柯爾百貨 (KSS) 2002 Q4 法說會逐字稿

Good evening ladies and gentlemen and welcome to the Kohl's Department Stores fourth quarter earnings release conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question & answer session.

I would now like to turn the call over to miss Patty Johnson, Chief Financial Officer.

Miss Johnson, you may begin.

Thank you and welcome to everyone.

Welcome to the fourth quarter earnings release conference call.

Joining me today are Arlene Meier, Chief Operating Officer, Kevin Mansell, President and Larry Montgomery, Chief Executive Officer.

We will have time at the end of the session to take a few questions.

But before we get started, let me remind you that our discussions and comments made during the course of this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Such forward-looking statements which reflect management's current views of future events and financial performance are identified by forward-looking terminologies such as `plans, beliefs, expects, may, will, should, anticipates`, or similar expressions.

These statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those anticipated by the forward-looking statement.

These risks and uncertainties include but are not limited to those described in Exhibit 99.1 to Kohl's annual report on Form 10-K and other factors as may periodically be described in Kohl's filings with the SEC.

Also, please note that replays of the web cast of this call will be available for 90 days, but this recording will not be updated, so if you're listening after March 4th, it is possible that the information discussed is no longer current.

Now let me turn the call over to Arlene Meier, who will kick off the presentation with a recap of our financial performance.

Thanks, Patty.

Let me start with the P&L and then I'll spend a few minutes on the balance sheet and cash flow as well.

From the top line standpoint as you know, we delivered a 16.9 percent total increase on the quarter with comp store sales increasing 1.2 percent on the top of over the strong 10.1 percent a year ago.

For the full year, we exceeded our target and increased total sales 21.8 percent, while comp store increased 5.3 percent.

That 5.3 compared to a 6.8 percent comp store increase the year prior.

From a gross margin standpoint, five-fold gross margin was 32.71 percent on the quarter compared to 32.88 percent last year.

So a decrease of 17 basis points.

Year-to-date we actually increased five-fold margin by 12 basis points from 34.28 percent last year to 34.4 percent this year.

On a LIFO basis, margin was basically flat on the quarter. 33 percent this year and last year, and year-to-date 34.42 percent this year compared to 34.25 percent last year.

The LIFO adjustment itself was a credit on the quarter of $9.2m compared to a credit of $3.5m a year ago.

And for the full year, a credit of $2.1m compared to $2.3m [Inaudible] charge a year ago.

Kevin, when he goes through his remarks, will kind of go through what happened with sales and how each have the merchandise categories performed, and how that impacted margin.

For guidance on a go forward, we'll continue to guide flat gross margin rate as you look at 2003.

From an expense leverage standpoint, you'll see that SG&A declined 48 basis points for the quarter and 47 basis points year-to-date.

So, on the quarter SG&A was 15.56 percent compared to last year's 17.04.

Year-to-date we actually came in under 20 percent.

So, with the performance of 19.93 percent compared to 20.4 percent last year.

Obviously, when you look at those raise both for the quarter and year-to-date, we continue to achieve significant productivity improvements throughout the entire company.

And keep in mind, when you look at that fourth quarter, we were able to achieve that kind of leverage on a 1.2 percent comp increase.

So, we are pretty proud of that.

Depreciation and amortization on the quarter $51m, a 22 percent increase roughly over the $41.7m a year ago, and year-to-date $191.4m compared to $157.2m a year ago, so just under 22 percent.

Pre-opening on the quarter, $7.7m compared to $3.9m last year.

Year-to-date,

$39.3m compared to $26.6m a year before.

So, keep in mind, we opened 75 stores during the year compared to 62 stores in 2001.

For the 75 stores we opened in the year, on average, we spent about $500,000 a store.

Now, keep in mind, this spending occurred typically over the course of two years.

So, that is really the total that would have been spent the entire period for those stores.

Our guidance for first quarter of 2003; we spent already approximately $8.6m in fiscal 2002 for the stores that will open in first quarter of 2003.

