柯爾百貨 (KSS) 2003 Q3 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Kohl's department store's third 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.

I would now like to turn the call over to Mr. Wes McDonald, Chief Financial Officer.

Mr. McDonald, you may begin.

Thank you.

Good afternoon.

With me today are Larry Montgomery, CEO;

Kevin Mansel, President; and Arlene Meier, COO of Kohl's Corporation.

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 view 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 are subject to certain risks and uncertainties which would 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 99.1 in Kohl's Annual Report on Form 10-K 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.

So if you are listening after December 13, 2003, it is possible that the information discussed is no longer current.

With that I'll turn the call over to Arlene Meier.

Thanks, Wes.

First, I'm going to run you through the P&L for the quarter as well as the balance sheet at the end of the quarter.

So highlights, obviously, you all have already seen sales performance on the quarter. $2.4 billion in sales, but an 11.7% increase over last year, bringing year to date to about $6.7 billion, about a 13% increase over last year.

In looking at the quarter, transactions in comp stores increased about 1.5% over last year while average transaction declined about 2.9%.

On a year-to-date basis, transactions in comp stores are up 2% while average transaction declined about 3%.

From a gross margin standpoint on a [inaudible] basis on the quarter and year to date, 34.1%.

The quarter last year, 34.8% and year to date 35.3%.

I think you all are aware that we are not providing anything for LIFO this year because at this point we really haven't seen obviously any inflation.

When you look at the quarter, the decline in margin rate -- and Kevin will speak to this a little bit further when he is talking to each of you -- but the decline in margin rate for the quarter was primarily attributable to women's apparel.

We took deeper mark downs in the quarter, both promotionally and permanent, to make sure that we were appropriately positioned for the holiday season.

And as I said, Kevin will spend a few more minutes talking about that.

From an SG&A standpoint, on the quarter $524 million compared to $455 million last year, up 15% over a year ago, and year to date SG&A expenses are up 14% over last year.

We are very pleased with the strategy that we took in fall season.

As you all know, we took a little different approach to planning our expenses and that worked very well for us on the quarter.

During the quarter, store expenses increased in line with the increase in the number of stores.

So as you know, we now operate 542 stores compared to 457 stores a year ago.

It's about a 19% increase in store growth.

Advertising expenses were basically the same percent to sales as last year.

And as planned, our distribution centers, credit and corporate office were all able to show good leverage with no comp store sales increase.

We would expect to see that similarly in fourth quarter.

The expense plans for fourth quarter were done similar to third quarter.

They are based from a bottom-up approach off of a flat comp.

And, again, as we look to leverage, we can leverage expenses at a modest comp store sales increase for the quarter.

Turning to depreciation amortization.

For the quarter, about 60 million this year compared to 49 million last year and year to date 172 million against 140 last year.

So both the quarter and year to date up about 22% which, as you're aware, the majority of those increases are a result of new store openings in our remodel programs.

From a preopening standpoint on the quarter, about $21 million in preopening expenses compared to $11.7 million a year ago.

Year to date about $39 million compared to $31.6 last year.

And we opened 50 stores during the third quarter mostly in October, as you are aware.

A year ago we opened 37 stores in the quarter, so the number of openings in the quarter was up significantly.

Approximately 90% of the preopening costs for those 50 stores were incurred in the third quarter.

Average preopenings for those stores ran in total about $480,000 per store.

When you combine that with the stores we opened in the first half of the year, the average of all 85 stores opened in this fiscal year was about $550,000 a store.

Hopefully you all saw the release so you know we are planning to open 95 new stores next year with about half of those stores being in the first quarter.

We would expect similar to this year to incur about $550,000 a store in preopening, so that gives you guidance in fourth quarter our expectation we would spend about 25% of those costs in the fourth quarter.

Moving further down the P&L from an operating income standpoint on the quarter, $210.6 million, 8.8% of sales.

Year to date $610 million, 9.1% of sales.

