Prepared remarks
Hello, everyone. Thank you for joining us and welcome to the Q1 26 Kohl's Corporation Earnings Conference Call. After today's prepared remarks, we will host a question-and-answer session. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, please press *1 again. I will now hand the conference over to Trevor Novotny, director of investor relations. Trevor, please go ahead.
Thank you. Certain statements made on this call, including those regarding our projected financial results, business outlook, and future initiatives, are forward-looking statements. These statements are based on current expectations and assumptions and are subject to certain risks and uncertainties that could cause Kohl's actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, the factors described in Item 1A of Kohl's most recent annual report on Form 10-Ks, 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; Kohl's undertakes no obligation to update them. In addition, during this call, we may refer to certain non-GAAP financial measures. Please refer to the cautionary statement and reconciliations of these non-GAAP measures included in the investor presentation filed as an exhibit to our Form 8-K, as filed with the SEC and available on our Investor Relations website. Please note that this call will be recorded. However, replays of the call will not be updated, so if you are listening to a replay, it is possible that the information discussed is no longer current. Kohl's assumes no obligation to update such information. With me this morning are Michael J. Bender, our chief executive officer, and Jill Timm, our chief financial officer. I will now turn the call over to Michael.
Thank you, Trevor. Good morning, everyone, and thank you for joining us this morning to discuss our first quarter results. We are pleased with our start to 2026 as our comparable sales were down 1.1% versus last year, marking the best quarterly performance in over four years. In addition, we continue to manage the business tightly, resulting in strong expense discipline, inventory management, and an improved balance sheet. The progressive improvements from the prior quarter exemplify our ability to execute with agility and make necessary adjustments in our business. Moving forward, we remain realistic about the important work ahead of us, but the early results in Q1 give us increased confidence in our ability to execute against our key initiatives. Since stepping into this role one year ago, we have focused our efforts around resetting our foundation in order to position Kohl's for long-term success. It is imperative that we get this work right. Each day is an opportunity to win our customers' trust and business, and we are working diligently to do so. We take accountability for our performance, knowing that success may not always be linear. We will remain agile and make strategic decisions based on the evolving trends in our business and customer behaviors. As you saw from our release this morning, we did exactly that and are back to delivering progressive improvements in our business. Now looking deeper at our Q1 results, we saw a meaningful improvement in our loyal Kohl's card customer. This important customer base stabilized their performance and ran a flat comp in the quarter. This represents a significant improvement from the fourth quarter where we ran down mid single digits. A lot of the efforts we have taken over the past year have been tailored around reengaging this core customer, who has proven to be an extremely productive and loyal customer. Proprietary brands were another bright spot in the quarter, running up 6% on a comparable sales basis. This performance reflects the strength of our By Kohl's brands, which offer quality products at an affordable opening price point and which can only be found at Kohl's. Additionally, last quarter we identified a few operational opportunities within our seasonal businesses, particularly around fall seasonal inventory planning and allocation. After identifying these opportunities, we took immediate action and implemented strategic adjustments to our buying and supply chain processes for our spring seasonal assortment. In Q1, we saw a notable benefit following these adjustments, as our spring seasonal business was up mid-teens versus prior year. While trends are encouraging, we are not satisfied with where we are. We need to continue to show up for our customers every day as they continue to put importance on value and remain under financial pressure. Next, I want to provide an update on the progress we are making against our key initiatives. These initiatives are specifically designed around our customers and are focused on delivering great products at an exceptional value with a frictionless and inspiring experience. Let me begin with our first initiative: delivering a more curated, balanced assortment. At the onset of this work, our product offering had become overly saturated in certain products and categories, leading to unintentional lost sales with our core loyal customers. We immediately began making improvements to our assortment offerings by reducing our choice counts from market brands and reintroducing products in lost categories such as petites and fine jewelry. Since then, we have continued to curate our assortment to further address needs across all our customers. The edits are aimed to drive a more consistent shopping experience with improved product clarity, purpose, and relevance. In some categories, this work is well underway, and we are already yielding positive results. This gives us strong conviction as we continue this work into our remaining lines of business. There are incremental benefits to come as we progress through the year. Let me start with the categories that are further along with their initiative work. In the first quarter, we had four lines of business that delivered flat to slightly positive comps, including women's, kids, accessories, and home. A category that has always been important to Kohl's is our women's business. We have implemented a lot of changes to this category over the years