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Kohl's (NYSE:KSS)
Q1 2018 Earnings Conference Call
May. 22, 2018 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, thank you for standing by. Welcome to Kohl's first-quarter 2018 earnings release conference call. Certain statements made on this call, including projected financial results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl's intends forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates," "plans," or similar expressions to identify forward-looking statements.

Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements. 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. Also, please note that replays of this recording will not be updated. So, if you are listening after March 22, 2018, it is possible that the information discussed is no longer current.

At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to your host, Michelle Gass, the chief executive officer of Kohl's Department Stores. Please go ahead.

Michelle Gass -- Chief Executive Officer

Thank you, Greg. Good morning and thank you for joining us today. With me is Bruce Besanko, our chief financial officer. And before I turn the call over to him for a review of our first-quarter results, I'd like to take a moment to say how pleased and honored I'm to represent Kohl's in my new role as CEO.

I've now been with Kohl's for five years and during that time I have had the great opportunity to work alongside Kevin and the leadership team as we architected our overarching strategic framework and the greatness agenda in our key priorities of driving traffic and operational excellence. I am stepping into this role and what I believe is an incredible time for the company. Our strategies are gaining traction and we have momentum. I look forward to working with the team as we continue to focus on delivering solid execution, innovating for the future and continuing to enhance our culture of speed and agility in this dynamic retail environment.

We had a strong start to 2018, and I am very pleased with how the team has sustained our momentum coming into the year. We achieved our third consecutive quarter of comparable sales growth and our ninth consecutive quarter of inventory reductions. Our ongoing focus on the key pillars of our greatness agenda and our two key priorities continue to deliver results this quarter. I'll now turn the call over to Bruce for a review of our first-quarter financial results.

And then I'll return to add more color on the business and update you on our key initiative.

Bruce Besanko -- Chief Financial Officer

Thanks, Michelle. Comp sales for the quarter increased 3.6% on a fiscal basis, our third consecutive quarter of positive comp growth as Michelle just mentioned. And less noted our comp comments are on a fiscal basis. We achieved comp-sales increase in both stores and in our digital channel.

Digital was especially strong with an increase of 19 %. The comp sales increase was driven by an increase in average transaction value resulting from a strong increase in average unit retail .Transactions were relatively flat for the quarter. From a line-of-business perspective, home, footwear and men's were our strongest performers while the children's business was the most challenging. From a regional perspective, the West, Midwest, and South Central outperformed the company.

The Northeast and Mid-Atlantic, which were negatively impacted by weather, as well as the Southeast, underperformed the company. Our first-quarter comp benefited from the calendar shift due in part to the timing of the friends-and-family event leading into Mother's Day. We estimate this impact to be approximately 320 basis points. The shift will also positively impact our second-quarter comp but will be a headwind in the third and the fourth quarters.

We're pleased to report such strong comps in the first quarter despite unfavorable weather from snowstorms, which we estimate reduced our first-quarter comps by approximately 100 basis points. Michelle will provide additional comments on our sales results in her remarks. During the quarter, we adopted the new revenue-recognition standard. It has an immaterial impact on accounting for returns and rewards programs such as Kohl's Cash and our loyalty program.

The most significant change is to revenues from our credit card operations. These were previously recorded as a reduction of SG&A expenses but they're now included in other revenue which is a new line on the face of our income statement. As a result of adding this new revenue line, we will no longer report gross margin on the face of our income statement. Our gross margin rate is calculated using net sales and not total revenues.

We'll still discuss our gross margin rate on these calls and in the MD&A section of our 10-K and 10-Qs using net sales as the denominator. For additional details regarding the impact of the new standard on our financials, please refer to the information that was posted to the Investor Relations section of our corporate website earlier this morning. Moving to gross margin. Our clean inventory position and our localization inventory management and speed initiatives resulted in strong margin performance for the quarter.

The operational agility created by these initiatives allowed our merchants to react more opportunistically to consumer demand throughout the quarter. As a result, we were able to drive better full price and clearance sell-throughs resulting in less permanent and promotional markdowns. In addition, shipping costs were better than expected to benefit from higher buy-online-pick-up-in-store demand, or BOPIS demand, and shipping efficiencies driven by our technology investments. As a result, our gross margin increased 50 basis points, which exceeded our most recent guidance.

Consistent with our expectations SG&A increased 3.7%, or $45 million, to $1.3 billion for the quarter. As a percentage of total revenues, SG&A deleveraged 6 basis points. Our stores' organization did a great job managing payroll, driving savings through our operational excellence initiatives, which more than offset wage rate pressures. Marketing also leveraged as we continue to optimize our marketing spend across channels.

Credit, which now includes only expenses as the revenue is reported in other revenue, also leveraged. Technology expenses were again higher as we continue to make investments in programs like cloud migration and omnichannel growth to support our operational excellence initiatives and long-term success. Corporate expenses also increased primarily due to the recent leadership changes. Turning to depreciation.

