柯爾百貨 (KSS) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen.

Welcome to the Kohl's department stores first quarter earnings release conference call.

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

Later we will conduct a question-and-answer session.

Before we begin, let me remind you that our discussions and comments made during the call contain 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 terminology such as plans, believes, expects, may, will, should, anticipates or similar expressions.

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

These risks and uncertainties include but are not limited to those described in exhibit 91.1 on Kohl's annual report on form 10K and other factors that may periodically be described in Kohl's filings with the SEC.

Also, please note that replays of this call will be available for 30 days, but this recording will not be updated.

If you're listening after May 15, 2003, it is possible that information discussed is no longer current.

I'd now like to turn the call over to Ms. Arlene Meier, Chief Operating Officer.

Ms. Meier, you may begin.

Thank you.

With me today are Larry Montgomery and Kevin Mansell.

So, I will kick off by giving you the highlights on the P&L and balance sheet, then turn it over to Kevin.

First of all, you saw, obviously, that we released sales last week.

From a total sales standpoint on the quarter, total sales were up 13.2% on top of a 25.7% increase a year ago.

From a comp store standpoint, we were down 2.4%, but that was against a very strong 9.1% comp increase a year ago.

From a transaction standpoint, in comp store we were actually up in transactions low single digits, while average transactions declined mid single digits.

From a gross margin standpoint, on a FIFO basis, 35% of sales compared to 35.2% last year; the FIFO margin rate decreased 24 basis points versus a year ago.

You will note that we have not made any LIFO provision in the quarter.

At this point as we've looked at the indices, we don't see any inflation in the pools that are in LIFO, so that's why you don't see a provision at this point.

Kevin will talk to you about the mix of sales and how the merchandise categories performed in a minute.

From an expense standpoint, overall SG&A expenses increased 15% over last year.

As a percent of sales, 22.4% compared to 22% last year, an increase of 37 basis points on the quarter.

As we look forward, we recognize we're faced with a short-term difficult environment, without reducing marketing of investing in the infrastructure to support our future growth.

We have tightened expenses for second quarter and going into fall season.

Depreciation and amortization, $55.4 million compared to $44 million last year.

Obviously that increase is due to our investments in capital primarily associated with new stores and remodels.

From a preopening standpoint, we basically came in where we guided you in our last call, $15.5 million this year compared to $16.9 million a year ago.

We opened 35 stores in first quarter this year while we opened 38 stores in the first quarter last year.

For the 35 that we did open this year, we spent approximately $690,000 a store.

Of that total, if you recall, about $8.6 million was spent in fiscal year 2002.

As you look at Q2 and Q3, as you know, we planned to open about 45 new stores in the third quarter.

That will compare to having opened 37 new stores in the third quarter last year.

Because almost all of the stores will open in October, we'll probably spend somewhere between 12 and 15% of their total preopening costs in the second quarter.

The remainder will fall in third quarter.

In total, we would expect to spend about a half a million dollars a store for those 45 stores.

It's a little early to give guidance yet on Q4 for preopening.

As you know, we haven't yet announced how we will split the store openings in 2004 between the quarters, so we will do that on our next call.

From an operating income standpoint, operating income increased 6.6%, from $184 million last year on the quarter to $196 million this year.

Net interest expense, $17.8 million this year compared to $12.6 million last year.

As you all recall, we issued about $300 million of noncallable 6% senior notes in fourth quarter of last year.

So, that interest expense is reflected in the quarter.

That debt was issued to replace potentially 2 and 3/4 percent convertible bonds, which can be put back to us for the first time in June of this year.

I believe the put date is June 12.

From that date forward, Kohl's as well at any point after that can call those bonds.

So, those bonds were actually issued in June of 2000, when 30-year debt would have cost us well over 8%.

So that, was the purpose for the bonds.

The one thing I should point out is if the bond holders, say 100% of them, elect to put those bonds back to us in June, we would incur a write-off of deferred financing fees in second quarter of about $6.1 million.

Assuming that that were to happen, that would mean that interest expense for us for the full year will run somewhere between 70 and $75 million.

From a tax provision standpoint, you see that the tax provision is 37.8%.