We would anticipate spending approximately another $15-16m in the first quarter associated with those stores.

In second and third quarter, we will incur the pre-opening cost for the 45 stores that we plan to open in the third quarter.

These 45 stores compared to 37 stores opened last year in the third quarter.

Because almost all of the stores will actually open in October, when you are looking at Q2 versus Q3, you can expect that somewhere between 12 percent and 15 percent of the total cost will fall into the second quarter.

As I look at Q4, to be honest with you, it's tough to give you any guidance on Q4 yet, because Q4 will be (ph) spending that occurred for stores that will open in first quarter of 2004.

And at this point, we have not yet announced when our openings will be in first quarter.

When you look at the fiscal year 2003 stores, you look at those 87 stores that we will open, we will spend somewhere between $550,000 and $600,000 per store on average.

And that takes into account, obviously, a higher level of spending in Southern California.

From an operating income standpoint, you will see that we increased operating income on the quarter, net 16.5 percent over the last year, with an increase when you look at the dollars, $465m compared to $389m a year ago.

For the full year, operating income increased 28.3 percent over last year.

There is some $850m to $1.09b.

When you look at operating margin, you are looking at a 12 percent of sales for the year compared to an 11.4 percent a year ago.

So, a pretty incredible performance.

Moving down the P&L, looking at interest expense; $16.6m on the quarter compared to $13.1m last year.

And then, you are aware that in November, the company issued $300m of non-callable, 6 percent unsecured senior notes.

So, that interest expense in Q4 reflects interest on those notes incrementally.

For the total year, interest expense was $56m compared to $50m last year.

Our expectation, taking into account that debt offering, has been -- in 2003, we would expect interest expense between $70m and $75m.

From a tax provision standpoint, you will see that the income tax rate for fiscal 2002 was 37.8 percent.

Fourth quarter was no different than the first three quarters.

That compares to 2001at basically 38 percent.

We expect, in 2003, that our rate will be flat to 2002 at 37.8 percent.

From a bottom line standpoint, Q4, we increased income from about $234m last year to $279m this year to 19.3 percent increase on the quarter.

And total year net income increased to 29.8 percent, increasing from about $496m a year ago to over $643m in 2002.

Keep in mind that that 29.8 percent is on top of sixth consecutive years of earnings growth in excess of 30 percent.

So, we feel very good about the bottom line result.

When you look at EPS that resulted in $0.81 a share on the quarter, and $1.87 on the year compared to $1.45 on the year 2001.

From a return on investment, we achieved a 21.6 percent return on investment compared to 21 percent last year.

I know, every retailer kind of looks at return on investment a little different.

But, the way that Kohl's has measured ROI is looking at EBITDAR, earnings before interest, taxes, depreciation, amortization, and rent, and dividing that by the average quarterly growth investment, which includes the gross fixed assets, capitalizing all rent, consolidate other assets and liabilities, excluding short-term investments and cash equivalents.

We are pretty proud of the fact that, in a pretty tough year, again we increased return on investment dramatically.

Now, let me take a minute and just run through two or three of the key items on the balance sheet.

But, first before I get to balance sheet; square footage, because many of you always ask about square footage.

On a gross standpoint, we ended the year with $40.387m compared $33.548m a year ago.

At selling square footage standpoint, $34.507m compared $28.576m a year ago.

That was 28 percent increase in square footage.

Now let me move to the balance sheet.

Accounts receivable, you will see that net accounts receivable were about $990m at the end of the year compared to about $836m a year ago and 18.5 percent increase over last year.

Some key statistics that relates to Kohl's charge.

First of all, Kohl's charge sales were actually up, over 31 percent over last year.

We increased loyalty pretty dramatically in that our share increased about 250 basis points from 31.8 percent in 2001 to the share being 34.3 percent in 2002.

One other reasons why you are seeing that the receivable balance hasn't grown at the rate of sales, is really because of the rate that that file is turning.

