Kohl’s Corporation (NYSE:KSS) Q4 2022 Earnings Call Transcript

Kohl’s Corporation (NYSE:KSS) Q4 2022 Earnings Call Transcript March 1, 2023

Operator: Good morning. My name is Audra, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl’s Corporation Q4 2022 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. At this time, I would like to turn the conference over to Mark Rupe, Senior Vice President of IR. Please go ahead.

Mark Rupe: Thank you. Certain statements made on this call, including projected financial results and the Company’s future initiatives, 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 Item 1A of Part 2 of the Company’s quarterly report on Form 10-Q for the first quarter of fiscal €˜22 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. In addition, during this call, we will make reference to non-GAAP financial measures. Information necessary to reconcile these non-GAAP financial measures can be found in the investor presentation filed as an exhibit to our Form 8-K filed with the SEC and is available on the Company’s Investor Relations website. 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 So, if you’re listening to a replay of this call, it is possible that the information discussed is no longer current, and Kohl’s undertakes no obligation to update such information.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 CFO.

I will now turn the call over to Tom.

Tom Kingsbury: Thank you, Mark. Thanks to all for joining us this morning. I want to start by saying that I’m excited to be leading Kohl’s during this pivotal time. Kohl’s is a solid company. We have a substantial opportunity to make a difference in the retail landscape. As you will hear today, we have a solid foundation and a highly motivated team with a set of priorities to drive Kohl’s sales and earnings growth. During the past three months, I have had the opportunity to assess our go-to-market strategies, our operational capabilities and processes in our organizational structure. I have also visited a number of our stores across the country and engaged with many of our brand partners. It is clear to me that Kohl’s fields an important need in the market offering highly relevant products at a great value to millions of customers in conveniently located stores across the U.S. and online.

We are making great strides in beauty through our Sephora partnership. However, we have lost some ground in other key categories. Candidly, I know we can do better. To reach our full potential, we will refine our strategy and reestablish merchandise disciplines with a customer center focus across the organization. This will sharpen our positioning with customers, allow us to capitalize on new opportunities and drive greater efficiency. Our efforts have already begun. We took a number of proactive measures in the fourth quarter to clear our inventories, and we will seek to maintain the discipline by planning inventory down mid-single digits percent going forward. We also implemented several growth initiatives in Q4 that will begin to benefit our results in 2023 and structure the organization to run more efficiently.

One of the early messages I shared with our leadership team was that we must simplify how we work to drive efficiency, which in turn will allow for greater time to be spent on executing and driving our strategy. In late January, we realigned parts of the merchandising and marketing departments with the objective of driving efficiency in our operations. This included consolidating the number of general merchandise managers to 4 from 7, a structure that we had prior to the pandemic as well as transitioning, planning and allocation to report directly to me. And more recently, I am pleased with the appointment of two key executive leadership positions. Yesterday, we announced the hiring of Dave Alves as our new President and Chief Operating Officer.

Dave is a 30-year retail veteran and will lead our enterprise operations including our nearly 1,200 stores, global supply chain and distribution center network, real estate portfolio, among other functions. In addition, we appointed Nick Jones as our new Chief Merchandising and Digital Officer. Nick has great experience across many of our categories, including apparel, home and gifting and will be instrumental in leading our merchandising strategy and functions. Both Dave and Nick will join us in the coming weeks, and I look forward to our partnership. Through these important actions, I am confident that we have the right plans, organizational structure and team in place to drive improved more consistent sales and earnings performance over the long term.

That said, I want to be realistic in setting expectations. The full impact of our efforts will take some time. It won’t happen overnight. And we must acknowledge that we are implementing these actions in a challenging macroeconomic backdrop. As Jill will discuss in more detail, our actions against this backdrop form the basis of our prudent guidance for 2023. With that context, I will now discuss our path to improve performance and the key priorities that will guide our forward action. We are focused on four overarching priorities in 2023 that will drive overall sales and profitability. They are: enhance the customer experience, accelerate and simplify our value strategies, manage inventory and expenses with discipline and strengthen the balance sheet.

