柯爾百貨 (KSS) 2004 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the Kohl's department stores fourth quarter and year end 2004 earnings release conference call.

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

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

  • Before we begin, let me remind you that our discussions and comments made during the course of this call include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Such forward-looking statements which reflect management's current views of future events and financial performance are identified by forward-looking terminology such as plans, believes, expects, may, will, should, anticipates, 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 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 this call will be available for 36 hours but this recording will not be updated so if you are listening after February 24, 2005 it is possible that the information discussed is no longer current.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 & EVP

  • Thank you.

  • With me today is Larry Montgomery, Chairman and CEO.

  • Kevin Mansell, President and Arlene Meier, Chief Operating Officer.

  • Before we begin let me remind you that all the financial data that we'll be presenting today includes the adjustments for changing in our lease accounting methodologies as we described in our February 22, press release in both fiscal 2004 and fiscal 2003, the effect of these changes for the quarter and the year for both fiscal years are described in the footnotes to the financial schedules included within today's quarterly earnings release.

  • Arlene is going to start off with reviewing our financial performance, I'll walk us through the balance sheet, Kevin will go through some of our marketing and merchandising initiatives, and Larry will wrap up with our expansion plans and our guidance for 2005.

  • With that, let me turn it over to Arlene.

  • Arlene Meier - COO

  • Thanks, Wes.

  • First we're very pleased with our results for the quarter as well as for the year.

  • Going through the P&L, sales for the fourth quarter were approximately 4.1 billion, up 14.5 percent over 3.6 billion last year.

  • Year-to-date, 11.7 billion, a 13.8 percent increase over last year's 10.3 billion.

  • Look at comp store, as you know we achieved a 1.3 percent comp store sales increase on the quarter and a .3 percent increase in comp for the year.

  • From a region standpoint, the southeast region was our strongest region from a comp perspective on the quarter, while the northeast region was our strongest when you look at the full year.

  • Midwest obviously due to its maturity would have been the toughest both for the quarter and year-to-date and again you should expect that going forward because they are the most mature region.

  • From a new store standpoint, productivity continues to run between 70 and 80 percent of an average store.

  • When you look at Q4 on average the productivity was 75 percent.

  • Again, we would expect as you look at fiscal 2005, we would expect the same productivity levels out of our new stores.

  • When you look at a line of business standpoint, accessories led the Company not only for the quarter but for the year while men's was the most difficult in both the quarter and the year.

  • And Kevin when he speaks will talk to the opportunities obviously in those areas.

  • As you look at gross margins, first on a FIFO basis, gross margins for the quarter was 33.7 percent, excluding the EITF impact, gross margin was 33.1 percent.

  • That compares to 30.8 percent in the fourth quarter of '03, and 32.7 percent in the fourth quarter of 2002, so as you can see, we exceeded even 2002 levels.

  • When you look at the total year, again on a FIFO basis 35.2 percent excluding the EITF impact 34.7 and that compared to 33 percent in 2003 and 34.4 percent in fiscal 2002.

  • From a overall standpoint, the improvement you're seeing in margin both for the quarter and the year was really a result of all of our inventory management initiatives.

  • So more frequent flow of merchandise, improved store allocation of the merchandise we did purchase, and better merchandise content.

  • End result obviously was lower levels of clearance and less discounting required to sell through clearance.

  • When you look at that margin performance excluding the EITF, that's the best in our history, and as we look at 2005, with all the initiatives and opportunities we still have from an inventory management, we would expect to be able to maintain those gross margin rate levels.

  • From a LIFO standpoint, we actually had a LIFO charge on the quarter and the year of 2.4 million.

  • Looking at SG&A 750 million this year compared to 622 last year for the quarter, a 20.6 percent increase, similar increase percent year-to-date.

  • If you exclude the impact again of EITF we would have been up about 17 percent in dollars both for the quarter and year-to-date.

  • And that's basically in line with our increase in number of stores.

  • For both the quarter and the year, we leveraged expenses in distribution, credit, and corporate office, as we told you we thought we could on no comp increase.

  • And as we look forward to 2005, we would continue to expect to leverage those three areas at no comp so as we drive a comp store increase obviously we would expect quite a bit of leverage in those areas.

  • Both stores and advertising should leverage in 2005 on modest comp-store sales increases.

  • We do, however, from a store perspective have incremental expenses in particular in payroll as we continue to roll out and service the cosmetics department.

  • The overall in 2005, as we include cosmetics, we would expect SG&A to leverage at about a 3 percent comp-store sales increase.

  • Moving on if you look at depreciation and amortization, 78 million on the quarter, up 288 million year-to-date, about a 20 percent increase over last year.

  • And Wes will comment to our capital expenditures in a minute.

  • From a preopening standpoint, we spent 2.6 million in the fourth quarter compares to 4.6 million last year, I think you're aware that basically Q4 expenses relates to new store openings for first quarter of 2005.

  • We'll open 32 stores in the spring season, 15 in March, 17 in April, and 1 in May.

  • During the first quarter last year, in comparison we opened 47 stores, 21 in March, and 26 in April.

  • Over the course of the year, in total, we opened 95 stores compared to 85 in 2003.

  • On average, we spent about 540,000 per store, now that's an updated number because of that lease accounting change so that 540 includes the rent expense that we've now had to add in for leased stores.

