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Kohl's (KSS 1.03%)
Q4 2023 Earnings Call
Mar 12, 2024, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Audrey, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl's Corporation fourth quarter 2023 earnings conference call. Today's conference is being recorded.
All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instructions] At this time, I would like to turn the conference over to Mark Rupe, senior vice president, investor relations and treasurer. Please go ahead.
Mark Rupe -- Senior Vice President, Investor Relations and Treasury
Thank you. Certain statements made on this call, including projected financial results and the company's future initiatives, are 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.
Forward-looking statements relate to the date initially made, and Kohl's undertakes no obligation to update them. Today's call will reference material included in an investor presentation included as an exhibit to our Form 8-K furnished to the SEC, which is available on the company's investor relations website. In addition, during this call, we may make reference to non-GAAP financial measures. Reconciliation of non-GAAP financial measures can also be found in the aforementioned investor presentation.
Please note that this call will be recorded. However, replays of this call will not be updated. So, if you're listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl's undertakes no obligation to update such information. With me this morning are Tom Kingsbury, our CEO; and Jill Timm, our chief financial officer.
I will now turn the call over to Tom.
Tom Kingsbury -- Chief Executive Officer
Thank you, Mark, and good morning, everyone. Our fourth quarter performance capped off an important year for Kohl's. As we've discussed throughout 2023, our company has undergone a significant amount of change across the business as part of our efforts to strategically reposition Kohl's for growth in 2024 and beyond. During the year, we assembled a largely new leadership team, enhanced our store experience, expanded our partnership with Sephora, invested in underpenetrated categories, and adjusted our go-to-market strategies in existing categories such as rebalancing assortments across all lifestyles.
In addition, we made further progress in simplifying how we deliver value to our customers and embedded new inventory management processes. Through all of this change, we stayed focused and executed against each of our four strategic priorities, which are enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expenses with discipline, and further strengthening our balance sheet. The early success of our strategies is evident. Our store business had its best comparable sales performance since 2010.
Sephora at Kohl's continued to drive meaningful beauty sales growth. We managed inventory down 10% at year-end. And we delivered 2023 earnings ahead of our expectations. I want to thank the broader Kohl's team for adapting to new ways of working and for driving significant change across the organization.
We accomplished a great deal in 2023. And while there is more work to be done, I am confident that through our collective efforts, Kohl's is becoming more relevant to customers. Looking ahead to 2024, we are incredibly focused on driving growth. We are expecting comparable sales to be in the range of flat to up 2%.
Key drivers of comp growth in 2024 will be continued growth in Sephora at Kohl's, which will represent over 10% of our net sales for the year; incremental sales from our home, gifting, and impulse initiatives; the initial sales benefit from our partnership with Babies "R" Us, through which we will meaningfully expand our presence in the baby gear category; the scaling of our key value initiative, which is high volume pricing across our private brands, building off the success of our tests last fall; and improved performance across our apparel and footwear assortment as our efforts to increase relevance come to life in our existing brands, as well as new brands. From a profitability perspective, as Jill will discuss in more detail, we expect strong inventory management to drive further gross margin expansion in 2024 and we plan to continue to benefit from disciplined expense management. That said, we have embedded the potential impact of the recent CFPB late fee ruling into our 2024 outlook, which will serve as a headwind in the back half of this year. I will discuss our strategic priorities in greater detail in a moment.
But first, let me touch on our fourth quarter results. Net sales decreased 1.1% in Q4, and comparable sales, which excludes sales from the 53rd week, decreased 4.3%. The holiday period started off mixed, with November being the weakest month in the quarter, due, in part, to warmer weather. December comparable sales were flat to last year, and January sales were down as we lapped elevated clearance activity from the prior year.
However, January was better than our plan. Another positive was that we drove increased regular price sales in December and January through the delivery of transitional goods. From a channel perspective, our stores continued to outperform. With stores comparable sales down 1% in Q4, we saw continued strong results from Sephora, as well as our initiatives in holiday gifting and home decor.
Digital sales, excluding the 53rd week, were down approximately 10% in the quarter, however, improved as the quarter progressed. Beyond the top line, we were able to successfully manage gross margin and expenses to achieve an operating margin of 5% in Q4 and 4.1% for the full year, slightly ahead of our guidance outlook. Let me now turn to our longer-term initiatives and provide an update on our four strategic priorities. Our first priority is enhancing the customer experience.
This priority encompasses all the work we've done to enhance our store experience, including expanding the number of locations with Sephora. It also includes our work to drive growth in underpenetrated and new categories and our efforts to become more relevant in our apparel and footwear offerings. Let me start with stores, the cornerstone of our business. We recognize that for us to grow sustainably over the long term, we need to increase our store sales productivity.
In 2023, we reestablished stores as a key focal point of our strategy, which consisted of leadership's time and attention, meaningful investments, and new operational processes. We expanded and repositioned our gifting assortment to the front of the store, simplified our in-store signage and graphics, consolidated the customer checkout area, enhanced our overall merchandising offering, and empowered our stores to capitalize on opportunities to drive sales in their local markets. These actions are beginning to resonate with our customers. Store comparable sales were flat in 2023, our best performance since 2010.
In 2024, we will build on our momentum with a variety of store-focused initiatives. These will include new merchandising strategies and the rollout of queuing lines to more than one-third of our stores. We also remain focused on returning our digital business to growth. Our focus this year is on reinforcing value simplification in all communication and scaling new targeting initiatives, as well as improving the search and product recommendation capabilities of our site to drive increased traffic and higher conversion.
