柯爾百貨 (KSS) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen and welcome to Kohl's Department Store's second quarter earnings release conference call.

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

Later, we will conduct the question and answer session.

Before we begin, 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 terminology such as; plans, beliefs, expects may, well, should, anticipates or similar expressions.

These statements are subject to certain risks and uncertainties which could cause Kohl's'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 99.1 to Kohl's's annual reports on form 10 k and other factors as may periodically be described in Kohl's's filings with the S.E.C.

Also, please note that the replays of this call will be available for 30 days but this recording will not be updated so if you are listening after August 14, 2003, it is possible that the information discussed is no longer current.

I will now like to turn the call over to Miss Arlene Meier, Chief Operating Officer.

Miss Meier, you may begin.

Thank you.

Thank you for joining us this afternoon.

With me this afternoon are Larry Montgomery, Kevin Mansell and also with me today is Wes McDonald.

Wes just joined us on August 4th as our new Chief Financial Officer.

Wes comes to us from Abercrombie & Fitch where he served as CFO for the last three years and prior to that, he served for 12 years in various positions with Target.

So, we're very glad to have Wes on board and hopefully you all will spend quite a bit of time with him in the near future.

Let me give you a rundown of the P&L and the balance sheet and then both Kevin and Larry will comment on the business.

First, on the P&L side, as you know for the quarter we had a comp store sales increase of 1.1%, that was on top of the 10.6% increase a year ago.

Total sales increased 14.9% on top of a 26.8% increase last year.

On a year-to-date basis, comp store sales were actually down 7.10% compared to a 9.6% increase last year.

Total sales for the first half, up 14.1% on top of 26.2% increase last year.

During the second quarter, transactions in comp stores increased 3.4% while average transactions declined 2.3%.

On a year-to-date basis, transactions increased 2.5% in comp store while average transactions declined 3.1%.

From the gross margin standpoint for the quarter on a FIFO basis, gross margin was 33.4% compared to 35.9% last year.

On a year-to-date basis, 34.2% compared to 35.6% last year.

FIFO margin rate for second quarter was down about 250 basis points compared to last year.

On a year-to-date basis, down about 140 basis points versus a year ago.

We haven't provided anything for LIFO this year.

As you know, there's no inflation, so there's no LIFO provision on the quarter or year-to-date and that 250 basis point decline in margin reflected the fact that as we all told you coming into the quarter, we were going to be very aggressive during the quarter to drive the selling of seasonal merchandise and allow us to be properly set for back to school.

So as you look forward, that is behind us and our plans for the fall season is for gross margin rates to be flat to last year.

From an expense standpoint on the quarter, SG&A was 21.45% compared to 22.05 last year, an improvement of 50 basis points.

On a year-to-date basis, 21.9% compared to 22% last year, so, slight leverage of about 12 basis points year-to-date.

We're pretty pleased as you all know, we took a tough stance on expenses coming into the second quarter after a pretty disappointing first quarter.

So, we're very pleased with the management of expenses for the quarter.

However, the significant reduction in SG&A rate that I just mentioned versus last year is primarily attributable to our incentive compensation program.

With no increase in earnings versus last year on the first half, we have not earned a bonus under this plan.

So it's substantially different than a year ago when we ran 40% increase in earnings over the year before for the first half of the year.

We have completed the planning of fall expenses, as you know, we were targeting expenses based on no comp store sales increase, as expenses flex up with sales increases over the course of the season, we would expect to leverage 10 to 15 basis points in SG&A at a 3% comp store increase.

We feel very good about that plan.

Depreciation and amortization, 57 million on the quarter compared to a year ago, up about 20%.

Year-to-date, 112 million compared to 91 last year, so up about 23%.

Preopening expense, As you know, we opened 35 stores in the first half of the year compared to 38 stores last year.

We planned to open 50 stores in the third quarter compared to 37 stores a year ago.

On the quarter, we incurred about $2.5 million of preopening expense, it's all related to stores opening in the third quarter.

