Kohl's Stock

Hello, everyone. Thank you for joining us, and welcome to Q2 2026 Kohl's Corporation Earnings Conference Call. [Operator Instructions]. 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-K and as may be supplemented from time to time in Kohl's other filings with the SEC. All of which are expressly incorporated turn 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 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 So if you are listening to a replay, it is possible that the information discussed is no longer current, and Kohl's assumes no obligation to update such information. With me this morning are Michael 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 today for Kohl's Second Quarter 2026 Earnings Conference Call. Our second quarter performance reflects the continued progress we are making against our key initiatives, leading to another improvement in our comparable sales trend. In addition to the top line performance, our team demonstrated strong operational discipline.

By maintaining this rigor around our expense and inventory management, we have substantially improved our balance sheet and cash flow generation. The solid financial foundation we have built over the past year is enabling us to invest in the business, drive value for our customers and return capital to shareholders. We are operating in a challenging macroeconomic environment where our customers are experiencing persistent financial pressures from inflation in their everyday expenses like gas and food. While their day-to-day priorities may change, the consumer is consistently looking for value, a compelling assortment and an inspiring experience. The work we have underway is focused on addressing each of these customer priorities.

And as we look to the remainder of the year, we expect this economic backdrop to continue. We believe that our healthy balance sheet will provide us meaningful support and flexibility to navigate through this environment to continue our journey of progressive improvement. Before I get into more detail, I would like to extend my sincere gratitude to our entire Kohl's team for their efforts over the past quarter. While this quarter marks another small step in the right direction, we know there is more work to be done. Each day, we have the opportunity to show up for our customers and I'm confident that the work we are executing is leading us in the right direction.

Now let me share some additional highlights from our performance. We are pleased to see continued positive momentum across key areas of our business throughout the second quarter. First, our loyal poles card customer showed ongoing progress and delivered a sales increase of 1% in the second quarter. Over the past year, we implemented multiple targeted actions to successfully reengage these individuals. This milestone represents the beginning of our journey, and we see further opportunities to deepen our engagement with this key customer, which represents our most productive customer base. Second, our proprietary brands increased 3% in the second quarter.

Over the past year, we have made significant progress enhancing our proprietary offerings, receiving strong positive customer response, we have driven major improvements by delivering exceptional value and increasing inventory depth by 6% to support better product availability. Third, we also made deliberate progress in transitioning our seasonal goods earlier, a strategy that drove positive sales in the spring and maintained a flat performance in Q2.

Building on this we set our fall seasonal assortment in July to effectively capitalize on the back-to-school window, which has already provided a strong start to the season. We plan to continue this proactive approach as we head into the holiday season, positioning us to capture demand early and maximize momentum throughout the remainder of the year. Next, I would like to give you an update on the progress we are making against our 3 key initiatives we outlined at the beginning of the year. This work is rooted in putting the customer at the center of everything we do.

Let me begin with our first initiative, offering a curated and more balanced assortment that fulfills the needs of all customers. Through enhancing assortment clarity, fulfilling customer demands, and improving product relevance, we are continuing to refine our offerings. This strategic focus enabled sales improvement across the majority of our lines of business. Home had the strongest performance this quarter, delivering sales growth of 1%. The strength in home was driven by decor and small electrics. Home Decor benefited from our adjustments in merchandising efforts to deliver more choices in this category with choice count receipts up over 10% to last year.

We saw particular strength in our Americana Decor as we celebrated America's 250th anniversary. As we head into the fall, we are investing into more choices for our fall and harvest Decor assortment. Small Electrics continue to benefit from newness and innovation in national brands such as Shark and Ninja. We also saw strong performances from KitchenAid and GreenPan. We anticipate further opportunity in this category in the back half of the year, as we have strong receipt flow this year after being limited in our buys last year due to tariff pressures.

Our Bedding and Bath categories were flat for the quarter. with strength coming from our proprietary brand offerings of the Big One and Mariana. We also saw solid growth in our Mingle and co brand within our tabletop category. Now let me move to our kids business, which was flat in the quarter. Toys continues to be strong with a double-digit sales increase led by LEGO, K-Pop Demon Hunters and our value towers. To support the high-volume holiday season, we will continue driving growth in toys by expanding our inventory investment.

Additionally, in Q2, we launched value-driven family fan zones featuring localized to team apparel and accessories. We saw strong traction around the World Cup, and we have recently transitioned these spaces to showcase our NFL licensed products ahead of the new season. We also saw strength in our private label brands and kids. We rolled out our popular Flex brand to all stores in June and initial results are exceeding our expectations. Our SO brand generated positive pops in the second quarter with growth in our young girls category.

In addition, Jumping Beans built momentum across the quarter, supported by the July introduction of our baby line and our ongoing emphasis on the brand's exceptional value proposition. To build on our infant and baby apparel business, we are expanding our offering of baby gifts and accessories through our Babies RS partnership. We recently rolled out in-store fixtures across all locations to highlight our top-selling baby gifts and accessories, driving solid second quarter growth. We're also completing 56 additional BabiesRUs shop build-outs in September.

Total accessories also outperformed the company with a flat performance versus last year. Excluding our Sephora business, accessories increased mid-single digits. This performance was driven by newness and impulse and jewelry. Our Impulse business maintains strong momentum, supported by accessible pricing and frequent product refreshes that deliver new, discoverable assortment. Key drivers include trending items like needle squishies, alongside everyday essentials, such as Toy trees and sunscreen. Jewelry continues its strong performance, delivering a mid-single-digit sales increase in the second quarter. We saw strength in our boxed giftable, personalized and sentiment themed as well as our fashion jewelry.

Building on the strength of this category, we are rolling out an additional 350 fine jewelry case lines in the fourth quarter, bringing the total store count with case lines to 549 stores. In addition, 320 stores will be receiving elevated fashion jewelry fixtures by November. These fixtures will highlight newness and inspire customers to complete their look with fashion accessories. Our Sephora at Kohl's business faced headwinds this quarter with sales down 4%. While we continue to see strong customer demand for newness, the top line performance was pressured by the impact of expanded distribution for several of our key brands.

Breaking down the performance by category. Fragrance remained a strong driver, anchored by new brands like Dolce and Gabana and YSL, while haircare also outperformed the company led by Way and Kerastase. In makeup, we continue to see strong traction from existing brands like Charlotte Tilbury, Makeup by Mario and Merit as well as Newness buoyed by the launch of MAC. However, this growth was dampened by declines in brands with expanded distribution. Finally, Skin Care had a challenging quarter. as we lapped several major launches and have yet to reach scale from existing new launches in K-Beauty and body, including brands like Salt & Stone, which is already off to a strong start.

We recognize that in addition to driving our core offering, this business is also driven by newness and innovation, and we are excited about our upcoming category launches. In fragrance, we are introducing Khloe Kardashian and Givenchy alongside expansions from KAYALI and Jo Malone. This will be supported by new fragrance towers in 250 stores this November. In Hair Care, we are launching ME, Crown Affair Panov and from labs, while our skin care category will debut ever eaten, topicals and ultraviolet.

Furthermore, we're rolling out holiday outposts in 130 stores, building on our strong gifting category as our gift sets continue to resonate well with our customers. And finally, we are continuing to maximize our travel and trial assortment to attract new customers through our Q lines, maintaining a focus on delivering value. While we're excited about these actions to implement newness into our Sephora Kohl's business, we want to be realistic in our expectations for the remainder of the year. We expect the softer performance we've seen year-to-date to persist until we can reach full scale with new brands and cycle through the headwinds from expanded distribution from a few of the bigger brands.

Turning to our women's business. Performance moderated in the second quarter, finishing down 1.5%. Despite the broader slowdown, we continue to see standout strength in our juniors department, which delivered another 10% increase. This momentum was driven by exceptional customer response to our SO brand and a successful infusion of newness throughout the assortment. Active also outperformed the category led by Nike, which saw its largest gains of the year alongside sustained strength in our proprietary tech gear and Flex brands.

Furthermore, our denim business returned to positive growth, and we are well positioned to build on this momentum as we transition into the critical back-to-school season. These gains were partially offset by underperformance in our intimates category. Additionally, growth in our proprietary brands slowed during the period. This was primarily a result of higher-than-anticipated sell-throughs early in the quarter, which left us inventory constrained and unable to effectively chase back into the business. We've taken decisive action to address this for the back half of the year.

Our new fall proprietary receipts are already off to a strong start, and we have made a significantly larger inventory investment to ensure we are better positioned to meet demand through the remainder of the year. Our Men's business improved by 100 basis points from the prior quarter, now running in line with the total company. This category continues to work through assortment edits to reduce redundancy and improve clarity in our offering. Men's is seeing strong customer engagement with proprietary brands which increased by high single digits during the second quarter.

Key growth drivers include tech gear and Flex with Flex benefiting from the successful debut of its new golf apparel collection. The dress category also continues to be a strong category for us, driven by both proprietary and national brands from Apt. 9 and Hager. This was offset by softness in our active national brand business. Although footwear continues to trail overall company performance, the category delivered the most significant sequential gain with comp performance accelerating approximately 500 basis points compared to Q1. Momentum built across the quarter as we introduced fresh inventory and enhanced depth in core active brands like Nike and Adidas.

Additionally, we saw strength in our Kids footwear business running up mid-single digits, which gives us confidence in our back-to-school assortment. Looking ahead, we are reinvesting in women's boots to capture the demand unfulfilled last year because of tariff constraints. We anticipate this category will serve as a positive driver in the fall. Overall, we remain on track for further category gains in the back half of the year. We are also further curating our product assortment by expanding our marketplace business. This year, we are more than doubling our selection of marketplace products and vendors driving relevant category and brand expansion, while early in its growth Full Marketplace is becoming a more meaningful part of the business, increasing 88% this quarter.

This capability creates an opportunity to attract more customers by expanding assortments to support seasonal transitions invest into white space categories and bridge inventory gaps to complement our core assortments. Now let me move to our second initiative, reestablishing Kohl's as a leader in value and quality. We know our customers remain under financial pressure, and they are becoming increasingly choiceful, actively seeking value in every purchase.

Throughout the past year, we have actively refined and differentiated our value proposition to meet these expectations by expanding coupon inclusion, testing new promotional offers and investing in our opening price point proprietary brands. These strategic enhancements are designed to deepen our engagement with our existing customer base while simultaneously attracting more new customers. Throughout the quarter, we made further strides in optimizing our pricing and promotional strategies.

The successful testing of new promotional formats, including VIP cardholder events, fulls deal days and personalized. Just For You offers, which generated a positive response and increased productivity with our Kohl's Card customer. Leveraging these insights, we plan to broaden our targeted pricing initiatives and promotional events to offer even greater value to our customers. Our proprietary brands continue to serve as a cornerstone of our value proposition. We are making investments focused on enhancing our inventory depth and assortment elevating the in-store experience to better showcase our collections and scaling our marketing support to ensure these brands remain top of mind. Our entry price point brands, including Sonoma, Tech Gear and the Big One, continue to resonate with our customers who are focused on value. We believe these targeted actions will continue to resonate with our shoppers and bolster our competitive position.

Additionally, we continue to lean into our [ Buy Khol ] marketing campaign we launched earlier this year. In Q2, we tested a Buy Khol promotion to deliver more engagement and visibility with these brands, and we are pleased with the start of this campaign and the awareness it is drawing to our proprietary brands that you can only find at folds. Moving forward, we will continue to fund this campaign, leveraging a cross-channel marketing approach, utilizing a wide range of influencers on social media. As we look ahead, we are finding additional ways to feature value in our product offerings.

A good example of this is our back-to-school assortment, which highlights thousands of products all under $25 price points. Building on the momentum of our deal bar and toy tower concepts in Q2, which feature items priced under $10, these offerings effectively capture incremental basket growth with trending toys seasonal gifts and home decor. This leads to our third initiative, delivering a frictionless shopping experience across our omnichannel platforms. delivering a seamless inspiring experience whether in-store or online remains a critical component of our strategy. Product relevance and consistent in-stock levels are the primary enablers of this experience and we are sharpening our focus on both.

We are strategically investing in inventory depth for our apparel, increasing our depth by low double digits, while simultaneously reducing our overall assortment choices by high teens to improve clarity, simplify the shopping journey and deliver trip assurance. Additionally, we are refining our allocation processes to provide better product distribution especially in our lower-volume stores that have previously faced limitations in inventory and selection. By getting the right inventory to the right place, we are confident this will drive improved engagement and productivity across our entire fleet.

To further support these inventory investments, we are leaning into our in-store experience and marketing efforts. We will be completing our elevated in-store experience for our Buy Khol brands this fall. You will see this across all stores elevating key brands like Sonoma, LC: Lauren Conrad, Flex, so and more. This experience is designed to inspire our customers with full outfitting concepts on manikins, improved signage and way-finding to the brands they love and find your fit sizing charts to leave them to the exact styles and fits they're looking for.

Alongside these store enhancements for our proprietary brands, we're also investing in upgraded experiences for key strategic partners Nike and Levi's. The elevated product displays will showcase fresh looks and inspire our shoppers. By building a more engaging environment that Spotlights key brands, we empower customers to spend their money on the choices that suit them best. Last, to meet our customers wherever they prefer to shop.

We're also investing in our digital capabilities and enhancing the omnichannel experience. Store pickup has increased meaningfully and now represents over 20% of digital demand reinforcing the advantage of using our store network to give customers greater speed, convenience and choice in how they shop with Kohl's. For customers looking for same-day delivery, we continue to scale Instacart. And in July, we recently launched a new partnership with DoorDash to capture incremental demand and new customers. We are also encouraged by the early signals from Agentic Commerce.

Adoption is still small, but customers who engage with our AI shopping assistant are showing stronger conversion and higher revenue per visit. We see significant opportunities to expand AI-assisted discovery gifting and purchase confidence over time. The modernization of our digital experience is well underway with most core customer journeys now on our new platform. Early results show faster page performance and improved customer behavior through product pages, cart and check out.

We are also continuing to build capabilities that reduce friction, including flexible payment options such as Klarna ahead of holiday. Collectively, we believe these investments will benefit us over the long term to improve the experience for our current customers and to help us attract new customers. In closing, we have a lot of great work currently underway and more opportunity lies ahead of us. The second quarter proved to be another step in the right direction, and I'm confident in the direction we are heading.

Before I hand the call over to Jill, I would like to take a moment to welcome Elliott Rogers to Kohl's as our Chief Operating Officer, who will join us on September 9. Elliott brings more than 20 years of leadership experience in retail and large-scale operational roles, has helped brands navigate through change, embrace innovation and drive results through strong execution. I'd also like to congratulate Brian Parisi who will be stepping into the newly created role of Chief Customer Officer. Bringing marketing and digital experience under one leader will help foster a greater focus on the entire customer life cycle, connecting our brand positioning and customer experience. As we make important progress across the business, we are also taking meaningful steps toward building for the future. I look forward to the contributions Elliott and Arion will make as we drive our business forward. With that, I will now turn the call over to Jill.

Thank you, Michael. For today's call, I will provide additional details on our second quarter and year-to-date results, an update on our capital allocation and provide commentary around our updated fiscal year 2026 guidance. As you heard from Michael, Q2 is another point of progress against our key initiatives. Our comparable sales declined 0.9% in the second quarter, driven by a slight decline in both average transaction value and transactions. Year-to-date, our comp sales declined 1%.

Our store sales continued to show sequential improvement or down 2%, while our digital business increased 2.8% in the quarter. As Michael mentioned, we saw the majority of our lines of business improved their sales trend from the first quarter with home, kids and juniors leading the company. In addition, our Kohl's charge performance was up over 1% for the quarter and 0.6% for the year. Our marketplace business continues to grow, up 88% compared to last year, and is becoming a more meaningful contributor to our overall performance.

Including the marketplace GMV growth, our comparable sales would have improved by 65 basis points and then down 0.2% in Q2. For the year, Marketplace increased 75% and would have improved our year-to-date comp by approximately 60 basis points to down 0.4%. Other revenue, which is primarily made up of our credit business, declined 1% in the second quarter and 5% year-to-date. This represents a notable trend improvement driven by the stronger Kohl's Card sales over the past couple of quarters.

Gross margin improved 305 basis points in the second quarter and 162 basis points year-to-date. In Q2, we received approximately $150 million of tariff refunds of which approximately $100 million benefited our cost of merchandise sold. A portion of the refund was recorded as a reduction of inventory, shared with our vendor partners and invested to deliver greater value to our customers. Excluding the impact of the tariffs, our growth have increased approximately 5 basis points, in line with our guidance. SG&A expense declined 0.9% in Q2 and 1.3% year-to-date. Our Q2 decline was mainly driven by expense savings across stores, corporate and credit. Depreciation expense was $173 million in Q2 and $347 million year-to-date.

Interest expense was $63 million in Q2 and $126 million year-to-date. In the second quarter, we retired an additional $63 million of our long-term debt at a discount of $6 million through open market debt repurchases Year-to-date, we've repurchased a total of $113 million at a discount of $15 million. Our tax rate was 23%. This resulted in net income of $151 million in Q2 and or $1.28 earnings per diluted share. Year-to-date, our net income was $137 million or $1.18 earnings per diluted share.

Moving on to our balance sheet and capital allocation. We finished the second quarter in significantly better cash position compared to last year. Our cash and cash equivalents were $821 million, and we continue to operate the business with no borrowings on our ABL. This represents over a $700 million increase to our net cash position when compared to last year. This strong cash position gives us the ability to invest in our key initiatives to drive the business and deliver value to customers. Inventory decreased approximately 3% compared to last year. We continue to invest in our proprietary brand inventory while reducing redundancy to bring better value and clarity to our customers.

