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Operator
Good afternoon, ladies and gentlemen.
And welcome to the Kohl's department stores second 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, statements made on this call include projected financial results are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements.
Such risks and uncertainties include those that are described in Kohl's annual report on form 10-K, and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.
Also please note that replays of this call will be available for 24 hours, but this recording will not be updated so if are you listening after August 12, 2004 it is possible that the information discussed is no longer current.
I would now like to turn the call over to Mr. Wes McDonald, Chief Financial Officer.
Mr. McDonald, you may begin.
Wes McDonald - CFO
Thank you.
With me today is Larry Montgomery, Chairman and Chief Executive Officer, Kevin Mansell, President and Arlene Meier, Chief Operating Officer.
Arlene will take us through the financial performance.
I will review some points on the balance sheet.
Kevin will walk through some of our merchandising and marketing highlights.
And Larry will wrap up with a discussion of our expansion plans and earnings guidance.
With that, I will turn it over to Arlene.
Arlene Meier - COO
Thanks, Wes.
Let me take you run through on the P&L from a sales standpoint, as you know, sales for second quarter were approximately 2.5 billion, an increase of about 13% over last year.
Likewise, year to date, the increase was approximately 13%.
Year to date sales at 4.9 billion.
In the second quarter, as you know, we had a comp store sales decline of about 1%.
That was totally attributable to a decline in the number of transactions.
Year to date, where our comp was down about a half a percent, transactions and comp stores were basically flat, while average transaction is what caused that half a percent drop.
From a region standpoint, you've been hearing this so far all year, the northeast obviously was our strongest region from a comp perspective, while the midwest remains our most difficult region.
Productivity of new stores, we continue to be pleased with, they continue to run between 70 and 80% of an average store.
From a line of business standpoint, accessories led the company for the quarter, while kids was the most difficult on the quarter.
As you look at gross margin, I think you all know, because of an accounting change, as it reflected in how we had to account for some vendor moneys for advertising, this increased margin rate has had a negative effect on SG&A so I am going to give you margin both ways on a reported basis for the quarter, margin was about 36.4%, if I exclude the effect of the EITF, it was about 36%.
That compares to last year at 33.4%, on a FIFO basis, and is flat to 2002 levels, so we're very, very pleased that we fully recovered the gross margin rate lost that we had experienced a year ago.
On the season reported gross margin, 36%, again, excluding the EITF, 35.6%, and that compared to last year on a FIFO basis, at 34.2, and 2002, at 35.5.
So we feel very, very good, totally, as we look at going into the second half, the recovery we had in the first half.
With the cleaner inventory position, we're pretty confident that as you look at third quarter, as you know, a year ago, we deteriorated 70 basis points from third quarter of '02 on a FIFO basis.
We would expect to fully recover that 70 basis points.
In addition, I would expect that the impact from EITF will be pretty similar in Q3 as it was in Q2.
When you drop down to SG&A, as you look at SG&A expenses, we came in as expected.
The unfavorable impact of the EITF for the second quarter was about 50 basis points when you look at things on a percent of sales.
And year to date, the impact was about 60 basis points.
Excluding the effect of the EITF, SG&A for second quarter was up approximately 17% over last year.
Our expectation for the third quarter when you look at SG&A dollars is for an increase of approximately 24%, including the effect of the EITF.
This guidance includes our incremental costs associated with launching our beauty initiative, as well as marketing costs to support the rollout of several of the new brands that we're introducing in the quarter.
When you look at depreciation and amortization, 70.8 million this year compared to 57 million last year, about a 24% increase, increases primarily due to our new store openings.
As you look at D&A expense for the third quarter with the opening of the new stores that are planned, we would expect that expense next quarter to be about 74 million.
Pre-opening expense on the quarter, 4.7 million, compared to 2.5 million last year.
We'll open seven stores in August of this year.
That compares to opening two stores in August last year.
In the first half, we opened 47 stores now, compared to 35 stores.
On an average store basis, including the 5.2 million that was incurred in fourth quarter of fiscal '03 for the spring opening, we spend on average $490,000 per store.
As you look at third quarter, with the stores in the markets that we plan to open during third quarter, we would expect pre-opening to be about $23 million on the quarter.
So as you look at all store openings for 2004 for the year, we would expect the overall average to be pretty comparable to what we spent for fiscal 2003.
From an operating income standpoint, 265 million this year, compared to 203 million last year.
So an increase of 30% over last year on the quarter.
Operating income for the quarter was 10.6% of sales, compared to 9.2% last year, Wes is real happy to get back into the double digits on operating income.