That represents about 10% of the total costs that will be incurred for those 50 stores.

So our expectation is that in total, we'll spend on average $500,000 per store for those 50 stores.

To give you a little bit of guidance for the fourth quarter: We plan to open approximately 95 new stores in 2004.

We expect about half of those stores will open in Q1.

On average, we would likewise expect to spend about a half a million dollars at the store and we would expect about 25% of that to fall into the fourth quarter of this year.

Operating income on the quarter, 203 million compared to 213 last year, down about 4.5%.

Keep in mind that 2002, the quarter had an increase of 39.8% over the year before.

Year-to-date, about 400 million in operating income compared to 397 million last year.

So, up slightly on top of the 39.4% increase for the first half last year.

Interest expense on the quarter, about 23 million in interest expense compared to 13 million last year.

Year-to-date, 41 million compared to 25.6 million the year before and we previously told you, we did redeem the convertible debt in June.

That Q2 interest expense includes a write-off of about $6 million of deferred financing fees.

As you look forward at Q3 and Q4, it would really be comparable to Q2 if you backed up the different financing fees.

So we would expect to spend roughly 17 million a quarter in the fall season.

Tax provision has not changed, though we are continuing to provide at 37.8%, that's comparable to a year ago, comparable to what we reserved in the first quarter.

Bottom line net income on the quarter, about 112 million compared to 124 million a year ago, 9.8% decline compared to a 43.8% increase a year ago.

Year-to-date, 223 million compared to 231 last year, a decline of 3.4% but again, against a 43% increase a year ago.

Bottom line EPS, 33 cents on the quarter and 65 cents year-to-date.

Square footage, Let me give you square footage for each of your models.

As you look at the end of second quarter, gross square footage 43,691 and selling square footage, 37,320.

So about 18% increase over last year.

With the stores that we planned to open in the fall season, we expect to end the year at 48,328 gross, 41,100 selling about a 19.7% increase in square footage on the year.

Now let me hit two or three of the highlights on the balance sheet.

First accounts receivable at the end of the quarter about 950 million compared to 828 million last year, just under a 15% increase.

Kohl's's charge sales were actually up about 19% over a year ago.

Our share, 34.8% year-to-date compared to 33.4% last year.

So our direct marketing and loyalty programs continue to drive great traffic increase into the store.

From a quality of the portfolio, payment rates continue to be higher than a year ago.

We're looking at about 30% payment rate compared to about 28% last year.

The turnover of the file, 3.5 times this year compared to 3.3 last year.

Again, we continue to be very pleased with the quality of the portfolio.

As a percent of receivables, write-offs were comparable to last year and the reserve for bad debt at the end of the quarter is about 2.2% of receivables, again, comparable to last year.

From an inventory standpoint, total inventory at cost, a billion 716 against a billion 454 last year and 18% increase in inventory, which is very much now in line with our square footage growth and I know Kevin's going to spend some time talking about that as well.

From an accounts payable standpoint at the end of the quarter, 702 million compared to 590 a year ago, an 18.8% increase, accounts payable as a percent of inventory, 40.9% this year compared to 40.6% a year ago.

So as we look forward to fall season, we would expect that ratio to be pretty consistent both third and fourth quarter with our Q2 level.

From a capital expenditure standpoint in the quarter, we spend about 212 million, year-to-date about 335 million.

We still expect that we'll spend between 800 and 825 million for the full fiscal year.

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

Thanks, Arlene.

Let me take you through some of the elements.

We'll start with the sales performance for the second quarter.

Well, obviously we're not happy with the second quarter or the first half sales performance overall, we are pleased with the liquidation of our clearance and the repositioning of our inventories for back to school and for the fall season.

As you know, we are more aggressive in our clearance efforts and are now well ahead of last year's liquidation in our kids, young men's and juniors area as we enter back to school and in line with last year everywhere else.

On a positive note as well, our basic businesses throughout the store in both apparel and home continue to do well and perform well over last year's level.