Interest expense on the quarter was about $16 million.

Year to date $56.7 million.

As you look at Q4, it should be fairly comparable to Q3 in your model.

So I would expect we'll probably run between $16 and $17 million in interest expense in Q4.

From a tax provision, the provision on the quarter was similar to what you've seen all year and last year, 37.8%.

Bottom line net income on the quarter about $121 million, 5.1% of sales.

Same percent of sales year to date, $344 million of income.

That resulted in EPS on the quarter as we had guided you when we released our sales this last month, of 35 cents and the year to date $1 a share.

For those of you that put square footage in your model, where we ended Q3 and therefore, we'll also end Q4 because we've opened all stores: Gross 48,414,000 square feet selling for those of you that track off of selling, 41,447 both being up 20% over last year.

Moving to the balance sheet.

Accounts receivable at the end of the quarter, a billion 48 compared to $979 million a year ago, a modest increase of 7.5%.

From a Kohl's charge sales standpoint, year to date Kohl's charge sales are up about 18% over last year.

Our share continues to increase.

Our share this year is up over 100 basis points again over last year and it's about 36%.

The file continues to turn fairly quickly.

The turn this year, 3.5 times, slightly higher than a year ago at 3.4 times.

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 at the end of the quarter is about 2.1% of receivables, so pretty consistent with where we've been all year .

From an inventory standpoint at the end of the quarter, inventories was 2.4 billion compared to 2.1 last year, up 16.7%.

Those inventory levels are in line with both the square footage growth and consistent with our plans.

They do reflect earlier receipt of imports this year versus last year.

I think most of you recall that with the dock strike a year ago, we had pretty significant delays in receipt of import merchandise and things typically we would expect in October actually were delivered in November last year.

So this year all of that came in at the time we would have expected, and it's reflected in that end-of-quarter number.

From an accounts payable standpoint, accounts payable about 1.1 billion this year compared to 865 million last year, an increase of over 29%.

As a percent of inventory, accounts payable is about 46% compared to 41.6% last year.

This increase is greater than last year primarily due to the timing of receipts, particularly the earlier receipt of imports that I just mentioned; but it also gives you kind of an indication of how current the inventory is from a receipt standpoint.

As we look forward to Q4, we would expect accounts payable as a percent of inventory to probably be in the mid- to high-30s.

From a capital expenditure standpoint, for the quarter we spent about $195.6 million.

Year to date we have spent $530.2.

Our expectations on the year, especially in light of the number of stores I just told you will open in the first quarter, is this year we'll spend between $825 and $850 million in total.

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

Thanks, Arlene.

I'll first make some comments about the third quarter and, then, talk about outlook for fourth quarter sales.

As it relates to sales in the third quarter, well obviously we're not happy with either the third quarter or the year-to-date sales performance overall.

We do believe we are well positioned for the upcoming holiday season.

Our basic business is throughout the store, in both apparel and home, continue to do well and perform well above last year.

And our Get It! and table and tower programs continue to increase in penetration to total store business.

Looking at the business regionally, for the third quarter the Northeast was the strongest region with mid-single-digit comp increases on top of a double-digit increase last year.

The Midwest was the toughest region, declining approximately 4% after a 3% increase last year.

Year to date, the Northeast, Southeast, mid-Atlantic and South Central all had low, single-digit increases on top of high, single- to double-digit increases last year.

The Midwest is down 3% against mid-single increase last year.

Looking at the business from a category standpoint.

The footwear and home areas led the company for the third quarter posting low, single-digit increases.

Women's apparel and accessories were down low- to mid-single digits for the quarter.

Seasonal apparel businesses such as sweaters, outerwear and fleece were very difficult in October which with results significantly lower than the company's comp.

These classifications were a large part of our overall comp decline both the month of October and the third quarter.

I also wanted to take a minute to talk about the recent announcement of our partnership with Estee Lauder as it relates to our continued focus on introducing new brands and new concepts to our target consumer.