That's consistent with our tax provision rate a year ago.

That resulted in bottom line net income of $111 million compared to $106.6 million last year, a 4.1% increase..

That's on top of a 41% increase a year ago for the same quarter.

And as we guided you last week on the sales call, that resulted in 32 cents a share from an EPS standpoint.

For those of you that track square footage in your models, gross square footage, 43,604,000 compared to 37,042,000 last year.

Selling square footage, 37,281,000 compared to 31,588,000 a year ago.

So, an 18% increase in square footage over last year.

Now, flipping to the balance sheet, I'm just going highlight two or three items.

One is receivables.

As you will see, net receivables increased about 16% over last year.

Kohl's charge sales actually increased about 17% over last year.

From a share standpoint on first quarter last year, our share was 33.7%.

Kohl's charged share this year was 34.9%.

At the same time, we continue to see payment rates up versus a year ago.

So, we're still running in the high 20% range, which is what we've been running for a couple quarters now.

As a result, the turnover of that file continues to increase, so on an annualized basis, the turn last year was 3.2.

Now we're looking at 3.4.

From an inventory standpoint, 1.8 billion in inventory compared to 1.4 billion a year ago, a 27.6 % increase.

Kevin will speak to the drivers in the overall content of that inventory in just a minute.

The only other thing I want to point out is accounts payable. $608 million this year compared to $581 million last year.

As we look forward, we would expect AP as a percent of inventory to be in the high 30 to low 40% range.

It's about 34% actually when you look at first quarter of this year.

Going down the balance sheet, you will see a current portion of long-term debt, that $358 million includes the convertible debt I mentioned when I covered interest expense.

One last item is capital expenditures.

For Q1, we spent about $123 million, we continue to expect that on the year we spend between 800 and $825 million.

With that, I'm going turn it over to Kevin.

Thanks, Arlene.

Let me first start with some comments about the first quarter performance.

Obviously we're very disappointed with the overall results for the quarter.

However, we are pleased with the liquidation of clearance, and we were able to reposition the mix of our inventories well for the second quarter business.

We had, as you know, a very late start on the selling of spring apparel, especially categories like shorts and capris, on the bottom side of the business, and tees, tanks and polos on the top side of the apparel business.

As more normal temperatures arrived in parts of the country, we have seen the consumer respond.

From a regional standpoint, all regions were up against strong comp increases last year with company up 9.1 for the quarter last year.

The best regions this year for the quarter were the southwest and south central regions, which were both up modestly.

The most difficult were the Midwest and the northeast.

Of our six major business groups, the top performing category was the accessory group, up 3% on top of a mid-teens increase last year.

All three of our apparel businesses, men’s, women’s and kids, were down about 3%.

Women’s and kids were both up against low teen increases from last year.

Within the women’s business, juniors performed very well on top of strong comps last year.

And in addition, in men’s and women’s, our updated sportswear strategies in both were up significantly compared to our overall sportswear performance.

Finally, our Table and Tower and Get It initiatives continued to grow from a total and percent of business standpoint and are planned for further growth and penetration through the rest of this year.

They are currently highly focused on summer, basic apparel items.

Moving on to the inventory number, I realize there is a lot of concern out there about our level of inventory today and in particular, the level of clearance that we came into the year with versus where it is now.

I want you to know that in partnership with our vendors, we've been very aggressive on clearing these goods.

Clearance is a small part of our overall inventory level, and it continues to remain so because we do continually take new markdowns each month.

We also clear those goods more effectively than any other retailer with a very aggressive clearance strategy in-store.

The vast majority of our overall inventory increase are in the forward apparel categories of shorts and capris in bottoms and tees, tanks and polos in tops.

In addition, we've continued to maintain a very aggressive approach to basics.

Staying in stock on key basic apparel classifications like underwear and socks and continue to support all of our key Get It programs throughout the store.

Having said that, because of the late start to selling spring apparel, our inventory levels are still higher than we would like them be.

As Arlene said, inventory was up 27.6% over the prior year at the end of the first quarter.

I am comfortable, however, with the mix of that inventory from a forward-selling standpoint and the investment in our key areas of basic classifications and apparel and also our key Get It programs.

