柯爾百貨 (KSS) 2005 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, welcome to Kohl's department stores first quarter 2005 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 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 plan, believe, expect, may, will, should, anticipate, or similar statements.

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 on Kohl's annual report on form 10K, 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So if you are listening after May 12, 2005, it is possible that the information discussed is no longer current.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.

With me today is Larry Montgomery, Chairman and CEO, Kevin Mansell, President, and Arlene Meier, COO.

We'll go through our financial performance, Arlene will take us through that.

I'll walk through the balance sheet.

Kevin will talk about merchandising and marketing, and Larry will talk about our growth prospects as well as our earnings guidance for next quarter.

In the release today you should have received the restatement of prior year's results.

As you know, we decided to early adopt in the first quarter of this year, statements of financial accounting SFAS 123-R, 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 base method.

The Company has elected to use the modified retrospective method, which requires the restatement of prior year's results.

Prior period financial statements will be restated under the provisions of SFAS 123-R to recognize compensation costs in the amounts previously reported in the pro forma footnote disclosures.

The restatements for each of the fiscal 2004 quarters will be included in our 2005 quarterly filings on forms 10Q, and we also attach these restated income statements attached to the quarterly earnings release today.

Any information that we share compared to last year is the result of these restated numbers.

With that I'll turn it over to Arlene to walk through our financial performance.

I will take you through the P&L.

Obviously, we're very pleased with our performance in the first quarter.

Starting with sales, for the first quarter total was 2.7 billion, compared to 2.4 billion a year ago, up 15.2%.

Same time, as you know, we achieved a 3.7% comp-store sales increase.

When you look at that increased transactions on a per-store basis we're basically flat to last year, while average transaction value is what drove the comp.

In looking at that average transaction, it was a combination both of units per transaction increasing versus last year, as well as average unit retail.

Looking at the regions across the country, we're pleased to say that all regions achieved positive comps for the quarter.

The northeast region was the strongest from a comp perspective, followed by regions with warmer weather, such as the southeast, south central, and southwest.

Looking at our new stores, the productivity of our new stores continues to run between our 70 and 80% range.

Kevin in a minute is going to talk to you about the lines of business, so I'm not going to get into that right now.

From a gross margin standpoint, we reported a gross margin of 35.85% this year, compared to 35.6 last year, so an increase of 25 basis points.

The improvement in the margin for the quarter was really a result of our inventory management initiative, which included frequent flows of merchandise, improved allocation by store, and the improvement in merchandise content.

Most of the improvement was actually driven by improved rates by division, leading that was really our women's and men's apparel areas versus last year.

When you drop down and you look at SG&A for the first quarter, SG&A was approximately 673 million.

It was an increase of about 16% over last year's restated 581 million.

From a leverage standpoint, distribution, credit, corporate, and advertising all leveraged on the quarter, and as we expected and told you coming into the quarter, store expense did not leverage, primarily due to the cost of the rollout of cosmetics in March.

As you know, we rolled out an additional approximately 300 stores during march.

In addition, as a result of our earnings increase over last year, we have accrued towards an incentive compensation in the quarter, where there was no accrual made in the first quarter of 2004.

As you look towards the second quarter, we would expect to leverage SG&A at approximately a 3% comp store sales increase.

Looking at depreciation and amortization, about $80 million on the quarter, about a 20% increase over last year, looking at second quarter we would expect about $85 million.

Preopening expenses on the quarter were 12.6 million versus 19.4 million in the first quarter last year.

As you know, we opened 32 stores in the quarter. 15 in March and 17 in April.

This compares to last year, when we opened 47 stores. 21 in March last year and 26 in April.

On average, we spent about $480,000 per store for the new stores opened during the quarter.

Of the total about 3.2 million of that was actually incurred in the fourth quarter of fiscal 2004.

As you look to the second half of the year, average preopening expenses for the stores we planned to open in the back half, average should be about 520,000 per store, and that takes into account the mix of new markets, as well as fill-in stores that will open in the second half.

From an operating income standpoint, approximately 218 million on the quarter, about a 20.4% increase over last year.

Operating income was 7.9% of sales this year, compared to 7.6% a year ago.

Interest expense about $17 million on the quarter, and we would expect about the same as you look at the second quarter.

Our provision for taxes did not change. 37.8% still consistent with what you saw in 2004.

Bottom line net income for the first quarter, 125 million, up approximately 21% over last year.

Bottom line EPS as a result of $0.36 a share compared to $0.30 last year.

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

Thanks, Arlene.

Gross square footage at the end of the quarter was 60,264, versus last year's 52,617, an increase of 14.5%.

Selling square footage was 51,723 versus last year's 45,153, an increase of 14.6%.

On accounts receivables, we ended the quarter with accounts receivables of about 1.3 billion versus last year's 1.1 billion, an increase of 17.5%.