Depreciation expense was $243 million for the quarter, up $5 million over last year's first quarter. The increase was primarily driven by IT investments in our fifth e-commerce fulfillment center. Net interest expense decreased $5 million for the quarter. The decreases reflect lower interest expense and are capitalized leases as the store portfolio matures, as well as increased interest income due to higher yields and investment balances.In April, we completed a tender offer for $500 million of our outstanding debt.

This resulted in an 8-basis-point reduction in our weighted average interest rate and extended the remaining maturity of the portfolio in additional six months. The debt tender will reduce interest expense by approximately $25 million on an annual basis. This savings was not included in our original guidance. In conjunction with the $500 million tender, we incurred a $42 million debt-extinguishment charge in the first quarter.

Now moving on to taxes. Our tax rate was 22.8% for the quarter, significantly lower than last year due to tax reform, favorable audit settlements and the share-based compensation rules that went into effect last year. As a reminder, under the new rules income taxes related to share-based awards are recognized as income tax expense rather than as equity. Given our stock price, the new rules resulted in lower tax expense this year and higher expense last year.On a GAAP basis, net income for the quarter was $75 million and diluted earnings per share $0.45.

Excluding the loss on extinguishment of debt, diluted EPS increased 65% to $0.64. Looking at our store portfolio, we ended the quarter with 1,158 Kohl's stores, which is unchanged from last quarter. Gross footage was 99.1 million square feet and selling footage was 82.8 million square feet. We were also pleased to reopen two stores during the quarter that were temporarily closed due to damage from natural disasters in 2017.Turning to the balance sheet.

We ended the quarter with $822 million of cash and cash-equivalents, an increase of $197 million despite repaying $500 million of debt during the quarter. Our inventory initiatives resulted in inventory per store decreasing 7% and our AP-to-inventory ratio increasing 195 basis points to 39%.Moving on to capital management. Capital expenditures were $133 million for the quarter, $83 million lower than last year. The largest driver of the decrease was prior year spending on our fifth e-commerce fulfillment center.

We continue to expect capital expenditures for the year to be approximately $700 million. Weighted average diluted shares and shares outstanding at quarter-end were both at 167 million. We repurchased 1.1 million shares of our stock during the quarter and continue to expect repurchase $300 million to $400 million for the year. Last Wednesday, our board of directors declared a quarterly cash dividend of $0.61 per share.

The dividend is payable on June 27 to shareholders of record at the close of business on June 13th. As you saw in our release we're updating our annual adjusted earnings guidance to $5.05 to $5.50 per share. This excludes the one-time debt extinguishment charge of $42 million, or $0.19 per share, taken in the first quarter. Based on our better-than-expected first-quarter results, we now expect gross margin to increase to 15 to 20 basis points for the year.

The debt tender transaction decreases our interest expense expectation to $260 million for the year. We continue to expect SG&A to increase 1% to 2% for the year on a post-revenue-recognition basis, with the second quarter increasing mid-single-digit percentage. And now I'll turn the call to Michelle, who will provide additional details on our results and an update on our key initiatives.

Michelle Gass -- Chief Executive Officer

Thank you, Bruce. We've had a great start to the year and I'm very pleased with how well the team executed during the quarter. To provide additional color in our strong comp sales, home significantly outperformed, followed by footwear and men's. On a regional basis, the West, South Central, and the Midwest outperformed the company.

Active continued to be a key contributor to sales growth, delivering 10% comp growth for the quarter. Given the weather headwinds Bruce spoke to earlier, the organization proactively leaned into less seasonally dependent categories, such as home, active footwear, and apparel, denim, and wear-now, and key item basics. This strategy along with our digitally forward agile approach to marketing allowed us to deliver strong sales results for the quarter and is a true testament to the team's innovative thinking and cross-functional collaboration. In addition to our continuing positive comp sales trend, we drove a 50-basis-point increase in gross margin over the prior period.

This improvement was largely driven by our ongoing focus on inventory management, as well as our speed localization and standard to small initiatives. And now I'd like to turn to a discussion of the progress we are making on each of our key pillars. I'll start with an update on our product initiative. We continue to see great success with our national brands, which are up 6% during the quarter and which now represent 60 % of total sales.

As I mentioned, actively continues to outperform the company, increasing 10% in Q1 driven by our top three active brands, Nike, Under Armour, and Adidas.We have distinct strategies to drive the sustained growth of each of these important brands. Nike which is one of our largest national brands continues to post strong growth on both the core assortment across all lines of business, as well as new additions such as Nike golf. We are pleased to share that Under Armour is experiencing strong growth in its second year through expanded assortment and new categories such as Under Armour golf, men's basics, swim and outerwear. With respect to Adidas, we're seeing tremendous growth from our focus on the greater breadth of product, elevated assortment and enhanced base in some of our stores.As part of our efforts to invest in our active and wellness initiative in a bigger and bolder way, we will launch an active expansion test in 30 stores in August.

Our teams have been collaborating with all of our active brand partners for some time to create a much more dramatic elevation of product in the customer experience in those stores. This will result in an increase in square footage for the active business by approximately 40% and will provide customers with almost 50% more choices.Now moving to our proprietary brands. We experienced flat comps for the quarter across our private and exclusive brand portfolio. As you know, we continue to invest in our speed platform.