Moving on to take a look at our outlook for second quarter sales.

To remind you, we had a strong second quarter last year and achieved a 10.6% comp for the quarter.

We achieved an 8.7 comp in May, 14.8 in June, and 7.5 in July.

With the delayed start to spring apparel spending and recognizing the overall weakness in spending, we have made adjustments to our receipts in second quarter to reflect those facts and the strong second quarter last year numbers.

From a sales forecast standpoint, we've lowered our sales forecast for the second quarter that we are buying to.

Larry will talk more about that in just a minute.

More importantly, though, we have tightened our expenses in the second quarter to allow us to be more aggressive on marketing and more aggressive promotionally from a pricing standpoint.

From a marketing viewpoint, we have strengthened our print pieces, we've increased our direct mail and we've dramatically increased our broadcast primarily through net national network television and radio.

From a pricing standpoint, we will become much more aggressive to ensure we drive the top line.

I think you know no one can do that better than Kohl's.

It's a part of our core overall strategy.

By the end of the second quarter, we will sell through summer merchandise and be studying for back-to-school and transitional merchandise.

We are planning the end of second quarter and enter fall with an inventory increase in the low 20s as compared to last year.

It's also important note we were up against much smaller sales comparisons in the fall season.

We will, however, approach fall seasonal apparel more conservatively until we see a change in the consumer mentality.

As I said earlier, we will continue, however, to be aggressive on in-stocks and basics and on our key Get It item programs because we believe we have a long-term market share opportunity in doing so.

Let me turn it over to Larry to talk about both our expansion and comments on how we're looking at the business.

Thanks, Kevin.

Just recapping a little bit.

Obviously a very difficult quarter for Kohl's, the toughest in our history as a public company.

Difficult economy and a late start to spring played a big role in that.

That having been said, our performance was not acceptable.

As Kevin said, we positioned ourselves to be much more aggressive until the economy improves.

I could take a couple of minutes to talk about our expansion and then some comments on our earnings guidance for the second quarter.

First of all, 2003.

During the quarter, as you know, we successfully opened 35 stores, including our entry into Southern California and San Antonio.

We continue to be very pleased with the sales performance of all of our new stores.

In March, we opened 28 stores in Los Angeles.

And in April, we opened 7 stores, three are new-market entry into San Antonio.

One store in Springfield, Mass, one store in Grand Rapids, Michigan, one store in Boston and one store in Philadelphia.

For fall, we're going to open approximately 45 new stores, almost all of which will be beginning of October.

New market entries, 10 stores into Phoenix, two in Tucson, one in Flagstaff and three in Las Vegas, as well as an additional 29 fill-in stores in existing regions.

We continue to be very committed to our remodel strategy as you know.

All the stores in Indy, Cincinnati and Dayton are currently under construction and remodel now.

They will be re-grand opening in October.

Talking about fall -- or talking about 2004 for a second, our plans are to open approximately 95 to 100 stores as a combination of new stores and new markets and fill-in stores in existing markets.

We will continue to expand our presence in the southwest region, where we can continue to leverage our regional management and distribution infrastructure that's currently in place.

We have plans to add additional stores in the greater Los Angeles area as well as market entries into Sacramento, San Diego and Fresno throughout the year.

Equally important, we will continue to deploy our fill-in strategy, which has been so successful by adding additional stores in existing markets across the country to leverage our infrastructure.

We remain very committed to our expansion plans.

We will continue to increase square footage at 18 to 20% square footage per year.

Talking a little bit about the second quarter and earnings guidance, as Arlene mentioned, we've tightened expenses for the second quarter and are doing the same as we plan our fall season.

As Kevin mentioned, we've intensified our marketing and gotten more aggressive on pricing.

Up against strong comps for the second quarter and haven't seen a change in the environment yet.

We continue to see a slower economy, less demand for apparel and priced deflation.

We believe this is a short-term situation, not a long-term problem.

As a result, we're targeting comp store sales for the second quarter to be flat to up 3%.

If these levels, we'd expect earnings to be in the range of 38 cents to 42 cents.

We believe our strategy is sound, customer traffic continues to increase, as Kevin told you, we will be well-positioned to drive the business as the environment improves.