Let me now turn to Sephora at Kohl's, which continues to deliver exceptional results. 2023 was truly a breakout year for our partnership with Sephora. We delivered more than $1.4 billion in sales, which was up more than 90% year on year and included greater than 25% comparable beauty sales growth in the shops opened in 2021 and 2022. For Q4, Sephora sales increased more than 70% and comparable sales growth was nearly 25%, which was on top of a strong growth in the prior year.
We ended the year with a Sephora presence in 910 of our stores, with 860 large-format and 50 smaller-format shops. We are pleased with the consistent strong performance we have seen across both formats. In 2024, we will further expand our partnership, opening approximately 140 smaller-format shops. And in 2025, we will roll out a Sephora presence to the balance of the Kohl's chain.
Taking a step back, it is quite impressive what we've been able to accomplish with Sephora. They are a great partner, and our teams have worked tirelessly over the past three years to position ourselves for this success. Based on our current trajectory, we now believe that we'll surpass our previously shared goal of $2 billion in sales by 2025. I want to now transition to our efforts to meaningfully increase our sales in underpenetrated categories.
We've talked a lot about our efforts across home, gifting, and impulse during 2023. And this year, we are partnering with Babies "R" Us to meaningfully expand our presence in the baby category, which is a compelling whitespace opportunity for Kohl's. Collectively, we see these underpenetrated categories as more than $2 billion sales opportunity over the next several years. Let me share some details on each of these distinct opportunities.
I'm excited that Kohl's will expand our offering of baby gear and accessories through an exclusive license agreement with Babies "R" Us in the U.S. This partnership provides a significant growth opportunity in a large category that has been displaced in recent years and builds on our existing assortment while broadening our reach with younger customers. To capitalize on the opportunity, we plan to open Babies "R" Us shops in approximately 200 Kohl's stores in fall of 2024. The shops will include baby gear, accessories, and furniture, complementing our existing infant and toddler business.
The shops will vary in size, with the majority being 1,500 square feet. In addition to stores, we will offer baby gear products digitally and launch a baby registry later this fall. I look forward to sharing more details on upcoming earnings calls. Rebuilding our home business also represents a meaningful opportunity.
We have invested a great deal of time and energy in rethinking our home business strategy, leveraging our team's history of success in the category. In 2023, we focused on building our assortment across wall art, glassware and ceramics, botanicals, storage, lighting, seasonal decor, and pet. As we move through the fall season, our in-store assortment began to reflect all of this work, and we are pleased that this has led to an increase in home sales in stores. In 2024, we expect home sales to increase as more customers become aware of our expanded assortment.
This month, we are launching a new marketing campaign to increase awareness of our new home collection for every room, every style, and every budget. We will continue to invest in merchandising and marketing to support our efforts throughout the year. Now, let me touch on gifting and impulse. In 2023, we made great strides in becoming a year-round gifting destination.
One of the first moves I made after my return to Kohl's was repositioning gifting to the front of the store and expanding the assortment we offered. This proved successful, with a strong performance across all key events, including holiday, where we achieved a nearly 90% sell-through. We expect growth in gifting to continue in 2024 and beyond as we build further awareness and broaden the categories we offer. We will also invest in more receipts around key events given the strong sell-throughs we are experiencing.
Rounding out our opportunity in underpenetrated categories is impulse. In 2023, we expanded our assortment of impulse items merchandise in the customer checkout line, which drove over 40% sales growth. We will further capitalize on this opportunity this year by rolling out queuing fixtures and expanded assortments to an additional 350 stores, bringing our total to 435 stores. So, to summarize, the baby, home, gifting, and impulse categories together represent a sales opportunity of more than $2 billion over the next several years.
I look forward to updating you on our progress in future quarters. I now want to detail some of the work we have underway to rebalance our assortments and to improve the performance of our apparel and footwear offerings. During 2023, we embedded new disciplines and enhanced our processes to ensure we are delivering more relevant product to our customers. This has included operating with greater flexibility and speed in managing inventory, expanding choice counts to serve more customers, and introducing market brands to deliver more fashion.
Our customers will begin to see the full impact of our efforts in the coming months. Let me share a few examples of strategies we have underway. In women's, we are rebalancing our inventories by category and we'll maintain a consistent focus on newness. This spring, we will build on our success in dresses by broadening our assortments and expanding dedicated in-store dress shops to 700 stores.
We will also continue to amplify polished casual more broadly by leaning into Lauren Conrad and Simply Vera Vera Wang. And within our junior business, we will further scale our market brand strategy and introduce new brands such as Aeropostale and Madden Girl. In men's, we are diversifying our offering to serve more wearing occasions. This will include increased choices in polished casual, expanded use of market brands to deliver on the latest fashion trends, and the introduction of new brands.
In kids, we are strengthening our offering across pre-teen, little kids, and baby through greater newness and new brands while focusing on simplified value. We are increasing the number of stores offering Little and Co. by Lauren Conrad, a brand that has seen significant positive growth in recent years, and we will benefit from our new partnership with Babies "R" Us, which will attract younger customers to Kohl's. In addition, across our broader apparel assortment, we'll offer several new brands in 2024, including Quiksilver, Roxy, Limited Too, Madden Girl, and Aeropostale.
And in footwear, we have a big opportunity to reestablish our positioning in dress and casual footwear. This year, 70% of our dress and casual assortment will be new or updated. We will also elevate our lifestyle assortment with new products from national brands such as Skechers Slip-Ins. As you just heard, we have a lot of actions underway to enhance the customer experience to grow our business, and I'm highly optimistic that our future results will reflect this.