and are excited about the momentum we are creating here. This category overpenetrates into our proprietary brand offering, which delivered a strong performance in the quarter. This momentum continues to be driven by our juniors business, up 10% in Q1. This strength is led by performance in our proprietary brand, SO, which is quickly becoming one of the largest brands in our women's department. As we look ahead, we will continue to lean into the success with our SO brand by expanding the assortment into dress and casual categories with our Office Edit collection. Building on the success of proprietary brands in our juniors business, we have implemented similar strategies across the rest of the women's category. This led to strong Q1 performance in women's sportswear and Sonoma, driven by key proprietary brands like LC Lauren Conrad. Going forward, we will curate our assortment to maximize the potential of these brands focusing on trending categories such as denim to provide relevant, affordably priced styles. Moving to our kids category, which historically is a resilient category as parents often tend to spend on their kids even when their wallets are stretched. Given this, we sought to find ways to elevate our proprietary brand offering in kids apparel. A few actions we have recently taken include rolling out our FLEX brand to kids in all doors by June, introducing a new tween brand, Sea and Sky, which is currently exceeding our expectations, and expanding our assortment of the opening price point Jumping Beans brand into our baby and infant category. Outside of apparel, we are also enhancing our offerings within our toy and baby gear businesses. In toys, we will be launching an offering of K-Pop Demon Hunters and amplifying our offering of LEGO novelty sets. For our baby gear business, we are expanding our Babies"R"Us gifting zones with the addition of high-velocity gifting and accessory items, as well as rolling out an additional 56 new Babies"R"Us shop-in-shops this fall. Additionally, we are excited about the opportunity we have to grow our teen business with an offering of teen apparel and accessories in-store and online. Looking ahead, we are implementing a value-driven family fan zone to create a one-stop destination beginning with the World Cup in Q2. Accessories also delivered a flat comp in the quarter. We continue to benefit from the rollout of our impulse queueing lines, running up over 50% in the quarter. The impulse product offering includes lower price point products that are often basket builders and provides an opportunity to introduce newness to our customers. Our total jewelry business, driven by fashion and bridge jewelry, remains strong. Following a successful 200 store test, we are expanding our fine jewelry offering to an additional 350 doors, viewing this as a significant white space opportunity. Complementing this fine jewelry expansion, we are also rolling out a new line of fashion and hair accessories under our proprietary SO brand. These accessory fixtures will be placed in the juniors department to inspire customers to complete their looks with trending, value-priced accessories. Our Sephora at Kohl's business underperformed in the quarter, running down low single digits. Fragrance and hair care continue to be the strongest categories led by new brands such as Kayali and Kérastase. Makeup and skincare underperformed in the quarter. Looking forward, our efforts are focused on driving traffic and conversion by maximizing key holiday moments, curating a portfolio of new and emerging brands, and providing great value. We are leveraging the strength of our fragrance business for key gifting moments such as Mother's Day and Father's Day through existing brands and newness from Billie Eilish and Coach. In addition, we are expanding our makeup offering, having successfully launched M·A·C and Rare Beauty, which is resonating well with customers and is scheduled for a full store rollout later this year. In skincare, we are rolling out newness with trending Korean brands like Beauty of Joseon, Aestura, and Biodance. Alongside these product introductions, we are making strategic investments in dedicated social media campaigns to support these efforts. The home category outperformed in the first quarter, improving over 400 basis points from our fourth quarter performance. Our customers continue to respond well to newness and innovation in this category from key brands like Shark and Ninja. On the soft home and tabletop side, we are leaning into proprietary brands like Miryana and Mingle & Co. Our home decor category showed a dramatic improvement from the fourth quarter, running up low single digits. Improvement comes following the adjustments we made within our seasonal decor businesses where we had previously overinvested in depth and did not offer adequate choices to the customer. We are applying these valuable learnings as we move forward optimizing our Americana business for the 250th anniversary as well as our fall harvest and winter holiday decor collections. Now let me move to our men's and footwear businesses, which underperformed the company. We expect to show progressive improvements as our adjustments in these categories begin to take hold. We anticipate our men's business to begin showing improvements in the second quarter. Throughout this category, we have been making edits to improve our assortment clarity and reduce redundancy. Our proprietary brands will be our core business driver with complementary key national brands to help offer a clear good-better-best offering. This July, we are excited to announce the launch of Brixton, a modern lifestyle brand across 300 of our stores. Although the footwear business lagged in the first quarter, we expect this business to improve as we bring in newness and more depth for back to school. This includes newness in key active brands like Nike, highlighting their V5 Runner and Court Vision Low sneakers and adidas. We are servicing our casual footwear with proprietary brands like Apt. 9 in men's and LC in women's. Now, let me move to our second initiative: reestablishing