In the meantime, you can expect us to continue to outperform our direct competitors.

On a longer term outlook, we expect to get back to mid single digit comp increases and overall top line of 20% sales growth as the economy improves.

At this point, I think we'll open it up for questions from the field.

Thank you.

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

If you have a question, you need to push the 1 on your touch-tone phone.

You will hear an acknowledgement that you've been placed in queue.

If you wish to be removed from the queue, press the pound sign.

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

If you're on a speaker phone, pick up the handset before pressing the numbers.

If there are any questions, press the 1 on your touch-tone phone.

Our first question comes from Emme Koslov from Sanford Bernstein.

Hi, thanks, question for Kevin, can we get more understanding on why you're comfortable with the high inventory levels?

You say clearance is a small part of what's there.

Are you saying the primary excess is basics and you can work with partners to delay the additional receipts?

And Arlene, how are we seeing write-off trends in the credit business?

Thanks.

Yeah, I mean, essentially we're -- we ended the quarter between 27 and 28% to last year and as you break that down, we look at it, of course, clearance and nonclearance.

Clearance is a very small part of that.

From a nonclearance standpoint, we're looking at the business and looking at which of our apparel classifications are forward.

I mentioned by far the biggest ones: shorts, capris, tees, tanks, polos.

We feel really good about the position of that inventory as it relates to where our sales come from in May, June and July.

And then secondly, we -- we definitely took an aggressive approach coming into the quarter and while we're moderating that, we're going continue to maintain a really high stock visibility on key basic categories, underwear, stocks, sleepwear, linens, towels, bedding, soap, you know, from an overall viewpoint, that's kind of why we feel on the inventory level is higher than we'd like it to be.

The mix feels pretty good.

Arlene probably would be better to answer on the credit.

On the delinquency piece, first of all, write-offs were up only modestly on the quarter versus last year.

Our write-offs being down substantially.

Bankruptcies up slightly.

But overall, the two combined were down as a percent of average receivables.

Our delinquency rate, although we don't disclose the rate itself, is actually down versus last year coming out of the quarter, as well.

Great, thanks.

Our next question comes from George Strachan from Goldman Sachs.

Please go ahead.

Thank you.

Kevin, could you comment on the payables inventory ratio down about 700 basis points year-over-year?

And how that fits into the vendor support that you're getting.

Are you getting more current support and in return for that, the terms have deteriorating a bit?

Or am I reading it wrong?

I'm probably better doing that than Kevin.

Really what you're seeing there is that the terms are consistent with what we've been running.

It is the fact that we do come in and always set spring early in the season and then blend receipts in based on rate of sale.

So, what you're seeing there is that as spring didn't start early, obviously kept -- slowed up some of the forward receipts and that's what's reflected in the 18% of inventory.

And -- and the vendor support that you're getting, because you mentioned it specifically in your discussion of gross margin, is that appear to be sustainable indefinitely going through the difficult period?

Well, it is open to question.

You know, I think what happens is, as you know, we have developed because we do have a more narrow vendor base, what I think are really unusually strong partnerships and we do provide those vendors with essentially all of their future growth, I think, when it comes to this distribution channel.

And so, you know, we're going to have really good times, and we just went through some periods of sales that we don't like as much, our vendors are going to be there for us.

We're there for them.

They know that long-term charge, this is a winning strategy, we're very focused on brand, unlike most of our competition, we're going to support their brands in our marketing and in our store and they're going to get the benefit of that in orders down the road.

So, you know, I -- I think they have been there for us in the past and they'll be there for us in the future and vice versa.

You know, Larry talked a little bit about 80 stores this year and 95 to 100 next year.

That's a lot of growth.

And one more question onto that.

Obviously, when you have high inventory levels that some of the stores get pretty hard to shop.

What are you doing with payroll on the floor to maintain your convenience advantage relative to the traditional mall anchors?

George, we're very focused on handling the inventory in stores.

I think that, you know, the lion share, the stores out there, have done an excellent job at handling the inventory.

We are not going to sacrifice putting people on the floor to handle the inventory and our operational efficiency should be able to handle it.