In 2001, our turnover on the file was 3.2 times and that increased to 3.5 times this year, reflecting the increase in payment rate that we have been talking about all year.

From an inventory standpoint, you will see inventory at a $1.627b compared to about a $1.2b a year ago; 35.8 percent increase.

Part of that increase is actually our investment in inventory for the Southern California stores.

Basically all of those goods were received in December and January.

Kevin will spend a little more time talking about inventory content and some of the other things that are embedded in that inventory in a few minutes.

From the accounts payable standpoint, balance at the end of the quarter at $695m represented about 42.7 percent of inventory compared to last year; the AP balance being about 40 percent of inventory.

A lot of that is because of earning (ph) that inventory for the Los Angeles stores.

None of that was paid for, obviously, before end of year.

So, it increased to that 80 percent of inventory pretty substantially.

As we look at 2003, we should pretty much expect, by quarter, that AP, as a percent of inventory, will be in the high 30 percent to low 40 percent range.

And we'll take a minute and talk just about the cash flow statement.

Net income of $643m; we generated about $670m in cash flow from operation.

Capital expenditures, for the year, was about $716m, with fourth quarter spending being $222m.

Our expectation, as we look at fiscal 2003, is that we will spend between $800m and $825m of capital expenditures.

At year-end, you will see that we were actually sitting with cash, and with some cash in investments totaling $566m.

At this point I am going to turn it over to Kevin.

Thanks, Arlene.

I will make some comments about the fourth quarter and then we will talk a little bit about our outlook for our first quarter.

First, as it relates to the fourth quarter, obviously we were pleased that we continued to increase market share for the fourth quarter and for the year in a tough retail environment.

It gives us the confidence that our customer continues to see us as a better solution to their shopping needs.

Having said that, we feel we are owed additional share over and above that performance.

And I'll talk in a moment on our strategies to address that in the first quarter of the year.

Looking at the business from a region standpoint for the fourth quarter the mid-Atlantic, south central and the southeast regions by the company.

On a year-to-date basis, the mid-Atlantic and the northeast regions by (ph) the company and all regions comp positively for the year.

Looking at the business from a category standpoint of our six major business groups, the top performing categories were Children's and Women's, which reflected the way the businesses performed for the year as well.

Within the Children's business, the infants and toddlers classifications were particularly strong.

Within the Women's business, the intimate apparel and juniors classifications stood out.

The categories that were toughest for the quarter and the year were Men and Footwear.

All major categories ended up posting positively from a comp standpoint.

Our Table and Tower, and Get It initiatives continued to grow in the fourth quarter from a total and a percent of business standpoint in our plan for further growth in penetration and total sales again this year.

Moving on to talk a little bit about inventory, as Arlene said our inventory was up 35.8 percent over the prior year at year-end.

The key drivers in that number were as follows.

One, an increase in pre-opening inventory for new store.

Last year in March we opened 12 stores in Houston.

This year of course we are opening 28 stores in Southern California in March, and a significant portion of the inventory to stock these new stores was received and on-hand at the year-end.

Second, we made a significant additional investment in basics based on both our success last year and on continued customer feedback, but this is high on our priority list in terms of needs and satisfaction.

Third, we came out of holiday this year with more clearance inventory than a year ago.

We have seen very strong sell-through of clearance however and we are comfortable with our ability to clear through any remaining stock.

On an overall basis, I would say we are very comfortable with constant over-inventory and we are very set to do spring business going forward.

Now moving on to look at first quarter sales.

As you may remember we had a very strong first quarter last year and achieved a 9.1 percent comp for the quarter in total.

We had an early spring break weather-wise last year and it resulted in a 14.4 comp in February, 9.1in March and 5.3 in April.

So for this year obviously the weather has been unfavorable for spring apparels selling and history has taught us that our performance by month is very dependent from the timing of the break of spring to accelerate our overall apparel sale.

We do have a significant amount of new spring content and brands that are being introduced and expanded throughout the store this spring.

Perhaps more newness than in anytime in our history.