Successful execution across these priorities will unlock considerable long-term shareholder value. Let me walk you through each of these priorities discussing the actions and intended outcomes we are driving towards. The first priority is enhancing the customer experience. It is imperative that we continue to provide the best experience for our customers when they shop at our stores and online. We are focused on ensuring that our customers are finding the product assortment they are looking for tailored to the way they shop. Our partnership with Sephora is an excellent example of how we are enhancing the customer experience. Nearly 8 million of our customers purchase beauty products at Sephora at Kohl’s last year, and this will continue to grow in the coming years as we further expand our store presence.

In the fourth quarter, our total beauty sales increased 90%. We achieved high-single-digits percent comparable beauty sales growth in the 200 Sephora shops that opened in 2021 and better-than-expected sales in the 400 shops opened in 2022. We also continue to see strong digital sales growth. Our Q4 performance in many ways cemented our positioning as a major player in the beauty industry based on our notable market share gains. I want to commend the team for successfully capitalizing on the holiday selling period. We drove value through our expansion and gift sets, merchandise both in the shop and in aisle with fragrance being a key category. I am confident that we can build on this momentum in the months and years to come. I recently met with Sephora leadership.

And what I can tell you is that, one, we both are pleased with the partnership we’ve built and what has been accomplished in such a short period; and two, we both see immense opportunities to continue to drive sales and profitability in the future. This summer, we’ll open another 250 Sephora shops, bringing our total to more than 850 stores, featuring the standard 2,500 square foot space. In addition, we are opening 50 smaller formats Sephora shops by the end of this year with a plan to roll out to the remainder of the chain by 2025. Moving beyond beauty. Let me now touch on efforts we have underway in our product and merchandising. As it relates to our product assortment, we remain highly committed to the active business supporting our key brands, though we’ll recenter our focus on our customers’ needs by capitalizing on multiple lifestyles.

We will rebalance portions of our assortment to capture our customers’ return to more normal purchasing behavior for their wardrobes. Additionally, we’ll add more offerings across casual and career wear, including, for example, further expanding our women’s dress business following last year’s success. We also see clear tangible opportunities in other categories in which we are underpenetrated. Home and gifting are two areas that our customers expect more from us. I believe Kohl’s can increase its penetration in areas like home décor and become a destination for gifting. To capitalize on this, we are rethinking how we source portions of our assortment, recognizing that we can find great values, increase our speed and broaden our offerings by going into the domestic marketplace regularly.

I now want to highlight the importance of our stores. We have an incredibly strong physical presence across the U.S. They continue to represent nearly 70% of our annual sales and are critically important to how we engage with our customers. I have worked with our real estate team in reviewing our portfolio and remain very comfortable that our stores are healthy. Frankly though, we have to do a better job of driving greater in-store productivity, and I am confident that we can. In the fourth quarter, some of our early efforts began to bear fruit. Looking ahead, we are rethinking how we merchandise stores to deliver a better experience for customers to drive greater frequency of visits and capture more share of their wallet. Let me share a few early examples of actions we are taking in areas that simply weren’t up to standard.

In early December, we moved our gifting assortment to the front of the store from the back to better capitalize on peak holiday traffic. This proved highly effective, resulting in sell-through significantly higher than the prior year. We will also showcase more products, including home and gifting, near the front of the store to inspire our customers as well as feature more impulse products, which is a largely untapped opportunity for Kohl’s. In addition to our stores, we are also highly committed to our digital business, which represents over 30% of our sales. Two of our key digital growth initiatives include expanding Kohl’s Marketplace and Kohl’s Media Network. Kohl’s Marketplace is broadening our product offering online to capture incremental sales opportunities and Kohl’s Media Network is leveraging our digital platform and site traffic to partner with more of our key brands and capture more advertising dollars.

As you just heard, we have a lot of initiatives and actions underway to enhance the customer experience. This will be a continuous focus of ours. The retail industry is ever evolving, and we must ensure that our positioning consistently meets the needs of our customers. Now, let me transition to our second priority, which is accelerating and simplifying our value strategies. In today’s inflationary environment, it is very important that Kohl’s stands for value, both in our pricing and in our messaging. We provide great value to our customers through Kohl’s Cash, our rewards loyalty program and our Kohl’s Card. That said, we know that our promotional strategy at times can be a disadvantage to Kohl’s when compared to our competitors’ price-focused strategies.