And I know there's been some conversation out there about a couple of our stores didn't look up to our standards.

I don't accept that at all and the company doesn't accept it.

I see us going forward looking as sharp as we ever have.

Great, thanks a lot.

Our next question comes from Deborah Weinswig from Smith Barney.

Please go ahead.

Two questions.

Larry, you had spoken about the fact that there is less demand for apparel.

Have you seen any difference in terms of sales of basics?

And where you have a little more fashion, like maybe in juniors, in terms of sales trends?

Kevin can best comment that, but --

Well, on an overall basis, you know, probably one thread that's been pretty consistent is we've been more successful with more updated sportswear, and it doesn't matter if it's missy or women or petites or juniors.

So, I think that's been a thread and it's run through.

It's also been a thread that's run through into men’s.

So, you know, you can read into that.

Customers are looking for newness, probably, looking for a new reason to buy.

That's something we're trying to recognize in the dress.

You know, that's probably the primary focus.

I don't know if that answers what you were looking for, Deborah.

That's it.

And the other question I had is in your comments you had kind of gone through, you know, the southwest and south central regions were strong and the Midwest and northeast were more difficult.

Can you discuss specifics with the regions in terms of the consumer in those regions or what might be attributing to that?

Yes, that's --

They need the coats in the Midwest and northeast and they're wearing t-shirts in the south.

We're making light of that, but to a great degree, you know, one of the biggest things that influenced that performance is that some of those stores had weather that made more sense to sell, you know, capris, tees, tanks, shorts, et cetera and, you know, the two regions we called out that were particularly low, you know, definitely faced weather issues that were very different than that.

It definitely had an impact.

Okay, great.

Thank you very much.

Our next question comes from Daniel Barry from Merrill Lynch.

Please go ahead.

Yeah, good afternoon, a follow-up question with George, you said you're going to cut expenses.

Can you give us confidence that you can cut expenses without building up lines at the stores?

I notice they seem to be building up in some areas because labor's a main expense.

How do you cut expenses but get the shop-ability you're known for?

I think it is a combination of looking at all the central expenses, but the -- the expenses that the customer sees, the neatness of our buildings, the convenience aspect of getting people in and out, which we had in a couple of those stores out your way.

We are committed to executing at a store level as we always have.

And, you know, I'm disappointed to hear some of the comments I've heard back from some of the people in New York.

We've taken the steps to address that and I can guarantee you that our stores are going to be looking sharp and we're going to take care of the customers out there.

It's a key to our success.

You're taking a lot of costs out of the central, rather than in the store?

Yeah, Dan, really because we're more proactive on second quarter and looking forward, we really have looked at all of the lines.

So, you know, we've looked at distribution and all the corporate office functions and the whole intent being to protect store payroll and to protect marketing.

Okay, great, thanks.

Our next question comes from Jeff Klinefelter from U.S.

Bancorp Piper Jaffray.

Please go ahead.

Yes, a question, really, about the price deflation comment that you made.

Curious, it seems like we've had had a lot of people comment recently, including Wal-Mart and K-Mart, about having too much seasonal inventory and apparel inventory.

You know, what gives you confidence that, you know, this will be more of a situational deflation or a temporary deflation?

And where might we see, you know, some of the strength coming back here in the back half?

Well, I think, you know, part of the price deflation issue, you know, clearly has to do, in our case, I can't comment about the other people you mentioned, but in our case, there is no question in the first quarter.

The level of our, you know, winter seasonal inventory coming into the quarter and the lack of did I mand for spring and summer-weight goods impacted the average in retail going out the door.

And I think some of those consumers, you can say it may have been further exasperated with the overall mood to not spend anyway.

But I think, in our case, people were making choices and in some situations, I think they chose lower price pointed goods that we had marked down versus newer goods which were in and the weather really wasn't right to sell.

So, that definitely affected us.

Beyond that, there is, you know, definitely some price deflation going on and, you know, as we always do, you -- because to a great extent, you know, we've seen lower prices and much of our overseas development for the last year to two as we've grown.

But to a great degree, we try to build it into product and address it that way and give the customer a little better product for the same price.

Okay.

Thank you.

Our next question comes from Bob Drbul from Lehman Brothers.

