Kohl's Corporation
Q2 2021 Earnings Call Transcript

Published: 19 Aug 2021

[Operator:]

Good day and thank you for standing by. Welcome to the Q2 2021 Kohl's Corporation's Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised, today's conference is being recorded. I'll now hand the conference over to Mark Rupe from Kohl's Corporation.

[Mark Rupe:]

Thank you. Certain statements made on this call, including projected financial results and the Company's future initiatives, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl's intends forward-looking terminology such as beliefs, expects, may, will, should, anticipate, 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 So if you are listening to a replay of this call, it is possible that the information discussed is no longer current and Kohl's undertakes no obligation to update such information. 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.

[Michelle Gass:]

Thank you, Mark. Good morning and welcome to Kohl's second-quarter earnings conference call. Our performance during the second quarter marked another important step in our pursuit of becoming the retailer of choice for the active and casual lifestyle. During today's call, I want to leave you with 3 things

[Jill Timm:]

Thank you, Michelle. And good morning, everyone. I want to start by echoing, the results are truly reflective of our strategy work. We are driving top-line growth and expanding our operating margin. This puts us in an incredibly strong financial position. Importantly, we believe this is sustainable and is supported by several transformational brand partnerships that we will launch in the upcoming weeks. For today's call, I'm going to review our second-quarter results, discuss our capital allocation actions, and then provide details on our updated 2021 guidance and outlook. For the second quarter, net sales increased 31% to last As expected, digital sales declined 14% due to last year's heightened level that benefited from store closures, however, increased 35% compared to the same period in 2019. Other revenue, which is primarily credit revenue, increased 15% over last year. Turning to gross margin. Q2 gross margin was 42.5%, up materially from last year's COVID impacted 33.1% and up points from the second quarter of 2019. margin expansion continued to benefit from tightly managing inventory, with a focus on term and further scaling . In addition, our performance was amplified by the favorable industry backdrop, where reduced promotional activities supported a greater percentage of full-price selling. And executing against our strategy, we have structurally improved our margin efficiency and are confident in our ability to sustain the recent improvement. That said, we are monitoring industry-wide supply chain uncertainties and cost inflation. As it relates to the supply chain, it is a fluid and evolving situation. While we have experienced inventory receipt delays in many areas of the business due to temporary factory closures and port congestion, our women's business has a disproportionate exposure given its high penetration of private brands. We are managing the situation aggressively, leveraging our diversified global supply chain to ship production, when and where appropriate, and to prioritize and expedite orders while also maintaining a high frequency of pickups at the ports and deliveries to our stores. Given the fluidity of the situation, we will remain agile and responsive with a focus on minimizing disruption. Now let me discuss SG&A. In Q2, SG&A expenses increased 18.2% to $1.2 billion driven by significant topline growth. As a percentage of revenue, SG&A expenses are leveraged against both 2020 and 2019 as we continue to deliver against our efforts to drive marketing and technology efficiency and improve store labor productivity. As we look ahead, wage inflation is expected to remain at headwinds. The employment market remains very tight. To strengthen our position heading into the important holiday associates in our stores and distribution centers, we will continue to monitor our positioning in the market to ensure that we remain competitive. We will look to mitigate the higher costs through increased store productivity and efficiency across all other areas of the business. Our strong margin quarter. This was a 10-year high and represented an increase of more than 400 basis points to the same period in 2019. Last, let me touch on some additional financial items. Depreciation was $9 million lower than last year due to reduced capital spending in 2020. Interest expense was $16 million lower than last year due to lower average debt outstanding dollars, and earnings per diluted share was a Q2 record of . Turning quarter with $2.6 billion of cash and cash equivalents. Inventory at quarter-end was 1% higher than the prior-year and down 25% to the same period in 2019, marking another ten-year high in turnover. Inventory ended the quarter lower than we expected, driven by strong sales during the period and the industry-wide supply chain challenges I just discussed. Turning to cash flow. We generated a positive operating cash flow of $1.4 billion and a free cash flow of $1.25 billion in the second quarter. . Capital expenditures were approximately $130 million in the second quarter. Given our strong financial position and outlook, we are increasing our investment planned for 2021. We now expect to spend $600 million to $650 million, which includes store investments driven by our Sephora partnership, refresh activity, and other customer experience and sales-driving enhanced mannequins. In addition, we opened a new e-commerce fulfillment center earlier this year. Now, let me discuss our capital allocation actions during the quarter. During the second quarter, we accelerated our share repurchase activity. Repurchase This is a direct reflection of the confidence we have in our business and our future. Based on year-to-date share repurchases of $300 million, we now plan to repurchase $500 million to $700 million of shares in 2021. And as announced last week, our Board of Directors declared a quarterly cash dividend of $0.25 per common share. The dividend is payable on September 22nd to shareholders of record at the close of business on September 8th. Turning to our guidance outlook for 2021. Based on our strong second-quarter performance, we are raising our full-year outlook. We continue to be thoughtful and prudent in setting our financial outlook for the balance of the year considering the uncertainty around consumer spending, given the Delta variant situation as well as the supply chain challenges and wage headwinds I discussed. Based on this, we are guiding the year as follows. Net sales to increase in the low 20% range, up from our prior expectation of a mid-to-high teens increase. Operating margins to be in the range of 7.4% to 7.6%, up from our prior expectation of 5.7% to 6.1%. This positions us to achieve our 2023 operating margin goal of 7% to 8% this year. And EPS to be in the range of $5.80 to $6.10 excluding non-recurring charges, up from our prior guidance of $3.80 to $4.20. This guidance represents an all-time high EPS for our Company. In summary, we are really pleased with our second-quarter results and the progress we are making with our strategy. Our efforts are gaining traction, and we enter the back half of the year with key transformational partnerships that will drive sustainable growth for years to come. We are happy to take your questions at this time.

