what we've seen in these situations is that where you may not be selling it when it's really cold or people are stuck at home with the snowstorms, once that weather turns, we do see pent-up demand.

We had that experience last year as weather was a bit erratic as well.

So I feel really good about the spring inventory.

We're well positioned.

We're extremely clean.

Our aged inventory is really down.

So I'm excited.

I think we're all anxiously waiting for that business to -- for the weather to turn.

But that being said, I think the team is ready.

We have marketing plans in place.

And I think also our agile marketing efforts, as I mentioned, allow us to once the weather turns, will amplify and lean into the demand to even drive more.

So I -- as -- I'll reiterate what Bruce has said, while a slow start, we feel very confident in our annual guidance of flat to up 2%, we feel confident in our margin guidance of growing that again this year.

So I think we've got a fantastic year ahead.

Okay.

Just lastly on Planet.

That's very helpful.

Our surveys indicate such broad appeal for this concept.

And it's a great comp and unit growth story with non-correlated traffic opportunities.

What -- can you move this faster?

What's your thought on the pace and some background on the rationale?

It seems like a really win-win, especially, as you dive into active further?

Yes, you've got that.

We see the Planet Fitness partnership as a real win-win.

And in fact, the teams are working to take advantage of the co-location in these first 10 stores to figure how we can co-market to these customers.

So very excited about it.

I think like everything, we have to build a few.

We'll learn, and we'll take it from there.

But all our indications is this is going to be a great fit for us and for our customers.

Next question is from Matthew Boss with JPMorgan.

Congrats on a nice quarter.

I guess, Michelle, first on comps.

In 2019, maybe versus performance this past year, how would you rank the incremental opportunities by category?

And maybe what's the largest swing factor between flat and positive 2% comps for the year?

So thanks for the question, Matt.

As I said in remarks, I'm really excited as we enter the year.

I think for us, the theme of 2019 is innovation.

We have innovation happening across all parts of our business.

So if I start with product, there's innovation in every area.

It's hard to think aloud a particular category.

I will start with Women's as we've got a huge brand launch ahead of us this summer/fall in Nine West.

But I also think, EVRI, which we're in process of launching today, is going to be great.

It's been some time in the making, the team has been very thoughtful on how to approach the plus customer in terms of product and basics and fashion.

So I think between EVRI and Nine West, we're in good shape.

Our proprietary brands continue to be a focus.

As you know, that's more than 2/3 of our business with Women's.

So continuing to drive that speed agenda is really important.

If I cut across all the categories, active is a priority.

We have deep partnerships with our partners.

And frankly, the product elevation in every business, whether it's Women's, Men's, kids, footwear, that's coming.

And that will continue to be a lift for us, especially now as we expand in the 160 stores where we'll have that broader assortment.

On -- in Home, excited about Scott Living and Property Brothers.

They've got great broad reach as it relates to their on-television presence.

And I'm anticipating they're going to be involved as we market the product.

The product looks fantastic.

So I just think the innovation really cuts across.

And then if I move over to our channels, Digital and in-store, it's all about creating a great experience, driving traffic, the marketing focus will enable that.

But in terms of in-store, we have a lot going on, as I mentioned, some things that are rolling and then others that are incubating as I mentioned around the rightsizing opportunity, the expanded active, we're experimenting with the Weight Watchers partnership.

So there really is a great spirit of innovation happening at the company to make sure that we can sustain the demand.

Great.

And then Bruce, maybe on the gross margin front.

I guess, what inning are we in today with inventory management?

And maybe what are you seeing from efficiency initiatives that you have to offset e-commerce pressure over time?

Good question.

So on the inventory, Matt, I would say, when I look at the levels of inventory turn in our past, we have still room to improve.

We're certainly not in the early innings, but there's still a nice gap between what we once had from an inventory turn perspective and what we experienced even after these 12 consecutive quarters of reductions.

So I think there's room.

On -- from an e-com, as you know, e-com turns faster, and it has a higher penetration, particularly in the holiday, so I think there's opportunity there too.

The other thing I would add to Bruce's comment, inventory management's been a key enabler.

We often talk about it in the context of margin, but it's also a sales driver.

The speed initiative is part of that.

I mean one of the biggest benefits we have in speed is when we see things working, we can chase into units.

And we've literally chased into millions of units.

It's had a major impact to our business.

I think the team is doing a really nice job of how they're thoughtfully reducing choices so going deeper into the things that matter.

And then as we see those things resonating, we're getting the turns, like I said, then we can chase into them.

The last point I'd make is while the bar raises on inventory management, we're investing technology to increase our sophistication, predictive analytics to really know where and how to place that inventory.

So that gives us, like I said, a further runway on this inventory management, inventory reduction and ultimately, greater turns on our inventory.

Congrats again.

Next we'll go to Dana Telsey with Telsey Advisory Group.

Congratulations on the nice progress.

Michelle, as you think of national brands and proprietary brands, what's your outlook for performance of each?

And you've mentioned active, what are you most excited about there?

And then just lastly on online costs, what changed this season in how you're executing fulfillment and managing SG&A?

Great.

So there were a few questions there.

Why don't I take the proprietary and brand question, also touch on active, and then I'll let Bruce touch on the cost piece.

So first of all, I am a believer that, ultimately, that the customer decides what brands are resonating with them, and we're constantly editing our portfolio.

So we're not necessarily driving to a particular mix, per se, we're looking at what's relevant.

And today, as we sit here, national brands are penetrating at about 60% and our proprietary brands, about 40%.