In addition, our get it and table and tower programs continue to increase in penetration.

Most positively of all, comp store traffic counts for the quarters were up, with July transactions up 7.5% over last year indicating continued market share gains.

From a regional perspective, all regions were up against strong comp increases last year and the company this year was up 1.1% for the quarter.

This year, the best regions for the quarter and for year-to-date were South Central and Southeast, which were up mid single digits.

Most difficult regions were the Midwest, Mid-Atlantic and Northeast.

From a merchandise category perspective, comp store sales results didn't vary widely among our six major business groups in neither the quarter nor the half.

Young men's and children's areas led the company but all six major groups performance were within three or four points of one another.

Naturally, seasonal categories such as shirts and capris struggle the most along with areas like summer home.

Across the store, basic businesses such as socks, underwear and sleepwear and apparel and basics in home did the best.

To talk a little about inventory in the liquidation of our clearance.

As I said, we have cleared the largest part of our seasonal merchandise.

Although it affected profitability in the quarter, it was required for us to be comfortable with the overall level of our inventory, the content of it and our positioning for the back half of the year.

We feel we've accomplished all of that.

We have planned inventory based on a 3% sales increase for the fall season.

We have funded and remained committed to being in stock on basics, table and tower and our get it programs.

Our strong vendor partnerships, especially in these businesses, allow us to replenish as sales would increase over that level.

We are planning to end the third quarter with an inventory increase in the mid to high teens, essentially flat comp stores compared to last year.

At the end of the year, we expect inventory to be up only single digit in total and down on a comp store basis as we ended last year much heavier than we wanted.

Looking forward into the third quarter, we had a fairly strong third quarter last year and achieved a 5.9% comp for the quarter.

That was a combination of a 4% increase in August and a decline in September of 3.2 and a double digit increase of 18.3 in October.

As I just indicated by our sales and inventory plans, we are approaching fall seasonal apparel more conservatively until we see a change in the consumer mentality.

We continue to be focused in all of our efforts and our traditional core customer as it has always been that customers of middle income, family oriented female consumer with a core customer's age being 35 to 55 years old.

Focusing on her, means delivering her basics in stock without exception and supporting our most important initiatives of key items for our get it and table and tower programs and the rest of apparel we are focused on providing her with the same traditional stable brands that she has wanted in the past and have now added some more updated brands, as well, to drive incremental sales.

From a marketing standpoint as we enter fall, we have strengthened our print, increased our direct mail efforts and dramatically increased our broadcast on events primarily through national network television and radio.

I'm going to turn it over to Larry to talk about expansion.

Thanks, Kevin.

Just a couple of opening comments after Kevin and Arlene talked.

It's been a pretty difficult first half of the year but as both Kevin and Arlene outlined, we're well positioned for the second half of the year.

We're very pleased with the start of our back to school business with the selling in the stores, but we recognize that it's only a couple of weeks and we're going to remain with our conservative plan until we see a sustainable trend.

A couple of comments on expansion.

During the first half of the year, we successfully opened 35 new stores including our entry into Southern California and San Antonio.

We're very pleased with the sales performance of these new stores as they continue to run at our first-year productivity expectation of between 70 and 80% of a mature store.

Now, we had previously announced 80 stores for the full year 2003, we're now planning 85 stores.

That's just a little bit less than 20% square footage growth.

That will put us at 542 stores at the end of the fiscal year and for fall, we're going to open up 52 new stores, 48 in October and 2 in August.

New market entries, 10 stores in Phoenix, 2 in Tucson, 1 in Flagstaff, 3 in Las Vegas, 3 in Little Rock and 2 in Birmingham.

We continue in still existing markets with 29 stores. 11 stores in the Midwest, 5 in the Mid-Atlantic, 5 in the Northeast, 4 in the Southeast, 2 in the South Central and 2 in the Southwest.