Kohl's as a leader in value and quality. Value has always been a cornerstone of Kohl's foundation, and in today's macro economy, it is a necessity for the low- to middle-income consumers that we serve. They continue to seek value in an attempt to stretch their dollars for themselves and their family when more of their money is being spent on essentials like food and gas. Last year, we began our work to deliver more consistent, competitive value to our customers by increasing the number of brands eligible for coupon usage. We experienced an immediate and consistent increase in our penetration of sales included in coupon usage. We currently feel good with the edits we have made to our brand eligibility, but we will continue to closely monitor this going forward. The most impactful way we can improve our value offerings is through unlocking the power of our proprietary brands. Now as I previously stated, our proprietary brands increased 6% on a comparable sales basis. Our customers love the quality and affordability of the brand products we are offering, and we will continue to increase our investment in proprietary brands for the remainder of the year. To support the inventory, we are also enhancing our in-store experience and driving increased awareness through our By Kohl's marketing campaign. We began to roll out the in-store experience in Q1 with LC Lauren Conrad and Tech Gear, both of which had strong performances in Q1. Following this success, we are continuing our efforts to enhance our in-store experience through key proprietary brands across our apparel categories. Our By Kohl's marketing campaign is off to a strong start, helping boost momentum for our proprietary brands. In Q1, we introduced By Kohl's to consumers and highlighted a few of our key private brands with video, social content, consumer press, and through partnerships with relevant influencers and celebrities. This campaign will continue amplifying the awareness of our By Kohl's brands in the second quarter and heading into back to school. Outside of proprietary brands, we are finding additional ways to increase our value product offerings. A great example of this is within our impulse category, where we recently introduced the deal bar and toy towers in all of our stores. The deal bar highlights seasonal decor and gifting, all at price points under $10. Our toy towers include offerings of toys at $4.99, $7.99, and $9.99 price points with trending toys like the NeeDoh squishy, introductory LEGO sets, and gaming cards. Both initiatives have exceeded our initial expectations as value continues to resonate with our customers. Moving to our third initiative: enhancing our omnichannel platform to create a frictionless shopping experience. In order to create a more cohesive and frictionless omnichannel experience, we need to improve the synergies within our store and digital businesses. A key component for enhancing our experience will be our inventory management. Specifically, we are working to improve our trip assurance to create a more reliable and consistent experience for our customers. Trip assurance needs to be a key differentiator for us going forward. Simply put, the customer needs to be able to come to Kohl's, find what they are looking for in the size and color they want, and get it at an affordable price. To better achieve this, we are planning our apparel depth up high single digits and conversely planning our choice counts down high single digits. By enhancing our inventory composition, we will be able to see benefits across both our stores and digital channels. This provides the customer more options in how they want to receive their product: in store, shipped to them, or through our buy online, pick up in-store options. It also improves the speed to which the customer receives their products. Not only will this help create a better customer experience, it will also afford us the ability to increase our inventory turns and ensure freshness of seasonal receipts. Digitally, we are excited about the work we are doing to modernize and enhance our experience. Earlier this month, we launched a gift finder on our website that is powered by AI through Google Gemini. We are encouraged by the initial results and about the potential for these AI-enabled experiences. These enhanced shopping experiences will help improve product discovery and customer engagement with further opportunity to support conversion and reduce friction across the shopping journey over time. Beyond AI, we are making progress across the core digital shopping experience. We are enhancing how customers discover and navigate our assortments through more curated digital experiences, improved storytelling, product spotlights, and brand-level filters. At the same time, we are reducing friction at key moments of the journey, including clear delivery information and easier returns. Together, these improvements are intended to make Kohl's more relevant, easier to shop, and more connected across the customer journey. Another growth driver for our digital business will be our digital marketplace. This year, we are planning to more than double our current offering of marketplace items on our website. While still early in its growth and maturity curve, our marketplace strategy has become a more meaningful part of the business. We believe this creates an opportunity to attract and convert more customers by expanding our assortment into white space categories that complement our core offering. In closing, we are pleased with the results from our first quarter as our strategic initiatives are gaining traction. We remain intensely focused on execution and progressive improvements as we move through 2026. Before I hand the call over to Jill, I wanted to take a moment to express my sincere gratitude to our Kohl's associates. Our first quarter results are an exciting step in the right direction and could not have been done without all of the hard work from everyone here at Kohl's. Thank you for all you do every day to serve our millions of customers across the country. With that, I will now hand the call over to Jill.
