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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.
Our strategic effort to transform Kohl's into the leading destination for the active and casual lifestyle continues to gain traction.
We delivered another outstanding performance in the third quarter, continuing our momentum from the first half of the year.
During today's call, I want to leave you with three things.
First, we achieved record Q3 earnings and raised our full year outlook, resulting in an all-time high earnings per share for the company.
Q3 sales increased 16% to last year, and our operating margin was a nine-year high of 8.4%, benefiting from our actions to structurally improve our profitability.
Second, our efforts to reposition Kohl's are working.
Active sales growth accelerated in the quarter, led by our key active national brands.
And we launched several new transformational brand partnerships across the business including the rollout of the first 200 Sephora at Kohl's stores.
While having very little impact to this quarter given the timing of the launches, we are pleased with the early results and what this means going forward.
And third, we are accelerating our share repurchase activity, reinforcing our commitment to driving shareholder value, and now expect to repurchase $1.3 billion for the year.
We see a lot of value in our company and believe repurchases are a great mechanism to return capital to shareholders, given our promising outlook and formidable cash position of $1.9 billion.
All of the pieces of our strategy are coming together, and we remain incredibly confident in our future.
As we look ahead, we are focused on building on this year's success.
We are positioned to exceed most of our 2023 goals this year, and we look forward to sharing an updated financial framework at our Investor Day on March 7, 2022.
Now I'll cover a high-level overview of our third quarter performance, an update on the progress we're making against our strategy, and our approach to the holiday season.
Jill will then discuss our Q3 results in more detail and updated 2021 financial outlook.
Let me add a little more color to our Q3 results.
Our 16% sales increase was the result of strong performance across both stores and digital.
We continue to be encouraged with how the channels reinforce each other, together delivering an exceptional customer experience through a seamless omnichannel integration of offerings and conveniences.
Store sales increased double digits and continue to be the principal channel for new customer acquisition.
And we're very excited by the significant growth we are seeing in omnichannel customers, which are the most productive customers.
Digital sales remained strong in the quarter, growing 6% to last year and increasing 33% on a two-year basis.
As a percentage of total sales, digital was 29% in the quarter.
From a category perspective, our investments in active continue to pay off.
This is most evident in the broad strength we are seeing across our differentiated portfolio of national and private brands.
Active sales significantly outpaced the company, growing more than 25% to last year and more than 20% on a two-year basis.
We're seeing strength across the board in men's, women's, and children's apparel as well as in footwear.
Of note with active apparel, we are especially pleased with the traction we are gaining in athleisure and inclusive sizing.
From a brand perspective, our key national brands of Nike, Under Armour, adidas, and Champion all delivered exceptional growth.
In addition, our more value-oriented active private brands also continue to perform very well.
Tek Gear achieved solid double-digit growth, and we continue to be pleased with the customer response and sales of our new athleisure brand, FLX, which we expanded to more stores late in the third quarter.
Active is now one of our largest areas of business, representing 26% of our Q3 sales, and we remain confident in our ability to maintain our growth momentum.
Looking ahead, we expect active will continue to benefit from increased in-store space and its front-of-store positioning in locations with Sephora at Kohl's shops.
We also continue to experiment with new merchandising to elevate the active category in our stores.
Some of our other highlights in the quarter include men's sales increasing more than 30% to last year and footwear and accessories both up more than 20%, and children's up low double digits, driven in part by strong demand for toys.
We saw a very strong growth on both a one- and two-year basis for many of our key private brands and national brands across all categories.
For our private brands, these included Sonoma, SO, Apartment 9, and Jumping Beans.
And notable performers beyond active and our national brands include Levi's, Vans, Haggar, Ninja, Shark, Koolaburra by UGG and Hurley.
I will now provide an update on the progress we are making against our strategy.
As I indicated, all the pieces of our strategy are coming together.
Our investments to strengthen our product assortment and enhance the shopping experience have improved our relevancy with core customers and are driving new customer acquisition.
Let me start with Sephora.