We do realize that the introduction of new initiatives and brands like this one are critical to the continued success of Kohl's and we are very committed to continue to identify, develop and launch them.

Our customer is constantly looking for newness in product and convenience, and the partnership with Estee Lauder meets that need for her.

This particular project addresses our focus on finding a great company as a partner, solving a specific consumer need in a unique way, and creating excitement in our store.

Moving on to talk about margin for the third quarter, Arlene covered our gross margin rate.

First, let me tell you that with the exception of women's apparel, all of our other six major business groups delivered gross margin rates comparable to last year.

Women's apparel remains a difficult category.

We have been and will continue to be aggressive promotionally on slow-selling merchandise.

For the fourth quarter, we expect that margins could still be under some pressure.

On a FIFO basis, margins could be down 30 to 50 basis points.

We are trying to be very proactive to our approach to both drive sales and ensure we continue to drive our inventories down on seasonal categories.

Moving on to inventory and on order, we're very comfortable with the overall level and content of our inventory and on order for the fourth quarter.

While we've been conservative in our commitment on seasonal merchandise and the women's sportswear business in total, we have funded and continue to remain committed to our high level of in stock on basic areas, Get It! programs and table programs.

Our ability with our supplier base to flow these businesses based on need remains a Kohl's strength.

At year end, we continue to expect inventory to be up only single digits in total over last year.

This would be down substantially on a comp basis.

As you will remember, we ended last year much higher than we wanted in seasonal categories.

Let me move on to talk about the fourth quarter outlook.

As we look at the all important November-December time frame, we remain very cautious.

Although we reported only a modest comp increase a year ago, the loss of six shopping days between Thanksgiving and Christmas last year was significant.

As we had expected last year, the month most impacted by this timing shift was November.

This resulted in a comp decline of 3.4% on the month.

December last year gained one shopping day over 2001 and resulted in a comp increase of 3.3%.

This year the calendar for November is comparable to last year.

With the environment that we've seen and the consumers' tendency to shop closer to need, we expect comp store sales for November to be flat, down slightly.

In December, we gained an additional day this year and we expect comps to increase mid-single digit as a result.

From a marketing standpoint, we have strengthened our print, increased our direct mail, and increased our broadcasts primarily through national network television and radio.

It is our plan to make Kohl's message of brands, value, and convenience stand out this holiday season.

I'm going to turn it over to Larry to talk about expansion and then wrap up.

Thanks, Kevin.

When you look at the third quarter, it was a difficult quarter for us; but as Kevin and Arlene have stated, we are well positioned for the fourth quarter.

Selling of seasonal apparel for the third quarter was well below last year, but with the arrival of colder weather lately throughout the U.S., we believe we'll continue to take market share during this holiday season.

I'll talk about expansion a bit.

When you look at 2003, we opened 50 stores in the fall of 2003, 48 in October and 2 in August.

In new market entries for the fall 21 of those stores: 10 were in Phoenix, 2 in Tucson and 1 in Flagstaff, Arizona; 3 in Las Vegas, 3 in Little Rock, and 2 in Birmingham, Alabama.

We also had 29 fill-in stores: 11 were 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.

We currently have 542 stores compared to 457 at the same time last year.

That's an 18% increase.

We continue to be pleased with the performance of all of our new stores as they continue to run between 70% and 80% of an average store's volume in the first year.

Looking ahead to 2004, our plan for 2004 is to open approximately 95 stores.

About half of these stores are going to open in the spring season.

The new markets that we see for the spring season, we're going to open 7 stores in Sacramento, 5 in San Diego, 3 in Fresno and 2 in Bakersfield, California; 3 in Memphis, 2 in Syracuse and 2 in Burlington, Vermont.

We'll continue to fill in existing markets with 24 stores: 2 in the mid-Atlantic, 5 in the Northeast, 4 in the Northwest, 2 in the South Central, 4 in the Southeast, and 7 more in the West.

