Kohl's Corporation (KSS) Earnings Call Transcript & Summary

Good afternoon, and thank you for joining us for this next session of the Goldman Sachs Global Retailing Conference. My name is Brooke Roach, and I cover the apparel, accessories and brand sector here at Goldman Sachs. We're very pleased to welcome Kohl's for our next session. Here with me to walk us through the details of the strategy is Jill Timm, CFO. Welcome, Jill.

Thanks, Brooke. It's good to be here.

Jill, would you like to kick off with a few brief opening remarks?

Sure. I just -- I think I wanted to talk about the fact that we launched our strategy just under a year ago, and we feel like we're making great progress against that strategy. We said we wanted to be the destination for the active and casual lifestyle. And you can see we are doing great performance out of active. It was up over 40% in the last quarter to the last year and 20% to 2019. And we're in the midst of launching a lot of our new initiatives. Our partnership with Sephora. We just opened 100 doors with the last 30 opening on Friday. And we still have our key new brand launches ahead of us with Tommy Hilfiger, Calvin Klein and Eddie Bauer. So we feel great with where we're positioned from our growth. And then fundamentally, we've restructured our business to be much more profitable. And you saw in Q2, we posted an EBIT margin of 12.8%. I think it was a 10-year record. And as we look forward, we feel really confident in the strategies that we have, but we know we're still navigating some uncertainty with the Delta variant, supply chain disruption and the labor market, which I know are some items that we'll get into today.

That's great. Thank you so much for those introductory comments. Jill, I'd love to kick off with a discussion on the strategic transformation of Kohl's. Kohl's has been undergoing this for several years now. And on the latest conference call, you signaled that Kohl's has several additional new key partnerships on the horizon, among other changes. As you look ahead, how do you think the business will evolve over the course of the next 3 to 5 years? And what's your vision for Kohl's?

Yes. I think our vision, obviously, is to be the destination of the active and wellness lifestyle, and that's something that we've talked a lot about, and we put a lot behind active. So first, we have a new partnership with Sephora, and that has afforded us the opportunity to invest back in our stores. And we see the stores as a key differentiator for Kohl's. It's a heightened experience for our customers to come in. We have a great level of convenience being off-mall or within 15 miles of 80% of the U.S. population. And so as you walk in the store, I know Brooke, you've had the ability to walk Ramsey, New Jersey with me to see the Sephora shop, it's completely transformed, as we walked in, really have become a destination for beauty with our Sephora partnership. The Sephora partnership has taken over the jewelry counter. So if you think of that productivity gain of not fine jewelry, but Sephora and beauty, it's something that Kohl's hasn't done in the past. We've been in the low, low single digits. We now have -- see this as a bigger business. It's a traffic driver, and it drives a lot of new customers. We don't have a great overlap with our customer base with Sephora. So early intel, what I would tell you is we're really pleased. I know we'll talk about Sephora later. But we're really pleased with the beginning phases of those 100 doors that have opened and the launch of digital. But now when you walk in, right across the front, you're going to see active. And really, we're seeing those core brands, Nike, adidas, Under Armour, really continuing to perform, and we continue to get a breadth of assortment from them that you haven't seen in the past. Our athleisure side of the business, Champion, leads that, and we just launched our FLX brand, which now is expanding to 500 doors because that, too, is exceeding our expectations from that perspective as well. We also are transitioning Women's. And I think that's the one place that if you look at over the last couple of years, we haven't really won on the Women's side of the business. We've made the biggest fundamental move since I've been at Kohl's in Women's. We've changed the leadership team completely. We've edited out 10 brands, and we're really standing for more of our flagship brands like Sonoma and SO. We've introduced in Nine West. And so as we've done that, what we're seeing is those new go-forward brands are continuing to comp positively. We're seeing progressive improvement. But what I would say is Women's is probably distortedly more impacted by the supply chain challenges than anyone else. 70% of our Women's business is proprietary. So as we moved into this year, we planned conservative from inventory, not realizing the recovery would happen as quickly as it did. We were going to chase into receipts, which obviously get compromised with the supply chain disruption. And so the edits happens but the newness isn't flowing as quickly. The newness is selling when it's in, but we're not getting as much of it as we had hoped at this point. I think second, we want to be the destination for omnichannel. Omnichannel means that our customer is 4 to 6x as productive as a single-channel customer. And so we continue to invest in the stores and really complement that with digital, so you can shop any way you want. And the stores have become a large contributor to digital. They actually fulfilled over 40% of our digital sales. We have Buy Online, Pick Up In Store; Buy Online, Ship to Store; we have Drive-Up. So any level of convenience for that customer to really shop both channels. And then last, we want to continue to deliver value. And we've always stood for value. It's a core tenet for Kohl's. We have an amazing loyalty and rewards program. And what we've done, and we can talk about this more, is we've really simplified that value equation. So the customer sees the true value that Kohl's is bringing, especially that new customer who didn't necessarily understand the couponing game. So I'll pause there, but I'm really excited about the restructuring that we've done. You can see that through the profit. You can see our confidence in the outlook that we've given you for the rest of the year.