We have made progress over the past couple of years in our pricing and promotional optimization efforts. We will build on this progress in 2023, accelerating our efforts to reduce our reliance on general promotions. We will test everyday value pricing with a small percentage of our product assortment and if successful, grow it appropriately in subsequent years. We fully recognize the sensitivities around pricing with our customers, and we’ll approach this with great measure and flexibility. A part of this will enhance consistency in our marketing messaging to improve the customer experience, drive increased customer engagement and make our pricing less complex. When we stand for something with greater clarity and value, our customers do respond.

This is evident in the customer response we have experienced in recent weeks related to our clearance effort. Another way we will enhance the value we are providing our customers is through our industry-leading loyalty program. In 2023, we’ll broaden the reach of our credit opportunities through the launch of a co-brand card with Capital One. We already have a strong private label Kohl’s credit card, so recognize that today’s younger customers want greater flexibility in their payment options. Let me now turn to our third priority for 2023, which is managing inventory and expenses with discipline. As I mentioned earlier, we took proactive actions during the fourth quarter to clear out excess inventory and slow selling goods. This is best seen through our inventory progression over the past few quarters.

Inventory was up 48% year-over-year at the end of Q2, up 34% at the end of Q3 and up just 4% at year-end, despite a tougher sales environment. Inventory is now generally back in line with our sales performance when compared to 2019. We took markdowns following Christmas, which benefited our sales performance in the quarter. Q4 comparable sales of down 6.6% improved through the quarter with November down low-double-digits percent, December down mid-single-digits percent followed by up high-single-digit percent in January with a positive trend continuing into February. Jill will discuss the related impact to margin in more detail in a moment, but it was important that we took these actions in Q4 to best position the Company for 2023. During the past three months, I have spent a significant amount of time focused on merchandising, including establishing stronger inventory control processes.

We are putting a spotlight on fresh receipts and on driving turnover. We will operate so that we have plenty of room to chase receipts, enabling better management of receipt flow. As part of this, we are committing to plan — planning inventory down mid-single-digits percent going forward. We will also adjust how we mark our goods, getting rid of excess inventory or slow-selling items on a more even flow throughout the year, instead of waiting until the end of a season. In terms of spring 2023, we feel good about our Q1 inventory position with a steady flow of transitional receipts that arrived during January and February. And considering there are still a lot of macro headwinds for Q2, we have left even greater liquidity and our open to buy with lots of room to chase.

I am optimistic that through our new inventory control processes we will be able to increase our sales productivity and inventory efficiency. Now, let me address our focus on expense management. This has been a core strength of Kohl’s over time, but given the ongoing inflationary environment, it must be an even greater priority for the organization. In 2022, our SG&A expense ratio drifted higher on lower sales, increased strategic investments and wage inflation. Growing sales is paramount to easing the expense pressure. However, we must proactively capitalize on other opportunities such as increasing self-service capabilities in our stores, driving improved marketing efficiency and reducing spend across all areas of the company. And lastly, our fourth priority for 2023 is strengthening our balance sheet.

Our focus remains on returning our balance sheet to its historical strength after a challenging 2022. Our long-term objective remains to manage our business at 2.5 times leverage. In January, we replaced and upsized our revolver to a $1.5 billion secured facility, which enhanced our liquidity and flexibility. This was the right move given the ongoing macro uncertainty and the actions we are taking to drive Kohl’s sales and earnings growth. While we were only partially utilized at the end of the year, we will increase our borrowings in the first quarter to fund working capital and the recently completed retirement of our February 2023 bond maturities. However, we will work our revolver balance down throughout the year with no borrowings planned at year-end.

Jill will discuss our other capital allocation priorities in more detail, including our commitment to the dividend, which represents a healthy yield at the current share price. So to summarize, enhancing the customer experience, accelerating and simplifying our value strategies, managing inventory and expense with discipline and strengthening the balance sheet are four overarching priorities for 2023. And the broader Kohl’s organization is aligned and focused on executing against each of them. Now, let me frame up how we are thinking about 2023 in the context of the priorities and actions I just discussed as well as the anticipated soft consumer demand outlook. We are prudently planning the year with sales down 2% to 4% and our operating margin and earnings pressured largely as a result.