Now, let me discuss our second priority, which is accelerating and simplifying our value strategies. We've talked a lot about simplifying the value we deliver. Our goal is to ensure we are meeting our existing customers' expectations while also attracting new customers with prices that consistently show up competitively. We made a lot of progress in 2023 shifting toward more targeted offers and clearing goods more regularly.
We also successfully tested high volume pricing on 30% of our private brand offering throughout the back half of 2023. And based on this, we recently scaled high volume pricing to the balance of our private brands. We are also strengthening our loyalty offering. In 2023, we introduced the co-brand credit card, adding to our existing suite of loyalty offerings, which includes Kohl's Cash, Kohl's Rewards, and our Kohl's private label card.
Our loyalty offerings are a tremendous asset for Kohl's, and our credit customers spend, on average, six times more per year than nonloyalty customers. The introduction of our co-brand card expands our addressable market to reach a broader customer base that prefers greater payment flexibility. Co-brand cards have higher average balances and are more reliant on revolving interest fees as compared to private label cards, and they are also generating additional revenue streams such as interchange fees. We see incremental credit revenue from the co-brand card growing to between $250 million to $300 million annually by 2025.
We converted nearly 700,000 private label cardholders to co-brand in mid-2023 and plan to convert another nearly 5 million customers to the co-brand card later this year, bringing it to more than 25% of our 20 million active cardholders. And in 2025, we will further grow our customer base through additional conversions and new customer acquisition. Our co-brand card is a key mitigation measure to offset late fee regulatory changes. As Jill will discuss in more detail, we see the impact largely in 2024.
In full year 2025, the ongoing headwind will be offset by the expected contribution build of the co-brand card and additional mitigation action. I will now transition to our third priority, which is managing inventory and expenses with discipline. During Q4, we showed strong inventory and expense management. We reduced inventory by 10% compared to last year, ahead of our goal of planning inventory down mid-single digits percent.
The new disciplines we implemented earlier this year, which allows us to operate with greater open to buy, continue to prove beneficial. Looking ahead to 2024, we are planning inventory down mid-single digits percent, with a focus on driving inventory turns. And from an expense perspective, we reduced Q4 SG&A 4%, which was slightly better than our expectation. Looking ahead, we will continue to manage expenses tightly with greater marketing efficiency and automation while increasing productivity in stores and distribution centers.
And lastly, our fourth priority is strengthening our balance sheet. We remain committed to returning our balance sheet to its historical strength. During Q4, we generated significant cash flow, enabling us to significantly reduce our debt levels. Our revolver borrowings were $92 million at year-end, down from $625 million at the end of the third quarter.
And we retired $111 million of bonds. In 2024, our focus will be to pay down the remaining revolver balance, rebuild our cash position, and capitalize on additional opportunities to reduce debt and further lower our overall leverage. We will also remain committed to returning capital to shareholders through our dividend. Jill will discuss our overall capital allocation priorities in a moment.
To summarize my comments today, I want to leave you with three things. First, as you heard today, we made great progress in repositioning Kohl's during 2023. Our efforts enhanced the store experience and increased the relevance of our assortment. We also embedded new disciplines and processes across our enterprise, allowing us to effectively manage inventories.
Collectively, these actions have positioned the company for improved sales in 2024 and beyond. Second, we have our sights set on growth and have several compelling initiatives in place to deliver incremental sales in the coming years through Sephora, home, baby gear, gifting, and impulse. We will also improve the performance of our apparel and footwear assortments through greater product relevance and more simplified pricing. And third, we are committed to driving profitability and strengthening our balance sheet through strong cash flow.
In 2024, we expect to drive further gross margin expansion and we will tightly manage expenses, resulting in another solid year of cash flow generation, which will provide us opportunities to further reduce our debt and overall leverage. I want to thank all of the Kohl's associates across the organization for their efforts to reposition our business. I am incredibly proud of what we've accomplished in 2023, and I look forward to seeing more of our efforts come to fruition in 2024 and beyond. I hope those listening today will get a chance to visit our stores to see all of the great work that is taking place.
I will now turn over the call to Jill to discuss our fourth quarter and full year 2023 results and outlook for 2024.
Jill Timm -- Chief Financial Officer
Thank you, Tom, and good morning, everyone. As you just heard, 2023 was an important year where we made progress in our efforts to reposition the business for future sales and earnings growth. We are excited to see our actions build further momentum in 2024 and beyond. I will now provide additional details on our fourth quarter and full year 2023 results and then discuss our guidance outlook for 2024.
Net sales declined 1.1% in Q4 and 3.4% for the year. Comparable sales, which exclude $164 million of sales from the 53rd week, declined 4.3% in Q4 and 4.7% for the year. Store comparable sales were down 1% in Q4 and were flat on the year, which, as Tom shared, was our best performance since 2010. In the quarter, store sales were driven by strong performance from Sephora at Kohl's and growth in the home category.
Digital sales, excluding the 53rd week, declined 10% in Q4 and 15% for the full year. From a penetration perspective, digital accounted for 35% of Q4 net sales and 29% of full year net sales. In the quarter, digital sales trends improved as the quarter progressed, with December and January down mid-single digits percent to last year, which gives us confidence as we look to 2024. Other revenue, which is primarily our credit business, grew 1% in Q4, in line with our expectations as we began to benefit from our recently launched co-brand card, offset partially by higher loss rates.
For the full year, other revenue declined 5%. Moving down the P&L. Gross margin in Q4 was 32.4%, an increase of 937 basis points. The year-over-year increase was driven primarily by reduced clearance markdowns as we lap last year's significant actions to clear inventory.