  • In 2005, from an average per store, we would expect on that same basis to be about $525,000 per store.

  • From an operating income standpoint 540 million of operating income for the quarter compared to 410 million last year, so about a 32 percent increase.

  • On a percent to sales 13.2 percent compared to 11.5 percent a year ago.

  • From a full year standpoint, 1.236 billion compared to just a little north of 1 billion last year, so about a 23 percent increase in operating income over last year.

  • Percent to sales 10.6 percent compared to 9.8 in 2003.

  • Interest expense 17.4 million compared to 16.2 million last year for the quarter, about 62.5 million year-to-date compared to 72.9 million a year ago.

  • Provision for taxes, no different in fourth quarter than it's been all year, 37.8 percent and that's what we would expect again in 2005.

  • So from a bottom line net income standpoint, 325 million of net income for the quarter, about a 33 percent increase over last year.

  • From a total year standpoint, 730 million, up approximately 26 percent over last year.

  • From an EPS standpoint, $0.94 for the quarter compared to a restated LY of $0.71 and year-to-date 2.12 compared to $1.69 a year ago.

  • As we pointed out in the release we did earlier this week, the effect of the lease accounting change was approximately a penny on the quarter, and $0.03 on the year.

  • And then just to remind you as you're doing the comparison against 2003, the result of adopting EITF 216, the effect bottom line was diluting EPS about $0.03 for the full year.

  • With that, I'll turn it back over to Wes.

  • Wes McDonald - CFO & EVP

  • Thanks, Arlene.

  • For your model square footage at the end of fourth quarter gross was 57.386 million, an increase of 18.5 percent over last year's 48.414.

  • Selling square footage of 49.201 million, an increase of 18.7 over last year's 41.447.

  • On the accounts receivable line we had net accounts receivable at the end of the quarter of about 1.4 billion versus last years 1.15 billion an increase of 22.5 percent.

  • Our Kohl's charge sales were about $4.6 billion versus last year's 3.7 billion, an increase of about 21 percent.

  • Our Kohl's charge chair was 39.2 versus last year's 36.0.

  • And the account receivables continue to turn very well on an average 3.6 versus 3.5 last year.

  • And we continue to be pleased with the quality of the portfolio.

  • Write-offs as a percent of charge sales for the year were 0.9 percent this year compared to 1.1 last year and the reserve at the end of the quarter was approximately 1.8 percent of receivables compared to 2.0 at end of 2004.

  • Our inventories were about 1.95 billion over last year's 1.6 billion, an increase of approximately 21 percent.

  • And at the end of the quarter an average store is up approximately 3 percent versus last year.

  • Fixed assets capital expenditures were 220 million for the quarter, and for the year we had capital expenditures of approximately 890 million, capital expenditures are expected to be about 875 million in fiscal 2005.

  • Last year we thought we would be cash-flow neutral this year and positive in 2005.

  • But I'm pleased to report we generated $58 million in free cash flow this year as defined by cash generated from operations less capital expenditures.

  • In 2005 we've expected to do a little bit better than this.

  • On accounts payable line, the balance at the end of the quarter was about 705 million versus last year's 533 million, an increase of 32 percent.

  • And on a percent of inventory basis we were at 36.2 versus last year's 33.1 and the change versus last year reflects the benefits as Arlene mentioned earlier of executing our inventory management initiatives and flowing goods closer to point of sale.

  • Looking forward to the first quarter, we would expect AP as a percent of inventory to be in the high 30s to low 40s.

  • Another piece of information for your modeling, at the end of the quarter basic shares were 343.160 million.

  • Diluted shares were 345.678.

  • On a year-to-date basis basic shares 341.724 million and diluted 344.773.

  • Kohl's corporation has decided to early adopt in the first quarter of 2005 the Statement of Financial Accounting Standards or SFAS 123R which modifies SFAS 123 accounting for stock based compensation.

  • This revised accounting standard requires that all stock-based compensation including grants of employee stock options be accounted for using a fair value based method.

  • The impact of the adoption of this accounting change on Kohl's Corporation's 2005 diluted earnings-per-share is expected to be a reduction of $0.08 to $0.09 with the expense being incurred in approximately equal quarterly amounts throughout the year.

  • The effect on fiscal 2004 diluted earnings-per-share would have been similar.

  • As a result all prior period financial statements will be restated to recognize compensation costs in the amounts previously reported in the pro forma foot notes disclosures under provisions of SFAS 123.

  • The restatements for each of the fiscal 2004 quarters will be included in Kohl's 2005 quarterly filings and 2005 forms 10-Q.

  • With that, I'll turn it over to Kevin to talk a little bit about merchandising and marketing.

  • Kevin Mansell - President

  • Thanks, Wes.

  • Let me just recap finally on sales before we move on to 2005 initiatives.

  • As Arlene mentioned we achieved a comp store increase of 1.3 percent for the quarter.

  • One change we made in the fourth quarter versus last year was to bring in more transitional goods in December for early spring selling.

  • We've been very pleased with the results of that strategy, and we'll apply it in 2005 in a more meaningful manner differentiating by market and climate as we go through our seasonal transitions.

  • We've been very pleased with the initial spring selling in all apparel areas.