I want to be realistic in setting expectations. The benefits from our actions will take time. However, I am confident that successful execution against our priorities will produce the intended improvement in sales and earnings growth over the long term. While 2023 may be viewed as a transitional year, it is our objective to show progressive improvement against our priorities and actions as we move through the year. We look forward to providing updates on future quarterly calls. In closing, I want to reiterate that Kohl’s has a solid foundation in place. I am excited to lead this company and see immense opportunity to unlock value. I want to thank our loyal associates who are serving our customers every day. I will now turn over the call to Jill to discuss our fourth quarter results and 2023 outlook.

Jill?

Jill Timm: Thank you, Tom, and good morning, everyone. I will review our fourth quarter results and then discuss our guidance outlook for 2023, the key takeaways from our Q4 performance and that we took meaningful proactive measures to better position the business for 2023 and that our sales remained pressured by the persistent inflationary environment. Net sales were down 7%, driven largely by reduced traffic with higher average ticket and lower units per transaction offsetting one another. Our middle income customers remain pressured and continued to lean into our value-oriented private brands. As Tom indicated, our sales trends improved throughout the quarter and were especially strong as we transitioned to a clearance focus in late December and January, and this continued into February.

From a channel perspective, store sales improved sequentially throughout the quarter and were down 3% to last year. The improved performance was driven by having more Sephora shops open and elevated clearance demand late in the quarter that largely occurred in stores. Digital sales were down 12% to last year and accounted for 37% of sales. From a product perspective, sales of our private brands were relatively flat in the quarter with strong performance in many of our top private brands, including Sonoma, Croft & Barrow, Tek Gear and Lauren Conrad. Sales of our national brands were down high-single-digit percent, mostly due to weaker active home and denim performance. Accessories was our best-performing line of business, up mid-single-digits percent to last year.

Strong sales growth in beauty was partially offset by lower sales of jewelry which, as a reminder, is largely driven by in-store displacement associated with removing the fine jewelry counter to make room for Sephora shops. We have an opportunity to do a better job solving for the lost sales in this category. As it relates to some of our other categories, men’s and women’s apparel outperformed the Company average. In men’s, we saw solid results in tailored dress, young men’s and outdoor. While women’s benefited from higher demand for elevated casual and dress wear and a sequential improvement in intimates. Juniors continued to be a headwind within women’s, and active was challenged across all lines of the business. Home, footwear and children underperformed the Company average.

Other revenue, which is primarily our credit business, declined 13% in the fourth quarter. Performance of our credit business continues to be pressured by a lower overall accounts receivable balances and normalizing loss rates. Now let me turn to the rest of the income statement. Q4 gross margin was 23%, down from last year’s 33.2%. The decline was driven primarily by two items: clearance markdowns of approximately 750 basis points and product cost inflation of approximately 200 basis points. We also saw headwinds from higher shrink and higher-than-expected freight expenses in the quarter. SG&A expenses declined 0.6% to $1.7 billion, reduced spending across marketing and distribution were mostly offset by higher store expenses driven by wage headwinds in the quarter.

Depreciation expense of $200 million was $7 million lower than last year due to reduced technology capital spend. Interest expense of $78 million was $13 million higher than last year due to Sephora related lease amendments and increased revolver borrowings. Net loss for the quarter was $273 million and loss per share was $2.49. Turning to the balance sheet and cash flow. Our inventory at quarter-end increased 4% compared to last year, yet declined 10% against the fourth quarter of 2019, which is generally in line with the sales decline over the same period. As Tom indicated, we are committing to plan inventory down mid-single digits percent going forward. Operating cash flow was $707 million in the fourth quarter. Capital expenditures for the quarter were and for the year were $826 million.