Gross margin also benefited from lower freight expense and digital-related costs of shipping. For the full fiscal year 2023, gross margin increased 347 basis points to 36.7%. SG&A expenses in Q4 decreased 4% to $1.6 billion, leveraging approximately 82 basis points versus last year. The decrease to last year was driven primarily by lower marketing and distribution costs.
For the full year, SG&A decreased 1.3%. Depreciation expense in Q4 was $187 million and was $749 million for the full year. As compared to last year, depreciation expense declined $13 million and $59 million, respectively, driven by reduced technology capital spend. Interest expense in Q4 was $82 million and was $344 million for the full year.
Relative to last year, interest expense increased $4 million in Q4 and $40 million for the year due to increased revolver borrowings throughout the year. Our tax rate was 14% in Q4 and was 15% for the full fiscal year. Net income for the quarter was $186 million and earnings per diluted share was $1.67. For the year, net income was $317 million and earnings per diluted share was $2.85.
The 53rd week added approximately $0.09 of diluted earnings per share to the full year. Now, moving on to the balance sheet and cash flow. We ended the year with $183 million of cash and cash equivalents. Inventory was down 10% compared to last year.
We continued to benefit from our new disciplines where we operate with greater flexibility, allowing us to manage inventory effectively in the quarter. Operating cash flow was $789 million in Q4 and $1.2 billion for the full year. Adjusted free cash flow was $684 million in Q4 and for the year was $519 million. Capital expenditures for the quarter were $82 million and $577 million for the year.
Looking ahead to 2024, we expect capex spend to be approximately $500 million, below 2023 due to fewer Sephora at Kohl's openings. Capex in 2024 will include investments to expand impulse queuing fixtures to 350 additional stores, opening approximately 140 Sephora small-format shops, the launch of the Babies "R" Us partnership, and the opening of six new stores, inclusive of one relocation. Now, let me provide an update on our capital allocation priorities. We remain committed to strengthening our balance sheet and returning capital to shareholders.
During the fourth quarter, we retired $111 million of bonds; and for the year, retired $275 million. We ended the year with $92 million on our revolver, down significantly from the $625 million at the end of the third quarter and similar to last year's level. In 2024, our focus will be rebuilding our cash balance, moving off the revolver, and capitalizing on opportunities to further reduce our debt and overall leverage. As for shareholder returns, we remain committed to our dividend at its quarterly level of $0.50 or $2 per share on an annual basis.
For the year, we paid $220 million of dividends to our shareholders. On February 28th, as previously disclosed, the board declared a quarterly cash dividend of $0.50 per share payable to shareholders on April 3rd. Now, let me provide details on our outlook for 2024. As you've heard this morning, we've made a lot of progress in repositioning Kohl's for future growth and have several important initiatives that will build this momentum in 2024.
We continue to approach our guidance outlook prudently, recognizing that macroeconomic environment remains uncertain. For the full year, we currently expect net sales to be in the range of 1% decrease to a 1% increase versus 2023, comparable sales to be in the range of flat to a 2% increase, operating margins to be in the range of 3.6% to 4.1%, and EPS to be in the range of $2.10 to $2.70 per diluted share, excluding any nonrecurring charges. As Tom mentioned, our guidance includes the potential impact from the recent CFPB late fee ruling in the second half of the year. We have worked very closely with Cap One, our credit partner, and have various initiatives in place to mitigate the effects of this ruling, including the scaling of our co-brand credit card.
We believe co-brand is an incremental $250 million to $300 million in annual credit revenue and will be a key driver to offset the impact of this ruling in full year 2025. Now, let me share some additional guidance details. We expect other revenue to be down mid-teens percent for the full fiscal year 2024, with a mid-single digit decline in the first half of the year, driven by higher anticipated loss rates, partially offset by co-brand growth; gross margin to expand 40 basis points to 50 basis points for the full year, driven by inventory management, lower freight expense, and continued benefits from the simplification of our value strategies; SG&A dollars to be flat to slightly down with wage inflation, offset by labor productivity improvements and marketing efficiency and lapping the 53rd week; depreciation and amortization of $765 million; interest expense of $320 million; and a tax rate of 23%. As it relates to Q1, we expect comparable sales to be at the lower end of our annual guidance as we lap last year's clearance activity and as our initiatives build throughout the year.
With that, Tom and I are happy to take your questions at this time.
Questions & Answers:
Operator
Thank you. [Operator instructions] We'll take our first question from Bob Drbul at Guggenheim.
Bob Drbul -- Guggenheim Partners -- Analyst
Hi. Good morning.
Tom Kingsbury -- Chief Executive Officer
Good morning, Bob.
Bob Drbul -- Guggenheim Partners -- Analyst
I guess, two questions that I have for you, Tom. I think the first one really is, you know, for the full year, can you just talk more around the confidence that you have in, you know, achieving positive comp store sales growth this year? And then the second one, I think, you know, for Jill is on the CFPB ruling, can you just expand a bit more around your assumptions like, you know, the sort of magnitude of the second half headwind, you know, any of the mitigations that you could implement in the second half of the year? I know you talked about that $250 million opportunity, but just a bit more granularity on the credit piece would be pretty helpful to us. Thanks.
Tom Kingsbury -- Chief Executive Officer
Thanks, Bob. As far as growth go, we're -- we feel very confident about being able to hit our guidance of zero to plus 2. You know, 2023 was really a setup year for all the initiatives that we think we'll be able to really take advantage of in 2024. The Sephora thing, you know, you've heard us talk about it a lot.
I mean, we just feel really, really good about it. And, you know, we have -- we already have it in 910 stores. We're going to add another 140 small formats. We're already stating that we're going to beat our goal in 2025.