[Operator:]

Our first question comes from the line of Bob Drbul with Guggenheim Securities.

[Bob Drbul:]

Hi. Good morning. Congratulations.

[Michelle Gass:]

Morning, Bob.

[Bob Drbul:]

Morning. 2 questions for you. I think the first one is to work on the Sephora partnership. Can you just talk about the game plan in terms of the limited customer overlap, like how you're approaching getting to their customers, how they're talking about coming into your customers? And I don't know if that is the loyalty program, but I'd love to just hear exactly how you're starting that as the partnership unfolds. And then the second question for Jill, on the share buyback program, how should we think about that, the new up the next few quarters?

[Michelle Gass:]

Well, thanks Bob for the question, Michelle here. I'll kick it off on the Sephora partnership. First, let me say that we are really, really pleased with how this partnership has launched. As you know, we're in the early days. We just have a few stores open as we sit here today, but by tomorrow, we will have more than 70 stores open, which is exciting, and then 850, as you know, over the next couple of years. And then, we did launch our online Sephora shop on August 1st. I'd say across both online and our early stores again just we're seeing. Customers are coming in, they're engaging. What's been interesting is their shopping . They're shopping makeup, they're shopping skin, hair, . And as we look at the types of brands that they're buying, they're hitting all price points. So everything from the Sephora collection. But we have sophisticated shoppers. They're buying Charlotte Tilbury, they're buying Olaplex in the hair area. The early indications are very encouraging, and I'd say both Sephora and Kohl's are really pleased with the launch. And I think as everything we've seen to date, launching this complex of an initiative standing up 200 stores, launching a completely new online experience. It's about as flawless as we could get. So, couldn't be more pleased on that front. And then to your question around the customer overlap or as we think about the incrementality opportunity, we're really optimistic there. As you made a note, the overlap, as it relates to both stores and customers, is pretty minimal. So that says there's a great opportunity for customer acquisition for Kohl's and for Sephora. They get to tap into our 65 million customer base and we get to tap into younger customers who today don't have the convenience of getting it to a Sephora given fueling this launch with lots of marketing. On a local level, of course, when we open a store, we're doing a lot of digital and social marketing as we introduce customers to our website. It's really across the board, taking advantage of all our marketing levers. And one of the aspects, I think, which also makes this partnership unique is how we're thinking about the loyalty programs, to your point. As we bring in a and a customer buying Sephora at Kohl's to get both their beauty insider points and Kohl's Reward. And as we're bringing customers in, we're actually seeing So that is something that our associates are doing there. Of course, support trained, but they are doing a great job signing up Beauty Insider and Kohl's Rewards. So it's great value to the customer. And in terms of us having them engaged in both programs provides a lot of great data in terms of understanding them and how we can leverage that in driving HALO purchases. And, of course, the email files are very powerful from a marketing standpoint. So anyway, to sum it up, early days, very pleased, and more to come and the

