Kohl’s - Q3 2025

Executive Summary

• Q3 2025 results and call materials are not yet available; Kohl’s has scheduled its Q3 2025 earnings conference call for November 25, 2025, making this a pre-call recap anchored in prior-quarter trends and current quarter press releases.
• Trajectory into Q3: Q1 2025 comps declined 3.9% with gross margin up 37 bps and diluted loss per share of ($0.13); Q2 2025 comps declined 4.2% with gross margin at 39.9% and diluted EPS of $1.35 (adjusted $0.56).
• Guidance was raised in Q2: adjusted operating margin to 2.5–2.7% (from 2.2–2.6%) and adjusted diluted EPS to $0.50–$0.80 (from $0.10–$0.60) for FY 2025; net sales decline narrowed to (5%)–(6%).
• Q3 seasonal setup: Kohl’s launched holiday promotions and Black Friday events to drive value and traffic, and declared a $0.125 quarterly dividend (payable December 24, 2025), a potential sentiment support into the print.

What Went Well and What Went Wrong

• What Went Well

  • Proprietary brands and value orientation gained momentum; management quantified margin uplift from proprietary penetration and cited sequential gains, including July comps turning flat in Q2.
  • Accessories/jewelry outperformed; jewelry sales up ~12% YoY in Q2 after reinstating fine jewelry presence and “accessories pad,” supported by impulse queuing rollout (+30% sales).
  • Disciplined cost control and inventory: SG&A down 4.1% YoY in Q2; inventory down 5% YoY; receipts managed down in the mid-teens, supporting margin and cash flow.

• What Went Wrong

  • Core Kohl’s card customer performance lagged (sales down low-teens in Q2), weighing on credit-related “other revenue”; management is working to re-engage this segment via coupons and assortment corrections.
  • Traffic remains the key pressure point; Q2 sales decline driven primarily by fewer transactions, with value-seeking behavior and trade-down into opening price points noted by management.
  • Category softness: men’s/kids and active footwear underperformed in Q2; tariffs/macro uncertainty remain headwinds prompting margin guide to the low end of prior range to preserve promotional flexibility.

Transcript

Operator (participant)

Thank you for standing by. My name is Brianna, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Kohl's Corporation Third Quarter 2024 earnings conference call. Please note that this call is being recorded. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question, please press star followed by the number one on your telephone keypad. To withdraw your question, press star one again. I'll now turn the conference over to Mark Rupe. Please go ahead, sir.

Mark Rupe (SVP of Investor Relations and Treasurer)

Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are 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 make reference to non-GAAP financial measures.

Reconciliation of 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 this morning are Michael Bender, our Independent Chair of the Board, Tom Kingsbury, our CEO, and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michael.

Michael Bender (Independent Chair of the Board)

Thank you, Mark, and thank you for joining us this morning. I'm going to provide some brief introductory remarks, and then I'll turn it over to Tom and Jill to review our third quarter results. We will then take some Q&A. As we shared last night, Tom Kingsbury will step down as CEO effective January 15th, 2025, and will stay on in an advisory role to the new CEO and retain his position on the board through his retirement in May of 2025. On behalf of the board, management, and all our associates, I want to thank Tom for his leadership and ongoing service to Kohl's. Tom has a lot of history with Kohl's, as many of you know, and we are grateful for him stepping in to lead us through our transformation over the past couple of years.

I'm excited to share that the board has appointed retail veteran Ashley Buchanan as CEO effective January 15th. Ashley has been CEO of The Michaels Companies since 2020 and prior to that held a variety of senior executive roles at Walmart and Sam's Club during his 13 years at the company. His vast retail experience, leading operations, merchandising, and e-commerce will bring a steady, proven leader to Kohl's as we continue to transform the business and drive future growth. Ashley has driven change by setting a clear vision, empowering teams, and practicing organizational accountability for results. We know he will be a great leader and bring a new perspective in our next chapter. I'll now turn over the call to Tom to discuss our third quarter results.

Tom Kingsbury (CEO)

Thank you, Michael, and good morning, everyone. I would first like to thank Michael, the broader board and management team, and our associates for the opportunity to lead this great company during the past couple of years. Kohl's long-term opportunity is significant, and I look forward to supporting Ashley through the transition. Turning to our third quarter results, they did not meet our expectations and were frankly disappointing. Sales have been a challenge for us throughout 2024 and weakened further in Q3. Over the last several quarters, we have implemented a significant amount of change across our assortment, value strategies, and in-store experience. We believe these actions will make us more competitive over the long term. However, we undervalued the short-term impact this change could have on our sales performance. Apparel sales in the third quarter declined 9% as sales remained soft in our apparel and footwear businesses.

Although we had a strong collective performance across our key growth areas, including Sephora, Home Decor, Gifting, and Impulse, and also benefited from the opening of Babies "R" Us shops in 200 of our stores, these are unable to offset the declines in our core business. We are not satisfied with our performance and are taking aggressive action to reverse the sales declines. We must execute at a higher level and ensure we are putting the customer first in everything we do. As Jill will discuss later in the call, our updated fiscal year 2024 guidance reflects the continuation of the sales pressure we have seen this year and our expectation for a highly competitive holiday season. My main focus today will be discussing the key drivers of our sales weakness and the actions we are taking to stabilize the sales trend now and going forward.