So, that's going to keep on giving us some plus sales. And then one thing I'm really excited about is what we're doing in our home business. We're investing in a lot of categories, candidly, that we weren't really in. I mean, in terms of home decor, wall art, lighting, pet.
And if you go into our stores now, you'll see the elevated inventory levels in those categories now. I'm really happy with what our team has done so far in order to, obviously, improve that presentation. You know, gifting, you know, we've done very, very well since moving gifting to the front of the store. We did well in Valentine's Day.
We did really well in holiday, as I mentioned before. But we want to be known for gifting headquarters, and we're doing a good job of getting there overall. Impulse, that's another big category for us. You know, we're adding queuing lines to 350 stores to bring it to 435 totally.
You know, I think we're a little bit behind the eight ball in terms of really building out the impulse business. Obviously, a lot of people are doing it, and we expect significant growth out of that category overall. You know, today, we announced that we have a partnership with Babies "R" Us. You know, it's just part of our overall campaign to get younger customers into our stores.
You know, Sephora has done a phenomenal job helping us with that. The Babies "R" Us is just part of that. We really feel that it'll help bring in a younger consumer. And it's a category, candidly, that, you know, is really wanted and needed by the customers based on all the different things that have been happening over time.
So, we're happy to be able to supply that product to our customers overall. You know, our private brands, we've really elevated it from a high volume pricing perspective overall. It's in all of our private brands. So, that's also giving us growth.
We tested it, and it did extremely well. We see that continuing. And then in our apparel and footwear areas, we're adding 700 dress shops in women's. We're also working hard on bringing in more market brands in juniors.
It's another part of our initiative to bring in the younger consumers. We really feel that the junior business, and it's already doing well, is going to continue to help us satisfy the younger customer, but also the Sephora customer, what --you know, which we're working on. Overall, men's, you know, we've done very well in polished casual, suitings, dress shirts, etc. We see that continuing for a long time.
And then kids, same deal in terms of a lot more polished casual, more dressed-up product, girls' dresses, etc. But also, there will be a benefit from the BRU partnership overall. We're working hard on our footwear business. Over time, we've really reduced our product offering in dress and casual.
So, we're primarily athletic. So, we're fixing all of that. And then, you know, the accessories business, we just have a big opportunity there in jewelry, handbags, and accessories. So, with all that said, you know, it's hard not to feel very confident about our growth in 2024.
We have a lot of things that are working and a lot of things that we want to continue to go after aggressively.
Jill Timm -- Chief Financial Officer
Great. And then, Bob, in terms of the credit and the CFPB, obviously, you know, credit has been a really important part of our loyalty program, that credit customers are incredibly important to us, not just from the credit revenue side, but they shop us the most, they give us the most share of their wallet. And we have been testing the co-brand card to really be an extension of that loyalty. It actually allows us to reach a broader customer and one that prefers more payment flexibility.
So, with that launching, we did that last year. We tested it with about 700,000 people. And so, as we assume the CFPB legislation goes into the back half of the year, in conjunction with that, we're also rolling out the co-brand card to another 5 million customers, which helps us then offset some of those headwinds. Obviously, it's a build.
So, as we gave the guidance with other revenue being down mid-teens for the year and only down mid-single digits in the front half of the year, the bulk of that headwind comes in the back half. But then, as we indicated, those balances will build. Obviously, on a co-brand card, it's a much larger line of credit available to them and it gives us other revenues like interchange fees to offset. So, by the end of 2025, that's where that incremental $250 million to $300 million will come in to fully offset any headwinds that we see from these legislative changes.
Bob Drbul -- Guggenheim Partners -- Analyst
Thank you.
Operator
We'll move next to Mark Altschwager at Baird.
Tom Kingsbury -- Chief Executive Officer
Hi, Mark.
Mark Altschwager -- Robert W. Baird and Company -- Analyst
Thank you. Good morning. Thanks for taking the question. You quantified the $2 billion incremental sales opportunity in underpenetrated categories.
How are you thinking about the pace and the build to 2 billion and just any thoughts on sales displacement as you make room for some of these newer categories?
Tom Kingsbury -- Chief Executive Officer
I don't -- you know, we don't see a lot of displacement of product. You know, we -- we're continually are reducing our inventories. We're down 10% at the year-end. So, that makes way for a lot more categories, a lot more choices that we can give the customers.
We're looking at the 2 billion over several years. So, you know, we'll have incremental growth in those categories really starting now, and Babies "R" Us will obviously add in the fall season. But it's just spread over -- it's spread over several years.
Jill Timm -- Chief Financial Officer
Yeah. And I would just add, Mark, you know, we've talked a lot about having excess space in our stores, and we've tried different partnerships and different arrangements over time to how we can capitalize on that space. So, I think partnerships like bringing in BRU allows us to really just drive more productivity. As Tom had mentioned, it was one of our key goals to do this year.
And then obviously, a lot of the market brands and the changes is really just on turn, choice count, and leveraging our inventory better than we have in the past. And I think you've seen that throughout the year that we're really committed to that inventory management being down 10% and, as we mentioned on the call, being down again mid-single digits in 2024.
Mark Altschwager -- Robert W. Baird and Company -- Analyst
Thank you. And just a follow-up on the comp guide, first, just anything you're willing to share on the quarter-to-date trend relative to how you spoke to the Q1 comp, and what are your expectations for Sephora comps for the year? Thank you.