  • Chaps was advertised in our tab for the first time in our President's Day sale and we believe it has a very strong presence in the store in both casual and dress that will help improve the men's business.

  • Let me touch on our four major initiatives in 2005, and we'll start with merchandise content.

  • Three of our new brands for 2005, Chaps, Royal Velvet, and, Oh Baby, shipped in mid-January for spring 2005 selling.

  • Chaps is 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.

  • We are working toward that goal now that we have launched it in men's.

  • We've expanded our dress wear and suit separate businesses and we'll introduce Chaps and Access Suit separates this March.

  • We've also been very pleased with the customer response in Phase I of our roll out of beauty.

  • We will complete the second phase of the beauty roll out to approximately 300 stores in the next week or so, and we'll complete the remainder of the chain in August.

  • We're also very excited about a relationship with Cami's that we'll launch for back-to-school 2005 and will initially be in juniors, girls, accessories and footwear.

  • We have exclusive rights to the brand and apparel and will be the sole U.S. provider of all Cami's merchandise at the end of fiscal 2006.

  • We're also extending some of our existing brands into other areas.

  • We'll capitalize on the success of updated and contemporary brands and introduce Access into casual sportswear in spring '05 and Nine & Company and apt. 9 into casual sportswear in fall '05.

  • Each of these brands along with Daisy Fuentes will be merchandised as a brand not by classification making it easier for our customers to put together the looks they want.

  • We've also expanded Daisy and apt. 9 into special sizes this spring.

  • In 2005, we remained focused on serving our updated and contemporary customers.

  • We made a lot of progress in 2004 in Missy apparel and I think you'll see tremendous progress in other areas of the store this year, especially men's, home, and footwear.

  • We're continuing to focus on introducing newness, and we'll have some additional initiatives to share with you throughout the year.

  • Our second major initiative is inventory management and as Wes mentioned earlier inventory levels on an average store basis were up about 3 percent at the end of the fourth quarter.

  • At the end of January clearance unit inventory per store was down approximately 10 percent from last year.

  • I'm very comfortable with this level and pleased with the freshness and the content of our inventory going into spring.

  • For 2005, I'd expect to see improved inventory turnover through better flow of goods and quicker sell through to clearance merchandise.

  • I'm not planning continued reduction of inventory per square foot.

  • You'll continue to see new fresh product coming into our stores throughout the year as we focus on bringing in new colors and variations of best-selling merchandise.

  • We'll also continue to improve our ability to clear goods to better increase our sales and margins as well as provide a sense of urgency for the customers to buy.

  • Our third initiative is our in-store shopping experience and our market research there indicates that we received a lot of credit from the customer for improvements in the experience.

  • In 2005, we're focused on how merchandise is presented to make it more visually appealing and easier to put together across the store in both apparel and home.

  • We'll do this through better use of visual forums in women's and children's and by making more productive use of wall space to merchandise outfits in all apparel areas.

  • Our goal in 2005 is to make the shopping experience more exciting for our customer by increasing the flow of newness, creating consistent color and trend statements across the store, and by bringing in fashion items more frequently and through quicker transition of seasonal goods.

  • Our final initiative is around marketing.

  • Again, we made a lot of progress in 2004, but it is probably our biggest area of opportunity for this year.

  • We still need to cut through the clutter and differentiate ourselves from the competition.

  • Marketing as you know goes hand in hand with merchandise content.

  • We'll make a big splash about our new merchandise initiatives in 2005.

  • We're focused on attracting new customers and increasing the frequency of our occasional customers in order to drive the comparable store sales increases we desire.

  • We've developed a fully integrated marketing approach using circulars, direct mail, radio, magazines, and in particular, television to help brand Kohl's.

  • This has led to the development of a new positioning statement for Kohl's targeting both existing and new customers.

  • Expect Great Things will be our new tag line in our marketing communication.

  • Delivering our brand promise to the customer that she'll have a great shopping experience, find great styles and brands, all in a easy, convenient shopping environment.

  • This new positioning statement will launch in our media beginning next week.

  • Expect Great Things is a long-term strategy to move from good to great in everything we do.

  • I'm going to turn it over to Larry to talk a little bit about expansion and forward guidance.

  • Larry Montgomery - Chairman & CEO

  • Thanks, Kev.

  • Last year at this time we told you our 2004 earnings expectations were based on a low single-digit comp sales increase and that we expected to achieve net income growth for the year of 25 to 30 percent over 2003.

  • We delivered the net income growth that we promised with a 26 percent increase over last year.

  • In addition we generated free cash flow as Wes mentioned for the first time and was a year ahead of schedule.

  • I'm pleased with the progress that we made in 2004.

  • It was a solid year for earnings and from an operational perspective, however, it was missing the top-line sales that we've grown accustomed to.

  • Our goal for 2005 is to return to mid-single digit comp sales.

  • We're going to continue to focus on the four initiatives we introduced in 2004.

  • Merchandise content, marketing, the in-store shopping experience, and inventory control.

  • These are the right things to focus on for 2005.

  • We made good progress in 2004 but we need to move from good to great.

  • Talking about 2005 expansion, we currently have 637 stores compared to last year, at this time 542 which is an increase of 17.5 percent.

  • In 2005, we plan to open approximately 95 stores that's increase of 15 percent.