Year to date operating income is up about 16% over last year.
Net interest expense, 15 million on the quarter.
That compares to 23 million last year.
Just as a reminder, during second quarter last year, interest expense included the write-off of about $6 million of deferred financing fees related to the convertible debt.
Interest expense, as you look forward, as you look at third quarter, we would expect to be about $16 million.
From a tax rate standpoint, we continue to see that tax rate for the year at about 37.8%, so consistent with what you saw in the first quarter.
All of that resulted in a bottom line net income of about 156 million, compared to 112 million last year.
So up 39%.
Year to date, about 270 million compared to 223 million a year ago, so up about 21% on a year to date basis.
From an EPS standpoint, that resulted in 45 cents a share, compared to 33 cents last year.
And from a bottom line, the impact from EITF did not impact EPS on the quarter.
With, that I'm going to turn it over to Wes to go through the balance sheet.
Wes McDonald - CFO
Thanks, Arlene.
In terms of square footage, we ended the quarter on a gross square footage basis of 52,702,000, an increase of 20.6%.
Selling square footage was 45,256,000, an increase of 21.3%.
Our accounts receivable balance was about 1.1 billion at the end of the quarter.
Versus last year's 950 million, an increase of 15%.
Our Kohl's charge sales continued to be strong as sales increased year to date 21.4% and in comp stores, our share continued to run very strong, and comp sales were up 9.8%.
Share continues to increase at 37.4 versus last year at 34.8.
And we continue to turn the receivables very quickly, 3.6 times this year, versus 3.5 times last year.
We continue to be pleased with the quality of the portfolio.
Write-offs as a percent of Kohl's charge sales year to date were 1.2% this year compared to 1.4% last year.
The reserve at the end of the quarter was approximately 2% of receivables, compared to 2.2% at the end of the second quarter in 2003.
Inventory levels.
Inventory was 1.776 billion, versus 1.717 billion last year, an increase of 3.5%.
Inventory levels are down significantly from last year.
At the end of the quarter, an average store was down approximately 14% in dollars, and 13% in units.
At the end of July, clearance unit inventory per store was down almost 50% from last year.
On our fixed asset, capital expenditures were about $275 million for the quarter.
And year to date, CapEx is about $443 million.
Capital expenditures are continued - they're expected to be about $1 billion for the fiscal 2004 year and we expect to fund all of these expenditures from cash flow from operations.
Our accounts payable balance at the end of the quarter was about 789 million versus 702 million last year, an increase of a little over 12%.
The change versus LY, reflects the benefits of executing our strategy to flow goods closer to the point of sale.
At the end of the quarter, we were -- percent of inventory was 44.4%, versus last year's 40.9.
And we would continue to expect AP as a percent of inventory to be in the high 30s to low 40s.
For the effect of the EITF 02-16 pronouncement, at this point we expect net earnings will be impacted in the third quarter by approximately a penny a share as we open our remaining 2004 new stores.
As a bookkeeping note for you guys out there on the weighted average number of shares, the basic shares at the end of quarter were 341,030,000.
And diluted were 344,195,000.
And with that I will turn it over to Kevin to talk a little bit about merchandising and marketing.
Kevin Mansell - President
Thanks, Wes.
I am going to start talking on sales.
Obviously while we were disappointed with the sales results for the second quarter of fiscal 2004, our emphasis on inventory management resulted in increased profitability for the quarter.
In the second quarter, we started to see stronger selling of new receipts in many of our apparel areas, especially in missy and juniors.
As a result, we expect to be able to drive comp sales increases going forward.
From a point of reference, our comp increase in August last year was 3.2%, September delivered a 5.5% comp increase, with October down 11.6.
For the quarter, we were down 1.3% comp.
We continue to be focused on four key areas.
Inventory management, the in store shopping experience, merchandise selection, and marketing differentiation.
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.
Our clearance levels are down almost 50% to last year on a per store basis, and are even lower than 2001 and 2002's levels.
As we look forward to third quarter, this will result in a substantial reduction in clearance sales, particularly in August.
As Arlene mentioned, this is what allowed us to recover our gross margin rate in the second quarter, and it's what gives us the confidence that we will recover our gross margin rate loss from a year ago in the third quarter.
The effect of lower clearance levels in our comp sales lessened as the fall season progressed.
We're very comfortable with our inventory position going into the fall season.
And we expect to end the third quarter with inventories down low teens on a per store basis to last year.
Relative to 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 of the entire organization.
