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Text: Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.
2021 was a pivotal year for the company.
We achieved record earnings per share and successfully launched several key strategic initiatives that position us to drive growth for years to come.
I am proud of how our team has remained agile and focused in a challenging environment during the past couple of years.
We've proven that Kohl's is an incredibly strong and resilient company and has a very bright future.
During today's call, I want to leave you with three things.
First, we have fundamentally restructured our business to be more profitable.
In 2021, we delivered an all-time record adjusted earnings per share of $7.33, eclipsing our previous high of $5.60 in 2018.
And our operating margin of 8.6% exceeded our goal of 7% to 8% two years ahead of plan.
Second, our strategy is building momentum.
Sephora is driving impressive results, which gives us a lot of confidence as we expand the partnership to more than half of our store base this year.
We are also pleased with the ongoing strength in our active business, which grew more than 40% relative to last year.
And third, we are returning a significant amount of capital to shareholders.
We continue to see a lot of value in our company and are reinforcing our commitment to driving shareholder value in 2022.
The board has approved a 100% increase in our dividend, which equates to an annual dividend of $2 per share.
In addition, the board has authorized a $3 billion share repurchase program, and we plan to repurchase at least $1 billion this year, of which $500 million is expected to be repurchased through open market transactions or an accelerated share repurchase program executed in Q2 2022.
In addition, we are focused on running our business the right way.
We have a long-standing commitment to ESG stewardship, including a strong environmental platform, diversity and inclusion strategy and focus on giving back to communities.
We continue to raise the bar in all of these areas and look forward to releasing our 2021 ESG Report in the spring, which will include details on our ESG goals, progress to date and SASB and TCFD reporting.
We remain extremely confident in driving profitable future growth and cash flow generation, and we look to build on this past year's success in 2022 and beyond.
I'll start by adding more color to our Q4 results.
We drove strong margin improvement and delivered fourth-quarter earnings per share ahead of expectations.
Following a strong sales start to the quarter, we experienced significant additional inventory receipt delays and were unable to fulfill all of the customer demand during this critical holiday time.
We estimate that our sales growth was impacted by approximately 400 basis points as a result of the worsening of supply chain disruption to our business.
We also experienced a softening in-store traffic in January due to omicron.
Our ability to navigate these challenges and still report strong earnings is a testament to how we fundamentally restructured our business to be more profitable, with an assortment that has a higher margin profile and an expense structure that is more efficient.
In terms of the top line, Q4 sales increased 6% to last year, led by a double-digit increase in-store sales.
We saw the best performance in categories where we had sufficient inventory, such as active, and conversely, weaker results in areas with inventory challenges, like women's.
This gives us confidence that as we improve our inventory position in 2022, we will be able to better capture customer demand and drive sales growth.
Stores remain extremely important to our business.
The vast majority of our customers shop our stores, and the stores play a central role in our omnichannel model.
During the fourth quarter, more than 40% of digital sales were fulfilled by stores.
As it relates to digital, sales increased 21% to the same period in 2019 and were down 1% to 2020.
As a percentage of total sales, digital sales were 39% in the quarter.
For the year, relative to 2019, digital sales increased 30% and accounted for 32% of total sales.
From a category perspective in Q4, active continues to be a key growth driver of our business, with sales increasing more than 25% to both last year and on a two-year basis.
Kohl's continues to assert itself as a leading destination for the overall active category, including performance, athleisure and outdoor, through its differentiated portfolio of national and private brands.
We saw strength across all active categories in Q4: women's, men's, and children's apparel as well as in footwear.
From a brand perspective, our key active national brands of Nike, Under Armour, adidas, and Champion all experienced exceptional growth.
In addition, our national brands of Levi's, Vans, Ninja, Koolaburra by UGG, LEGO, and Hurley also outperformed.
From a private brand standpoint, we saw strength in brands like Tek Gear, Sonoma and SO.
Jill will share more color on the quarter in a moment.
Let me now provide an update on our strategy and key 2022 initiatives.
We made important progress in our pursuit of becoming a leading destination for the active and casual lifestyle in 2021.
Core to this strategy is our product, building a meaningful beauty business, continuing to grow our active category, improving women's and introducing iconic relevant brands to further differentiate our brand portfolio.
Many of these major initiatives were launched late in 2021 and are just starting to scale, with most of the upside opportunity still ahead of us.