  • We'll open 33 stores in the spring season, in March we'll have 15 stores compared to 21 last year, 4 in the southwest, 3 in the south central, 3 in the southeast, 3 in the mid-Atlantic and 2 in the midwest region.

  • In April we're going to open 17 new stores compared with 26 in April of last year. 3 stores and a new market entry into Buffalo, New York 4 in the northeast filling in. 4 in the midwest, 4 in the southeast, 1 in the mid-Atlantic and 1 in the south central.

  • We're also going to open up 1 store filling in the midwest in May.

  • In fall we'll open approximately 62 stores, almost all of which are going to open in October.

  • This compares to 48 from fall of 2004.

  • Also in the fall we'll make our first entry into the state of Florida with stores in Orlando, and Jacksonville.

  • The remainder of the fall stores will be in existing markets or smaller new markets.

  • As we look beyond 2005, we continue to see huge opportunities to grow both from ground up as well as acquiring refurbishing preexisting buildings. 2005 will mark our entry into Florida and that has tremendous future growth for the Company.

  • We continue to be very pleased with our entry into the southwest which continues to offer a major expansion opportunity for us.

  • And the Pacific Northwest holds huge opportunities for us as well.

  • As you know, our original model required 20 percent square footage growth for us to deliver 20 percent net income growth per year. 2004 gave us the confidence that we can deliver 20 percent earnings growth with a lower rate of square footage growth.

  • Our infrastructure is now well developed to support us as a national retailer and we can leverage SG&A cost at a lower total sales increase.

  • We've also refined our preopening process reducing the cost to open new stores.

  • As we look beyond 2005, we'll continue to update the model and evaluate the appropriate square footage growth to deliver 20 percent earnings growth per year.

  • Talking about earnings guidance for 2005, we continue to focus on delivering 20 percent earnings growth a year.

  • We recognize that this requires us to run on mid-single digit comp.

  • All you've heard today about our progress in 2004 and our direction for 2005 gives us confidence that we can do that.

  • After taking into account the expensing of stock options, and the change in our lease accounting for both 2004 and 2005, we would expect earnings in the range of $2.40 to $2.50 per diluted share or 20 percent over last year.

  • For the first quarter as our new merchandising initiatives roll out, we would expect comps of 3 to 4 percent or earnings of $0.35 to $0.37 per diluted share which is 20 percent over last year.

  • With that I'd be happy to take any questions.

  • Operator

  • (OPERATOR INSTRUCTIONS) The first question comes from Deborah Weinswig from Smith Barney please go ahead.

  • Deborah Weinswig - Analyst

  • Can you elaborate on the traffic and ticket as broken down by quarter and as we look to 2005 where do you think there's more opportunity between those two?

  • Arlene Meier - COO

  • When you look at traffic on the quarter, average transaction actually was up a little north of 4 percent.

  • Number of transactions was actually down about 3 percent.

  • What's hard for me to know, Deborah, and I think you know this, I know number of transactions, I really don't know number of customers.

  • So I don't know how many times a particular customer might have come through the door.

  • So, you know, when we refer to those numbers, it is number of transactions.

  • As you look at 2005, when we look for mid-single digit comp increases, it will be a combination.

  • It will be increase in transactions as well as increase in average transactions.

  • So if you look at our history, when we've driven mid-single digit comps it's a combination.

  • Deborah Weinswig - Analyst

  • Okay.

  • And then one other question.

  • Larry, you had spoken about basically increasing your efficiencies in terms of preopening cost per store and also it looks like CapEx in '05 will be less than in '04.

  • Can you help elaborate in terms of what's happening with both of those numbers?

  • Larry Montgomery - Chairman & CEO

  • Well, I think if you look at our preopening cost they continue to come down per store so I think we're just getting better at that in terms of the whole process.

  • In terms of CapEx being less this year, a lot of it has to do with the office building.

  • Wes McDonald - CFO & EVP

  • Right.

  • We had the office building in the make in DC which was a sort of an incremental expense in '04.

  • There's a little bit of residual left in spending in '05 on that but not very much.

  • Deborah Weinswig - Analyst

  • Okay.

  • Great, thanks so much.

  • Operator

  • The next question comes from Amy Koslov from Sanford Bernstein, please go ahead.

  • Amy Kaslow - Analyst

  • Hi, there, I wanted to ask about marketing.

  • You've had an improving traffic trend through the quarter but it hasn't quite hit positive territory, so are you planning on doing more brand specific advertising like Chaps versus just the overall Kohl's store marketing program to give that marginal or the new Kohl's customer more of a reason to come to the stores to get these positive mid-single digit comps and then just as a follow-on can you give us any details on the '05 marketing plan for the beauty business and even just any small performance comments you could potentially share with us?

  • Thanks.

  • Kevin Mansell - President

  • It's Kevin.

  • I think on an overall basis the short answer is that point as it relates to brand marketing, yes, there's a substantial increase in that, and probably the example you mentioned is a good one.

  • The Chaps launch is an example of us trying to take a position on a brand we thinks going to be important for us in the future not only in men's but elsewhere and make that the focal point, and we're going to continue to do that in spring with our other key brands.

  • As it relates to beauty marketing, the additional stores, 300 stores that are rolling out now, the true launch of the real marketing effort for beauty starts in March with the launch of those stores.

  • So you'll start to see it throughout the March period and then through, right through the spring season in all of our media.