I think as we look ahead, we've got a great pipeline of innovation and newness and excitement really across both.

Women's, we -- you touched -- you mentioned Women's, Dana, and we -- as I said earlier, that's about 2/3 proprietary.

So we've got to be really focused on making sure that we have got the inventory balance right, we've got basics, we've got relevant fashion, the speed initiative gives us more precision as it relates to getting that fashion right.

But I'm really excited about what's ahead in our key brands.

LC Lauren Conrad has been really just on a phenomenal growth trajectory.

We have more plans for that brand as we look out.

And I think we really have it right there.

But I think even in our core private brands, Apartment 9 has been really positive in Women's, SONOMA has been really positive.

And in the areas where we have got some softness, be it classics or juniors, the teams know what those issues are, and they're actively course correcting.

I think for active, I am very excited about how our pilot went, the 30-store test, proving out that we can further extend in this really important category.

I think importantly as we do customer surveys and the like, customers are giving us credit for being a real player in active.

I mean, there really has been a shift since 2014 when we began this journey.

So there's lots of good examples across -- really across all lines of business of levels and innovation.

I'd call out on the Men's side as an example.

Getting into the Golf business with our active brands has been a huge hit.

The jacket and layering side, which hasn't been a big part of our business, has been providing a lot of incrementality.

And I mentioned on Women's, we're going to be expanding into plus with Nike, which will also be a big win.

So there's just -- there's lots there.

We got a great pipeline.

And I'm looking forward to all we're going to bring to our customers this year.

And now I'll hand it over to Bruce.

Yes, so with respect to SG&A and the cost of ship, so first, Dana, we remain committed to leveraging expenses at a 1.5% to 2%.

I think the company's done a great deal of effort, particularly, with our operational effectiveness and excellence initiatives.

And in fact, as I mentioned in my prepared remarks, fiscal '18 was our second year, and we're delighted to report that we're already at the $250 million mark in both SG&A and gross margin savings.

So this third year here, which is fiscal '19, we have even more to go get.

So that's all good.

And then with respect to cost of shipping, we -- cost of shipping is an important element of the efforts here around operational excellence.

We need to mitigate the rising cost of shipping by increasing store pickup penetration.

We're doing that with BOPUS and our recent BOSS launch.

We need to minimize split shipments and manage our cost per package, which is part of the operational excellence work that is -- that we're undertaking.

We need to help with speed to customer and driving the overall cost down.

EFC 5 is one of the ways that we do that.

There's more productive -- the EFC 5 is far more productive than the first generation of distribution centers.

We announced that we'd be opening a sixth -- or begin investment in the sixth EFC here shortly.

And so for all those reasons, we think that we can get the cost of shipping down.

And it's an element of the technology investments that we've been making that we expect to deliver benefits over time.

Our next question is from Mark Altschwager with Baird.

Congrats on a strong 2018.

Just to start out, Bruce, following up on some of those gross margin comments, how should we be thinking about that gross margin algorithm overall?

Is it still 20 basis point headwind from e-commerce offset by a positive merchandise margin?

Yes, the headwind from cost of shipping remains, in our view, 20 to 30 basis points.

Now as I said, with Dana's question, we intend to look at ways that we can mitigate some of that through operational excellence and through technology investments.

But the 20 to 30 basis point headwind exists and to the extent that we move more sales into the Digital channel, that cost of ship may go up.

Got it.

And then separately, last year management spoke to some customer count metrics.

I'm wondering if you have any updates on that front.

Was net customer acquisition up year-over-year in 2018?

Are you bringing in younger customers?

How do the Bon-Ton markets, maybe, compare to a control group?

Just any color there would be great.

Yes, great.

Thanks, Mark.

We are very encouraged by our continued efforts around customer acquisition.

And again, in Q4, our new customer acquisition rate was up in the low double digits.

So we're continuing to get those new customers in.

We do see that the competitive store closures are helping that, but it's not just that.

We're getting new customers really across the board.

And as I spoke earlier about personalized marketing, that's a real asset now for us as we can retain them and grow them into loyal customers.

Best of luck.

Our final question will be from the line of Lorraine Hutchinson with Bank of America Merrill Lynch.

I wanted to focus on credit for a minute.

Are you seeing any change in payment trends in your portfolio?

And then, also, what's your outlook for credit for 2019?

Lorraine, let me take a stab at that.

So let me just take a step back, our credit operation is an important element of our loyalty program.

In fact, as we talk about the millennials, millennials are an effort that we're focusing on in credit as well.

We've -- about 1/3 of our new applications are coming from millennials, about 1/4 of the new accounts are from millennials, so we think that that's a great opportunity as we focus on millennials.

In fiscal '18, ex the 53rd week, we grew revenue, and we grew profitability.

The team has done a fantastic job in terms of managing costs.

We've consolidated the Dallas call center as an example of that.

Our fraud expense has been going down significantly.

And so the team has done just a tremendous job in terms of ensuring that the credit operation, both on the top line and on the bottom line, remain solid.

In terms of 2019, we haven't provided any guidance on the credit card profitability or the revenue.

But we're hopeful that we can continue to convert some of the new customers that Michelle just mentioned that, particularly in the fourth quarter where we had new customer acquisition, that we can convert them through our loyalty ladder into credit card holders.

Ms. Gass, any closing comments?

No, I just want to say thank you to everyone listening on the call today.

And we're looking forward to a great 2019.

Thanks so much.

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