[Jill Timm:]

So from a cash position, obviously, we feel great with where we ended the quarter at $2.6 billion and our ability to generate the cash flow. Our priorities have always been first, to invest back in the business, so we are increasing our Capex spend. We had originally guided 550 to 600. We've increased that to 600 to 650. And the majority of that, you're going to see, is going to be throughout the store, really elevating that level of experience and discovery. But then we always want to return it back to our shareholders and that's why we did increase the share repurchase activity. We were able to take advantage of the cash flow and, obviously, we thought there was an opportunity to buy into the stock and we were able to buy up to the high end of our original guide at that 300 million. So as we look for the balance of the year, we will continue to leverage that additional cash flow and return it back to shareholders. So as we look to the 500 million to 700 million, obviously, that will be dependent on what we see from a stock perspective, but don't want to miss the fact that we think there's a long-term value opportunity in our stock and that's really what's that's confidence and increase in share repurchase shows.

[Bob Drbul:]

Great. Thank you very much.

[Operator:]

Your next question comes from the line of Steph Wissink.

[Steph Wissink:]

Thank you. Good morning, everyone.

[Michelle Gass:]

Good morning, Steph.

[Steph Wissink:]

I'm wanting to just follow up on the operating margin success in the quarter, which was quite mind-boggling frankly to see that 12.5% plus, maybe help us think through the back half of the year, what's embedded in your guidance. And then also if we think about that upper end and kind of your long-term goal, what would bring the numbers down from what you're achieving now. What do you see as transitory versus what's reinforcing your strategy is more permanent.

[Michelle Gass:]

Steph, thanks for the question. Michelle, here. I'll start and then I'll have Jill jump in to provide more color in detail. First off, we are very, very proud and pleased with the number we just posted at 12.8% exceeding our own expectations. And, certainly, as we guide now the year, we are squarely in the goal that we set for 2023, so we're going to have to hit this year. And we have a lot of things in our strategy that are working, things that we communicated back in our October strategic plan. From a pricing promotion standpoint, we are optimizing the equation between how we price, and how we promote, and, surgically in some cases, pulling back offers, reinvesting part and price, and reinvesting into the bottom line. Our inventory management efforts are working. We're at a ten-year high as it relates to inventory turns. So the team will continue to tightly manage that. And then I would say, the front half of the year, it's been a favorable environment. And that has helped to amplify our results. But I think it's important for you and others to understand that it's really the strategies leading, and then we leaned in to take advantage of the environment. And this is critical for us going forward. We have very, very strong confidence. You saw us guide back back end of the year and for the full year, that this is sustainable for us. These are long-term strategies, so can't say enough that this is and set us up for sustained growth. And then I think Jill can add a little bit more color as it relates to the details on how we think about it.

[Jill Timm:]

Yeah, I think, Steph, we did take advantage of a great market, but I think the big thing is our strategies are working. And we're really excited about the strong start to the year, but we wanted to approach it prudently. I mean, as Michelle highlighted, and we did in our comments, is there's a heightened level of uncertainty as we look to the back half of the year with the Delta variant, what is that going to do for consumer confidence? You have a lot of supply chain disruption, wage cost, inflation, and labor and freight as well. So we just really wanted to make sure that we were set up to take advantage. We feel incredibly confident in the outlook. And I think as we look over the long-term potential, we're really going to assess that over the balance of the year and then come back to you at a later date of really what we expect this to be able to do for the long-term perspective. But I just want to leave you with the fact that we're incredibly confident and we do expect to sustain our recent margin performance and build on it.

[Steph Wissink:]

Thank you very much.

[Operator:]

Your next question comes from the line of Lorraine Hutchinson.

[Lorraine Hutchinson:]

Thanks. Good morning. I wanted to follow up on your comments on the sourcing environment. Could you talk about -- just frame for us how much pressure you expect on the second-half gross margin. And then are you looking at this as simply a cost issue or do you anticipate any lost sales from canceled orders in the back half?