Let me start with our game-changing partnership with Sephora.
As we've shared before, this introduction will propel Kohl's into a leading beauty destination.
It also is a great example of how we are investing in profitable future growth by elevating our product assortment and the overall experience.
Sephora drove significant beauty sales in its first holiday season at Kohl's.
We are continuing to see increased levels of traffic and a mid-single-digit sales lift in the first 200 stores that have Sephora as compared to the balance of the chain.
We continue to see strong new customer acquisition in our Sephora stores who are younger and more diverse.
New customers represent more than 25% of Sephora at Kohl's shoppers.
Customers are shopping across a wide range of price points and categories such as makeup, skincare, and fragrance.
Some of the top-selling brands during the holiday season included Sephora Collection, Fenty, Too Faced, Charlotte Tilbury, OLAPLEX, and tarte.
Sephora at Kohl's customers are also shopping across the store.
More than half are attaching at least one other category in their purchase, with women's, accessories, and active being the most prevalent.
The frequency of customer return trips is also building the longer the Sephora shops have been opened.
Sephora will be a key driver of our growth in 2022 with the opening of another 400 new shops, reaching half of our store base.
And in 2023, we will open another 250 Sephora shops.
We are working closely with Sephora to test and launch additional opportunities to grow our collective business.
We look forward to highlighting some of these at next week's Investor Day.
In conjunction with the Sephora openings, we are also investing to elevate the overall store environment.
We are repositioning categories to deliver against our new strategy, such as moving active to the front of the store.
We continue to improve our merchandising efforts and offer an ongoing pipeline of newness and discovery.
By the end of 2022, more than half of our store base will have Sephora and the new elevated experience, which is an important milestone in our evolution.
In addition to moving active to the front of the store, we will be driving growth through further expansion in our assortment and elevated merchandising across all of our key national brands.
We're also growing our outdoor business.
Following the successful launch of Eddie Bauer, we will expand the brand offering from 500 stores to all stores in 2022.
We will also increase distribution of Under Armour Outdoor from 400 stores to all stores and remain committed to growing our business with Columbia and Lands' End.
And we're focused on further growing our plus size and big and tall businesses, which continue to resonate with our customers.
In addition to Sephora and active, let me share some of our other key initiatives, starting with men's.
Our men's business has continued to be a strong performer and benefit from our recent brand introductions of Tommy Hilfiger, Calvin Klein, and Hurley.
We look to build on this momentum in 2022 by dedicating more space and expanding each of these brands.
Let me now turn to women's, which is an important business for Kohl's.
As you know, we have taken a number of steps to reposition the women's business.
We entered 2021 with a conservative plan given the uncertainty of the year ahead and the significant transformation of that business.
As the macro environment improved, we were challenged to sufficiently replenish our inventory levels given the worsening supply chain disruption.
As a result, the core women's business operated with an average inventory down nearly 45% to 2019 during the fourth quarter.
While 2021 included many challenges, the women's business delivered multiyear highs for sell-through, turn, and margins.
You'll hear more about our women's strategy at next week's Investor Day.
We are also focused on other initiatives across the business.
We will inject more discovery into our stores with more frequent use of capsules such as: Draper James RSVP, a collection from the brand founded by Reese Witherspoon; and a premium denim offering, including Buffalo and Levi's SilverTab.
Leveraging the reach of our strong omnichannel platform, we will also be introducing dozens of emerging products and brands on a rotating basis, including brands such as Colors for Good and Love Your Melon that have a philanthropic mission.
Let me now provide a quick preview of what to expect at next week's Investor Day event.
We are looking forward to sharing with you how we are evolving Kohl's into a focused lifestyle concept with a clear mandate on driving profitable growth.
In addition to Jill and I, several other members of our executive leadership team will join us to discuss key initiatives across merchandising, marketing and technology.
We will also review our long-term financial plan and highlight our ESG efforts.
Before I hand it off to Jill, let me briefly summarize my comments today.
2021 was an important and pivotal year for Kohl's.
We accomplished a great deal strategically and financially as we've highlighted today.
Given the strong growth initiatives in front of us, we have great confidence in the future.
We are focused on driving shareholder value and are reinforcing our commitment to returning capital to shareholders.