Please go ahead.

Thanks, good afternoon.

I guess two questions, the first one would be on the CFO search, can you give us an update there?

And the second one would be if you maybe could give us an update on, you know, the thought process on California, how it's going?

The expectations for the rest of the year?

How it's performing for you here?

Well, on the CFO search, I will take that one first.

As you know, we've been working with an outside recruit for that search, and I personally began interviewing the top candidates, actually beginning this weekend.

So, until I get those first people in the door, I'm not going to judge the quality of the candidates, but what I've seen from resumes, the quality of the resumes that have come in has just been tremendous.

So, I feel pretty good about what we're going to be able to do on that search.

Larry, I'll let you talk about California?

You don't want to say who the candidates are? [ Laughter ] California, we continue to be pleased with California.

It got off to a huge bank.

We see -- what we see in the market today is the opportunity for a significant amount of additional stores in the L.A. area as well as, you know, what we announced Sacramento, San Diego, Fresno.

But the whole southwest we see as a huge opportunity for us.

And we're very excited about the infrastructure that we've got in place, we've got great talent, got a great distribution facility.

Our ability to open up with a bang like that gives us a lot of confidence that -- that we made the right decision going in that direction.

So, we're very excited about the southwest.

Just as a follow-up, any time horizon where you think you might have the CFO search finalized?

Bob, until I actually begin to interview these candidates, I wouldn't want to throw a timeline out.

Okay.

Thank you.

I guess they don't like talking to me, Larry!

Next we have a question from David Cumberland from Robert Baird.

Please go ahead.

Good afternoon.

A couple of questions for Kevin.

Can you elaborate on your plan to price aggressively to drive sales, would that come in the form of adding sales events?

Or increasing discounts for your events?

Or some combination?

And the second question is -- is the rollout of new and extended brands complete in all cases?

On the -- on the marketing standpoint side, you know, I think the thrust is in marketing pieces.

Print is basically relatively equal, our focus there is more productivity and more meaningful advertising and more exciting advertising.

And broadcast, we do actually have a significant weight increase.

So, there is actually more frequency going on, and you're going see that when you watch television, you're going to see a higher rate.

You know, from a productivity standpoint on our pricing standpoint, we definitely are becoming -- going to become more aggressive with pricing and you will see that, you will see that reflect in our print pieces and see that highlighted in broadcast, as well.

As it relates to the new strategies for the most part, I think without exception they are all rolled out to all stores in the company.

So, all the things we've been talking about and actually I mentioned in the call that the response actually to much of the updated offering in both men’s and women’s has been very favorable.

Great, thank you.

Our next question comes from Ellen Schlossberg from William Blair and Company.

Please go ahead.

Thanks.

A couple of questions.

With respect to the home area, can you give us a comment on what's going on there?

And then with accessories, what's been driving that business and what -- what will be driving that business going forward?

As it relates to home, home's been basically about equal to the store in the first quarter.

And really nothing in -- within home that I would call out exceptionally one way or the other.

It kind of reflected the overall store trend.

From an accessories standpoint, you know, from a classification viewpoint, fashion, jewelry has been very good, basic accessory categories like handbags, belts and summer, spring/summer accessory items we've focused on have been pretty good.

And I think we also believe from an opportunity standpoint that the accessory business is a larger opportunity business in the second half of the year.

Do you notice a difference in the stores that have the new accessories floor set versus the other stores?

Well, we have -- Ellen, we haven't done in-depth analysis yet of looking at returns there and it is probably, honestly, going to be through the spring before we really do that.

Okay.

And then one more question with respect to the regional performance.

How much, if at all, did the maturity curve play into the results?

I would say it really didn't.

What we saw within each of the regions is what you would expect.

So, newer stores and Midwest and northeast equally had a difficult time as did the mature stores.

Okay.

So, with respect to the -- across the different regions, not necessarily within, but across the different regions, would one region have potentially done better or worse than another because there is a group further along the maturity curve?

I think with what we saw with the seasonality, it's really tough to look at this particular quarter that way.

Within the southern climates, for example, newer areas did better, obviously than mature, just as you would typically see.

If I look within a region relative to each other, Ellen, they performed as you would expect.