Our receipts were up 7% in the quarter to support trending categories such as toys, jewelry and juniors. We also put forward fall seasonal receipts to capture early demand for back-to-school. In addition, our choice count was down mid-teens, while our debt increased mid-single digits, helping drive increased trip assurance for our customers. We now anticipate inventory to be down low single digits for the year. Now I want to provide an update on our current capital allocation priorities. Our first priority will always be to invest into our business. Capital expenditures year-to-date are $146 million. Prioritizing investments in our store fleet, including expanding impulse lines, deploying modernized store devices and self checkouts as well as general maintenance projects. Additionally, we are supporting our digital business by investing in site experience, automation and AI. We continue to expect our full year capital spend to be approximately $350 million to $400 million.

Second, we will continue to return capital to shareholders through our dividends. In Q2, we returned $14 million to shareholders through our quarterly dividend. And as previously disclosed, the Board on August 18, declared a quarterly cash dividend of $0.125 per share payable to shareholders on September 23. Third, we will continue to evaluate the market for opportunistic debt repurchases. Year-to-date, we have repurchased $113 million of debt at a discount of $15 million. The efforts to deleverage over the last 3 quarters allowed us to reduce our long-term debt to its lowest level since 2007. And last, driven by our strong balance sheet and the confidence in our path forward, we are pleased to increase our capital returns to our shareholders.

Under our existing $3 billion board authorization, we are resuming our share repurchase program with plans to buy back approximately $100 million in stock in 2026. This represents our first buyback since 2022 and underlines our ongoing dedication to enhancing long-term shareholder value. Now let me provide some details on our updated guidance for 2026. Our second quarter results reflect the continued progress we've made against our initiatives and demonstrate the ongoing discipline with which we operate the business.

While we are encouraged with our results, and we believe our strategic initiatives will allow us to make further progressive improvement throughout the year, we want to be mindful of the current macroeconomic environment we are operating in. We continue to see choiceful discretionary spending from our core low to middle income customer as they remain financially pressured. The realization of approximately $150 million of tariff refunds has provided us with even greater financial flexibility. We are strategically prioritizing the reinvestment of these proceeds directly into our core business initiatives to better serve our customers.

We are deploying this capital to uphold our commitment to value while simultaneously strengthening our inventory position to support our opening price point brands. In addition, we are investing in media to deepen customer engagement and increasing store payroll to build on positive results from our recent staffing tests, which demonstrating meaningful improvements in customer satisfaction and sales productivity. Our updated guidance does not include the impact of any future tariff refunds. Given that context, we are raising our annual guidance and now expect comp sales to be in the range of 1.5% decrease to flat versus 2025. Adjusted operating margin to be in the range of 3.5% to 4% and adjusted earnings per diluted share of $1.80 to $2.40 and which includes tariff refund benefit of approximately $0.65.

Before we move to Q&A, I'd like to extend my sincere gratitude to every polls associated for your continued hard work and dedication. Your commitment and passion to serving our customers and executing against our key initiatives is helping create a stronger Kohl's with many exciting opportunities ahead. With that, Michael and I are happy to take your questions at this time.

[Operator Instructions]. Your first question comes from the line of Chuck Grom with Gordon Haskett.

You've seen some nice improvement in your Kohl's charge comp over the past 4 to 6 quarters from down mid-teens to positive 1% here this quarter. Historically, what is that just about the trajectory of the business, particularly in your proprietary brands, but also in your women's business.

What I would say, first, we're really pleased with the rebound of our Kohl's Charge customer. I think it reflects how they've reacted to a lot of the changes that we have made in the store, particularly around our proprietary brand and adding back key categories like jewelry and petites as well as the coupon inclusions.

I think when we look at the Kohl Charge Card, we know they never stopped shopping us. They just went elsewhere to find some of those items that weren't substitutable like jewelry and petites in our stores. So as we brought back in the brands that they've known to love for us, which was proprietary brands, they've reacted quite well, and we've seen that work. Obviously, juniors as a standout, so doing incredibly well.

But juniors, I think now is on its third almost double-digit positive quarters of comps. So really a sentiment from that customer, they're reacting to that assortment. From a women's perspective, I'd say they over penetrate their proprietary brands, about 70% of our women's apparel and our cold charge customer makes up a lot of that share as well. So bringing those items back into the store, they've reacted incredibly well.

In fact, Women's, I think you heard on the call, we had higher sell-throughs than anticipated and just couldn't chase into that business fast enough. The good news is we did accelerate our fall receipts and we're feeling really good with that business as it exited July and into August. So I would say that Kohl's charge rebounding is definitely a function of the efforts that we had a foot, but also them reacting to the great products that we're not showcasing in our stores.

The only other thing I would add to that, Chuck, would be that it also bodes well for us in looking out into the future about the projections for our credit revenue, right?

Exactly. Which you saw, I think, in credit revenue only being down 1% in the quarter. I'd say now we expect that more to be probably with the company top line versus lagging just given the quick rebound we saw for this customer.

Okay. You got to my second question on the credit revenue. And then just on the comp in the quarter. Any color on the cadence phasing throughout the quarter. It sounds like July may be strong, but just can you confirm that? And any thoughts on back-to-school. And as we think about the back half of the year, you're your guide does imply a little bit of an acceleration on the stack. Can you help us think about the trajectory of the phasing here in 3Q and 4Q? And I guess what gives you the optimism that you can improve on a stock basis. So a multipart question there.

Sure, I can start. I think for quarterly comps, there was a lot of shifts in the calendar this quarter, particularly around deal days and the Prime Event. What I would say is we feel very good with how we exited July pulling forward those back-to-school receipts definitely gave us that momentum. We were able to capture that market share. And as that moves into August, we're seeing strength out of sweaters fleece, denim.

Even you heard Michael on the call talk about footwear improving 500 points. We're seeing our active footwear rebounding, particularly in performance and any newness that's setting in the floor. So I would say we feel good with the momentum that we brought out of July. We're building that in August as well. As we approach the back half of the year, I think what it brackets is the guide for the back half would be flat to down to. So kind of very similarly to how we approach the guidance for the front half of the year.

We do like our initiatives. We see the progressive improvement happening I think particularly around inventory, we're investing back into inventory. We talked about that being in a lot of our low-volume stores. We've done a lot of testing about that inventory in the stores, making sure it's productive and really saw a large movement in a sales perspective by putting in some of those basics, having that depth restoring that trip assurance. So those are things that give us confidence that we can build. However, as I mentioned, we're operating really in certain times, and we have a lot of pressure on our customer from a macro perspective.

So I kind of look at it as though we have really run a one in the front half. That's the midpoint of the guide. That means we do nothing different. But if the initiatives continue to progress, as we anticipate them to, that's how you then get up to the flat. And quite honestly, I would say that would build into I mean I think Q4 for us last year was a little disappointing so that we would expect to do a little better there. We know -- we fell short with some of our fall seasonal product. We know we are limited in some of our bids, particularly around home decor, boots and small electrics, all in which are doing much better as we've seen in the front half of the season and are excited about even the start to harvest into core in the back half of the season. So we would expect to be flat to exiting positively from the top end of the guide as we close out the year.

And just maybe one other thing to add two other things to add. In terms of the category performance that gives us confidence that the back half of the year has some upside potential. We think about things like team apparel. We used to have that here at Kohl's. It's coming back into stores. Joe mentioned small electrics and boots that were impacted by tariffs last year, that's something we'll overcome. It's not a challenge for us going forward. We're also going to be rolling out, as I'd mentioned, Babies"R"Us stores to about 60 more stores roughly.

And we're rolling out also jewelry, both in fine and fashion expansion as well. across several hundred stores. So those things certainly bode well for us to believe that the holiday season and the balance of the year have some greater potential even in the performance that we've shown year-to-date.

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

I wanted to start off following up on the proprietary brands. In the prepared remarks, you flagged the slowdown due to inventory constraints I'm curious, roughly how much sales do you think that cost you? And then just any more color you can give on what that trend has looked like as you've chased into the fall receipts?

Sure. I think for proprietary brands, Mark, we're actually quite pleased. We were still up 3%. So I think this consistently shows us putting back positive comps on the board. Which, of course, as this matures, is going to be not at the highest level of growth that we've seen. But we think this is really a drumbeat that we can continue to prove in to. I think women's is probably the one category that we lagged in and that was you had seen kind of top line and took a little bit of a step back and it really being bifurcated between junior still up 10%, but in that core women's business, we just had stronger sell-throughs.

As you know, we approached the year from a conservative perspective from an inventory as we were making these changes. But really saw consumers react quite well to the changes we're making. So brought forward some fall receipts, like I mentioned, sweaters, fleece and denim being in a great denim cycle, seeing that both on the proprietary side, but also in Levi's on our national brand side as well. So I think we feel very well set as we approach the back half of the year. But I would say, if you kind of look at where women took a step back, that would say was mainly a measure of the inventory that we didn't have in stores.

And to follow up also, Jill, on the EPS guide. The range moved up to $0.80. The tariff refund was 65% of that. Can you talk us through the rest? I mean any of that operating versus what are the below-the-line impacts with interest expense and share count. And did anything change with respect to your back half assumptions on the gross margin and SG&A puts and takes?

Sure. What I would say overall is credit revenue, obviously, was a standout for the quarter, and we expect that to get better. So high level, that's probably the biggest difference between the guide with tariffs taking in the $0.65, and I would say, credit revenue being the remainder. There are some other puts and takes in the P&L. We talked about on the call, we are going to continue to invest into value. So I think as you look at the margin guide, you're going to expect fall to be negative now, but that gives us a lot of flexibility to make sure that we're being competitive and watching where the prices are in the back half of the year. We know and we set ourselves up for Q4 originally with our guidance. That it was going to be much more promotional and expected Q4 to be down, but I would just say now, we're set up well with these tariff refunds to invest it back into value and be competitive from a pricing perspective.

We also talked about investing into both media because we need to make sure people are aware of that pricing change as well as store payroll. We did some testing in our store payroll we are much more customer facing with that store peril, and we saw a nice lift in both of our sales and our customer engagement. So I would say SG&A will probably be more flattish to slightly down in the year as we make that investment. And to your point, that comes out of some of those other below-line items like D&A and interest to keep us whole from an EPS perspective.

Your next question comes from the line of Paul Lee with Citi. Please go ahead.

It's Tracy Kogan filling in for Paul. First question, I was hoping you guys could comment on your free cash flow expectations for the year and if they've changed at all and whether that includes the tariff benefit? And then is it fair to think your capital allocation strategy at least for the remainder of the year, would favor debt repayment over share repo?

And where do you expect to end the year on cash? And then my second question is, is it fair to think that you're current trends are in line with what your implied back half guidance is of flat down to.

Sure. So okay, I'll start with the free cash flow. Really, I would say I'd start with operating cash flow, Tracy, and we think that will probably be in the, call it, $950 million, maybe up as high as $1 billion depending on where you put us on the range from that perspective. We still think CapEx will be $350 million to $400 million. We have a lot of projects that we think could be helpful, particularly in the stores as we called out on the call as well as really IT around our digital business as well. So that would put you kind of in that $600 million OCF range, both of which will -- our free cash flow range, both of which will include the tariff.

So that's where I feel like we have a great positioning from a cash flow generation, which gave us the opportunity to reinstate the share buyback program, which we had mentioned on the call, first time since 2022. And hopefully, you see that as a strong confidence that we have as we continue to build this business as well as the cash flow generation that this business has brought us forth with, which has helped us be able to invest back in and really show that progressive improvement. I would say in terms of prioritization, I'm looking at both. I mean, obviously, we had some opportunistic buys from a debt perspective. So we'll continue to watch how those are trading and take the opportunity at the discount and take advantage of that.

But I wouldn't say we're prioritizing one or the other. I also think we have a big opportunity to take advantage of where our share price is as well and do a buyback here. So I would say from my perspective, we have room to do both. I wouldn't say that one is prioritized or the other. I just think that will be more opportunistic just based on where it's trading at. And then in terms of where I think we're going to end the year, I would say, we think we need about $700 million. I've said that many times to run the business. We will probably be over that this year, I would say, just given the cash flow generation that we had in the tariff.

So I'd say that would probably be closer to $800 million to $900 million and how we ended the year, depending on how opportunistic we are in the market from a debt perspective. We've also mentioned to you we have the debt coming due in 2030 that is a non-call too. So we will look opportunistically at that debt as well, just given the high interest rates. So we may end the year with a little bit more cash holding on to that to make sure that we can address those debt levels into 2027 when the noncall period comes up.

Got you. And then your [ untrended ] in line with your guidance for the back half?

Sorry, I lost that one. I would say we feel very good with the trends. We wouldn't have guided the way we did if we weren't confident in that, Tracy.

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

As you think about your consumer, do you see your consumer, are they -- compared to last quarter? Are they healthier, the same? What changes have you seen in the consumer profile of your core consumer. And then when you think about inventory level planning for the back half, I think inventories were down 3% this quarter. How are you planning inventory levels going forward? And it was very impressive with the positive comp that home drove. Anything we should be watching for in home.

And then when you mentioned jewelry and impulses growth drivers for accessories, how are those performing? Is this sequential improvement? And are there any other categories and accessories that we should be watching?

Thanks for your questions, Dana. I'll take the first one around the consumer. I would say that the consumer is in a similar place as where we saw them in the first quarter. serving a middle to lower income customer who is -- you've heard me describe it this way in the past of family sitting around the kitchen table, trying to make life work. Gas prices, food heating bills, things like that, that need to be taken care of as essential components of the cost structure that the family has.

And then after that, making sure that they have enough left over to continue to run their household. And that's where we are leaning in heavily to value and making sure that all of our efforts are geared toward making sure that value is a part of what we offer convenience in terms of the access, whether it's in the store or online. And then when a customer does choose to come see us that they have an inspiring experience as well. So we've done some work around making sure that the in-store experience has been enhanced, and we'll continue to do that through the balance of the year.

I don't necessarily see that sentiment from a consumer perspective, changing very much in the coming months as we move through the holiday time frame. And that's why, as Joe mentioned, we set our plan up to make sure that we would be able to have the flexibility to be competitive as we move through this current back-to-school season. And as we head toward holiday, which we know is typically a competitive season, and we expect that to be the case going forward. So we're staying close to the consumer sentiment. We understand their positioning and their mindset, and we're bringing value everywhere we can to make sure that we're meeting the more they need to be met.

And then I think, Dana, from an inventory level perspective, as you called out, we were down 3%. We're going to expect to run the business down low single digits in the back half of the year from an inventory perspective. We think that's the right place to continue to try to drive top line, but also get a little bit more productivity out of that inventory from a churn perspective. I think from a line of business perspective, I'll let Michael also chime in here. I think we feel really pleased with home.

I think two things that lagged us last year. One was small electrics, which we had to buy down because of tariffs. We don't have to do that this year, and we're seeing really good news coming out of that Shark can inject anything with innovation really working well for us. And then the second category, as we mentioned, was home decor. Last year, Harvest and Halloween where the first category is really impacted by tariffs. So the bus were impacted as we were in and out of the market.

We set that early, and we're starting to see strong sell-throughs out of that product, and we're very confident as we move into holiday decor products as well. So we think those are both big opportunities from a home perspective as we move into the back half of the year. And then jewelry seems to be something that continues to trend incredibly well with our customers. As you know, we had gotten rid of our fine jewelry, our core customer, that Kohl's customer told us they wanted it back. We brought it back in.

It's worked well, and we're expanding that now to 350 additional quarters this fall. But on top of that, just really our fashion jewelry. We've given it a home behind our Sephora pad and brought accessories together and really launching and elevating those fixtures has worked well for us is seeing some goodness coming out of fashion and bridge as well. We're seeing anything really like with personalization and sentiment doing well in that category. So do expect as we move into holiday, jewelry gifting is a big portion of our business. So we think we can really lean into that category and drive some additional sales there. So those are the two big categories, the accessories, in general, just outperforming. You can see when you look at accessories, without Sephora, we're up that mid-single digits. So really a category that's trending well, and we'll continue to drive that through our inventory buys and placement in the back half of the year.

And Dana, the only other thing I would add on to what Jill said from a category perspective would be in our kids business, our kids area of toys would be a big driver for us during the back half of the year as well. We've made significant inventory investment there across the box. The toy towers where we have items under $10 also are underpinning this idea around value. And that's an area that we've seen some strong growth in this year and want to continue that momentum with the buys and the inventory investment that we've made behind that particular category.

Your next question comes from the line of Bob Drbul with BTIG.

Just two questions for me, really. The first one is when you look at the trends in Sephora. Where do you think that is going? I think as you look into the back half of the year, and I'd even say declining. This is sort of a bit of a change, right, in the marketplace. I guess the second question I have is can you also just talk about traffic trends, what you're seeing with traffic? I think it was slightly negative this quarter, but if you can just talk through that, that would be helpful for us.

Yes, sure. Thanks for the question, Bob. I'll take the first one and Jill can take the second. As far as the for is concerned, what I would tell you is that we're in a cycle where a handful of major brands are -- have experienced expanded distribution. We still have a robust pipeline of existing new brands are just not big enough at this point because they haven't scaled to offset the softness that we're seeing from some of those much larger well-established brands.

So our focus with Sephora is really on selling these new brands that are coming through because we still have a robust pipeline, like I said, focusing on newness. We think in the back half of the year, in particular, the gifting expansion that we have outlined for our stores will be helpful in terms of driving that business. And we have holiday outposts going to 130 stores and the gift sets, like I said, will really resonate. We've also added Sephora, some support items into the Q line. activity. So those are the things that we're focused on. This is a cycle that happens within the beauty business, and we're just at a point right now, like I said, we're that expanded distribution means that some of these large established brands that we've had in our portfolio for a while, our customers have more access to those brands.

We'll build these new items and new brands coming through. And as they scale, that will help to offset. We wanted to be realistic, and that's why I said in the earlier commentary that what we're seeing right now would suggest that the performance that we've seen with Sephora will continue along the same path that we've seen through the first half of the year.