We're very pleased with the progress made to date.
And we know very well that this will ultimately help improve both our top and bottom line.
We have made some changes to our in store merchandise presentation that you should have seen already in the second quarter, and more will be coming as we progress in the third quarter.
These include changes in space allocation, adjacencies, and graphic presentations throughout the store.
On merchandise selection, in the second quarter, we introduced everGirl, a brand from Nickelodeon, targeted to the tween customer that has gained a lot of acceptance through its unique Web site.
The initial sell-through on the merchandise for back to school has been great.
We also introduced Bongo in juniors and are also very pleased with the initial selling.
By mid September, you will see Daisy Fuentes in both career and active wear, rolled out to all of our stores.
Additional categories such as sleep wear, accessories and shoes will be introduced later in the fall season.
Mid September will also be the introduction of Apt. 9, our new private label brand in men's and women's.
As you may recall, Apt. 9, will be positioned as modern and sophisticated with clean lines and will be dress casual to dress clothing.
Some of you may have already seen some Apt. 9, merchandise begin to arrive in our stores.
At the same time, we are also expanding the presence of our successful updated lines Nine & Company, and Access.
The increased presence of these brands will be a powerful driver of our missy business this fall as well.
As you know, we will be entering an entirely new category with the introduction of the beauty business at Kohl's, developed in partnership with Estee Lauder.
It will initially consist of three new exclusive brands.
Two of the three brands have already been announced, American Beauty and Flirt.
The third brand, Good Skin, will be announced tomorrow in women's wear daily.
We're very excited about the look of the product, the packaging, and the fixturing.
Everything is on track from production to store implementation.
And the implementation will be complete in the initial 288 stores by early October.
Each of these merchandise initiatives is focused on addressing very specific customer feedback, as well as supporting positioning of the Kohl's brand overall.
I'm very pleased with the progress we have made in the merchandise content in the second quarter.
And what I feel is even more dramatic improvement in the fall as some of these key merchandising initiatives really take hold.
Two initiatives for spring 2005 are also on track.
Chaps and Royal Velvet will be shipping in January for spring selling.
Chaps will be the largest brand introduction that we have ever done in men's, and we believe it has the potential to become an across the store brand.
Royal Velvet will initially sell in bath, but we feel it has potential to expand throughout the home.
Finally, marketing.
We continued to test different things in the second quarter across the country.
We have incorporated our learning in our marketing for the important back to school and holiday seasons.
We will also continue to test things going forward, as we must continue to stand out among the competition to remain the destination of choice for our customer.
We will be adjusting our mix of print, broadcast, both TV and radio, and direct mail to find the most effective medium for each type of event.
As we make these changes, we're ensuring that the message of brands, value, and convenience remains strong, that pricing is easy to understand, and that we create a sense of urgency for the customer to get to the store for each event.
I am going to now turn it over to Larry to touch on expansion and earnings guidance.
Larry Montgomery - Chairman & CEO
Thanks, Kevin.
First of all, we have made significant progress on our 2004 initiatives, as evidenced by our strong earnings performance for the second quarter.
We're very comfortable with the level and content of our inventory and the controls we have in place to maintain the appropriate level.
At the same time, our in store efforts to create a better shopping environment has been well received by the customer.
As Kevin mentioned earlier, we've seen continued improvement in the selling of new receipts throughout the second quarter.
This fact, along with our planned new merchandise launches, coming throughout the third quarter, give us confidence that we will return to positive comp store sales increases beginning in the third quarter.
Let's talk about expansion for a minute.
During 2004, the first half of the year, we successfully opened 47 stores.
We significantly increased our presence in the southwest, with new market entries into Sacramento, San Diego, Fresno, and Bakersfield, California.
We're pleased with the sales performance of the new stores, and they continue to run at our first-year productivity expectations of between 70 and 80% of an existing store.
As announced earlier, we're planning to open 48 stores this fall season.
This will take us to 637 stores by the end of 2004.
For the 48 stores for fall, seven are going to open up in August, and 41 in October.
New market entries, which is 24 of those stores, 11 in San Francisco, 5 in Salt Lake City, 3 in Rochester, New York, 2 in Portland, Maine, 2 in Reno, Nevada, and 1 in Montgomery, Alabama.
The fill-in markets, also 24 stores, will consist of 9 in the midwest region, 6 stores in the northeast region, 5 stores in the southwest, 3 in the south central, and 1 in the southeast region.
For 2005, we plan on opening up approximately 95 stores.
We will talk a little bit about earnings guidance.