[Jill Timm:]

Yeah. I definitely think it's both, to be honest, Lorraine. We are managing this very aggressively, as we mentioned. We are shifting production where we can to navigate the temporary factory closures. We've prioritized POs to make sure we're bringing the seasonal items or event-driven items on time. We are increasing the frequency of store deliveries, we've added courier; so everything we can do to ensure that we're flowing goods is what we're doing. But I would definitely say inventory was a little bit lighter than we expected at the end of the second quarter. We didn't make the progress back that we would have expected, and that definitely is going to weigh a little bit from a sales perspective. We're aggressively going after that into the back half of the year. But we do want to make sure that we have instilled discipline and we're turning that inventory as well. I would say we're going to expect to build back into inventory. Some of the cash that you see on the balance sheet will go back into investing and inventory. But I do think there will be some costs associated with moving through the supply chain, getting those capacity needs because it's going to cost a little bit more money. That is all baked into the back half guidance that we gave to you, as well as, any concerns we would have for flowing goods, which we're working really hard at. But I think Michelle called out in our comments, Women's are disproportionately hit by that given the high proprietary brand penetration. So we're really focusing on that given the transition that that has been in. We feel great with the performance we've seen out a Women's, especially in those go-forward brands, but we now need to continue to flow those goods.

[Michelle Gass:]

Yeah, the only thing I would add, Lorraine, to that is categories where we really leaned in like Active. We're in a great inventory position there. And as we shared, business was at 40% last year up? 20% on a 2-year basis. So the good news here is the customer is responding to what we're putting in front of them. As Jill said, we have some more acute, hopefully, temporary issues in categories like women that the team is all over and being really creative so we can accelerate those goods.

[Lorraine Hutchinson:]

And then maybe if I could just ask a follow-up on Sephora. Many of your peers have beauty penetration in the low double-digits. Is there anything structural that would prohibit you from reaching that over time?

[Michelle Gass:]

No, I don't think there's anything structural to that. Again, we're just in the early days here. But as you've heard us talk about since we announced the partnership, we're really bullish. We think we're going to create a very big beauty business for the Company, and we're also going to get the halo impact by all these new and younger customers coming in. Again, early days encouraged with the first few weeks here, but very optimistic.

[Lorraine Hutchinson:]

Thank you.

[Operator:]

Your next question comes from the line of Gabby Carbone with Deutsche Bank.

[Gabby Carbone:]

Hi. Good morning. Congratulations on the nice quarter. So I wanted to ask about Amazon. It's been a very innovative partnership. And then maybe what have you learned from this initiative and does it continue to drive improvement in conversion? And then kind of going back to Sephora. How can you apply your learnings from Amazon to the Separtnership? And do you think the Four could be more impactful when it comes to converting shoppers into Kohl's customers versus what you've seen at Amazon?

[Michelle Gass:]

Yes. Thanks for the question, Gabby. First, on Amazon, they've been great partners. Goes back to the original start of the relationship where we saw the complementary strengths of we are very strong operationally, we do returns really well, and we provide a seamless experience for their customers. And what we get in return is new customers, traffic. And one of the things we have actually seen is that our conversion year-on-year is improving as customers get to know Kohls more. And -- then we have the teams always play with different offers, etc. But we're really pleased. And it is contributing to top-line, gaining new customers, and financially accretive as well. I think as we were just saying, I think with Sephora, we will see a halo effect as well. As I mentioned earlier, we have this joint loyalty programs, so Beauty Insiders coupled with Kohl's Rewards. And also, it's worth mentioning that it's not only Sephora. if you think about in our stores, and we're deeply committed to our stores. We run stores well, and I think as we said in our remarks as well, they were the key driver to our sequential improvement this quarter. But we're rethinking the entire store. We're making investments to refresh the store. We're re-flowing our categories to reflect our new strategy of really pivoting harder into active and casual., as an example, as these 200 stores get built out, we're moving our active business right to the front of the store. So as a customer walks in, what they experience is not only looking in front of them seeing this beautiful Sephora shop, but they're seeing Nike and Under Armour and Adidas and Champion. And then we're just making other shifts around the store so it's more seamless and more logical. So, to me, it's that entire equation. And so we're fully expecting that as customers come in, yes, they'll shop in Sephora, but then they'll see these amazing brands and the Kohl's experience around them. And I think the same will go true as it relates to the digital experience if they're coming online and buying Sephora online. will be able to see what's in their basket. We have strong digital marketing capabilities and very strong personalization capabilities. And, again, as they enroll in our loyalty programs, we get their emails and that's been a very effective and efficient way for us to reach our customers. And we're north of 40 million email accounts that we have to reach customers. So we've continued to grow that as well.