Jill Timm -- Chief Financial Officer
I think, you know, Q1, you have to remember, February is when we lap our large clearance event. So, we would tell you, you know, that's why we expect it to be at the lower end and then obviously the build of everything that we spoke about. But what we feel really good about is the positive momentum we're seeing in our reg price business. We saw that as we exited the year.
We continue to see that positive momentum into February and March, which shows us that our customers are really reacting to the newness that we're putting on the floor and it's really resonating with them. And so, that's been a key indicator that things are working. Tom also mentioned we saw our Valentine's Day business do incredibly well. So, as we really lean into that gifting, we move it to the front of the store, it's resonating with the customer.
Another thing to point out, and we talk about Sephora, we actually continue to see really great strength in Sephora. So, our comps continue to be up. We're seeing that be a great traffic driver, new customer. We talk about that affinity, and the affinity across the store happens to overlap a lot with these new initiatives.
The basket build is in impulse. It's in kids, which now we're complementing with Babies "R" Us. It's in the juniors business, which us bringing in those market brands that are really going to resonate. So, we definitely think there's a big opportunity, not just that the comps will continue within the Sephora shop, but really that halo effect in the rest of the box with a lot of the initiatives that we're enhancing this year.
Tom Kingsbury -- Chief Executive Officer
And Sephora, another thing that'll help the growth is we're adding about seven or eight new brands to the assortments overall. So, obviously, newness is very important. But we're seeing, you know, from some of the brands that we've had since opening, Sol de Janeiro is really strong. It's one of our top brands actually in the company.
The Sephora collection is doing extremely well. And Rare Beauty. Those three brands are doing really, really well. So, between the newness and the receptivity to the existing brands, we really feel that the Sephora can keep on working well.
Mark Altschwager -- Robert W. Baird and Company -- Analyst
Thank you. Look forward to following the progress this year.
Tom Kingsbury -- Chief Executive Officer
Thank you.
Operator
We'll take our next question from Oliver Chen at TD Cowen.
Oliver Chen -- TD Cowen -- Analyst
Hi, Tom and Jill. There's a lot of great initiatives, and a lot of it seems incremental, so which part of the portfolio is more of a drag or negative? Is it juniors? And Sephora, clearly, gets young customers. What kind of clothing do they want and how are you executing to become more trend-relevant? And, Jill, as we look at the model throughout the year, the gross margin compare gets tougher given great execution there. We'd love thoughts on the complexion of that, as well as I'm thinking we should expect a better second half on the comp side given your Q1 guidance.
And finally, the -- you've been doing a good job at cleaning up the online business or thinking about it for the long term. Should we still expect that to be negative and stores to be slight positive? Would love thoughts there as well. Thank you.
Tom Kingsbury -- Chief Executive Officer
OK. I'll take a portion of it, and then I'll let Jill weigh in. First of all, online. Online will perform comparable to the brick-and-mortar business.
You know, we did clean up a lot, as you said, and we expect it to return to growth in 2024. As far as attracting, you know, the Sephora customer, juniors is really, really key. And we're already doing very well. We're going into the marketplace, and we're buying product, and -- so we can react to trends.
You know, the Sephora customer really is trend-driven, and our junior business is going to give us that opportunity. But, you know, we were buying a lot of goods in juniors through our proprietary brands. And, you know, we would buy it, you know, 12, 14 months out. And by the time we delivered it, it would be dead on arrival just because that customer reacts quickly to trends overall.
So, using the marketplace to get the product is really going to help us satisfy the needs of the Sephora customer. We're -- we feel very confident about that.
Jill Timm -- Chief Financial Officer
And I think a good proof point for that was that we did see a trend change in our juniors business and improved by over 500 points in Q4. So, as a lot of these initiatives started landing with that product, it really resonated with the customer. And like I mentioned earlier, it was one of the top things in their basket from a Sephora customer halo effect. So, I definitely think we can build on that.
From a modeling perspective, what I would say is we expect margin to actually be up 40 to 50 relatively comp across the quarter. So, I think there's some benefit early on from [Inaudible] that may ease, but then we have some other back half. So, I would expect that to be pretty comp across the year. You're right with the comp build.
So, as we mentioned, in Q1, we expect it to be at the low end of the range, one, because we lapped such a big clearance impact last year in February, but also because a lot of the initiatives that Tom has outlined are going to build. We're launching and building out our impulse lines as we speak, but that's happening at the end of the quarter into Q2 and Q3. Babies "R" Us is going to launch in the back half of the year. So, a lot of these initiatives will build as the year goes on.
And quite honestly, it just takes time for the customer to identify and realize we have that newness to drive them back in from that perspective. And then I think the last thing I would just say from a digital perspective, agreeing with Tom, we think it can get back to it. We don't have the headwinds from the offer reductions. We got through that from last year, which obviously was something that weighed on us differently.
But we're also doing things to drive and enhance our search capabilities so we have better querying, better search results. So, there are definitely things that we're doing to drive not only the traffic but also conversion within our website as well that we think will be contributors to getting the digital back to flat to growth in 2024.
Oliver Chen -- TD Cowen -- Analyst
Thanks a lot, Tom and Jill.
Jill Timm -- Chief Financial Officer
Thanks, Oliver.
Operator
We'll go next to Matthew Boss at J.P. Morgan.
Matt Boss -- JPMorgan Chase and Company -- Analyst
Great, and thanks for all the color. So, Tom, could you elaborate on the drivers of store comps in the fourth quarter? I think you cited it as the best since 2010. And then maybe just to break apart your flat to 2% same-store sales guide, what are you embedding or what do you need from the core? So, meaning apparel and footwear comps maybe relative to the negative performance this year in that category.