As a reminder, CapEx in 2022 was driven primarily by the 400 Sephora openings, store refreshes and 5 new stores and 4 relocations. In 2023, we are planning to invest $600 million to $650 million, including 250 Sephora openings, an additional 50 small format Sephora shops, store refreshes as well as 7 new stores, one of which is a relocation. Now, let me provide an update on our capital structure and capital allocation priorities. Strengthening our balance sheet is one of our top priorities in 2023. It is important that we rebuild our cash position and it remains our longer-term goal to manage this business at a leverage target of 2.5 times. We will make progress on both cash and leverage as we move through 2023. We will be utilizing the revolver to fund both, working capital and $164 million bond retirement in the first quarter, and we’ll sequentially work it down through the year with no anticipated borrowings at year-end.

In addition to the February bond retirement, we will also retire $111 million of bonds in December of 2023. As it relates to returning capital to shareholders, we will continue to prioritize our current dividend, which represents a healthy yield for our shareholders. During the fourth quarter, we paid $55 million or $0.50 per share in dividends to shareholders. In addition, as previously disclosed, on February 21st, the Board declared a quarterly cash dividend of $0.50 per share payable to shareholders on March 29th. And as it relates to share repurchases, as we stated on our Q3 earnings call, we are not planning any additional repurchase activity until our balance sheet is strengthened. Now, let me provide details on our outlook for 2023. As you’ve heard today, we are highly focused on four key priorities to drive improved sales and earnings performance.

This, coupled with the still challenging macroeconomic environment supports a prudent stance on planning the upcoming year. As Tom indicated, it is important that we establish realistic expectations of our performance given the actions we have underway, allowing us the flexibility to take additional actions, if appropriate, and to build on our progress through the year. For the full year, we currently expect net sales to decrease 2% to 4% versus 2022 and includes the 53rd week, which is worth approximately 1 percentage point of growth, operating margin to be approximately 4% and EPS to be in the range of $2.10 to $2.70, excluding any nonrecurring charges. Let me share some additional guidance details. We are planning other revenue to be down in line with our overall net sales in 2023.

We expect D&A to be approximately $770 million, interest expense of $350 million and our tax rate to be approximately 23%. And from a margin and cost perspective, we expect gross margin to stabilize in 2023 and be in the 36% to 36.5% range. Freight expense is expected to be a tailwind with progressive benefits through the year, and we expect product cost inflation to remain a headwind in the first half of the year. As it relates to the promotional environment, we expect it to remain competitive. We expect SG&A dollars to deleverage slightly. Wage inflation will continue to be a headwind, offset by benefits from a more efficient organization structure and fewer Sephora openings this year. Lastly, I want to highlight a couple of items about how we are thinking about the year.

As it relates to Q1, we have seen sales trends quarter-to-date above our annual guidance. However, much of this upside has been driven by elevated clearance activity that has a lower margin. As we work through the clearance inventory, we expect trends to moderate. We expect both our sales and earnings to build through the year. Our guidance assumes that EPS will be lower in the first half of the year as compared to last year, with the second half benefiting from easing freight and product cost inflation as well as lapping of the inventory actions taken in the fourth quarter. With that, Tom and I are happy to take your questions at this time.

Operator: We’ll go first to Bob Drbul at Guggenheim Securities.

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Q&A Session

Bob Drbul: Hi. Good morning. And Tom, welcome. I guess just two questions that I have. The first one really for Tom, can you elaborate some more just on the opportunities that you do see now at Kohl’s and what excites you about the opportunities? And the second question is really for Jill. When you look at the guidance that you’ve given us, can you just elaborate a little more as how you have approached the guidance and how you think about it? Just how we should be expecting things to play a little more, that would be great. Thanks.

Tom Kingsbury: I think Kohl’s has a lot of opportunities. It’s really a solid company with things in place already. I mean, I think Kohl’s has done a really nice job to set things up, such as the Sephora business. I think that’s — will continue to be a big opportunity for us. It’s bringing in a different consumer, a younger consumer, a more diverse consumer. So, I think that’s all very good. We just need to improve some of the disciplines that we have — the inventory discipline. We got out of control in 2022. We did a good job in €˜21. But €˜22, obviously, we have a big spike in the inventory. So, we need to improve those disciplines and need to be more agile in terms of having open to buy, to spend every single quarter so that we can chase the business.