There's a lot to unpack there, and I'm excited to dig into each of those in more detail throughout this fireside chat. But maybe first, I'd love to hear your thoughts on the consumer environment and current trends. Can you talk to the current trends that you're seeing in your business as you navigate back-to-school, rising Delta variant case counts in the U.S. What expectations do you have into the back half of this year as we get further away from stimulus payments?

Yes. I think part of the guidance that we gave in the back half of the year, we had mentioned we're trying to be really thoughtful, we're trying to be prudent and there was a lot of uncertainty. With the stimulus subsiding and the Delta variant rising, what was that going to mean for consumer confidence? So as you saw in our guidance, we were a little more conservative from that perspective. And as we mentioned on the earnings call, we didn't have a back-to-school in 2020. We were really excited as we went into the back-to-school season this year, and we are seeing great trends in active, in denim, in backpacks, in those back-to-school categories which really align well with our active and casual lifestyle mission. So we feel good with how that starts. We're really pleased with the back-to-school start. But we continue to monitor as the Delta variant rises as we now see unemployment, subsidies subsiding, what will happen as we move forward? So I think we're continuing to just be prudent as we work through the back half of the year. And then what does the supply chain disruption mean as well? The flow of goods has become more challenged. So we look and have aggressively been working through that. But those are things that we took into consideration was look in the back half of the year. But back-to-school start, we're pleased with, but I think we're all going to just be cautious given the uncertainty that we've just navigated and the uncertainty that lies ahead.

That's incredibly helpful. As a follow-up question to that, I'd love to hear about kind of your initial thoughts as we move into 2022. This year, the overall apparel environment has been fairly favorable as consumers have been restocking their wardrobes and returning to in-person events. As some of these trends maybe fade a little bit or as we move into 2022, how are you thinking about your ability to capture market share and continue to profitably drive growth.

I look at the initiatives that I mentioned at the onset of this conversation was, first, beauty. It is a trip driver for us. If I look back over time, Kohl's has tried to move into beauty several different ways. We've never done it with a 2,500 square foot shop, and we've never done it with such a prestigious partner as Sephora with the amazing brands that they bring forward. So one, it is a trip driver, and it brings new customers into our store. Historically, when we've done this with less brand notoriety and space, we've seen a halo effect to the total store of about 2%. So we do think that, that will continue to drive more. And we have 400 stores going live next year, and then we get 850 total chain in 2023. So that is a multiyear approach that we think will continue to elevate the store. And the productivity changes we've made by eliminating jewelry and bringing in beauty, obviously, is going to be huge from a productivity perspective. Active and casual, I think as people are getting back out, I think they still love the comforts of the active and casual, so how can you blend that. And that's where FLX comes into play. Even Nine West, it has a dressy aesthetic to it, but still very casual and comfortable. So I do think by lending into that, people are going to lean in still being comfortable with some fashion element. And then the new brands that we're bringing in, Calvin Klein, Tommy Hilfiger, Eddie Bauer. So the newness also, I think, will generate a lot of excitement and discovery. And speaking of discovery, as you know, behind the Sephora shop, we now have a FLX space for discovery. And today, Yummy Sweaters reside there. So really, it will be a discovery zone that will be there for about 90 days. We'll continue to change out the brands. But it will really speak to that Sephora customer, the younger customer to get her out of just a Sephora shop and walking around the store, and then knowing that it's always going to be changing, coming in to see what's new. So I think really elevating that element of discovery will be helpful as well.