Tom Kingsbury -- Chief Executive Officer
OK. Drivers of comp, overall, Sephora, home, all the things that I've been talking about overall. You know, the gifting, the impulse. And we really need -- we need the core to help us hit the numbers we want to hit as well.
But I think -- you know, as I articulated, I think that there is a big opportunity in the core if we can continue to go after things like ladies' dresses, you know, the juniors business, as I mentioned before, other polished casual businesses, you know, same with men's overall, just having broader assortments of product. We have to serve a lot of customers, and we want to give them a lot of choices overall. We got a little too narrow in our assortments, you know, in terms of too much active and casual. We still feel very good about those categories, but we also feel that we're going to get the growth out of maximizing, you know, more of the dressed-up product.
You know, people are looking for that clothing. People are going out more, and they're obviously wanting that kind of clothing as they -- you know, as part of their wardrobe. They're looking in their closet, and they don't have that product. So, we're going to fulfill that.
Matt Boss -- JPMorgan Chase and Company -- Analyst
Great. And then, Jill, on gross margin, what do you see as the right long-term gross margin target for the business? I think your guidance this year implies you exceed the 36, 37 target for the year.
Jill Timm -- Chief Financial Officer
Yeah. I would say, we -- obviously, we're exceeding it, so we feel good. I think the algorithm to get to 7 to 8 is still really dependent on our top-line growth, and that's where, you know, we have to continue to focus, which you've heard a lot from us today on why we believe we can get back to growth. On the margin side, we did say 36 to 37.
We're exceeding that. So, I would say, I think we can stay a little above 37 moving forward. I also would say, our SG&A costs have risen a lot since the algorithm came in in terms of wage inflation. So, between the two, it still balances out to get us to the 7% to 8%, but I would say that our algorithm will be more margin-based based on the experiences that we're seeing.
A lot of that benefit is coming through from the inventory management discipline that we're seeing. So, you know, inventory being down 10%, continuing to plan it down mid-single, taking our turns or clearance markdowns much more timely. This is less markdowns but more timely markdowns, so they're not as deep as well. And just having more choice rather than being so deep is also something that helps our turns.
And so, you know, as I look back, when we turn fast, we've run some of our best operating margins. So, that's really the focus on what's going to be a key driver from a margin perspective. And then from an SG&A perspective, we continue to do what we can do obviously from a cost discipline. Felt good we were down this year in our SG&A despite our 53rd week.
So, we'll continue with that discipline. And with the top-line growth, we'll continue to make progress despite just a little bit of a step back this year with the legislative change toward that 7% to 8%.
Matt Boss -- JPMorgan Chase and Company -- Analyst
Great. Best of luck.
Jill Timm -- Chief Financial Officer
Thank you.
Operator
Our next question comes from Dana Telsey at Telsey Advisory Group.
Jill Timm -- Chief Financial Officer
Good morning, Dana.
Tom Kingsbury -- Chief Executive Officer
Hello.
Dana Telsey -- Telsey Advisory Group -- Analyst
Can you hear me OK?
Jill Timm -- Chief Financial Officer
We can now, Dana.
Dana Telsey -- Telsey Advisory Group -- Analyst
Oh, good. Perfect. So, nice to see the improvements and, certainly, a lot of the initiatives. Tom, when you think about the private brands, how are the private brands doing? And with the new Babies "R" Us that's coming in, what does that replace in the store? And then just speaking about the stores, you had once talked about potentially even opening a couple of stores.
How do you think of the store base today? And the capex investment, whether in remodels, given the improvement in the store base, what are you thinking about in terms of that investment? Thank you.
Tom Kingsbury -- Chief Executive Officer
Well, we feel good about private brands. As far as private brands as a percent of total, it will probably go down a little bit because we're working really hard on delivering more and more national brands. But it's a, you know, product that delivers a lot of value on the selling floor, and that's obviously really key. So -- but, you know, we are moving forward faster.
We're trying to bring in more national brands overall. But we really -- you know, private brands are critical to our success, and we're going to keep delivering that kind of value for a long time. Babies "R" Us, we have a lot of space, as Jill said in our stores, and it's going to be part of the infant-toddler presentation. So, we're just going to carve some space out.
It's about 1,500 square feet. You know, we have 1,500 square feet in the store that, you know, we can definitely utilize overall. So, it's not really going to displace anything. Again, we're going to continue to reduce our inventories, you know, mid-single digits for the foreseeable future.
And so, it's -- you know, we're going to have plenty of space. We're not worried about that at all. New stores, right now, we have, you know, five or six stores that we're opening. That's probably going to be our cadence for now.
We're still working on, you know, what the smaller stores are going to look like. But as far as remodels, you know, one of the benefits of Sephora is we were able to touch stores. You know, we have Sephora now in 910 stores of our 1,200. So, a lot of those have already been touched because of Sephora when we made the move to clear out the space for Sephora.
Do you have any comments, Jill, on the --
Jill Timm -- Chief Financial Officer
No, I would just say a couple of things on the -- a lot of what we're talking about, including Babies "R" Us, is touching whitespace opportunities and leveraging and increasing store productivity. And that's really what our goal is. Obviously, we're excited. We ran our best store comp, you know, since 2010.
So, that's a pretty good accomplishment that that's working in the right direction. In terms of store openings, you know, we have an incredibly healthy store base, so we feel great with the fleet we have. And I think, over the long run, we do believe there's more store opportunities. But in this case, like Tom mentioned, we just have to figure out what that box needs to look like once we get a lot of these initiatives in flight.