We are doubling our dividend, and our Board has approved a $3 billion share repurchase authorization, with a plan to repurchase at least $1 billion in shares in 2022.
As we close out this important year for the company, I want to express my sincerest gratitude to all of our associates across the country for their tremendous commitment and hard work.
It has been an extraordinary couple of years, and this team continues to foster a strong culture, deliver exceptional service to our customers and create a bright future for Kohl's.
I want to start by reiterating the three key takeaways from today's call: one, we have fundamentally restructured our business to be more profitable, and this is showcased by a record year of EPS; two, our strategy is building momentum, and this will continue in 2022; and three, we are reinforcing our commitment to driving shareholder value, doubling our dividend and planning to repurchase at least $1 billion in shares in 2022.
For today's call, I'm going to review our fourth-quarter results, discuss our capital allocation plans and then provide details on our 2022 guidance outlook.
For the fourth quarter, net sales increased 6% to last year, and other revenue, which is primarily credit revenue, also increased 6%.
As Michelle indicated, following a strong start to the quarter, the sales trend worsened due to inventory receipt delays and the spread of omicron.
We estimate that our sales were impacted by approximately 400 basis points in the fourth quarter as a result of supply chain challenges.
Turning to gross margin.
Q4 gross margin was 33.2%, up 124 basis points from last year, driven primarily by higher inventory turns and regular price selling, reduced sourcing costs, and pricing and promotion optimization strategies.
This was partially offset by higher transportation costs as freight expense was more than 140 basis point headwind to gross margin in Q4 and was $40 million higher than we expected.
Now let me discuss SG&A.
In Q4, SG&A expenses increased 5% to $1.7 billion, driven principally by our top-line growth.
As a percentage of revenue, SG&A expenses leveraged by 15 basis points to last year, with improved store labor productivity and lower technology expenses more than offsetting increased wage investments across our stores and fulfillment centers.
Depreciation expense of $207 million was $11 million lower than last year due to lower capital spend.
In total, our Q4 operating margin was 6.9%, representing an increase of 172 basis points to last year.
Last, let me touch on some additional financial items.
Interest expense was $5 million lower than last year due to lower average debt outstanding during the quarter based on steps we took in 2021 to return our balance sheet to its healthy prepandemic debt structure.
Net income for the quarter was $299 million, and earnings per diluted share was $2.20.
This compares with last year's adjusted earnings per share of $2.22, which included $1.15 of tax benefits.
As evident in our performance during 2021, our strategic actions over the past 18 months to enhance our gross margin and improve the efficiency within our expense structure are working.
For the full year, we achieved a gross margin of 38.1%, which exceeded our 36% target, and we have managed expenses tightly, lowering marketing and technology spend each by more than $100 million since 2019.
These were key drivers in our ability to deliver an operating margin of 8.6% in 2021, exceeding our 2023 target of 7% to 8% two years ahead of plan.
And we reported an all-time record earnings per share of $7.33, well ahead of our prior high of $5.60 in 2018.
Turning to the balance sheet.
We continue to be in a strong financial position.
We ended the quarter with $1.6 billion of cash and cash equivalents.
As it relates to inventory, we continue to deliver very strong inventory turnover in Q4, resulting in a 4.1 times turn for the year, achieving our goal of four times or more.
Our inventory balance at year end was 13% lower than 2019.
However, this was not reflective of our position during the holiday period.
We entered the quarter with inventory trending down 25% to 2019 and slightly worse on an available-for-sale basis, and we expect it to maintain this level through the holiday.
However, a strong start to November, coupled with unexpected receipt delays, led to significantly less inventory in stores than planned during the key shopping weeks.
Average available-for-sale inventory was down nearly 40% to 2019 during November and December, and our position in stores was even worse than this.
In assessing our results, it was clear that our challenged inventory position hindered our ability to drive the intended sales.
We saw a distinct correlation between inventory and sales growth across our store base and across our categories.
Our inventory position began improving in January as receipts began arriving, though was still down approximately 30% on average during the month.
Looking ahead, we feel good about our overall inventory composition.
Although certain receipts were late, we don't believe we have a margin liability as we will continue to work through inventory in Q1 in core merchandise items like fleece and use pack and hold strategies on seasonal goods such as sleep sets and pajamas.
And we've taken additional proactive steps to ensure we are better positioned.
Turning to cash flow.