In assessing our business during the third quarter, we identified three areas that led to our underperformance. They include a decline in traffic, especially early in the quarter during the back-to-school season, a reduction in receipts in our private apparel brands, which impacted our ability to drive sales in our key value items and categories where we have lost traction that represented opportunities for us going forward, such as fine jewelry, bath and body, and intimate apparel, and legacy home products. Let's start with the first area, which is the decline in traffic. In Q3, transactions declined approximately 3% after increasing approximately 2% in Q2. This change represented the entire deceleration in comparable sales in Q3 versus Q2. Softness in transactions was most notable early in the quarter during the back-to-school season, with August being the weakest month.

Our children's business was especially challenged in apparel during this time, though improved late in the quarter. We are highly focused on driving traffic. In response to the softer trends experienced in Q3, we are increasing our touchpoints with our most engaged customers through more targeted offers and direct mail, as they have shown a greater responsiveness to this form of marketing. In addition, given that our customer continues to be pressured, we are showcasing the great value we are offering this holiday across our merchandise assortment and our marketing message. We will also lean into social and digital marketing to continue to drive new customer acquisition and see a significant opportunity to capitalize on the nearly four million new Kohl's Rewards members added in 2024 with targeted rewards-only events during the holiday season.

The second area is a reduction in receipts in our private apparel brands, which impacted our ability to drive sales in our key value items. Over the past 18 months, we have managed inventory very tightly, largely driven by new processes implemented by operating with more open-to-buy liquidity and clearing goods on a more regular basis. At the same time, we increased our inventory investments in our key growth categories such as Sephora, Home Decor, Gifting, and Impulse. And we have also brought in a significant number of new market brands to capitalize on trend-right merchandise. Together, these investments led to meaningfully lower receipt levels in the private apparel brands, which our customers rely on. In Q3, private brand inventory decreased more than 20% as compared to the prior year, and for several of our key brands, it decreased even more.

Given the importance of opening price points in the current environment, not having the appropriate level of private brands hurt our ability to serve our customers. This had an outsized impact in our women's business, where we have the highest private brand penetration. It was also evident in our men's and children's businesses, and although we are pleased with the positive sell-throughs we are seeing as newness in our private brands hits the selling floor, we simply did not have enough private brands inventory given our investments in market brands and our key growth categories. I want to be clear, though, we continue to believe our market brand strategy and investments into the key growth categories are the right long-term strategic moves. We simply must do a better job of balancing these initiatives while managing the core business.

Let me now share the immediate actions we are taking to regain balance across our assortment. Number one, we have already begun to balance our buys in the near term to ensure we have the proper inventory support for our key private brands. This is evident in our in-transit inventory levels, which consist primarily of our private brands increasing 40% when compared to the prior year. These goods are now hitting the selling floor in time for holiday. Additionally, we are ensuring that we are leveraging market brands opportunistically through a chase approach as we build our presence rather than a replacement for our private brands, which have been taking place. While it will take some time to reposition our inventory, we do expect our actions to deliver improved relative trends in Q4 with greater benefit in early 2025.

The third area is categories where we have lost traction that represent opportunities for us going forward. The most notable example of this was our exit from the fine jewelry business, a category that had been highly valued by our customers. As we introduced Sephora shops into our stores, the fine jewelry business was largely displaced, which resulted in a persistent headwind to our sales performance for many periods. On a positive note, we are excited to reintroduce fine jewelry to our customers this holiday season in 200 of our stores. We will also have an expanded in-aisle placement of bridge jewelry in all stores, which will build off the positive sales growth we saw in Q3 for fashion and bridge jewelry. Overall, we expect much stronger performance in the jewelry category in Q4 based on our initiatives.

In addition to jewelry, we also see opportunities in Petites, Intimates, and our Legacy Home business. In basics, we meaningfully reduced our presence in 2022, a move that, at the time, was in conjunction with actions to reduce inventory. This was a short-sighted decision that we are committed to resolving. In 2024, we increased our Petites offering and expanded the assortments to all stores this quarter. Based on this, we expect our Petites business to build in Q4 and into 2025, continuing the initial momentum we began to see in Q3. In Intimates, we continue to see sales pressure in Q3. As I touched on last quarter, we have struggled with some of the key brands in our assortments due in part to lack of inventory depth, which is important in this highly size-intensive category.

During Q3, we accelerated newness and enhanced depth across all brands, which led to better results as we moved through the quarter, including a 500 basis point trend improvement in October. We expect trends to further build in Q4, driven by better inventory support and incremental newness supported in key marketing events. In our Legacy Home business, sales within kitchen electrics, floor care, and bedding remain challenging. However, we are optimistic that our efforts will gain traction this holiday season, driven by increased innovation, new brand introductions, and a stronger value messaging. Our efforts include launching Hotelier, our new private bedding and bath brand in all stores, new assortments in floor care, and compelling promotions targeted at kitchen electrics, which is a highly price-sensitive category.

So, to summarize, we have identified the key areas of our business that have pressured our performance, and we are taking aggressive action to reverse the sales declines. We expect that fixing these areas while continuing to benefit from our key growth initiatives will improve the overall sales trend starting in Q4, with full benefit accruing in 2025. Now, let me provide an update on the progress we have made in our key growth categories that are going to drive the business in Q4 and serve as a foundation for growth going forward. Starting first with Sephora, which continued to deliver strong growth in Q3, with total beauty sales increasing 15%. Comparable beauty sales increased 9%, which was an acceleration on a two-year basis as compared to the second quarter. Fragrance, bath and body, and skincare were especially strong in the quarter.