As we've said from the beginning, this is a game-changing partnership for us.
Consistent with our strategy, Sephora adds tremendous credibility to Kohl's as a more useful upscale and modern retailer.
We are thrilled with the early response we are seeing from our initial opening of 200 Sephora at Kohl's shops.
I know many of you are interested in hearing more specifics on how the shops are performing, so I'm happy to provide you with some preliminary results.
In short, Sephora at Kohl's is working.
First, Sephora is driving extraordinary growth in our beauty business.
Second, we're seeing an incremental mid-single-digit sales lift to the overall store sales where we have launched.
Third, we are bringing in new customers.
More than 25% of Sephora at Kohl's shoppers are new to Kohl's.
They are younger and more diverse, and we are successfully driving loyalty sign-ups.
Fourth, we're pleased to see customers purchasing across a wide range of beauty categories and price points, the assortments resonating.
And lastly, customers are shopping across the store.
Roughly half of our customers buying Sephora are attaching at least one other category in their purchase across all of our lines of business.
We've already started to see customers return, which is encouraging and is expected to build as they get to know Kohl's.
From the outset, this partnership was structured to drive joint success, and we couldn't be happier with how our teams are collaborating.
These early results are very encouraging.
And as we build out the fleet, this initiative will have a significant positive impact on our growth trajectory and brand relevance.
Looking ahead, we will build on our success as we continue the store rollout.
Planning is underway for the additional 400 Sephora at Kohl's openings beginning in late spring 2022.
In addition, we will open 250 in 2023.
As we renovate our stores for the Sephora build-outs, we are also making investments to elevate the overall store environment.
This includes reflowing our categories to deliver against our new strategy as an active and casual destination, better use of space for mannequins and storytelling and overall updates to the store.
As we rolled out this updated experience to our first 200 stores, the customer feedback has been extremely positive.
As part of this, we are injecting more discovery, leveraging flexible space behind the Sephora shop, which showcases a rotating assortment of emerging brands.
Yummy Sweaters are currently positioned in the space for holiday, and we are excited to use this space to debut an exclusive Draper James capsule collection this spring, a brand founded by Reese Witherspoon.
I now want to share a quick update on our recent new brand introductions of Calvin Klein, Tommy Hilfiger, and Eddie Bauer.
We introduced Calvin Klein basics and loungewear in 600 stores in mid-September.
And added Tommy Hilfiger men's sportswear in 600 stores in early October.
And in late October, we began offering Eddie Bauer in 500 stores, expanding our presence in the outdoor category and building on our investments and momentum with Columbia and Lands' End.
While it's early, we are extremely pleased with the initial results of these new brands.
Collectively, they are exceeding expectations and customers are delighted to be able to get these iconic brands at Kohl's.
I now want to provide a quick update on women's.
As we've discussed on prior calls, we are deeply committed to reigniting growth in our women's business and have implemented a number of bold actions.
We completely reset the brand portfolio to improve overall clarity and shopability.
And strengthened our differentiation by amplifying key private brands like Sonoma while selectively introducing relevant national brands.
We are pleased with the leading indicators and the underlying trends.
Customers are responding very well to our go-forward key brands and metrics such as sell-through, inventory turn and margin are at multiyear highs.
However, receipt delays have impacted the women's business disproportionately, hindering our ability to drive overall growth to our expectations.
So let me touch on these supply chain challenges and what we are doing to address them.
Like many, our business has been impacted by extended transit times, resulting in inventory receipt delays and significantly higher transportation costs.
The most visible evidence of this can be seen in our inventory level at the end of Q3, down 25% on a two-year basis.
While we planned inventory to be down this year as compared to 2019 aligned with our strategy to drive margins and turnover, our levels remain below that original plan.
We have aggressively implemented a number of measures throughout the supply chain to mitigate and minimize production and transit delays.
We also made sure that we protected new brand receipts and inventory tied to key promotional events.