And then in terms of traffic, Bob, what I would say is that we talked about ATV and traffic both being slightly down in the quarter. And I would say slightly down is probably the best performance we've seen in traffic in some time, I wouldn't say I'm missile 2019, this is our best traffic performance from a quarter perspective. So really seeing traffic be an enabler of the progress. I think part of that is our Kohl's charge customer was not giving us all of the footsteps they were previously giving us.

So Kohl Charge being up one definitely comes with more trips into our store as they shop at the more frequent frequently. So benefiting from that perspective, but really feeling great about the traffic improvement that we saw this quarter.

Your next question comes from the line of Michael Binetti with Evercore ISI.

I guess just a few on the guidance. The high end of the range for the back half embeds maybe, call it, 25 basis points of operating margin improvement on a little less than a plus 1% comp, call it, that would be the best comp we've seen in a while from you at the high end and you've been leveraging operating margins on negative comps for a long time. Is there some embedded level of reinvestment that you would start to put into play if you did to turn a corner on the comps in the second half.

Maybe you could just walk us through if there's a punch list. And then on because you just mentioned traffic versus ticket. I'm curious on given some of the changes in opening price points and the success you're having on proprietary brands and facing into some more of that, improving availability there, how you're thinking about traffic versus ticket build in the second half?

And I'm sorry to ask the third one here, but we've heard from some of the mass retailers, they expect deflation in some of these core categories in the second half. Have you as you think about ticket in the back half have you seen any of that in the competitive set? And maybe what's important to consider if we do enter a period of persistent inflation of some of us -- or deflation, sorry, that some of us remember from a few years ago.

I'll try to hit all these, Michael. I think from a -- yes, no problem. I think from a back half comp perspective, we have leveraged incredibly well. One of the things I did mention is we are going to invest though some of these tariffs into media and store payroll because we see the payback. So I would say the investments we're making both in price in media, in-store payroll. We're doing that because we think there's a return to be had off of those, which should help generate cap line growth.

If we're not seeing that, then that's when we'll make adjustments accordingly. But I think there is going to be, I think, a lot of promotional activity in the market, and we need to make sure we're being competitive. So that's starting one. But two is then we need to make sure that we're informing our customers through the media side and then really ensuring they have a great experience, whether that be digitally or within the stores from a store payroll perspective. And so those are the places that we feel will drive top line and we'll get the return out of. And we have a lot of testing that gives us confidence in those investments and the top line return that we'll be getting.

I think from an opening price point perspective, I mentioned our ATV was down slightly in the quarter. I haven't said that for some time that we've been talking because we had always kind of seen the ticket moving up. We are seeing people trade into the opening price point, as you mentioned, into proprietary brands. It's where we're making our investment from an inventory expect expectations perspective. And we know that, that's for the customer, they're stretched, and they're making those trade-offs. They're buying into our proprietary brands like tech gear and active because it's a little bit more within their budget as their budgets are being stretched. So we did see that trade-off happening.

We saw that AUR is coming down, the UPT is coming up, but not enough right now to offset it completely, which is why it was down slightly. As we move into the back half of the year, I would expect that to continue, especially given the investments we're making in price and the investments we're making in the proprietary brand portfolio. I think I hit all of them. Did I miss one?

The deflation from some of the mass competitors.

Yes. I wouldn't say we're seeing that yet, but I think we'll be prepared, and I think that's where we gave ourselves room from a margin perspective, how we're using the tariffs to invest back in. So we will be competitive from that perspective. So we start seeing that we will react accordingly. But I think right now, we're just seeing that shift down, but what we need is more units in the transaction. And a lot of things we've laid out in our strategy is driving that impulse deal bars, the under 10 deals, the toy towers.

When we just talked about back -- we have thousands of items under $25. So everything we're trying to do right now is drive value but get more in that basket and making sure that they leave satisfied from everything they're looking for, which is why we're also investing back into depth around trip assurance.

We have reached the end of the Q&A session. This concludes today's call. Thank you for attending. You may now disconnect.

Hello, everyone. Thank you for joining us, and welcome to the Q1 2026 Kohl's Corporation Earnings Conference Call. [Operator Instructions] 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, with factors described in Item 1A of 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 here 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 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, and Kohl's assumes no obligation to update such information. With me this morning are Michael Bender, our Chief Executive Officer; and Jill Timm, our Chief Financial Officer. I will now turn the call over to Michael.

Thank you, Trevor, and 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 ran down 1.1% to last year, marking the best quarterly performance in over 4 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 1 year ago, we have focused our efforts around resetting our foundation.

In order to position Kohl's for long-term success, it's 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, and we will remain agile and make strategic adjustments 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 stabilize 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 Bicol 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 with 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 an importance on value and remain under financial pressure.

Next, I want to provide an update on the progress we're 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 has become overly saturated in certain products and categories, leading to unintentional lost sales with our core loyalist customers.

We immediately began making improvements to our assortment offerings by reducing our redundancy and 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 with their incremental benefits to come as we progress through the year.

Let me start with the categories that are further along in their initiative work. In the first quarter, we had 4 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've implemented a lot of changes to this category over the years and are excited about the momentum we are creating here. This category over penetrates 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 1 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've implemented similar strategies to the rest of the women's category. This led to strong Q1 performance in women's sportswear, driven by key proprietary brands like LC Lauren Conrad and Sonoma.

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, C 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're expanding our Babies"R"Us gifting zones with additional fixtures of high-velocity gifting and accessory items as well as rolling out an additional 56 new Babies R Us shop and shops this fall.

Additionally, we are excited about the opportunity we have to grow our team business with an offering of team apparel and accessories in-store and online.

Looking ahead, we're 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 queuing 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, doing this as a significant white space opportunity. Complementing this fine jewelry expansion, we're also rolling out a new line of fashion and hear 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 Kaali and Kerastase. 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're 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 Billy Elish and Coach.

In addition, we're expanding our makeup offering, having successfully launched MAC and March, which is resonating well with customers and is scheduled for a full store rollout later this year. In skincare, we're rolling out newness with trending Korean brands like Beauty of Josion, Astora and Biovance.

Alongside these product introductions, we're 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're leaning into proprietary brands like Mariana and Minglan Co.

Our home decor category showed a dramatic improvement from the fourth quarter running up low single digits. This 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're 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've 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're excited to announce the launch of Brikston. -- 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 and with proprietary brands like Apartment 9 and 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's a necessity for the low to middle income confirms that we serve.

We 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've made to our brand eligibility, but we will continue to closely monitor this going forward. 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 proprietary brand products we're offering. And we will continue to increase our investment in proprietary brand inventory for the remainder of the year.

To support the inventory, we're also enhancing our in-store experience and driving increased awareness through our Bicol marketing campaign. We began to roll out the in-store experience in Q1 with our 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 Bicol marketing campaign is off to a strong start, helping boost momentum for our proprietary brands.

In Q1, we introduced by Coles 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 Bicol brands in the second quarter and heading into back-to-school.

Outside of proprietary brands, we're 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 gifting, all at price points under $10. Our toy towers include offerings of toys at $4.99, $799 and $9.99 price points with trending toys like the nidus 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're working to improve our trip assurance to create a more reliable and consistent experience for our customers.

TripAsurance 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're looking for and the size and color they want and get it at an affordable price.

To better achieve this, we're planning our apparel depth up high single digits and conversely planning our choice counts down high single digits. By enhancing our inventory composition, we'll be able to see benefits across both our stores and digital channels.

This provides the customer more options for how they want to receive their product in store, ship 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're excited about the work we're 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're 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're also making progress across the core digital shopping experience. We're 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're reducing friction at key moments of the journey, including clear delivery information and easier returns. Together, these improvements are intended to make coals 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're 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'll 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 2026 guidance. Net sales declined 1.7% and comparable sales declined 1.1% in the quarter. The difference between net sales and comp sales is due to the timing of closed stores in the first quarter last year.

Going forward, we expect net sales and comp 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 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 more loyal and productive customer for polls.

Other revenue, which primarily consists of credit business declined 8% to 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 to 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 to last year. Interest expense was $63 million, a decrease of $13 million to last year. This decrease was primarily the result of the execution of open market debt repurchases and 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 barring 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 improved debt and expect inventory to be down low to middle single digits for the year.

Now I want to turn to capital allocation, where our 4 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 dividend. 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'll 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 choiceful 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 EPA tariff refunds. In the first quarter, we submitted $140 million of claims related to the Phase 1 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.

A operating margin to be in the range of 2.8% to 3.4% and earnings per diluted share of $1 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.

[Operator Instructions] Your first question comes in the line of Mark Altschwager from Baird.

Thank you. Maybe just to start off, some of the best performance we've seen in a few years. The composition across categories looks more balanced. Could you just talk us through some of the key drivers to the improvement? How much you're 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?

Yes. Thanks for the question, Mark. It's Michael. I would say that one, obviously, we're 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 our work around proprietary brands.

That's been 1 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.

And we feel like 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've 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 really working hard to make sure that the product that we share with our customers is on point. So feel good about that progress.

As far as the outlook going forward in terms of what we see going forward. Certainly, the 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 in mid-teens, I believe, is the number. And importantly, that was an indicator of how we fixed some of the challenges that we talked about in our last quarterly call with you coming out of the holiday time frame, and our inventory is clean, and so we're 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 don't know if you want to share any more, but that's -- those are a couple of areas of importance for us.

Yes. I think just on the quarter-to-date performance, I think 1 of the things we saw in Q1 is we did build our sales as the quarter went on. So these initiatives definitely showed that progressive improvement.

And as we start Q2, we are, as I mentioned on the call, I'm pleased with the performance. we think we can build on the continued momentum we saw behind these key initiatives, particularly the proprietary brands as Michael mentioned, we did transition into our spring seasonal goods earlier. And so we're going to do that again with back-to-school, which we think will also be a benefit into Q2 and Q3.

And to follow up, you mentioned the inventory down 1 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 back if the improvement trend continues?

Yes, I think you're absolutely right. This is probably 1 of the cleanest inventory positions we've been in, in a while. I think 1 of the things to look at is our receipts were actually up in the quarter. So some of this is to 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 trend in 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's 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're able to invest back into that value to drive that consumer back to coal and make them the selection of choice. We know they're going to be choiceful with who they are shopping to.

So we want to make sure that we're in that consideration that and we're going to be doing that by making sure that we're providing the value across our store, particularly proprietary brands, but the deal bar that we're showing everything between $9.99, $7.99, $4.99, really resonating with that customer. So I would say we feel good with saying our margins are going to be in that flat to slightly down range, even though we're going to have clean inventory as we invest back in value.

Your next question comes from the line of Oliver Chen from TD Cowen .

Jill, a lot of encouraging progress. You called out stores under performance. 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 it.

I know you've been working on trip assurance, and it sounds like the Kohl's card customers happier -- do you expect that to continue because that's been weaker. And then secondly, this is the first time, I believe, I've 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?

Sure. I think a lot of questions there, Oliver, so I'll try to hit on some of them. From the in-stack perspective, in terms of the stores, I think getting back in better in stacks 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's down 8%, received through -- what I would tell you is our -- particularly our apparel areas, 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 receipts coming in are up in the high single digits.

And then conversely, our choices are down in those high single digits. So as the quarter progressed, we talked about our sales to get better. We're also seeing that inventory positioning gets better as we enter into Q2 in terms of the stock level. So I think that's definitely a key category. I think some other initiatives that we put forward, the impulse up 50% in the quarter. That's definitely a store base.

We're getting another unit in the basket. So that is something that we're definitely seeing win from a store perspective. And I think just the flowing 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're making in our store experience. We started with some proprietary brand being LC and tech gear, really elevating that experience. You're going to see us continue that throughout the store, really curating an experience for them using manikins, kind of shop-in-shops.

So giving them some inspiration on what they're buying from a fashion perspective. clearly, women's getting to flat is kind of a milestone for us, Juniors being up 10%. Junior is 1 of the first places that we actually were able to have an impact. It's 1 of our fastest turning businesses you can kind of see how we establish that with juniors. It's been successful.

It's carrying into women's, and we expect that to move into men into Q2, as we indicated as an opportunity for us as well. I think from a cooled card performance, A lot of the efforts that we've been talking to you guys about for a year was really geared at getting back that customer. The good news is we haven't lost them.

We needed them to come in more frequently and getting them to flat and having a 600-point improvement from Q4 was definitely a sign that we're doing the right things. They overpenetrated in jewelry. They overpenetrated and petite they overpenetrated in our proprietary brand.

They looked for value in the store, and they weren't finding that, and now they came back in and saw that we were providing it. So I do expect we're going to continue to see our cold charge customer performing, that will lag a little bit in terms of how we see that move into the other revenue line like we spoke to, but we do expect that line to improve throughout the quarter as well.

From a Sephora perspective, obviously, we expect that, I think, to stay kind of with the company guidance this year. We do have a lot of newness coming in that we're excited about, but there's just some key categories that we need to make some moves on. So within makeup, which did leg, we do have MAC coming in. We are very excited about the performance of MAX.

We will roll that out to all stores in the fall. So that should be a benefit to us. We continue to lean into fragrance, which is an outperformer for us. And we, I think, have seen some newness in there, Kaali being 1 of our top brands that continues to perform. And on the skincare side, which did underperform as well, we are seeing some news coming in there with the Korean skincare efforts as well.

So the newness is coming in. I just think it's going to take a little bit more time before that gets back to leading the company, but we definitely expect it to be more with the company as the year progresses.

Oliver, the other thing that I would add to in terms of category focus for us going forward, that continues to give us encouragement about the progress that we intend to continue to make is footwear. That's been an area of the business that's lagged we see newness coming in, in the back-to-school time frame and look to the back half of the year for that piece of the business to continue to -- or to start to show some improved performance, and that contribution will be important to our overall comps as we move forward. So that's what's 1 area that we have some really designated focus on as well.

Your next question comes from the line of Bob Drbul from BTIG. Please go ahead, is now open.

Joe, can you spend a little more time on the credit business on the credit trends that you're seeing? And then when you think about sort of the savings in credit and the savings in corporate expense. Can you spend some time just around what you're doing and what you're seeing there?

Sure. I think from a credit perspective, obviously, it all starts with the top 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 will over penetrate into proprietary brands.

So the investments that we spoke to was definitely moving back into proprietary brands. The case that we had from an inventory perspective was really to fill back into those brands. And you saw they were up 6% in the quarter. So definitely continue to chase from that perspective.

With that customer's health, we're seeing, obviously, on the credit revenue line, it's still lagging. We do expect that will improve. It will just do that over time. So a lot of these sales, as we talked about, the quarter improved and the strength of that quarter improved.

Each month in Q1 and this customer as well improved each month. So a lot of that coming later into April as well. So we should see 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 a credit portfolio looks pretty strong as we move forward to the year, obviously, watching that carefully just given the pressures we're seeing from a consumer perspective, but not seeing any pressures into that portfolio yet.

In terms of the savings from a credit perspective, I think you're seeing a lot of that in terms of how we're servicing the customer from a payroll perspective, so we continue to employ technology and AI within our servicing efforts, and we're seeing some of those things come through our credit line in terms of savings and across corporate expenses, I think we're really focusing on driving returns back through our P&L.

And so as we're doing that, we're trying to look for places that we can save in terms of overhead, and that's really where I think a lot of these corporate expenses came through. it was across all the areas of the corporate expense line, but really trying to stay there 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 from Citigroup.

Sorry if I missed it, but 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're seeing and if you think tax refunds might still be playing a part?

And then also, just bigger picture, I've heard you talk about proprietary brands across the call on several times. And I'm curious where we're heading in terms of that private brand penetration for this year. What's built in to your guidance and assumptions?

And how does that percentage penetration compare to history in terms of are we getting close to a peak in terms of what proprietary brands will represent of the assortment.

Great. Paul, thanks for the 2 questions. As far as the tax refunds are concerned, your question there. Interestingly, at Kohl's, that doesn't actually correlate well with our business. And so in terms of any impact or upside that we would see from increased dollars in the marketplace from a tax refund standpoint. We don't see that as pronounced, I'll say, as you might see with other retailers.

At the same time, we love the fact that there is more money in the market. And 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 a proprietary brand performance is concerned and where it's headed, -- we've said before that we're going to let the customer take us where we need to be in terms of the overall mix.

We don't have a percentage target that we're necessarily running to. And as you know, with the addition of Sephora over the last 4 or 5 years or so, we're 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's part of the formula here at Kohl's is 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're working through our proprietary brand portfolio is really resonating with customers.

And we said they're up 6% in the past quarter in -- we see that continuing going forward. And we think that, that's going to be an important part of us to continue to focus on. We'll continue to place more inventory in that space with proprietary brands. And we'll really let the customer take us to the spot that we need to be whatever that appropriate mix is.

And Joe, any help you can give on the free cash flow assumption for this year? .

Yes. 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 set going to be about $0.5 billion to $600 million in free cash flow for the year. .

And that does not assume any tax refund, correct? .

Correct. There's no tariff refund in any of the estimates that we had given today. Obviously, we talked about the fact that we did apply for those but we haven't received those refunds yet. So those will be all on top of the numbers that we have guided today.

Your next question comes from the line of Michael Binetti from Evercore ISI.

It's Carson on for Michael here. you highlighted several future opportunities editing the men assortment, bringing in innovation on footwear and Sephora. You talked a little bit about Sephora a minute ago, but 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 as well. .

Yes. So from a Sephora standpoint, what you should be looking for, Carson, as we move forward, and Joe outlined this in her commentary when she spoke about it. We'll have a number of different rollouts as we continue to progress through the course of the year. Mac is in 850 stores currently and will be rolled out to the balance of the chain of stores throughout the rest of this year.