Our Kohl's charge sales continue to grow share.

The share was 39.6 versus last year's 37.5, an increase of 215 basis points and our Kohl's charge sales were up 21.9% over last year at about 1.1 billion.

Accounts receivable continues to turn very quickly. 3.8 this year versus 3.6 last year, as we continue to be pleased with the quality portfolio.

Write-off of the percent of our charge sales for the quarter were 1.1% this year, compared to 1.2% last year, and the reserve at the end of the quarter was approximately 1.8% of receivables, compared to 1.9% at the end of the first quarter in fiscal 2004.

In terms of inventory, 2.1 billion versus last year's 1.9 billion increase of about 13.5%.

At the end of the quarter, inventory per average store was approximately flat to last year.

Flowing goods more frequently, has allowed us to adjust orders of slower-selling product during the first quarter, and receive smaller quantities in the second quarter, to allocate goods more accurately as weather improves.

Our capital expenditures were 170 million for the quarter, and we continue to expect expenditures for the year to be about 875 million for fiscal 2005.

Accounts payable balance was 687 million versus last year's 747 million, a decrease of 8%.

As a percent of inventory 32.5% versus 40.1%.

Our expectation for second quarter is for our percentage of inventory to be in the high 30s to low 40's.

Weighted average shares basic for the first quarter was 343,526 and diluted was 345,906 respectively.

And with that I'll turn it over to Kevin to talk about merchandising and marketing performance for the quarter.

Thanks, Wes.

Let me start with sales.

As Arlene indicated, we achieved a comp store increase of 3.7% for the quarter.

Accessories, men's and women's apparel, exceeded the Company comp.

Accessories benefited from our beauty initiative, now in over 600 stores, as well as strong sales in fashion jewelry, handbags and sleepwear.

Men's improvement was led by the introduction of Chaps, as well as strong sales in dress furnishings overall.

And in women's, we continue to be pleased with performance of our newer and our expanded brands in Missy and special sizes.

Such as Daisy Fuentes, Access, Nine & Company, and apt. 9.

Although our seasonal apparel classifications did not meet our expectations overall, they did in fact meet our expectations in our warm-weather markets.

As a result we're confident that the content is on-trend and that our overall sales will improve in these businesses in the second quarter.

Looking at merchandise initiatives for the rest of 2005, the introduction of the new brands in the first quarter was received very well.

Chaps had the biggest impact on our sales due to the size of the business.

We're pleased with the performance of Access casual sportswear in the first quarter, and we remain on-track to launch Nine & Company and apt. 9, casual sportswear in the fall of this year.

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

Wave two of the beauty rollout was completed in the quarter, and we'll complete the rollout of beauty to the remaining 100 stores in August.

As we mentioned in the year-end conference call, we'll launch Candie's for back-to-school 2005, and it will initially be in juniors, girls accessories, and shoes.

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

In addition, as we announced yesterday, we're partnering with Tony Hawk to bring his designs into our young men's and boys business.

This is an exciting partnership with Quiksilver, which will strengthen our young men's and boys' business, and deliver another new exclusive brand.

We continue to attract brands that resonate with both our young mens and juniors' customers to better compete with department stores, but also teen specialty retailers.

Finally, we intend to continue to introduce newness, and we'll continue to have additional initiatives to share with you in the coming months.

Finally, as it relates to inventory management, as Wes mentioned, inventory levels on an average store basis were flat to last year at quarter end.

I'm very comfortable with this level, and pleased with the content of our overall inventory as we go into the second quarter.

Our seasonal areas entered the quarter appropriately inventoried for the summer as well.

We plan to invest in a launch of Candie's for back-to-school, and going to support our trending men's business, especially in the dresswear category.

As a result, I would expect our inventory to be up in-line with our comp expectations at the end of the quarter.

We continue to expect to see improved inventory turnover through better flow of goods throughout the year.

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

In summary, I'm very pleased with the progress we made in both our merchandising areas and our marketing in the first quarter.

In addition, we have filled all of our key merchandising and all of our key planning to allocation positions, and I'm very happy with the talent we now have in place.

The people who have been with us for a while have made some significant contributions to our business and our newcomers have a significant amount of new great ideas.

Some of them are already beginning to make an impact, with a lot more to come.

Let me turn it over to Larry to talk about expansion and guidance.

Thanks, Kevin.

First of all, I'd like to say that I'm very pleased with the progress that we've made in the first quarter.

Our projections were for a 3 to 4% comp sales increase and net income growth of 20%., and we achieved both of those goals.

We continue to work hard on our initiatives and I think you're seeing the progress.

Our gross margin for the first quarter was the best first quarter in our Company's history.

We continue to roll out new brands that have have been well received, and well accepted by the customers, and as Kevin said, we are going to continue to do that.