The brands that are on this platform, including brands such as LC Lauren Conrad, simply Vera Vera Wang, Apt. 9, and Urban Pipeline, significantly outperform the balance of the portfolio. Further, we continue to edit out some of our underperforming proprietary offerings, making room to further invest in higher performing brands and categories.Footwear continues to be one of our strongest performing categories and is an excellent example of the success we've had implementing new product strategies. We have continued to enhance our portfolio with the introduction of relevant new brands including Madden NYC, Clarke's Coolibar, and most recently Circus by Sam Edelman and Timberland Pro.

In addition, we continue to maximize the athletic opportunity with Nike, Under Armour, and Adidas as well as lifestyle offerings with Vans and Converse.Further, I am encouraged with how the teens are utilizing digital data and insights to inform not only our omnichannel business strategies but also our in-store merchandising. I also want to provide you with an update on our women's business as this is a key priority for us. We are pleased that for the first quarter, our core women's business was in line with the overall company sales performance. This was primarily driven by continued improvement in the women's updated and contemporary business, the intimate and active categories and was driven by speed as well as clarity of brand assortment and value.In addition, we are also very excited about several new brand launches.

First, we announced yesterday that we are partnering with POPSUGAR, a leading digital media company to launch POPSUGAR at Kohl's this September. This new innovative apparel brand will be targeted toward millennial women and will tap into POPSUGAR audience of more than a 100 million readers and 31 million social followers to both inform the assortment and drive unique joint marketing approach.We are also excited to announce the launch of two new brands that will increase our relevancy in the toy space, Lego and FAO Schwarz. We will launch both of these brands in September in time for the holiday season. And I'm confident they will resonate strongly with our customers.Before I move off from our product initiatives I want to take a moment to welcome Doug Howe to Kohl's as our new chief merchandising officer.

Doug brings over 30 years of retail experience most recently as the global chief merchandising officer at the Qurate Retail Group, leading QVC's and HSN's overall merchandising strategies. We look forward to the value and contributions that I know Doug will bring to our already very strong merchant organization.Next, let me talk about our strategic pillar of easy experience. Our digital business continues to grow and become a greater part of total company sales. In fact, first-quarter digital sales increased almost 20%.

Mobile was a key driver of that digital growth representing over 70% of digital traffic and almost half of the digital sales. Recent enhancements include your price feature which shows customers the net price after promotions and the smart card feature, which incentivizes customers with Kohl's Cash to pick up their items in store. Both are continuing to positively impact sales.We are excited to see the acceleration of our BOPIS penetration which is not only lowering our overall shipping cost but also driving incremental attachment sales. During the quarter, our stores fulfilled approximately 30% of digital units, compared to about 25% in the first quarter of last year.

We are supporting our digital growth by investing in both our store fulfillment capabilities, as well as our state-of-the-art e-commerce fulfillment centers.Our omnichannel fulfillment strategy is helping us improve the speed, quality, and cost within our fulfillment network. To further support our digital growth there are three key initiatives I'd like to highlight for you. First, we will be launching online shipped to store otherwise known as BOSS this summer. This will significantly broaden the assortment available to our customers to pick up in store and add to our existing buy-online-pick-up in-store platform, which has seen very robust growth in the past few years.

This is another great way that we see we can bring traffic into our stores.Second, we will begin the multi-year build-out of our six e-commerce fulfillment center. It will be highly automated similar to our fifth ESC that came online in 2017 which is 3 times as productive as our first generation ESC. Third, we're making further investments in our analytics-driven inventory deployment model to enhance both speed to customer and cost efficiencies across a fulfillment network.Next, I'm excited to share with you the progress we're making in our pillar of incredible savings. Just this week we launched the next generation of our loyalty program in a pilot across a 100 stores in eight markets: Phoenix, Raleigh, Indianapolis, Minneapolis, Austin, San Antonio, Buffalo, and Rochester.

We will read the results of this pilot through the holiday adjust if necessary and anticipate a full program roll out sometime in 2019.There are several exciting changes in core tenets of the next generation Kohl's rewards program that I want to highlight. This program is designed to drive traffic and sales through further engaging existing customers and acquiring new customers. First, it simplifies the program into a single rewards currency based on the power of Kohl's Cash. Second, it will broaden access to some of our key sales events which historically have been limited to Kohl's charge card holders.

And third, we will offer our customers the opportunity to earn Kohl's Cash every day with 5% for members and 10% for Kohl's charge card holders.Lastly, through the loyalty program, we will be personalizing offers and experimenting with additional benefits including free shipping for elite members. And finally, I'd like to update you on our store optimization strategy. We continue to make significant progress on our standard to small initiatives. As a reminder, this initiative aligns our merchandise assortment and presentation to the sales volume of the store and creates a better customer experience.