And we'll continue to focus on making sure that those brands deliver for us going forward. So that's the story on Sephora. Ask the other part of your question again. I want to make sure I understand that.

You called out editing the men's assortment and training in the basin on footwear called out as future opportunities in the presentation and I heard that in your prepared remarks.

Yes. So from a footwear standpoint, we're 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's where you'll see more effort from us in terms of the back half of the year in terms of really making sure delivers for us going forward.

Got it. And then maybe on the balance sheet. You paid down $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 the share repurchases?

Thanks, Bert. The 4 priorities are always going to be investing back in the business. And so this year, $350 million to $400 million computer and Pulse rollout to all stores, which obviously has been a effort that has been paying us back up 50% in the quarter. we continue to invest back into Sephora and our store experience, like I mentioned, really elevating that experience.

So those will be the key places we invest this year. We continue to fund the dividend, always our second priority, so really holding that dividend this year.

And then obviously focusing on delevering and taking advantage of the opportunistic market from a debt repurchase perspective. So obviously, making buys in Q4 and Q1, both at a nice discount. So really looking for those opportunities.

I would say, running the business around that $700 million of cash that we ended the year with is kind of the right place for us to run our business. So as we really stabilize from a cash positioning perspective, and also our performance in terms of starting to show some growth, both on an expansion of EBIT as well as our profit line. I think that would be the point then we would start considering putting back in a share buyback program.

But I think first and foremost, it's going to be stabilizing that balance sheet, getting us and maintaining at that $700 million of cash 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 for our business before we would then put in a share buyback program.

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

I wanted to ask on the promotional optimization and simplification initiative kind of in your targeting process there. how are you making sure that you offer value to customers, they're also optimizing your margin in AUR across both in-store and digital. So I know that's been a focus. Curious how you see that as potential margin opportunity as well? .

Yes. I think this has definitely been an effort that we've had and spoke to for a while, and I think it's really that mix of pricing and couponing to make sure that we're balancing what drives our consumer behavior. .

A lot of the things that we have done in the past to simplify was we've gotten rid of those stackable coupons. We try to make it quite easy to get to an end price. So we -- you understand really what you're getting from a value perspective.

So a lot of things that we're starting to look at today is more around personalization, targeted offers to drive consumer behavior. For example, we know our cold charge customer is much more responsive to a coupon. So how can we target into that coupon. We've also used more like real-time offers, particularly in the digital channel to get people to add more to basket or get a higher conversion rate.

So really seeing those behaviors and reacting into it. overall, we're always using an elasticity modeling to understand where that price needs to be to drive behavior.

So it's a push pull perspective in terms of what we're looking at. I would say AUR for us is really kind of been neutral, I think, over the last several years. You've seen our ATV flat AUR might have been slightly up with UPT down and then UPT goes up with AUR slightly down.

This quarter, what I would say, as you saw, our ATV was slightly up in the quarter, which did offset the traffic being down. That was more a factor of our reg selling price happening versus a little bit more clearance last year.

So there's always that balance that we're looking at in terms of what our right price needs to be with the balance of driving consumer behavior. But I think what we're really focusing on is doing that in a much more targeted personalized manner going forward versus just a general offering that has stackability around it.

And that's been really working for us, which has allowed us to expand margins in the past. Obviously, this year, really focusing on value, we're going to want to make sure that we're the 1 and the retailer of choice for that customer and doing that through delivering more and more value.

So I think those efforts are what going to be -- even though we have good news coming out of inventory management, we have good news coming out of proprietary brands. We are seeing a digital business that's lifting that then does take away some of that margin and the rest of that, we want to invest back into value to make sure that we're attracting back to that customer as well as new customers into coal.

That's really helpful. And then on that last point on new customers and then you're talking about AUR, I wanted to drill down a little bit on the private label 6% comp. So if you could talk about AUR versus units there.

And then are you seeing new customers for your private label brands? I know that's very strong with your core customers, but curious how you're seeing maybe a new customer to Kohl's, interest in private label -- and then on that point, any update on kind of your national brand assortment, how you're thinking about any changes there?

Sure. I can start, and I'll let Michael weigh in. I think from a private label perspective, it definitely is our opening price point as we mentioned. And we had been void of opening price point over the last couple of years. So bringing this back in really introduce another level of value for our consumer.

As you mentioned, it was something our core customer had come to know and love and really did miss when we didn't have it. But I'd also say given the value proposition and the quality of this product, we also see it attracts into new customers, particularly in today's environment when they're looking for a great deal and great value.

And I think that's what our proprietary portfolio really offers to them. We spoke about Flex and our active brand across all lines of business has done incredibly well. It's a great value at great quality, and we're seeing that really resonate, which is why we're now expanding it to kids in all of our stores.

It's really done well in terms of men's and women's across, I think, all customer cohorts. Lauren Conrad has been another standout for us in women's. And then obviously, we've celebrated the SO brand across our juniors business, which I think 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've crossed that into our junior -- so brand as well. So I think it definitely brings in fulfills to all customer types. -- obviously helped us really reestablish that loyalty with our core customer and getting them back to stability from a flat comp, but also, I think, fills the need that new customers are looking for from a value perspective. In terms of national brands, I'll let Michael kind of talk to you about what we're thinking there.

Yes. And from a national brand standpoint, what I would point you toward is some of the elimination of redundancy that we've seen in the national brand assortment that we have. and a focus on some of the key partners that we have like a Nike, Levis, et cetera.

And so those are the areas where we're really leaning in with national brands to make sure that the complement of national and proprietary brands, again, reaches the appropriate mix for us going forward.

But we're excited about the mix that we have in our performance in Q1, and we'll continue to to have that be a focus for us going forward in addition to, as Jill mentioned, leaning in hard with our proprietary brands given the backdrop.

I think what I would say to all of you is that right now, -- our customer is sitting around their kitchen table. I've said this to you before. They're sitting around the kitchen table, trying to make life work.

And it's the combination of how do I pay for gas food, light bill, all the things that are necessities and with what's left over, which retailer is the 1 that's going to help me stretch my dollars as far as I possibly can. And to the extent that we can be sharp, yes, on price but also on the quality and the style of offerings that we have, particularly in apparel, but across the categories, including home and others, that's where we believe we can win.

And so that combination of both national and proprietary brands is going to be an important mix for us to stay focused on going forward. But we're excited about that. And those are some of the things that you'll see us continue to focus on going forward.

[Operator Instruction] your final question will come from Brook Roche from Goldman Sachs. Your line is now open. .

I 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 brand penetration but offsetting this might be a little bit stronger digital penetration. Any help that you can give on the moving pieces between fuel, promotions, pricing, value, tariffs and product costs would be very helpful. .

Great. Thanks, Brook. And you got it right. I think the biggest thing is, overall, and you saw that in Q1 is we will benefit from the tailwinds of our proprietary brands. So 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%. So obviously, really excited about the fact we got to a point of stability last year and now showing growth in that channel, and we do expect that channel to continue to grow for us which does have some headwinds to margin with the cost of shipping.

So really seeing a balance from that perspective. You mentioned fuel. We do have fuel now embedded into the guidance that we gave you at the current rates that obviously will have both the headwind to margins from an inbound transportation perspective, as well as in SG&A as we think about our transportation cost of moving goods from our DCs to our stores, also considered in the guidance that we have given you, but will be a headwind from a margin perspective.

I think offsetting that is obviously the clean inventory we spoke to, we did have higher reg selling in the quarter. We expect that to continue just given the fact that our inventory is clean, and we're running much more of a chase model accelerating receipts into the quarters, and we would expect that to continue as well.

And I think the offset to that then is exactly what you said around promotional activity. we know value is core to what our customer is looking for. You heard what Michael was saying, these customers are choiceful we need to make sure that Kohl's is in their consideration set, and that's really going to be done through value.

We serve a middle to lower-income customer. So this is very important to them. So we're going to make sure that we continue to lean in on that. So I think those kind of become your balancing factors, and that's really where you get to the guide of that flat to slightly down giving us some room.

I would say, particularly if you remember in Q4, 1 of the things that we talked about with not having that breakthrough pricing during those key holiday moments. So we definitely are going to make sure we're making those investments in those key holiday moments throughout the year as well. So that will be a little bit more pressure from a margin perspective as well.

But when you bring all those things together, I think that's really how you land on the flat to slightly down guide that we gave for the year.

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? -- that's additional couponing, changes in promos or other types of targeting that you think could drive a sequential acceleration from here in that trend? .

Yes. Thanks for the question, Brook. Yes, we'll continue to double down, if you will, on making sure that we are doing things to continue to attract that customer back to the business. As Joe mentioned, we didn't lose that customer. We lost a bit of their wallet share.

And with the combination of bringing more brands back into coupon eligibility, et cetera, those are the things that are helping to bring that customer back. So we'll continue to focus on all the things that will help us do that.

This focus on proprietary brands, we think, is 1 of the accelerators of what has brought that old Kohl's charge card customer back to our business and having that be flat or for -- and so focusing on making sure that, that continues to be an area that we show to the customer will help us in that regard as well.

We have reached the end of the Q&A session. This concludes today's call. Thank you. You may now disconnect.

Good morning, and welcome to the Kohl's Corporation Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Trevor Novotny, Director of Investor Relations. Thank you. 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-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 may refer to certain non-GAAP financial measures. Please refer to the cautionary statement and reconciliation 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, and Kohl's assumes no obligation to update such information.

With me this morning are Michael 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 Kohl's fourth quarter earnings call. Before I begin this morning, I want to express my sincere gratitude to the entire Kohl's team. 2025 was a year of substantial change and notable progress, and I appreciate the way our team has adapted and committed to new ways of working through the business. We're ending 2025 in a stronger position than we started though important work remains ahead of us. Thank you for your continued dedication and belief in Kohl's.

During this transformational time for our business, we are taking a long-term view. We take accountability for our performance each quarter while making decisions for the long term with the understanding that progress will not be a straight line. Over the past year, our efforts have been focused on resetting our foundation. This focus is intended to stabilize the business and strengthen our operational ability to build for a stronger future.

In 2025, we made meaningful progress, and this aggregate work has us moving forward in the right way. While we've made progress addressing issues and strengthening areas of our foundation that work will continue to be the focus for most of 2026. Addressing operational opportunities and modernizing our processes and ways of working is critical for what comes next for Kohl's, and there are no shortcuts. We're confident that the work we are investing in now is essential to improving our business and getting back to growth.

During today's call, we would like to discuss 3 items with you. First, we'll review our fourth quarter performance. Next, I will provide an update on how we will execute against our key initiatives in 2026. And lastly, Jill will give more details on our Q4 financial performance as well as give guidance to 2026. Although we are not pleased with our top line results in the fourth quarter as comparable sales decelerated to down 2.8%, we are pleased with our strong inventory discipline and expense management, helping to deliver diluted earnings per share of $1.07, well ahead of last year. We also strengthened our balance sheet, ending the year in a strong cash position with no borrowings on our revolver.

While not the primary driver of these sales results, severe weather was responsible for about 70 basis points to our comparable sales decline as approximately half of our stores were closed during the winter storms towards the end of January. Beyond the impact of winter storms, we have identified 2 primary factors impacting our Q4 top line results. First, we have an opportunity to better execute our fall seasonal business. The softness in this category uncovered some operational opportunities for us with regard to our inventory depth and allocation. We do not consistently have the right product in the right quantity, in the right places. This issue was outsized in our smaller format stores, which meant we were not consistently able to meet the demand in key moments. However, we continue to experience positive growth in our year-round businesses, including the emphasis on core basics and essentials, which were not impacted by inventory allocation issues.

Second, we needed to offer breakthrough pricing during our key holiday shopping periods to drive more excitement for customers to choose Kohl's. During the fourth quarter, we lost some competitive ground during high-traffic shopping windows, including Black Friday, Cyber Monday and the week following Christmas. We know consumers are more value conscious and there is opportunity for us to regain share during these windows through strong promotional statements that better align to our customer needs and priorities. Consistent and differentiated value statements across marketing, in-store and online will be a catalyst to improve our performance.

While acknowledging and addressing these issues from Q4, we remain committed to the path we're on to improve the business. This year, we made significant progress, resulting in a 300 basis point improvement in our comparable sales from last year. There were a number of areas that drove progress this year. Beginning with our Kohl's Card customer, who improved 120 basis points from the third quarter, now running down mid-single digits. While this performance is not where we ultimately want it to be, we are encouraged by the significant progress we've made from the first half of the year where these shoppers declined in the mid-teens. The reengagement of the shopper is instrumental to Kohl's long-term success as they are the most productive customer we serve. Additionally, we remain pleased with the performance of our non-Kohl's card customers and new customer acquisition. Overall, we are proud of the progress we've made toward reengaging our Kohl's Card customers while continuing to attract and serve new customers.

Next, we have made solid progress across our proprietary brand portfolio. Although these brands were down 3% overall in the quarter, our proprietary apparel was flat, with the decline primarily driven by our home business. Our juniors business, which grew 8% in the quarter, continues to benefit from investments in our proprietary brands. So we are furthest along in our progress with this category as it has faster turns and shorter lead times. We're excited about taking this momentum from the juniors business and expanding the efforts throughout the remainder of the women's category.

Batiste is another area within women's that continued its great momentum running up 26% to last year. This category benefited from the in-store presence we built with key proprietary brands, LC Lauren Conrad and Simply Vera Vera Wang. Our men's and kids departments also showed strength in proprietary brands, both running positive comps in the fourth quarter. This strength was driven by brands like FLX, Tek Gear, Jumping Beans and Apt. 9. Our home business underperformed largely due to softness in seasonal decor, particularly within our proprietary brands. We bought too deep which limited customer choice for the various holiday celebrations. We also have an opportunity to be more competitive by offering better value through sharper price points in key seasonal items.

Moving to the remaining lines of business. The accessories business continues to outperform. Our support business grew 2% with comparable sales improving to flat in Q4. This was driven by our expanded holiday gifting sets and continued strength in our fragrance and hair care categories led by brands such as YSL, Valentino and KAYALI. Excluding Sephora, our accessories business increased low single digits, led by the expansion of Impulse to nearly all doors in Q3, helping deliver over a 40% comparable sales increase versus last year. We also saw positive performance in our jewelry business with strength in our fashion and bridge jewelry. Our footwear business underperformed the company due to softness in active footwear and boots. We expect that our boots business to remain soft in the fourth quarter and proactively reduced our buys based on pricing expectations. The strength in dress and casual footwear across men's and women's businesses partially offset this category softness.

Beyond our category performance, it is also important to acknowledge that the consumer is behaving differently in this challenging macroeconomic environment. We know our core low- to middle-income customers continue to face financial pressure, and they are seeking value. As we expect this customer behavior to persist, we are adapting our strategies to ensure we are delivering great value to better serve this customer. We have taken immediate action to address the opportunities and to build upon our strengths. As we move into 2026, we will continue to work on our key initiatives. This work is essential for setting up Kohl's for long-term success and will take time.

In 2026, we are committed to continuing the progress we laid out in 2025 and have clear actionable insights that we can build on. Starting with our first initiative, offering a curated and more balanced assortment that fulfills the needs across all our customers. As we work through our merchandise strategies, our goal is to invest in key styles and categories while reducing redundancy to ensure we have a purpose behind each product and brand. By exiting out of unproductive styles and offerings, we can reinvest into higher turning items to drive a more balanced assortment.

In our apparel businesses, we're focused on increasing our investment into our basics while also rightsizing our assortment offering in trending categories. By strengthening our core apparel business category we ensure that our customers can consistently rely on us for the essential high-quality items they need for daily life. In addition to our core business, we continue to find ways to curate our assortment into more fashion and relevant categories such as denim, dress and active wear. In our women's business, we are broadening our denim assortment with more styles and fit through our key national partners such as Levi's and enhancing proprietary brands such as LC Lauren Conrad and Sonoma. Additionally, we will build on the momentum in juniors by introducing the Office Edit by So to provide a new compelling assortment in the casual and dress categories. For our men's business, we are investing into key item programs within proprietary brands such as Tek Gear and Sonoma. And we will expand upon successful brands like FLX with our new offerings of FLX Golf premium pants and fleece. We also have an additional opportunity to grow our dress category with an exclusive Haggar Hall of Fame launch.

In our kids business, we will differentiate with our proprietary brands by introducing merchandising statements that show an expanded assortment of under $10 entry price points in So and Sonoma. We will also expand key brands like Jumping Beans into Baby and FLX Kids to all stores by Q2. Last, we recently launched our new proprietary tween brand, Sea + Skye in Q1. We're driving the next phase of growth in our Sephora at Kohl's business by strategically curating an exciting assortment. We successfully launched M.A.C, a leading makeup brand in over 850 of our Sephora at Kohl's stores this month. This launch immediately delivers enhanced newness and a strong value proposition to our customers. Recognizing that newness is vital in the beauty industry, we are also preparing to expand assortment with proven brands like Tarte and Charlotte Tilbury.

Additionally, we see further opportunity in 2026 to build on the successful launch of our Impulse initiative. Following the rollout of an Impulse Q Line in nearly all of our stores, we have identified more ways to inspire our customers and drive highly incremental impulsive shopping behaviors. To capitalize on this, we are implementing the Deal Bar, an Impulse Toy Tower, both of which are specifically designed to offer compelling value on items like seasonal home decor and trending toys with all products priced under $10. We're excited to roll out these offerings this spring to maximize key seasonal moments, including Valentine's Day, Easter and Mother's Day.

In footwear, as we transition to spring, we expect our dress, casual and active categories to gain momentum. We're focused on improving our inventory position and reducing overall choice to deliver better clarity on the sales floor, while ensuring greater depth in key styles our customers are seeking. And lastly, in our home category, we will deliver more value through our investment into key proprietary brands such as Big One while simultaneously growing newly launched brands such as Miryana, Hotelier and Mingle & Co. In addition, we will leverage key national brand partners who continue to deliver newness and innovation, including brands like Shark and Ninja.