That's really great. I'd love to dig into a few of those initiatives in a little bit more detail. You've mentioned Sephora several times, and clearly, it's a very important initiative for Kohl's. You're about a month into the first shop-in-shop launches, and you're continuing to roll this out across hundreds of stores. Can you provide an update on any early insights that you're seeing across that first cohort of stores, whether that's new customer acquisition, incremental traffic to the stores or customer cross shopping?

Sure. I say -- well it is early. So there's only as much data I have. We launched digital on August 1. We opened up our first 70 stores, I think August 20 and then the next wave of stores happened last Friday. So it is new. What I can tell you is we're really pleased with how Sephora is performing. It is exceeding our expectations. We're seeing the customer shop across all price points. We're seeing the customer shop across skin, hair and makeup. So really taking advantage of every offering that we have from a Sephora perspective. The cross shop, I would say I don't have a lot of data on it right now because it is new, and the customer data comes in typically monthly. So we don't have full month of data in yet. But given the newness and the sell-throughs we're seeing in the Women's pad, like I mentioned earlier, it's really resonating with that customer. Anything we put in new is selling, just getting enough of that newness is the challenge we have right now with the supply chain. So I think with the women-focused customer base of Sephora and the progressive improvement we're seeing, I think there's some early indicators, but we'll give you more information on that, I think after Q3, when I can talk to you about more specifics for customers. But overall, we're definitely seeing Sephora exceed our expectations, and we think this is just a huge opportunity as we continue to roll this out for our chain.

That's great. And right next to the Sephora shop-in-shops is the expanded active pad. Kohl's has meaningfully expanded that floor space that's dedicated to active outdoor and healthy lifestyles. And I was wondering if you could talk a little bit more about some of the trends that you're seeing in your active business today. Any context you can provide on active footwear versus apparel, national brands versus private, athleisure versus performance, that would be very helpful.

So you're absolutely right. We took the opportunity when we brought Sephora in and we're going to do that construction to really reflow our store. So the new -- the customer is now greeted with active right across the front of the store. And you see those key brands, Nike, Under Armour, adidas, Champion and it's complemented then with our proprietary brands as well from our opening price point of Tek Gear to our new brand of FLX. What I would say is active is performing across all of the brands, across apparel and footwear. So it is driven by strength in the 3 key national brands, Nike, adidas and Under Armour. We're also seeing our private brands do really well in that opening price point for Tek Gear. We're seeing both apparel and footwear perform. And on the athleisure space, Champion is just doing incredibly well. It continues to have strong performance. And as I mentioned, we complemented that with FLX, which has exceeded our expectations, and we're now going to roll that out to 500 doors. So we feel great with that. And as we look at outdoor, Columbia continues to perform. We continue to add an expanded assortment there. And then we'll be complementing that with Eddie Bauer, and we'll be expanding Lands' End to 300 doors. So a lot happening in that space, and we just continue to fuel it as that has definitely been an engine of growth for us.

That's great. And you've touched a few times on the Women's reset and the initiatives that you have there. Can you talk to some of the early signs of success in this endeavor? I know you mentioned that when you have newness in, it's selling well. But I'd love to hear, are you acquiring new customers in the Women's business as you get that newness in? Is the mix of that Women's business changing? And what gives you confidence that this is going to continue to show signs of success as the supply-demand balances in the overall industry rebalance?