The stores look better and the changes we've made in merchandise presentation to make it easier for the customers to find what they're looking for, have been noticed.

Our changes in marketing have been effective, and we'll continue to use new methods to attract new customers and get the occasional customer to increase their frequency.

I'd also like to echo Kevin's comments on our management team.

I'm very excited about the talent level throughout the organization.

We've filled all our positions in the stores with a promotion to EVP of stores of John Worthington, and all the territory managers are in place.

All of these people were part of the improving in-store experience in 2004, and they have the skills to continue to improve our operations.

Both in the customers' eyes and from our look at productivity.

When I talk about the expansion for the year, we currently operate 669 stores compared with last year at the same time 589.

In 2005, we'll open up 95 stores that's a 15% increase over the prior year.

We opened 32 stores in the first quarter.

In March we opened 15 stores. 4 in the southwest, 3 in the south central, 3 in the southeast, 3 in the mid-Atlantic, and 2 in the midwest.

In April we're going to open up 17 stores. 3 new market entry into Buffalo.

In April we opened up 17 stores. 4 in the northeast, 4 in the midwest, 4 in the southeast, 1 in the Mid-Atlantic and 1 in south central.

In May we're going to open up 1 store in Chicago.

In August we'll open up 4 stores, 2 in Cleveland, and 1 in Baltimore, and 1 in Philadelphia.

The remaining 58 stores will open up in October.

The total of 62 stores compares to 48 stores in the fall season of 2004.

We'll also make our first entry into the state of Florida with stores in Orlando and Jacksonville.

The remaining of the stores will be in existing markets or smaller new markets.

Taking a look at the second quarter and just recapping last year, our comp results for the second quarter of last year.

We had a 5% comp increase in May, and we had declines in June of 3.7% comp, and in July of 3.9% comp.

For the quarter we had comp store decline of 1.1%.

May last year benefited from the early break of warm weather throughout the country, and we had huge increases last year in seasonal apparel, shorts, Tees, tanks and Capris.

As we look at this year, we have not yet experienced a break in the weather in the majority of our markets, and don't expect to until the end of the month.

As a result we expect May could be flat to down low single digits.

June and July should be mid to high single digit comps, due to the break in the seasonal business, and in June we expect a benefit of Father's Day, due to strong year-to-date performance in our men's categories.

In giving you earnings guidance for the second quarter in total, we would expect comp stores sales increase of 4 to 5%, and earnings of $0.49 to $0.52 per diluted share.

We continue to focus on delivering 20% earnings growth per year.

And we continue expect earnings for the year to be in the range of $2.40 to $2.50 per diluted share, or approximately 20% over last year.

At this time we would like to open it up for questions.

Thank you.

We will now begin the question-and-answer session. [OPERATOR INSTRUCTIONS] First is from Emme Kozloff, Sanford Bernstein.

Kevin, can you get us comfortable with mid-single digit positive comp for the second half of the year?

Is there any particular category that should have a greater than average impact on results, like beauty or Chaps, for example?

Arlene, in terms of SG&A can you tell us what kind of of drag to expect from beauty on SG&A irrespective of of the leverage pivot point?

Thanks.

The comfort level that we have is that if you go back three months we talked about the first quarter, and I think the standard we set was, we see mid-single digit for the year.

We see the first quarter being in the 3 to 4 range.

The reason we had the confidence level to say that then was new initiatives, brands, classifications, you mentioned beauty.

We talked like Daisy, apt. 9, Urban Pipeline, Chaps.

That is what was going to drive our business.

And we still feel exactly the same way.

We're now sitting here after the quarter is over, and essentially exactly what we told you would happen in the first quarter has come to pass.

Those new initiatives, those new brands, along with the changes in in-store, excitement created from a visual perspective, is what has driven our business.

And while we're always looking for better comps, we delivered exactly what we said, and I think we got the same level of confidence has we look in the second, third and fourth quarters.

It is about these new initiatives, these new brands and these new classifications, and then making it more exciting in the store, which I think you're seeing and you'll continue to see more.

Arlene?

As it relates to SG&A and the guidance I gave you for the second quarter of expecting to leverage at a 3% comp, that takes into account what the incremental costs are to be running that beauty department.

When you look at the beauty, it is really two pieces, what is it take being that we're doing more service in that department.

But the bigger piece that really hit first quarter and as you saw last year as we did rollout of stores, is it takes quite a bit of incremental payroll just to set up the department, and that is all hitting SG&A, but as you look forward second quarter, going forward, minimum you should expect us to leverage a at 3% comp.

So basically the drag on Q1 we can largely attribute to the beauty expense?

Well, couple things, really.

I mean, you have beauty is one.

And, two, as I pointed out, we did accrue bonus in Q1 this year because of the earnings increase.

And a year ago in Q1 we weren't at a level of earnings increase to accrue any bonus.