And finally, we are taking immediate actions to recapture our seasonal decor business through offering greater customer choice and sharper price points on key items. Our second initiative is our focus on reestablishing Kohl's as a leader in value and quality. Value continues to be a focus and is especially important given the macroeconomic uncertainty. The majority of our customers are low to middle income. These consumers have been consistently under pressure and are being thoughtful with how they are spending their discretionary income. It's clear that when we offer value, it resonates with this customer. Kohl's has an opportunity to deliver more consistent competitive value to all of our customers. In 2025, we took important initial steps to enhance our promotional strategies and increase brand eligibility in our coupons. These actions proved to be a critical first step, resulting in an improved trend, particularly among our Kohl's Card and loyalty customers.

In 2026, our focus remains on building upon the momentum we've established and deepening our commitment to delivering undeniable value to every customer. We are executing a strategy that includes simplifying our promotional statements and deploying more personalized real-time offers. This allows us to be more targeted rewarding our most loyal and deal savvy customers while ensuring a compelling value message breaks through to a broader customer base. We're also making meaningful investments to amplify our proprietary opening price point brands, which provide exceptional quality at an accessible price. These strategic adjustments will strengthen our competitive position and ensure we deliver incredible value to all customers.

A key element of Kohl's value proposition is the power of our high-quality proprietary brands. This year, we are committed to increasing our investment into proprietary brands inventory, marketing and experience. In the women's business, we are excited about the work we are doing to amplify key proprietary brands, LC Lauren Conrad and Tek Gear. In stores, we are elevating the experience to improve findability and inspire our customers. To achieve this, we are adding improved signage for better way finding, highlighting key styles with mannequins and adding find your fit communication to better help customers find the product and fit they desire. This experience will be completed with our LC Lauren Conrad brand in Q1, and we will complete the Tek Gear experience in Q2.

We are also excited to build up the momentum of another strong proprietary brand in FLX. Last fall, we introduced FLX through our kid's category in 300 stores. Currently, we've expanded this to 600 stores in Q1 and are expecting to be rolled out in all stores by Q2. In addition to the investment we are making into our proprietary brands inventory and experience, we will be supporting them with a new marketing campaign, celebrating our By Kohl's brands. The By Kohl's campaign will put a spotlight on the great brands that customers can find only at Kohl's. We will focus on several By Kohl's brands by highlighting style, quality, fit and aesthetic. To accomplish this, we will be leveraging our Kohl's Mom this spring, utilizing a strong cross-channel campaign, including fun social content, TV and digital video. We're also creating a landing page on our website and app to better highlight the proprietary brands to our customers.

And lastly, our third initiative is delivering a frictionless experience across our omnichannel platforms. A frictionless experience starts with reestablishing trip assurance for our customers. To address this, we are making deliberate changes to both our planning and supply chain processes. Specifically, we are committed to investing in depth with plans to increase it in the high single digits while simultaneously curating our choice counts for greater clarity and relevancy. This strategy includes protecting our replenishment receipts and heightening our in-stock levels, all while improving inventory turn to ensure the freshness of receipts. These adjustments are designed to ensure that the right product with sufficient depth is available at the optimal time across all our stores.

Encouragingly, we are already yielding positive results from the implementation of some of these disciplines. We successfully executed a substantially smoother transition of our spring receipts heading into 2026. And our spring seasonal categories have started strong. To complement our investments in clarity and debt, we are focused on delivering a more consistent shopping experience through improved inventory allocation, which directly strengthens our omnichannel performance. By increasing inventory depth and improving in-stock levels, we are better positioned to leverage our store-enabled fulfillment tools such as BOPUS and BOSS. These omnichannel options provide our customers with greater speed and convenience while allowing us to utilize our ship-from-store capabilities more efficiently. We will continue to refine these tools to ensure a frictionless and reliable experience across all touch points regardless of how or where our customers choose to shop.

In addition to stores, we have an opportunity to modernize our capabilities and enhance our digital experience. We're focused on delivering a better experience and deeper connections through advanced personalization and contextual relevance, making every interaction with Kohl's more meaningful for the customer. We are enhancing our omnichannel capabilities across all digital touch points such as search, findability and availability as well as elevating our store-enabled services as key differentiators to maximize convenience and create a seamless integrated shopping experience.

And last, we are actively modernizing our site structure and foundational data architecture. This ensures our digital ecosystem is discoverable, high-performing and fully prepared for our future driven by AI and agent technology. Now before I hand the call over to Jill, I would like to reinforce my perspective on the year. We've made meaningful progress in strengthening our foundation, and I'm confident that we are on the right path. While our fourth quarter results presented clear opportunities, we have already taken immediate action and are poised to build upon the strengths we have established. We're leaving 2025 in a measurably stronger position than when we entered it, and we are unwavering in our commitment to driving continued progressive improvements throughout 2026.

I will now turn the call over to Jill.

Thank you, Michael. For today's call, I will provide additional details on our fourth quarter results and outline our fiscal year 2026 guidance. Net sales declined 3.9% in the quarter and 4% for the year. Comparable sales declined 2.8% in Q4 and declined 3.1% for the year. The decline was primarily driven by a decrease of transactions, specifically in stores. Store sales declined mid-single digits for both fourth quarter and the full year, primarily due to a decline in transactions. Additionally, as Michael noted, our stores experienced a negative impact in January due to unforeseen weather conditions. Digital sales grew low single digits in the fourth quarter and were flat for the year. This performance was primarily driven by higher traffic offset by lower conversion. We are pleased to have established a critical point of stability ending the year flat.

However, our goal was to drive a more substantial growth in Q4 following the headwinds of the previous year. Our digital business has a higher penetration of our Kohl's Charge customer. And although we are seeing improvement in this customer performance, it is still down mid-single digits, pressuring our digital business. In addition, we need to further elevate conversion through better inventory availability and findability, which are being addressed for the inventory strategies Michael outlined.

Moving down to P&L. Other revenue, which consists primarily of our credit business declined 9% to last year in Q4, an improvement from the third quarter, driven by better Kohl's Card performance. For the full year, other revenue declined 10%. As a reminder, at the beginning of the year, we shifted certain credit-related expenses from SG&A against our other revenue line. For the upcoming year, we will lap this adjustment to our other revenue should normalize and reflect the relative performance of our Kohl's Charge customers. Gross margin in Q4 expanded by 25 basis points to 33.1% of sales. This expansion was driven by continued strong inventory management resulting in lower clearance markdowns.

This was partially offset by increased cost of shipping as our digital penetration increased 220 basis points to 35% of total sales for the quarter. For the full year, our gross margin expanded by 34 basis points to 37.5% of sales. SG&A expenses decreased $76 million or 4.9% in Q4. Excluding the shift in credit-related expenses, SG&A declined 4.1%. The decrease in SG&A was driven by lower store, marketing and fulfillment related expenses. For the year, SG&A expenses decreased 4.1% and excluding the shift of credit-related expenses, SG&A declined 2.8%.

Depreciation expense was $174 million in Q4, a decrease of $9 million. For the year, depreciation declined $43 million to $700 million. The decline was mainly driven by closures of stores and one of our e-commerce fulfillment centers last year. Interest expense was $59 million in the fourth quarter and $288 million for 2025. This was a reduction of $15 million for the quarter and $31 million for the full year. The decrease was a result of the execution of an open market debt repurchases at a discount of $11 million in the fourth quarter and lower utilization of the revolver throughout the year. Our tax rate was 18% in Q4 and an adjusted tax rate of 16% for the full year. Adjusted net income in the fourth quarter was $125 million resulting in adjusted diluted earnings per share of $1.07. Adjusted net income for 2025 was $186 million or adjusted diluted earnings per share of $1.62.

Moving on to the balance sheet and cash flow. We ended the year with $674 million of cash and cash equivalents, an increase of $540 million from 2024. Inventory decreased approximately 7% compared to last year. Our disciplined inventory management has enabled the more timely flow of transitional receipts, positioning us with stronger, fresher spring inventory as we enter 2026. Operating cash flow was $750 million in Q4 and $1.4 billion for the full year, a $700 million increase from 2024. Our capital expenditures were $64 million in Q4 and $372 million for the year. In addition, we achieved our goal of fully exiting the revolver with no borrowings at the end of the year, and we further deleveraged our balance sheet by buying back $87 million of long-term debt at a discount to par value during the quarter.

In 2025, we returned $56 million to shareholders through our quarterly dividend. And as previously disclosed, the Board on February 25 declared a quarterly cash dividend of $0.125 per share payable to shareholders on April 1. Now let me provide details on our outlook for 2026. We believe the actions we are taking as well as the strategic initiatives laid out by Michael will allow us to continue making progressive improvements for the business in 2026. Our outlook reflects our confidence in our ability to execute against these initiatives with great discipline, while considering the uncertain macroeconomic environment we continue to operate in. We remain cautious as our core low- to middle-income customers remain choiceful with their discretionary spending.

Our outlook for 2026 are as follows. For the full year, we currently expect net sales and comparable sales to be in the range of a 2% decrease to flat versus 2025. Operating margins to be in the range of 2.8% to 3.4% and earnings per share to be in the range of $1 per share to $1.60 per share. Now let me share some additional guidance details. We expect other revenue to be down 4% to 6%. The decrease is due to lower accounts receivable balances driven by sales underperformance in 2025 by our credit customer. Gross margin to be flat to down slightly, driven by increased proprietary brand sales offset by increase in digital sales and elevated promotional offers as we drive more value for our customers.

SG&A dollars to be in the range of down 0.5% to down 1.5%. These savings will be driven by lower store payroll, marketing and supply chain costs. Depreciation and amortization of $700 million, interest expense of $285 million and a tax rate of 22%. We will continue to manage inventory tightly and expect inventory to be down low to mid-single digits and capital expenditures to be in the range of $350 million to $400 million. As we anticipate the new initiatives to take time to have an impact, we expect sales to build throughout the year. And although we are pleased with our start to Q1, specifically in our spring seasonal and year round businesses, there's a lot of quarters still ahead of us. We expect Q1 comparable sales to be down low single digits with the remaining metrics balanced by quarter.

With that, Michael and I are happy to take your questions at this time.

[Operator Instructions] Our first question comes from Chuck Grom from Gordon Haskett.

Can you just talk about the By Kohl's campaign that you're going to launch this spring? What it's going to involve? And then laterally, what's your expectations for comps in 2026 amongst your Kohl's Cardholder given the recent improvement that you saw in the back half of 2025?

Maybe I'll take the first half of the question, Chuck. And Jill can handle the second part. As far as the By Kohl's campaign, we've actually launched that already, and it's a continuation of our effort to make sure that the power of our proprietary brand portfolio is showcased and emphasized. So there's a marketing element to it that brings some of our most important proprietary brands together like FLX and others, but it's also an opportunity for us to continue down the path as we've been talking to you over the last 3 to 4 quarters about the importance of the proprietary brand portfolio to our customers in general, but in particular to those that are Kohl's Card carrying members. It's a mouthful, sorry. And so it's an important first step for us to be able to -- our next step for us to be able to showcase those brands in a way that elevates them, allows us to tell stories in an inclusive manner across both of our platforms of stores as well as digital.

And in terms of the Kohl's Card holder, obviously, it's continued to lag our performance this year but showed step improvement from down mid-teens to down mid-single digits at the end of the year. I'd expect this to continue to improve based on a lot of the efforts that we're putting for us. First, they do overpenetrate in proprietary brands. So as we're making that investment back into those brands, it has resonated with that customer, one, because it provides incredible value, it's opening price point. We also need to restore the trip assurance with this customer. So investing back into depth will help with that as well, so when they come they can find what they're looking for.

A couple of other key things that we've done is the coupon eligibility resonated with this customer as well as that we bought back in jewelry and petite. So I think you're going to see a build in this customer. It will probably still lag in the front half of the year. I think it will catch up in the back half of the year. The good news is our non-Kohl's Charge customer has been running positive. And we continue to see new customer acquisition up as well. So those are definitely driving our business. We just need to get this customer back into parity with our comps. And I think that will happen more in the back half of the year as some of these new initiatives start resonating more with that customer.

Okay. Great. And then just on the credit revenue line, you're guiding down 4% to 6%. Is there any geographical shift across the P&L that's happening? Or just maybe just explain why you expect it to be down? And then just bigger picture, is there a way to size up how much of an impact the shift away from your proprietary brands over the past handful of years has actually had on your credit business, given that I believe that the cardholders likely over-index to own brands versus national? Just trying to understand the implications on -- from credit because of the shift away from mix in recent years. And I guess the opportunity that indirectly presents.

Yes. I would say it's going to lag, so that's why we're down and lagging from a sales perspective. We're coming into the year with less accounts receivable which is what really generates that interest revenue and the late fee revenue for us. So it's always going to lag. When you make your purchase in month 1, we don't start building until 30 days later, you don't start getting accrued into interest for 30 days and then it really builds and accumulates. So it's always going to lag top line just given the lag of those purchases.

I would agree, as we move into proprietary brands, they definitely over penetrate into that category. We were really void of an opening price point in our store over the last couple of years because we hadn't invested into proprietary brands, and this customer is finding that value elsewhere. The good news is as you continue to shop us, we just got less frequency from this customer. So as we brought back coupons, as we've brought back proprietary brands, we're starting to see that reaction to our customer, which is really what is driving that 120 basis point improvement in that comp from Q3 to Q4, and really moving from down mid teens to down mid-single digits by the end of the year. So big improvement. We continue to expect to see improvement, but it will lag on that credit revenue line just because of how the interest in late fees accrue to the balances.

Our next question comes from Mark Altschwager from Baird.

Michael, you outlined several initiatives today. What do you view as the most immediate catalyst for recapturing market share in 2026? Furthermore, how should we think about the scaling here where these assortment pivots and other initiatives provide enough lift to drive a return to comp growth?

Yes. Thanks for the question, Mark. I would say just carrying on, on Jill's commentary around proprietary brands, that's been a significant focus for us in the past call it, 8 to 9 months or so in terms of restoring what we believe to be the proper balance. And again, we're not targeting a specific number that we're looking for from a mix perspective of proprietary brands for a number of different reasons are really a focus for us in bringing and restoring the activity that we need with our customer. Joe mentioned the importance of the Kohl's credit card carrying customer. They index heavily toward proprietary brands. So that will be a big focus for us.

I think also beyond that, making sure that the continuation of the brands that we will be pushing forward to both national as well as proprietary will be a big part of that. Our focus right now also is on making sure that we provide, I'll say, maximum value to our customers. And so you're seeing us offer more in the way of, call it, $10 and under items. So look at toys as an example. We have a toy tower that we're rolling out to stores that has price points of $4.99, $7.99, $9.99, and then the Deal Bar, which we've recently rolled out as well, which if you walk into the entry of our store provides another impulse opportunity and a pickup for customers beyond what you can see as you're checking out in our queue line. So those are just a couple of examples of where we're focused right now and more to come.

And Jill, follow-up on the EBIT margin guidance calling for about 50 basis points of compression at the low end. What specific headwinds are captured in that lower end, that 2.8% floor? What are you incorporating in terms of changes to tariff rates, if any? And just any further color you can provide on the expected cadence for the year on EBIT margin would be helpful.

Yes. I think the biggest thing from an EBIT is on the down too, it's just harder to leverage our SG&A costs, just given the fixed cost nature of our business. So I think we've done a really incredibly good job of bringing down our expenses over the last couple of years. We'll continue to operate with that discipline into 2026 as well. But I think it just puts pressure on the EBIT expansion. Obviously, it's flat. We're expanding the margin. So I think that shows our discipline in terms of how we're managing expenses that we are able to have some expansion on the top end of the guidance.

From a margin perspective, I think we've managed our tariffs incredibly well. We've actually offset that. So I do want to give a shout out to our sourcing and buying teams and how they've managed this dynamic environment in terms of still being able to expand our margin this year by over 30 basis points and 25 basis points in the fourth quarter. Next year, really, we're going to manage it the same way. So we think we have the right mitigation tactics to manage through tariffs. The big thing that we want to make sure that we're going after is value. We know we serve the middle to lower income customer. We know they have to be choiceful with their discretionary spend.

And so a lot of what we're talking about today is how we can stand for value, whether that be through our proprietary brand portfolio, through the price points that Michael indicated with the $10 and under, but also making sure that we're going to be able to break through with our promotional values as well. So we want to give ourselves some room to be able to do that. We know our proprietary brand will be a tailwind in the mix as we definitely move more into sales there. While we also see digital as a growth opportunity, we were happy to get to a point of stability and putting a flat comp for the year, but we really think this can be a growth engine for us as well into 2026, which will then add some pressure to margin. So those are some puts and takes. So margin, I would say, isn't going to be a driver of the EBIT expansion, but rather it's going to be around our expense management and then obviously getting to that flat comp allows you to expand it on the top end.

Our next question comes from Bob Drbul from BTIG.

Just a couple of questions from me. On the women's business, as you think about this year and I think the progress that you made last year, where are the biggest opportunities ahead? And I guess on the same line of questioning would be just in home, I think when you think about what you've learned sort of Q4 in-home, soft home, table top. Can you just talk through that category as well? And just curious on sort of online versus in-store, how you would merchandise that category.

You'll take a shot at that first?

So from a women's perspective, I would say one big call it is juniors, Bob, it was up 8%, really seeing momentum behind our sole proprietary brand, which, as you know, junior is fastest-turning business. We're probably the most mature in that curve in terms of how we went after our proprietary brand portfolio. So I think that's kind of a litmus test for us and really what we're going to continue to chase after, and that's where women's will continue to lead to. I think there's a couple of opportunities if I think about women's. We're in a denim cycle. You're going to see us leaning into our proprietary brands with LC Lauren Conrad and Sonoma, but also great national brand partners like Levi's. So that's going to be coming to life in our store as well. We know we had a little bit too many choices on our floor, so they're really going to be curating that assortment and putting more depths in so we can be in stock on those basics that we need.