Okay.

Okay.

Thanks.

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

Please go ahead.

Yeah, hey.

Hi, guys, a couple of questions.

On the placing issue, you said average unit retail was down in the first quarter.

How many quarters has this been going on in terms of price pressure and deflation?

I think the first quarter is really the first one that we've had where it's been of any significance.

I mean I wouldn't say to you we haven't had a business where we've had it because we probably have, but from an across-the-board standpoint where we saw, you know, all of the different divisions down, this was the first quarter where that was that widespread.

Fourth quarter we definitely had lower average unit retails, but it was much more mixed where we saw some lower average unit retails in like import areas and didn't see it in others, but this quarter we saw it across the store.

So, can you help us understand, then, I mean if average unit retail was down in Q1, we all shopped your stores, you're extremely promotional, what's going to change here in Q2 in that you're saying you're going to get more promotional?

A couple of things, one, big, which we tried to really spend some time talking to you about in the call, is just the relative level of the clearance that we came into the first quarter with and its impact on customers making decisions during the quarter as to what they were going to buy.

So, the mix of that, the impact of clearance as a percent of our business in the first quarter was significant and it impacted the overall average unit retail.

As we look at the second quarter, clearance is a much lower percent.

Our inventories are basically all focused around key basic inventory areas and wear-now apparel businesses, like tee shirts, polos.

I think you're going see a much lower impact overall.

I would expect after unit retail to probably be down in the second quarter.

I think it's just a relative degree, and we're going to drive marketing and that pricing component, the units and the transaction counts in the store up, and I think one of the positive things coming out of the first quarter that we do feel very good about is we had more footsteps in our stores.

More people shopping in our stores than last year.

Okay.

And then last, it sounds like you're tightening the belt on corporate, but marketing, it sounds like you're going to invest there.

So, should we be thinking SG&A dollars are going to grow less in Q2?

Or the same as it was in Q1?

Can you give us a sense how those two weigh one against the other?

I think the most important thing is for you to just realize we have really adjusted expenses to allow Kevin to drive the business, and we will make sure we do the right thing from the expense as far as where we're investing it.

At this point, Dana, we're not going to give you the numbers, but we really looked at where are the right places to cut expenses.

Great.

Thank you.

Our next question comes from Michael Exstein from Credit Suisse First Boston.

Please go ahead.

Good afternoon, everyone.

Two quick questions, one, can you talk about the convenience side of your message and whether you're going to intensify that?

It is certainly something that your mall-based competitors can't counter very easily.

And secondly, when you talked about the long-term sort of view about the company, I think I heard you talk about 20% revenue growth and is that -- that sounds to me like you're talking about decelerating the revenue growth assumption going forward?

Well, first of all, we're not going to decelerate the revenue growth.

Our plans are to, you know, once the economy turns around, as we told you for the second quarter, and for the early stages of planning for fall, we're going to plan very conservative until we see the business turn around.

And then with our vendor partner jump on and make it happen.

I mean we're going to play conservatively until then.

But we would certainly expect as the economy turns around to go back to the former model that we've always talked about which is 5% comp and 20% top line growth and 20% bottom line growth.

There is no change in strategy in terms of what we want to ultimately accomplish.

In terms of the convenience factor, you know, that's one thing we have over our competition pretty significantly.

As you look at the growth where we're committed to that 18 to 20% square footage growth every year.

You know, half of those stores enhance the convenience aspect in existing markets.

We continue to go back in and add where we can do additional volume and create additional convenience.

At the same time, we continue to look at our in-store formula to find out better ways to serve the customer and get them out quickly.

So, we're committed to convenience being a key element in our success going forward.

Thanks a lot.

Our next question comes from Christine Augustine from Bear Stearns.

Please go ahead.

Thank you.

I have two questions.

The first is: Is there a specific strategy to deal with the intensified competition in the moderate apparel arena from the department stores?

And particularly with the more kind of classic and -- I guess I call them more mature brands.

And my second question is, I'm kind of surprised that you're saying flat to up 3% comps given your outlook, you know, for the overall macro environment continuing to be soft.

Because it is still a pretty big swing from what you did in the first quarter.