In 2017, we aligned space to sales potential in approximately 300 of our lower volume prototype stores by editing the floor pads to tailor to local brand and category preferences and removing more than 100 fixtures per store.This change reduced inventory, improved gross margin, significantly improve customer service scores and maintain sales. In 2018, we plan to convert an additional 200 stores. The conversions began last week and will continue through the third week of July. We expect to see similar results in these stores.

As we discussed on the last quarter's call, we will be right-sizing several of our stores by reducing the footprint of select locations. And to be clear, the new space that will be occupied by a complimentary business will be a separate store with its own entrance.Our key priority with this initiative is to drive additional traffic to our Kohl's stores and we remain on track to pilot our first few locations with all the grocery stores as we announced earlier this year. Before we wrap things up, I just want to give a quick update on our pilot with Amazon. As you know, this pilot has been running for a little over six months and it has continued to be a positive experience for both our customers as well as Amazon customers.

We are continuing to gather with Amazon to assess the pilot.So in closing, we are very pleased with our strong start to the year. As we continue to build on our recent momentum and execute against our two key priorities of driving traffic and operational excellence. I'm encouraged with the traction we are getting with our many initiatives to drive traffic including our product strategies, the piloting of our new loyalty program and our technology enhancements to improve both the digital and in-store customer experience.I also want to reiterate that we have a keen focus on operational excellence. We have made great progress in our efforts to remove more than $250 million from our ongoing expense base, which affords us the opportunity to continue to make investments in customer experience, technology, and our people.

As I begin my tenure as CEO I do so with great confidence in our team and our path forward. We're happy to take your questions at this time.

Questions and Answers:

Operator

[Operator instructions]. Your first question comes from the line of Lorraine Hutchinson from Bank of America. Please go ahead.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Thank you, good morning. Bruce, could you provide a little bit more details around the shift that you discussed? Was that inclusive of both the friends and family event shift on the calendar and then how are you planning second-quarter comps as you see the other side of this shift?

Bruce Besanko -- Chief Financial Officer

Yes, good question, Lorraine. So as Michelle and I said in our prepared remarks, our comp increased 3.6% on a fiscal basis. We estimate this result benefited from the retail calendar shift by 320 basis points. So to answer your specific question and included both the shift out at the beginning of the year, the 53rd week in 2017 and then this shift in friends and family.

So it's the entire retail shift as part of that 320 basis. What's the main driver was the fact though that we shifted out the relatively lower sales volume week in the last year that's the 53rd week and replace it with the stronger friends and family event which increased in breadth over time from even just a few years ago. So that was the essence of the shift.

Michelle Gass -- Chief Executive Officer

And, Lorraine, Michelle here. I would also build on Bruce's point. We did see an acceleration of our business and friends and family in particular. So we're very pleased with that acceleration hence why we posted an overall very strong fiscal comp.

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

And then do you expect to give that back in 2Q that 320 basis points?

Bruce Besanko -- Chief Financial Officer

No. What we would expect to happen is in the second quarter we'd see the same phenomenon as the first quarter, that is to say, the shift would be a positive impact because we're bringing in a back-to-school week versus a non-back-to-school week, that shifted out. And then in the back half of the year, as I said in the third in the fourth quarters, we'll have the opposite effect.

Operator

Thank you. Your next question comes from the line of Matthew Boss from J.P.Morgan. Please go ahead.

Matthew Boss -- J.P.Morgan -- Analyst

Thanks. So, Bruce, as we think to the back half of the year and holiday I guess how would you rank the multiple top-line initiatives that you guys have in process? And then what are you embedding for 4Q versus the flat-to-up guide for the year just against that strongest performance that you had last year?

Bruce Besanko -- Chief Financial Officer

Let me start with the guidance piece, Matt, and then maybe Michelle and I'll both tag-team on the various initiatives because we have a whole host of initiatives that have been unfolding, and those were a lot of the reasons why we're seeing the momentum in our company. But in regards to the guidance question, obviously, we've increased the guidance. The sales number, though -- we increased the guidance in large part because of the gross margin outperformance in the first quarter, though we're still early in the year. But the comp sales for the annual basis is still flat to 2% higher for the year.

And as I just said, the retail calendar shift favorably impacting the first half and negatively impacting the second half. And then just one more comment on this guidance, obviously, the gross margin beat was pretty good in the first quarter. So we've taken effect of that obviously updated the guidance from a margin perspective 15 to 20 basis points. The SG&A we've kept at 1% to 2% on a post-revenue-recognition basis, though we've also added that the second-quarter increase should be a mid-single-digit percentage increase, just as it was in the first quarter.

And then, as I said in the prepared remarks, the debt tender offer will reduce, and the interest expense, and so we're expecting that to be closer to an estimate of about $260 million. And then on the initiatives, Michelle do you want to comment on those?

Michelle Gass -- Chief Executive Officer

Sure. I'll comment on those, Matt. I feel very confident as we look to the balance of the year including the second half and holiday. I think we have a great breadth of the initiative.