We went a little too far, I think, this year into core knits and sweaters. So we know we have an opportunity to curate that better as we get to the back half of the year. I'm really excited about our spring seasonal selling. A lot of the changes that we learned from our missteps in fall seasonal, we've corrected and we're starting to see that momentum as we called out with our spring seasonal businesses, which will only grow in volume as we move into March and April. So we're excited about that opportunity in front of us. So I think that women's really has the right formula from a junior's perspective, and they're going to continue to follow that as we move into the New Year.

From a home perspective, I think what we learned there was on seasonal decor, people like more choices. And so we went a little too deep in some categories, and we needed to give more choices from that perspective. So they have already corrected from that, we'll move into it. So we know as we go into next year, don't go too deep on the Santa Claus and Snowman, but have a little bit more array from a choice perspective, and then having start price points.

And so as we think about where we can add some more value, particularly as we get into that seasonal business, that's where we'll go. So we have a couple of places along the way. We did some small testing in Valentine's Day, you'll see Mother's Day, Father's Day. So we have some moments to make sure we get it right before the big holiday season, but we feel good with the progress that, that team has made and the steps they've already taken to correct what we saw during the holiday season.

I guess -- and if I could just ask a follow-up, would you be -- on the marketing expense, when you think about sort of how you're approaching reengaging with some of your credit customers but also noncredit customers. Where did you end up in marketing? And can you just talk through the plans for '26 in terms of leverage, not leverage in terms of how much you're going to spend?

I think marketing this year, we ended up close to a similar [ 8 Ss ] last year, kind of that's my metric for how I look at the productivity. What I would say is, we always look at opportunities. That team has done an amazing job of finding productivity and making our working media work harder for us. So it has been a way for us to save some money. However, we spent a lot of time with our Chief Marketing Officer about where and how we can invest back in to drive sales. So if we see opportunities, we're definitely making those investments and making sure we get the return back off of the money. So even though there are some savings, I think if you look at that productivity factor, you'll see it's pretty in line with where we've been.

And it is a place that if you look at versus where we plan to be we will tend to invest back into because we know we can get the sales, particularly in digital. It's a very easy way for us to invest in, get some search terms, get some paid traffic in moving our digital business forward and getting a really good ROI out of it. So I think we have a very good system in terms of how we measure marketing and then how we make those investments to make sure we're getting the return back from an organization perspective.

Our next question comes from Dana Telsey from Telsey Group.

I know you have a very healthy store base in relation to profitability. How are you thinking of openings and closings this year and the small store boxes? What's the game plan and remodels? And then on -- Michael, as you talked about the initiatives for top line growth, how do you see the framework of the store changing either by category, obviously, at the Impulse lanes? And what does footwear and active mean for you this year?

Good. So I'll try to take some of those questions. Thanks, Dana. The question around stores, and we've talked about this before. I think we have a -- we have a store base of 1,150 stores roughly that vast majority are well over 90% are profitable. And as we look at that store base on an annual basis, we'll continue from a hygiene perspective to make sure that we believe that those stores are positioned in the right spot and delivering what we need.

So I would not anticipate any sort of grand plan of saying stores -- we're taking stores out or adding stores at this point. The focus for us is actually on optimizing what we already have, and we'll be focused on making sure that we continue to push the store's productivity as far as we can going forward. We will look at stores like we do on an annual basis, like I said. And to the extent that there are opportunities for us to either relocate, those are opportunities for us, we can do that. But no major change in the store base expectation at this point. And then as far as footwear, do you want to cover that?

I think on footwear, we need -- I guess, footwear is doing well from a dress casual perspective and we're seeing some green shoots there, particularly like in sandals. We knew boots was going to be tough. We bought that down just given the exposure to tariffs in that category. So that was an anticipated piece. I think the big piece of it for us, as you mentioned, from an active perspective is getting innovation and some movement from an innovation perspective in the footwear business. We've been working really closely with our top 3 partners.

I think we do expect to see some momentum build in that category throughout the year. But I would say we'd probably be set better from that perspective for back-to-school into fall just because of the change that it does take to get there. So I would say from a footwear perspective, I expect it to probably lag in the front half of the year, but by the back half of the year, get back into parity from a comp perspective just given we do have a big active footwear business, and that will take some time to bring that innovation through from that perspective. .

And then in terms of, I think, your last question, if I wrote it down correctly, it was the top line framework for store changes. I think we've made the big changes in the last couple of years. Obviously, Sephora coming in was a big moment for us. We had some missteps with the jewelry. So bringing jewelry back in, showing that and showcasing that, having accessories have a home behind this Sephora pad and moving juniors back to the front of the store were some big showcases that we had in 2025.

Clearly, putting juniors in the front was working. That cross-shop ability with Sephora was persistent and consistent for us, which is a good thing. Impulse line and queuing lines have come in. We now have that in all stores, which we finalized at the end of the year. So that was a white space opportunity for us. And you're now going to see gifting zones as well, and those are going to be with the $10 price points. We're going to have more table towers, whether that be impulse, gift deals and also in toys.

And then we did some in-store showcases of our proprietary brands. So you'll see if you come in, we are showing more around Lauren Conrad. You're going to have elevated signing, mannequins, really a much more curated assortment. That should be in stores now. And then Tek Gear will be the secondary brand that we're going to be supporting as well to showcase it.

So we're investing in the proprietary inventory. We're investing in the marketing to make -- to build awareness, and we're investing in the in-store experience as well as you're going to see it on our digital experience as well for the customers to showcase those brands. So really putting our effort behind growing back those proprietary brands, which is we know provide incredible value, but also resonate with that core loyal customer for ours as well.

And Dana, just to add on to what Jill was saying. What you're hearing her talk about is trying to bring some fun and excitement back to particularly the store environment. So we've talked to you before about the storytelling nature of retail and what's important, and being able to not only curate the right assortment, which is what our customers are asking for, but also do some storytelling. So whether it's the use of mannequins, the way we position an LC by Lauren Conrad brand like Jill just mentioned in our stores, those are all important aspects of us being able to actually bring some fun back to the Kohl's environment and make sure that what we're offering is not just an item at a price, but also a story around it so that whether it's the entire outfit that we can display and talk to from a mannequin standpoint, those are the kind of things that are important for us that we think will help enhance the experience in store for our customers as they engage with us.

And then similarly online as well, telling that same story. So there's a pull-through of that thread all the way through the experience that a customer can have, whether they want to engage with us online or in-store or all the different versions in between, like BOPUS and the rest.

Next question comes from Oliver Chen from TD Cowen.

Michael and Jill, regarding trip assurance, what's the timing of that happening? And there are some things you can do sooner, you've been doing them, make them happen. But how does it phase in quarterly? And as we also model other income, what should we know about the comparisons and drivers throughout the year as the profitability of your company is quite sensitive to that line? It sounds like a lot is under your control. But what could derisk factors to the upside and downside on other income for us to consider?

And third, you've been on an inventory management journey for many, many years. I think it's different now. But what's different in terms of breadth versus depth? It sounds like there's some decisions that were made that were self issues in terms of what you're choosing to do with basics and others.

Yes. So on the trip assurance question, what I would tell you is that, that work is well underway, and we've been focusing on that in large part of 2025, and it will continue into '26 as well. And the whole focus there is our customers count on us to actually have what they're looking for, whether it's online or in store, particularly in store. And what we've been doing is curating the assortment to the point where we have the appropriate level of choice. And in many cases, that means reducing the choice offerings that we have, but at the same time, actually going deeper on that so that particularly in the basics area, and that work will continue. Our teams collectively across the organization have been working diligently on that over the last several months and the last number of months, and we feel like we're making good progress in that area. Jill, do you want to talk about the income?

Sure. I think when you referenced other income, you're referencing the other revenue, Oliver. But really, it's going to be about our credit sales. And I think that's where it's going to ebb and flow. So as I mentioned, it comes out of this year. We have a lower accounts receivable balance just because it's been lagging. We need to build that back. So the guide of down 4% to down 6% will lag the comp just because of the way that, that build happens, the way that it revolves and it generates that revenue. So I would say we're staying down flat to down 2%. We know our credit card customer needs to continue to improve. I think we can see that improvement more in the back half of the year, but it will still cause a lag on the other revenue line. So I think if you kind of look at that spread that we gave you, it's probably a good spread to use as we move in to the current year. There are no reclassifications, so it's very pure this year, so it should be an easier way for you to be able to model that.

And Sephora has been a great new customer recruitment tool. What's your latest thinking on the best adjacencies next to that? And where are we given that there's lots of nice conversion opportunity? And lastly, Michael, this is simple, but hard, but what do you think it takes to positive comp in stores? Like there are a lot of great things happening, but what's your visibility or your thoughts on which ones will be the critical drivers just to get back to positive comps on multiple years of negative comps?

Sure. On the Sephora question, we feel very good about the partnership there. In terms of the adjacencies, we have moved juniors across from Sephora. So we feel like that was a positive move and is paying dividends for us in terms of a customer coming in for Sephora purchase and then turning out and seeing what's available. That's a younger oftentimes more diverse, more digitally savvy customer that comes in to shop for Sephora. And we want to make sure that the products that they see outside of the Sephora portion of the store are consistent with what they're looking for. And that move with juniors has been a big part of that.

As far as getting back to growth, right? I don't want to pinpoint a date in the time to say it's going to happen. But the kinds of things that we're doing in terms of the progression that we've been on over the past year, in particular, but over the last couple of years, I would say, are, I think, indicative of the progress that we're making. We've mentioned proprietary brands. We've mentioned the calling of the -- duration of the assortment. Those are all things that we think are right. I talk to the team all the time here about -- I use the analogy of a restaurant that we've got to get the product right because that's what people ultimately come for, experience and all the other things that are wrapped around it are important as well, and we're working on those as well. But we've got to get the product right to make sure that, that's what the customer continues to come back around.

So we'll continue to focus on building that space to get back to growth eventually. What I would tell you is that if you look at the progression that this organization has been on over the last, call it, a couple of years, we had a negative 6% comp 2 years ago. We produced a minus 3% comp this past year in 2025. We're giving you guidance, as Jill mentioned in her commentary of being flat to down 2%. We came out of the fourth quarter roughly around the 2%, if you back out the weather impact of the 70 basis points that we mentioned.

And so we're guiding on the low end of where we're already performing. And if you build these capabilities on top of that, that's what we believe would get us at least back to flat. And we have the ambition, obviously, to get back to growth eventually. And that's what the aim is. We understand that, that's the life and blood of any business to grow. But we also want to be measured and disciplined in the way that we get there, particularly against the backdrop of the environment that we're operating in from an economic standpoint.

Our last question today comes from Michael Binetti from Evercore.

Thanks for all the detail here. Just on the comps, Jill, you suggested that we'd be building to the flat to down 2% through the year. Maybe just a thought on -- trying to connect that to your comment on the first quarter. Sounds like seasonal goods and some of the holiday decor was the headwind in fourth quarter, but the core was stronger if the spring seasonals are getting better and the quarter was stable. How should we think -- I'm trying to think about trends in first quarter relative to the negative 2% to flat for the year.

And then I'm also curious, it sounds like with the coupon and shifting to -- expanding the coupon a little bit deeper, as you said, shifting to more of the entry-level price points to drive value. It sounds like a good idea, very important. Can you just talk about how you're thinking about the range of outcomes for units versus AUR that could support the negative 2% to flat comp for the year?

Sure. So I think from a comp perspective, Michael mentioned it well. We anchored the low end on our current performance. If you look at fall, we exited the year down to the flat, shows that we're going to have progressive improvement throughout the year. So really by starting at the low singles that I guided for Q1, you'd actually say your exit rate has to get positive to exit at a flat. So we do know we have to make some changes. Obviously, we had some missteps with fall seasonal. We made those corrections with spring. It started out great. It's a small portion of the business right now.

So I think caution. I don't want to become overly optimistic. That's, as you know, not my nature, but we feel good with that business. We feel good with our year-round business, which has actually continued to perform well even through the fourth quarter. So I think we're cautiously optimistic there, but there's a lot of macro headwinds. And we know our consumer is low to middle income. They're under a lot of pressure. Obviously, a lot of things happening today that is taking their discretionary income. So we also want to be mindful of the environment that we're operating in. So we're kind of balancing that as we enter into this year.

We also know a lot of these investments into depths are going to happen as the year progresses. We mentioned footwear. We know we have some new innovation coming, but we don't expect that until the back half of the year. So there are things that are happening, but it does take some time to make those moves. So we wanted to make sure we gave ourselves that room within the guide to be able to make those changes. And as we continue to show progressive improvement throughout the year, that will show these efforts are working.

But I think as Michael mentioned in his prepared remarks, it's not going to be a straight line. I mean, there are going to be some ups and downs, and it's not just within these 4 walls that we get to control what's happening. We do have to be mindful of the external environment, which brings us to why the coupon and the opening price point is so important. We know that our customer, particularly the low- to middle-income customer, is going to over penetrate in these value brands, so we need to bring that to them.

We've seen -- gosh, I think if I look back for the last 20 quarters, Michael, we typically have seen a pretty flat average transaction value. Our issue continues to be traffic. So whether we're bringing in higher price point or lower price point, they will fill that basket and our average transaction value typically has stayed relatively flattish. It really comes down to driving traffic, which you've heard a lot more about marketing in this call because we know we need to continue to drive that traffic both in stores and digitally.

We've done an incredible job digitally. We had -- our traffic was very solid in the fourth quarter. We need to continue to do that to the stores. And I think the investments we're making in that experience, like Michael outlined, is a way for us to bring in some more traffic as well as just a better flow of goods. We transitioned in January this year, which is probably the first time we've done that in a long time, bringing in newness, having those transitional goods. It gives that customer a better reason to shop. And just on that inventory management, it affords us more currency of inventory and flowing goods faster, which we also think could be a driver of trips. So I actually feel well positioned as we enter the year. But I would say that I'm also just cautious, being mindful of the macro environment that we're operating in.

And we're out of time for questions. This will conclude today's conference call. Thank you for your participation. You may now disconnect.

Good morning, and welcome to the Kohl's Corporation Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.

I'd now like to turn the call over to Trevor Novotny, Director of Investor Relations. Thank you. 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-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 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 this call will not be updated. So if you are listening to a replay, 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 John Schlifske, our Independent Chair of the Board; Michael Bender, our Chief Executive Officer; and Jill Timm, our Chief Financial Officer.

I will now turn the call over to John.

Thank you, Trevor, and thank you for joining us this morning. I will be providing some brief introductory remarks, and then I'm going to turn it over to Michael and Jill to go over our third quarter performance, and then we'll take some Q&A.

As announced yesterday, the Board has appointed Michael Bender as Chief Executive Officer of Kohl's. Michael is a seasoned retail veteran who has a deep understanding of Kohl's business, serving as a Board member since 2019 former Chair of the Board and most recently as Interim CEO since May.

In addition to his Kohl's experience, Michael brings over 30 years of senior leadership experience across the retail and consumer goods industries. Over the last 6 months, the Board has gone through an extensive search process to identify our new CEO, and we could not be more thrilled to have Michael as the next leader of this company. There's been a lot of change over the last year at Kohl's, and Michael has proven to be an effective leader, fostering a strong culture and providing stability through the transition.

Additionally, during this time as interim CEO, Michael has made important strategic decisions address key areas of opportunities and help deliver progressive improvements to the business. Kohl's has a solid foundation for the future, boasting over 1,100 stores in a vast digital platform that serves more than 60 million customers each year. We have the utmost confidence that Michael is the right leader for this company, and we're excited about the substantial opportunity that can be realized under his leadership.

On behalf of the Board, I'd like to congratulate Michael on his new position. We look forward to supporting him and the management team in this next chapter.

With that, I'll now turn the call over to Michael.

Thank you, John, and good morning, everyone, and thank you for joining Kohl's third quarter earnings conference call. I'm honored to assume the role as Chief Executive Officer of Kohl's, and I would like to thank John and the Board for giving me the opportunity to lead this great company.

Since I joined the team in May, I've been deeply impressed with the Kohl's team, their resilience and their motivation to win. My commitment is to lead this organization, our associates and our customers. Every day, Kohl's has the privilege of serving millions of customers, and we will continually strive to enhance their experience and meet their evolving needs. I'm excited about the opportunity that lies ahead and look forward to repositioning Kohl's for future success.

Now during our call today, I'd like to discuss three items with you. First, discuss our third quarter performance; second, highlight the progress we're making against our 2025 initiatives. And lastly, give a brief overview of how we are positioned for the Q4 holiday season.

Let me start with our third quarter results. We are pleased as we delivered both top line and bottom line performance ahead of our expectations for the third consecutive quarter. These results directly reflect the progress we're making against our 2025 initiatives, which are building momentum and continuing to resonate with our customers. While we are encouraged with the progressive improvement we're making, we want to acknowledge that this performance is not representative of where we aspire to be.

Our team is working diligently to further execute against these 2025 initiatives to deliver quality products, great value and a frictionless experience to our customers. Looking deeper into our top line performance, our comparable sales performance continued to improve as we ran down 1.7% in the third quarter. We started the quarter with a better-than-expected performance in August and back-to-school season.

However, in September, we experienced a slowdown as we faced unseasonably warmer weather impacting our fall seasonal businesses. October was the strongest month as we delivered a positive 1% comparable sales performance. The quarter was led by a strong digital performance, up 2% versus last year.

