Good day. Thank you for standing by, and welcome to the Fourth Quarter 2021 Kohl's Corporation Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation there will be question and answer session. [Operator Instructions] Thank you.

I would now like to hand the conference over to one of your speakers today, Mr. Mark Rupe. Sir, please go ahead..

Thank you. Certain statements made on this call including projected financial results and the company's future initiatives, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Kohl's intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements.

Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10-K and 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. In addition, during this call, we will make reference to non-GAAP financial measures, including free cash flow.

Information necessary to reconcile these non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC and is available on the company's Investor Relations website. Please note that this call will be recorded. However, replays of this call will not be updated.

So if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me today are Michelle Gass, our Chief Executive Officer; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michelle..

Women's, Men's and Children's apparel as well as in Footwear. From a brand perspective, our key active national brands of NIKE, Under Armour, adidas and Champion all experienced exceptional growth. In addition, our national brands of Levi's, Vans, Ninja, Koolaburra by UGG, LEGO and Hurley also outperformed.

From a private brand standpoint, we saw strength in brands like Tek Gear, Sonoma and SO. Jill will share more color on the quarter in a moment. Let me now provide an update on our strategy and key 2022 initiatives. We made important progress in our pursuit of becoming a leading destination for the active and casual lifestyle in 2021.

Core to this strategy is our product, building a meaningful beauty business, continuing to grow our Active category, improving Women and introducing iconic relevant brands to further differentiate our brand portfolio.

Many of these major initiatives were launched late in 2021 and are just starting to scale, with most of the upside opportunity still ahead of us. Let me start with our game-changing partnership with Sephora. As we've shared before, this introduction will propel Kohl's into a leading beauty destination.

It also is a great example of how we are investing in profitable future growth by elevating our product assortment and the overall experience. Sephora drove significant beauty sales in its first holiday season at Kohl's.

We are continuing to see increased levels of traffic and a mid-single-digit sales lift in the first 200 stores that have Sephora as compared to the balance of the chain. We continue to see strong new customer acquisition in our Sephora stores who are younger and more diverse. New customers represent more than 25% of Sephora at Kohl's shoppers.

Customers are shopping across a wide range of price points and categories such as makeup, skincare and fragrance. Some of the top-selling brands during the holiday season included Sephora Collection, Fenty, Too Faced, Charlotte Tilbury, OLAPLEX and Hart. Sephora at Kohl's customers are also shopping across the store.

More than half are attaching at least one other category in their purchase with Women's, accessories and Active being the most prevalent. The frequency of customer return trips is also building the longer the Sephora shops have been opened.

Sephora will be a key driver of our growth in 2022 with the opening of another 400 new shops, reaching half of our store base. And in 2023, we will open another 250 Sephora shops. We are working closely with Sephora to test and launch additional opportunities to grow our collective business.

We look forward to highlighting some of these at next week's Investor Day. In conjunction with the Sephora openings, we are also investing to elevate the overall store environment. We are repositioning categories to deliver against our new strategy, such as moving Active to the front of the store.

We continue to improve our merchandising efforts and offer an ongoing pipeline of newness and discovery. By the end of 2022, more than half of our store base will have Sephora and the new elevated experience, which is an important milestone in our evolution.

In addition to moving Active to the front of the store, we will be driving growth through further expansion in our assortment and elevated merchandising across all of our key national brands. We're also growing our outdoor business. Following the successful launch of Eddie Bauer, we will expand the brand offering from 500 stores to all stores in 2022.

We will also increase distribution of Under Armour Outdoor from 400 stores to all stores, and remain committed to growing our business with Colombia and Lands' End. And we're focused on further growing our plus size and big and tall businesses, which continue to resonate with our customers.

In addition to Sephora and Active, let me share some of our other key initiatives, starting with Men's. Our Men's business has continued to be a strong performer and benefit from our recent brand introductions of Tommy Hilfiger, Calvin Klein and Hurley.

We look to build on this momentum in 2022 by dedicating more space and expanding each of these brands. Let me now turn to Women's, which is an important business for Kohl's. As you know, we have taken a number of steps to reposition the Women's business.

We entered 2021 with a conservative plan given the uncertainty of the year ahead and the significant transformation of that business. As the macro environment improved, we were challenged to sufficiently replenish our inventory levels given the worsening supply chain disruption.

As a result, the core Women's business operated with an average inventory down nearly 45% to 2019 during the fourth quarter. While 2021 included many challenges the women's business delivered multiyear highs for sell-through, turn and margins. You'll hear more about our Women's strategy at next week's Investor Day.

We are also focused on other initiatives across the business. We will inject more discovery into our stores with more frequent use of capsules such as Draper James RSVP, a collection from the brand founded by Reese Witherspoon; and a premium denim offering, including Buffalo and Levi's Silver Tab.