[Gabby Carbone:]

Great. Thank you for that color. If I can just sneak in 1 more question. Your gross margin performance is really great in the quarter. Is there any way to quantify maybe how much are you benefiting from your own promotion, optimization versus just kind of a general tight inventory kind of favorable backdrop we're seeing now?

[Jill Timm:]

So, Gabby, I think the fact that we actually are able to leverage our core capabilities around pricing and promotion, actually, and taking advantage of the environment is a huge positive. So to actually separate how much is the environment versus how much is Kohl's, I think it actually all has to do with the capabilities that we have. We're able to lean in more from our pricing, really able to eliminate some of the offers that we saw less productively because the environment afforded us to. And also, to be honest with you, our customers told us that they were willing to do that. We were confusing in some instances, we're driving a lot of new customers into our stores to these key initiatives, and we really need to simplify that pricing. So, I think really, we took advantage of the market, but we're able to really lean into our core capabilities to be able to do that. And as we approach the back half of the year, we'll always be really agile as we move through that. We do think simplified pricing, more pricing events, is definitely the way to the future. But we're also going to react to how the customer is reacting to us as we approach the back half of the year. And quite honestly into the future by leveraging this core capability.

[Gabby Carbone:]

Great. Thank you so much. Best of luck.

[Operator:]

Your next question comes from the line of Oliver Chen with Cowen and Company.

[Oliver Chen:]

Hi, thank you. The Sephora's are quite impressive. As we look forward, what are your thoughts on the comp lift to the overall Kohl's relative to all the testing done and your experience with beauty in the past? Would also love your thoughts on holiday relative to back-to-school, and what you're seeing for back-to-school, and what differences or similarities you may execute upon as we approach a unique holiday season as well? Thank you.

[Jill Timm:]

Sure. Oliver, I'll start on the beauty question and let Michelle talked to you about back-to-school and holiday. But I think you've been with us a long time. We've definitely gone through our phases of beauty. And when we've done in the past, when we've actually created a beauty department and brought in those mid-tier prestige brands. We actually did see conflict just from the incremental traffic. So this is a really strong traffic-driving replenishable item that customers came to the store for. So by doing that without a key top partner like Sephora, we would expect to be able to drive north of that 2% once we get this scale to the store. So we're excited about what it can bring, just a new customer growth that Michelle had mentioned. Two, it is a key traffic driver. We've seen that in the past. And three, the halo effect that it has on the rest of the store. We did take this opportunity not just to put Sephora in, but as Michelle mentioned, we really reflowed the store, we refreshed the source of those customers coming in are going to see a new Kohl to really attract them across the pad, whether it be too active to women's behind the Sephora shop is you saw when you toured it. We now have Calvin Klein, but we also have the space that will be more capital of collections. So it's going to be an element of discovery as we continue to change out what is in that space to really engage with the customer. So we are taking advantage of Sephora and the traffic it's going to drive in a much bigger way than we have in the past as well.

[Michelle Gass:]