  • But particularly I think you'll see a dramatic change in the focus of -- on beauty and our print media.

  • And then the other part, of course, that not only the brands play a role in too but our overall focus on new merchandise initiatives play a role and is the launch of our Expect Great Things positioning statement.

  • And we're actually going to launch that on broadcast this coming Sunday on the Barbara Walters special.

  • And you'll see I think the brand positioning plays a key role into that as well so hopefully that answers your question.

  • Amy Kaslow - Analyst

  • Great, thanks.

  • Operator

  • The next question comes from Daniel Barry from Merrill Lynch.

  • Please go ahead.

  • Daniel Barry - Analyst

  • Good afternoon, a question about your gross margin, you indicated it had might stay high this year.

  • What would happen after this year, and why is it staying so strong?

  • Is it a mix change, is it your initiatives?

  • Exactly what's behind that continuing improvement?

  • Larry Montgomery - Chairman & CEO

  • I think what we said is that we expect to maintain what we achieved and that's our focus for 05.

  • What drove last year, Dan, as you know is improvements that we made in the way we approached inventory management and that was a combination of slower receipts and it also was a big factor was improvements in our allocation system.

  • We invested both in people and process and software to do a better job there.

  • And an improvement in terms of the way we allocate goods so that on -- in an average store basis, our sell-throughs at the end of the season were better there for the amount of goods left over -- the clear was lower.

  • We're going to continue to work on making that better and I think there's still upside on it, but we also want to be very aggressive promotionally, and we'll continue to do so.

  • So I think the guidance we're giving is a good guidance.

  • We see upside in the way we run the business, but we're also going to make sure that we continue to focus on taking market share.

  • Daniel Barry - Analyst

  • Right but just to clarify, the changes you're making is that going to enable your gross to stay at this high level after this year?

  • Arlene Meier - COO

  • Yes, Dan.

  • Absolutely, the changes that we have made all carry forward.

  • Daniel Barry - Analyst

  • That's a higher number than you've been sort of guiding before.

  • And then the other question relating to gross too is, what's your estimate for inflation based on your earnings, apparel inflation, particularly in view of the change in apparel quotas?

  • Larry Montgomery - Chairman & CEO

  • I don't think there will be any apparel inflation.

  • I mean, I think our strategy as it relates to lower cost has been and will continue to be to focus on providing a better product to the customer so we maintain our retails and continue to offer newness and more quality.

  • Daniel Barry - Analyst

  • So the assumption is no change in pricing at the price level but maybe some improvement in terms of deflation in the cost level.

  • Is that --?

  • Larry Montgomery - Chairman & CEO

  • I think a good assume is that there is deflation occurring in our apparel cost but we've had in place over the last year as it relates to '05 selling a very big focus on improving the quality and the fabrication and style so that we don't have to reflect it in lower out the door retail.

  • Daniel Barry - Analyst

  • That's great.

  • Thanks.

  • Operator

  • The next question comes from Bob Buchanan from AG Edwards.

  • Please go ahead.

  • Bob Buchanan - Analyst

  • I want to congratulate Kevin for doing a great job last year in terms of better allocating product and better flowing product and improving the turn.

  • Related to that, Kevin, I was just wondering your per store inventories were up about 3 percent coming into the year.

  • Is that kind of a consistent bogey that we can look for in terms of per store increases throughout this year?

  • Kevin Mansell - President

  • Yes, Bob.

  • I mean overall I think Wes mentioned or I mentioned during the comments on inventory that we're not planning reductions in our, you know, per square foot inventory so I think that's probably a good number to work with.

  • You know we'll look to make improvements in turnover, but that's going to come more from slower receipts than it will from dollars per square foot.

  • Bob Buchanan - Analyst

  • Kevin, I was just wondering in terms of your markdown strategy, it appears you're still pretty heavily relying on clearance to get through the goods that don't sell.

  • Is there any opportunity in your view for taking some earlier markdowns, not being as heavily reliant on clearance?

  • Kevin Mansell - President

  • Yes, I mean, I think we're in a process of examining better ways to clear which would include ensuring that we can optimize the promotional markdowns we take prior to going to clearance.

  • So that's a focus for '05 particularly I would say beginning the second quarter.

  • Bob Buchanan - Analyst

  • Okay.

  • Just a final question.

  • Where would you assess you guys right now in terms of your ability to micromanage the inventories by store.

  • In particular, I saw some pretty early receipts of shorts in the Chicago stores and I'm just wondering if you're able to fine tune that a little bit better as time goes on?

  • Kevin Mansell - President

  • Yes, I mean, we definitely have the capability without question.

  • I think we're continuing to learn the optimum time for receipts.

  • The receipt flow that we had on spring goods by region or market was different this year than last year.

  • We actually delivered more spring goods earlier but it was wear now spring merchandise.

  • And then our forward spring merchandise delivered differently depending upon whether it was in a northern market like Chicago or a southern market like Atlanta.

  • We probably still have opportunity to get the right amount of that at a point in time.

  • So, you know, the question you're asking about Chicago and the level of, let's say, shorts or capris we have, that's something I think we can continue to work on improving.

  • Larry Montgomery - Chairman & CEO

  • We'd rather have a rack of shorts than a rack of 80 off, though.