Thank you, Michael. For today's call, I will provide additional details on our first quarter results and provide commentary around our fiscal year 26 guidance. Net sales declined 1.7% and comparable sales declined 1.1% in the quarter. The difference between net sales and comparable sales is due to the timing of closed stores in the first quarter last year. Going forward, we expect net sales and comparable sales to be more aligned. The decline in sales can primarily be attributed to a decrease in transactions. Our stores business underperformed in the quarter, running down low single digits. This softness is primarily driven by a decline in transactions. We are addressing this by continuing to invest in-store inventory to ensure better in-stock levels and trip assurance. Additionally, we are elevating the in-store environment to create a more inspiring and consistent shopping experience. Digital sales grew 4% this quarter, fueled by increased traffic. This performance is a direct result of our strategic investments to modernize and enhance our digital experience. Additionally, our marketplace business continues to grow and become a more meaningful contributor to our overall performance. Including marketplace GMV, our comparable sales would have improved by approximately 50 basis points and would have been down 0.6%. In addition, our Kohl's card customers delivered a flat comparable sales for the quarter, representing a 600-basis-point improvement compared to Q4. This is an important stabilization of our core customer, as this cohort is a more loyal and productive customer for Kohl's. Other revenue, which primarily consists of credit business, declined 8% versus last year. This decline was primarily driven by lower accounts receivable balances as we entered into 2026, which in turn generated less late fees and interest. As we continue to improve the performance of our Kohl's charge customers, we expect other revenue to improve throughout the year. Gross margin improved 4 basis points versus last year, driven by a higher sales penetration of proprietary brands. This increase was mostly offset by higher shipping costs from increased digital sales penetration. SG&A expenses decreased approximately $20 million, or 1.6%, this quarter. The decline was mainly driven by savings in our credit and corporate expenses. Depreciation expense was $174 million in Q1, relatively flat versus last year. Interest expense was $63 million, a decrease of $13 million versus last year. This decrease was primarily the result of open market debt repurchases at a discount of $9 million during the quarter. Our tax rate was 15%. This resulted in a net loss for the quarter of $14 million and a loss per diluted share of $0.13. Moving on to the balance sheet and cash flow. We continue to operate our business with discipline and ended the quarter with $429 million of cash and cash equivalents and no borrowings on our ABL. This compares to $153 million of cash and cash equivalents with $545 million borrowed on the ABL last year—an improvement of over $800 million in our net cash position. Inventory decreased approximately 8% compared to last year. Our receipts were up 1% in the quarter as we made a more timely transition into our spring receipts and chased into trending businesses, resulting in a turn improvement of 8% in the quarter. Looking ahead, we will continue to accelerate our investment into proprietary brands, further reduce our choice counts, and improve depth, and we expect inventory to be down low to middle single digits for the year. Now I want to turn to capital allocation, where our four priorities remain the same. Our first priority is investing in our business to drive our strategic initiatives. Capital expenditures for the quarter were $84 million, supporting the completion of our rollout of impulse lines to all stores, new brand launches in Sephora, and regular maintenance of our store fleet. We continue to expect our full-year capital spend to be in the range of $350 million to $400 million. Second, we will continue to return capital to shareholders through our dividends. In Q1, we returned $14 million to shareholders through our quarterly dividend. And as previously disclosed, the board on May 20 declared a quarterly cash dividend of $0.125 per share payable to shareholders on June 24. Third, we will make opportunistic debt repurchases. During Q1, we repurchased $50 million of debt at a discount of $9 million. We will continue to evaluate the market for further debt repurchase opportunities. Last, as we continue to solidify our balance sheet and improve our business results, we will look at implementing a share buyback program in the future. Now let me provide details on our updated guidance for 2026. We are pleased with our first quarter performance, delivering results at the high end of our expectations. While we are pleased with the start to the second quarter, and we believe that our strategic initiatives will allow us to continue making progressive improvement throughout the year, we want to be mindful of the current macroeconomic environment we are operating in. We continue to see thoughtful discretionary spending from our core low- to middle-income consumer as they remain financially pressured. Additionally, I would like to note that our guidance currently does not include any impact from potential AFA tariff refunds. In the first quarter, we submitted $140 million of claims related to the Phase 1 China tariffs we paid as importer of record. The total tariff refunds we are eligible to receive is $190 million. We did not receive any tariff refunds within the first quarter. Given that context, we reaffirm our guidance and continue to expect comp sales to be in the range of a 2% decrease to flat versus 2025, operating margin to be in the range of 2.8% to 3.4%, and earnings per diluted share of $1.00 to $1.60. I want to extend my gratitude to all Kohl's associates for your unwavering dedication and hard work. Our start to 2026 has been encouraging, and it is entirely due to your commitment to executing our key strategic initiatives and your intense focus on serving our customers. With that, Michael and I are happy to take your questions at this time.
Questions and answers
We will now begin the question-and-answer session. Please limit yourself to one question and one follow-up. If you would like to ask a question, please press *1 to raise your hand. To withdraw your question, please press *1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Mark Altschwager from Baird. Please go ahead. Your line is now open.
Thank you. Good morning. Maybe just to start off, some of the best performance we have seen in a few years. The composition across categories looks more balanced. Can you just talk us through some of the key drivers to the improvement? How much are you attributing to the initiatives taking hold versus the comparison or any competitive disruption? And, relatedly, just what are you seeing quarter to date that gives you confidence that the trajectory can continue?
Yeah. Thank you for the question, Mark. It is Michael. Good morning. I would say that, one, obviously, we are super pleased with the way that the quarter came in. Our focus has been relentless on making sure that we are doubling down on our work around proprietary brands. That has been one of the strengths of the business in Q1, and we certainly see that continuing going forward as we continue to make further investment in that area of the business. What I love about what happened in the quarter for us around proprietary brands was that it was broad-based across women's, men's, kids categories. Juniors, as we mentioned, was up 10% led by SO. We feel like that is something that is really resonating with our customers. One, because we now have the opportunity to offer an opening price point to consumers who are really focused on value right now, which is a big thrust for us in terms of our commitment to delivering value, and also because of the quality of the product. I have said in the past that if we can get the product right here at Kohl's, that puts us in a really good position to win going forward, and our merchant teams and those that feed into the merchant area of our business have been working hard to make sure that the product that we share with our customers is on point. So I feel good about that progress. As far as the outlook going forward in terms of what we see, certainly, commitment to continuing our investment across the proprietary brands and across our entire assortment is important as well. Spring seasonal in Q1 was a big plus for us, up mid-teens, and importantly, that was an indicator of how we fixed some of the challenges that we talked about on our last quarterly call coming out of the holiday time frame. Our inventory is clean, and so we are offering fresh new receipts to customers more and more now and able to actually chase in those moments where product is selling even faster than we had anticipated. So those are a couple of areas that I feel are really important for us. And Jill, I do not know if you want to share any more, but those are a couple areas of importance for us.