In looking at First Call earnings per share estimates for the quarter, the range is very broad. 39 cents to 48 cents.
Arlene gave you earlier guidance on most of the components of the P&L.
Assuming a low single digit comp store sales increase, we would expect earnings in the range of 41 to 44 cents per diluted share for the third quarter.
We continue to be comfortable with the earnings guidance we've provided for the year.
With the low single digit comp increase for the fall season, combined with more normalized gross margin rates, net income should increase between 25 and 30% over last year.
That implies an earnings per share in the range of $2.13 to $2.21 per diluted share.
With that, we will be happy to open it up for questions.
Operator
Thank you.
We will now begin the question-and-answer session.
If you have a question, you will need to press star, then one on your touch-tone phone.
You will hear an acknowledgement that you have been placed in queue.
If your question has been answered, and you wish to be removed from the queue, please press the pound sign.
Your questions will be queued in the order that they are received.
If you are using a speaker phone, please pick up the handset before pressing the numbers.
Once again, for any questions, please press star, then one, on your touch-tone phone.
Our first question comes from Emmy Coslov from Sanford Bernstein.
Please go ahead.
Emmy Coslov - Analyst
Thanks.
I have a couple of questions.
First, is your expectation for positive comps in Q3 back end loaded given the compare.
Second, on Estee Lauder can you give us comfortable that execution risk isn't too great there?
There has been a big concern in the market lately given it requires, you know, special fixturing, training and as a new category, inventory for you guys to manage?
And then finally given the new group of owners from Mervyn's who want to keep the operations alive, do you expect them to be more of a competitive threat than when it was under Target?
Thanks.
Larry Montgomery - Chairman & CEO
That's three questions, Emmy?
Emmy Coslov - Analyst
Yeah.
Or one, A, B, C.
Larry Montgomery - Chairman & CEO
Okay.
We each get to answer one.
Why don't you take the first one.
Arlene Meier - COO
Okay.
As you look at the comp on the quarter, as Kev said, coming out of July with 50% less clearance than last year means obviously we have that much less that we need to be selling from a clearance standpoint in August, so yes, as you progress through the quarter, we would expect August to be the most difficult and to get progressively better.
Kevin Mansell - President
Emmy, it Kevin.
As it relates to Estee Lauder, no, I think we feel great about our current position from all aspects, from an assortment standpoint, really, really good, on delivery of all three brands, and all the products, from a implementation of both fixturization and hiring, plans are exactly on track for the implementation I just gave you, and from a, you know, flow standpoint, of course, we had put in place contingency plans that would allow us to exceed, you know, our sales pro forma numbers substantially and still remain in stock, and those are well on track.
I think I mentioned earlier that, you know, Lauder is involved from a replenishment standpoint on a VMI basis, helping us keep in stock as well.
Larry Montgomery - Chairman & CEO
Emmy, what was the exact question about the new owners from Mervyns'?
Emmy Coslov - Analyst
Just, they decided to keep it alive.
Do you think that's more of a competitive threat for you guys, is it neutral or less?
Just, you know, any thoughts on that?
Larry Montgomery - Chairman & CEO
You know, it's so vague as to what's actually going to happen, I think I will reserve my judgment until they close and try and figure out what they are going to do.
Emmy Coslov - Analyst
Okay.
Fair enough.
Thanks.
Operator
The next question comes from George Strachan from Goldman Sachs.
Please go ahead.
George Strachan - Analyst
Hello, everybody.
Even adjusted for EITF, it looks like the gross margin in the second quarter was roughly the highest in the history of the company as a public company.
Is that partially because of the inventory controls that you put in place in the quarter?
And how sustainable do you think margins at that level are?
Arlene Meier - COO
George, that is -- that does match our high in our history for the quarter, so it is clearly a result of how much cleaner we are from an inventory position.
So again, like I said, on third quarter, we expect to recover 100% of what we had lost last year as well on third quarter, so it's not like we haven't run pretty good margin rates year after year.
We're just looking to get back to our historical level.
George Strachan - Analyst
But, as a goal, I mean would you expect to continue putting up numbers like that?
Or is that really kind of the high water mark because of the quarter?
Arlene Meier - COO
We would expect, like I said, to recover in third, our goal for the year was to get back to that 34% range that we have run historically.
George Strachan - Analyst
Great.
Thank you.
Operator
The next question comes from Daniel Barry from Merrill Lynch.
Please go ahead.
Daniel Barry - Analyst
Hi.
Good afternoon.
The 95 stores next year, any indication of new markets, even smaller one?