  • Bob Buchanan - Analyst

  • I got you, again, congratulations.

  • Operator

  • The next question comes from Jeff Klinefelter from Piper Jaffray.

  • Please go ahead.

  • Jeff Klinefelter - Analyst

  • Quick question for you Kevin.

  • In terms of your merchandising opportunities for '05 you mentioned that men's should be an area of improvement.

  • It was a weak area in '04.

  • Could you comment a little more specifically on where you're getting traction, is this as a result of kind of a denim trend in the bottoms, is it more young men than men's?

  • Just curious for a little more color.

  • And then follow up on someone else's question on price points.

  • Just curious if there's a little bit -- there's sort of a premium trend taking place in the industry right now and are you seeing any opportunities or any shifting rather where consumers are moving up to more premium price points and isn't that having any impact on your overall mix?

  • Kevin Mansell - President

  • Taking them one at a time.

  • I think the opportunities in men's are pretty much across-the-board, young men's right through more mature men's.

  • We've got a number of big initiatives in mature men's that are definitely going to impact the business positively and we talked a lot about the Chaps initiative in sportswear but we have a very strong trending business in dress which Chaps is impacting and going to impact even greater in the spring.

  • I mentioned the introduction of Chaps suit separates, Chaps dress shirts, Chaps ties, the Access suits separates opportunity so there's pretty broad opportunity in men's.

  • There also, I think, is opportunity in young men's and this issue of premium product is, I think, particularly so in young men's where we're seeing improved sell-through and also a openness to buy on the customer's basis as it relates to more premium denim.

  • I think that gives us an opportunity to maintain and certainly probably increase price point just from a style standpoint.

  • So that's a potential positive, but what we're mostly focused on is getting the assortments more right for the customer and ensuring that we're dealing both with our traditional and classic customer but also our more updated one.

  • Jeff Klinefelter - Analyst

  • Great.

  • And then also do you have room at this point do you feel like you have room to go after and pursue other national brands throughout the store, men's, women's, children's, do you have a mix in mind that you want to maintain with own brands versus national brands?

  • Kevin Mansell - President

  • Well, we've had a mix that's been pretty much 75 national brands, 25 private or proprietary brands.

  • The thing that has developed that's been a very strong positive is the growth of exclusive brands, brands that sometimes I think we believe are very strong national brands and a good example is Daisy Fuentes, another great example I think is the Cami's launch where there's a brand that's highly recognized and very much in demand by that consumer but we've created a situation where it's become proprietary and exclusive to us.

  • So I think those continue to be opportunities, and we're not -- you know, we mentioned earlier in the year, I know Larry has mentioned a number of times, we're not going to stop pursuing newness.

  • So you're going to hear about other new initiatives coming, both branded and proprietary.

  • Jeff Klinefelter - Analyst

  • Great, thank you.

  • Operator

  • The next question comes from David Cumberland from Robert W. Baird.

  • Please go ahead.

  • David Cumberland - Analyst

  • Good afternoon.

  • What is the status of the search for a GMM in women's and also on the management side, when do you expect the new EVP of product development to have a meaningful impact on the business?

  • Larry Montgomery - Chairman & CEO

  • This is Larry.

  • I think that we are very close to announcing apparel GMM.

  • So that will be forthcoming and we think that Peggy Eskenasi is going to have a pretty good impact on business, you know, a little bit during the fall but big time next spring.

  • David Cumberland - Analyst

  • A couple of other questions.

  • What is the comps expectation by month within Q1, should February be lower than March, April, due to less clearance and a higher comparison?

  • Wes McDonald - CFO & EVP

  • We're going to try to get out of the monthly comp game, and we're just going to stick with the quarterly comp.

  • I don't know what the weather's going to be like and when spring's going to finally come so we just think for the quarter we feel pretty comfortable with the 3 to 4 percent.

  • David Cumberland - Analyst

  • Wes, will the impact of the accounting change in '05 be similar to '04, about $0.03 in '05 including a cent in Q1?

  • Wes McDonald - CFO & EVP

  • Yes.

  • David Cumberland - Analyst

  • Thank you.

  • Wes McDonald - CFO & EVP

  • For a lease accounting.

  • Yes.

  • David Cumberland - Analyst

  • Right.

  • Thanks.

  • Wes McDonald - CFO & EVP

  • Yes.

  • Operator

  • The next question comes from Dana Cohen from Banc of America Securities.

  • Please go ahead.

  • Dana Cohen - Analyst

  • Hi, guys.

  • Just following up on that if just looking at the guidance then of 2.40 to 2.50 does that include the $0.08 to $0.09 and the $0.03 for the accounting?

  • Wes McDonald - CFO & EVP

  • Yes.

  • Dana Cohen - Analyst

  • And is that predicated on a mid-single digit comp since I think you said earlier you can lever on the 3?

  • Wes McDonald - CFO & EVP

  • Yes.

  • Dana Cohen - Analyst

  • It's predicated on the mid-single digit.

  • Wes McDonald - CFO & EVP

  • Right.

  • Yes.

  • Dana Cohen - Analyst

  • And then lastly, on the searches, the one big outstanding one is stores, I mean, where does that stand?

  • Larry Montgomery - Chairman & CEO

  • Going to be about the same day as the GMM of apparel.

  • Dana Cohen - Analyst

  • So very close.