I think just on the quarter-to-date performance, one of the things we saw in Q1 is we did build sales as the quarter went on, so these initiatives definitely showed progressive improvement. And as we start Q2, we are, as I mentioned on the call, pleased with the performance. I think we can build on the continued momentum we saw behind these key initiatives, particularly the proprietary brands. Michael mentioned we did transition into our spring seasonal goods earlier, so we are going to do that again with back to school, which we think will also be a benefit in Q2 and Q3.
Thank you. And to follow up, you mentioned the inventory being down 8%, one of the cleanest positions in some time. Can you talk a bit more about the gross margin implications there, clearance markdowns, AUR, AUC dynamics through the year here and just any pockets where you might want to add inventory if the improving trend continues? Thanks again.
Yep. I think you are absolutely right. This is probably one of the cleanest inventory positions we have been in a while. One of the things to look at is our receipts were actually up in the quarter, so some of this is the compare where inventory was last year, but our receipts were actually up 1%, which just shows you the freshness of the inventory that we do have. We did chase receipts where we saw the trending sales. So I think we feel very well positioned in terms of what our inventory looks like. From a margin perspective, obviously, our big key focus here is to continue to deliver value, and that is something that we know is going to be critical for our consumer, particularly that middle- to lower-income customer. So by giving ourselves some room on the margin, we are able to invest back into that value to drive that consumer back to Kohl's and make us the retailer of choice. We know they are going to be choiceful with who they are shopping with, so we want to make sure that we are in that consideration set. We are going to be doing that by making sure that we are providing the value across our store, particularly proprietary brands, but the deal bar that we are showing everything between $9.99, $7.99 and $4.99 is really resonating with that customer. So I would say we feel good saying our margins could be in that flat to slightly down range, even though we are going to have clean inventory as we invest back in value.
Thank you for your question. Your next question comes from the line of Oliver Chen from TD Cowen. Please go ahead. Your line is now open.
Hi, Michael and Jill. A lot of encouraging progress. You called out stores underperformance. Which categories do you think will help drive improvement there? And also, when you spoke to in-stocks and trip assurance, would love details on categories and timing for improving that. I know you have been working on trip assurance, and it sounds like the Kohl's card customer is happier. Do you expect that to continue? And then secondly, this is the first time, I believe, I have heard about Sephora underperformance. Will you expect that to continue? How much time does it take to try to reinvigorate some of those weaker categories? Thank you.
I will take your side first. Sure. I think a lot of questions there, Oliver, so I will try to get in some of them. From the in-stock perspective, in terms of the stores, I think getting back to better in-stock is critical from a store perspective. We have let that customer down by not really fulfilling that trip assurance promise that we have given them in the past. So this inventory position we talked about, even though it is down 8%, our receipts were up 1%. What I would tell you is particularly our apparel areas—so if you think of the areas that you want to have the in-stocks in for those key essential items: women's, men's, and kids—we did see that our depth of receipts coming in are up in the high single digits, and then our choices are down those high single digits. So as the quarter progressed, we talked about our sales getting better. We are also seeing that inventory positioning get better as we enter Q2 in terms of the in-stock level. So I think that is definitely a key category. I think some other initiatives that we have put forward, the impulse up 50% in the quarter, that is definitely a store-based win and we are getting another unit in the basket. That is something that we are definitely seeing win from a store perspective. And I think just the flow of goods being in a chase position and knowing that we have newness setting is a reason for the customer to make more trips back into the store. And then last, I think the investment we are making in our store experience—we started with some proprietary brands being LC and Tech Gear, really elevating that experience. You are going to see us continue that throughout the store, really curating an experience for them using mannequins, kind of shop-in-shops, so giving them some inspiration on what they are buying from a fashion perspective. Clearly, women's getting to flat is kind of a milestone for us. Juniors being up 10% was one of the first places that we actually were able to have an impact. It is one of our fastest turning businesses, so you can kind of see how we established that with juniors being so successful. It is carrying into women's, and we expect that to move into men's in Q2, as we indicated, as an opportunity for us as well. I think from a Kohl's charge performance, a lot of efforts that we have been talking to you about for a year were really geared at getting that customer back. The good news is we had not lost them; we needed them to come in more frequently, and getting them to flat and having a 600-basis-point improvement from Q4 was definitely a sign that we are doing the right things. They overpenetrated in jewelry, petites, and proprietary brands. They looked for value in the store and were not finding that. Now they came back in and saw that we are providing it. So I do expect we are going to continue to see our Kohl's charge customer performing. That will lag a little bit in terms of how we see that move into the other revenue line we spoke to, but we do expect that line to improve throughout the quarter as well. From a Sephora perspective, obviously, we expect that to be more in line with the company this year. We do have a lot of newness coming in that we are excited about, but there are some key categories that we need to make moves on. Within makeup, which did lag, we do have M·A·C coming in and are very excited about the performance of M·A·C. We will roll that out to all stores in the fall. That should be a benefit to us. We continue to lean into fragrance, which is an outperformer for us, and we have seen some newness there—Kayali being one of our top brands that continues to perform. On the skincare side, which did underperform as well, we are seeing some newness coming in there with the Korean skincare efforts as well. So the newness is coming in. I just think it is going to take a little bit more time before that gets back to leading the company, but we definitely expect it to be more in line with the company as the year progresses.