Yes. I would say it was definitely a huge transformation. And I mentioned, we edited out 10 brands. And I would say that's probably one of the biggest edits we've done for Kohl's. We haven't always been great editors in a large scale, and 10 brands off the pad was pretty meaningful. And we really wanted to stand for our flagship brands. We wanted to drive clarity to those brands. And we really wanted to ensure that we had reduced our choice count and given depth to our customers so we could fulfill that shopping experience. So as we move through this, active obviously plays into that. It's where we're moving to. We launched Nine West to take and moved out of Apartment 9. We also eliminated some of those classic brands that just weren't performing for us. So what is good about Women's is it's showing progressive improvement. The newness is selling. And so as we put newness in, we're seeing great sell-throughs on it, the issue we have is we can't get enough of it. And I think the uniqueness for us was, one, we came with a really conservative plan not understanding how quickly the recovery would happen. Two, we are exiting out of brands. So the exit happened. But then getting into that newness with the supply chain disruption, we couldn't leverage the same chase model we've always used. And so when we expected kind of our curtains up moment for Women's, it wasn't going to be until fall. So we knew we were going to go through this transition in the front half of the year. But we're not seeing those goods come in quite as quickly as we would have hoped, given the supply chain disruption. What gives me optimism is the fact that what we're setting for newness is selling. And our go-forward brands like Sonoma and SO are positive-comping. So I think she's definitely voting yes for what we can give her from that perspective. In terms of new customers, I would say we are seeing a lot of new customers come into our store. We're seeing that through our non-Kohl's charge because of the huge opportunity to move them in that loyalty ladder into our rewards program, and then obviously into our Kohl's charge program. So to attribute it just to Women's is difficult, but across the store, we are seeing new customer growth, and that is continuing.

That's great. You mentioned the supply chain a few times there when you were talking about the Women's business. Clearly it's an issue across the industry, and it's been top of mind for investors. Can you provide an update on how you're thinking about upside constraints to the top line into the second half, the additional transitory costs that you may be seeing to get that inventory into the stores in time for some of those key events, and what your key levers to mitigate some of these supply chain pressures are, whether that's increasing lead times, shifting production, air freight or something else?

Yes. I would say supply chain is definitely a headwind. I don't think that's unique to Kohl's. I think you're hearing that across all of retail. And really, quite honestly, almost every industry that does any type of importing. The situation continues to be fluid and evolving with the Vietnam shut downs that added more complications into it. So we do a lot of production in Vietnam. What we're able to do is leverage our supply chain and really move countries of production as quickly as possible out of Vietnam so we can continue producing. We look for expedited ships. So there are ships that move more expedited. We try to get space under those ships, so we can cut some days out. The ports are difficult. I think the backups there continue to add in. I mean we do diversify on both coasts. So we are using New York and Savannah and Miami as well as L.A., but the ports are definitely backing up. As soon as we can get the containers unloaded, we're adding in more regional carriers so we can continue to bring those into our distribution centers. And then we're adding trips from our distribution center to the stores, so we can pull those goods more timely as well. We continue to prioritize any time-sensitive goods such as ad goods. So as you can imagine, going into the back half of the year with the after Thanksgiving sale, Black Friday, we're definitely looking to make sure that those goods are set so we don't miss out on that sales opportunity. But as you know, our inventory was down about 25% as we ended Q2 with sales up versus 2019. And so that's difficult to continue to run that. The turns look great, but we definitely want to bring in more inventory to drive that top line. And if I go back to a moment for Women's, even though we were down 25% as a company, Women's was down even more. So you can understand how it's hard to drive those positive momentum when you're down that much from an inventory perspective. So we are doing everything we can to ensure that we're bringing in the goods as quickly as possible. And I would say everything we talked about obviously comes at a cost, and those are all contemplated as we gave the guidance for the back half of the year.