Brands including YSL, Laneige, and Sephora Collection drove solid growth. Looking ahead, we are confident in our ability to continue driving strong Sephora growth. For holiday, we have significantly expanded our gifting assortment, building off of last year's success, and we see cross-shopping as a key opportunity to capitalize on as Sephora will be in more than 1,050 of our stores this holiday, 15% more than last year. Now, let me provide an update on our progress in building our business in the under-penetrated categories of Home Decor, Gifting, Impulse, and Baby Gear. In Q3, sales from these categories continued to build. Let me highlight a few of the key takeaways. In our Home business, sales of seasonal and everyday decor increased more than 50% year over year. We also experienced solid growth across many other areas such as storage, wall art, glassware, and pets.

In Impulse, we drove sales growth of more than 40% as we expanded Queue Lines to 200 more stores in the third quarter. We expect strong growth to continue as we enter the holiday season with Queue Lines in 435 of our stores. And I'm happy to share that we successfully launched Babies "R" Us shops in 200 of our stores and online during Q3. We are broadening our reach with young families, acquiring new younger customers to Kohl's that are shopping multiple categories, including children's, accessories, and women's. We also introduced a Babies "R" Us registry in early October and are already seeing thousands of expectant mothers register. We expect our Baby Gear business to continue to grow as awareness builds as we recognize the benefits from registry sign-ups as we open more shops in the coming years.

Collectively, we continue to see these under-penetrated categories representing a significant opportunity in the coming years. Together with Sephora, the key growth categories represent high teens% of our business today, and they are growing rapidly and are expected to have a long runway of growth. Now, I'd like to share how we are approaching the holiday season. Kohl's is known for providing great holiday value, and this year will be no different. We will continue to establish ourselves as a key gifting destination with an expanded selection of products across apparel such as sweaters, fleece, and holiday outfitting, stocking stuffers and toys at compelling price points, Sephora gift sets, boxed jewelry, and cold-weather bedding from brands like Cuddl Duds.

Importantly, our key growth categories, as well as seasonally relevant businesses like toys, jewelry, and home, increased by approximately 1,000 basis points in penetration and will benefit our results in Q4 as compared to Q3. From a marketing perspective, we will amplify Kohl's Cash and Rewards, deliver targeted offers to drive engagement, and leverage influencers and social media engagement. We expect this holiday will be highly competitive given the late Thanksgiving. Our focus will be on maximizing the big shopping days. As it relates to our more recent performance, November sales are off to a marked improvement relative to Q3 comps. We have seen solid fall seasonal demand as well as the initial benefit from the investments we have made in our private brand inventory. In addition, we have seen heightened customer engagement during the start to the holiday.

That said, there still remains a lot of holiday shopping in front of us, and we are focused on executing a great customer experience. Before turning it over to Jill, I also want to highlight that we remain highly focused on expense management. In Q3, we managed expenses down 5% compared to last year, and it will remain a priority of ours as we work to stabilize our sales performance. In addition, our balance sheet remains in a solid position, and we expect to drive significant cash flow generation in Q4, which will reduce our revolver balance meaningfully by year-end. Jill will share more on this in a moment. To summarize my comments today, I want to leave you with three things. First, we continue to have strong conviction in our ability to reposition Kohl's for future growth.

Though recognized that we moved too quickly in some areas, we are focused on improving sales through driving traffic, increasing receipts in our private apparel brands, and regaining momentum in categories where we lost traction. Second, our investments in key growth areas continue to deliver solid results. Sephora at Kohl's continues to drive strong sales growth and bring in new customers. And we continue to build our business in Home Decor, Impulse, Gifting, and Baby Gear, all of which are positioned to deliver incrementally this holiday season as they grow in penetration. And third, the holidays have always been an important time for Kohl's. And this year, we will deliver even more value through our expanded gifting assortment. While we expect the holiday to be highly competitive, we are well-positioned from a product and marketing perspective to improve our sales trend.

I want to thank all of our Kohl's associates across the organization for their efforts to position us for a successful holiday season. I hope those listening today will get a chance to visit our stores over the coming weeks. Jill?

Jill Timm (CFO)

Thank you, Tom. And good morning, everyone. For today's call, I will provide additional details on our third-quarter results as well as an update on our fiscal year 2024 guidance. Net sales decreased 8.8% in Q3 and are down 6.1% year-to-date. Comparable sales declined 9.3% in Q3 and declined 6.4% year-to-date. In Q3, transactions were down while conversion improved, and our average basket sizes remain lower as compared to last year. Digital sales outperformed store sales in the quarter, though both were down to last year. Other revenue, which is primarily our credit business, decreased 3.6% in the quarter, which was slightly better than our expectations.

Year-to-date, other revenue declined 4.6%. Moving down the P&L, third-quarter gross margin was 39.1%, up 20 basis points versus last year. The increase was driven by inventory management and lower freight expense, partially offset by higher digital penetration and increased promotional activity. Year-to-date, gross margin was 39.4%, an increase of 42 basis points. SG&A expenses declined 5.1% to $1.3 billion in Q3, benefiting from tightly managed expenses across the organization given the sales decline, especially in corporate and store-related expenses. Year-to-date, SG&A expenses have decreased 3.4% compared to last year. Depreciation expense in the quarter was $184 million, down $4 million from last year. On a year-to-date basis, depreciation was $560 million, down $2 million to the prior year. Interest expense was $76 million in the quarter, down $13 million from last year. The decline is primarily related to lower long-term debt outstanding.