And, Oliver, the only other thing I would add in terms of category focus for us going forward that continues to give us encouragement is footwear. That has been an area of the business that lagged. We see newness coming in the back-to-school time frame and look to the back half of the year for that piece of the business to start to show some improved performance. That contribution will be important to our overall comps as we move forward, so that is one area where we have some really designated focus as well.
Thank you. Best regards.
Your next question comes from the line of Robert Drbul from BTIG. Please go ahead. Your line is now open.
Good morning. Thank you. Jill, could you spend a little more time on the credit business and on the credit trends that you are seeing? And then, when you think about savings in credit and the savings in corporate expense, can you spend some time around what you are doing and what you are seeing there? Thanks.
Sure. I think from a credit perspective, obviously, it all starts with the TAP line, and we really need to stabilize that customer, which this quarter really showed a mark of getting to stability with a flat comp. And so we do like to see that. This customer overpenetrates into proprietary brands; the investments that we spoke to were definitely moving back into proprietary brands, and the chase that we had from an inventory perspective was really to fulfill back into those brands. You saw they were up 6% in the quarter. So definitely, continue to chase from that perspective. With that customer's health, we are seeing, obviously, on the credit revenue line, it is still lagging. We do expect that will improve, but it will just do that over time. A lot of these sales that we talked about this quarter improved month over month, and this customer as well improved each month. So a lot of that came later into April as well. So we should see our other revenue line improve. Obviously, the guide is for it to improve. The health of the customer is great. Payment rates are actually up, interestingly, and our loss rates are down. So the health of that customer, at least from our credit portfolio, looks pretty strong as we move forward through the year. Obviously, we are watching that carefully just given the pressures we are seeing from a consumer perspective, but we are not seeing any pressures into that portfolio yet. In terms of the savings from a credit perspective, I think you are seeing a lot of that in terms of how we are servicing the customer from a payroll perspective. So we continue to employ technology and AI within our servicing efforts, and we are seeing some of those things come through our credit line in terms of savings. Across corporate expenses, I think we are really focusing on driving returns back through our P&L, and so as we are doing that we are trying to look for places that we can save in terms of overhead, and that is really where I think a lot of these corporate expense savings came through. It was across all areas of the corporate expense lines, but really trying to stay disciplined so we can invest that back into sales-driving initiatives. For example, we did invest more into marketing in the quarter to help drive the momentum that you did see throughout the quarter.
Your next question comes from the line of Paul Lejuez from Citigroup. Paul, please go ahead. Your line is now open.
Hey. Thanks, guys. Sorry if I missed it, can you talk about the impact of tax refunds that you think might have helped you in the first quarter, if at all? Maybe also quarter to date, if you can give a little bit more detail about what you are seeing and if you think tax refunds might still be playing a part. And then also, bigger picture, you talked about proprietary brands across the call several times. I am curious where we are heading in terms of that private brand penetration for this year. What is built into your guidance and assumptions and how does that percentage penetration compare to history? Are we getting close to a peak in terms of what proprietary brands will represent of the assortment? Thanks.
Great. Paul, thanks for the two questions. As far as the tax refunds are concerned, your question there: interestingly at Kohl's, that does not actually correlate well with our business. So in terms of any impact or upside that we would see from increased dollars in the marketplace from a tax refund standpoint, we do not see that as pronounced as you might see with other retailers. At the same time, we love the fact that there is more money in the market. We always love actually more money in the hands of consumers. So to the extent that there has been any impact, we certainly would like to see that. As far as proprietary brand performance is concerned and where it is headed, we have said before that we are going to let the customer take us where we need to be in terms of the overall mix. We do not have a percentage target that we are necessarily running to. And as you know, with the addition of Sephora over the last four or five years, we are never going to get back to some of the percentages that you may be familiar with at Kohl's in the past in terms of the proprietary and national brand mix. National brands are still very important and always will be, and that is part of the formula here at Kohl's: being able to offer a rich national brand assortment along with our proprietary brands. But particularly against the backdrop now of the economy that we are working through, our proprietary brand portfolio is really resonating with customers. We said they are up 6% in Q1. We see that continuing going forward, and we think that is going to be an important part of our focus. We will continue to place more inventory in that space with proprietary brands, and we will really let the customer take us to the right mix.