Quick question off of gross margin.

How did the improvement breakdown between lower markdown versus higher IMUs?

If you looked at the overall improvement which was about 25 basis points I think mix played a factor in that to a smaller degree.

Third of it was mix.

And then actual real improvement in margin and specific business is women's and men's apparel, and in particular was the majority of the improvement.

Like anything else, I mean, that's a combination of factors of a little better sourcing, and little improved markup, and also, you know, this whole strategy that we've implemented in trying to flow receipts closer to sales is enabling us to plan and schedule our mark-downs much more effectively.

All right.

Thanks.

Next question comes from Deborah Weinswig from Smith Barney.

Please go ahead.

Another question on the SG&A front.

I think, Arlene, you mentioned on the last conference call that you expected SG&A to leverage at about 3% comp, and I think that was for 2005 in general.

So kind of-- ?

That would be for the year, Deb. 300 stores that rolled out in the first quarter where we had training costs.

I expect as the year goes on, for that number to even out.

Okay.

So still expecting 3% for the full year.

Yes.

Even though we're saying 3% for the second quarter we expect that to be lower on the back half.

That's correct.

Perfect.

In terms of it sounds like there has been significant improvement on the inventory side.

Can you give us more details there, maybe what your goal is longer-term, in terms of inventory?

From an overall perspective at a high level I guess the focus that we would probably get repetitive, but it is really where our attention is, is this strategy of trying to time our receipts closer to when the customer is looking to buy.

And so there is a lot behind that, Deborah, building the planning organization.

I think, if you remember, mid-year last year we talked about increasing both the size of the organization, and putting in a whole level of senior VP's to run the business as the merchant partner.

We invested from a systems standpoint to do a better job on a store and market perspective to get that right.

Those-- I think our overall attention is to allow and adjust inventory, as we see demand rise or fall.

And I think the first quarter, frankly, is a good example of that being executed where, you know, we essentially came in right where we told you we would come in, in sales.

I think at the beginning of the quarter we set expectation level of probably a low single digit increase in inventory.

We came in a little better than that even though some of the seasonal business didn't perform to expectations, we were able to adjust receipts because we have kept them close to sales.

Great.

Hopefully that helps.

That's very helpful.

Thank you.

Next question comes from Adrianne Shapira from Goldman Sachs.

Please go ahead.

Thank you.

My question related to cosmetic business.

It sounds as if you had highlighted Kevin, that accessories, within that cosmetics strong.

Could you give us a sense of how the stores are performing that now have cosmetics beyond just cosmetics, what it is doing to the rest of the store, the halo effect that cosmetics is actually driving better traffic to the rest of the store?

Again, from a high-level I think our quick answer is going to be until we get the thing rolled out, and we're actually more aggressively marketing in all the elements of media, it's very difficult to read that effectively.

There is no question whether it be anecdotally or through our charge data that it is having a positive impact on customers' perception of Kohl's as a destination for their needs.

But until we get all of the stores rolled out at the end of July, and then we're actually really aggressively marketing that as an ind integral part of our whole focus for her, I think it is premature for us to talk about it.

Okay.

And then on the marketing, as you mentioned, I know you tested a direct-mail component more on the brand image side.

Can you give us a sense how that performed?

And then should we expect more?

And then on the marketing when cosmetics we can expect that to show up more prominently in the circular?

Giving too many secrets.

I think overall was that the, and Arlene is warning me not to give you too many secrets, on an overall basis, we talked about the fact we want to utilize direct mail to get at our customers wants and needs, and we began doing that in the quarter, and we're learning from that and we're going to continue to do that going forward throughout the year.

And from a beauty perspective, we said that once we roll out all the stores, beauty will essentially be in all of the elements of media that we have, whether it is in direct mail, print, national magazine, radio, television.

Great.

Just my last question.

There seems to be a clearly a lot of M&A activity in the middle market across the department stores.

Can you give us your perspective of what seeing in the competitive landscape, in terms of level of promotions, and maybe any sort of opportunity you're seeing to pick up some critical shares, there clearly is a fair amount of dislocation.

I'm not sure what level of promotion has to do with the availability of real estate, Adrienne.

I didn't mean real estate, Larry, I mean there clearly is confusion in terms of direction.

Oh.

Not so much on the real estate side, but share opportunity and even perhaps talent opportunity.

It is Kevin.

I think from talent perspective, obviously, you know, we're going to inspect that aggressively from a product and content perspective.

We've pretty much laid out our strategies.

You know where we're going and you know what our focus is.

And whatever happens from a consolidation or if merger activity occurs, if the middle that we occupy there becomes, you know, an open customer to get, I think we're really well equipped to do so.

We're really focused on it.

And you know every one of our key areas of focus.

Thank you.

Next question comes from Jeff Klinefelter from Piper Jaffray.