Year-to-date, interest expense decreased $17 million to $245 million. Net income for the quarter was $22 million, and earnings per diluted share was $0.20. Year-to-date, net income was $61 million, and earnings per diluted share was $0.55. Moving on to the balance sheet and cash flow. We ended Q3 with $174 million of cash and cash equivalents. Inventory at quarter-end was down 3% compared to last year, with on-hand inventory down 7% at the end of the quarter. As Tom indicated, we are focused on better balancing our inventory levels with a renewed emphasis in our private brands, which is reflected in the 40% increase in in-transit inventory at quarter-end. We remain highly focused on managing inventory efficiently with the goal of increasing turn. Year-to-date, operating cash flow was $52 million, while year-to-date adjusted free cash flow was a use of $376 million.

Now, let me touch on a couple of our capital allocation priorities. Capital expenditures year-to-date were $367 million, significantly less than the $495 million last year driven by fewer Sephora openings. We are still planning 2024 CapEx of approximately $500 million, consisting of investment in 350 impulse queuing lines, 140 Sephora small shop openings, the launch of 200 Babies R Us shops, and six new store openings, including one relocation. After investing in the business, strengthening the balance sheet, and returning capital to shareholders also remain top priorities. We ended Q3 with $749 million on our revolver. This was higher than last year's revolver balance of $625 million, with the increase largely attributable to the retirement of the May 2025 bonds earlier this year.

We remain focused on paying down our revolver balance and rebuilding our cash position and expect significant cash flow generation in Q4 to further our efforts on this front. Looking ahead, we will continue to monitor our options with respect to the July 2025 notes and will likely address them closer to maturity given the favorable coupon rate. As for shareholder returns, we continue to prioritize the payment of our dividend at current levels. In Q3, we distributed $55 million in dividends to our shareholders, and as previously disclosed, the board on November 13th declared a quarterly cash dividend of $0.50 per share payable to shareholders on December 24th. Now, let me share some detail on our updated outlook for 2024. As you've heard this morning, we are taking aggressive actions to stabilize our sales trend as we reposition Kohl's for future growth.

As a result, we are approaching our financial outlook for the year prudently, taking into account our year-to-date performance, and it will take time for our actions to deliver the intended outcome. For the full year, we currently expect net sales to be in the range of a 7%-8% decrease versus 2023, as compared to our previous guidance range of a 4%-6% decrease. Comparable sales to be in the range of a 6%-7% decrease. Our previous full-year comparable sales guidance range was a 3%-5% decrease. For the fourth quarter, our guidance implies comparable sales in the range of a 5%-8% decrease. Other revenue is expected to be down mid-single digits for the full year.

We expect gross margin to be at the high end of our previous guidance of 40-50 basis points expansion as compared to last year. For SG&A, we now expect SG&A dollars to be down 3.2%-3.5% for the year as compared to our previous guidance of a 2%-3% decline for the year. We expect operating margin to be in the range of 3%-3.2% as compared to our prior guidance range of 3.4%-3.8%. EPS to be in the range of $1.20-$1.50. This compares to our prior guidance of $1.75-$2.25. With that, Tom and I are happy to take your questions at this time.

Operator (participant)

Thank you. As a reminder, if you have dialed in and would like to ask a question, please press star followed by the number one on your telephone keypad to raise your hand and join the queue. And to withdraw your question, please press star one again. We kindly ask that you limit yourself to one question and one follow-up question. Our first question comes from the line of Bob Drbul with Guggenheim.

Bob Drbul (Senior Managing Director in Equity Research)

Please go ahead. Hi. Good morning. Thanks for taking the question. [crosstalk]. And Tom, best of luck on your retirement. And thanks for all the help over the last few years and actually many years. We go back. [crosstalk]. Two questions for you.

The first one, just when you look at the traffic trends, I think the aggressive actions that you lay out, which ones do you think will be the biggest impact to your traffic, I guess, in Q4, but also into 2025? And then the second question is, Jill, on the credit card, can you just give us an update just in terms of the trends, in terms of some of the conversions, and if it's actually playing to the way that you thought it would this fall and heading into holiday?Thanks.

Tom Kingsbury (CEO)

Well, first of all, I think the key for driving increased traffic, and we're seeing that already in November, is really showcasing the great values that we have on the selling floor today. The merchants really went out there and bought some really, really great product at great values. So really showcasing that.

We do that every year, but we really have a heightened approach this year based on what happened in the third quarter. We've gone over it multiple times. Also, really targeting our most engaged customers. I think that's really important. We probably didn't do enough of that in the third quarter, so we distorted it in our efforts in the fourth quarter through more targeted offers and more direct mail. So I really think that's going to be important. We're really leaning into social and digital marketing to drive new customer acquisition as well, trying to leverage the four million new rewards members that we have. So really think that those three things have and will drive increased traffic in the fourth quarter. Jill?

Jill Timm (CFO)

Yeah.

And Bob, in terms of credit, I think overall credit's kind of performing where we expected, obviously weighed down by the softer sales that we saw for the quarter. We are seeing payment rates are starting to drop, but all of which we anticipated, which I think you saw our other revenue line come in a little bit better than how we set expectations. As we go into the fourth quarter, we'll start benefiting a little bit from co-brands. We did launch our co-brand in mid-September. So those cards were just getting in mailboxes as we were kind of looking in October. So by the time they spend and you see that revolving interest coming into the portfolio, it's really going to be a Q4, but much more predominantly a 2025 benefit for us.