It’s better to understand what the customer wants and go after it than to buy it all upfront and hope it sells, okay? So, we’re doing a lot of that. We already took significant actions in the fourth quarter as we — Jill and I both said. We also want to — we’re looking at our store operations. We think that’s a big opportunity for us. We’re working on changing some of the flow of product, not tremendously, but we feel that we need to have more gifting upfront. We did that in the fourth quarter, and it did very well. So, we continued it for Valentine’s Day. We’re going to do it in Mother’s Day, all the true gift-giving periods. Just to have the store look a little bit different, we’re working on sidelines. We’re working on reducing the amount of graphics and signs we have in the store, just to have a more modern feel in our stores overall.

But, we want to obviously have higher productivity in stores and that’s what we’re working on, as well as we want to continue to grow our digital business overall. So — but I think in general, I think there’s a lot of opportunities. The reason why I came back to Kohl’s is because I see those opportunities, and I see that we can take advantage of those opportunities in the future.

Jill Timm: And then, Bob, in regards to our guidance, I think what we did is we took a cautious plan as we look to the year. We wanted to be appropriate with our guide, given the environment, it’s high inflation, interest rates are rising, and we know that has a large impact to particularly our middle income customer. So, as we are navigating them in certain times, we have a lot of change that Tom had outlined not only in the script, but obviously just in his remarks as well in terms of what we see ahead of us. So, we do expect the sales to build throughout the year. Particularly as these initiatives roll out, we’re going to have more Sephora stores open. We’re going to work more on the gifting, impulse, home décor really seeing that build throughout the year.

And then I think as well with gross margin, we’ll see that build throughout the year as well with the freight moderating. We’re going to see commodity costs come down, starting with our back-to-school receipts. And then we’re going to start taking more timely clearance markdowns throughout the year. And this will actually have a bigger impact to Q2 margin because we’ve typically taken these seasonally. You’ll see a negative impact in Q2, but a positive impact in Q3 as we move those marks up and take them much more timely, particularly on our spring and summer goods from that perspective. And then, in SG&A, we’ll expect Q2 and Q3 to have more costs associated with them just due to the timing of when we’re opening up our Sephora shops. Last year, we started that construction earlier in the year and this year, you’ll see it more in Q2 and Q3 with the 250 stores and then those 50 new shop stores.

So, that’s kind of how I would make the model work and your build work from a guidance perspective.

Operator: We’ll move next to Gaby Carbone at Deutsche Bank.

Gaby Carbone: Tom, so previously, Kohl’s is targeted a 7% to 8% long-term operating margin. You’re guiding to 4% for FY23. I was wondering if your confidence still in that 7% to 8% goal over time. And what does the bridge look like to get there? Thank you.

Tom Kingsbury: Well, I’ll talk for a few minutes, and then I’ll have Jill. Overall, we’re still confident in the 7% to 8% target that we have. A lot has to do with rebuilding our sales to obviously get to those levels again. But we’re not changing. We’re not changing our long-term guide at all because we feel we can get there. But I’ll let Jill talk about it.

Jill Timm: Yes. I think the framework that we gave you with the 7% to 8% still exists today. And as Tom mentioned, it really starts with sales growth. And if you recall in that framework, it was a low-single-digit sales growth that was the beginning of that framework. So I think we feel confident in the initiatives that we’ve outlined today, like I mentioned, that we’re going to get back to that growth pattern. But as Tom suggested, it takes time to do this. So, we’re moving things in the right direction. So, we look at this as a long-term framework that still exists. You go into the margin side of things, our guide this year is at the low end of that, it’s a 36% to 36.5%. But we do think we’re going to continue to see benefits, particularly around the strong inventory management that Tom spoke about.

We’re going to have better inventory control processes, this will drive turn, we’ll have better reg selling. So, we do see that we can continue to get to that higher end there. And then from expenses, we’ve always had a very strong focus on expense discipline at Kohl’s. We know we can leverage at about a 1.5 comp. This continues to be a focus for us. We’re looking for efficiencies across the business. But particularly, you’re going to see that around like automation, the self-service in our stores, automation in our distribution centers. We’ve done a lot of organizational optimization. We’re looking at marketing efficiencies, all places that we can continue to lean into to bring down our SG&A run rate as well. So I think overall, hopefully, you heard from both Tom and I, we’re very confident in the long term framework for op margin, getting back to 7% to 8%.