Yes, Kevin, question on merchandising.

Maybe using Chaps as an example, when you bring these new brands in, it would seem to be driving, you know, traffic and probably conversion in your stores.

When it comes in, you know, what do you find it displacing within the departments?

And over time is the idea here to build as many of these exclusive nationally recognized or nationally established brands as possible, and go more toward classification--go more toward brand merchandising versus classification throughout your store?

You know, in terms of what new brands are displacing, you know, the answer is on honestly, Jeff, it depends.

Sometimes they can displace almost what I would call labels that we might be merchandising.

In some cases they mean reallocating fixture space, not displacing the brand per se, but reallocating how many fixtures they occupy.

From a perspective of strategy, though, I would say--I would want to reinforce, our business model is built on national brands.

That is not changing.

And it is still the driver of our business.

I think you're going to see us continue to identify ways for us to get national brands, in some proprietary format, and I would put the Quiksilver, Tony Hawk or the Candie's example out there for you.

But we want a balance.

We want a strong national brand business.

We're very committed to it.

It gives us credibility with the customer and it creates a reason to buy, and then we'll balance that with things that can make us different and special, and you know what those are, you know, the initiatives like beauty, and other things like we just talked about with Tony Hawk and Candie's, and then our own private label.

But I would emphasize to you that our business is still driven on the basis of national brands.

Okay.

Thank you.

Lastly would be in terms of margin implications of doing these deals like Candie's, Chaps, Tony Hawk, do you look at this as being generally neutral on the gross margin front, or is there change of margin in the margin mix?

I think there is some logic to say that differentiation creates opportunity to enhance margin.

I think we've clearly been consistent in our approach for margin.

We are focused on driving comp store sales, and we expect to maintain our margin performance that we've had, which, you know, as a reminder, has been pretty much at our historic level high.

But this is not a margin strategy; this is about driving comp sales.

We think national brands and differentiation is going to get us the comp sales we need.

Okay.

Thank you.

The next question comes from Dana Cohen, Banc of America.

Please go ahead.

Hey, guys, I have a couple of questions.

For starting out on the first quarter, helping to understand the pieces a little bit, just trying to understand earnings coming in, in the middle of the range, yet comps came in at the high end, and margins were better than your flat plan?

Was there some SG&,A offset in there to help us to understand this?

To be honest with you, if we would have hit a 4% comp instead of 3.7, you would have been at $0.37.

I think it would be a better sand-bagger.

Okay.

That sounds like a plan.

Just also on the talent issue, you said that you're happy, I guess, with the talent, and yet it seems to me there's also going to be a big opportunity here as, you know, a lot of jobs are lost to the industry and how do you look at that?

I think we each have a different piece of this.

Arlene has some, and Larry clearly has some and I do from a merchandising standpoint.

On mine I would say one area that we're clearly intently looking at, is the build-out of our product development area.

Because, as we fill that out, and build that up, I think what's happening in terms of talent in the industry being available, is going to give us access that we might have had more difficulty getting otherwise.

I know Larry --

I think we've always been very aggressive, against traditional department stores and discounters, and any place we can get talent, just to fuel the huge growth that we've had, the number of stores, and expansion of our corporate talent.

So we're not approaching it any differently.

We're looking for the best talent out there.

Not necessarily who might get displaced.

I guess my last question, Kevin, one thing you didn't touch on was jewelry, and you made a hire recently.

Can you talk about that an opportunity in the back half of the year?

When is Tony Hawk line going to launch?

Tony Hawk line will launch in spring of 2006.

So you probably see it in the stores at the end of January or so.

And honestly I am really excited about that because I think it does not only gets us differentiated brand, but exposes us to relationship to Quiksilver, who has a strong point of view about design, and understands that business, and can help us a lot in terms of driving that business.

Both jewelry, and I would also add Home to that, Dana.

We have new merchants in that area that have only been with us a few months.

They have brought to the table a lot of great ideas from both of an assortment and presentation standpoint, and they'll clearly make an impact, and it is an impact that we're looking at probably substantially as we go in to the second half of the year, particularly the fourth quarter.

All right.

Thank you.

The next question comes from Gregory Fowlkes from Morgan Stanley.

Yes, thanks, just a couple of questions.

You mentioned that several categories have been really strong and with the weakness in certain seasonal categories, it seems the case may have been you might have been chasing some of the better-performing categories.

Is that currently the case?

What categories, I think the Chaps line, for instance, some of the suit separates seem to have been doing very well.

What's the inventory situation there?

It is Kevin.

On a high-level, I would say that has not been an issue.

On a more specific level, and a good example might be like Chaps suit separates, or Chaps men's dress furnishing, where the trend was really spectacular, I think in some cases we have been chasing the business and I think I feel pretty good about where we're going to be positioned for Father's Day going forward.