We're close to finalizing our plans for 2005 new stores, and we expect those increase in the square footage to be another 18% to 20%.

Talking about earnings guidance for the fourth quarter.

As we entered the all-important fourth quarter, we continued to remain very cautious.

It's too early to get a read on how the customers are going to spend during the holiday season.

The bulk of the spending will occur between Thanksgiving and Christmas; and we've positioned ourselves conservatively on the inventory front but we can react quickly as customers begin to open their pocketbooks a little bit further.

Expenses are being appropriately controlled.

We will be priced aggressively to continue to take market share, and we're positioned to drive traffic in all of our stores throughout the fourth quarter.

In looking at the first call estimates for earnings per share, the range is very broad.

Assuming a low- to mid-single-digit comp store sales increase, and the potential of 30 to 50 basis points pressure on FIFO gross margin, we would expect EPS of 89 cents to 95 cents for the fourth quarter.

At this point we are ready to take any questions.

Thank you.

We will now begin the question-and-answer session.

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

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Once again for any questions, please press star 1 on your touchtone phone.

Our first question comes from Emme Kozloff (ph) from Sanford Bernstein.

Please go ahead.

Question here first, can you give us visibility into why we should expect your women's business to be better positioned this spring both in terms of product selection and inventory?

And I'm making the assumption that you can't make any major changes in Q4 other than adjusting receipts.

And, then, with respect to gross margins, how should we think about your gross margin opportunity going forward?

Has the competitive environment forced you to lower the bar overall on your pricing on a more permanent basis?

Thank you.

Emme, it's Kevin.

First of all, in women's sportswear, I think some of the difficulties that we've faced -- and we talked about this in both second and third quarter -- were managing our inventories down.

And the level of inventory caused many of the problems that resulted in those lower gross margins.

So I think step No. 1 for us was getting a more manageable inventory level and getting inventory level that looked more like our sales.

Step No. 2, of course, is just all about the content.

And we have tried to identify and correct the deficiencies and also focus in on the things that have been good, because there has been some good selling.

Looking forward from a gross margin standpoint, I don't think we're prepared to talk about guidance going forward.

Much of the margin erosion (ph) on a year-to-date basis -- and you heard me just talk about it in the third quarter -- was very concentrated in one particular area, and most of the rest of the business in the store continued to maintain kind of historical levels in gross margin.

So we've got to fix that one area and then continue to deliver the results in the rest.

And I'm sure we'll talk to you after the fourth quarter about guidance for next year.

Okay, thanks.

The next question comes from George Strachan (ph) from Goldman Sachs.

Please go ahead.

Good afternoon, everybody.

We've been in stores recently and noticed that -- and I'm curious about this -- there appears to be perhaps a de-emphasis at least of the signage in the Get It! program and the table and tower fixturing moved off of the aisles into the pads.

Maybe there's a transition of some kind going on.

Also, it looks like inventory per square foot may be down a little bit in here.

Are you actually taking -- is there a tactic here to take some inventory out to reduce some of the congestion in the stores?

It's Kevin, George.

From a Get It! perspective, we've continued to try to enhance the visual part of the Get It! program, and that's probably what you're referring to.

We've tried to implement new creative in the store in our key Get It! items that focuses in on the merchandise and less about the message.

Because essentially the customer was saying that literally the words "Get It!" don't mean anything to me.

I'm more interested in the merchandise content.

As it relates to table and tower, yeah, we have reduced the number of locations and fixtures in our table and tower program by weeding out things that were less productive and also in response to what we felt was more congested aisles than we were satisfied with.

So we do have -- and I think the numbers probably 10% to 15% less on an average store basis, fixturization on the table program than last year, but the items that we have are much more productive.

In terms of moving it off the aisle, George, there's a few counties -- the county on Long Island where we got to -- we have some restrictions as to what we can put in the aisle in terms of inventory per square foot.

We are just controlling our inventory better.