As the customer continues to use it, we see those balances revolve, and we get the benefit of those interest income numbers. But I think we're expecting it to be in that mid-single digit range as we close out the year, so really performing the way we expected it to this year.

Bob Drbul (Senior Managing Director in Equity Research)

Thank you.

Jill Timm (CFO)

Thanks, Bob.

Tom Kingsbury (CEO)

Thanks, Bob.

Operator (participant)

Our next question comes from the line of Mark Altschwager with Baird. Please go ahead.

Mark Altschwager (Senior Research Analyst)

Good morning. Thank you for taking my question. Thanks. Tom, just why is now the right time to be passing the torch? Just a lot of balls in the air right now with some of the strategic changes you've been making. I guess, what are the guardrails you have in place to limit disruption through the transition?

Is your successor aligned in terms of a lot of this element on the strategic agenda, or should investors be bracing for some bigger changes in the periods ahead?

Tom Kingsbury (CEO)

Well, to answer the last part first. Ashley is very much aligned with the strategy that we have in place right now. He's spent a lot of time with our board of directors, time with me. Obviously, as always, there will be some changes and modifications, and he'll want to obviously put his fingerprints on the strategies, which is what you would expect. For my timing, I signed up for two years, and two years would be up in May of 2025. I came in to help out the company in the transition, and it's not an exact science in terms of hiring somebody.

We were fortunate to have Ashley come and decide to join us, and this is the way the timing worked out overall. So the team is in a good place, and we have significant guardrails in terms of making sure that there aren't any big issues. But that's how the timing came about, and we just felt that it was best to do it now. I think, Michael, you want to weigh in on this?

Michael Bender (Independent Chair of the Board)

Yeah, sure. Yeah. It's Michael Bender here. And just to add on to Tom's comments, both about his tenure here. So first of all, I want to reinforce what we've said in all of our announcements about how grateful we are about what Tom has done over the past couple of years or so in his role. He's brought a number of really positive things to the business: inventory discipline, merchant discipline.

He's brought new brands to the business, so we're excited about the impact that Tom has had. As far as the transition goes, we knew that we had, as Tom mentioned, a time-based agreement with him starting in May of 2023 that would expire next year, and so as we talked about it with Tom and the board, we engaged in what we felt was a very robust succession planning process, and as you know, really strong CEOs are hard to find, and so when we were able to attract Ashley to the business and identified him as the ideal candidate with an availability date of mid-January, that made sense to us to continue to move that process. We're pleased that he can start in the January timeframe.

That'll allow actually for an orderly transition with Tom staying on as an advisor, as we've said, and a board member until May. So we're excited about that. Specifically around the question about change in strategy, as Tom mentioned, we feel like we've got a plan in place that we are executing against. What Ashley brings and what the board sees in him that we like and what brought him to close out the agreement to bring him on board, several things that I'll mention. He knows customers. He follows the data, and he follows what customers want and then brings solutions to them. There's evidence of that in both his experience running Michaels as well as Walmart. Ashley's a merchant, so he knows product.

He's got deep digital chops and has demonstrated expertise in how to integrate digital into physical settings, which is an important part of the Kohl's business. He's obsessed with the customer experience and understands how to drive that positively from an efficiency standpoint and making sure that customers have a great experience. He knows how to operate at scale. Kohl's is a big business. It's over 1,000 stores. So it's important for us to have someone sitting in the chair that understands how to operate at scale. And then lastly, I would say that from a character standpoint, Ashley's a principled, inspiring leader of people. And our culture here at Kohl's is really important for us to continue to maintain and grow and evolve. And Ashley, we feel all of the board members and the team have felt really comfortable with that.

He's excited about getting started and already has a number of requests for information about the business, although he doesn't start until mid-January. He's been in a number of our stores, and he's been developing a point of view on our digital business by ordering items online and checking that out. So we have someone who's excited about stepping into the role. And with Tom's support in the transition, we feel good about the progress that we'll be able to continue to make while we focus on making sure that these next six to eight weeks, as we move through the balance of holiday period, will be strong.

Mark Altschwager (Senior Research Analyst)

Thank you for all of that detail. Jill, if I could follow up on credit, you spoke briefly about the co-brand rollout.

I know initially when we thought the late fee change could result in a pretty significant change to the existing credit revenue stream, the co-brand was thought to be an offset to that, which would imply pretty material revenue contribution as we look into 2025. Can you just walk us through the current thoughts there? If the late fee change doesn't happen, I guess, why wouldn't that be a significant upside to the current run rate of credit revenue? Thank you.

Jill Timm (CFO)

Sure. So in terms of the co-brand, when we decided to launch co-brand, it was really to reach the younger customer, which we know didn't really want to have a private label credit card in their pocket. So this is a new product that we could continue to evolve our loyalty through the card, but let them do it with a Visa card in their wallet.

Obviously, one of the benefits to that was it's much more driven off of interest versus late fees because you run a bigger balance off of a card that you can use outside the four walls of Kohl's. And obviously, then we also benefited from some of the interchange fees. So if we do not end up having any risk from the CFPB legislation, there would be that benefit that we've outlined in regards to the co-brand. Of course, the bulk of that, as we stated, would be more in 2025. There will be some benefits coming through in Q4, but really need to get that card in the customer's hands, get them shopping with it, and having those balances revolve before you're going to start seeing a lot of that revenue flow through.