  • Larry Montgomery - Chairman & CEO

  • Very close.

  • Dana Cohen - Analyst

  • Good to hear, thank you.

  • Larry Montgomery - Chairman & CEO

  • You bet.

  • Operator

  • The next question comes from Joe Teklits from Wachovia Securities.

  • Please go ahead.

  • Joe Teklits - Analyst

  • Just a little clearance for me.

  • Mid means 4 to 6 comp, right, in your language?

  • Wes McDonald - CFO & EVP

  • Come on, Joe, you know my language.

  • Joe Teklits - Analyst

  • I've been around longer than that but I just wanted to make sure.

  • Wes McDonald - CFO & EVP

  • All right.

  • Joe Teklits - Analyst

  • Two other questions, one, any reason for the back waiting of the store openings this year and does that impact the earnings growth front half to back half at all or is it meaningless and then the second question is just when we might hear about Chaps in other categories or classifications in the store like women's.

  • Arlene Meier - COO

  • To answer your question on the timing of new store openings, typically new stores do not positively impact bottom line in the year they open on average.

  • Typically they're break even.

  • Joe Teklits - Analyst

  • Okay.

  • Arlene Meier - COO

  • So it being weighted later in the year should not impact earnings, obviously it impacts sales but it does not impact bottom line.

  • Joe Teklits - Analyst

  • Is that just finding real-estate?

  • Is that the reason they're just opening later this year?

  • Arlene Meier - COO

  • Yes.

  • In some case it's the timing of when did we want to open in the southeast, did we want to do that in spring or did we want to do it in fall and some of it is just by region when we felt the stores were appropriate to open.

  • Joe Teklits - Analyst

  • Got you.

  • Thanks, Arlene.

  • Kevin Mansell - President

  • On the Chaps thing, I think we need to get a couple months behind us.

  • We just launched a brand new sportswear Sunday, and we're launching it in the dress area basically a week from now.

  • But I also would say, you know, frankly, that we think we have a lot of confidence that it has, -- it would resonate well with the consumer in other categories so I feel really optimistic about it but we definitely would like to get a couple months worth of selling under our belt.

  • Joe Teklits - Analyst

  • Is that your decision or the parent Company's decision?

  • Or you both have to agree on that?

  • Kevin Mansell - President

  • Yes.

  • I think that's something that together with the owner of the brand we'll build a plan together that will make a lot of sense.

  • Joe Teklits - Analyst

  • Thanks, good luck.

  • Operator

  • The next question comes from Bob Drbul from Lehman Brothers, please go ahead.

  • Bob Drbul - Analyst

  • Two questions please.

  • The first one is for the your goal on the mid-single digit comp 4.05 what are your assumptions around the midwest region in terms of the sales performance from that region?

  • Larry Montgomery - Chairman & CEO

  • I think it's no different than our guidance has always been.

  • Midwest being the most mature markets in the Company are going to be a little less than the mid-single digit comp and all those brand new areas like the southwest et cetera will be a little bit higher than that.

  • So not much different than the way we've performed for years.

  • Bob Drbul - Analyst

  • Second question is, can you talk a little bit about, you know, as you head into Florida, you know, really what you've learned from California, and then sort of an update on the California stores and the performance that you're getting from those stores?

  • Larry Montgomery - Chairman & CEO

  • Yes, we learn from California on a pretty regular basis, and I think that we've responded pretty quickly to it in that it's been, you know, right up at the top in terms of most recent comp store sales so we just learned a lot about marketing in different climatic situation, transition of merchandise, et cetera.

  • We're going into some fairly traditional markets with Jacksonville and Orlando, so we think that some of the learnings from California will help us down there.

  • We're certainly not going in not knowing about hot/warm climates.

  • We think we're ready for them.

  • Bob Drbul - Analyst

  • One final question is.

  • There's a talk in the marketplace around the value of credit card portfolios, I just wanted to see if you guys would comment on your thoughts around continuing to own your credit card.

  • Arlene Meier - COO

  • Well we like our credit card.

  • Obviously it has contributed significantly to the bottom line so I think us being in control is very important to us.

  • Bob Drbul - Analyst

  • Okay.

  • Thank you.

  • Operator

  • The next question comes from Patrick McKeever from Suntrust Robinson Humphrey, please go ahead.

  • Patrick McKeever - Analyst

  • Sure, thanks.

  • I guess this question is for Kevin.

  • Kevin, if you take all the new merchandise lines that you introduced in 2004 and the ones that you will introduce in 2005 or are planning to introduce, collectively, about how much of the or what percent of the mix of merchandise within the store might that represent?

  • Kevin Mansell - President

  • I think the short answer is I don't know the answer to that.

  • And in addition, if I did, I don't know that it's a meaningful number.

  • You know, we look at the new initiatives not only as to how they contribute in their own way, but also how they contribute in the broader way with the customer who expects newness and freshness in our stores.

  • So, you know, while we might look at an individual initiative like Daisy and say that it does X amount of millions of dollars of business, the more important thing is what does it do for the overall view of the customer as it relates to Missy sportswear and that's much bigger, much, much bigger impact.

  • So I don't have the number I don't that we'd share it anyway because it's a lot of detail but I think the bigger thing we're focused in on is what does our customer say about what those brands mean to her.