They're really balanced. First off, the national brand portfolio that continues to get stronger and stronger. And I don't see that letting up that we'll continue to be strong. Secondly, I'm very excited about what's happening with our proprietary brands, and the speed platform and I think as we comp that business which is a little softer last year.

I think we have a great opportunity. Third, we see great momentum in our active business that is not letting up. And we had great sales in active last holiday. And I think that's going to be the case as well.

Fourth is digital as we spoke earlier, we're making a lot of investments both in the customer-facing initiatives for digital, as well as the back end. I think that will continue to serve as well. And then lastly, I'll make mention that we have an opportunity to gain market share. Like we took advantage last year with store closures.

We have that same opportunity as we look to the balance of the year.

Matthew Boss -- J.P.Morgan -- Analyst

Great and then just to follow up on the standard to small strategy. What's the sales and margin impact that you see on the legacy Kohl's business after its retrofit? And on the partnership front if the convenience pilots were successful what kind of timeline what do you think we're looking at for a material rollout of any of these concepts?

Bruce Besanko -- Chief Financial Officer

On the first part, the standard to small what we've seen is no impact of sales. We've seen a slight increase in gross margin. We've seen increased customer engagement scores and obviously, the inventory was taken down by lows double-digit percentage. So that's sort of a standard to small model that we've seen over the first 300 stores.

And then Matt the second part of the question was?

Matthew Boss -- J.P.Morgan -- Analyst

On the convenient pilot so yes the Aldi were successful what type of timelines for any type of material rollout you think?

Michelle Gass -- Chief Executive Officer

Yes. Matt, we're in the very early days of this. We haven't even actually built one yet. So I think as we approach everything we along with them will open a few, will get a sense of how they're working and then together we'll make a decision on our way forward.

Operator

Your next question comes from the line of Oliver Chen from Cowen & Company. Please go ahead.

Shawn -- Cowen & Company -- Analyst

Hi, thanks. This is Shawn. Bruce, my question was about traffic and the traffic trends that you're seeing and what you're most excited about in terms of driving traffic for the next few quarters? Also in the context of the products assortment what are your thoughts about children in terms of what kind of changes you can make there and opportunities you have? And if you could just help us understand the magnitude of active as a percentage of sales that would be helpful as well? Thank you.

Bruce Besanko -- Chief Financial Officer

I might hit on the traffic first and then you can jump in Michelle on any added comments there and then the second half. So on traffic, as I said in the prepared remarks it was approximately flat. We think it may have been impacted by the inclement weather that we cited particularly in the mid-Atlantic and the Northeast where there were snow storms that had about a 100-basis-point impact. So I think that may have had an impact on our overall transactions and traffic.

We're excited about the various initiatives that Michelle has outlined just a second ago that we think will continue to help us from a traffic perspective.

Michelle Gass -- Chief Executive Officer

Yes. I'll build on that from a traffic standpoint I feel like across the organization we have a lot of great ammunition to continue to drive traffic both with our existing customers and with our new customers. On the product front, I mentioned we've got across all of our categories great initiatives including active that we've been speaking about but our women's business is gaining traction. Our proprietary brands business is gaining traction.

So I think that's really exciting and then on the marketing front, I've been really pleased to see how that team has been really planful on how we're thinking about attracting new customers. We continue to see new customer rates improve versus prior year. So that's very encouraging and I also think from an agility standpoint as we go about a quarter and the team is doing great work to be responsive to sort of day-to-day needs of the business. So I think we're very well-positioned on that front.

You asked a question around kids and while kids did have a tougher Q1, we can actually point a lot of that. I'd have to say to weather because it is one of our more weather-sensitive categories. And as we saw that shift, the kid's business bounced right back. So I think there we have a great portfolio of brands, obviously, Jumping Beans, our private brand that business has been accelerating over the last couple years Carter's phenomenal brand doing really well with our business and then active in kids as we brought all the brands across into the active portfolio for kids has done quite well.

And then your last question on active as a percent of sales that continues to be a bigger and bigger part of our business. And so we're very pleased about that.

Shawn -- Cowen & Company -- Analyst

OK. Just a quick follow-up on loyalty. This change seems quite productive in terms of simplify to amplify what you're doing here. How have you managed risk in terms of the change and are you more excited about acquisition or retention in terms of how you're thinking about customer lifetime value with this program and what it may do and different risk and opportunity factors around the timing of this?

Michelle Gass -- Chief Executive Officer

Yes, great, great question. I'll reiterate how excited I am about the program. I think over time it's easy to layer in additional programs and it can get a little complicated for our customers. So the team did a great job taking a step back and simplifying the overall program aligning it all under the umbrella of Kohl's Cash, which I think is really powerful.

In terms of the transition, we're in the midst of that as we speak. We actually started just rolling it out yesterday across these markets. And they have a very thoughtful plan to connect with our customers really in every form of media to tell them about the change, to move their points into Kohl's Cash etc. So I feel really good about the robustness of the plan.

That being said, it's a pilot and it's a pilot deliberately so that we'll learn what's most resonating with customers and what's not. And we'll course-correct as we go forward. And I think the program really equally addresses our existing customer and our new customer. I think new customers will see the simplicity.