Great. And then relative to back-to-school holiday, back half of the year, I'd say right now, we are happy with how back-to-school is playing out. We're seeing strength in key categories that we've really invested in like active. So kids are continuing to buy a lot of activewear to go back to school, whether that's apparel, certainly, the sneaker category, both in terms of active and athleisure brands, across the brands I was speaking to earlier, the Nike, Adidas, Under Armour, Champion, but also brands like Converse and Vans. We are a destination for those brands. We really separate and differentiate ourselves. On denim, feel great about our denim offering that's really resonating with our customers. As you know, we are a leading retailer of Levi's, strong private brands like Sonoma, even brands like Lauren Conrad. So, and even backpacks that really didn't have much of a business last year, we're seeing nice growth in a backpack. So we're optimistic. As kids return back-to-school. And I also think as even adults are back in-store shopping. As people refresh their wardrobe, as they get out and about whether it's a return to the office are just going to dinner, or maybe traveling. So I think we're set up really well, as Jill said earlier, we're doing everything we can where we have some pockets here and there of inventory issues to make sure that we can expedite and get back in stock in areas like women's, put broadly. We're confident as we head into the back half. And, then, I'd say as we move into the holiday, a couple of things. One is those same categories like active, casual apparel, we expect to continue as customers refresh their order, but I think really importantly, and what's different for Kohl's this year is the newness we're bringing in and these transformational brand partnerships. We mentioned kind of early days with Sephora, but by the end of October, were going to have 200 stores open. And as you've seen, Oliver, these are 2500 square foot shops. They're beautiful. The products are amazing. And so we think that's going to be a draw for customers, new customers, and even existing customers. and then get that HALO effect. And then that will start being material when you've got 200 stores coupled with a great omnichannel and digital experience. That's number 1. And then secondly, as it relates to our Casual apparel strategy, super excited about the brands coming in. Calvin Klein is just launching as we speak on the intimates and basics and loungewear, optimistic about that. Tommy Hilfiger will be launching soon. That is just a premier brand. We're super excited to bring that into our business, in the men's business. We recently launched Cole Haan on the footwear side, and then Eddie Bauer. I mentioned in my remarks when we think about activity, we think about the entire spectrum of active, athleisure, and outdoor lifestyle. And whether that's literally to go mountaineer, you can buy things from Kohl's, or if it's just you want to wear more apparel that's outdoor-oriented, we're going to have those offerings, and Eddie Bauer is a fantastic brand to join Lands' End in Colombia, which we already have. And then last but not least is our recently introduced FLX brand that is off to an amazing start. And we're expanding that to more doors this fall. So if you take a step back and you think about where we are in our journey. I mean, we are really now on the cusp of this curtains up moment for a new, more modernized Kohl's, still keeping and retaining our core customers with the great brands that we've only strengthened like Sonoma and Croft & Barrow, but then complementing them with these exciting brands like Sephora, like Tommy, like Eddie Bauer, that are going to resonate with our core customers as well as new customers Yeah, couldn't be more excited about what it means for the back half and, I think, importantly, for the long-term sustainable growth of the business.

[Operator:]

Your next question comes from the line of Mark Altschwager with Baird.

[Mark Altschwager:]

Great, good morning. Thanks for taking my question. I was hoping you could provide a bit more color on the progress with the Women's assortment. I guess it sounds like there's some noise on the supply chain front right now. I guess cutting through that, how do you think you're tracking with the improvement? And could you confirm if the supply chain delay is related to your private brands or is that impacting the timing of the rollout of some of the new brand partnerships? Thank you.

[Michelle Gass:]

Great, Mark. Michelle here. I will take the question first to answer your specific question just at the end. The supply chain disruption is largely around our private brand. So that's what we're seeing it. And again, can't say enough that the team is all over it. In terms of women's, were actually where we expected to be in the transformation, As you know, we made a huge move starting last year to fundamentally transform this business. We edited out ten brands. That's about deepening our position with these brands, giving them more space, like a Sonoma, Lauren Conrad, Vera Wang, that type of thing, removing any kind of redundancy that we might have seen with the brand, things like Nine West and Apt. 9 having that all be Nine West. And also the pivot that we're making broadly for the Company on really showing up and owning that casual apparel space. So we're seeing great results in denim and in basics, like tees and that type of thing. And of course, as a place for fashion. And we feel great about what's on deck for that as well. The early indications are really positive. As we look at our private brands in Women's, brands like Sonoma, SO, Lauren Conrad, and more are positively comping as we go back to 2019. So on a 2-year basis, if you set that as a baseline. That gives us the real indication of the customer responding to our sell-throughs. And our inventory turns on Women's, really strong. We're also investing -- as we talked about the investment in our stores, we're investing in the shopping experience. So just -- as we've removed inventory and deidentified. We're investing in things like mannequins and storytelling and what have you. And again, the customer's responding there. So I feel really good about how we're progressing. I think much of our opportunity is still ahead of us as we address these short-term inventory challenges, to bring in the new brands. And it is important to note, even as we sit here today, we've seen significant sequential improvement from where we were 6 months, 9 months ago. So you look at the sequential improvement, you look at the positive 2-year comps in some of those key brands that we're doubling down on, and then we look ahead to the new brands coming, I think we're really, really set up well.

[Mark Altschwager:]

That's very helpful. And then, Jill, I was hoping to touch on credit quickly. I know the growth there is expected to lag the sales recovery, but just any more detail you can provide in your expectations in the context of the higher revenue guidance? And just related to that bigger picture, interested in your thoughts on credit penetration as we move forward especially as you attract the younger customer to the brands. Do you think you're going to see similar levels of credit penetration as you have historically? Thank you.

[Jill Timm:]

Sure. I think when we started the year, we started with a very low accounts receivable balance like we had mentioned to you. And you had seen that reflected in our Q1 results. We had mentioned that we do expect credit to grow throughout the year, but it will still be flat versus last year as we build that AR back up. In addition to that, we have a really healthy consumer, so our payment rates are very elevated. So people are paying off their balances. You're not seeing them revolve around generating that incremental credit revenue. So -- and then last, are credit losses are actually really low. So it is a healthy customer, but we're starting from a low place just because of the 2020 pandemic impact on that portfolio. It will build the rest of the year, but we'll still be flat relative to 2020. What I would say is we're delivering this operating margin despite that. In the past, I think we had gotten a lot of benefits out of our credit portfolio. And this year with it being down, we're actually able to deliver this strong operating margin without having the credit revenue flow through. I will say is we are seeing a lot of new customers. We have a huge opportunity to convert them through that loyalty ladder, bringing them into the Rewards program, and ultimately getting them to their credit card. But I would expect with the new customers that we're bringing in through all the initiatives that Michelle outlined, Sephora, the new brands, that we will see our credit penetration probably down year on year before we bring them into that credit card portfolio. But the strength of the core of what we've done from our foundational changes, our structural changes, is going to still afford us to drive profitability. And then that will just be benefits in years to come as we move them through to the credit card.

[Mark Altschwager:]

Thanks again.

[Operator:]

Your next question comes from the line of Chuck Grom of Gordon Haskett.

[Chuck Grom:]

Hey, great quarter. Some of your peers are choosing to raise retail. I'm just curious if you could speak to your AUR trends and, I guess, your expectations going forward on that front? And then, for you, Jill, as a follow-up, in order to get to an up 20% sales guide for 2021, it seems to imply that sales per store would be down more in the back half than they were in the front half which, given the Sephora launch and given some of the new brands, it just doesn't really seem to make sense. So just wondering if you could just speak to that expectation.

[Jill Timm:]

Sure. So I think first, Chuck, if you look over time, we've actually been raising our AURs just really based on product models of what we've been able to bring in and we've seen the customer respond to that. So I think we have shown a history bringing that through. I don't know that we are going to be seeing ticket changes, but we are seeing AUR changes based on the promotional activities. Really leaning more into pricing, having less of that coupon. So that's really how we've balanced and been able to take advantage. I think of the consumer market and the full-price Reg selling that we indicated in the front half of the year. We will continue to take advantage of that as the market affords us. But really, we'll make investments back out of promotions potentially into pricing to really have that simplified equation stand out, especially as we bring a lot of these new customers in so they can quickly get to the key value that Kohl's provides. So I wouldn't say we are making any overt changes to tickets, but you will see that through the promotional calendar that we have lent to. And then, additionally, you'll see AURs changes relative to the price that we're bringing in. And all the brands that Michelle indicated having much higher AUR benefits, whether that be Sephora, Calvin, and Tommy, and we've done this over time and really seen it resonate with our customers. So they are willing to open up their wallet to buy those brands because they see the value not only in price but in the quality of the product that we're bringing in. And then in terms of the back half of the year, definitely, you can do the math. It does look like it would be a slowdown to see what we have seen in spring. I think when we approached our guidance, we definitely wanted to be thoughtful, but also give you prudent guidance given the heightened uncertainty. You have Delta variant happening, you have the supply chain disruption that we've mentioned, you have a late tight labor market where we're going to have to pay more for wages as we bring people in. So really taking into account all of those unknowns. We brought our guidance, I think, in from a thoughtful and prudent perspective. But it does show a slowdown in the back half of the year. I don't want that to leave you with the fact that we don't have confidence in our outlook. We definitely believe our strategies are working. We believe much of the opportunity is still ahead of us. And the fundamental restructuring of the business, we think, will definitely help us drive growth and profitable growth. But we also want to make sure that that's done over the long term in a really efficient model. And, obviously, we will go after as much growth as we can in the back half of the year. But given the uncertainty, just wanted to leave you with guidance that seems ed more prudent at this time.

[Michelle Gass:]

I'll just echo what Jill said 100%, but to also amplify that, we are going to go after all the opportunities in front of us. And you're right, Chuck, I mean, we're stacked as we look at the back half of the year. These are not only exciting initiatives, they are proven, right? I mean, these are known iconic brands in Sephora, Eddie Bauer, Tommy, Calvin Klein. It's an incredible lineup. And so really, really excited as we enter the back half of the year. As Jill said, we're really thoughtful in our guidance, but I think it's also important to reiterate that we also guided our EPS at an all-time record high. So feel good about that. And yes. Carry on.

[Chuck Grom:]

That's great. And then just as a quick follow-up, just if you look at the front half on gross margins relative to '19, they're up against several hundred basis points. I presume you don't want us to model that sort of improvement, but any handling you can do in terms of the gross margin line in the third and fourth quarter relative to '19 would be helpful. Thanks.

[Jill Timm:]

Yeah. Obviously, we were able to take advantage of a great market. I think some of the things that will persist is we're going to have inventory management. We're going to continue to turn. We mentioned we are light on inventory. We are going to make an investment in inventory. We are going after as fast as we can into those inventory areas that were light, specifically trying to continue to have a lens on inventory management. In pricing and promotion, we're going to take advantage of the market, but we're also going to play to go after what the customer is looking for. As we move into a heightened promotional activity for the holiday, do we need to be there or not? What does this holiday look like relative to 2020 and 2019? We'll be on there ready to make sure that we're adjusting accordingly. And that's really through targeted offers, through better pricing. And so we will make sure we're making those moves as well as we look in the back half of the year. And then there are the elevated freight costs that you've heard from everyone that we will take into consideration. And then, as we talked about the solutions for the supply chain, we're expediting some orders to bring them in. We're adding carrier pickups to ensure that we're flowing goods more timely. There are definitely going to be costs associated with how we can flow that inventory, all of which are considered in the guide. And as Michelle mentioned, I just want to underline, which still gets us to an all-time high from an EPS perspective.

[Chuck Grom:]

Great. Thanks, and good luck.

[Jill Timm:]

Thank you.

[Operator:]

Your next question comes from the line of Paul Lejuez with Citigroup.

[Paul Lejuez:]

Thanks. During merchandise margin improvement that you've seen versus '19 has been consistent across categories. And if you could share, where you've seen the biggest improvement versus areas that are lagging, where you think you still have the biggest opportunity from here. And then, so, on Amazon. I know you seem happy with the partnership. Curious, you think they are -- I'm curious if there are any changes to terms or if they have expressed any desire to alter the arrangement in any way? Anything you could add on that front. Thanks.

[Jill Timm:]

So Paul, I would say collectively, we have seen our merch margin improve across all of our lines of business. Everyone has improved turn. We're focused on the making of everything we're investing in much more productive. So we're giving more space to Active. It's one of our most productive areas. So I think as we've looked across the space, we've moved out of category offers for one item as to how we've reduced some of our promotions, and that has been across all of our categories. So nothing has been outside of 1 degree or not. We're taking advantage comes to our advantage. So I would say each and every line of business drove additional margin and drove improved turns. And we've looked across and simplified the pricing and promotions equally across all of our lines of the business which has resonated from that perspective. I would say, we expect that to continue as we move forward. Obviously, we're outsizing in certain areas, such as the Active, that is most productive for us. And then I think from a women's perspective, that's where we have the opportunity to bring in more inventory. But on those go-forward brands, it's really in the newness we're putting in front of the customer, it's very much resonating. So we expect that reg sells price selling to continue in those areas as well.

[Michelle Gass:]

Yeah. And to your question, Paul, on Amazon, echo what I said earlier, we're both really pleased with the partnership. It's delivering against what we expected. It's accretive to sales, and to traffic, new customer acquisition, and to profit the returns process. And both Companies share the obsession with putting the customer first and exceeding customer expectations. Then we have world-class promoter scores. Plan to continue forward, like I said, it's doing what it's supposed to do. And as I mentioned earlier, we're also seeing some nice upticks in conversion as we bring in these new customers and as they get introduced to Kohls. We're looking forward to the partnership continuing.

[Paul Lejuez:]

Great. Thank you. Good luck.

[Michelle Gass:]

Thank you.

[Jill Timm:]

Thank you.

[Operator:]

Your last question will come from the line of Dana Telsey with Telsey Advisory Group.

[Dana Telsey:]

Hello? Hello?

[Operator:]

Dana, your line is open.

[Dana Telsey:]

Hello?

[Operator:]

Your line may be on mute.

[Michelle Gass:]

Okay. Well, I think we'll wrap it up. Thank you, everyone, for listening to the call today. We look forward to speaking with you in November.

[Operator:]

Thank you. That concludes today's conference call. You may now disconnect.