I guess you're not ready to announce big ones?
Larry Montgomery - Chairman & CEO
We're not ready to do that just yet, Dan.
But I think that we pretty much tell you what's going on next year on the fourth quarter.
Daniel Barry - Analyst
And then you haven't said anything lately about the small store concept.
Can you update us on that?
Larry Montgomery - Chairman & CEO
The small store continues,, we're continuing to watch, that and you know, I think it is going to be a part of our expansion, you know, down the road.
But we still have, again, such huge opportunity with our 88,000 square foot prototype that that is really where our focus is right now.
Daniel Barry - Analyst
Do you think any of those 95 would be small stores?
Larry Montgomery - Chairman & CEO
There is a chance we may try a couple.
It wouldn't be more than a couple of stores.
Just to to try some different regions.
Arlene Meier - COO
Keep in mind, Dan, when you look at small store, I wanted to be able to see how well they perform in their second, third, and fourth year, to know how to really pro forma things out in the future, before we start to open a lot of them.
Daniel Barry - Analyst
Fair enough.
Thank you.
Arlene Meier - COO
We're still in a learning period.
Operator
The next question comes from Jeff Klinefelter from Piper Jaffray.
Please go ahead.
Jeff Klinefelter - Analyst
Yes, Kevin, a couple questions for you on the merchandising.
You did mention that you got some great early reads on missy's and juniors.
Could you talk maybe a little bit more about young men's, men's, and childrens.
Children's seems to have been weak at a lot of places this spring, summer, and kind of early fall season.
Maybe some explanation, if you have any, for why that is?
And then any signs of strength or recovery in the other two categories?
Kevin Mansell - President
You know, Missy, I think we pretty much hit on all the things that are driving missy, and, you know, one of the reasons I think we feel so much stronger about the third quarter is that the things that are driving missy right now, Daisy, you know, Nine and Co, Access, looks like Apt. 9, as they take hold, in a much bigger way, in September, we think they are going to have a very positive impact.
You know, kids has been week for us.
It was weak in the second quarter for sure.
But one thing that has consistently worked in kid's and I think that's been the case in the example I will give you is newness, and everGirl has been a home run.
And right out of the box.
And has a lot of opportunity to grow.
And a lot of that is based on, you know, newness and new concept, and new initiatives creating some new excitement.
So I think introducing more newness in the kids is important.
Jeff Klinefelter - Analyst
Any comments on pricing, I guess, to that extent?
I mean is their price resistance, inflation, deflation, impact, anywhere in particular in the store right now?
Kevin Mansell - President
No, I think it's, -- honestly it's a lot like the other areas, so much about -- is about content, you know, and everGirl is not, you know, a opening price point product line.
It's, you know, for us, you know, moderate to more premium, and yet, it's by far the most successful thing we have.
Jeff Klinefelter - Analyst
Okay.
Great.
Thank you.
Operator
The next question comes from Deborah Weinswig from Smith Barney.
Please go ahead.
Deborah Weinswig - Analyst
Good evening.
Two questions.
One, at the beginning of the quarter, your guidance had been for flat comps and guidance for earnings was 42 to 45.
You came in a little light on the comp.
What drove earnings to the high end of the range?
What was different than what you expected going into the quarter?
Arlene Meier - COO
Recovery on margin was greater than we would have thought coming into the quarter, so I think that's just a reflection on how much better sell-throughs were on product than we might have initially thought.
Deborah Weinswig - Analyst
Okay.
And then Wes, you gave a lot of detail on the balance sheet.
Can you also help us understand the kind of increase in accrued liabilities in the year?
On the quarter?
Wes McDonald - CFO
Yes, some of that was due to payroll increase, and then sales and property taxes pretty much increased along lines of store growth.
The big increase was in accrued capital.
We had traditionally done the accrual at the end of the year, and we moved to do this accrual on a quarterly basis.
You would have seen the same kind of increase on the first quarter as well.
And the offset to that is really just in CIP.
Deborah Weinswig - Analyst
Great.
Thanks so much.
Operator
The next question comes from David Cumberland from Robert Baird.
Please go ahead.
David Cumberland - Analyst
Good afternoon.
Some questions on marketing.
Arlene, you mentioned marketing to support product launches.
Will marketing as a percent of sales increase in Q3?
If so, by roughly how much?
And then a separate question, on marketing, have you noticed any competitive response to some of your marketing changes?
Arlene Meier - COO
Well, one, from a marketing as a percent of sales for Q3, to be honest with you David, that's not a number that we would give you.