Talking about 2004, our plan for 2004 is to open 95 stores, which is about an 18% square footage growth, that will be a combination of new stores and new markets and fill-in stores in existing markets.

We'll continue to expand our presence in the Southwest region where we can leverage the regional management and distribution infrastructure that's already in place.

About half the new stores will be opening in the spring and they will include new market entries into Sacramento, San Diego and Fresno, California.

Equally important, we'll continue our fill-in strategy that's been so successful by adding additional stores in existing regions across the country.

Comment on earnings guidance, As Arlene mentioned, we've tightened our expense controls for the fall season.

As Kevin mentioned, we have intensified our marketing and gotten more agressive on pricing, consensus is currently at 44 cents for the third quarter, that is consistent with our guidance for a 3% comp for the quarter.

With that, we are ready to take any questions there may be.

Thank you.

We will now open the question and answer session to south side and by side analysts.

If you have a question, you will need to push star one on your touch-tone phone.

You will send acknowledgement that you have been placed in queue.

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

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

If you are using a speaker phone, please pick up the handset before pressing the numbers.

Once again, for any questions, please press star one on your touch-tone phone.

One moment, please.

And our first question comes from George Strachan from Goldman Sachs.

Please go ahead.

Thank you and congratulations on the inventory reduction, it's been amazing to watch the clearance racks melt away in recent weeks.

If I may, I'd like to ask a big picture question about top line growth.

Historically, it's been a big productivity gain component and it's clear that the square footage component remains in tact.

I guess the question a lot of us have is you are now at $240 more or less, that is $100 above penny and you've had tremendous success at adding all of the key middle market brands.

You've densified the inventory, you've gotten into a lot of the big four season markets and obviously get it and table and tower have been a huge success.

What do you see as the drivers of productivity going forward and do you even need them to achieve 20% earnings growth on a go forward basis?

That's a large question, George.

I think we'll all chime in a little bit but I think that our growth strategy continues to be about 18% to 20% square footage growth.

I think that we have tremendous opportunity for productivity improvement in all those classifications of business you just talked about.

I think table and tower and get it, I think we see huge improvements in those.

I see us looking at our box in general and looking for improvements there.

You got anything to add to that?

There is this area we wouldn't tell you that as we look at it that we feel like we haven't left sales on the table.

So I think there's just huge opportunity to keep driving more volume out of those same boxes.

Kevin, you have a lot of initiatives that are going on, but --

I echo the same thing.

There's no line in our merchandise category groupings that we don't feel have opportunity to grow.

There are clearly areas of the store that don't produce at the same level as the store total and they can grow dramatically, so, we think there's plenty of opportunity to grow.

And what about the Southern markets as opposed to Northern markets in general?

You know, we've had some conversation about four season markets being, generally speaking, more productive.

And obviously lately we've been focusing on more Southern markets.

Is that a factor at all?

I mean, I think Kevin outlined for you, George, the fact that the Midwest, the Mid-Atlantic and Northeast, the four season markets as you call them were our toughest markets.

Actually, the best performing markets were in the South and I think we're trying to make sure that we end up with a balance of markets in all different climactic situations.

I think it helps balance out our sales performance and obviously, we've got opportunity for much more growth in the South and Southwest and Southeast than we do in the Central part of the country right now.

So, our strategy remains the same.

So we're going to zero in on $200 a square foot basically?

Got to set the hurdle high, right?

I think that we always set the hurdle pretty high.

There isn't one line on our operating statement that we don't look to have improvement and productivity.

Thank you very much.

Our next question comes from Emme Kozloff from Sanford Bernstein.

Please go ahead.

Hi.

Can you talk a lit about the competitive environment?

We've heard some mixed results, so far, for early back to school sales trends from various retailers.

Are you seeing or anticipating high levels of promotional activity in the market and is that price deflation imbedded in the flat gross margin expectations, if I heard that correctly?

Thanks.

It's Kevin, and I think from a competitive standpoint promotionally, you know, we're like 2 1/2, 3 weeks into back to school.