They'll be excited about the everyday Kohl's Cash about 5%. I think with our most loyal customers especially those that have our charge card, we're adding the benefit of earning 10% Kohl's Cash every day, which is a lot of value-adds. So overall we're going to learn a lot but I think we're walking and feeling very, very good about what this will mean to our customers.

Operator

Next, we'll go to the line Randy Konik from Jefferies. Please go ahead.

Randy Konik -- Jefferies -- Analyst

Yes, thanks a lot. I guess the first question is for Bruce. I look at the model and it looks like you are tracking over the next few years to get to prior peak EBITDA near $3 billion and the capex requirements of the business start to continue to moderate. I guess my question is how do you think about the medium-term capex needs of the business? And you nicely paid down debt so just trying to think about how you think about the different utilization of cash flow around dividends share repo and then further debt pay down? Thanks.

Bruce Besanko -- Chief Financial Officer

Thanks for the question, Randy. So as we guided to approximately $700 million of capex for this year. We are not providing any guidance going forward but what I can tell you is that we're going to continue to provide whatever monies the business needs to sustain the kind of growth that we think we can achieve. And so we're going to continue to invest in our store base.

We're going to continue to invest in our omnichannel experience. We just finished out EFC5 and we're obviously in consideration of another EFC coming up. And so we will adapt our capital needs to whatever the business needs in order to grow. And then secondly beyond that, we'll obviously have had a nice run with our dividend.

We expect to continue to obviously provide that return back to our shareholders. We've had great dividend growth over the past several years. And we're hopeful we can continue that and then to the extent that there's additional cash flow then we would use that to buy back shares. So that's sort of the set of priorities that we have but the first and foremost is we want to provide whatever capital is necessary to continue the growth we've, we think we can achieve.

Randy Konik -- Jefferies -- Analyst

Yes, right, good. And the cash flow looks like it's going to continue massively accelerate so, just switching gears, I guess, Michelle, when I look at the commentary AUR, it seems like that's been a nice inflection in the business. Kind of give us some perspective on where you're seeing the most lifting AUR in the business and how much-continued rooms do you see in that kind of metric going forward because it seems a like an ability to help drive continued comp improvement over time.

Michelle Gass -- Chief Executive Officer

Yes, Randy, thanks for the question. Well, first I want to reiterate our top priority is driving traffic. And so we've got the whole organizations focused on that. We appreciate the fact that our AUR is increasing.

A lot of that has been driven and it's been happening for some time now. So this is not a new trend around the shift in mix to national brands. So in particular as we've introduced the higher-end product in our active brands. This quarter we had a particularly stellar quarter for the home business that helps drive our AUR.

So there's a lot of good there but to me, that's more of just a byproduct of the products that our customers are responding to and I'll again I'll say again our No. 1 focus is to drive traffic.

Bruce Besanko -- Chief Financial Officer

And I just add on what Michelle said just to further add on that the ATB has been up for the last five years and as she said mainly driven by the AUR which is the result of national brands and leaning into home and so on.

Operator

Your next question comes from the line of Chuck Grom from Gordon Haskett. Please go ahead.

Chuck Grom -- Gordon Haskett -- Analyst

Hey, thanks, good morning. Just on the 3.6% comp just curious how that fared relative to your original plan of 0% to 2% in terms of internal expectations. I am curious if you could give some color on the month of May and then Bruce with the second quarter given the multiple moving parts the 320-basis-point shift and then obviously you're going to have a benefit coming in at the end of the quarter. I wondered if you could just give us some color and how you think we should be modeling the second quarter.

Bruce Besanko -- Chief Financial Officer

Yes. Well, I'll start. There are multiple pieces to that, Chuck, so if we miss a piece obviously jump in but I think the first part of the question was we comp at 3.6 fiscal and how did that compare to plan. I say we were generally pleased with that performance.

We obviously had the weather impact that I mentioned from snowstorms. There were actually two weather impacts. One was the snowstorms in the Northeast and mid-Atlantic that's the one that we quantified up about100 basis points. And then obviously there was more seasonably cooler weather during our spring transition.

And so Michelle had alluded to that when she was talking about our children's business. We've not quantified that piece but both of those did affect it but nonetheless, I think we are pleased with the sales number that we racked up at the 3.6% on a fiscal basis. You want to comment on that.

Michelle Gass -- Chief Executive Officer

Yes, no, I'll just I'll build on that I think we're very pleased with that result. As I mentioned in my comments I think even going into typically this time of year can be a little bit more volatile. So proactively the team's really learned in from a product standpoint into home, footwear and active. And all those did really, really well and then another kind of key items categories, whether its basics or denim or intimates those also did very well.

So I'm very, very pleased with the result, and we're seeing that momentum continue. So I think we're set up really well for Q2 and see what happens but I think we're all feeling pretty good.

Chuck Grom -- Gordon Haskett -- Analyst

No doubt about all the drivers but just given the calendar shift and I know you don't want to give specific quarterly guidance going forward but it might be beneficial everybody if you could shed to how you're thinking about the second quarter and the third quarter in light of the NRF stuff?