All of these initiatives address our customers' desire to continue to see newness and more updated fashion in our assortment.

In the Missy area, we will still benefit from our second season of the full roll out of our Nine and Co. brand strategy, which has been very successful and we are completing the roll out into both Petite and Women's sizes as well.

We were also rolling out the Access brand by [Inaudible] to all stores in Missy and introducing the Access for Men brands into the men's sportswear area across the company as well.

Havana Jackline of casual sportswear is being rolled out to the whole company in both Men's and Women's as well this quarter.

In addition we have introduced a new line of updated sportswear into the men's sportswear category called Exist.

And finally, we have introduced the Janson brand into our swim business in both Men's and Women's and we will be adding it to our men's sportswear business in the second quarter.

As we have expanded nationally we have also used our market solution initiatives to continue to differentiate our assortments by market.

Nowhere is that more evident than in our assortments in our Southern California opening.

We are very pleased with the changes that reflect the lifestyle of our customer in that region.

Given the promotional nature of the business in the top economic [desirement], we also wanted to speak to our marketing initiatives for this spring.

As you know, the fact that we are expanding nationally, with that growth in the Southern California, Arizona and Nevada markets this year has given us substantial leverage across all media including print, broadcast, and direct mail.

We've reinvested that savings into broader and more substantive marketing efforts across the whole company.

We have strengthened distribution and quality of our Sunday pass used to growth in our credit file to expand our direct mail, and with our national network television and radio ability now, has been able to significantly augment our spot buys.

This has also had the added positive of new market consumers seeing and hearing our broadcast long before we actually enter the market.

I'm going to turn it over now to Larry, to discuss our expansion plans.

Thanks Kevin.

First of all, I'd like to say that the company is extremely pleased with the performance for the year on top of six consecutive years of 30 percent earnings growth.

We came back in 2002, a very typical retail environment and delivered a 29.8 percent increase in earnings with a 21.8 percent increase in sales.

We increased market share in every region where we do business and we continued our successful expansion program across the country.

Recapping openings for last year, we opened 75 new stores in the full year 2002.

We are very pleased with all the new markets that we entered, and we see major opportunities to continue to expand in all regions where we currently do business.

Looking ahead to this year, 2003 expansion, we plan to open approximately 80 stores for the full year, 35 stores in the first quarter. 28 of those stores are going to be in Los Angeles.

We quietly opened those 28 a couple of days ago, and the grand opening is going to be March 7.

We're extremely excited about how those stores look, as Kevin spoke to the content.

We are definitely prepared to do business in Southern California.

In addition, in April we'll open seven more stores, three stores in the new market entry in San Antonio, one in Springfield, Massachusetts, filling [Inaudible] Grand Rapids, Michigan, another one in Boston, and one in Philadelphia, continuing to fill-in markets where we are doing business.

In the fall of the year, we are going to open up approximately 45 stores, almost all of which are going to be in October.

New markets that we are going to open up, we're going to have 10 stores in Phoenix, two stores in Tucson, Arizona, one in Flagstaff, and three stores in Las Vegas.

In addition, we've got 29 stores that we're filling-in in existing regions.

Looking ahead to 2004, we plan to open between 95 and 100 stores, that's going to be a combination of new stores in new markets as well as fill-in stores in existing markets.

We continue to expand our presence in the southwest region, so we can leverage our regional management, our distribution infrastructure, which is all now in place.

Our plans include additional stores in the Greater Los Angeles area, and new market entries in to Sacramento, San Diego and Fresno.

Equally important, we'll continue our fill-in strategy, it has been so important to our success by adding additional stores in existing regions across the country.

Looking at the earnings guidance for the first quarter, First Call range is $0.36 to $0.40.

That range implies a comparable store sales increase of low to mid-single digits, and we are comfortable within that First Call range.

Okay, Arsula, we'll turn it over to you for questions.

Thank you madam.

We will now begin the question and answer session to sell-side and buy-side analysts.