I haven't seen any significant increase in promotional activity from anybody.

It is intense at back to school, outside of holiday, it's probably the most intense promoting period the whole year for retail.

That's true this year as well.

So, I haven't seen a dramatic change there.

The deflation piece, you know, yeah, it's factored into both our sales guidance and it's factored into our margin guidance as well and you know that the way we've tried to address deflation in apparel, which has been a significant factor for probably the last 12 to 18 months is to, you know, where we can sometimes improve the value equation and offer a better product so we don't have to lower the retail sold and then other cases actually go right at it and pass the savings completely onto the customer and try to get more market share.

So, that is part of both the sales and margin guidance.

Great.

Thanks.

Our next question comes from Daniel Barry from Merrill Lynch.

Please go ahead.

Yeah, good afternoon.

When you went into California, there was a lot of concern you might have trouble there because of the high ethnic mix.

How have you done in those special markets and obviously doing okay there but are you learning anything new that you didn't know before that may give us some confidence that you possibly could do better with the stores you are opening in California next year?

I think our focus is every time we open a new group of stores to do better.

We certainly learned some things there but our productivity in those stores in L.A. is right where we thought it would be.

I think as you look at it by different classifications of business, there's going to be different opportunities.

We're pleased with what we're seeing and will be very aggressive with opening up new stores out there.

Was the mix, the variation among the stores about the same as a new store opening?

Variations in terms of content you mean?

No, in terms of the sales you are getting in the stores.

I mean it's like any other market we have.

I mean, there are higher volume stores based on density and lower volume stores based on density that maybe are in high growth areas.

So in every major way, this is more or less a normal opening.

It really is, Dan, and even as you look towards the fall as you look at Phoenix and Vegas and other markets looking to open, just like any other market, we're doing from a greenfield standpoint, we're looking for 70 to 75% productivity out of those stores.

And that will be true if we come back and add stores in California next spring as well.

We'll continue to look at that market entry which is 70 and 75%.

That's great, thanks.

And our next question comes from Deborah Weinswig from Smith Barney.

Please go ahead.

Thank you.

Great quarter considering the environment.

What did you learn from the first half of 2003 that will change how you operate going forward?

I think we outlined that pretty well throughout our presentation today, and that is we're going to be conservative in the way we plan or sales.

We're going to have a real hard look at every line on the expense part of the business in terms of trying to increase productivity and we're also going to have a very keen eye in terms of making sure that our level of inventory and content of our inventory is the most productive that we can make it.

So, I think those three things right there, I mean, started out with an inventory issue, we don't have it anymore and our planning is in line with what we think is a reasonable expectation until we see the business turn around.

Okay, and then Kevin at the analyst meeting, you had discussed maybe being a little more focused on fashion.

Can you update us on your thoughts there?

Sure.

And you know, it's some extent I tried to address that actually in the comments and you know, I want to make sure that we're really clear on this because in our effort, I think to keep everybody updated on, you know, new initiatives at Kohl's which are part of our overall success as we add new brands or develop new concepts, that's certainly part of our growth.

But in that effort, I think we communicated or certainly was read as, if we were very focused on a younger, more updated customer and a younger more updated customer is part of our merchandise mix, there's absolutely no question about it, but the core customer we had is still the same core customer we've always had and that's where most all of our focus is to key brands that we've grown with, the key brands that are part of our assortments in men's and women's apparel are the same key brands today and we see just as much growth.

We just think that that updated portion is potentially incremental to that and we're not going to leave it not to be done.

So we are going to go after it but our focus 100% is on the core customer we've always had and I, you know, I would really emphasize that to you.

I don't know if that was a poor process in ours in terms of communicating or if it was misread but it is not the fact, we're very focused on the same customer we've always had.

Okay and a last quick question.

Larry, can you update us on the small store test?

As you know, we opened up four small stores last third quarter about a year ago.

We said it'd take us through our second holiday to figure out exactly how that would fit into our long-term strategy.