I think we still get a pretty good merchandise impact on the floor.

And then I heard you correctly in saying that despite this, that actually your penetration on these programs is up relative to total sales?

Yep.

Yes, it is.

And again, I think a lot goes back to productivity.

We tried -- part of what Larry is referencing is we tried to weed out things that clearly haven't been working in these two programs and then focus inventory into the ones that are.

Great.

Thank you.

The next question comes from Daniel Barry from Merrill Lynch.

Please go ahead.

Good afternoon.

You said we were going to reduce your seasonal and sportswear, I believe.

I assume this is change within the store, shifting fixtures and so forth to reduce the space allocated those areas?

And the second part of it, why do you think that those two areas are so weak besides obviously weather?

It's Kevin, Dan.

As it relates to investment, we are talking about inventory investment so it's not a question of space allocation.

We haven't changed any of our space allocation at all on the women's business or really on seasonal classifications like outerwear, sweaters, or fleece.

And we still believe very strongly, very strongly, in the long-term potential of Kohl's in the women's sportswear business.

We're talking strictly inventory investment in categories in women's case that haven't been producing at the result we'd like and managing those levels down.

On the seasonal categories, I don't -- I hate to say weather, but frankly that's what it's been about when it comes to sweaters, outwear, and fleece.

They definitely have been dramatically impacted by weather.

All right, thanks.

The next question comes from Mark Mandel (ph) from Blaylock.

Please go ahead.

Thanks a lot.

Just a follow-up on that last question.

Have you not seen an improvement [inaudible]

I'm sorry, Mark, you were breaking up.

Can you repeat your question?

Let me pick up my handset.

Sorry about that.

Have you not seen an improvement in business, a significant one, given the cold snap that we've had in the Northeast and Midwest?

Well, obviously we wouldn't comment on November, but certainly in areas where there's been colder weather seasonal categories have dramatically improved.

Okay.

Second question, regarding your promotional posture, do you still expect advertising expense ratios to remain flat Q4 over Q4?

I don't think we give any guidance specifically on line basis business.

Jump in there, Arlene.

No, obviously, we are pretty aggressive from a promotional standpoint and advertising is not an area that we would ever cut back.

Okay.

And just, finally, a housekeeping question: Do you have the average fully diluted share count for the third quarter?

You know what, I don't have it with me.

Wes may -- if you don't mind, Mark, I'm just going to ask you to give Wes a call.

Actually, it's 344 --

Do you have it?

Yeah. 344,447 (ph).

Great.

Thanks a lot.

The next question comes from Shari Schwartzman Eberts from J.P. Morgan.

Please go ahead.

Thank you.

In terms of the same-store sales guidance, just looking at the year to date trend, obviously not low- to mid-single digits.

I was just wondering what the rush now, or your expectation for low- to mid-single digits in Q4 was backed up by?

When you take a look at our performance last fourth quarter, we take a look, from our point of view, our inventory position and our promotional calendar for the next quarter.

We feel that we can deliver those numbers.

A combination of both those things, being better positioned and having an aggressive calendar.

Okay.

Second question.

In terms of what percentage of your business is women's apparel?

Overall women's apparel is probably in the high 20s.

I think for the year it's probably around 30 or so.

The area that we've been talking at length about, though, we released those sales mix numbers, Shari, based on the those six major business groups.

And women's apparel includes a lot of other classifications that have been very healthy like intimate apparel, for instance, or juniors as well.

The area that we have been talking specifically about is women's sportswear, which would be a subset of that number Wes just gave you.

Okay.

Any ballpark you can give us in terms of what percentage of the business that would be?

That's not something that we would provide.

Okay.

That's fine.

And then just one last question on the inventory, up 16.7% in dollars.

Do you ever look at what it's up in units?

Sure.

You know units and dollars are very similar.

I don't have the very specific number right in front of me, Shari, but right now I think our units and dollar increase is pretty similar to one another.