We would expect it to be up, though, relative to last year.
Most significantly, because of the launch of beauty.
So that's a new initiative that obviously we're going to launch that properly.
And what was the other part of the question, David?
David Cumberland - Analyst
Competitive.
Right, with your marketing changes, have you noticed any competitive response?
Larry Montgomery - Chairman & CEO
No, I don't think there is any -- nothing specific, David, no.
David Cumberland - Analyst
Great.
Thank you.
Operator
The next question comes from Joe Teklits from Wachovia Securities.
Please go ahead.
Joe Teklits - Analyst
Thanks.
Hi, good evening.
Two questions.
First, Wes, can you give us how you see the metrics playing out for the quarter?
To get the positive comps on such a large inventory decline?
Wes McDonald - CFO
Well, I think you mean the comps are going to be driven primarily by transactions per store.
There could be some upside in AUR, as we continue to, you know, have lower clearance than last year, but I think the real driver of comps is going to be in getting the people into the door, and buying the product.
Joe Teklits - Analyst
So given that approach; is there any cap to the potential comp that you could report, given the low inventory levels?
Arlene Meier - COO
Kev.
Why don't you talk a little bit though, about timing of receipt, because part of what we're looking at as far as lower inventory level in October is just some of the timing between October and November.
Kevin Mansell - President
Right.
No, that is a good point.
You know, I know you know that we have been talking about making receipts follow more closely to sales, which has been a big objective of the company, so a little bit of that end of October projection that we gave you, the, you know, low double digit number isn't anything more than a reflection of that.
It's just us looking at where the sales are coming from, and mirroring them in receipts, and that means, you know, we're going to be receiving goods in September and October, received goods in September and October last year that we'll receive in late October and November this year, so, you know, what we experienced so far, is that has been a positive.
I mean it's positive obviously from allocating the inventory and gross margin flow-through standpoint, but it has also been a positive from an in store environment standpoint.
It's a lot more shopable store.
Joe Teklits - Analyst
Right.
And so then the year end inventory I would imagine would be -- would not be down as much?
Kevin Mansell - President
No.
Wes McDonald - CFO
It should be sort of flat.
We have said it's going to be flattish but the big improvement will be in the content of the inventory.
We're going to have a lot more newness versus last year and we were still fairly heavy in clearance inventory.
Joe Teklits - Analyst
Okay.
One last question.
Larry, the market seems a bit worried about $45 a barrel oil.
Is there any point where you actually become worried about that?
Larry Montgomery - Chairman & CEO
The market seems worried about what?
Joe Teklits - Analyst
$45 a barrel oil.
Gas prices, per se.
I mean is there any point where you actually become worried about that, the impact on your consumer?
Larry Montgomery - Chairman & CEO
You know, I think that, you know, people like Wal-mart and Target, with their customer might be worried a little about that.
I think that -- when you look at the price of gas, in our concept being convenient locations, you don't have to drive far to get there, I look at that almost as maybe a positive.
Joe Teklits - Analyst
That's a good answer actually.
All right.
Thank you.
Operator
The next question comes from Dana Cohen from Banc of America Securities.
Please go ahead.
Dana Cohen - Analyst
Hey, guys.
A couple of questions.
First of all, on the SG&A, it looks like it's a little higher or it sounds like it's a little higher maybe than originally expected.
Where is the investment?
It sounds like the marketing.
Can you just flush out a little bit sort of what has changed?
Second, the marketing side, what should we be looking for, you know, how much of it will be branded?
Because I mean for example I saw the everGirl commercial where it was more branding, not price.
How important is that going to be as we move into the fall?
And then lastly, can you just give us any sense of what you think the Labor Day shift impact is going to be on the August numbers?
Arlene Meier - COO
Let me first talk about the marketing.
It's not higher than where we were planning to be.
At this point, we really hadn't given you all any guidance as it related to the third quarter or the break down of things in the back half.
So obviously, we've been very much aware of, you know, what we want to spend as we look at new product launches, as we look at the beauty launch, all of that was already a part of our thinking, as we gave you overall guidance of earnings on the year at the beginning of the year.
Dana Cohen - Analyst
And would there be elevated spending in the fourth quarter as well?
Arlene Meier - COO
No, I think when we look at fourth quarter, we're on a more norm as far as that being totally focused on holiday.
As you know most of our product launches that have yet to happen are basically all third quarter.
Kev, I can't think of anything that is waiting really 'till fourth quarter.
Kevin Mansell - President
No.