I think we will have a pretty good idea by the end of the year, but the company is primarily focused on, you know, continued growth of our existing prototype which we see for a long period of time.

Great.

Thanks so much.

You bet.

And our next question comes from Bruce Missett from Morgan Stanley.

Please go ahead.

Hi, I never pushed the button to ask a question but I will ask one.

Does the black out on the EaStrachan Seaboard affect comp store sales for the month of August?

We're not sure.

Depends on how long it lasts.

I didn't expect all you guys to be on the phone with the black out there.

It really is funny, since we're largely out of power, I didn't push any buttons to ask a question but I appreciate the operator putting me through.

I'll actually pass on anything more serious than my last question.

Nice talking to you, Bruce.

Our next question comes from Linda Kristiansen from UBS.

Please go ahead.

Hi.

I have two questions.

One, can you give us a number of what the clearance inventory was as a percent of total inventory at the end of the second quarter versus the second quarter last year?

And also, on the table and tower program, I understand you made some changes there, maybe pulled back on the number of tables but also shifted maybe more impactful merchandise.

Could you talk a little more about that, Kevin?

Sure.

As it relates to question one, I don't think we've ever talked about what specifically clearance is a percent of our total inventory in dollars and units.

I wouldn't want to start that now.

It would vary anyway, as you go through the course of the year as you transition season to season.

I tried to address it, Linda, by updating it as it compares to last year at this time, you know, we were more aggressive, particularly in the younger businesses because we felt like we really needed to be positioned for back to school and young men's, juniors, kids.

So, we're actually in quite a bit better shape than an average store in those businesses compared to last year and in the rest of the store, we're pretty much equal to last year at this point in time.

And also point out to you last year at this time, we were coming off of an incredible first half for the level that we had was very small.

As it relates to table and tower, you know, we have table and tower is roughly a couple of years old and we, you know, continued to learn about content and fixturization in our effort and in that effort as we enter fall, we have reduced the number of fixture locations, you know, roughly by 10% to 15% in the stores by eliminating things, items, categories that consistently didn't perform and they didn't work well as a program.

So, you know, on the top line roughly we probably have 10% to 15% less fixtures as we go into holiday and come out of holiday and it is a much more focused approach, so it's more tied together than it was in the past.

Is it more national brands oriented than it was or?

No, I think the mix is probably pretty similar.

It's a pretty good mix of both branded and branded.

Thanks a lot.

Our next question comes from Christine Augustine from, Burst, I'm sorry, Bear Stearns New York.

Hi, thank you.

My fist question is related to systems.

When you decide what type of systems to implement or which ones that you want to enhance, what other retailers do you benchmark and how would you assess your systems versus the retailers that you are benchmarking?

Boy, that's a loaded question.

When we're looking at systems, obviously we're talking with, you know, anything that's available out there from a package software, we look at things that are customized.

We do a lot of things internally.

Typically, we look at discounters and what is at Target and what is at Wal-Mart.

Quite often, people like that and what they are doing because they tend to be ahead of the department stores.

You know, we feel very good, you know about our system.

Typically, we're far ahead of any other traditional department store and I know there's some feeling out there that systems may have created some of our inventory issues this spring and I guess I just want to take the opportunity to assure you all that our inventory level had nothing to do with the system, it totally had to do with the fact that we came in planning for a mid single digit comp store increase both in fourth quarter and the fist quarter and that just simply didn't happen.

So I don't want you to think that there's any issue with our system that you're looking at and I don't know if there's anything more, Kevin that you want to add.

No, the only other part would I add is part of the same piece is I know there have been some things written that in addition to systems may be impacting the inventory number that somehow new programs that we rolled out last year in planning our assortments also impacted that and that's totally off base and could not be further from the truth because we are just barely in a pilot stage with the new assortment planning tool.

We just are beginning that, so, it's the same answer Arlene just gave you.

Okay.

My second question is for the comps in the third quarter, you're guiding to a 3% comp but the comparisons are pretty varied from August to September and then October.