We continued our strong cash flow generation with $497 million of operating cash flow and $296 million of free cash flow in Q4.
For the full year 2021, we generated operating cash flow of $2.3 billion and free cash flow of $1.6 billion.
Capital expenditures for the year were $605 million, driven mainly by Sephora build-outs, refreshes, and fixtures for new brand launches as well as the completion of our six e-commerce fulfillment centers.
For 2022, we are planning capital expenditures of approximately $850 million.
This is higher than 2021 due to our continued investment in enhancing our store experience, including 400 Sephora build-outs and store refreshes as well as five new stores and four relocations.
Now let me discuss our capital allocation actions.
During the fourth quarter, we further accelerated our share repurchase activity, buying over 10 million shares for $548 million.
For the full year, we repurchased 26 million shares for $1.35 billion and ended the year with approximately 131.3 million shares outstanding.
As it relates to our dividend, we paid $147 million to shareholders in 2021.
In total, we returned $1.5 billion to shareholders in 2021.
The board has approved a 100% increase in our dividend, which equates to an annual dividend of $2 per share, and a $3 billion share repurchase authorization.
In 2022, we plan on repurchasing at least $1 billion, illustrating the confidence we have in our business and in our key strategic initiatives.
Now let me provide details on our outlook for 2022.
As you've heard today, we are confident in our strategies to continue our growth in 2022.
Our guidance assumes that our business will strengthen as the year progresses, given the timing of our key strategic growth initiatives, specifically the rollout of our 400 Sephora shops.
For the full year, we currently expect net sales to increase 2% to 3% versus 2021; operating margins to be in the range of 7.2% to 7.5%; and earnings per share to be in the range of $7 to $7.50, excluding any nonrecurring charges.
Let me share some additional guidance details and notes.
We are expecting higher G&A and interest expense in 2022 due to lease accounting.
As we have stepped up our investment in stores with Sephora and refreshes, it has resulted in a number of leases being reclassified to finance leases from operating leases.
Accounting treatment for finance leases recognizes expense in G&A and interest expense rather than rent expense.
As a result, we expect G&A to be approximately $860 million and interest expense of approximately $300 million in 2022.
And lastly, we expect a tax rate of approximately 24%.
I want to highlight some additional guidance items.
First, from a net sales perspective, we expect Sephora to be a key driver of our growth in 2022 with the opening of another 400 new shops.
Given the timing of the Sephora store openings and inventory flow normalizing, we are expecting sales growth to build as the year progresses, with the second half stronger than the first half.
Second, we are expecting significantly higher freight and product cost inflation in 2022.
While we will benefit from our ongoing sourcing initiatives and some pricing actions, we do not expect to fully mitigate the headwind.
As a result, we are planning gross margin to contract by approximately 100 basis points in 2022 relative to 2021.
Third, from an SG&A expense perspective, we are planning expenses to be higher in Q1 and Q2 driven by the opening of 400 Sephora stores and the related store refresh costs.
And fourth, our guidance assumes our plan to repurchase at least $1 billion of shares in 2022, of which $500 million is expected to be repurchased through open market transactions or an accelerated share repurchase program executed in Q2 of 2022.
For modeling purposes, please note that we ended 2021 with 131.3 million shares.
In summary, our business remains financially strong.
We delivered record earnings per share in 2021 and returned $1.5 billion in capital to shareholders.
We will build on this performance in 2022 as we scale key initiatives and improve our inventory positions.
I will now hand it back to Michelle.
Before we move to Q&A, I want to address some of the uninformed and inaccurate commentary regarding the Board's openness to maximizing value.
We have a strategic and financial plan that will deliver substantial value.
The board is testing and measuring that plan against other alternatives.
As we announced on February 4, the company retained Goldman Sachs to engage with interested parties.
That effort continues and has included engaging with unsolicited bidders as well as proactive outreach.
Engagement with those parties is ongoing.
Our proxy, when filed, will provide more detail.
The board is committed to fulfilling its fiduciary duties and will choose the path it believes will maximize the value to shareholders.
So contrary to what others might say, the Board's approach is robust and intentional.
We won't be commenting further on this topic during today's call.

user
q4 earnings per share $2.20.
sees fy earnings per share $7.00 to $7.50 excluding items.
sees fy sales up 2 to 3 percent.

assistant