If you have a question, you'll need to push the one on your touchtone phone.

You'll hear an acknowledgement that you have been placed in queue.

If your question has been answered, and you wish to be removed from the queue, please press the pound sign.

Your questions will be queued in the order that they are received.

If you're using a speakerphone, please pick up your handset before pressing the numbers.

Once again, if there are any questions, please press the one on your touchtone phone.

Thank you, our first question comes from George Strachan from Goldman Sachs.

Please state your question.

Thank you very much, and congratulations on a great performance in what's probably a worst quarter in recent memory.

I guess, the question I had and Arlene you alluded to it, just a terrific 40 basis points of expense leverage on that one percent comp.

How did you manage to slow the SG&A growth to about 14 percent from a 21 percent run rate earlier in the year, and actually, you know, thinking about that is there any way to show some of the same discipline going into, what's probably going to be continued to be a tough environment in '03.

Yeah, I think what we saw George is, as you know, third quarter became kind of tough and one of the things we talked about as a company.

What were the things that we could do to really tighten though, not knowing you know what would fourth quarter be and what does the environment hold for us.

So, I would say the same things that we did in fourth quarter, we are continuing to do and I think we are going to prudent on where we spend our expense dollars.

As Kevin said, you know we are not holding any thing back on marketing.

We are not holding anything back on making sure that from the store payroll and things in-store that the customer experiences right.

But there are quite a few things that we saw and we could do from a conference standpoint and we will continue that.

Where are the opportunities there?

Because it seems like the you know, pretty decisive reduction in expenses?

A number of things really helped us.

You know, everything from distribution, which leveraged quite a bit this year versus a year ago.

I think that's the productivity that really these [Inaudible] opened up with versus what we have seen traditionally.

We got some benefits and credits from two standpoints.

One is because Kohl's charge share increased, that naturally took down bankcard.

I mean as you know, none of us like paying those bank card rates.

Another piece on the credit side, I call it credit but it is really not from the proprietary side but third party.

Debit card was very successful for us in the fourth quarter.

I mean obviously, that's a much cheaper rate than our third party credit card.

So, it's really things of that nature George, that we continue to see opportunity plus this headquarter's (ph) functions as well.

Great, congratulations again.

Thank you.

Our next question comes from Daniel Barry from Merrill Lynch.

Please state your question.

Let me add my congratulations too in one of the terrible quarter from the environment.

My question is, one area you didn't touch was your small store test.

I was hoping in this call you might give us little more details on that.

Dan, it's Larry.

You know we have got four stores out there and I think the initial comment when we opened up those stores, we need it to at least to get through this spring season and towards back-to-school so we can get you know, pretty close to a full year under our belt to understand how they did operate.

Book these for themselves but we surely not ready to drive any conclusions on what that means for expansion.

But we will keep it closed.

We have got a lot of, to keep putting that larger prototype store and I think that's where our focus is going to be.

I understand.

All right, I will ask next time thanks.

Thank you, our next question comes from David Cumberland from Robert Baird.

Please state your question.

Good afternoon.

Couple of questions for Kevin.

On the key item program, where does that stand on brand penetration and what is the potential increase of the brand presence there?

And then, can you comment on customer reception of your early spring offering in the few markets with normal weather?

Well first, from on the Get It issue, I think price for the fall season in the fourth quarter pretty much reflects that.

Our brand penetration is very close now to the overall store.

It's slightly less but not dramatically so.

I think there isn't any reason over time that it won't just reflect exactly the rest of the store.

And as it relates to spring selling, you know we have definitely seen some good signs in spring selling in markets where there has been warmer weather.

But we've certainly had some very cold and nasty weather in lots of the country and you know, I think until we get a break that's broad enough, we won't be able to tell you anything more specific about you know, some of the new styles or some of the new brands.

Thank you.

Thank you.

Our next question comes from Dana Cohen from Banc of America.

Please state your question.

Hi guys.

Couple of questions.