As Jill will discuss in further detail later in the call, the improved performance was driven by an acceleration in our transactions versus prior quarter. This was particularly notable with our Kohl's Card customer, whose sales performance improved by over 500 basis points from Q2. This demonstrates important progress we're making with reengaging our core customers. While these results are encouraging, we continue to operate in an environment where our customers are becoming increasingly choiceful as their discretionary income remains pressured. This is especially notable in our low to middle-income consumers, as well as in our younger customers. These customers are becoming increasingly savvy and are seeking more value.

We expect this customer behavior to continue into the fourth quarter as we believe the macroeconomic environment will remain uncertain. This leads into the progress we're making against our 2025 initiatives. These efforts are centered around three key priorities: first, offering a curated, more balanced assortment that fulfills the needs of our customers.

Next, reestablishing Kohl's as a leader in value and quality and lastly, delivering a frictionless shopping experience across our omnichannel platforms.

Starting with our first initiative, offering a curated and more balanced assortment that fulfills the needs across all of our customers. By delivering an improved rebalanced assortment, we are able to serve a broader range of customers. As we have previously communicated, our focus in recent years has been around attracting a new customer which unintentionally led to not fully catering to our core loyal customers' needs. Each quarter this year, we have made meaningful improvements to our assortment offerings, which have translated to an improvement in transactions particularly from our core customers.

In addition, we are pleased to report that the new assortment continues to resonate with our non-Kohl's card customers, driving a fourth consecutive quarter of positive sales growth. The category that is particularly important to this core customer and overall company performance is our women's business. Women's ran in line with company performance and experienced a significant improvement from the second quarter. This was led by positive performance in our proprietary brands, which heavily penetrated into our women's business.

We continue to see the benefit from reinvesting inventory into key priority brands like Lauren Conrad, Simply Vera Vera Wang and Tek Gear. Within the women's category, we experienced an acceleration in our juniors business, which ran a positive comp in the quarter. Juniors is a pivotal component to the women's performance as it is a faster turning business and has reduced lead times on products. We saw strength in our key fall categories such as sweaters and fleece. We also benefited from the denim trend with national brands like Levi's and proprietary brands like So.

Lastly, we continue to see positive performance in fatigues, as we benefit from reestablishing this category in all stores earlier this year. Building on this success, we are excited about expanding this presence next year with our proprietary brands, Lauren Conrad and Simply Vera Vera Wang, in all stores.

Our men's business showed significant improvement in the quarter, running in line with company performance. This improvement from Q2 was driven by better clarity in our offering. As we enter Q4, we are continuing to make progress around clarity as receipts for our choice counts are down 10% and debt is up 5%. Customers leaned into proprietary brands, which ran a positive comp in the quarter as they looked for key brands like FLX and Tek Gear. In addition to solid proprietary brand performance, men's apparel also saw strong performance in the dress and tailored category with brands like Haggar and Apt. 9.

Accessories continues to be a bright spot for the company with Sephora, impulse and jewelry collectively helping to deliver positive comparable sales in the quarter. Sephora ran up 2% in the quarter with comparable sales down 1%, with solid performance in categories like fragrance and hair care from brands like YSL, Valentino and Summer Fridays. We continue to be pleased with this partnership, which delivered nearly a $2 billion business in 4 years. Sephora is outstanding at offering discovery, innovation and newness to customers and we are thrilled to announce that we will be offering MAC in 850 of our Sephora at Kohl's stores in spring of 2026.

In September, we completed the rollout of 613 impulse queuing lines, establishing a presence in nearly all stores. Impulse ran up over 40% in the quarter as we continue to benefit from this white space opportunity that adds an additional unit to our customers' baskets.

Jewelry ran up 10% in Q3 as we continue to gain traction in this category after we establish the destination for accessories behind Sephora. Strength in jewelry came from both fashion and ridge jewelry, as well as fine jewelry, both running positive comps in the quarter. We continue to test fine jewelry in 200 doors and believe this category will be an opportunity for us moving forward as its nonsubstitutable nature helps provide an incremental sale.

Our home business showed the largest improvement in the quarter, running in line with company performance. Soft Home categories like bedding and bath outperformed with strength from new proprietary brands like Hotelier and Mariana. Small electrics continue to underperform as expected given the impact of price increases and buying quantities down based on our elasticity analysis.

Lastly, footwear and kids remained challenged in the quarter. These categories remain an opportunity for us moving forward. In kids, we are looking for ways to highlight key proprietary brands like Jumping Beans and Little and Co. The footwear business continues to underperform with softness coming from active footwear and boots. We expect the boots business to remain soft in Q4 as we adjusted our buys down given the pricing elasticities of this category. Dress and casual footwear showed strength in the quarter with brands like Apt. 9.

Moving on now to our second initiative, reestablishing Kohl's as a leader in value and quality. What differentiates Kohl's is our ability to offer customers a blend of top national brands like Nike, Levi's and Sephora, as well as proprietary brands that are exclusive to Kohl's. This complementary brand assortment is essential to our value proposition as it enables customers to find quality, relevance and value in shopping at Kohl's. This value proposition is especially important to our core loyal customers who expect to find exceptional value when shopping at Kohl's.

As our customers continue to be more choiceful and remain under pressure, we have the opportunity to meet their needs and offer more value with elevating our proprietary brands. We identified the opportunity to reinvest into our proprietary brands 1 year ago as we over-indexed into market brands, making it more challenging to find products at an opening price point.

Since identifying this opportunity, we have made sequential improvement each quarter delivering a positive proprietary sales performance in the third quarter. This performance was led by brands like So and Juniors, LC and Simply Vera Vera Wang in women's and Tek Gear and FLX and men's. In addition to these well-established brands, we are seeking to find new opportunities to offer more value-oriented proprietary brands in categories like home and kids.

In home, we recently launched three new brands. Hotelier, Mingle & Co. and Mariana, which serve our soft home and tabletop categories. Our customers have shown positive initial reactions to these introductions, and we are excited about these brands moving forward. Building off the success of our FLX brand, which delivered another quarter of double-digit sales growth, we made the decision to expand this brand into our kids department in September. Currently, we have FLX kids in 300 doors and are committed to expanding this to more doors next spring. As we continue to refine our balance between national and proprietary brands, we're committed to moving where our customer is leading us.

The second action we took to deliver more value to our customers was through enhanced promotional strategies. Kohl's has traditionally offered incredible value to our customers through our coupon led promotional strategy. And after excluding a growing number of brands, our promotions became less impactful to our customers over recent years. This ultimately created unnecessary friction within our shopping experience particularly with our Kohl's card customers.

In response to this, we identified a list of brands to be coupon eligible at the end of the first quarter. Following the success of the initial wave of brand inclusion, we made the decision to add a second wave of brands into the coupon in late August. The second wave was smaller as it included roughly 50 brands that are more digitally native. We continue to see a positive impact to our digital channel as this channel experiences elevated pricing transparency.

Additionally, we are encouraged by the improvements this is generating with our core Kohl's card customers. We continue to test ways to drive customer awareness on brands that are now coupon eligible through signage and graphics.

Next, I would like to discuss our last priority, which is delivering a frictionless experience across our omnichannel platforms. We're focused on creating an elevated more consistent experience across our store fleet and on our digital platforms. To capitalize on this opportunity, we're identifying ways to optimize our store layout, increase our inspiration and restore trip assurance.

We continue to see benefits after making edits to our store layout. Following some preliminary adjacency analyses, specifically with juniors and accessories businesses. We decided to move juniors to the front of the store across from Sephora and establish an accessories pad behind Sephora. Since making these changes, both categories have shown progress.

In accessories, excluding Sephora, we've seen three consecutive quarters of positive sales growth driven by initiatives like jewelry and impulse. For juniors, we achieved a positive comp in the third quarter as we benefit from Sephora across shoppers and investments we've made into our proprietary assortment. Moving forward, we're continuing to look for ways to optimize our store layout to enable us to capture incremental sales.

In addition to the store layout, we are enhancing the shopping experience by increasing the inspiration in our stores. A few ways we are achieving this are by showcasing newness and relevant styles with manikins and enhancing brand awareness and findability through in-store graphics. You will start seeing some of this in-store inspiration in Q4 with our holiday displays with most of the inspiration to set in 2026.

Digitally, we continue to make solid progress applying artificial intelligence to improve efficiency and elevate the customer experience. AI is helping our engineers work faster to complete site updates and enhance our app performance. In marketing, predictive AI is guiding media investments and personalizing offers and generative tools are helping creative teams produce content faster.

While many initiatives are still developing, we are already seeing benefits in productivity, agility and customer engagement. We're taking a disciplined approach to scaling these capabilities as we continue to modernize the business and position Kohl's for long-term growth.

Lastly, we remain extremely focused on restoring trip assurance to our customer experience. This is a core pillar of what Kohl's is known for, and our increased choice counts over recent years has resulted in limited debt in key essential items. We're making progress in this, specifically in our women's business with categories like intimates and dresses, both of which made edits to exit out of less productive styles. We're also investing into depth for key sizes, helping deliver improved sales performance in both categories. As we continue to prioritize this initiative, we're using AI to help optimize our inventory allocation which will help provide a more consistent and reliable shopping experience going forward.

Now I would like to give a preview on how we're approaching the ever-important holiday season. We're excited about the momentum and opportunity we have heading into the holidays. The holidays are always a promotional time period, and we expect this to continue this year, especially given the state of the consumer. We have done a lot of great work throughout the year to show up for customers as a destination for exceptional value and gifting, a 1/3 of which will be exclusive to Kohl's. We entered the quarter in a better inventory position particularly with our proprietary brands, which will be essential in offering value to our customers in holiday through our sweaters, knits and fleece offerings.

In Sephora, we expanded our holiday gifting steps which have continued to resonate well with our customers. We're also building on new brand launches from Q3 with additional brands like Danessa Myricks, [ Astora ], Biodance and Kayali, which has become our #1 fragrance in women's. In addition to proprietary brands in Sephora, we're excited about the product offerings in our home category this year in hard home business, we're thrilled to offer new items such as the Green pan by body flay alongside new innovative items from key brands like Ninja and Shark. On the soft home side, we're emphasizing our bedding with value-oriented brands like Cuddl Duds and cozy throws from Big One.

Importantly, toys will be a key gifting category for us this holiday. We're excited about our offering of trending toys like Barbie, LEGO and Tonie's 2, as well as toys from favorite brands like Hot Wheels and Step2. This year, we're also seeing great engagement with our trading card offerings like Pokemon. From a marketing standpoint, we're making a statement in front of the store that is designed to inspire featuring everything customers need to welcome the holidays, find thoughtful gifts for the family and host and style. We're leading with compelling value to our customers, leaning into Kohl's cash and awards, which helps drive repeat trips and increased engagement.

Additionally, given the changes we made to our coupon inclusion this year, our customers will have more purchasing power this year compared to last year.

Before I turn the call over, I want to reiterate the key messages from this call. First, our improved performance in the third quarter is a direct reflection of momentum we're building to better serve all customers. Second, we're making great progress against our 2025 initiatives. We're encouraged with the results, but still have more work to do.

And third, we're excited about how we are positioned to deliver exceptional value to our customers during this important 2025 holiday season. All this progress and momentum could not have been made without the incredible work from our Kohl's associates. We have made great strides together as a team, and each day, I work with you, I am more and more impressed with our resilience and desire to win. The opportunity that lies ahead of us is clear and substantial, and we are committed to making more progress each quarter.

With that, I would now like to hand the call over to Jill.

Thank you, Michael. For today's call, I'll provide additional details on our third quarter results and give an update on our fiscal year 2025 guidance. Net sales declined 2.8% in the quarter and 4% year-to-date. Comparable sales declined 1.7% in Q3 and declined 3.2% year-to-date. The third quarter improvement was mainly driven by an increase in transactions versus prior quarter, while our average transaction value remained flat year-over-year.

In addition, proprietary brands ran a positive comp in the quarter with business accelerating as the quarter progressed. Digital sales outperformed stores again in Q3 and grew by 2.4% versus last year. This performance was driven by an increase in traffic throughout the quarter going from high single digits in August to high teens in October. From a customer perspective, we saw significant improvement in our Kohl's card customers, which were down high single digits in Q3, an increase in trend of over 500 basis points in the last quarter with the improvement coming from both the store and digital channels.

Moving down the P&L. Other revenue, which primarily consists of our credit business, was $168 million in Q3, a 17% decline compared to last year. As a reminder, we launched our co-brand credit card last September, so on a comparable basis, starting this quarter, we are no longer receiving the incremental benefit seen in the first half of this year.

In addition to this, we continue to face a headwind as we shifted some credit-related expenses from SG&A into other revenue. While our Kohl's Card still remains pressured, we made meaningful progress reengaging this customer throughout the year. We remain committed to furthering this progress as we continue into Q4 and next year.

Gross margin in Q3 was 39.6%, an improvement of 51 basis points versus last year. This year-over-year improvement was driven primarily by strong inventory management and product mix benefits driven by our positive proprietary sales performance this quarter. Year-to-date, gross margin was 39.8%, an increase of 39 basis points to last year. SG&A expenses declined 2.1% to $1.3 billion in Q3, driven by lower spending in stores, marketing and fulfillment with additional savings stemming from a portion of credit expenses shifting into other revenue. Year-to-date, SG&A expenses have declined 3.8%.

Depreciation was $176 million in Q3, a decrease of $8 million versus last year. The decrease was driven by lower capital expenditures and the impact from closed locations. Year-to-date depreciation expense of $526 million, down $34 million for the prior year. Interest expense was $75 million in the third quarter and $229 million year-to-date.

In the third quarter, we realized a benefit of $9 million within our adjusted tax line. This benefit was due to the release of tax reserves. We now expect our full year tax rate to be roughly 18%. Adjusted net income in the third quarter was $11 million, equating to an adjusted diluted earnings per share of $0.10. Year-to-date, adjusted net income of $61 million and adjusted diluted earnings per share is $0.54.

Moving on to the balance sheet and cash flow. We ended Q3 with $144 million of cash and cash equivalents. Inventory decreased approximately 5% compared to last year in Q3. We are positioned well from an inventory perspective as we head into the holiday season as we had a better flow of inventory this year and brought in inventory earlier than last year, which had elevated in-transit levels.

Year-to-date, our operating cash flow was $630 million, and our adjusted free cash flow is $270 million. We remain on track to achieve $1.3 billion of operating cash flow and $900 million of free cash flow at the end of this fiscal year. Our borrowings on the revolver declined to $45 million at the end of Q3. Over a $700 million decrease from last year. We remain committed to fully exiting the revolver by the end of this year.

Capital expenditures ended at $308 million year-to-date. We are on track to spend approximately $400 million of CapEx this year, with the majority of these investments relating to the completion of our full chain Sephora rollout, implementing 613 additional impulse queue lines, and the expansion of one of our next-generation e-commerce fulfillment centers.

Year-to-date, we have returned $42 million to shareholders through our dividend. And as previously disclosed, the Board on November 12, declared a quarterly cash dividend of $0.125 per share payable to shareholders on December 24.

Next, I would like to provide an update to our 2025 outlook. As mentioned previously in this call, we made meaningful progress to date on our 2025 initiatives. Each quarter, we have made sequential improvements in our key areas of focus, including investments into our proprietary brands and debt accounts delivering competitive value through our promotional strategy and optimizing our store layouts, all of which are continuing to resonate with our customers.

With that said, we continue to navigate a fluid and dynamic macroeconomic environment. We recognize that our middle to low-income customers are experiencing persistent pressure and a tightening of their discretionary income. We aim to be mindful of this as we lay out our updated outlook. For the full year, we expect net sales decline of 3.5% to 4%, comparable sales decline of 2.5% to 3%.

Other revenue down 11% to 12%, gross margin expansion of 30 to 35 basis points, and SG&A decline of 3.75% to 4% and adjusted diluted earnings per share of $1.25 to $1.45.

Lastly, I would like to emphasize my sincere appreciation of the incredible team here at Kohl's. We have been able to make significant progress on our goals despite navigating an uncertain and challenging environment, thanks to your continued commitment. I'm excited to continue this progress forward with all of you. I want to reiterate the importance of your impact to both our customers and our organization.

We are now happy to take your questions at this time.

[Operator Instructions] Our first question comes from Chuck Grom from Gordon Haskett.

And first of all, congrats, Michael on the new responsibilities. At a high level, I'm just curious, as you guys add back brands to the coupon eligibility list and make changes to the store layout and bring more of the prop brands back, how you're connecting with former and lapsed customers to make them aware of the changes? And where do you think you are, I guess, on that recovery path at this point in time?

I think, Chuck, we have -- the good news is with our core customers, they were still shopping us, we just lost some of their trips. So we have a lot of data around that customer. We know what they like to shop with. We know when they shop. So our marketing team has been able to use a lot of that data to go after them from a marketing perspective.

I would say that's been ramping up because as we've been bringing back in the items into the coupon, as we've been bringing the proprietary inventory back into our stores. We want to make sure when we did invite them in, that we were in stock and the items that they were looking for. Similarly with the jewelry brand and petites coming in because they actually over penetrated into the brand -- those brands as well.

So this past quarter, we did some personalization in terms of coupons. We know that resonates really well with them and actually made it in Kohl's cash as well. So we took away the exclusion headwind from that perspective as well. And we've really seen high engagement from that. So we're pleased with the trend improvement we've seen in the Kohl's charge customers up 500 basis points in the quarter. But clearly, we still have room to continue to move forward. And I think as we bring back in those brands, we continue to market to them, we're going to get more of their footsteps, particularly during this key holiday period.

And Chuck, I would -- just to add that the difference that we see between both the brick-and-mortar and the digital side of that question that you're asking, we see a more immediate response on the digital side.

Obviously, when we're able to communicate the brands that are back in the coupon. From a store perspective, we're still building that and we're doing things like making sure that when there's an item in a store that is coupon eligible that we're placing a sign, for example, on the fixture that says this item now coupon eligible, that will -- that ramp-up will take a little bit more time than what you see from a digital perspective. But we're excited, as Jill said, about the progress that we're making there and unifying those efforts.