Leveraging the reach of our strong omnichannel platform, we will also be introducing dozens of emerging products and brands on a rotating basis, including brands such as Colors for Good and Love Your Melon. that has its own profit mission. Let me now provide a quick preview of what to expect at next week's Investor Day event.

We are looking forward to sharing with you how we are evolving Kohl's into a focused lifestyle concept with a clear mandate on driving profitable growth. In addition to Jill and I, several other members of our executive leadership team will join us to discuss key initiatives across merchandising, marketing and technology.

We will also review our long-term financial plan and highlight our ESG efforts. Before I hand it off to Jill, let me briefly summarize my comments today. 2021 was an important and pivotal year for Kohl's. We accomplished a great deal strategic and financially as we highlighted today.

Given the strong growth initiative in front of us, we have great confidence in the future. We are focused on driving shareholder value and are reinforcing our commitment to returning capital to shareholders.

We are doubling our dividend and our Board has approved a $3 billion share repurchase authorization, with a plan to repurchase at least $1 billion in shares in 2022. As we close out this important year for the company, I want to express my sincerest gratitude to all of our associates across the country for their tremendous commitment and hard work.

It has been an extraordinary couple of years, and this team continues to foster a strong culture, deliver exceptional service to our customers and create a bright future for Kohl's. With that, I'll now turn the call over to Jill, who will provide more details on our financial results and 2022 guidance..

Thank you, Michelle, and good morning, everyone. I want to start by reiterating the 3 key takeaways from today's call. One, we have fundamentally restructured our business to be more profitable, and this is showcased by a record year of EPS. Two, our strategy is building momentum, and this will continue in 2022.

And three, we are reinforcing our commitment to driving shareholder value, doubling our dividend and planning to repurchase at least $1 billion in shares in 2022. For today's call, I'm going to review our fourth quarter results, discuss our capital allocation plans and then provide details on our 2022 guidance outlook.

For the fourth quarter, net sales increased 6% to last year, and other revenue, which is primarily credit revenue also increased 6%. As Michelle indicated, following a strong start to the quarter, the sales trend worsened due to inventory receipt delays and in spite of Omicron.

We estimate that our sales were impacted by approximately 400 basis points in the fourth quarter as a result of supply chain challenges. Turning to gross margin.

Q4 gross margin was 33.2%, up 124 basis points from last year, driven primarily by higher inventory turns and regular price selling, reduced sourcing costs and pricing and promotion optimization strategies.

This was partially offset by higher transportation costs as freight expense was more than 140 basis point headwind to gross margin in Q4 and was $40 million higher than we expected. Now let me discuss SG&A. In Q4, SG&A expenses increased 5% to $1.7 billion, driven principally by our top line growth.

As a percentage of revenue, SG&A expenses leveraged by 15 basis points to last year, with improved store labor productivity and lower technology expenses more than offsetting increased wage investments across our stores and fulfillment centers. Depreciation expense of $207 million was $11 million lower than last year due to lower capital spend.

In total, our Q4 operating margin was 6.9%, representing an increase of 172 basis points to last year. Last, let me touch on some additional financial items.

Interest expense was $5 million lower than last year due to lower average debt outstanding during the quarter based on steps we took in 2021 to return our balance sheet to its healthy pre-pandemic debt structure. Net income for the quarter was $299 million and earnings per diluted share was $2.20.

This compares with last year's adjusted EPS of $2.22 and which included $1.15 of tax benefits. As evident in our performance during 2021, our strategic actions over the past 18 months to enhance our gross margin and improve the efficiency within our expense structure are working.

For the full year, we achieved a gross margin of 38.1%, which exceeded our 36% target and we have managed expenses tightly knowing marketing and technology spend each by more than $100 million since 2019. These were key drivers in our ability to deliver an operating margin of 8.6% in 2021, exceeding our 2023 target of 7% to 8%, 2 years ahead of plan.

And we reported an all-time record EPS of $7.33, well ahead of our prior high of $5.60 in 2018. Turning to the balance sheet. We continue to be in a strong financial position. We ended the quarter with $1.6 billion of cash and cash equivalents.

As it relates to inventory, we continue to deliver very strong inventory turnover in Q4, resulting in a 4.1 times turn for the year, achieving our goal of 4 times or more. Our inventory balance at year-end was 13% lower than 2019. However, this was not reflective of our position during the holiday period.

We entered the quarter with inventory trending down 25% to 2019 and slightly worse on an available-for-sale basis, and we expect it to maintain this level through the holiday. However, a strong start to November, coupled with unexpected receipt delays, led to significantly less inventory in stores than planned during the key shopping weeks.