  • Patrick McKeever - Analyst

  • Sure, sure and the second question you've commented in recent months about some of your newer lines selling with less aggressive markdowns.

  • Does that continue to hold true, are you planning that to be the case in 2005?

  • Kevin Mansell - President

  • Most of our new initiatives have been successful, and as a result of being successful, we have had less clearance clearly at the end and it's allowed us to flow more goods behind them which always helps margins.

  • So I think our plan is certainly that they're going to have that kind of effect in '05 as well.

  • Patrick McKeever - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Please go ahead.

  • Christine Augustine - Analyst

  • Thank you.

  • Would you be willing to discuss your online strategy?

  • Do you see it as more of a marketing vehicle, could it be a way to accelerate your clearance efforts?

  • You know, get it out of the store and clear it through the online?

  • Do you ultimately hope that that's -- can be sort of a viable second channel of distribution for your brand?

  • Arlene Meier - COO

  • We do see a lot of opportunity from an online standpoint.

  • Today what we find with the customer that we e-mail to that's part of our e-mail list and is also an in-store customer, typically that customer overall spends more in brick-and-mortar as well as online because it becomes another marketing vehicle.

  • So we continue to see a lot of opportunity extended sizes, extended assortments that we've been doing very successfully to a smaller amount online that'll expand this year so again it's just another way to reach.

  • As far as your question about clearance online, the cost, we clear very well online what clearance we do have within fulfillment center at the time we're breaking price but to move clearance out of the store and to a fulfillment center for distribution to fulfill an order would not be cost-effective.

  • Our best way to clear merchandise is in-store and that customer appreciates that great value at the same time.

  • Christine Augustine - Analyst

  • Thank you.

  • And if I could just clarify on the first quarter, the $0.35 to $0.37 normalized out for the stock option, the early adoption of that and the lease accounting, it would be $0.38 to $0.40?

  • Wes McDonald - CFO & EVP

  • Yes, I mean, the options is worth $0.02 and the lease accounting is worth a penny.

  • Christine Augustine - Analyst

  • Okay.

  • Thank you.

  • Wes McDonald - CFO & EVP

  • Do that same math with LYs to get to an apple/apple.

  • Christine Augustine - Analyst

  • Thank you.

  • Wes McDonald - CFO & EVP

  • Okay.

  • Operator

  • The next question comes from Bernie Sosnick from Oppenheimer, please go ahead.

  • Bernie Sosnick - Analyst

  • Yes, thank you.

  • Expect Great Things says that you feel very confident of your ability to execute and satisfy the customer when she comes in.

  • You've told us a lot of good things about merchandising.

  • But when you say Expect Great Things, what are you expecting her to compare it with, and also you don't have the organization completely in place just yet.

  • Could you tell us about your degree of confidence of following through on that expectation?

  • Larry Montgomery - Chairman & CEO

  • Yes.

  • Bernie, it's Larry, and, you know, I think we've talked an lawful lot about the four initiatives for 2004 and the progress we've made.

  • We feel very confident that we've got processes in place and that we understand what it takes from a content and marketing point of view to drive it.

  • We also understand that we got to differentiate a little bit how we present different types of fashion merchandise in the store.

  • Everybody in the Company is on the same page with regards to their responsibility.

  • We've spoken to every store manager in the Company, all of the merchants are on the same page, and it's a commitment on the part of the whole Company.

  • We think that the direction that we're taking after using 2004 and just putting, you know, all the foundation together to make this happen, we think that our direct -- we have tremendous confidence in our direction that we're going to build momentum from the first quarter going right through holiday.

  • Now, again, it depends on our execution, and I know that, you know, we'll sit here and talk every quarter about how did our execution, how was our execution, and how did we perform in a comp-store sales level, we'll continue to learn but we're going to be very aggressive, and we're very confident.

  • Bernie Sosnick - Analyst

  • But there's also one other element to what I'm asking.

  • What do you expect the customer to Expect Great Things versus Target, Penny, department stores, there's a comparative that's in that Great Things expectation.

  • Larry Montgomery - Chairman & CEO

  • I think we're talking about brands, value and convenience and I think we're talking about Kohl's of 2004 versus Kohl's of 2005 and all of these initiatives were developed and all these new brand introductions were developed in relationship to how we want to compete against, you know, whether it's Penny's or Target or the traditional department stores or anybody else.

  • We're trying to differentiate ourselves and make ourselves more appealing and more exciting than anybody that's in the moderate priced apparel business and that is from what they see, how it's priced, how it's merchandised, and how they get checked out, and how we get back into stock.

  • Bernie Sosnick - Analyst

  • Great.

  • I take it as a feeling of confidence and you say that you're ready to carry it out with all the store managers and buyers on board.

  • Appreciate it.

  • Larry Montgomery - Chairman & CEO

  • Got it.

  • Thanks, Bernie.

  • Operator

  • Mr. McDonald this concludes the question-and-answer session.

  • Please go ahead with any closing comments.

  • Wes McDonald - CFO & EVP

  • Thanks, everybody, for listening.

  • Look forward to doing this again at the end of the first quarter.

  • Thanks,.

  • Operator

  • Thank you for participating in the Kohl's department store fourth quarter and year end 2004 earning's release conference call.

  • This concludes today's teleconference.

  • You may all disconnect at this time.