Our next question comes from Paul Lejuez from Citigroup.

Joe, can you maybe break down that $1.3 billion of operating cash flow. Just talk about the net income versus the onetime items versus working capital benefit within that? And then maybe if you can talk about CapEx, I think you said $400 million this year. How should we think about a CapEx number over the next several years?

And then I just wanted to make sure I understood the traffic versus ticket in terms of the drivers of the comp this quarter. I think maybe you said what happened versus last quarter. I'm just curious on an absolute basis year-over-year. What the drivers of comps between traffic can take it.

Sure. So I think, first, obviously, $1.3 billion in operating cash flow, we feel really good with the momentum that we've made there in addition to paying off over $700 million on the revolver. So we'll clearly have an exit plan for that by the end of the year. I mean, a big portion of what you're seeing, we did have the onetime gain, as you alluded to, which is about $100 million that we recognized last quarter, but the majority of this cash flow is coming through our strong inventory management.

And I think that's the big thing. Inventory down 5%, on the quarter where we were down 1.7% from a comp perspective. We continue to expect to manage our inventory down in that low to mid-single-digit number. So I think that's really where we're seeing. We had a better flow of goods coming into Q3 this year, which we do believe helps accelerate our business as the quarter progressed, and we continue to flow those goods I think more timely has been helpful to us, but it's also been beneficial from a cash flow perspective.

So I think I would really narrow it down to inventory management being a key unlock we expect that to continue. We have opportunities to turn faster as an organization. We've had this conversation and the faster return, the more we can generate from a cash flow perspective. So I feel very confident that this is a level of cash ex the onetime that we can continue to operate at.

From a CapEx perspective, at $400 million, obviously, we completed the Sephora rollout we accelerated the impulse lines given the fact that they were working so well in the front half of the year, we really lean into them and to get them in almost all stores by the back half of the year. It's really an extra unit in the basket outsized impact in the stores. As we go into next year, I'd suggest that our level will probably be in that $350 million to $400 million range.

Obviously, we'll ebb and flow based on any big products. And if we have a big new project to lay out, we would obviously call that out separately, but I think that's a good run rate to use as we move forward.

And I think the third question from a traffic and ticket perspective, our average transaction value is relatively flat. So the difference for the quarter from a comp perspective is really about traffic, but also the improvement from last quarter and that down 4% to the down 17% was all about improved traffic. And the improvement we saw throughout the quarter with October actually getting to a positive comp with all driven by improvement in traffic. So those trends have continued to improve, helping drive the momentum that we've discussed.

Our next question comes from Mark Altschwager from Baird.

Congratulations, Michael. Michael, which of the strategic initiatives outlined at the start of the year are showing the most promise? And how are you evolving the strategy to stabilize comps based on the learnings year-to-date?

Yes, thanks for the question. Of the three initiatives that we started out with, I would say that one of the ones that I'm most proud of in terms of the progress that we're making is around this notion of building a more balanced assortment.

We've focused a lot of attention over the last, call it, 6 to 9 months on making sure that what we're offering to customers, particularly from a value perspective is what they're looking for. And Kohl's has historically been known for being able to offer choice, but also depth so that there's Trip Assurance. That's the piece that we underscore quite a bit about making sure that that's what we're known for.

So if you take categories like in women's dresses intimates, there's been an awful lot of work done in those two categories in particular to reset and edit some of the choices that we've had and make sure that the depth is available for our customers. So there's still work to be done in that instance. But we feel really good about that work.

I would say secondly, the -- in general, the focus on proprietary brands and making sure that we're bringing those forward and achieving -- I'll say, what is the proper mix. And again, we don't have a target, but we have a customer-led mindset about where we need to be with proprietary brands. The curation of that assortment has been a big positive for the business.

As Jill noted, in terms of the progress that we're making and the performance that we're seeing. From our efforts there. And it dovetails nicely into being able to support opening price points for customers who are pressured these days. And so it marries nicely with where the customer mindset is right now. Those are a couple of areas that I would focus on.

That's great. And so do you think you have the pieces in place to deliver top line growth as we look into 2026? And then separately as a follow-up for Jill. How should we think about the further opportunity for cost savings on the SG&A line and the ability to sustain SG&A dollars down year-over-year over the next several quarters?

Mark, I would say on your question about our trajectory toward growth. Clearly, that's what we talk about on a daily basis here internally. I think the performance that we've shown consecutively now over the last three quarters of the progression toward growth is an indicator like that, the kinds of things that we're focused on delivering on behalf of the customers is what we should be working on. I don't like to put a timetable on it and say, on April 21. That's when you'll see growth. But we've shown in October, I think, is a good example of -- we have the ability to get to a positive growth trajectory in the business. And that's what we're doing every day in the work that we're advancing here.

And then from a cost perspective, I think we have a history, I think, of managing our business with good cost discipline. Obviously, our cost being down 2% in the quarter on the down 1.7% comp. So we continue to find ways to be much more efficient. I think this is just instilled in our organization, and it is something that we are constantly looking for is how can we do things more efficiently more productively, how can we leverage technology in what we're doing, day in and day out.

We've introduced a lot of new technology, whether it be within our new e-fulfillment centers within our stores to help us have those efficiencies. So I feel like the model and the discipline that has been established within the organization will help us continue to sustain that cost discipline I think the variable model we run runs really well. So if we get to positive growth, we should be adding those expenses in to support that as well. So I think that's the model.

As you know, we think we can leverage typically around that 1% comp. We've done better than that this year as we've really known we needed to tighten so we could open up funds to help us continue to drive into the initiatives that we've outlined to really help drive the progressive improvement you see on the top line.

And Mark, I would just say in answering your earlier question a little bit further to around what's going to help us get to a positive growth trajectory. We spend a lot of time inside the business since I've been on board, focusing on product. And making sure that that's at the center of how we actually drive the business. We do well with promotions. We have that down. But -- to the extent that there is a focus on product and making sure that we are both relevant, styles are right, and it speaks to the customer in a compelling way. That's where we've been spending a lot of time making sure that we're focusing our efforts in that regard. And that is one of the things -- one of the big things that's helping us show some of the results that we're speaking about today.

Our next question comes from Bob Drbul from BTIG.

Michael, congratulations. On the -- Jill, a question for you. On the gross margin side, when you think about sort of the fourth quarter and I think just when you generally look at some of the adjustments and changes that you're making to the promotional cadence and exclusions, can you just talk us through like the bigger drivers of your outlook and how you think about the opportunities with private brands, et cetera, contributed?

Sure. I think, obviously, first, if I start with where we were in Q3, up 50 basis points we really benefited one from the inventory management I spoke to, by flowing goods more current and trend right, we're able to have a better reg selling price. That will continue as we move into Q4.

Also, we benefited from mix in a couple of different ways. One, our proprietary brand portfolio running a positive comp in that side of the business, obviously, has an outsized impact to our margins to the good side. Second, if you underlook the categories from a home perspective, we knew electrics would underperform. We knew that there was going to be some pressure there and brought that down based on our elasticity analysis of where prices were moving. But we overperformed in our soft home, which has a better margin structure for us.

So overall, we start seeing mix really benefiting us. I think those things will continue to persist as we get into Q4. A couple of the headwinds, which is why we guided that margin a little softer than you saw in Q3. One is digital becomes a bigger portion of our business in Q4. So we will have added pressure from a cost of shipping perspective. And then we also expect it is a highly promotional time. We know that we have a low and middle income customer that are going to be more choiceful and they're really seeking value.

So we wanted to be set up so we could have that ability to really lean into value and our promotions during that time of year to ensure that we are meeting the customer where they needed to be met and also grabbing those sales from that customer, particularly that core credit customer, who loves the deal.

Great. And I just had a question on the -- I guess, on the debt and with the progress you made on the revolver. Can you just talk us through sort of rebuilding the cash balances like how you think about your debt position at this point? And any sort of targets as you think about heading into '26?

Yes. First, if I look at just the debt outstanding, I think we're about $1.5 billion of debt outstanding. So I actually look at our net debt leverage at about 1.2%. Obviously, our leases, which, as you know, we had to reset a lot of our leases when we put in the Sephora shops in all of our stores.

So when you add in the leases, that's what really brings our leverage ratio up. And if I break that into two pieces, we're really signed in for our first term of an extended lease payment, which averages about 4 years. So if you add that back in, it brings our lease leverage ratio to about 2.6x, but then when you add in the extended term, which is what we're using on our balance sheet because that's what we're depreciating our asset over is what brings you to the 4.5x leverage.

So I actually feel very good with $1.5 billion outstanding. We just refi-ed our long-term debt. We have nothing coming -- we don't have a stack coming due for 5 years. And as you saw, we deleveraged our balance sheet by about $700 million from last year. We'll be completely out of the revolver by the end of this year, which gives us additional liquidity of $1.5 billion as well. So I feel very well positioned from a balance sheet perspective. And then as we talked about, generating $1.3 billion of operating cash flow, really benefiting from that inventory management, which we think will be a continued benefit for us into 2026 as well.

Our next question comes from Oliver Chen from TD Cowen.

Hi, Michael and Jill. On the progress you've made how might you rank order some of the progress in terms of the opportunities on that positive comp opportunity with categories and/or strategies. Also was credit card income in line with what you expected and anything we should know in terms of making sure we model that correctly going forward? And then on the topic of speed in the organization, what's ahead for driving that? I know it's critical for merchandising and there's lots of AI opportunities and the demand volatility has been unprecedented. Kohl's Cash is also iconic. And I know that program has been an opportunity to simplify. But any updates there as well.

Great. So that's four questions in there. We'll try to address those, Oliver. The first one, in terms of rank order of the growth in the initiatives work, I would say that again, the focus that we've had on getting the assortment right, I rank is probably at the top of the list. Inclusive in that, as I had mentioned, around proprietary brands and getting the mix between national and proprietary brands in a better place. I feel like we've made some really good progress on that front.

Reassorting ourselves in terms of the style and relevancy of the product and the focus that we have there. I spent a lot of time myself with the teams, particularly on the women's side of the business since I've been on Board because as you know, women's here at Kohl's drives Kohl's. So -- that's been the focus for me in the first, call it, a couple of months or so of really digging in with the merchant organization.

I would say also that what you should see going forward from us and what I'm excited about also, you saw that we hired in the last three months or so, the new CTO, Steve Dee, as well as new Chief Digital Officer, Arianne Parisi, and building out an experience that's truly omnichannel and to your point, modernizing the business. They have leaned in very quickly both of them on helping us think through from a more commercial standpoint, what needs to happen in the business from that perspective. So those are a couple of areas that I would highlight in answering that first question that you have on. Jill, you want to take credit and...

From a credit perspective, it did come in where we expect it to be. Obviously, we guided it down as we lapped the launch of the co-brand last year. You can see in the implied guide that it will get slightly better in Q4. But I would say is our Kohl's Card customer sales did improve that 500 basis points. But as you know, it just takes a little bit of a lag for that AR to build and then revolve. So it's always going to be lagged based off performance before it hits into the credit line.

The other thing I would call is our payment rates do remain above last year. So that comes back into not building as much from an AR perspective and also a little bit less late fee income. And then although our loss rates are elevated, we actually did see them down slightly in Q3. So I feel pretty good with the health of the portfolio. It's really just continuing to get that credit card customer coming in shopping and letting their balances revolve to bring that back in. So we are expecting a little bit of a benefit into Q4, and then you should see more of that benefit as we enter into 2026 just given the lag of how that credit line runs.

I think from a Kohl's Cash perspective, I mean, you nailed it, it is iconic. We did actually celebrate our Kohl's Cash anniversary and put a whole event around it during this quarter, which was great. I think, hopefully, you saw that out on our social media because it was well attended by many as we are giving out some Kohl's Cash gifts and people really love what that looks like.

As we move into the holidays, we'll continue to leverage this as well. We have events planned around it. It's a way for us to get around. Obviously, it could be used in everything. So there is no exclusion you earn it, you can come back and redeem it. People love to earn it on gifts that they're giving and use it on a self gift during the holiday period. So I think this is definitely something that has set Kohl's apart and really resonates with both our Kohl's Charge and non-Kohl's Charge customer. And so our marketing team has done a really great job of exploiting that.

Okay. I had a follow-up, Michael, the company has been on this journey with merchandising in the past and differentiation has been important and making sure that the brands do all seeing the same or trends, right? I guess what's different this time? Or what are your plans in terms of what's going to be distinguished. And that should be a really easy compare. What should we know about the compare versus momentum, but it's to compare nonetheless. So for being negative, was that -- I know that business is remarkable, but was it a surprise that it was negative beauties than overall pretty vibrant?

Yes, I'll take this for questions. Jill, please chime in too, if there's more to say about it. But the Sephora business is something that we're really excited about. As I've mentioned in the past, it's approaching a $2 billion business for us over a 4-year time period and we feel good about the progress that we're making there. We've mentioned in the past that with this being now a 4-year-old business, you see similar to how a store matures, that business looking that way in some cases.

But Sephora, also, as we've mentioned, has an incredible pipeline of opportunity to bring newness and innovation. We've mentioned MAC coming in spring of next year, those are the kinds of things that will continue to fuel the growth of that business, and we feel very good about where Sephora sits. I have no concerns at all about that at all.

And I think in terms of where you're talking about updates from a branding perspective, I think the big thing, and Michael called this out a couple of times is we're really listening to the customer.

So moving back into proprietary brands, we are a void of an opening price point, Oliver, in our store, and our customer came to look for value. They came to look for the brands that they had known at Kohl's and they couldn't find that on the floor. So we're making that investment back into our proprietary brands, but we're doing it in a really thoughtful manner. We're not over-correcting.

Our inventory last year in Q3 and proprietary brands was down about 30%. This year, we're up about 11%. So still on a 2-year stack basis, we're down, but we're making those moves and making the right investments. And we're doing that in a better timely manner than what we have seen in the past. We are also editing out some of the redundancy we're seeing on the floor so that these brands can stand out more. We've made reductions so that we can have from a dress perspective, we can have a really great dress assortment, but we're going to do on half the racks that you've seen in the past because that's really what the customer was shopping and we saw our most productivity out of it.

We're starting to make some of those adjacency analysis and making those moves within our store. We've talked a lot about accessories and juniors, we know there's more to come from that as well. So how can we take advantage of what we know the customers putting in their basket and what could be that next item that they're looking to purchase for as well.

I think the big thing is Trip Assurance that we've talked about, and that's probably in the more early innings of things. We are starting to see, particularly as we move into Q4, that you're going to see our receipts are going to be more about adding depth on the floor and less choice count. And really being able to drive back that trip assurance our customer had come to known us for that we really disappointed her with. So I feel like the progress we've made is we got back into the coupon that's really resonated with our Kohl's Card customer.

We moved into the proprietary brands and jewelry and fatigue, all of which have outperformed and our customers voted yes on. And now we're going to start making some of those changes with our floor pad, as well as investing more into depth, especially as we move into 2026. You're also going to see, as we move into '26 a better way of transitionary goods. So we're going to see a much more transitional time in January and into February, given the strong inventory management we had, it's allowing us to have those moments and flow goods more timely, so we can take advantage of that first-mover opportunity that we probably missed out on in the last couple of years.

Our next question comes from Dana Telsey from Telsey Group.

Congratulations, Michael, and nice to see the progress. Obviously, a lot of talk about proprietary brands in the progress and enhancements being made there. Certainly seems like women's is the core. Any other brands you would call out or categories that you would call out on proprietary to watch for that can be meaningful. And what does it mean at all if anything changes on the tariff side, Jill, what does that mean to margins? How are you thinking about it? And then just brand inclusion in coupons, are you done with that? Where are you on the coupon cycle with brands?

I'll start with that first question, Dana. In terms of the bucket of coupon inclusions, I think for now where we want to be. We've done two tranches, a big one back in April and the latest one in August, and we feel good about the progress that we're making there and what we're seeing from customers, particularly as it relates to the Kohl's credit card customer. Mouthful. And that's one of the things that we're excited about in terms of what we're seeing there.

As far as other brands or categories that we see -- for me, there are several, but one that I'll highlight would be in the active side, both Tek and FLX are areas that are important for us. We mentioned earlier in the comments about the fact that we feel so good about FLX that we've extended into kids in 300 stores. There'll be 300 more in the spring and then a full almost every store by June of next year is where we're headed with that. So those are -- that's an example of the kinds of things that we're focused on in terms of additional focus on proprietary brands and extending it outside of categories that we currently have.

And then your question on tariffs, Dana. I think obviously, this quarter, we did well, I think we saw less of an impact. So I really want to give a shout out to our merchant and sourcing teams. They've done an incredible job navigating this dynamic environment and letting it really add up in a great place in terms of how we showed our margins. We do expect that this will be a little bit more pressure as we go into Q4 and into 2026 first because we'll have a full year of this exposure.

And also, I think just there's more certainty around what these tariffs means. So we're going to have a little bit more pressure as we do move into '26, but we feel good with our ability and how we've offset them to date. I just think with the certainty, we're going to see a lot more movement there as we go into 2026, both with our proprietary brands, international vendors.

Got it. And just one last thing, if I hadn't been mentioned. Anything on the store portfolio, how you think about openings, closings, relocations going forward?

Yes. I would just say that that's a normal hygiene practice for us to review our store fleet. The good news is that the vast majority of our stores, well over 90% are profitable and productive for us. And so as we do at the beginning of every year, we'll take a look at our stores. And if we deem there to be any necessary adjustments we'll make that. But as we did last year in closing 20 or so stores, we'll take a look, but that process is underway. Yes.

We are of time for questions today. This will conclude today's conference call. Thank you for your participation. You may now disconnect.