While it will take time for our inventory to rebuild, I am confident that the team is doing everything they can to mitigate the supply chain challenges as effectively as possible.
And as Jill will speak to later, this is incorporated into our outlook.
As a result of these actions, we are well-positioned for the holiday season with fresh receipts continuing to flow to support anticipated customer demand.
Now let me touch on some of our holiday plans.
We are once again excited to deliver an inspiring and welcoming shopping experience for our customers this holiday season, knowing it will look and feel a little more normal.
Friends and families are planning more in-person celebrations, which has influenced how we are approaching our holiday strategies this year.
From a product perspective, we are focused on amplifying key areas where we already have momentum: active and cozy for the entire family, home, toys, and discovering and gifting are already in high customer demand.
We have also positioned our holiday gifting area at the front of the store and the majority of our chain to better capitalize on traffic.
In addition, we are pleased to offer Sephora and many of our other new brands to our customers for the first time this holiday season.
Kohl's is known for providing great holiday value, and this year will be no different.
We officially kicked off the holiday season with our Black Friday preview event in early November, and we're very pleased with the results.
So we are off to a great start this quarter, and we are looking forward to continuing to engage our customers by bringing both product and promotional newness throughout the holiday season.
We will also support anticipated strong digital demand with our best-in-class omni capabilities, including an expanded number of drive-up parking spots for customer pickup and continuing to leverage our stores to help fulfill digital orders over the holiday season.
Before I hand it off to Jill, let me summarize my comments today.
As you've heard, we are making great progress against our strategy and navigating what continues to be a unique operating environment.
Q3 represented another outstanding quarter for the company, continuing our momentum from the first half of the year.
And our updated annual guidance positions us to exceed most of our 2023 goals two years ahead of plan and achieving an all-time record earnings per share.
Over the past 12 to 18 months, we have executed a major transformation of the Kohl's operating model, repositioning the business for sustainable future growth and improved profitability.
We're making tremendous progress in enhancing the relevance of the brand.
We have strengthened our product portfolio with the addition of many highly regarded national brands and have elevated our private brands with more clarity.
We launched an industry-renowned beauty partnership with Sephora, and we improved the overall customer experience through merchandising enhancements and new omni capabilities.
Looking ahead, we are in a very strong financial position and are incredibly confident in our future.
This is evident in our actions to continue accelerating share repurchases.
Our business has momentum, and we are focused on building on it as we move through the fourth quarter and into next year.
In closing, I want to express my sincere gratitude to all of our associates for their unwavering commitment to our company.
We appreciate all that you have done to prepare us for this key holiday season and all that you do every day to deliver a great experience to the millions of customers who choose Kohl's.
I want to start by reiterating Michelle's sentiment.
We delivered another great quarter and continue to gain traction on our strategic initiatives.
I am incredibly proud of our actions to reposition the business for future growth and drive improved profitability.
For today's call, I'm going to review third quarter results, discuss our capital allocation actions and then provide details on our updated 2021 guidance outlook.
For the third quarter, net sales increased 16% to last year and were slightly ahead of 2019, driven by growth in both our stores and digital businesses.
Other revenue, which is primarily credit revenue, increased 17% over last year.
Turning to gross margin.
Q3 gross margin was 39.9%, up 408 basis points from last year driven by our inventory management efforts and our pricing and promotion optimization strategies, offset partially by incremental transportation costs related to the constrained global supply chain.
Now let me discuss SG&A.
In Q3, SG&A expenses increased 6% to $1.4 billion driven by the double-digit to top-line growth.
As a percentage of revenue, SG&A expenses leveraged by 273 basis points to last year as we continue to deliver against our efforts to drive marketing and technology efficiency.
And improved store labor productivity, which more than offset increased wage pressure across our stores and distribution centers.
Our strong margin and SG&A performance translated into an 8.4% operating margin.
This was a nine-year high for the third quarter and represented an increase of 734 basis points to last year and an increase of 403 basis points to 2019.
Last, let me touch on some additional financial items.