On the inventories, can you give us a sense of what the inventories would have been up sort of what's the contribution from the new stores and maybe what's the increment from clearance?

[Inaudible].

The answer to that I don't have on my fingertips.

We can definitely get back to you on it as we [Inaudible] it won't answer it but I don't have that sitting here.

And then on the marketing stand, did you say the marketing dollars were going to be flat.

I wasn't clear about what you were seeing into next year?

No, I mean obviously, you know we are projecting and planning for you know 18 to 20 percent growth.

So, we are going to have a significantly larger marketing spend in 2003 than 2002 because of that.

What we were trying to point out is that even beyond that payment (ph) because of the leverage that we are getting as a national user of marketing, whether it be print or broadcast or direct mail, we have been able to experience pretty significant savings, but we have turned around and invested that into judiciously where we think the right places are to spend.

So we are planning to spend from a rate standpoint at last year's levels.

Okay, and then last question, can you give us some sense, I know you gave a sense of sort of comfort for comp for the quarter, can you give us some sense of what you think the shift will be March to April?

I think we have always kind of said this from a March, April perspective you got a kind of look at both months together.

I mean this year I think east is a little bit later than last year, but historically it is always proven out I think that you get a little more business when the weather breaks first so when the weather breaks we will influence that, but the bottom line on that is you got to look at March and April together.

Okay, great thank you.

Thank you, our next question comes from Deborah Weinswig from Salomon Smith Barney, please state your question.

Two questions, one with the move especially in Tucson, Southern California and other one-weather market, can you talk about your regional merchandizing initiatives?

Well without going into you know a lot of detail that would probably waste your time on the phone right now, you know just as we have explained before I think the way we have approached our tailoring and our assortments because we think it is really high on our priority list to be successful is to, we have invested significantly into systems in order to plan far, buy and then allocate goods based on regional needs.

We have created a planning organization, one part of which is called market solutions team and their job is to work with our store operations group, identify needs by market and region, tailor that information, communicate it to the planning and buying team and then let the planning and buying team execute that plan, and we think that has worked very, very well.

We are obviously continuing to learn in some of the new markets that we went into in the Southwest, but we are really happy essentially with what we are looking at in our assortments in Southern California and that is strictly a reflection of that whole process working well.

Okay great and then one other quick question.

Arlene, you highlighted the increase in the Kohl's charge share, what do you think drove that and are you seeing an increase in the number of NVC (ph) card holders and what are you learning from you know how does customer shop with you?

Well we definitely see loyalty with that customer.

So we continue to be focused on opening new accounts because they do come back, you know, month after month, and yes, we have seen it continue.

I expect we will continue to see growth in that MBC (ph) portfolio and what they are as a percent. [Inaudible] we have given out the percent, we have it.

But clearly that was a big help for us in fourth quarter in continuing to drive that customer right back into the store.

Great, thanks so much.

Thank you, our next question comes from Shari Eberts from JP Morgan, please state your question.

Hi everybody, couple of questions.

First on the free cash flow for the year, it was really only slightly negative for 2002, I guess I was wondering what you are expecting for 2003 as well as when you might hit more of a cash flow neutral position?

[Inaudible] we are probably pretty close to being there.

And when we look at what the mix is of stores for 2003 between owned and leased, I wouldn't think that you did expect anything much different if not a little bit better than what you saw in 2002.

Great.

Shari, the interesting thing will be as you saw this year, even though our charge sales grew our receivables grew at a lower rate.

So that will be one of the interesting things to see what happens with the growth in receivables because that is another driver.

For working capital benefits going forward?

Right.

Okay.

And then just housekeeping just for 2003, if there was any comment on just what we should expect for D&A as well as how you are going to be accruing for LIFO given the credit in the fourth quarter?

Yeah, I wouldn't change the LIFO accrual rate from last year, and for depreciation and amortization I would grow that commencer with the number of stores we're opening next year, the 80 stores versus the 75 last year.

Okay and then Arlene I know you mentioned that the penetration in terms of credit, I missed that if you talked about any of that delinquency trend that you seeing there?