Should we assume that you will have a negative come in October versus the tough comparison?

Ask us that after we get through August and September.

Okay.

To be quite honest with you, as you try to look at the months in the quarter, a lot from a timing of where that comp comes kind of depends on when you start to see selling of fall apparel.

You know, right now, we're in back to school.

We would hope to begin the fall will begin to happen in September but as you know, that didn't happen until October last year.

Okay.

Thank you.

Our next question comes from Sandra Barker from Monseck & Caldwell.

Please go ahead.

Hi.

Could you talk about your plans for private label as a percentage of the mix going forward and do you see that changing at all?

And secondly, just interested in what feedback you have gotten from customers as you've been through this period of very deep markdowns and some issues with storehouse keeping.

I'm just wondering how that has affected or has it affected sort of the consumer's perception of Kohl's or their willingness now to go back and buy at lesser markdowns?

It's Kevin.

Let me answer part of that and then maybe I will have Larry address part of it as well.

As it relates to our private brands business, we've historically, depending upon the season, been somewhere between 20 and 25% kind of private brands and they've mainly focused around Sonoma and Croft & Barrel, that's the bulk of our private business.

Nothing about that really changed in the spring.

Penetration was in the mid, I'd say 22, 23% which is pretty close to where it was last year, there wasn't anything dramatic there and we don't have really any plans to change that.

You know, our concept it is built and very focused on national brands and it will continue to be that.

So, private brands have a very meaningful part of our overall strategies but in relation to our total, will continue to be around 25% or so.

As for as consumer feedback, I think, to answer that two parts.

We'll let Larry talk about the store, you know, operations piece.

As it relates to just the pricing and the pricing levels we had togo to in order to get to the level of inventory we wanted to be, you know, clearance is part of our value equation and it's a really integral, critical part of it and our customer enjoys it and they get surprised regularly by what they are able to find and I think are really happy with what they are able to find.

So, I certainly haven't had any feedback that way and I wouldn't expect so because I think they just expect that and various times to be a larger part of our overall mix and that was the case recently.

As it relates to stores, I'll let Larry talk to that.

Yeah, I think with the amount of clearance that we had in our stores, you know, in the good part of the second quarter, the stores didn't look as good as what they normally do, the customer certainly got some great values.

We talked a lot about transactions being up and kept on driving people into the store.

In July, our transactions were up, you know, over 7%, which I don't think is a lot of other retailers out there getting that kind of foot traffic and so, you know, they get pretty good deals.

But as we said, we're pretty pleased with the start of our back to school season.

It's only a couple of weeks, we're clearly seeing an indication that they're interested in buying forward merchandise.

Great, thank you.

And we have time for one last question and this one comes from Deena Friedman from Piper Jaffray.

Please go ahead.

Hi, good afternoon.

My two questions are number one, in light of Wal-Mart's Levi's launch, have you seen any changes in your denim sales and number two, any plans to introduce additional brands in the next couple of months?

It's Kevin.

I'll take them one at a time.

Denim, we're just like essentially three weeks probably into back to school.

Denim, overall, has been good but we're only part of the way through back to school, so the story will have to play out.

As it relates specifically to Levi, essentially, the answer is, we essentially haven't really seen any effect.

I mean, Levi trends are at or better than they were before.

So, I think we feel pretty good about that and if I got new brands in the terms of the next few months, no.

You know about the new brands we introduced this year and we're focused on getting those right in the stores and in the right level and it continues to be two big areas, young men's and boys with a whole group of fashion brands and then men's and women's apparel with a couple more updated brands.

Great.

Thanks a lot.

Okay with, that, it wraps up the call today.

I particularly appreciate you folks on the East Coast, who don't have any power, that participated in the call.

So any other questions, give me a call directly.

Thank you, ladies and gentlemen.

This does conclude our Kohl's Department Store second quarter earnings release conference call.

You may disconnect and thank you for participating.