So, are you counting on the weather turning?

Is that really the swing factor?

Or is there something else you're seeing in the last few weeks to give you more confidence?

You take the first part of the that.

This is Kevin, on the first part as it relates, I think what you're asking is as you look at our business, you know, there are certainly some moderate traditional brands that are performing worse than the store.

Those, though, you know, as I said, have been balanced by pretty much the strategies that we tested and then rolled out on many of the more updated brands.

So, we have had great success in both men’s and women’s with, for instance, Access.

We've had great success in women’s, for instance, with 9 and Co. Great success in men’s with the launch of Excess.

So, there are clearly other brands that are growing dramatically and I think that's a part of that solution, is that on some of the -- as some of the traditional brands are not doing as well, you've got to have choices for customers for something new and something exciting and they're responding to those.

As it relates to the other piece, Larry --

Yeah, you know, we're talking about the weather for a second, I don't want to be a meteorologist here, but you know, we've seen some positive trends where we've had some halfway decent weather out there, I'd expect we'd get some sooner or later.

We have hope as far as that goes.

More importantly to that is what Kevin talked about in terms of our being pleased with the content of our inventory, the low level of clearance we have relative to the first quarter.

And the fact that what we own is definitely, you know, warm weather kind of apparel out there, and we're going to be promote it right and get more than our fair share of market share.

So, that is something that we believe pretty strongly in and believe we can execute that.

Does that answer your question, Christine?

Thank you.

Okay.

We have time for one last question.

Our final question comes from Shari Eberts from JP Morgan.

Please go ahead.

Hi, everybody, a couple of quick questions, just in terms of the tighter expenses, can you update us now where you think you can leverage expenses and what kind of comp?

Well, obviously we've guided to a lower comp, in that Larry's talking 0 to 3%.

And obviously within those ranges, we're saying we're able to leverage expenses because that's what's going to drive with Kevin to be able to be sharper on pricing.

Okay.

So it used to be 3 -- you've planned expenses up 3% and that's where you would hold expense leverage flat now at sort of 0 to 3?

Yes, within the 0 to 3 we will be able to leverage.

Okay.

And then in terms of the pricing adjustments that you're going to be making going forward, was just curious how much of that would be vendor-supported versus what will be a direct impact on your gross margin going forward?

There's a loaded question for you.

It's a combination of both, Sheri.

I mean we're definitely, you know, we -- we're committed to enter the second half of the year with our inventories right and efficient, and it's in the best interest of our part to do it and our vendors and there is just as committed to make sure that we're ready, willing and able to buy second half and going forward.

So, it will be a combination, as I said earlier, I think we're really a growth vehicle for those people and they recognize that.

And we recognize that their brands are what the store is all about.

Okay, but we should expect to see gross margin pressure continue a little bit, I would assume, given that the more price-intensive strategy?

Well, we said -- I think Arlene kind of answered that on the expense side earlier, which is what you've got focus on is operating margin, and we're going to drive expenses down and we're going to allow us to drive prices to the level that will create demand and we're going to get to the operating margin that Larry described in the guidance.

Gotcha.

And just last question, Kevin, I hoped you could just talk through your internal planning process for same-store sales?

You know, how you got to the 0 to 3.

Is it from each individual store?

How much macro environment is included in that?

Just your thought process, how you get to that.

I think the way we tried to look at it is, you know, we're coming out of a period where we were definitely disappointed and the performance was not in one or two areas.

It was across the store.

We did have a couple of businesses like accessories that did better, but they were off of their trend lines, as well.

So, generally we kind of took the viewpoint that it's an overall impact and we kind of have to look at each of the businesses equally and we can't could not one of the businesses to run big increase to carry us.

And then, you know, planning receipts based that, Shari, so that those receipts reflect that kind of sales trend, of course by area, and are going to position us so that come August 1, those inventories which are now 28% almost are going to be down in the low 20% range.

It's not any more complex than that.

Okay.

Thanks very much.

Okay.

Okay with that, we'd like to thank everybody for participating and anybody that needs to call me directly, you have my number.

Thanks.

This concludes today's teleconference.

Thank you for participating.

You may all disconnect at this time.