And, yeah, we look at that all the time on an average store basis and in total.

And what has been the trend in terms of units inventory throughout the year?

Can you comment on that?

[inaudible] probably follow.

Arlene --

[inaudible] follow pretty closely with what you're seeing on the balance sheet.

Okay.

Thank you.

The next question comes from Deborah Weinswig from Smith Barney.

Please go ahead.

Good evening.

When you look at the number of transactions and the average transaction, can you comment on what you're seeing in the basket, and how much of that is deflation?

The basket itself is pretty comparable to a year ago.

It might be up modestly.

Okay, what does [inaudible] Basically, an average basket for us is about four items per basket, and that's two for the quarter, it's two year to date, two a year ago.

So pretty much what you're seeing is deflation when you're looking at average transaction.

Okay.

And then last question: In terms of the women's moderate business, do you think it's a fashion versus basic question, or do you think it's something more than that at these levels?

Yeah, I don't think it's necessarily basic versus fashion.

As I said, honestly if we go back and analyze what's happened to that business over the course of the year, the most serious problem we've had in there has been the gross margin and the gross margin impact on our overall profitability.

And much of that has to do with inventory control and being more focused in how we plan that.

So it's not like oh, all the basic items in women's sportswear are doing really well or really poorly and all the fashion ends (ph) are doing well or really poorly.

That's not the case.

Okay great.

Thanks, so much.

The next question comes from Linda Kristiansen from UBS.

Please go ahead.

Hi.

This question is for Kevin.

When you think about the fourth quarter and the 30 to 50 basis point decline in gross margin, obviously you don't know, but are you thinking most of that, then, will be concentrated in women's and you actually think you could see some improvement elsewhere?

Or how are you thinking about the mix in the fourth quarter?

As we've looked at it, as I said, one of the reasons that we're looking at a potential pressure on our margin is we want to make sure that, (1) we drive sales.

So all businesses kind of participate in that, Linda.

But (2) that we make sure that that inventory number that we talked about at the end of the quarter, which would be down significantly on a comp store basis, and we get there.

If that means that we got to be more promotional in a business like women's and we got to be more aggressive then we're going to do so.

So it's not exclusively women's but, clearly. we are very focused on making sure we get our inventory to where we want.

Also, one of your competitors mentioned with respect to the moderate -- the women's moderate business, they thought they might see an upturn in the first quarter.

Are you seeing anything that might point in that direction from a fashion standpoint?

I know better is looking better, but is there anything suggesting that would trickle down to moderate?

They must have a better crystal ball.

I couldn't tell you anything that I'd specifically say is going to dramatically turn around in the first quarter.

And I just had a last question for Arlene.

On interest expense, the number you guided to in the fourth quarter is a little lower than I was looking for.

Is there anything in particular going on there?

No.

Basically, we know where we are from a borrowing standpoint.

We are in much better shape even then a year ago.

So that interest number should truly hold up.

Okay.

Thanks.

The next question comes from Bob Drbul from Lehman Brothers.

Please go ahead.

A couple of questions.

First is for Larry.

Since you've taken over the stores, maybe could you give us an idea in terms of any changes that you've made so far, and where you are in terms of maybe naming a new head of stores?

Actually, I'm having quite a bit of fun out in the stores.

And it's all about just getting back to fundamentals of how do you run a store?

How do you keep recovered (ph)?

How do you keep it replenished?

How do you keep it staffed appropriately?

And I think that the focus of our regional district store managers is much more in line with those fundamentals, and that's going to help us for a long period of time not just the fourth quarter.

And in terms of naming a new person, we're going to be out a ways on that.

Okay.

I'm having too much fun.

Okay.

As you look at the target for your inventory reductions, can you give us an idea in terms of how much of it is lower receipts versus how much more markdowns you would expect to get there, in terms of the plan?

Well, as I said in the beginning, we are kind of looking at our beginning of quarter inventory which, as Arlene mentioned, was slightly impacted by prior shift and how much import goods came in compared to last year because of the dock strike and our on order.