Got it. Thank you. And, Jill, any help you can give on the free cash flow assumption for this year?
Yeah. I think we continue to expect our operating cash flows to be around $900 million. We guided our CapEx around $350 million to $400 million, so I would say you are going to be about $500 million to $600 million in free cash flow for the year. And that does not assume any tariff refund. Correct, there is no tariff refund in any of the estimates that we have given today. We talked about the fact that we did apply for those, but we have not received those refunds yet, so those would all be on top of the numbers that we have guided today.
Got it. Thank you. Good luck.
Your next question comes from the line of Michael Binetti from Evercore ISI. Please go ahead. Your line is now open.
Hey, guys. It's Carson on for Michael here. You highlighted several future opportunities: editing the men's assortment, bringing in innovation on footwear and Sephora. Could you expand a little more detail on what each of those entails, what we should be watching out for on our store visits, and the timing of each of those? And then I have a follow-up.
So from a Sephora standpoint, what you should be looking for, Carson, as we move forward—and Jill outlined this in her commentary—is that we will have a number of different rollouts as we continue to progress through the course of the year. M·A·C is in 850 stores currently, and we will roll it out to the balance of the chain of stores throughout the rest of this year. We will continue to focus on making sure that those brands deliver for us going forward. From a footwear standpoint, we are focused on some of our big brand opportunities that we have with partners like Nike and Skechers, particularly as it relates to focusing on the back-to-school time frame, and that is where you will see more effort from us in the back half of the year in terms of making sure the footwear delivers for us going forward.
Got it. And then maybe on the balance sheet, you repurchased $50 million of debt in the quarter. I can hear the growing confidence on the balance sheet. Can you walk us through your thoughts on capital allocation and at what point does it make sense to turn on share repurchases?
Yeah. Thanks. First, our four priorities are always going to be investing back in the business. That CapEx range of $350 million to $400 million supports things like the Sephora rollout to all stores, which has been paying back, and continuing to invest back into Sephora and our store experience—really elevating that experience. Those will be the key places we invest this year. We continue to fund the dividend; that is our second priority, so really maintaining that dividend this year. Then, focusing on deleveraging and taking advantage of opportunistic debt repurchases. We made purchases in Q4 and Q1 at a nice discount, and we will continue to look for those opportunities. I would say running the business around the $700 million of cash that we ended the year with is kind of the right place for us. So as we really stabilize from a cash positioning perspective, and also our performance starts to show growth—both in expansion of EBIT as well as profit—I think that would be the point when we would start considering putting a share buyback program back in place. But first and foremost, it is going to be stabilizing the balance sheet, maintaining that cash position, and making sure that we can invest back in our business, particularly in these initiatives that we see as opportunities to continue to show growth and get us back to growth before we would then put in a share buyback program.
Great. Thanks for all the color.
Your next question comes from the line of Blake Anderson from Jefferies. Please go ahead. Your line is now open.
Hi. Thanks for taking my questions. I wanted to ask on the promotional optimization and simplification initiative. In your targeting process there, are you making sure that you offer value to customers while also optimizing your margin and AUR across both in-store and digital? I know that has been a focus. Curious how you see that as a potential margin opportunity as well.
Yeah. I think this has definitely been a focus that we've had and spoken to for a while, and I think it is really that mix of pricing and couponing to make sure that we are driving consumer behavior. A lot of the things that we have done in the past to simplify—we have gotten rid of stackable coupons. We tried to make it quite easy so you could get to an end price and understand what you are getting from a value perspective. A lot of things that we are starting to look at today are more around personalization and targeted offers to drive consumer behavior. For example, we know our Kohl's charge customer is much more responsive to a coupon—how can we target that coupon? We have also used more real-time offers, particularly in the digital channel, to get people to add more to basket or get a higher conversion rate. Overall, we are always using elastic modeling to understand where that price needs to be to drive behavior. So it is a push-pull perspective in terms of what we are looking at. I would say AUR for us has been relatively neutral over the last several years. You have seen our ATV flat; AUR might have been slightly up with UPT down, and then UPT goes up with AUR slightly down. This quarter, our ATV was slightly up, which did offset traffic being down. That was more a factor of our regular selling price happening versus a little bit more clearance last year. There is always that balance that we are looking at in terms of the right price versus driving consumer behavior. I think what we are really focusing on is doing that in a much more targeted, personalized manner going forward versus just a general offering with many stacking options. That has been working for us, which has allowed us to expand margins in the past. Obviously, this year, focusing on value, we want to make sure that we are the retailer of choice for that customer and doing that through delivering more and more value. So those efforts will cause some pressure on margin as we invest in value, even though we have good news coming out of inventory management and proprietary brands and a digital business that is lifting us; digital does take away some margin through shipping costs, and the rest we want to invest back into value to attract customers into Kohl's.