Average available-for-sale inventory was down nearly 40% to 2019 during November and December and our position in stores was even worse than this. In assessing our results, it was clear that our challenged inventory position hindered our ability to drive the intended sales.

We saw a distinct correlation between inventory and sales growth across our store base and across our categories. Our inventory position began improving in January as receipts began arriving, though was still down approximately 30% on average during the month. Looking ahead, we feel good about our overall inventory composition.

Although certain receipts were late, we don't believe we have a margin liability as we will continue to work through inventory in Q1 and core merchandise items like fleece, and use pack and hold strategies on seasonal goods such as sleep sets and pajamas. And we've taken additional proactive steps to ensure we are better positioned.

Turning to cash flow. We continued our strong cash flow generation with $497 million of operating cash flow and $296 million of free cash flow in Q4. For the full year 2021, we generated operating cash flow of $2.3 billion and free cash flow of $1.6 billion.

Capital expenditures for the year were $605 million, driven mainly by Sephora build-outs, refreshes and fixtures for new brand launches as well as the completion of our 6 e-commerce fulfillment center. For 2022, we are planning capital expenditures of approximately $850 million.

This is higher than 2021 due to our continued investment in enhancing our store experience, including 400 Sephora build-outs and store refreshes as well as 5 new stores and 4 relocations. Now let me discuss our capital allocation actions.

During the fourth quarter, we further accelerated our share repurchase activity buying over 10 million shares for $548 million. For the full year, we repurchased 26 million shares for $1.35 billion and ended the year with approximately 131.3 million shares outstanding. As it relates to our dividend, we paid $147 million to shareholders in 2021.

In total, we returned $1.5 billion to shareholders in 2021. The Board has approved a 100% increase in our dividend, which equates to an annual dividend of $2 per share and a $3 billion share repurchase authorization.

In 2022, we plan on repurchasing at least $1 billion, illustrating the confidence we have in our business and in our key strategic initiatives. Now let me provide details on our outlook for 2022. As you've heard today, we are confident in our strategies to continue our growth in 2022.

That said, we acknowledge that there are still a lot of macro environment challenges and uncertainties. Our guidance assumes that our business will strengthen as the year progresses, given the timing of our key strategic growth initiatives, specifically the rollout of our 400 Sephora shops.

For the full year, we currently expect net sales to increase 2% to 3% versus 2021, operating margins to be in the range of 7.2% to 7.5%, and EPS to be in the range of $7 to $7.50, excluding any nonrecurring charges. Let me share some additional guidance details and note. We are expecting higher D&A and interest expense in 2022 due to lease accounting.

As we have stepped up our investment in stores with Sephora and refreshes that has resulted in a number of leases being reclassified to finance leases from operating leases. Accounting treatment for finance leases recognized as expense in G&A and interest expense rather than rent expense.

As a result, we expect G&A to be approximately $860 million and interest expense of approximately $300 million in 2022. And lastly, we expect a tax rate of approximately 24%. I want to highlight some additional guidance items.

First, from a net sales perspective, we expect Sephora to be a key driver of our growth in 2022 with the opening of another 400 new shops. Given the timing of the Sephora store openings and inventory flow normalizing, we are expecting sales growth to build as the year progresses, with the second half stronger than the first half.

Second, we are expecting significantly higher freight and product cost inflation in 2022. While we will benefit from our ongoing sourcing initiatives and some pricing actions, we do not expect to fully mitigate the headwind. As a result, we are planning gross margin to contract by approximately 100 basis points in 2022 relative to 2021.

Third, from an SG&A expense perspective, we are planning expenses to be higher in Q1 and Q2 driven by the opening of 400 Sephora stores and the related store refreshes cost.

And fourth our guidance assumes our plan to repurchase at least $1 billion of shares in 2022 off which $500 million expected to be repurchased through open market transactions or an accelerated share repurchase program executed in Q2 of 2022. For modeling purposes, please note that we ended 2021 with 131.3 million shares.

In summary, our business remains financially strong. We delivered record EPS in 2021 and returned $1.5 billion in capital to shareholders. We will build on this performance in 2022 as we scale key initiatives and improve our inventory positions. I will now hand it back to Michelle..

Thanks, Jill. Before we move to Q&A, I want to address some of the uninformed and inaccurate commentary regarding the Board's openness to maximizing value. We have a strategic and financial plan that will deliver substantial value. The Board is testing and measuring that plan against other alternatives.

As we announced on February 4, the company retained Goldman Sachs to engage with interested parties. That effort continues and has included engaging with unsolicited bidders as well as proactive outreach. Engagement with those parties is ongoing. Our proxy, when filed, will provide more detail.