You'll always going to have individual classifications that that's an issue with, but on a high level I feel really good about that, I think the receipt and sales strategy we have in place is working well.

Then quickly on that, this is the lowest payables to inventory level you all have had in the a while.

Is that a timing issue or is there more to that?

As I mentioned it was a little bit of a timing issue, because when you flow more frequently, puts you into a position to not only chase business but to right-size business when it is a little bit slower than expectations.

The other reason that the payables is kind of low is because we only opened 32 new stores this quarter versus 47 last year, and as normal practice in retail, you tend to get extended dating on those new store receipts, and we had a lot less of obviously of new store receipts with 15 fewer stores opening, and that was a very significant part of that, as well.

Okay.

Great.

Thanks.

The next question comes from Robert Drbul from Lehman Brothers.

Couple questions.

First of all, with regards to the monthly comp guidance that you talked about, can you just give us an idea, in terms of how much flexibility you have on the events on the marketing side?

Especially as you look at your expectations for the month of May, where we are right now?

This is Kevin.

I'm not exactly sure where you're headed with that.

I mean, there is a timeline between, you know, today's date and some event that we might run.

And it's not next week, you know.

There is obviously a time lag between those, but in terms of adjusting marketing, you know, we--I think the point we were trying to make more, was that as we came into the quarter, kind of like we did in the first quarter, I think we had a pretty good understanding of the way things were going to develop in the quarter.

And if you remember in the first quarter we said March is going to be a tougher month for us.

We understood that.

And April is going to be a better month for us and we're just kind of saying the same thing about the second quarter.

We have more opportunity and the weather is clearly going to be more cooperative in June and July than it is in May, and we've made all the necessary adjustments to take advantage of that.

Great.

That was what I was trying to get at.

I think, Larry, as we looked at 2006, you guys really haven't commented on square footage plans for '06.

I was wondering if you might be able to give us an update on that from a real estate perspective?

We generally don't until later in the year, and our focus is clearly on the most important thing, is that we're going to deliver 20% bottom-line growth, every year.

And because we've been able to become a national company over the last couple of years, that has taken, as you have noticed over the past 2 or 3 years, has taken less footage growth to achieve that bottom line.

We'll keep you posted.

Fine.

With the continued focus on national brands, Nike made an announcement a few weeks question ago, about the exit of Sears in 6 months.

I wondered if you can talk to the athletic footwear business, and how that plays into your plans and if this gains an opportunity to gain more Nike business?

Business for us has been great.

Our overall active business whether it's been apparel, our athletic footwear has been very strong.

Nike is definitely our biggest player there and we've got a great relationship with them, and I think we're very much in-sync on strategy.

So, yes, I would say with fewer points on distribution, you know, there is more opportunity for the people who play a strong role with that brand, and I would think that we're going to be one of those people who could take advantage of that.

Great.

Thank you.

The next question comes from Dan Binder from Buckingham.

Couple questions.

Focusing on the costs for a minute.

We know there is higher payroll related to Beauty, and higher start-up costs related to the rollout, as well as the bonus accruals.

Just sort of looking at the quarter, how much of-- , you know, in terms of EPS would you sort of attribute to the one-time sort of start-up costs, and the bonus accruals?

And then, you know, if you hit your plan for the full year, will bonus accruals be a drag on earnings by as much as a couple pennies?

No, the guidance that we gave includes whatever bonuses that we would earn throughout the year based upon our assumption.

So I'm not really going to quantify the start-up in beauty costs.

We told you guys in February that would be an incremental SG&A cost, and it was going to be significant for the quarter, but we're not going to call it out as an extraordinary item or quantify it, as much as you would like us to.

No problem.

Maybe given the good progress on the inventory management, maybe could you give us an update in terms of where you are on your systems and investments there, and when you will be completed with that implementation?

Well, we'll never be completed.

There's constantly, as you he know, systems change, because there is always new technology being developed that can fit into Kohl's future.

So, as you know, we're working with a new partnership right now with SAS, which provides us a lot of new analytical tools, and that is all just all beginning, to be quite honest with you.

More to look forward to then?

A lot more to look forward to.

In terms of stock options expense , looks like about $0.03 this quarter, should we expect it to be $0.02 for the next three quarters each?

Stock options last year.

Yeah, it would be $0.02 a quarter.

It would be, you know, if you look at the quarterly guidance that we gave in restated earnings from last year, I would expect it to be a little bit higher than last year by quarter.

Okay.

Thanks.

Next question comes from Joe Teklits from Wachovia Securities.

Go ahead.

Mr. Teklits, go ahead with your question.

Can you hear me?

Sorry.

Just one last kind of question on inventory flows, clarity for myself.

Your inventory was supposed to be up low single digits.

It's flat.

Actually it was supposed to be up when we said.