So as we approach 2025, we'll look at really kind of where that legislation lies and give you guidance that would include, I think, a nice benefit from our co-brand launch, and that would build throughout the year.

Mark Altschwager (Senior Research Analyst)

Excellent. Thank you. And best of luck over holiday.

Jill Timm (CFO)

Great.Thanks, Mark.

Operator (participant)

Our next question comes from the line of Oliver Chen with TD Cowen. Please go ahead.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Hi, Tom. You brought a lot of constructive things to the organization, including speed, agility, and new categories. How would you diagnose the issues around the unintended consequences of some of these changes relative to the highly competitive promotional environment? And then second, as we look forward, fixing the core, it's been a multi-year issue in terms of apparel and embracing younger customers and also trying to get sustainably positive comps.

But what's your take on what may need to be done to fix the core in terms of the new CEO coming? And lastly, chase versus replacement. I didn't quite understand that comment in terms of that strategy that you're undertaking looking forward as well. Thanks a lot.

Tom Kingsbury (CEO)

First of all, obviously, one of the unintended consequences was the fact that we underplaced our private and exclusive brands. I would say that was one of the biggest issues that we had. We obviously need to make sure that we're more realistic in terms of our approach to how we're placing goods, that we have the right balance between the market brands, the private brands. We put, again, too much pressure on the turn of the private brands. We thought we could do more with a lot less, and that didn't work out for us.

It's just we're in learning mode, and that was a big lesson for us, which obviously was a big unintended consequence. I think all of us have learned from that overall. So that's important. We've already gone through, and for 2025, we've gone through the vendor matrices very, very carefully to ensure that we have the right receipt reduction ratios, making sure that we aren't putting too much pressure on any of the brands, that we're being much more realistic in terms of how we're approaching it. As far as chase versus replacement, making sure that we're utilizing our open-to-buy to go after goods when they're checking much more aggressively versus using our open-to-buy to replace things like our private and exclusive brands.

We just need to buy it up front correctly, which obviously we failed to do that, which resulted in the issue that we had with our private and exclusive brands. I don't know. You want to weigh in on any of that?

Jill Timm (CFO)

Yeah. I think the biggest thing you saw, Oliver, was we got excited about some of the market brands, but we were also trying to really tightly manage inventory. And so there became a trade-off there. And unfortunately, the unintended consequence was that we were down over 20% in our private and exclusive brands. And those are brands that really are opening price points. And so when we're looking to drive value for our customer, we disappointed them not having brands they wanted at this opening price point. And so that became a big headwind that we needed to overtake.

You saw in our inventory numbers, we were down three, but we were actually saying we were down seven on hand, and the difference of that is really our proprietary brands. They were in transit, which we take ownership of, and they're setting as we speak. So as we saw those first couple of weeks in November play out, we saw some of the newness in our proprietary brands hit. We're seeing great sales throughs, and I think those are one of the actions that we took that led to the market improvement that we referenced to our November results. So it was something that just takes a while to get back into given the length of time in terms of the import process, but now that we're in it, we're definitely seeing a benefit from that. So I think it's just really continuing the discipline.

We think managing our inventory down mid-single digits is the right answer to drive turn. But we just have to have a little bit more discipline in staying close to those core brands our customers want and using the market brands to really bring in that element of fashion and staying true more to that pyramid than we did during Q3.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay, Jill, on the guidance, what did you say it assumes for the inventory growth relative to sales in light of what you need to do to inventories? And final question on promos. What's embedded in guidance for merchandise margins and promotions? And does some of that relate to what you're seeing quarter to date, etc.? Thank you.

Jill Timm (CFO)

Yeah. I think for inventory, we're going to still expect it down mid-single digit. That's where we think it's the best to run the business.

We're getting back into the proprietary brands like we spoke to, but we'll balance that with less of the market brands on the table. So we feel like that's the right place to be as we end the year. And that's what I would expect us to be running the business going forward. We have a large opportunity to improve our turn as we've spoke to, but we're going to do that in a paced approach so we don't do things too quickly as maybe we learned our lesson this year in doing that. In terms of margin, we are expecting it to be promotional. It always is promotional during Q4. So we're set to do that. I think a couple of things that we found worked well for us through the last couple of years is doing more targeted offers.

So as Tom just mentioned, we did that in Q3. It definitely drives our behavior, particularly around our most loyal customers. So we know that that's a way for us to drive their behavior and have them see value. We do expect our proprietary brands to do much better than we saw in Q3 with the inventory investments that we're making, which obviously carry a better merch margin. So as we think about our margin for Q4, that's why we think we can get to the high end of the guide for the year, which would imply Q4 has a little bit of a step up in terms of what we saw in Q3. And then last, just, we're in a clean position from an inventory perspective. And Q4 is typically a big quarter from a clearance. So we do expect that will be a benefit for us as well.

So those are kind of the pieces of the puzzle we put together to feel confident in giving the high end of the guide on the margin for the year.

Oliver Chen (Managing Director and Senior Equity Research Analyst)

Okay. Happy holidays. Thanks.

Jill Timm (CFO)

You as well. Thanks, Oliver.

Operator (participant)

Our next question comes from the line of Chuck Grom with Gordon Haskett. Please go ahead.

Chuck Grom (Managing Director)

Hey. Thanks. Good morning and good luck, Tom, with everything. Can you guys just talk about the steps to recapture some of the lost customers that you may have alienated over the past couple of years by de-emphasizing the private brands and the jewelry counters? I guess on one hand, it's a big opportunity. On the other hand, it's sometimes very hard to do.

Jill Timm (CFO)

Yeah. I think this is going to come down to our investment in marketing, Chuck. And I think you saw we've run a pretty tight SG&A for the year.

In Q4, you're seeing maybe a little bit, if you do the math off of what we guided the year, a little bit more of an investment in SG&A, and that SG&A is going to come into marketing, so we know the holidays when we attract the most new customers to our store. It's when our loyalists see the best value that we have, so you're going to see that we're going to lean into Kohl's Cash. I think right now you're seeing our iconic 15-off-50 Kohl's Cash. That really resonates particularly with that most loyal customer, so leaning into those type of events so we can bring them in and show that we have value. Targeted offers has been something that we continue to lean into when we see work to drive that consumer behavior.

And then we're going to not only be in broadcast, in digital, in social from a new customer perspective, but we're going to lean back into direct mail and really go back to attract those customers who we know react to a direct mail flyer and tell them, "Guess what? We do have your jewelry. It's back in stock," particularly around those 200 stores that we're going to have those fine jewelry counters in to make sure they know we have it and we're not going to disappoint them. And we've heard them and their feedback, and we're reacting to it. I think we mentioned on the call in our bridge in fashion jewelry in Q3, we actually had a positive comp. So we are starting to get that message out, and the consumer is reacting to it. And we think we can build on that in Q4 as well.

[crosstalk] And then Petites. I think that's another area that was just unfortunately a miss. If you buy Petites, it's not a substitutable product, so we need to bring that back in. And so how we can market and make sure that now that we have it in Q4 and really ensure that when they come in, they have that trip assurance that they're going to be able to find that assortment back in our stores is a big deal. And that's going to be to a customer who was more loyal to us, so we know we can bring them back into these targeted offers and through the reach of marketing that we're going to make a big investment in in Q4.

Chuck Grom (Managing Director)

Okay. Great. Thanks very much. And then I guess on the new product offerings, particularly Sephora, which remains strong, like you said, a two-year stack improvement.

I mean, there's concerns in the marketplace that that comp tailing could moderate. So I guess what's the game plan to offset that potential deceleration? And can you discuss any improvement you've made on cross-selling across the store when somebody purchases a Sephora product?

Jill Timm (CFO)

Sure. I think first, we're so excited about Sephora, so I think that's why we did the two-year stack. That was just for you, Chuck, because I know you like those metrics. I actually liked this one a lot. Our customer loves it, and they keep coming back in for it. Gifting fragrance was an outperformer in Q3. And as you can imagine, as we go into Q4, it's a large gifting opportunity for us, and we're going to really lean into that. We had great success with our gift boxes last year. We're doubling down on that this year.

So everything Sephora, I think, is definitely continuing to work. But as we have less new stores opening, the comps will moderate. And you have it exactly right. Our biggest opportunity is continuing to drive that cross-shop. And I think we continue to see the cross-shop. There's not a lot of change there, but that remains the biggest opportunity. I think some of it being we disrupted with Juniors moving that to the front of the store and then not having some of the product, particularly our SO product, which is our opening price point, is a great fashion brand that Juniors has loved. We didn't have that product for them. Women's, we probably saw the biggest step change as that was much more impacted than other areas through our proprietary brand. So we need to bring the product in and then invite them in to shop again.

I think the third thing is Babies "R" Us, that continues to roll out. It's a younger customer. We're coming in with serving their families at a much earlier time in that moment, and we're seeing that really resonate. Younger customers, more diverse in the stores that we've brought them into, and we're really excited about the amount of registries that we've seen. It just launched in October, and the amount of registries has surpassed our expectations, so we know that's all sales coming in front of us as well. So I think you hit it on the head. We have a big opportunity on the cross-shop, but we're definitely focused on it, but we have to get back in stock on the things that they've come to know us for and things that they want before we will probably see that metric move.

Chuck Grom (Managing Director)

Okay. Great.

One quick last one from me. We've gone 53 minutes, and nobody's talked about the weather, which is pretty remarkable. But your business historically has always been very weather sensitive. So is there any way to handicap how much your sales were held back from the warmer temps over the past couple of months? Thanks.

Jill Timm (CFO)

Yeah. Weather's always been a huge impact in Q3 for us. It's the number one correlated sales driver in Q3. Our fall seasonals were well below our company average.

Tom Kingsbury (CEO)

Yeah. We had a significant drop in fall-related product in the third quarter. We haven't really talked about it, but it did negatively impact us. The good news is looking at the fourth quarter weather, knock on wood, it continues to be as it is, colder than last year. But yeah, it hurt us in the third quarter.

When you have such a high penetration of apparel and footwear, as we do, it hurts us. That's one reason why we're trying to build our beauty business and why we're trying to build our home business and all the things that are not so negatively impacted by the weather.

Jill Timm (CFO)

Yeah. And I would just say that part of the market improvement is fall season started selling when it cooled off. And that has definitely been a positive tailwind into Q4. And the other thing is Tom mentioned, apparel becomes less of a focus in Q4. So really, a lot of our initiatives around home, gifting, Sephora become a bigger portion of our penetration as we go into the holiday period as well.

Chuck Grom (Managing Director)

Great. Thanks, Jill. Good luck, Tom.

Jill Timm (CFO)

Thanks, Chuck.