You know, as it relates to the mix of marketing, you know, just because we seem to see ourselves coming and going, every time we talk too much about marketing, I would just say we've spent the first half of the year, you know, trying all kinds of tests in terms of the mix, the media, and the importance of event versus, you know, more desire or brand marketing, and broadcast, as compared to direct mail, or print, so we feel pretty good about the strategy we now have for the fall, based on that.
And it is different than last year.
But I wouldn't want to go into the detail of that, because I just don't think competitively that's a good idea.
And Labor Day shift, I think the answer on Labor Day shift probably is, it's not as significant at Kohl's as it is probably at -- particularly department stores, and I would say that based on what we saw let's say for Memorial Day where the shift seemed to be pretty significant in some stores.
Dana Cohen - Analyst
Great.
Thanks.
Operator
The next question comes from Robert Drbul from Lehman Brothers.
Please go ahead.
Robert Drbul - Analyst
Hi.
Two question, please.
The first one is on the cosmetics launch; is there any, in terms of the distribution and the store base, in terms of geography, can you give us an idea where the stores, the locations of the stores you're going to place the cosmetics in?
Kevin Mansell - President
We'll talk about it probably when we release the August sales numbers in September.
I just -- you know, again, competitively, we don't want to get too far ahead of ourselves, but it's a -- it's a broad geographic distribution, so it's markets across the country.
It's not concentrated anywhere in one place.
Robert Drbul - Analyst
Okay.
Great.
And then in terms of the midwest region, you know, can you just give us an update in terms of what you're seeing in terms of any signs of life for your stores in the midwest and your expectations, how they might perform going into the back half year?
Arlene Meier - COO
Well, really, as we look at midwest relative to the rest of the company, you have to realize first of all midwest is the most mature, so there will always be, you know, a pretty significant difference between midwest and say a newer region, so as we roll out the merchandise content initiatives that have been happening, the midwest benefits just like the rest of the company.
So as we start to run positive comp increases relatively midwest will improve as well.
Robert Drbul - Analyst
Great.
Thank you.
Operator
The next question comes from Bill Dreher from Deutsche Bank.
Please go ahead.
Bill Dreher - Analyst
Yeah, thanks a lot.
I just want to clarify a couple of things.
The SG&A you're looking for to be about 24% higher on a dollars basis so that would imply about $649 million?
Arlene Meier - COO
Yeah, we're looking at approximately -- I don't know what the --
Wes McDonald - CFO
Yeah, that's about right.
That's including the EITF effect.
Bill Dreher - Analyst
If you -- can you break out the EITF on a dollars basis?
Arlene Meier - COO
It's not something we're going to give you, Bill.
Bill Dreher - Analyst
Okay.
There has been a lot of confusion about your pre-opening expense.
The way I have been looking at it is, you know, 75% of it, that's being expensed in the current quarter and $650 million -- excuse me, $650,000, and then $25% in the next quarter, at $500,000.
Is that the right way to be looking at it?
How should we be calculating pre-opening expense?
Arlene Meier - COO
Well, when you're looking at the pre-opening in second quarter, that is all related to stores that open in August and October.
So for the August store, the bulk of the August stores pre-opening is probably in that number.
Okay?
And then the guidance that we gave you for third quarter is all related to the majority of the October stores and what little there is of August.
So I think the average cost for store for the year --
Wes McDonald - CFO
550.
Arlene Meier - COO
Is about 550, Wes?
Wes McDonald - CFO
Yes, 550 but all stores aren't created equal.
I think some people -- the reason we gave you the number this quarter is because there is a lot of differences in your guys' models out there when I was looking at it and we just wanted to make sure you were accurate.
But the stores earlier in the spring were a little cheaper than the stores that we're opening in the fall.
Obviously San Francisco is a very important market for us and we want to make a big splash there.
Arlene Meier - COO
Fill-in stores, as you all know, run quite a bit less than do new markets historically, a lot of our fill-in stores fell in fall season and new markets in spring season.
This year, as you saw, as Larry went through, half of the stores that we opened this fall are actually new markets.
And that may be why some people are confused in their model.
Bill Dreher - Analyst
But there is not -- but it sounds like there is not a significant difference in the pre-opening spans for those -- San Francisco stores than we're seeing in the southern California stores?
Arlene Meier - COO
No, they will open from an average pre-opening cost similar to --
Wes McDonald - CFO
Similar to L.A., yes.
Bill Dreher - Analyst
That's great.
And finally, there has been a lot of concern about the consumer and the back to school selling trends.
I know you guys are accelerating your own trends.
What can you say about sort of the consumer sense sort of mid June?
Kevin Mansell - President
The three of us are looking at each other.
That's a big one.
Larry Montgomery - Chairman & CEO
You know, I don't know that we're -- I don't know that we're qualified to comment on the consumer.
I mean our business since June hasn't been too great.
We have been working on a lot of our initiatives to get ourselves right so we can start taking market share.
I think that we've done those things.
And indications from, you know, late second quarter give us a lot of confidence going forward.
Arlene Meier - COO
As we look at new content that's been coming in in second quarter, like Kev said, you know, we feel very, very good about the sell-through and the response on the part of the consumer with a lot of that new product coming in.
That's what it's all about when you're looking at apparel.
Bill Dreher - Analyst
That's great.
Congratulations.
Operator
The next question comes from Bernard Sosnick from Oppenheimer Funds.
Please go ahead.
Bernard Sosnick - Analyst
Thank you.
With regard to same store sales, in July, you were looking for a 5% decrease.
You actually did a little bit better than that.
As you lay out the third quarter, you've given us an indication that October should look good but can we feel comfortable at least from August that you sense that there might be flat to positive sales for August?
Arlene Meier - COO
Well, I don't think we're prepared to throw guidance out by month in that way.
We clearly would see August as the most difficult of the three months in the quarter, you know, for a couple of reasons, when you look at the comparisons, the two coming in with less clearance, obviously, and the introduction of quite a few new things are all happening, you know, more in the early September time frame, and those are the things that are going to help accelerate those comps.
Bernard Sosnick - Analyst
Okay.
So part of your optimism is the timing of the introductions?
And in the meanwhile, from the back to school portion of the merchandise, which would basically be junior's, young men's and kid's, you had indicated that the junior's at least the tweens part is looking good, you feel comfortable with junior's.
What about young men's?
Kevin Mansell - President
Well, I think -- I mean just to correct one thing you said, Bernie, I mean overall, I think our optimism is based on the fact that new receipts, regardless of whether they're back to school area, which would include young men's, junior, kid's, footwear, or their career area, like missy and men's, missy particularly where we have a lot of new initiative, they're all selling well.
Bernard Sosnick - Analyst
Right now?
Kevin Mansell - President
Yeah, right now.
And so I, you know, we're pointing, you know, and saying we think the, you know, numbers for the fall, you know, are different by month, both as Arlene said, because of comparisons, but also just because the reality is that the impact of some of those much lower clearance levels are dramatically less as we go through the period too.
But selling has been good on new receipts throughout.
Wes McDonald - CFO
Throughout the second quarter.
Kevin Mansell - President
Yeah.
And it's been throughout the second quarter, too.
And it has -- it got better in July, I would say.
Bernard Sosnick - Analyst
Well, basically, then, you're saying not only is the quality of the sales better because of lower mark-downs, but the pace of sales for full-price -- the pace of sales for merchandise at prices that you had planned is looking good?
Kevin Mansell - President
That's a generalization, but that's about right, yep.
Bernard Sosnick - Analyst
Okay.
Turning to expansion, the second half expansion is broken down 50/50, new and fill-in markets what is your view over the next two years or so with respect to the balance between new and fill-ins?
Larry Montgomery - Chairman & CEO
You know, we're not going to change a whole lot our approach, Bernie, in that we're going to be looking to maybe not every year exactly 50/50 between new and fill-in, but over a period of time, our goal has always been to have 50% fill-in stores, and 50% new market, and for the foreseeable future, we don't see that changing a lot.
Bernard Sosnick - Analyst
Okay.
Good.
Thank you very much.
Larry Montgomery - Chairman & CEO
You bet.
Operator
There is time for one last question.
Our final question comes from Gary Holdsworth from Wedbush Morgan Securities.
Please go ahead.
Gary Holdsworth - Analyst
Yes, on today, you're glad that you're not in Florida? [ Laughter ] All right, and the question is, can you give us an update on filling some of the holes in your management team, particularly the product development person and the home goods area?
Larry Montgomery - Chairman & CEO
You know, those are our two top priorities, and we're very close to making some announcements on both those positions.
I would hope, you know, that this month, we would get a couple of things we have to get worked out to get those people on board.
Gary Holdsworth - Analyst
Thank you.
Larry Montgomery - Chairman & CEO
Okay.
Thanks a lot.
Operator
Thank you for participating in the Kohl's department stores second quarter earnings release conference call.
This concludes today's teleconference.
You may disconnect at this time.