That is really helpful. And then on that last point on new customers and AUR, I wanted to drill down a little bit on the private-label 6% comp. Can you talk about AUR versus units there? Are you seeing new customers for your private-label brands? I know that is very strong with your core customers, but curious how you are seeing maybe new customers' interest in private label. And then any update on your national brand assortment—how are you thinking about any changes there?
Sure. I can start and let Michael weigh in. From a private-label perspective, it definitely is our opening price point, as we said, and we had been void of opening price point over the last couple years. So bringing this back in really introduced another level of value for our consumer. It is something our core customer had come to know and love and really did miss when we did not have it. But I would also say given the value proposition and the quality of this product, we also see it attracts new customers, particularly in today's environment when they are looking for a great deal and great value. I think that is what our proprietary portfolio really offers to them. We spoke about FLEX in our active brand across all lines of business doing incredibly well. It is a great value at great quality, and we are seeing that resonate, which is why we are expanding it to kids in all of our stores. It has done well in men's and women's across customer cohorts. Lauren Conrad has been another standout for us in women's. We have celebrated the SO brand across our juniors business, which also benefited from the adjacency we had of moving juniors across from Sephora, and Sephora has been a driver of new customers for us, so they have cross-shopped into our juniors SO brand as well. So I think it definitely brings in and fulfills all customer types. It helps us reestablish loyalty with our core customer and gets them back to stability from a flat comp and also fills the need that new customers are looking for from a value perspective.
In terms of national brands, what I would point to is some of the elimination of redundancy that we have seen in the national brand assortment and a focus on some of the key partners we have, like Nike and Levi's. Those are the areas where we are really leaning in with national brands to make sure they complement the proprietary brands and achieve the appropriate mix going forward. We are excited about the mix and the performance in Q1 and will continue to focus on that while leaning into proprietary brands given the current economic backdrop. Our customer is making trade-offs, and the combination of sharp price and quality/style is what we believe will win.
I really appreciate the detail. Best of luck for the rest of the year. Thank you.
Thank you for your questions. Your final question will come from Brooke Roach from Goldman Sachs. Please go ahead. Your line is now open.
Good morning, and thank you for taking our question. Wanted to follow up on Blake's question earlier on margins. Jill, can you spend a little bit more time talking through your forecast embedded for gross margin for the year? It sounds like you might have a little bit of additional tailwinds coming from stronger private brand penetration, but offsetting this might be a little bit stronger digital penetration. Any help you can give on the moving pieces between fuel, promotions, pricing, value, tariffs, and product costs would be very helpful. Thank you.
Great. Thanks, Brooke. You got it right. The biggest thing is, overall—we saw this in Q1—we will benefit from the tailwinds of our proprietary brands. Being up 6% is definitely a benefit to margins for the quarter, and we do expect those brands to continue to outperform. However, digital was up 4%, and we do expect that channel to continue to grow for us, which does have some headwinds to margin with the cost of shipping. We have fuel embedded into the guidance that we gave you at the current rate. That will be a headwind to margin from an inbound transportation perspective as well as SG&A as we think about transportation costs moving goods from our DCs to our stores. Also considered in the guidance is the cleanliness of our inventory. We did have higher regular selling in the quarter. We expect that to continue given that our inventory is clean and we are running more of a chase model, accelerating receipts into the quarters, and we expect that to continue. The offset to that is promotional activity. We know value is core to what our customer is looking for. These customers are choiceful. We need to make sure Kohl's is in their consideration set, and that will be done through value. We serve a middle- to lower-income customer, so this is very important. We are going to make sure we continue to lean into that. So those become the balancing items and is how you arrive at the guide of flat to slightly down for the year, giving us some room. In Q4, one of the things we talked about was not having breakthrough pricing during key holiday moments, so we will make investments in those key holiday moments as well. When you bring these things together, that is how you land on the flat to slightly down guidance for gross margin.
Great. And then just a follow-up for Michael. It's nice to see the improvement in the Kohl's charge customer trend this quarter. Are you planning on making any additional changes to the way that you communicate with that customer for the remainder of the year, whether that is additional couponing, changes in promos, or other types of targeting that you think could drive sequential acceleration from here in that trend?
Yes. Thanks for the question, Brooke. Yes, we will continue to double down on making sure we are doing things to continue to bring that customer back to the business. As Jill mentioned, we did not lose that customer; we lost a bit of their wallet share. With the combination of bringing more brands back into coupon eligibility and targeted offers, those are the things that are helping to bring that customer back. This focus on proprietary brands has been one of the accelerators that brought the Kohl's charge card customer back to our business and having that be flat for Q1. We will continue to focus on that area to maintain and improve performance.
Great. Thanks so much. I will pass it on.
We have reached the end of the Q&A session. This concludes today's call. Thank you. You may now disconnect.