The Board is committed to fulfilling its fiduciary duties and will choose the path it believes will maximize the value to shareholders. So contrary to what others might say, the Board's approach is robust and intentional. We won't be commenting further on this topic during today's call. With that, we are happy to take your questions at this time..

[Operator Instructions] Your first question comes from the line of Oliver Chen from Cowen. Your line is open..

As we look ahead to your guidance regarding pricing and promotion, particularly as we anniversary some of the stimulus from last year.

What are your thoughts on balancing those and how that may interplay with gross margins? And then second, more broadly and your framework for value creation, how are you thinking about real estate? And what should we know about different parameters you have there as you do have valuable assets there as well?.

So first, in terms of the guidance with the pricing and promotion obviously value always intent a core tenet for Kohl's. And so as we look at pricing, we always want to take a thoughtful and strategic approach to make sure that we're serving our customer best. We do have a great pricing elasticity model.

So we do leverage that to make our pricing decisions. So for things that are not elastic like the core fashion kids, we're going to be much more sensitive on price versus things that are elastic like small electrics, toys and basics. So that model works for us, and that's how we'll change those pricing. Remember, 65% of our sales are national brands.

So they're really the ones who are driving pricing and allows us to maintain competitive pricing through the market at that point in time. And then last, just given our model of being promotional and kind of high-low, it gives us a lot of flexibility to take price through less promotions in terms of what we're on sale at.

So if we're on sale at 40% last year, we could be at 35% this year, and it affords us the opportunity to take price that way with the customer still seeing a great value in that sale.

And then last, as you know, we've been initiating a sourcing initiative that has been a key contributor to cost savings, and that's really helping us manage through some of these inflationary pressures as well.

So based on the margin that we gave in the guidance, we said there was about 100 basis points of pressure that really encompasses the freight, which you'll see really in the first 3 quarters of the year. We start lapping that in Q4 as well as any inflation and pricing pressures that we're anticipating for the year.

And then from a real estate perspective, obviously, we love our stores. They're incredibly healthy. Over 99% of them are cash flow positive. And so we think that they're a key asset for us, and we like them this way.

I mean they generate a lot of cash and there's other ways for us to monetize value out of those stores by continuing to drive sales there by using them for our omnichannel services and really servicing our customer with the level of convenience that affords us.

There's other ways for us to find, I think, capital in a more economic way than having to leverage our real estate at this time.

But clearly, when we needed it, which we showed you in 2020 during the pandemic, we leverage some of our fulfillment centers to do a sale leaseback and drive that capital because it made the most sense from a financial perspective..

Okay. And a quick follow-up. The details on receipt delays are very helpful. There's a lot of variables in the macro and geopolitical as well as what's happening in Asia.

So what's in your control and what's out of your control? And what are you monitoring for the receipt delays in terms of the back half and different risk factors we should be aware of?.

Yes. Thanks, Oliver, Michelle here. So you're absolutely right. I mean there are a lot of headwinds out there. And as it relates to supply chain, we're expecting that this is going to persist into this coming year. Yes, as we said in our remarks, that was a bigger headwind in Q4 than we had anticipated.

We saw additional inventory receipt delays above and beyond what we had expected. That being said, though, we sit here today feeling much better about our inventory position going forward. We've taken a number of incremental actions against what we were already doing last year from a navigating supply chain standpoint.

So for example, as the merchants bought spring, so the receipts that are landing today, that was happening late last summer. And I would say two things there that we did, which is different and incremental to the receipts that frankly we were chasing all last year.

Number one, we were more aggressive in our buy, so we guided year 2% to 3% as you've seen. And so we're planning the year up, and as a result we took our inventory levels and our receipts up. And so these decisions were made, like I said late last summer, so those receipts are flowing as we speak.

And in addition, we're also for the time being, adding a little more time to our timeline just to make sure that we are protected from [APO] standpoint. We've also put in even additional tools.

So we have very tight visibility between the supply chain teams and the merchants to make sure that we can track at a very detailed level when we're expecting arrivals on receipts. Like I said, we're expecting this to continue, but I think the totality of our actions positions us better, more medium term.

And we've done a lot of work on the diversity of our sourcing countries, and we're going to continue to do that and balancing cost and speed and what have you. And so we have a very deep view of that all the while, as Jill mentioned, making sure that we're taking advantage of cost opportunities in this really, call it, volatile environment.

But as we sit here right now in the very early days of the year, our receipts are flowing. Our inventory is up to last year, they're fresh receipts and the customer is responding..

Great job on Sephora..

Thank you, Oliver..

Thanks, Oliver..

Your next question comes from the line of Bob Drbul from Guggenheim Partners. Your line is open..

A couple of questions for me. On the Sephora piece, just wondering if you could maybe give us a few more numbers just around, I don't know, comps of Sephora stores versus non-Sephora stores traffic with the stores that has Sephora? And any more color on that.