That makes a lot of sense, and it's very helpful color. One of the offsets here to the supply chain challenges is that there is sometimes some opportunity to offset that in terms of lower promotions. And certainly, we've seen low promotions across the apparel industry year-to-date. Can you talk to us a little bit more about how you're thinking about pricing and promotions into the back half and holiday versus 2019 levels. And then into 2022, do you think that pricing and promo will be higher or lower versus 2021 and what we saw in 2019?

Yes, I would say for us, value has always been a core tenet of Kohl's, and we've always had a lot of sales and coupons. So one of the strategies that we've been working on for some time is really simplifying our value equation. So we started doing this through testing. And I think really through COVID, we were able to really accelerate that strategy. And what that meant was we are still going to be on sale, and we're still going to have coupons. But we had a lot of stackable coupons, and it became confusing to understand what the end value was to the customer. Not everyone loves to do math, and we really force people into doing more math to understand value. And as we are bringing these new customers in, it became more of a pain point for them than them seeing the value at the end of the day. So what we've moved to is we're still going to be on sale. But for example, today, we're in an epic pricing event. We just are on sale, just on price. There's no coupon that accompanies that. But last weekend, we did have a 20% offer that went out. So there's still coupon usage, but there was 1 coupon instead of multiple coupons which you may have seen in the past. And now to really say, hey, you have a 20% off, but Brooke, I know you love Lauren Conrad. I might send you a targeted Lauren Conrad offer because we have a new set coming in. I really want to encourage that incremental trip for you to come and engage with the Lauren Conrad and hopefully more as you come to the store. So we're really going to be leveraging less stackable coupons, more pricing events and then targeting those offers. And obviously, this year, with the fact there was the faster recovery and less inventory, everyone took advantage of more full price selling, and so we as well took advantage of that. But I think we are complementing that with the fact that we are able to really clean up our offers, which I will expect will continue into 2022 and beyond, and that's part of how we get to our margin expansion of the 7% to 8% goal that we set out. However, we will always be competitive. We want to make sure we stand for value. We have a lot of data on our 65 million customers, and we'll continue to use that data to inform us as we put offers in the market and make sure we're competitive to drive that sale for the customer.

That's really helpful. I'd like to follow up on that with a question about kind of ticket prices and pricing to offset costs. We've heard from a couple retailers and brands that they plan to increase prices to offset some of the inflation in costs, whether that's cost or labor or raw materials. As you look across your assortment, do you think that Kohl's has additional pricing opportunity from ticket price increases or merchandising decisions? And are your brand partners asking for you to raise prices?

I would say at this point, we aren't looking to raise prices from a ticket perspective. Obviously, with less promotion, there is some ability to increase AUR that way and as you said, expand margin. If I just step back for Kohl's, we've actually, over the last 5 years, continued to drive up our AUR. And we've done that really through a better assortment of goods. So our customer continues to be willing to pay for higher AUR items. And if you think of the new brands we've brought into our store, we've expanded our assortments with Nike, adidas and Under Armour, but we've also brought in things like Koolaburra by UGG, LEGO and now Sephora, Tommy Hilfiger, Eddie Bauer, all which are going to have a higher AUR. So we've continued to drive that with our customer. But in terms of pricing, we use the pricing elasticity model. And we've been here long enough and done a lot with retail and I've watched the cotton crisis and inflation in prices in the past. This elasticity model will tell us what the customers are really going to vote for. And in some instances, they're not going to take on those price costs, in other instances they are. And I think that's where we can flex in and out using a promotional strategy without ever having to really change the ticket price based on what we think the customer will want and based on their demand. So we will leverage that. And then we'll look for other ways to offset those costs. I think we have a very cost-disciplined culture. You've heard a lot about how we're going to drive savings through marketing, heightened store productivity. We continue to save in technology. So there's other ways for us to continue to deliver the profitability without having to have taken the risk on price increases at this point. I just think that there isn't something our customer is voting for. It's not something we're being asked to do, and I think we can manage it through our promotional model.