Tom Kingsbury (CEO)

Thank you.

Jill Timm (CFO)

Our next question comes from the line of Dana Telsey with Telsey Advisory Group. Please go ahead.

Dana Telsey (CEO and Chief Research Officer)

Hi.

Good morning, everyone. As you think about a big picture view of what's happening and where we are now, how much of it would you say, Tom, is internal that can be corrected over time? How much of it was the macro factors? And if you could push one button to accelerate something, what would that be?

Tom Kingsbury (CEO)

One button? Well, I think that the macro did impact us. Obviously, the customer, as we've been saying all along, has been squeezed. We had tough sales with our lower-income consumer overall with everything that was impacting them in terms of inflation, etc. And that hurt us. I don't know to put numbers to it overall. We think that most of the things that have happened are fixable in general.

We should be able to offset any kind of macro issues in terms of changing the product assortments and improving our marketing. We think that we can work to fix everything. I don't know if there's a total easy fix, but I think if we can continue to work on our execution, we should be able to capture the business that we really feel we can have, but it's up to us to fix it, and we're always going to have some sort of macro-type issue. We feel we're in a good place right now for fourth quarter because of all the effort we've put into gifting in terms of all the things we've done in our home business to try to build that business, our Impulse business, etc., our seasonal business.

But we feel that if we can continue good execution, we'll be in a good place.

Dana Telsey (CEO and Chief Research Officer)

Thank you. And Jill, anything on the puts and takes of expenses, given that you're managing so carefully, how you're thinking about labor costs this year compared to last year as we go through the season?

Jill Timm (CFO)

Sure. I think you saw we called out stores have done a phenomenal job managing expenses. And we really have a great variable model based on when we see our sales coming in, obviously also benefiting from our inventory management, having less units to touch to that process, as well as just the clean inventory, not having to take as many markdowns. So I would say we want to make sure that we have a great experience for our customers during holiday. So you will see that we're going to invest in that labor in the store.

But we also have a model that we can pull back when we don't have sales there. So I think that's been a key contributor to our expense management. But I would just say across all lines of this area, everyone's really shown up to pull back in terms of, "Hey, the sales weren't there. We need to pull back from an expense perspective." The one place that we will lean into in Q4, like I mentioned, will be marketing. So I think that's the one step change that you'll see from the beginning part of the year into Q4. We know we have an opportunity to re-engage with some of the customers that we disappointed with the exits of fine jewelry, Petites, etc. So we need to make them aware that we have it. We need to make them aware that they can find that value back at Kohl's.

And then continuing to drive that new customer growth that we've seen all year, as well as bring people into our loyalty program. And we're really proud with the 4 million sign-ups we've had, but we know we can build on that tremendously during Q4 as well.

Dana Telsey (CEO and Chief Research Officer)

Thank you.

Operator (participant)

Our final question today comes from the line of Paul Lejuez with Citi. Please go ahead.

Paul Lejuez (Managing Director and Head of Consumer Discretionary Research)

Hey. Thanks, guys. Just a couple of quick ones. Curious where you think you might be moving customers to, what other retailers might be taking share. Second, as you get into private brands again in a little bit of a bigger way, Petites, jewelry, what are you giving up in terms of floor space? What might feel the pressure? And then last, curious if you're thinking any differently about closing stores.

Jill Timm (CFO)

Okay. I'm going to start with the store closures.

I think you know we've always talked a lot about the health of our store base. We generate a lot of cash from our stores. We have the luxury of being in convenient locations and off-mall, which has always been helpful. With that said, we're always evaluating our fleet to optimize it and I think we're always going to have moves that I would consider more from a hygiene perspective, Paul, but I would definitely say that there are places that we'll look at, but over 90% of our stores are still four-wall cash positive. So it's a difficult financial decision to make it, but obviously, on the periphery, from a hygiene perspective, there's going to be some opportunities for us to address those underperformers, which we will do.

In terms of giving up floor space when we make the investment back in private brands, I think we've also talked about we have a lot of space. Our average store is over 80,000 square feet. We've been able to bring in Babies "R" Us and some other brands without having to really give up floor space. I think this is where we were saying we replaced a lot of our private brands instead of doing a chase with the market brands. And so we're going to just come back into having floor space dedicated to our private brands, but there isn't anything we really have to give up. We'll still have market brands. It'll just be much more in a fashion bringing in, get it out faster versus a replacement of a proprietary brand.

But I don't think we ever feel like we have been making choices because the floor space is really there in the box that we own today. And then in terms of customer share loss, I think we continue to monitor it. Obviously, being down, I think it's going to a lot of the winners that you've seen put their numbers out there. I think it gets pretty spread. So you can see it across whether it be Amazon, off-price, etc. I think there's a trade down that typically happens as well. So we know from a customer demographic, our upper-income customers are doing and faring better than our lower-income customers. So they become much more discerning in their purchases, either not buying as much because they can't afford to, or they're finding an alternative.

And that's where, obviously, when we didn't have that proprietary brand opening price point value, they found other options this quarter, which is why, again, it'll double down on the marketing that we're going to go after them to bring them back in, particularly once we have that inventory in place, which hopefully, Paul, if you get out to the store, you'll see is that they're already, and you can find yourself a great sweater.

Tom Kingsbury (CEO)

Thanks to everyone listening on the call today. We wish you a wonderful holiday season. Thank you.

Operator (participant)

This will conclude today's conference call. Thank you all for your participation. You may now disconnect.