And I guess just a little bit on your assumptions for Sephora driving the comp in '22, that would be helpful. And I guess the second question that I have is on the Active piece. Can you just give us an update on your Nike relationship? Have there been any major changes to note or anything along those lines would be helpful..

men's, women's, kids, footwear, the plus size opportunity, big and tall, those are great growth drivers for us..

And if I could just ask a follow-up. On the Women's business, I guess, give some color around some of the hindrance as you had.

But just curious, as you look to '22, I think was it the Draper James RSVP collections, is that going to be a big driver for you? And I guess just how do you think about Women's as you enter '22 and the recovery that you expect there?.

Yes. You bet, Bob. So we've been talking to all of you over the last 18 months that for Women's, we undertook a major transformation. This was not incremental moves. This was significant, exiting a number of brands, putting in a lot of new teammates into the group. And the team made a lot of changes.

As a result, as we entered into 2021, we had a very conservative plan. And so as the recovery started happening broadly and as we saw the new strategies of Women's take hold, the team was unable to chase. And so just to give you a sense, in the fourth quarter, women's average inventory was down about 45%.

So while we saw a great turn and sell-through, we just could not fulfill the demand in Women's. But again, there were some green shoots in terms of the opportunities we look forward. You mentioned Draper James, and I think that's a great example. You can expect more from us on discovery, in and out, capsules.

I think Draper James, also for us, is an illustration of a category that we can really expand and are doing that in the front half of the year, which is around dresses. And dresses are really trending and Kohl's is going to have a much bigger play in dresses this year and the years to come..

And your next question comes from the line of Gabby Carbone from Deutsche Bank. Your line is open..

I was wondering if you could just dig into what transpired on the top line in 4Q in terms of traffic. You mentioned generally softened. And any color you can share around core date trends and their thoughts as you cycled last year's stimulus payments. And then just maybe bigger picture.

Curious your view around consumer demand, especially as we're going into an inflatory environment..

Sure, Gabby. I can take that one. So I think as we said in our remarks on the prior quarter, we started the fourth quarter very strong. And we're very encouraged by that. And then what happened is as we sold through that product, we were not able to replenish with the receipts we needed and the receipt flow unexpectedly really slipped.

And so we were unable to chase what we needed to chase from that standpoint. So that was the -- I call it the primary issue as we got into late November, early December. And then Omicron hit and that impacted our business in January. And of course, through all of that time, we were dealing with the inventory headwind even as Omicron came on.

That being said, it was really towards the end of January that we started getting in receipts. As Jill mentioned, some of that was due to arrive, as I said, because the receipt slip was due to arrive in the earlier part of the year. So winter goods, holiday themed goods, we can leverage that, put that in pack and hold.

But importantly, we're now, as we sit here today, getting the vast majority of our seats, which are spring-oriented, which is what we want. As I was saying in my earlier remarks, we have bought more assertively so inventory levels are up. And we're encouraged.

So the second part of your question is, we have to acknowledge right now that there are a lot of macro headwinds out there. There's a lot of uncertainty for the consumer. I think we can be confident in our guide of 2% to 3%, given we expect Sephora to play a major role, and that's proven. We've seen that happen in 200 doors.

So my comment earlier, getting back into inventory and we're encouraged by looking at even Women's, which was most hurt from an inventory standpoint,, is benefiting right now and off to a good start to the year as consumers are reacting to the newness and having the fresh receipts in there.

What I'd say about the quarter, it's early days for us, and everything is reflected in our guide, in our guide to 2%, 3%. We do expect that to build over the years. So in concert with the Sephora rollout, we expect Q1 to be positive, but we do expect sequentially every quarter to build..

Great. Just a quick follow-up on Sephora.

Just wondering if you can give any color around how many new customers you kind of garnered thus far through the partnership and maybe how those demographics change versus a typical Kohl's customer?.

Yes, you bet. So as I mentioned earlier, about 25% of the customer shopping Sephora are brand new to Kohl's. So that is a great opportunity as we look forward. And what's also really exciting is the customers are younger and they're more diverse. So all part of our strategic platform going forward..

And your next question comes from the line of Mark Altschwager from Baird. Your line is open..

Just first off, to follow up on Sephora.

How much of the mid-single-digit lift is coming from growth in the beauty category, specifically versus the add-on purchases? And now that we're several months past the launch, any learnings you can share regarding the rollout and what strategies you might adjust as you enter the next phase? I'm just wondering if you think you can maybe build on that mid-single digit in round two..

Yes, you bet, Mark. So I'll take that one, too. So in terms of the mid-single-digit sales lift, today, we would say that primarily that's coming off of beauty. But we do expect, as we're bringing these new customers in -- I mean it takes a while, a few trips, and we are seeing, by the way, that build to for them to get to know Kohl's.