Michelle Gass -- Chief Executive Officer

Yes. The only thing I will add one comment to that and Bruce mentioned it earlier, which is we do have a back-to-school week coming into the second quarter. So if I look at the second quarter, we have a whole quarter to go here, but we're entering it with momentum and it will have the benefit from like I said that last week with an important back-to-school week coming into the retail calendar.

Bruce Besanko -- Chief Financial Officer

Yes. I just to reiterate I think the first half of this fiscal year will benefit from the shift, and the back half from a comp perspective the shift will have an unfavorable impact. We said that in the very beginning of the year and that's held in the first quarter, we expect it to hold in the second quarter and then on into the third and fourth.

Michelle Gass -- Chief Executive Officer

Yes and I'd say overall to add to what Bruce is saying and as he said earlier, our guidance for the year is zero to two comp, and we feel good about that.

Chuck Grom -- Gordon Haskett -- Analyst

OK, great. And then just on the fourth-quarter call you talked about a mid-teens lift in new customers just wondering how you cultivate those customers here in the first quarter? What you're doing the retainer shoppers going forward because obviously, that was a nice dynamic for you guys at the end of last year?

Michelle Gass -- Chief Executive Officer

Yes, a great question. The team through their personalization effort in the marketing team is really doing a great job with new strategies, new tactics to connect with these customers. The fact that we are today investing so much in digital we know more about our customers. Actually, it affords us an opportunity to connect and retain customers at a rate that we just haven't had those tools in the past.

So I'm optimistic that we are going to see over time higher retention rate.

Operator

Your next question comes from the line of Mark Altschwager from Baird. Please go ahead.

Mark Altschwager -- Robert W. Baird & Company -- Analyst

Good morning, thanks for taking the question. I wanted to follow up on gross margin really exceptional results against the tough comparison. How should we be thinking about that in the context of the now 15- to 20-basis-point annual guide and easier comparisons in the coming quarters? Any specific tailwind in Q1 that you would expect to subside over the next couple or any further detail there would be great.

Bruce Besanko -- Chief Financial Officer

Yes. I'll jump in on that one, Mark. Thanks for the question. We had a great quarter and gross margin was up 50 basis points, which were better than what we had anticipated.

Our inventory reductions, which were down favorably at 7% at cost in Q1 together with localization speed initiatives, drove that improvement. We had less permanent and promotional markdowns all of that played a role, shipping costs which are typically 20- to 30-basis-point headwind were better than expected. And so the guidance that we've provided for the year that is upgrading it to 10- to 20-basis-point improvements for the year was based on this improvement that we saw in the first quarter. And we expect a more normalized improvement for the rest of the year.

Mark Altschwager -- Robert W. Baird & Company -- Analyst

Got it and then just separately on the marketing front. Just an update on the personalization strategy and how that's unfolding this year? Any way to quantify the effect those initiatives are having on traffic or the comp? Thanks.

Michelle Gass -- Chief Executive Officer

Yes. Thanks, Mark. Personalization, as we've been talking to all of you about, is a very big focus for ours. We're investing a lot as it relates to technology and data and certainly the teams.

We have a lot of activity there. A lot of testing going on and we do think it's going to be a big contributor. As we sit here today we have our own internal benchmarks and metrics we will see it unfold. We're not in a position to a fully quantify because we're still in the testing and incubating but we're all pretty confident this is going to provide an uptick in sales and traffic as we look forward.

Operator

Your next question comes from the line of Paul Trussell from Deutsche Bank. Please go ahead.

Paul Trussell -- Deutsche Bank -- Analyst

Hi, good morning. Just you reiterated the 1% to 2% of SG&A growth for the year. Can you just talk maybe a little bit more big picture of where you stand now on your long-term cost-saving initiatives?

Bruce Besanko -- Chief Financial Officer

Yes. I'll jump in and then Michelle can add. So this is what you're referring to Paul is our operational excellence initiatives, which have begun bearing fruit late last year and now here in the first quarter. In fact, we achieved I think exactly what we had hoped for in terms of our operational excellence achievements here in the first quarter.

So we're starting to see that benefit roll into the P&L. The process has unfolded very well. The teams have been tasked and budgeted with these operational excellence initiatives. They're baked into their budget.

They're executing against them. And so and as I said in the first quarter, we saw the benefits of those things. So we're on track to hit $250 million plus over the three-year time period. And we're pleased with what we've seen so far.

Paul Trussell -- Deutsche Bank -- Analyst

Got it. And then you mentioned that the national brands now stand at 60% penetration I believe, which I think is the highest penetration in 10 years or so. Just how do you expect that balance between national and private to look over the coming quarters and years and just bigger-picture, what do you expect does to kind of bring to the table from a merchandise standpoint that you guys have not done yet?

Michelle Gass -- Chief Executive Officer

Yes, great question, Paul. As I think about it for Kohl's I think when we're at our best we have great balance across our national brands and our proprietary brands. We start with the customer and kind of follow the customer around what they want. Clearly, over the last year or so our increase in penetration of national brands has largely been driven by our active business.

And of course with the addition of Under Armour last year that had a major impact but we also are highly focused as I mentioned earlier on improving the health of our proprietary brands. So where that goes to me ultimately will be a result of where the customer takes us.

Operator

Your next question comes from the line of Michael Bonetti from Credit Suisse. Please go ahead.

Michael Bonetti -- Credit Suisse -- Analyst

Hey, guys. Thanks for taking our question here. I'm just on the modeling I know you guys are hyper-focused on traffic and I think you noted that transactions were flat in the quarter. And I know it's hard to make assumptions about how things like weather impact the traffic and you tried to help on the total comp but as you plan for the rest of the year is your assumption that look the underlying momentum here if we put aside weather, that the transaction number you guys give us every quarter can return to positive territory?

Bruce Besanko -- Chief Financial Officer

That's a great question, Michael. This is Bruce. We haven't commented on our providing any guidance on any of the components of the underlying comp. So we're not providing guidance on traffic or average transaction value etc.

In fact, we'd like to move away from that because those things tend to be as more difficult frankly to forecast but what you are right that we were essentially flat in the first quarter from a traffic perspective. ATV was obviously up and look we have a whole set of initiatives behind our No. 1 priority of driving traffic. Michelle has talked about those in her prepared remarks in here; in the Q&A.

Kevin has previous to that is talked about that. This is our absolutely No. 1 priority. The team is highly focused on it and the initiatives are designed to bring that to fruition.

Michelle Gass -- Chief Executive Officer

Yes. I just build on that I do think we had some unusual circumstances it affected certain regions but I think we all feel really good. We're leaning in with traffic enhancing initiatives both in our digital space and of course with our stores, feel very good about that even for the first quarter we do track our traffic in brick and mortar against the overall industry. We did outperform the overall industry as it relates to brick-and-mortar traffic.

So I think that's another data point. We watch that very carefully but that is the focus and like I said across both digital in our stores. And we have a very deep pipeline of both our existing brands of new brands and a comprehensive marketing strategy to make sure that we're resonating with both our existing customers and of course with new customers.

Michael Bonetti -- Credit Suisse -- Analyst

OK and then if I could just follow that up a little bit more on the product. Can you talk a little bit about athletic? I think how big is the athletic business as you define it today that part the comp up 10 and more importantly can you speak a little bit more to the comment about the athletics test stores? What's the goal there? And what are some of the big opportunities that you're focused on that you think could be a bigger idea for the company?

Michelle Gass -- Chief Executive Officer

So a great question something that we all have a lot of passion for in the world of active and wellness. Now to think about our overall strategy and really where Kohl's can set itself apart is we think about it both as active and wellness. We tend to go to sort of the active footwear and apparel but we also have a host of wellness initiatives across the company whether it's fitness trackers or even in the athlete category. And especially we feel like we're uniquely positioned because it's for the whole family.

So we're seeing active growth across the board, men's, women's, home, footwear, and kids. So we believe that gives us a real advantage. I think on top of that we've got a very unique portfolio. We have great strengths in our national brands I spoke to those but also in our proprietary brands.

So we'll go as far as the customer wants us to go. People aren't using these products just to work out anymore. They're living in them. So that gives us a broad permission to really expand the category.

So the test I alluded to I spoke to is really a test to help us understand how high is high. We're making a significant investment in extra space and fixturing giving great room for brands to come in and expand their offerings. We'll begin that pilot this summer and we'll learn from that in terms of how far this will roll out and scale but I know we'll get a lot of learnings that will impact our overall strategy with active. We don't see this trend I think we'd like to say it's not a trend anymore but we don't see this letting up.

And I'll just reiterate we will be on this journey with the customer and deliver the kind of products and initiatives that they want from us.

Operator

And at this time there are no further questions.

Michelle Gass -- Chief Executive Officer

OK. Thanks, everyone, for participating in. We'll see you soon.

Operator

Ladies and gentlemen, this conference will be available for replay after 11 AM Eastern Time today through June 22nd. You may access the AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 433484. International participants dial 320-365-3844. Those numbers once again are 1-800-475-6701 or 320-365-3844 with the access code 433484.

That does conclude your conference for today. Thank you for your participation. And for using AT&T executive teleconference. You may now disconnect.

Duration: 54 minutes

Call Participants:

Michelle Gass -- Chief Executive Officer

Bruce Besanko -- Chief Financial Officer

Lorraine Hutchinson -- Bank of America Merrill Lynch -- Analyst

Matthew Boss -- J.P.Morgan -- Analyst

Shawn -- Cowen & Company -- Analyst

Randy Konik -- Jefferies -- Analyst

Chuck Grom -- Gordon Haskett -- Analyst

Mark Altschwager -- Robert W. Baird & Company -- Analyst

Paul Trussell -- Deutsche Bank -- Analyst

Michael Bonetti -- Credit Suisse -- Analyst

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