It was mid-single digits we said.

Mid-single digits.

That makes it an even better question.

Correcting Kevin.

Sorry, I don't like to do that.

Okay, so your comp was going to be +4 to 5 on mid-single digit increase in inventory, and now your inventory is flat.

I like the inventory management too, I always worry about of course then not having enough inventory to drive the comp on the other side of that.

Did you say that you adjusted orders on slower-selling products, obviously that means seasonal products, does that mean you're going to postpone it and bring it in later, or do you bring something else in later in the quarter, fall merchandise or something like that to make up for it?

First of all, not to correct you, but we actually said for the first quarter our comp would be 3 to 4.

I'm talking about the second quarter.

It was 4 to 5 and then I expect our inventory at the end of the quarter, would be up basically in line with that.

And the flow of that is going to have a lot to do with where the sales come from during the quarter.

I mean, that's basically the logic behind the whole strategy, is to be able to adjust flow based on what is selling.

So a couple categories that are more forward, specifically Candie's, and men's dress furnishings and suit separates, which we really have a strong trend in.

We are going to clearly fund them, and that would be forward product for third quarter.

Okay.

I guess one last follow-up to that is when do you really have to pull the trigger, then, on whether you're bringing in more summer seasonal products or not?

I guess that decision has already been made so those orders are postponed?

I mean upon the particular classification we literally look at that every week.

Literally every single week.

That's good.

Thanks.

Next question comes from Christine Augustine from Bear Stearns.

Please go ahead.

Thank you.

Could you just clarify the leverage points on the SG&A with regard to comp 3% in Q2, and did you say in the second half it would be lower than that?

That's correct.

So is it--

It will be 3%, and so we can leverage at 3% comp in the second quarter.

We expect on the year as well to be about a 3 comp.

That means in the back half of the year, we'll do better than leveraging at 3.

Okay.

So you'll lever at a lower comp?

Correct.

Okay.

Thank you.

And then my second question, I know it's still early days on the Beauty, but how would you say your customer is responding to the fact that Beauty is kind of an everyday price point, versus the rest of the store which, you know, tends to be fairly promotional.

Have you got any push-back from customers?

Are there ways you can kind of getting around that, in terms of some types of other promotions with just Beauty?

I think the response overall is pretty favorable.

I'm sure you looked at it Christine, but there is substantial value in the price compared with like products in the department stores.

I think that customer clearly understands what she's paying for that merchandise.

Yeah, there are ways.

I mean, we include it in our marketing.

We connect it to other value offers.

We sample.

There are a lot of ways to get the value across, and you see more of these, as we go into third quarter, when it is in all stores.

Okay.

Thank you.

The next question comes from Mark Miller from William Blair and Company.

As you look at the Kohl's charge data, what are you saying for trends in the sales of your existing and loyal customers, versus sales to new customers?

Well, Kohl's charge continues to increase.

So obviously they're spending more.

As I said when we talked about average transactions, average transactions for the quarter is up.

And I just attribute that to the loyal customers putting more in their baskets.

It was the most improvement we've seen in the last few quarters on our non-Kohl's charge customers.

The Kohl's charge customers comps have been consistently strong where we're seeing success is getting that non-Kohl's charge customer into the stores, that is what has been driving the higher comp.

To be clear the acceleration quarter-to-quarter is more from occasional new customers?

That's correct.

Great.

I know you don't want to comment on '06 square footage growth at this point, but intuitively as the company gets larger, we think that over time the growth rate might slow.

I mean, in a general way as you have a national presence, how do you think about better leveraging your scale to maintain 20% growth long-term?

I think that--when you look at the SG&A of the Company over the past couple of years, we look to have continued improvement in the big lines of payroll, et cetera.

Preopening costs.

We continue to get more productive with that.

We're better at that.

I think we've got a long history of being able to leverage, run the business the way we have in the past.

I think that when you look at a couple of years ago we had to have a 20% square footage growth to get 20% earnings.

And a few years back, we had 17.

And the year we're in right now, we have about 15% square footage growth.

And we are very much focused on what does it take to achieve a 20% bottom line increase.

And we're not necessarily focused on what square footage we need to have every year.

So there's, you know, there is a lot of things that go into that equation, and I think we got a history of showing that we can deliver on a lower square footage growth, and we're not prepared to comment on 2006, because there is a lot of moving parts out there right now, with the whole retail sector.

Okay.

Final question is you talked last quarter about better ways to clear optimizing promotional mark-downs, a focus for this year.

You talked about that particularly beginning in the second quarter.

Can you talk about the timing of that is progressing as we move through the year?

Thanks.

I would think so that we're continuing to, as Arlene mentioned earlier, the partnership with SAS, and one of the components of that is going to be a mark-down optimization test, and we'll be doing that in the coming month.

Okay.

Thank you.

The next question comes from Bernie Sosnick from Oppenheimer & Company.

Can you help clarify for me some of the things you said with regard to the stock options?

You said the impact might be around $0.02 a share, little bit more in the upcoming quarters.

Can we assume it was that much in the first quarter, over and above the revision for last year's first quarter?

Well, I mean, the guidance for the first quarter of the 35 to 37 included what the stock option expense was.

It wasn't much different than what we anticipated, and, you know--

that impact was--

it was about $0.02 a share.

Which is similar to what it was for each quarter in 2004.

Okay.

Secondly, when you initially gave the guidance for the first quarter, was it against $0.33 or $0.30?

In our minds it was against $0.30 because we were going to restate options on an apple-to-apple basis it is 20% over last year.

So you knew that at the very outset?

Right, if you recall, Bernie, when we went through the last call, we went through with everyone that the lease/sold accounting change would have impacted us by a penny, and that expensing options was going to be you about $0.02 and that we would restate results.

I understand.

I understand that.

I'm just--I just don't know how to look at this, because it would seem that if we were working from a higher base, essentially you would have come in adjusted to $0.38, $0.39 a share.

If we had not chosen to expense stock options, Bernie, that is correct.

Okay.

That is correct.

All right.

Good.

Thank you.

That helps a lot.

Do we have any other questions?

Yes, the next question comes from Stacy Turnof from Merrill Lynch.

Could you update us on your small-store strategy, tell us how some of the stores are doing, and if there is any plans for acceleration in this business?

We do feel good about the small-store strategy.

This year in total--

We opened one in Mason City, Iowa in the spring, and we're opening 4 more in the fall.

So it is part of our growth plan this year, and you'll continue to see small stores as part of our growth plans going forward.

We're very happy with that strategy.

Jumping to your cosmetic business.

In the past you mentioned that you guys might expand that to bath and body, or fragrances, is that still a plan that you plan to do?

Yeah, I think in after we roll it out, because we haven't gotten it done, after we roll it out in the third quarter, one of the strategies we have in place is to enlarge it essentially by connecting it into our existing fragrance business, and that's still our strategy.

Great.

Thanks so much.

Yes.

The final question comes from Wayne Hood from Prudential Financial.

Yeah, Larry, related to that cosmetics question.

There has been a lot of talk and hype about it.

The real productivity in that pad, could it exist where you take the jewelry accessories area, and really upgrade the jewelry to fine jewelry the way J.C.

Penney's has done, to really drive a higher average ticket, given the like-customer base?

Is that something you would be willing to do?

I have a second merchandising question, as these buyers come into the home area, to what extent do you think they're going to need to edit assortments in the Home area, that would create some mark-down risk, or transitional risk in the back half of the year?

And I have a couple a earnings question and a ticket question.

This is Kevin.

As it relates to your first question, yeah, I think we tried to address that a little bit earlier.

Somebody asked about new people.

And clearly Jewelry and Home, where we have new teams in place with very strong backgrounds, we have every intention a lot of implementing a lot of new initiatives in the back half of the year, and specifically in the jewelry business, we think there is a big market share opportunity for Kohl's, as we implement those initiatives.

In the Home business, there are going to be changes.

There are going to be continued changes in presentation, of new brands to be introduced, new assortments to be done, but I would expect none of that to have any impact on our overall profitability in the Home area.

Will you be taking the jewelry area as high up as Penney is, and staffing it at the Penney level?

You're getting into details and specifics that relate to our strategy and I wouldn't want to get into that, Wayne, I would leave it as we clearly see the opportunity.

We looked at the market share data.

We looked at who owns the business, and it's a big opportunity and we're going to go get it.

While I've got you, the 4 to 5% comp guidance, what does it imply or embedded in that number for traffic, and when can we see some improved traffic, and positive ground and a better balance between traffic and ticket?

I hope what you see when you look at 4 to 5, as Wes mentioned, we are beginning to see some pick up a little bit with what's happening with non-Kohl's charge comp, which is a positive.

As we go into the second quarter and third, you will continue to see traffic to pick up.

Traffic actually did improve.

We were flat versus in the fourth quarter we were down 3 last year, so we are making sequential progress.

As we lap over some of the performance last fall, our traffic numbers are tremendously easier in the back half of the year, to address the question Emme had earlier.

The low end of your guidance which was $0.49, given you expect the expense rate to lever on a 3 comp, and assumes your low end of the range on a comp basis, would imply that the gross margin rate might even be down, to get to the low end.

I'm wondering are you expecting, if you hit the low end that your gross margin rate would be down?

No.

How do you get to the low end?

Well, as you know, we can go through the specifics of your model.

We tried to give you as many of the components of that, as we went through the P&L as we could.

Thank you very much.

Thank you.

There are no additional questions at this time.

Thank you for participating.

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