So we expect that over time, we'll be building back because we are seeing evidence of that. So half of people who are buying something with Sephora are also putting other things in their basket. But I'd say early days and stay tuned on that front. I think also, we're seeing nice lift in traffic.

So in that mid-single digits, we're seeing that come off the back of sales and traffic, which is also really encouraging. And to your second part of your question, we see a nice runway with Sephora ahead.

I mean part of the call it, the magic of this partnership and why they were interested in Kohl's to begin with is the strength of our omnichannel platform. So our store base, our digital capabilities, they have an incredibly strong digital capability as well as store base.

And when you bring those things together, how can you innovate and do more interesting things. And so we mentioned in our remarks that we are looking at new ideas and innovations to build on the partnership, and we will be talking about that next week at our Investor Day.

But suffice it to say, it's the store build-out and the comp that we should get on those same stores as we look out a couple of years, but also layering in more ways to be relevant with the customer and drive more new customers and traffic..

And a quick follow-up for Jill as well as regarding the comp guidance. You mentioned you expect the performance to build through the year. But just thinking about 2021, I mean you are lapping some greater pressure in Q1 versus what we saw in the middle of the year. And it does sound like inventory is catching up a bit as we enter 2022.

So just any more color on why we shouldn't see maybe a stronger start to the year in 2022?.

Yes. I think in terms of what we're seeing for the 2 to 3 comp like Michelle mentioned, a lot of that is built off of our initiatives. Obviously, Sephora shops will start opening in spring into summer, so we know that, that will continue to drive some momentum.

And although the inventory is flowing, it will take time for us to get back to the levels that we feel comfortable with to continue to drive demand as well as the newness. So we did talk about Draper James, it's set, but that is new as well.

So we know we have to build into our calendar some time for the customer for that to be resonating with them as well. So I think we look at it as we -- I know, although we're lapping on a 2-year stack, the easiest comp, we also know we're lapping some stimulus money.

We know that there is still uncertainty in the world today, and we wanted to be thoughtful of that as we put the guidance out there. So as Michelle mentioned, we do expect to still show growth in Q1, but we expect that growth to build as the year progresses, and we see our strategic initiatives starting to take hold throughout the year..

Your next question comes from the line of Blake Anderson from Jefferies. Your line is open..

I was just wondering if you could discuss broadly how your consumer is responding to inflation. Have you seen any change in behavior, any more trade down specifically you could talk to, to private label in response to any pricing actions you've taken or maybe demand in more discretionary areas? Just any high-level commentary would be appreciated..

Yes. So I'll take that one, Michelle here. So -- and Jill made a few comments on this earlier as well. I mean we're staying clearly very present to any impact that inflation may have to our customer, whether that's Kohl's or pressures they're feeling outside. I kind of go back to one of the core value elements or tenets of Kohl's is value.

And we have a lot of flexibility in our model in terms of how we price because we do use promotion, we do use incentives, that kind of thing. So -- and what the team has been able to kind of engineer over the last couple of years is being able to be very agile and responsive where we need to. .

That being said, I'd say, first of all, one of our advantages here is our brand portfolio, as you just alluded to, that we have a really robust range from your aspirational brands, like even if you take the Active category. You do have those aspirational brands like Nike and Under Armour, Adidas, et cetera.

But then we also offer the opening price point of a Tek Gear or even FLEX that has come in, we recently launched. So not only do we have the flexibility on how we price. But from a customer standpoint, they can walk in and see this great range.

I think it's also worth noting that more than 60% of our business is national brands, and they set the pricing. So from a competitive standpoint, we will be there with everybody else.

Where -- one of the things we've actually seen over the last couple of years is our average unit retail increase and that's been more around customers pricing up and responding to the elevated brands that we brought in, the inventory management, the less clearance, reducing promotions, that kind of thing.

So evidence to date, we feel well positioned, but there's a lot of volatility in the world. And so we are just staying very close, and we'll make needed adjustments to make sure that we are staying relevant with the customer..

That's super helpful. And then last question would be, you've talked about inventory, I think, in different categories.

Could you talk about your ability to secure Sephora-specific inventory? How is that progressing? Have you seen any challenges there? And then maybe building off the last question, any inflation commentary you can provide on the Sephora shops..

Sure. I think from a Sephora perspective, we have seen inventory flow really well. We've gotten ahead of that. In fact, some of the inventory increase that you saw at the end of January, we mentioned January, on average, inventory was down about 30%, but obviously landing the year only down 13%.