So, I would say our capex this year is still assuming we're going to touch some of those stores from a refresh perspective with the Sephoras, but we're able to keep that all within the $500 million of capex. And then our CapEx will elevate if we decide there's a new store opportunity. But at this point, we feel really good with where we're positioned for '24.
Dana Telsey -- Telsey Advisory Group -- Analyst
Thank you.
Jill Timm -- Chief Financial Officer
Thanks, Dana.
Tom Kingsbury -- Chief Executive Officer
Thank you.
Operator
We'll take our final question today from Chuck Grom at Gordon Haskett.
Chuck Grom -- Gordon Haskett Research Advisors -- Analyst
Hey. Thanks very much, and I appreciate all the color this morning. Jill, can you just touch on the composition of your comp in the fourth quarter between traffic and ticket? And then as we look ahead, how you're planning the 0% to 2% from a similar perspective?
Jill Timm -- Chief Financial Officer
Sure. I think from the fourth quarter and, quite honestly, our biggest issue from comp perspective has been traffic. And so, a lot of what you've heard about, you know, today on initiatives is how do we continue to drive discovery and excitement to drive traffic. And, you know, our ticket has been relatively flat to up.
We've driven higher AURs as we brought in new brands, and especially with Sephora, a little bit higher ticket, Tommy Hilfiger, etc. But we saw our wallet shares stayed and our transaction has stayed, you know, flat to up slightly. It's really been around our traffic that's been down, and that's been pretty consistent. So, a lot of the initiatives that we're focused on is how we can drive that discovery so they want to come in and see newness.
It's having more choice count. It's having less depth. It's having that, you know, fashion setting a lot quicker. And we're going to be in and out so there's newness for them to come in and see.
I would say that's exactly how we're approaching it this year is the difference between the negatives, positives having an improvement from that traffic perspective. We've consistently can see the ATV being up slightly. We expect that to continue. But the improvement is going to come with traffic through all these new brands, these new initiatives that we have landing.
Particularly around impulse and gifting, it's giving them reasons to come in and then adding into their basket. So, we feel like we're positioned well to achieve that.
Chuck Grom -- Gordon Haskett Research Advisors -- Analyst
OK. That makes sense. And then the second question is just on the gross margins and just to dovetail off Matt's question earlier, you know, at this point, your gross margins would be up over 37%. That hasn't happened in a long time.
And I'm curious the thought process on reinvesting some of that margin back into price. You talked about the success that you had in the back half of last year in the high volume pricing with some of the private brands. I guess why not invest more in gross margin to drive the traffic? Just curious the thought process there.
Jill Timm -- Chief Financial Officer
So, we did roll out all of our high volume pricing as we stand today. So, it is about, really, value, particularly on those private brands. That's what they stand for. And we're continuing to drive that.
I would say, you know, one of the things that we're using, and this is a place that, you know, we're moving into more automation around, is our pricing strategies and really making sure that we're competitive. We're using elasticity models. We're figuring out how to price that so it will drive more from a customer perspective. I would say the benefit we're getting is more around targeted coupons, targeted promotions.
You know, some of the offers that we were giving weren't as productive. And now, we're really going to focus it on the customers that will drive our productivity. That's one. Two, like I mentioned and I don't think I can say it enough for all my merchant friends listening, is inventory management and inventory discipline.
Faster turns, having to take less deep clearance, less clearance is a huge driver for us as well. And so, bringing in that newness and selling more reg price is a benefit to margin. So, I would say we're very keen on pricing. Value has been a core tenet of Kohl's since it's been started, and it will continue to be for us.
We think that's a space that we play incredibly well in. So, we aren't really driving margin, in my opinion, at the cost of taking prices up. We're driving margin based on the disciplines that we've put in and just the learnings through a lot of the elasticity modeling that we've been able to put in in the last couple of years as well.
Chuck Grom -- Gordon Haskett Research Advisors -- Analyst
OK. Great. And then one for Tom, just, you know, where are you guys on the journey to get younger with your customer base? You talked a little bit about the success you had with Sephora. Clearly, Babies "R" Us is going to help you.
But I think that that journey and where you are is an important thing to keep in mind. So, just anything you can share and where you think you can get to over the next several years? Thanks.
Tom Kingsbury -- Chief Executive Officer
Well, again, as you mentioned, I mean, we're making great progress in that journey. You know, Sephora is really helping us out a lot. The Babies "R" Us is also, as I mentioned earlier, part of that strategy. And then, you know, building on our junior business, rebuilding our accessory business overall.
Even the home decor business, you know, we really feel that that's a younger consumer overall. So, I would say, you know, we made a lot -- we made good progress in 2023, but we're going to continue to push hard because, obviously, we want to be more attractive to the younger consumer. The co-brand, also, is part of that strategy as well. So, we've got a lot of things working in order to, you know, have that younger customer come into our stores.
So, thank you.
Chuck Grom -- Gordon Haskett Research Advisors -- Analyst
Thank you, both.
Tom Kingsbury -- Chief Executive Officer
Thanks, everyone. Really appreciate it, and have a great day.
Operator
[Operator signoff]
Duration: 0 minutes
Call participants:
Mark Rupe -- Senior Vice President, Investor Relations and Treasury
Tom Kingsbury -- Chief Executive Officer
Jill Timm -- Chief Financial Officer
Bob Drbul -- Guggenheim Partners -- Analyst
Mark Altschwager -- Robert W. Baird and Company -- Analyst
Oliver Chen -- TD Cowen -- Analyst
Matt Boss -- JPMorgan Chase and Company -- Analyst
Dana Telsey -- Telsey Advisory Group -- Analyst
Chuck Grom -- Gordon Haskett Research Advisors -- Analyst