Our whole focus on inventory on order issue has been we want to be very conservative on areas in which we don't have a sales trend to support and have markdown liability.

On the other hand, there are many parts of the store, a lot of basic businesses, areas like home that have huge opportunity to grow and which we know, because of replenishment programs we have in place and supplier partnerships, that we can chase the business aggressively with.

So those businesses we are just as committed as we've ever been to be in stock and slow in (ph) goods and really keeping the same kind of commitment we've always had.

So it really depends upon the classification, what approach we're taking.

Okay.

And I guess just one more question would be: Can you give us an update on the smaller format stores and sort of what are your thought processes around the stores?

Well, as you know we opened up four stores a little over a year ago.

And as we've said all along, once we get to our second holiday season we'll be talking more about the viability of that format relative to our regular prototype drill (ph) sometime during the spring season.

Okay.

All right.

Thank you.

The next question comes from [inaudible] for Mosaic Research.

Please go ahead.

Good afternoon.

In regards to the inventory levels, I just did sort of a spreadsheet, and in 2002 it looks like at cost goods sold, you sold just under $6 billion but looks like you brought in $6.4 billion.

It looks like you're closer this year.

And through Q2 you brought in $89 million more than you sold.

You're getting closer, but how are you going to get it all the way to where it needs to be?

You're quoting a bunch of numbers.

I don't have them in front of me.

I'm not exactly --

I just added up the cost of goods sold and took the end of quarter inventories and backed in as a receipt of goods.

The way we're -- as I said, and I'm not trying to be repetitive, I'm really not.

But as we looked at our inventory, we are going into a quarter in which we are looking for low- to mid-single-digit comps and we're pretty well positioned we think in terms of overall inventory coming into it with a plus 16% or so.

Last year we came out of the quarter definitely heavier than we wanted to, but that was very heavily invested in seasonal classifications.

Between our inventory and our [inaudible] order for the fourth quarter, with those kinds of sales we feel pretty comfortable we're going to get our stocks pretty significantly below last year on an average store basis.

And, of course, that's in the store in total.

Some areas that are more basic will still be very similar levels to last year and others will be down even further.

So I'm not exactly sure it's going to answer your question, but it's really kind of the way we approach the inventory [inaudible].

The next question comes from Ellen Zigmen (ph) from William Blair & Company.

Please go ahead.

Taking inventory one step further, we talked about what your expectations are for the end of the quarter; but can you help us think about how you're looking at inventory levels for next year?

Probably too far ahead for us to talk about today, honestly.

We're kind of taking a snapshot and saying, Okay, come end of fourth, and as we look at spring, where do we want to be?

Well, we want to make the big correction to the seasonal mistakes last year, plan those down aggressively.

At the same time, we got core basic businesses, key Get It! programs and, of course, we'll have new table programs at that time.

That our customers' telling us you got to be 100% in stock.

That's what we are expecting.

So those businesses are planned with that kind of inventory investment in mind.

And correcting last year's mistake as we enter first quarter, I think, is really a big focus of ours.

And obviously, Ellen, when you are looking at it on a per store basis or comp store basis, all of our planning for spring we're really going back not just to the 2003 experience but prior years where we were very comfortable with our levels of inventory.

Okay.

In the fourth quarter gross margin, is there any recovery in there from West Coast strike pressure from last year or does there need to be?

I think if anything it's probably a sales opportunity.

We wouldn't sit here and try to quantify that at all, but if you think about it logically the ability to have those goods available for sale when we originally intended to have them last year probably puts us in a better position.

And, yeah, could that possibly then translate to a little bit better margin in those particular categories?

Yeah, probably.

So nothing meaningful on the freight side?

No.

And then finally, can you comment on the rollout of the urban brands, how they have been performing and whether you're noticing differences by region?

Overall they are performing well.

I wouldn't want to get into detail by brand, I don't think that would be fair right now.

And yean, there's clearly differences regionally in both the West Coast versus the East Coast but even within a region's particular market.

That's a learning process, to be honest with you, because as we've introduced them just in July and August, that's something that we are reacting to.

But you think it makes -- does it make sense for all the different markets, or you are still learning?

I think we're learning, honestly.

And it's more a question -- it's not as much a question of does it make sense everywhere as it is a question of how much does it make sense everywhere and to what level?

Okay.

All right.

Thank you.

The next question comes from David Cumberland from Robert Baird.

Please go ahead.

Good afternoon.

Kevin, you mentioned strengthened marketing planned in Q4 and talked about this in recent quarters, also.

How does the increase in marketing planned in Q4 compare to the increase in prior quarters this year?

Well our marketing -- we don't really kind of talk about this -- but with the kind of sales increase we are getting, we are obviously spending significantly more in marketing dollars.

And when you also factor in the leverage that we're getting on a broadcast basis and you kind of translate that, David, to more what does that give you in marketing clout?

It's pretty significant.

It's more than the dollar increase, because you're able to leverage the advantage of being national today.

So we're not going to go through with that for obvious competitive reasons, a lot of that detail; but it puts us in a pretty good position and we're clearly [inaudible] marketing is not something we are cutting.

We're spending more than ever on marketing.

And one other question for anyone.

Kohl's ongoing store expansion should allow for increasing economies of scale.

In what part of your business do you think you have the most potential to gain from scale economies?

If you're talking on the expense side, obviously, where we're really gaining is on the nonstore, nonadvertising kinds of expenses.

So right here in corporate office, credit distribution centers, all of those areas are able to leverage at a much lower sales increase today than they could a few days ago.

So at the same time it allows us from a systems development to continue to keep reinvesting dollars and systems that make the stores a lot more productive and hopefully easing their workloads.

Okay, thank you.

The next question comes from Christine Augustine from Bear, Stearns.

Please go ahead.

Longer term, talking past 2005 since it sounds like you've pretty much put all that square footage into place, will the square footage flow to 15% to 18% as we look out to say 2006 and beyond?

Our game plan right now -- again, we are just finalizing 2005, and we're going to be in that 18% to 20% square footage range.

We haven't had conversation about slowing down the growth, and we're getting pretty good at opening up these stores.

So for the time being, that's our strategy.

We are always looking at opportunities to do things differently and more productively; but for the time being, that's our strategy.

And what was the comp inventory at the end of 3Q?

I don't think we told anybody what the comp inventory was [inaudible] at the Q3.

Can you tell us?

No.

I don't think we are giving out or comp store.

But you're guiding for 4Q, comp inventory number?

Yeah.

To be frank about it, we're trying to [inaudible] something that we would have expected you guys to be very focused on, which is how are they positioning themselves for spring given what happened last spring?

And so we were trying to give you some visibility to that so you get the assurances that we're driving our inventory down where we need to drive it down.

Right.

And obviously our inventory increase, when you look at end of quarter, is less than our square footage increase.

Thank you.

We have time for one last question.

Our final question comes from Gary Holdsworth (ph) from Wedgewood (ph).

Please go ahead.

Right on the wire.

Thanks.

Just trying to understand November comp guidance for flat to down slightly.

When you said on this call in various places we're doing better because of weather thus far this month, we have a very positive calendar as far as incentives and promotion, et cetera, and then the calendar is basically equivalent.

First of all, I don't think we gave you any comment about the whole company doing better so far in November.

Where we've experienced the cold weather, that cold weather classifications are getting better.

And our real focus was, as I mentioned in my comments about the lion's share of that business coming between Thanksgiving and Christmas, and that's really where the big focus on our promotions are.

Thank you.

That clarifies things.

All right.

With that we thank everybody for participating on the call.

Wes will be happy to take phone any calls from anybody out there.

Thank you.

Thank you for participating.

This concludes today's teleconference.