Really we haven't seen much of a change from the delinquency at all.

So we are actually feeling pretty good I think when you look at bad debt reserve, it is very comparable to last year as a percent of receivables.

The piece we continued to watch is what is going to happen from the bankruptcy side.

The auto write-off side from the roll-rate standpoint has actually improved.

I think we stand a little conservative because we don't know what will happen with bankruptcies knowing simply making some of the offset on the bankruptcy [Inaudible] a little higher.

But we feel very good.

Delinquencies continue to come down.

Great.

Okay thanks very much.

Thank you, our next question from Linda Kristiansen from UBS Warburg.

Please state your question.

Good afternoon.

I was wondering on deflation, could you talk a little bit about the impact that it's had on your top line and you have just given a LIFO credit that's having an impact on cost of goods.

Could you talk a little bit about that?

Sure.

This is Kevin's favorite.

Yes.

Well, trying to break it apart a little bit from an average unit retail sold standpoint.

We have seen a slight decline in average and the retails sold.

And I am sure you have probably been hearing that from other people as well.

However, our average transaction for the year was equal to last year.

And that really continues to be our main focus, which is to keep that average transaction up because that would indicate to us that we are still getting the share wallet that we need to get.

From a cost standpoint, you know, there certainly have been price reductions on a cost basis particularly overseas with the environment that many of those factories are selling into.

Some of that Linda, you know, we have tried to reflect in better pricing to consumers.

Some of that just from a strategic standpoint.

You know, we, I certainly have always been in the opinion better that we give our customer better value so we might not lower the retail.

We might enhance the product, and simply make it a better product.

And you know, just overall from an impact on our cost structure, I would say I don't think we have seen an impact on overall cost structure really at all.

What about, do you see any change in the outlook for the current, for 2003?

Well, again from you know, we just started this year.

Sorry, I can't really comment at all.

It's on the beginning of this year, you know from a cost acquisition standpoint.

Right.

You know many of our factories are selling into a tough environment and tough economy.

And you know, they are interested in keeping the factories flow and the production up.

And so they have been very aggressive about cost negotiation.

And you know that's working to our benefit.

Right.

Okay, thanks a lot.

Thank you, our next question comes from Bob Drbul from Lehman Brothers.

Please state your question.

Good afternoon.

On the remodeled stores, can you talk about the performance of some of the stores that you have remodeled over the past year and your expectations for that?

And I guess could you also address how the stores are comping the older stores versus the newer stores more mature versus the newer stores?

I think the comment on the remodeled program is done through just our second year of remodeling major markets.

We just finished Milwaukee and started off with the bank, comfortable with what's going on in Columbus the year before.

I can't, we are going to continue to go after remodeling major markets Indianapolis this year.

Continue to finish up Chicago and go to Minneapolis the following year, I believe.

But we are pretty pleased with what it does for us in terms of old stores versus new stores.

Of course five years in older range between 2 percent and 3 percent comp-store sales increase on the year and stores younger than that in that 2 percent to 4 percent range anywhere [Inaudible].

Okay, thank you.

Thank you.

Our last question is coming from Christine Augustine from Bear Stearns.

Please state your question.

Hi!

Good afternoon everybody.

Two quick questions.

The first is, what should we be looking for in terms of inventory levels by the end of the first quarter?

And second question, why are you only opening three stores in Las Vegas?

We think that our research tells us and we are getting pretty good at this.

Our research tells us that we want to get in there with three stores and see how that community responds.

We think that all three of those stores are going to do well.

And we also think that the market has grown for additional expansion.

We are comfortable going in there with three.

Yeah, it's Kevin, from an inventory perspective, I think you know we are probably going to be in mid-20s somewhere in terms of the inventory increase going in to second quarter.

Okay, thanks.

Thank you.

At this time we show no further questions.

Hi, well thank you all for joining us.

Thank you ladies and gentleman, this concludes today's conference for today.

You may all disconnect at this time.