We took a lot of receipts at the end of the month, and a lot of that was for Sephora being ready for these shops to start opening in spring as well. So we feel well positioned in terms of our inventory for Sephora to continue to drive sales. In terms of inflation, I wouldn't say we've seen a lot of that specific to Sephora or the shops.

The good news is a lot of the construction materials, we sourced early given the supply chain disruption. So we weren't at risk for some of these commodity inflation. I think right now, it's managing the labor side of the business as we open the shop and have them constructed. But still within our guide of $850 million for the year.

And we feel open them and feel very confident with the return you're going to see off of that investment this year and moving forward..

And your next question comes from the line of Chuck Grom from Gordon Haskett. Your line is open..

Jill, only 100 basis points of good back on the gross margin this year. It was a good sign and better than expected.

Just wondering if you could sort of put some of the puts and takes out there for us, how you're thinking about it and also tie in your expectations for the promotional environment, are you expecting it to get back to normal? How are you thinking about that?.

Sure. I think from a 100 basis points, we'll say, freight is a portion of that. The majority of it though is really going to be around commodity inflation. We'll see freight, and that will hit us in the first three quarters and then we'll start lapping some of those costs that we incurred in Q4 of this year.

I would say the pricing inflation is much more back half-loaded, Chuck, because as Michelle mentioned earlier, we started writing our receipts for spring early, and that affords us the opportunity to get those receipts written and in before the commodity price increases took action.

So you're going to see a lot of that commodity price headwinds in the back half of the year starting in Q3 and Q4. And then in terms of flexibility for promotional activity, I think it is a core to who we are. We've talked a lot about that. We're high low. We use a lot of couponing. We know when to lean in and not.

We've only gotten better at this through all the data analytics that we've done through our personalization efforts. So I think it's something that will be utilized to drive behavior. But I still think even though we're buying more inventory, we are still incredibly committed to the disciplined inventory of driving turn.

So you aren't going to see us getting over skews and recorrecting from an inventory perspective. Obviously, this year wasn't where we wanted it to be, specifically Women's, more so in our private brands being down really driving that 400 basis points of headwind to sales.

But as we move forward, we feel like we'll flow into the goods, drive sales, but still be disciplined in turn. And then we'll use our promotional activity to help us with pricing and take pricing where we can.

And then leverage those offers to drive behavior because we know a consumer likes a great deal, and we just know better what drives those people's into our stores. So you and I may not get the same coupons, and I think that's where we're going to be better than we have been in the past..

And then Women's, it sounds like it was about a 4-point hit to the fourth quarter.

I guess is it the expectation that Women's continue to be a drag in the first couple of quarters? I'm just trying to connect the dots on the inventory levels being where they are versus the expectation for Women's to start to improve? Maybe a little bit of color on that.

And then I guess a follow-up on inventory would be how much of your inventories pack-away now versus, say, the past couple of years or historically speaking?.

So for -- I just want to clarify, Women's was not the full 400-point drag. We used it as an example because it was kind of one of those extremes being down at 45% in inventory. But there were other areas of the businesses, Soft Home has a lot of private label exposure. So that had some headwinds.

Men's as well, obviously, was an apparel perspective had some headwinds. We used Women's as the anecdote, but it was not fully the full 400 points. Contrary to that, we do want to talk about Active being up 25%. Their inventory was down on average only about 10%.

So that's kind of where you can see where we had the inventory we were able to chase the sales, but not that we had to have the more inventory from that perspective. In terms of pack and hold, it hasn't been a muscle that we use. I think the pandemic allowed us to learn how to use that muscle.

So we've started using it back in 2020, and we continue to use it where we needed to in 2021, and you'll see obviously pushing that forward in 2022. It is small. It's not a huge portion of the amount of inventory that we have. I mean it's very small in terms of what it is.

However, it allows us to hold the inventory, not take the markdown and preserve the margin. And quite honestly, Chuck, in this year, I get to preserve the margin, and I don't have the commodity inflation in the back half when we reset some of these goods. So it works both on top line and on the margin side this year.

But it is not something that we typically have done but it is something that we can utilize in these years that are unique, but again, very small..

And your next question comes from the line of Omar Saad from Evercore. Your line is open..

Very helpful information. I want to just follow up a little bit on the gross margin question. I think, Jill, you kind of hinted that you're expecting -- I want to make sure I interpret it right, but you gave the example of 35 off versus 40 off.

Are you expecting promotions to be down year-over-year this year? Is that your underlying assumption given all the data analytics and personalization you have? And then also, what's your competitive kind of assumptions around the competitive landscape on the margin line as well? And then I have one quick follow-up..

Sure. I think the example I was trying to give is we use couponing, obviously, but we also use just pricing and promotions every day in our stores. So instead of having to take adjustments on what people see for ticket, we can say instead of 40% off, it can be 30% off and help us really offset some of those cost headwinds.