That's really helpful. Let's pivot to your stores and your omnichannel strategy. I'd love to hear an update on this, and maybe let's start with stores. How are they coming back? What traffic levels are you seeing? And how does that differ by geography?

Yes. So we -- our stores, we think, is a key differentiator for us. And as you saw in Q2, the whole impact of sales recovery happened in our stores. If we step back and look at -- we had 2 priorities through the pandemic and one of those priorities was the health and safety of our customers and associates. So we made a lot of investments in our stores to make sure people feel comfortable shopping. And I think that has definitely paid dividends for us. We had put up plexiglass, we widened aisles, we've -- you've been in the store, it's really supplied and easy way to shop. And it's not crowded, so people feel safe coming in there. So we continue to see our stores benefit through the second quarter, and we would continue to expect that. That's where we're making our investments. If we look at where we're making investments, we historically had done a lot with technology. We're really pivoting that back into our stores. It's the Sephora shops, it's the active reflow. It's really refreshing that whole store experience and adding much more around discovery and experience. You're going to see a lot more manikins to inspire shopping. You're going to see these discovery zones like we talked about with the FLX space, but also just with new engagement end caps to really surprise and delight the customers that come into the store. So we love the omni customer, like I mentioned, and we will always have our digital -- we do see digital as a way to grow customers and acquire new customers. But we definitely think it complements incredibly well with our store base and the level of convenience and the level of discovery we're able to get them. Apparel is still something that you like to try on and touch, and I think we can deliver that in a unique way at Kohl's.

Got it. And one question that we're asking on digital across all of the companies across the conference is what their expectations are for digital penetration in 2022 relative to what we saw in 2020 and 2021. Do you think it will be higher, lower or the same? And then as you put that together with the stores and the digital, what is Kohl's doing to solve for omnichannel into fall and holiday of this year?

Yes, I would say we do expect digital to continue to grow. Obviously, last year was heightened with the stores being closed, so this year, we did expect it to step down. But if you look at our long-range plan that we put out to 2023 and the goals we set out, that did assume that digital will get back to about a 40% penetration. This year, I would expect it was probably about 25% in the front half of the year. It always out penetrates during holiday. So we'll probably see it in the closer to 30 percentage range, a little over 30% this year, and then we'll continue to see that grow to that 40% range by 2023 is kind of our expectations. But obviously, there's been a lot of change that happened over time from that perspective. So digital is something that we continue to see as a growth engine for us. We'll continue to fund into it, but we really want you to become an omni customer. You're just much more fruitful for Kohl's from that perspective.

Got it. And any exciting new initiatives on omni that we should be focused on into holiday?

Well, I think you're going to see us in holiday use our stores a lot more. So as we've talked about the store fulfillment being 40%. We have Buy Online, Pick Up In Store, you have the Drive Up, so levels of convenience from that perspective. We continue to always out-penetrate in digital during that holiday period, so you'll see us continue to drive newness both in our store and online. We do have a web-exclusive offering. But I would say we expect that it will continue to be a key contributor from that perspective. And then we will be testing in our stores for holiday as well in about 100 stores, self-pickup and self-returns, so making that ease and convenience happening as well.

That's great. One more question that I have for you on the use of your stores. You've had the Amazon Returns partnership for a few years now. As you think about the success of this initiative so far, would you consider partnerships with other e-commerce partners to better utilize your store network?

Yes. I think Amazon is just a really great example of how innovative partnership and how we want to leverage our stores differently. And so we are really pleased with the partnership with Amazon. It continues to drive incremental traffic into our stores. We provided a great customer experience, both new and existing customers. We mentioned last year we had 2 million new customers that came through this partnership, and 1/3 of those were millennials. So really playing in on that younger customer. And even though we're now in, I think, the second to third year here, depending on how the rollout of stores, we're continuing to see conversion improve and it's EBIT accretive. So we love this partnership. So given the success of this partnership, we continue to evaluate other new and innovative partnerships and how we can leverage our strong asset being a store to deliver uniqueness to Kohl's. I think a couple of examples that we can talk about beyond Amazon is Sephora. We use Curated by Kohl's. It's something that we've tested as well. And these are just really showcasing digitally native brands in stores to see is that another level of discovery? Will this resonate with the customer? And if they really like that brand, can we bring it to Kohl's as a full-time brand? And I'll use Lovepop greeting cards as one of those. It did work. It was a Curated by Kohl's brand. The customer really liked it. So now we brought it in as a permanent brand as well. And then I mentioned in the FLX space, we're going to continue to test into those. I love the Yummy Sweater. If the customer votes yes, does that become something that would be more permanent in nature? So I think a lot of this is test and learn with brands, partnerships. But obviously, I think there's an endless amount of uses that we could bring to our customers through our surveys.

That's great to hear. Let's pivot for a moment to margins. Wage inflation has been increasing as rates rise in the marketplace. Can you talk to your forecast for labor costs at Kohl's, both at stores and in DCs.

Yes. I would say, obviously, the labor market is tight. You guys read the headlines that we do. There's more jobs than there are employees at this point. If I look at it across both our stores and our distribution network, what I would say is we feel well positioned from a store's perspective. We've done a nice job of hiring there. We have a large part-time workforce that really values the flexibility that we've given them. We schedule and hold scheduling in advance. So people like having that known. And so we've adjusted our store hiring wages as needed. And this is something we've always approached wages is based on competition, turnover, where we are versus hiring goals. We'll make a market-by-market adjustment to those wages. We've also announced that we're doing incentives throughout the fall season to attract talent into our store network as well as our distribution network. If we take just a small portion of the stores in Sephora, and we have 200 doors opening, with that beauty adviser being kind of a niche area, we've also done really well and been successful in hiring that. So we feel well positioned in stores. Obviously, we ramp up for seasonal hires. But the area that probably has the most opportunity is the fulfillment network. And so as we try to ramp up with a lot of seasonal hires into the fulfillment network to address the digital growth that we were just talking about, that's where we probably have the largest opportunity. So we continue to look at different ways to incent them to come to Kohl's, whether that's through increased wages, through incentives. But the nice thing is we will continue to leverage our stores if we need to from a fulfillment perspective if we do end up a little short from labor, and that does allow us to be closer to the customer so we can ship with more speed. Second, the last 2 fulfillment centers that we did build were much more automated, so they do require less labor. But I would say that it's definitely a headwind as we move into the back half of the year. But again, one that we did contemplate when we gave the guidance for the back half of the year.

That's helpful. And as you think about all of these puts and takes and the meaningful progress that you've made this year against your 2023 margin targets, can you talk to the outlook for the path for operating margins over the next 1 to 2 years. What do you think are the most important near-term levers in driving that sequential improvement? And how do you think operating margins will continue to expand from the 7.4% to 7.6% guidance that you have for 2021?

Well, first, I mean, I'm really excited about the progress that we showed this year. I mean we had given a 7% to 8% goal for 2023, and we're also hitting the midpoint already with our guide for this year. So really showing that our strategies are working, and we made incredible progress on the operating margin goal. We continue to need to drive top line. We talked a lot about what levers we have in place, all of which are in front of us in the back half of the year and 2022 and 2023. Gross margin has benefited obviously from the reg sell price, but also from the pricing and promotional strategies that we discussed as well as the strong inventory management. I have a strong passion to turn inventory. We had a goal of getting to 4x. You'll see that we're actually very close on achieving that for this year. And then we continue to manage our SG&A costs. You saw that marketing is the goal of 4% [ ADS ]. We've continued to make strides down to that 4%. So we feel very much on path to hit that by 2023. Our store productivity continues to be heightened. We're investing in automation, like I mentioned, in testing the self-returns and self-pickup in 100 stores, and our tech spend is down. All of those lend to the operating margin hitting bull in year 1 versus year 3. So at this point, we continue to review our long-term potential for the balance of the year. But we have every confidence that we will be able to sustain this recent margin and build on it in the future as we move forward. And I just think if you take anything away from this conversation is that we have incredible confidence in the strategy that we have in place.

Thank you so much for providing those insights. I have a question on capital allocation. The company recently announced an acceleration in capital return to shareholders, including a faster rate of buyback. Can you talk to your capital allocation priorities, the most important areas of CapEx reinvestment that you're focused on in the business? And any plans for the remaining free cash flow?

Yes. So I feel great. We're in a wonderful cash position. We generate a lot of cash flow. And so we are able to look back at our capital allocation for the year, and we've always prioritized investing back in our business. And last year, obviously, our capital -- our CapEx was light given COVID so we cut back on any type of investments. And this year, as we approach the year, we had forecasted to be lighter than we've been historically for cap investment, just not understanding how with the recovery would happen. Given we've made the recovery quicker, you'll see that we're going to invest about $600 million to $650 million in CapEx this year, still below our historical averages. But as you look forward into 2022 and 2023, you'll see that we'll be spending closer to our averages, especially as we support the Sephora rollout and all of that is encompassed with that within the stores. Our CapEx has historically been about half into technology. I'll say you're going to predominantly see a lot of our future investment in the store. Given everything we just talked about, we think it's a key asset and a key differentiator for us. We then reinstituted the dividend. We were able to really reset that at a nice payout ratio and yield. And then we have obviously invested much more into share repurchases. So we started out the year saying $200 million to $300 million. We had bought at $300 million by the end of Q2. We increased that to $500 million to $700 million for the year. And I think it just shows you the confidence that we have in our strategies because we believe there's -- our stock is quite a value right now. So we continue to buy into that and will for the rest of the year as long as that value stays there. I think $700 million is a pretty big statement and our confidence from that perspective. The last thing I'd just mention is we do need to buy more inventory. Being down 25% to 2019 and up in sales is a tough -- I love the turn, but it's just really tough to continue to generate top line off of that. So we will invest back into inventory. I don't think we'll be back to where we want to be by the end of the year, given the supply chain that we previously discussed, but that will be an investment that we'll be making first and foremost.

That's incredibly helpful color. I guess my final question for you would be on one of your favorite topics which is turn. You mentioned that you'll be looking to invest back into inventory to drive that top line growth, and you also have this inventory turn target of 4x. Can you talk to how you're thinking about reinvesting back into inventory over the course of the next 6 to 12 months? And how you're thinking about balancing that with inventory turn?

So turn obviously, is a big passion of mine. It's a place that I think we have a large opportunity and getting to 4x, we will achieve that this year. and it is like a 10-year high. So it's definitely a huge progress in 1 year, but it continues to be a focus. And if you think of some of the initiatives that we're looking at, obviously, just even the clarity of the floor and taking fixtures off the floor helped us reduce some inventory because those fixtures are now much more productive. As we moved into active and we exited out of brands like dressy Men's areas and dressy Women's areas, it's much more productive and a higher turning business because that's where the customer is moving to. As we bring in Sephora and replace jewelry, as you can imagine, it's a much better turning business, much more productive for us within the store. So I think everything, the choices that we're making in standing for like better clarity, more depth, less choices, moving into higher productive areas is all going to lend to a faster-turning business. So as we make these investments, we're making investments in inventory to drive growth, and that combination helps drive turn.

Fantastic. Jill, thank you so much for joining us and sharing your -- joining us today at our Global Retailing Conference and for sharing your thoughts on the strategy and the path for growth for Kohl's. Thanks again to all who are also on the line listening, and we hope that you guys will be all able to join our next session.

Okay. Thank you so much, Brooke.