Interest expense was $12 million lower than last year due to lower average debt outstanding during the quarter.
Net income for the quarter was $243 million, and earnings per diluted share was a Q3 record of $1.65.
Turning to the balance sheet.
We continue to be in a strong financial position.
In late October, we made our final move to return our balance sheet to its pre-pandemic structure by migrating back to a $1 billion unsecured cash flow-based revolving credit facility.
We ended the quarter with $1.9 billion of cash and cash equivalents and no outstanding balance on our revolver.
Inventory at quarter end was 1% higher than the prior year and down 25% to 2019.
However, our available-for-sale inventory was down more than this given higher in-transit inventory, with Women's disproportionately impacted.
The industrywide supply chain challenges continue to impact our ability to rebuild inventory to desired levels.
On the positive side, our inventory composition remains very clean and turnover marked a 10-year high.
Turning to cash flow.
Year to date, we have generated operating cash flow of $1.8 billion and free cash flow of $1.3 billion.
Capital expenditures were $426 million year to date, driven by in-store investments related to the Sephora build-out, refreshes and other customer experience and sales-driving enhancements as well as a new e-commerce fulfillment center opened earlier this year.
In addition, we continue to expand our small-format store concept, opening four new stores at the beginning of the fourth quarter.
Based on our current outlook, we now expect capex spend to come at the high end of our $600 million to $650 million range.
Now let me discuss our capital allocation actions.
During the third quarter, we accelerated our share repurchase activity, repurchasing more than 10 million shares for $506 million.
Year to date, we have repurchased 15.6 million shares for $807 million.
We plan on continuing our accelerated share repurchase activity with an additional $500 million in Q4, bringing our total for the year to $1.3 billion.
As announced last week, our Board of Directors declared a cash dividend of $0.25 per common share.
The dividend is payable on December 22 to shareholders of record at the close of business on December 8.
Taken together, we have returned a total of $921 million to shareholders through share repurchases and our dividends during the first three quarters of 2021.
Turning to our guidance outlook for 2021.
Based on our strong third quarter performance, we are raising our full year outlook and are guiding as follows: net sales to increase in the mid-20s percentage range, up from our prior expectation of low 20s percentage increase.
Operating margins to be in the range of 8.4% to 8.5%, up from our prior expectation of 7.4% to 7.6%.
This positions us to exceed the high end of our 2023 operating margin goal of 7% to 8%, two years ahead of plan.
And earnings per share to be in the range of $7.10 to $7.30.
This guidance represents an all-time earnings per share high for our company.
Let me provide some additional context on our implied guidance for fourth quarter.
For sales at the midpoint of our full year 2021 guidance, it implies that a fourth quarter sales increase in the low double-digit percent range relative to 2020.
For operating margins, our full year 2021 guidance implies a fourth quarter operating margin of approximately 6.6%, which is an increase of 140 basis points, compared to 5.2% last year.
Embedded in our guidance, our incremental headwinds totaling more than 350 basis points as compared to the same period in Q4 2019.
These include higher digital penetration, freight and holiday surcharges, and higher wages and incentives.
Lastly, as a reminder, for comparison purposes, last year's fourth quarter 2020 earnings per share included $1.15 per share of incremental tax benefit driven by the tax planning strategies.
In summary, we are really pleased with our third quarter results and the progress we are making against our strategy.
As you've heard today, our business has clear momentum, and we look to build on it as we close 2021 and enter the new year.
We will review our overall strategy and update our long-term financial framework given that our strong performance in 2021 positions us to exceed many of our current 2023 goals.

user
sees fy adjusted earnings per share $7.10 to $7.30 excluding items.
q3 earnings per share $1.65.
raises full year 2021 financial outlook.
fy 2021 net sales is now expected to increase in mid-twenties percentage range.
fy 2021 adjusted earnings per share is now expected to be in range of $7.10 to $7.30.
plans to repurchase $1.3 billion of shares in 2021.
ended quarter in a strong financial position with $1.9 billion in cash.

assistant