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Operator
Good afternoon ladies and gentlemen and 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 we will 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 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, anticipate or similar expressions.
These statements are subject to certain risks and uncertainties which could cause Kohl's actual results to differ materially from those anticipated by the forward-looking statements.
These statements -- these risks and uncertainties include but are not limited to those described in exhibit 99.1 to Kohl's annual report on Form 10-K.
And other factors as may periodically be described in Kohl's filings with the SEC.
Also please note that replays of the call will be available for 30 days but this recording will not be updated.
If you are listening after May 13th, 2004, it is possible that the information discussed is no longer current.
I will turn the call over to Mr. Wes McDonald, Chief Financial Officer.
Mr. McDonald, you may begin.
- Chief Financial Officer and Executive Vice President
Thank you.
With me is Larry Montgomery, Chairman and Chief Executive Officer, Kevin Mansell, President, and Arlene Meier, Chief Operating Officer of Kohl's.
Arlene is going to take us through the P&L.
I will spend time on the balance sheet and Kevin will walk us through some of our marketing and merchandising highlights from the quarter, and Larry will close with discussing our growth opportunities and give you second quarter earnings guidance.
With that I will turn it over to Arlene.
- Chief Operating Officer, Treasurer, and Director
Thanks Wes.
From a top line standpoint, as you know, total sales were about $2.4 billion at 12.4% increase in totals last year with comps being flat.
During the quarter, transactions in comp stores increased approximately 1% while average transaction was down about 1%.
Northeast was our strongest region from a comp perspective while the mid west continued to be our toughest region.
From a new store standpoint, productivity continues to run 70 to 80% of an average store and that's what we will continue to expect all year.
From a line of business standpoint, accessories led the company for the quarter while shoes was the most difficult.
Moving on to growth margins.
We reported growth margin rate of 35.6% compared to 35% last year.
So an improvement of 60 basis points.
Approximately 40 basis points of that improvement was due to the accounting change that we mentioned to you last quarter that we would have for fiscal year '04.
So it's the impact of EITF-02-16 accounting by a customer for certain consideration receipt from a vendor.
What it relates to is vendor support that we received for new store advertising that used to be considered a reduction to SG&A, that support has gone into gross margin.
On a FIFO and LIFO basis, the margin was the same.
There was no LIFO adjustment either last year or this year on the quarter.
From an SG&A standpoint, SG&A expenses were about $565 million compared to $474 million last year. 19.3% increase.
Expenses for the quarter came in right at where we had expected.
The unfavorable impact of the accounting standard that I just mentioned, the quarter was actually about 70 basis points.
So when you are looking at SG&A as a percent of sales, keep that in mind.
Excluding the affect of the accounting change, SG&A was actually up about 16% in dollars over last year.
For the quarter as we look at the components on an apples to apples basis, store expense increase was slightly lower than our increase in number of stores.
We now operate 589 stores compared to 492 a year ago.
So almost a 20% increase in store growth.
When we look at the other components of expenses, advertising increased as we had planned.
DC's, corporate and our credit operations were all able to leverage on the quarter in spite of no comp store sales increase.
So we are pleased with that performance.
As you move down the P&Ls, you look at depreciation about a 19% increase of last year, right in line with our number of store openings.
From a preopening standpoint, $17.8 million this year compared to $15.5 million last year.
We opened 47 stores in the quarter, 21 in March and 26 in April.
During the first quarter last year, we opened 28 stores in March and 7 in April.
So a total of 35 for the quarter.
On average, we spent about $490,000 per store for the new stores that we opened this spring.
So if you recall, about $5.2 million of that cost was incurred in the fourth quarter of fiscal '03 with the remainder being incurred in first quarter.
From an operating income standpoint, $198 million, 8.3% of sales.
Interest expense $15 million compared to $17.8 million last year.
As you look at second quarter, I would expect interest expense to be slightly higher than Q1, so probably around $16 million.
If you recall, last year's numbers included a one-time charge associated with a convertible debt that was retired in June.
From a provision for taxes, our rate is consistent with 2003. 37.8% is -- and that's our expectation for the full year.
Bottom line net income, $113.8 million compared to $111 million last year.
And EPS of 33.
Keep in mine when you look at EPS, the bottom line impact of that accounting change that I mentioned, 60 basis points improvement in margin, 70 basis points hit on SG&A resulted in a bottom line hit of about a penny a share.
With that I will turn it over to Wes.
- Chief Financial Officer and Executive Vice President
Thanks Arlene.
Let me give you the-square-footage numbers at the end of the quarter.
Gross fair footage was 52,617,000.
For an increase of 20.7%.
Selling-square-footage is 45,153.
For an increase of 21.1%.
On accounts receivable, we ended the quarter with accounts receivable a little over $1.1 billion, a 14.5% increase.
We continued to turn the receivables fast 3.6 this year versus 3.4 last year.
We are continuing to be pleased with the quality of the portfolio.
Right off as a percent of our charge sales were 1.1% which is consistent with our fiscal 2003 performance.
And the reserve at the end of the quarter was approximately 1.9% of receivables.
Again, consistent with our reserve at the end of 2003.
On the inventory line, we ended the quarter with 1.8 -- little over $1.8 billion in inventory, an increase of 2.8%.
As we said, inventory levels are down significantly versus last year.
And at the end of the quarter, an average store was down approximately 14% in dollars and 11% in units.
Capital expenditures were $167.9 million for the quarter.
We continue to expect capital expenditures for the entire year to about be about $1 billion, and continue to expect to fund all of our capital expenditures for the year from cash flows from operations.
If you look at accounts payable, our balance ended the quarter at $746.4 million.
As a percent of inventory, that was 40.1% of inventory that was 33.6% last year.
The change versus last year really I think indicates the benefits of our executing the strategy to flow goods closer to the point of sale.
We will continue to expect AP as a percent of inventory to be in the high 30s to low 40s.
Let me try to sum up the effect of EITF-02-16 for the quarter and then give you some updated outlook for the year.
For the first quarter of 2004, the application of the new rule had the following impact as Arlene mentioned, increased gross margin as a percent of sales by approximately 40 basis points.
It also increased SG&A as a percent of sales by approximately 70 basis points.
The net effect was reducing income for diluted share by approximately 1 cent for the quarter.
At this point, we expect that the net earnings will be reduced for the fiscal year 2004 by approximately 2 cents per diluted share with remaining significant effect to occur in the third quarter as we open our remaining 2004 new stores.
And with that I will turn it over to Kevin.
- President
Thanks Wes.
Let me first start with sales.
While we were disappointed with the sales results for the first quarter of fiscal '04, our emphasis on inventory management resulted in increased margins for the quarter.
Our basic businesses throughout the store in both the apparel and home are performing well.
In our seasonal businesses, our strongest performance came in tees, capries and sandals.
Shorts have been the slowest seasonal catagory thus far.
In womens, we have seen healthy increases in our updated grams such as 9 and Coe and Access.
We extended both of these brands into foot wear and accessories with very strong results.
And both are planned for aggressive growth going forward.
We told you we would be focused on four key areas to get us back on track.
Inventory management, the in-store shopping experience, merchandise selection, and marketing differentiation.
Let me touch on each of these.
First inventory management.
We ended the quarter on plan from an inventory standpoint as Wes mentioned earlier, inventory levels on an average store basis were down about 14% at the end of the quarter with reductions even higher in seasonal areas in more closely resembling last year's level in basics.
We would continue to fund and remain committed to high levels of in-stock on both apparel and home basics, our Get It program and table and tower key items.
We feel very comfortable with our inventory position going into the second quarter, especially in seasonal area.
And expect to end the second quarter with inventory down mid teens on a per-store basis compared to last year.
With the cleaner inventory position, we feel confident we will see a significant improvement to our gross margin rate versus a year ago.
As you recall, our gross margin last year deteriorated 250 basis points from the second quarter of 2002.
Second, the in-store shopping experience.
Reducing the inventory levels helped considerably with shopability in our stores.
Returning to one of our core strengths of maintaining a clean, shopable in-store environment has been a focus for the entire organization.
We are pleased with the progress made to date and also know very well that this will ultimately help improve both our top and bottom line.
Third, merchandise selection.
As you know, we continue to inject newness into our brand both national and private.
In the first quarter, we introduced two new brands in the home.
Laura Ashley Lifestyles, and Gloria Vanderbilt Home.
Both have been a success and are scheduled for considerable growth in fall.
The success of Daisy Fuentes in our 180 test stores was positive that we decided to roll it out into all of our stores in the third quarter.
We also introduced urban pipeline.
A new private brand targeting young men and have been very pleased with the first quarter results on it as well.
In the second quarter, we look forward to introducing Ever Girl, a brand from Nickolodium, targeted to the tween customer who is gaining a lot of acceptance through its unique website.
As part of our private brand repositioning efforts, we will be introducing a new brand, called Apartment Nine in men's and women's sports wear this fall.
This brand will be positioned as modern and sophisticated with clean lines and will be dress casual to dress clothing.
This will give us six major private brands.
Sonoma focusing on casual weekend wear.
Croft and Barrel for a more classic business, casual look.
So for juniors.
Urban Pipeline for young men.
Tech Gear for an active lifestyle.
And finally Apartment Nine.
As you also know in fall we will enter an entire new category with the introduction of beauty business at Kohl's.
Developed in partnership with the Estee Lauder companies.
It will initially consist of three new exclusive brands developed by Beauty Bank, a new division of Estee Lauder.
The lines will be in about 280 stores for fall, with the remainder of the company to roll out in 2005.
Each of these merchandise initiatives is focused on addressing very specific customer feedback.
As well as supporting the positioning of the Kohl's brand.
We will continue to talk about new initiatives throughout the coming year and we will be discussing additional new brands in our May 26th investor's conference in Chicago.
I'm pleased with the progress we have made with our inventory levels across the store.
You will see improvement in the merchandise content in the second quarter and what I feel is more dramatic improvement in the fall as some of our merchandising initiatives take hold.
Finally, differentiation in marketing.
There were several changes to our events in the first quarter marketing calendar.
To be honest, some worked and some did not and we planned forward accordingly.
We will continue to test different things in the second quarter across the country in order to have enough success to bring some excitement to our customers for the important back to school and holiday seasons.
And we continue to adjust our mix of print broadcast and direct mail to find the most effective medium for each type of event.
As we make these changes, we are ensuring that our message of brands, value and convenience remain strong and pricing is easy to understand and that we create a sense of urgency for the customer to get to the store for each individual event.
Let me turn it over to Larry to talk about growth and earnings guidance.
- Chairman and Chief Executive Officer
Thanks Kevin.
While not satisfied with our top line results for the first quarter, we feel good about our inventory and expense control and we are very pleased with the results so far of our efforts in store to create a better shopping environment.
As we talk about growth in 2004, we plan to open up approximately 95 stores.
Over the course of the year we are going to add about 40 stores to the southwest and remaining 55 stores will be across the country.
In the spring, we opened 47 stores.
During the quarter, we had new market entries into Sacramento, San Diego, Fresno and Bakersfield, California.
We also added two additional stores in L.A. and two additional stores in Phoenix.
We also opened with three stores a new market in Memphis, Tennessee.
We also added eight stores in the northwest region, four in the mid west, four in the southeast.
Three in the southwest, two in the south central region and two more stores in the mid-Atlantic region.
For fall approximately 48 stores.
Almost all of which will open in October.
We have new market entry into San Francisco and into Salt Lake City, Utah. 32 additional stores across other regions of the company.
As we look at 2005, our plans remain the same as we told you in our fourth quarter conference call.
We plan to open approximately 95 stores in 2005.
And increasing-square-footage about 15%.
We will expand our presence in the southwest leveraging the infrastructure we built there with this new region of 2003 and will continue to expand our presence in our established markets.
As we recap first quarter and look into second quarter, we made significant progress in the four initiatives we outlined for you at the end of 2003.
We are very comfortable with the levels of overall inventory and the controls in place to keep it at the appropriate levels.
Our in-store efforts to create a better shopping effort have been well received by the customer and will continue to work on consistency and additional in-store enhancements to improve shopability.
As Kevin mentioned, we continue to make progress through new and existing brands and our initial -- and our marketing strategy continues to be refined as we enter the second quarter.
We felt the inventory in the store issues were our top priorities as we prepare for a strong back to school and holiday.
As we look at the second quarter, we still have a lot of changes in progress expenses are being appropriately controlled.
We are maintaining our discipline inventory levels and that will result in improvements, significant improvements, in our gross margin rates.
As we look at first call estimates for the quarter, the range is very broad. 38 to 45 cents.
Assuming flat comp sales, we would expect earnings to be in the range of 42 to 45 cents per diluted share.
We continue to be comfortable with the earnings guidance we provided for the year with the low single digit comp increase for the year combined with more normal gross margin rates, net income should increase between 25 and 30% over last year.
That implies earnings in the range of $2.13 to $2.21 per diluted share.
With that, we will be happy to take a few questions .
Operator
We will now begin the question and answer session.
If you have a question, you will need to press star-1 on your touch-tone phone.
You will hear an acknowledgement that you've been placed in queue.
If your question was answered and you wish to be removed from queue, please press the pound sign.
Your questions will be queued in the order that they are received.
If you are using a speaker phone, please pick up the handset before pressing the numbers.
Once again, if there are questions, please press star-1 on your touchtone phone.
Our first comes from Emi Causwall from Sanford Bernstein.
Please go ahead.
- Analyst
Hi thanks.
My first question is on Estee Lauder.
When should we expect to hear about the actual economics of the business, you know, specifically how you plan on accounting for it and say what will be Cap Ex versus preopening versus SG&A and the split with Estee Lauder on the cost overall?
And then, Larry, you mentioned the comp guidance for the year.
Is it correct to assume something like low single digits in Q3 and Q4?
Or somehow the last two quarters will be slightly imbalanced because of lead times on product or what have you.
Thanks.
- Chief Operating Officer, Treasurer, and Director
Let me take the Estee Lauder one.
Because you are asking more from an accounting standpoint.
As we look at Estee Lauder, it will just simply be another product line merchandise line in the store.
So it will not be separated as a separate strategy in anyway.
So all of the expenses associated with operating it is our own payroll, its our own advertising.
All of that will just be accounted for in SG&A just like everything else associated with the store.
So you won't see any preopening.
Because it's not a new store.
So any expenses that we have to launch, will all go through SG&A.
At this point to be honest with you, we don't have any intent of sharing any specifics on what the sales volume will be and impact on profitability.
It will all simply be part of our overall guidance for both third and fourth quarter as you look at sales expenses and bottom line.
- Chairman and Chief Executive Officer
As far as the second half of the year, we are expecting four initiatives to kick in a little stronger than they have so far this year and what we see for second quarter.
We are looking for the second half of the year, we are obviously expecting our four initiatives to kick in a little stronger than they have so far this year and what we see for second quarter, so we are looking for the second half of the year to be low single digits comps which will get us to low single digit comps for the year.
- Analyst
Thanks.
Operator
The next question comes from George Strachan from Goldman Sachs.
Please go ahead.
- Analyst
Thank you.
It's George Strachan.
We heard from some apparel vendors that moderate launch has been pretty tough this spring, and obviously there is a fashion cycle going on.
Do you think in some respects reacting maybe to last year you have been too basic this year and are these second half apparel lines going to address that to some extent?
- President
It's Kevin, George.
I think the answer is, looking at the sales, and I mentioned during the call lines like 9 and Coe and Access, whether in the sportswear or footwear, or accessories which are more updated have clearly far exceeded more classic lines in terms of growth.
If we had had more and if we had had more, for instance, Daisy, we would have clearly done better in sportswear.
I think the answer to your question is, yeah, I think that I wish we had more of some of that and of course we are correcting that and getting it right for the third quarter.
That's the reasons we are rolling out Daisy over all.
So I think we probably did leave a little bit on the table in lines like that.
- Analyst
Thank you.
Operator
The next question comes from Jeff Klinefelter from US Bancorp Piper Jaffrey.
- Analyst
Yes, Kevin, could you talk more about your strategy in womens in terms of going after more career wear than we are hearing again from other retailers that's a real successful area this spring season.
What is the strategy there?
What have you learned from the Daisy line that might lead you to some changes overall in womens?
Are there any-square-footage changes that would go along with that in terms how you are allocating within the new stores?
- President
Overall, first let's take the easy part, from the-square-footage standpoint, we feel really comfortable about the space a allocation.
We will be talking at the conference later in May about some merchandising changes that will occur in the store as we try to more clearly define the more modern and more updated part of casual career clothing and very clearly show the customer some of the successes that we currently have now, and then things like Daisy expansion and, of course, very importantly the introduction of Apartment Nine.
When you roll all of that off and see it from a presentation standpoint, I think it will be really, really impactful.
So, we are seeing some of the same things that you are hearing about and as I said to George, clearly, we have seen that in our own sales as well.
But I think you will see us and hear us talk about for third quarter some pretty dramatic changes as it relates to that.
- Analyst
Thank you.
Operator
The next question comes from Deborah Weinswig from Smith Barney.
Please go ahead.
- Analyst
Good evening.
Can you talk about the credit card penetration in the quarter and also any trends you are seeing in terms of how your NBC customer shopping is other than you non-NBC credit card customer.
- Chief Operating Officer, Treasurer, and Director
For overall credit, both NBC and the burgundy card holder are up considerably.
As you know credit is an important vehicle for us for driving traffic.
And obviously we are seeing much higher increases from a comp standpoint out of our credit portfolio.
What we see in-store, their response, clearly they are commenting, too.
And we are seeing higher frequency of shopping because of the improved in-store shopping experience.
We haven't changed anything about how we run the file or anything like that.
It's just that people are really responding to direct mail and that's increasing the frequency.
- Analyst
Thank you very much.
Operator
Next question comes from Daniel Barry from Merrill Lynch.
Please go ahead.
- Analyst
Thank you.
Good afternoon.
Both Wal-Mart and Target commented that they see the less deflational or some inflation actually in their business by the end the year.
Are you seeing that trend and related to it if you want to make a wild guess of what prices might do early next year with a removal of apparel quotas.
- President
I think next year that will be a wild guess at this point so I will sort of pause on that one.
As far as what we have seen in terms of AUR, actually in April we saw a slight increase, most of that was a function of just having less clearance.
And I would expect that to continue to benefit us throughout the year.
I don't think we have seen any in terms of increases from our vendors being passed on.
- Chief Operating Officer, Treasurer, and Director
We are not seeing any increases from a cost standpoint and vendors as you are looking at fall?
- President
No, not at all.
- Analyst
Thanks.
Operator
The next question comes from Bob Drbul from Lehman Brothers.
Please go ahead.
- Analyst
Good afternoon.
Question for Larry, can you give us an update for the search for head of stores and give us more color on some of the management changes and additions that you recently made?
- Chairman and Chief Executive Officer
I think we made a number of different changes in the company and we will spend some more time talking about that more specifically at our conference in a couple of weeks.
As you can see, we divided up the merchandising responsibility and we got a job open in operations as well as in planning and allocation and product development.
We are prioritizing those internally as to which will give us the biggest payback.
But we are looking for athletes that can clearly handle the kind of growth we were looking at going forward.
We are spending a lot of time on it so we make the right choice.
- Analyst
And housekeeping for Wes, can you give us the diluted share count for the quarter?
- Chief Financial Officer and Executive Vice President
Yep.
Let's just find it.
Actually, Bob, let's give you a call back.
I don't have it in front of me.
I'm story -- sorry.
- Analyst
Thanks.
Operator
The next question comes from David Cumberland from Robert W. Baird.
Please go ahead.
- Analyst
Good afternoon.
On marketing for the new merchandise that you are rolling out, can you comment on your strategies to make consumers that are not your most frequent shoppers aware of this new content?
- President
Sure.
As we talked about overall in marketing, we always had multiple medias, the print vehicles that we run are clearly really important.
Both direct mail and broadcast are ways to reach new consumers with new content and each of those brands and overall that whole updated world of women along with the huge new initiative with Estee Lauder have a very powerful marketing package supporting them in the third quarter and all the media that we participate in, direct mail, print, television, radio, they don't have backing in each one of those things.
For the most part in the apparel piece, the Daisy initiative, Apartment Nine, existing Nine and Coe and Access, those are broad lifestyle brands that reach into multiple areas in the store and, of course, the beauty business will be whole new unique experience.
So I think one of the things we are trying to accomplish there is clearly re-enforcement of the consumer already have but I think much more importantly reach out to the consumers that -- and offer them the same value that existing ones do.
- Analyst
And then one other topic.
Can you comment on your account plan for the month of May and later memorial day have an impact on May?
- Chief Operating Officer, Treasurer, and Director
As we look at the comp on second quarter, as we set within the guidance we are looking for a flat comp on the quarter.
We would expect to see that in May.
And then as you look at June, July, we would expect June to probably be a little stronger than July because of June getting the benefit of memorial day and if you recall July last year we were heavy from a clearance standpoint so we would expect those two things to offset.
- Analyst
Thank you.
Operator
The next question comes from Dana Cohen from Banc of America Securities.
Please go ahead.
- Analyst
Hi, guys.
Two questions.
One is, just help me out on the math.
If you take the spread between comp and total over-square-footage, it would look like new store productivity was more like 60% and you are saying it's still in the 70 to 80.
What are the differences there?
- Chief Financial Officer and Executive Vice President
I think you are rounding down.
If you do the math, it comes out to like 67 and change.
What you don't have unfortunately the ability to do is look at how long the store that were open during the month and calculating it that way and if you do that, that data would indicate we are right within the 70 to 80% range.
- Chief Operating Officer, Treasurer, and Director
It's simply the timing of when new stores open within the quarter and within the month.
- Analyst
And then my second question would be to Kevin in terms of the strategy of private brand, can you talk about sort of the organization, you know, have you made changes or do you feel there need to be changes?
There seems to be an evolving strategy from what it used to be.
And historically it was more commodity approach versus it sounds like it's going to a collection.
How do you feel about the organization?
Does it need changes?
Will the percentage actually be changing as well from a target standpoint.
- President
Clearly there will be changes.
It started with us saying we are going to add an Executive Vice President position to drive product development for our private brands.
And what will come out of that, I think, will be probably a more clear view of content and how content works with the rest of the product we sell in the store because private brand and attrition is probably not going to dramatically change.
We see that growing, but we also see our national brand business growing.
So from a positioning standpoint, private brand and its importance to the overall business, I don't really see that changing.
At the same time we recognize some of the misses we had from a merchandise standpoint have clearly been in that world and they need to participate in the same kind of fashion success that we get with our brands, our national brands.
So improvements there are really critical.
There is not going to be a revolutionary change and hasn't really been any revolutionary change in our position on it.
One of the things that Larry mentioned earlier I think to either a question or during the commentary is that we will probably go into a little bit more detail of about our overall product development process, about the organization, about how it works within the age 70 to 75% national brand business that we have at the conference at the end of May.
To get into that detail in a phone call will be really hard.
- Analyst
It doesn't sound like the 75% national brand is changing.
- President
No.
No dramatic change.
We didn't have much of a change in that in the first quarter.
I think we were about equal to last year.
- Analyst
Thank you.
Operator
The next question comes from Linda Christianson from UBS.
Please go ahead.
- Analyst
Have I two questions for Kevin.
One, just on inventory, I know you happy with your overall inventory level.
How about inventory allocation per store.
It looks like inventory is light in some of the stores.
And then secondly, can you give more detail on what changes we might see in the content in the second quarter?
I recognize the big changes in the third quarter.
But are we -- should we see anything different in the second quarter?
- President
Sure take them one at a time.
From an inventory basis, we would call it grade standpoint from a high volume store to a lower volume store.
That was definitely when we talked about inventory levels, if you remember, at the end of last year we also talked about receipt flow.
Bringing in receipts much more closely in line with sales and also allocating inventory in better way from a grade perspective or volume perspective.
We've gotten some really big improvements there.
So getting inventory and sales in line in lower volume stores or stores that are maturing in their curve has been a really positive thing and I think will probably get the really big benefit from that in the second quarter because as you get to the seasonal transition times, that's when those higher inventories and low volume stores really haunt you from a margin perspective.
From a content standpoint, we were very clearly focused on two things to start and that was getting the inventory right, including by store and by area.
And getting the shopping experience back to what it should be.
And I think we knew there were probably opportunities we missed in the first quarter.
I think there will be fewer in the second quarter as we bring in some more product in some of these more updated lines and also correct some of the issues from the first quarter.
I would agree with you.
The more dramatic improvement will occur in the third quarter.
I think we will make steady improvement over the quarters.
- Analyst
Any changes in presentation of product as opposed to content of product in the second quarter?
- President
Yeah.
There will be and it will be very focused in the women's area and it will occur during the second quarter and will go into a much more detail on that during the investor conference.
But, yes, the answer is there will be.
- Analyst
Thank you.
Operator
The next question comes from Stan Poser from Mosaic Research.
Please go ahead.
- Analyst
Thank you.
Good afternoon.
Couple questions.
Number one, as far as on the inventory levels, is there -- is the mix across the board in good shape as far as the product goes?
Or are certain areas heavier or lighter than others?
I was in the stores and saw the footwear area.
The business wasn't good and there wasn't a lot of inventory there in the store I was in.
- President
Looking at it on a this year, last year basis, if we were down overall, 14% down, which I think which we were down, in area like womens apparel was down more dramatically than that.
Footwear actually was only down low single digit to last year on an average store basis.
So very similar levels and that doesn't mean that we didn't have a problem to solve.
But overall home and footwear and accessories had very slight decreases to last year's level.
Womens apparel, men's apparel and kids apparel had very dramatic decreases to last year's level.
- Analyst
Gotcha.
Thank you.
Operator
Next question comes from Patrick McKeefer from SunTrust Robinson Humphrey.
Please go ahead.
- Analyst
Thank you very much.
When you look at the earnings number, 33 cents which was in line of your original guidance of 32 to 34 cents, and yet you were about 300 basis points shy of the mid point of your comp guidance of 2 to 4%.
My question is, what was the big swing factor relative to your or the offset maybe is a better word relative to your plan that allowed you to hit the earnings number?
- Chief Operating Officer, Treasurer, and Director
Basically gross margin.
We had thought that we would probably be slightly under last year gross margin picking out the effect of that accounting change and we ended up on a pure basis about 20 basis points better than a year ago.
So all about inventory management.
- Analyst
Okay.
And when you look across your store today and just the mark-downs, and whether it's a 25% mark-down, 30% mark-down, 40% mark-down, that sort of thing, is there a way of quantifying where the average mark down might be today versus a year ago?
- President
Well, there is a --.
It's not something that I have sitting here in my fingertips and doubt anything that we ever shared anyway.
- Analyst
Okay.
- Chief Financial Officer and Executive Vice President
Yeah, it's definitely less than last year because as I mentioned earlier with the AUR going up, that's all because of clearance.
It's not because of our normal promotional pricing being any higher than it was in previous years.
- Analyst
Okay.
And lastly, on the monthly same store sales numbers, 6.6 in February and down slightly in March and down 4.6 in April.
Just wondering if you can comment on that.
How the quarter progressed in that respect.
Maybe any color as to why February was strong.
I know you talked about this in February but why February was as strong as it was and April was as weak as it was.
Just any color to help us understand why the progression was such that it was.
- President
Well, I think when you look at February, we came out of the holiday season aggressive to get our inventories in line.
Although we started with less, we had a good a goodly amount of clearance in the buildings.
So we got very aggressive with that and I think that drove business because it wasn't on spring categories.
And as you look going forward as the weather changed and as we tried different promotional events, some worked and some didn't.
And it varied by month significantly.
And so it was a combination of that and as I said, our focus was on inventory control.
And the store experience, and we clearly missed some things toward the end of the first quarter in content and some of the marketing things we tried sort of varied by month.
I don't know if that's the color you were looking for but stay tuned.
- Analyst
That's helpful.
Thank you.
Operator
The next question comes from Gary Holdsworth from Wedler Morgan.
Please go ahead.
- Analyst
It's a follow-up to the question that was just asked.
What didn't work as far as a promotional activity and I know you won't get real specific here.
But we saw a number of activities with direct mail that probably worked because you were targeting your best customers.
Could you comment on the things that maybe didn't quite work as well as you planned.
- President
To be honest answer is, no.
There were as I said earlier, there were broadcasts changes that we made.
They had to do from a media standpoint in terms of wait and creative and timing.
Clearly print changes we made both up and down in pages on events.
So for the whole period we actually ran a few less pages than last year.
There were definitely direct mail adjustments that we made as we looked to see what gave us the greatest return.
But those are all things that clearly we wouldn't want to get into from a success and failure standpoint just suffice it to say that as those happened in the first quarter, adjustments were made in the second quarter to reflect positive things and the negative things and we will build on those.
We feel pretty good about what we learned and I also mentioned when we were talking about marketing, we are continuing to test things this month and next month that we want to see the results of and utilize during back to school and holiday.
So you will continue to hear us talk about testing different marketing events.
- Chief Operating Officer, Treasurer, and Director
Without giving you any specifics because that would be giving away secrets.
- Analyst
Okay.
Thanks.
Operator
The next question comes from Bill Dreher from Deutsche Banc.
Please go ahead.
- Analyst
Congratulations.
It looks like the turnaround is taking hold.
A couple questions here.
First on the balance sheet.
It looks like the short term debt popped up during the first quarter much more than I would have expected to $110 million.
Would have expected that type of thing in the third quarter.
Could you give us detail what was going on there?
- President
We chose to fully fund the [inaudible] because of tax advantages.
It's a timing thing.
So, I wouldn't read anything into it other than that.
- Analyst
Okay.
Next, talking about the gross margin.
You had a real nice job of showing gross margin expansion and backing out unusual item.
You have 20 bips up.
That was the toughest gross margin compared of the year.
You got into a real easy comparison in the second and fourth quarter as we go forward.
Do you think you might be able to show similar type of improvement in last year's numbers and where do you think we should think about gross margin for the remainder of the year.
- Chief Operating Officer, Treasurer, and Director
Obviously as you look at the quarter's, Bill, that you cited, we would expect the Marge be to be significantly better than last year.
- Analyst
Think you can get it all back?
- Chief Operating Officer, Treasurer, and Director
That might be stretching it a little bit but definitely we will get more than 20 basis points.
It's pretty significant.
When you look at what the inventory reduction level is and what that content of inventory is today, as Kevin said, the major reduction are in all those seasonal classifications that hurt us significantly in second quarter so we would expect to get an awful lot of it back.
- Analyst
So great.
Finally, one of your competitors had a great analyst meeting and put forth your GMMs.
Think we might be able to get to know your new GMMs a little better and get a feeling as to what is going on with them?
- President
You will get an opportunity to meet the key members of the merchandise team.
- Analyst
That's great.
- President
No cocktail like the other guys.
- Analyst
Give us a drink.
We may be more patient.
Thank you anyway.
Operator
The next question comes from Shari Eberts from J.P. Morgan.
Please go ahead.
- Analyst
Hi, everybody.
Can you talk about how that breaks out by region.
I know there were different sales performance in the mid west versus the northeast or the two that you called out.
Can you talk about how that is breaking out regionally.
- President
Your question cut out.
No heard the first part.
- Analyst
In terms -- is that better?
- President
Yes.
- Analyst
In terms of the inventory decline of 14%, I guess I was just hoping for more color on how that varied by region given the different sales performance last year as well as in the quarter in the northeast versus the mid west.
- President
I don't have it by region in front of me.
I don't know if Wes does either.
I do know that talking about it from a grade perspective, the larger decreases occurred in lower volume buildings because that's where we took really heavy gross margin hits last year in the second quarter as the season inventories were outlined compared to sales.
But regionally I --
- Chief Financial Officer and Executive Vice President
Yeah, you will probably see higher levels in the northeast because they are trending better.
And I think you would see if you were out in the new stores in L.A. and from last year I think you would see dramatically lower levels of inventory out there.
- Chief Operating Officer, Treasurer, and Director
Likewise, I would expect the mid west is more significantly down, than the northeast just because of what the comp sales performance has been by region.
- Analyst
Okay.
And then just my second question.
I didn't know if you would share this at the analyst meeting but talking about what kind of testing you have done in terms of the new private brands like the Apartment Nine, before the launch?
- President
We will talk more about it at the analyst meeting.
It's difficult for us to test our private brand itself.
We do a lot of research in terms of the positioning of the private brand and if it's appealing to where our customer demographics sees a gap in our assortments and compare that to the right price points are and what the right content is.
I don't know if that answers your question.
We will give more visibility into, hey, what really is Apartment Nine, and what is Apartment Nine compared to let's say Croft and Barrel and maybe that will help answer at the conference.
- Analyst
Thank you.
Operator
We have time for one last question.
Our final question comes from Joe Teclet from Wachovia Securities.
Please go ahead.
- Analyst
Thanks so much.
Wes, question for you.
Another gross margin question.
Can you go a little further and break down the direction of occupancy and merchandise margin in the quarter?
Even if we use 35.2%, it looks like this may have been your best first quarter gross margin ever.
And maybe you can just give a couple of reasons why that would be the case.
- Chief Financial Officer and Executive Vice President
Occupancy is not in margin so it's just pure merchandise margin.
- Chief Operating Officer, Treasurer, and Director
From a first quarter I could probably better answer that.
- Chief Financial Officer and Executive Vice President
This is my first quarter.
- Analyst
I haven't been here very long either.
I didn't know occupancy wasn't in there.
- Chief Operating Officer, Treasurer, and Director
That 35.2% is comparable to what we run the historically.
We have been between 35 and 35.2% in the first quarter.
- Analyst
And if I can ask another one since I am last.
It appeared in some of your promotions that a priced focused promotion, 50% off, whatever you want to use, is being less impactful this year and it appears that content is more important to the customer this year, is there any thought or need of adding another national brand to the stores at some point with which to then use in advertising as opposed to just private label?
- Chief Financial Officer and Executive Vice President
I think we are always looking for opportunities to add a credible national brand that we can take across the store.
We have never stopped looking for those.
And we will continue to be some interesting news going forward in terms of our ability to do that.
- Analyst
Maybe not this year but next year event?
- Chief Financial Officer and Executive Vice President
Well, really can't -- you know, I would love to be able to share that information with you, really I would.
And I think that over the next month maybe even at the investor conference we can shed more light on it.
- Analyst
Good enough.
- Chief Operating Officer, Treasurer, and Director
Wes, before we ring off, do you want to give them -- I found the shares in my mounds of paper. 343.858.
Bob if you are on the call, some other guys might need the number, too.
Thanks a lot.
- President
Thank you.
Operator
This concludes today's teleconference.
Thank you for participating and you may disconnect at this time.