Again, we use a pricing elasticity model. So we're going to do this in a really thoughtful manner and understand where the customer wants to see value.

Clearly, our opening price points might be some place that we leave because they already have great value, but in other places, we're able to take a little more ticket given what people are willing to buy for those products.

So I use it as an example of a different tool that we may have because we're not an everyday low price competitor from that perspective. In terms of promotional environment, obviously, we have talked about simplified pricing and promotions as one of our core strategies when we rolled out our strategy back in October.

We continue to leverage that really using the couponing in a more targeted manner versus making it just general scale for everyone. Clearly, we'll still have those general public offers, but really trying to drive more targeted behavior through personalized offers is how you're going to see us move forward.

So customers may not see it as less promotional, so just see it as more meaning promotions to drive their behavior coming into the store. I would also say we'll see us have less stackable offers. That's something that we've been doing. We know our new customers find confusion when they have to do a lot of math on multiple offers.

So really just standing for one big offer to drive that behavior because we weren't seeing those older stackable offers really drive meaningful sales behavior, and we are taking some margin pressure from that.

So I think we'll continue to lean into that strategy as we move forward, but obviously always evaluating the competitive landscape because we are known for value, so we want to make sure we continue to compete on that core strategy for Kohl's..

And then one quick follow-up.

I know it's really early, but are you seeing any impact in your business in Ukraine and Russia? Does the average American kind of Kohl's shopper paying attention to this, even if it's just a CNN effect and it kind of includes the TVs? Or is it too early to tell?.

Yes. Omar, I mean, agreed. And I think we're prepared that there's going to be an environment of a lot of uncertainty. And so as we messaged, we certainly contemplated that as we guided the year.

But I think more importantly, for Kohl's, we feel like we've just got a ton of tailwinds with our initiatives, starting with Sephora and Active, the new brands, getting back in inventory. So like everyone, we'll stay close, be responsive but we'll prepare for kind of another period of time with pressure and uncertainty on the consumer..

And your next question comes from the line of Dana Telsey from Telsey Advisory Group. Your line is open..

As you mentioned in the remarks about lower sourcing costs, are you seeing? How much of it is temporary? How much of it is long term? And what are you -- are you in the middle of the lower sourcing costs or how much lower could it go? And then just on the inflation question, what are you taking in terms of price increases? And does it vary by category? And are you seeing it in the national brands as well as your own brands?.

I can take the pricing one, Dana, and then I'll have Jill speak to our sourcing strategy. So as it relates to pricing, overall, and we'll speak to Jill speak to some of the mitigation strategies we have underway around our sourcing initiatives. We saw that benefit play out this year.

We're expecting more benefit again next year to mitigate some of the other pressures we face. But as we said to earlier, it's really important for us to continue to offer great value to the consumer. I think one of our advantages in an environment like that is that we have got a phenomenal brand and category portfolio.

So everything from your more aspirational brand products to your opening price point. So if you take Denim as an example, which is a trending category, we have a very big Denim business. We have Levi's on one end, and we've got Sonoma jeans on the other and which is also great quality. So just making sure we can meet the customer where they are.

As it relates to national brands, there are certain national brands that are taking pricing. We, like others, will be in a competitive -- same competitive environment as they take price. We'll, of course, be taking that along with them, but we'll stay close to it.

And again, of course, we've got other options for the consumer for those who are feeling that pressure. And then to your point, are there variances across the business? Absolutely. And I think we're much better positioned today given the investments that we've made in tools and technologies.

So we have a very robust elasticity model that not only looks at our pricing and behavior but relative to competition.

And so there are categories that are more elastic like your basics where the consumer isn't going to give you a lot of permission to take price, but then you have other categories that are less elastic, things that are more seasonal or fashion where we can make sure that we're being thoughtful.

But I think that's the key operative word is being thoughtful, being agile and making sure that we are making the right moves for the consumer in this process. And then, Jill, do you want to speak to sourcing..

Yes. For sourcing, I think last year, we had talked about this when we rolled out our strategy, and we said it would start in 2021 and it would continue into 2022. So we'll start seeing a lot of those efforts.

Those were around centralized sourcing, doing direct factor negotiation, reducing our reliance on third-party agents and also really continuing to evolve that sourcing strategy, seeking for more production in the Western Hemisphere, which Michelle mentioned earlier, helps us balance speed with cost.

So I would tell you that we are definitely, I think, in the middle innings of that effort, but there's more for us to continue to get will help us, I think, as we try to mitigate some of these bigger inflationary costs move forward into 2022, like I mentioned, a lot of that will be back half loaded for us..

Right. Well, thanks to everyone listening on the call today. We hope you can join us on Monday for our Investor Day..

Thank you. And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect..