柯爾百貨 (KSS) 2005 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Kohl's Department Stores second quarter 2005 earnings release conference call. [OPERATOR INSTRUCTIONS.]

Before we begin, let me remind that you our discussions and comments made during the course of this call include forward-looking statements, within the meaning of the Private Securities and 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So if you are listening after August 11th, 2005, it is possible that the information discussed is no longer current.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.

Thank you.

With me today is Larry Montgomery, Chairman and Chief Executive Officer;

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

Arlene will take us through the financial performance, I will walk through the balance sheet, Kevin will talk about some of our merchandising and marketing initiatives, and Larry will wrap up with our expansion plans and earnings guidance.

So with that, let me turn it over to Arlene.

Thanks, Wes.

Obviously, we're pretty excited about the second quarter, as well as the first half.

So let me run you through the components of the P&L.

Starting with sales.

Sales for the second quarter were approximately $2.9 billion, versus $2.5 billion a year ago, up 15.6%.

For the first half of the year, sales were approximately $5.6 billion, versus $4.9 billion last year, so up 15.4%.

When you look from a comp perspective, we achieved a 5.1% comp-store sales increase for the quarter, and year-to-date, 4.4% increase.

When you look at transactions, transaction on a per-store basis were up 1.3% for the quarter, while average transaction increased by 3.8%.

When you look at the first half of the year, that average transaction improved 3.8 as well, while transactions per store were up about 0.6%.

When you look at the regions, all regions achieved positive comp-store increases for the quarter and also year-to-date.

The Southwest region led the Company with a double-digit comp increase for both the quarter and year-to-date.

When you're looking at productivity of our new stores, it continues to run between 70% and 80% of an average store.

Kevin, in a few minutes, will talk about the performance of each of our lines of business.

When you look at gross margin, first of all, on a FIFO basis, gross margin on the quarter was about 36.9%, compared to 36.4% a year ago, so up about 50 basis points.

Year to date, approximately 36.4%, compared to 36% a year ago, so up 40 basis points.

Improvement in margin is really a result of all of the initiatives that we have had so far this year from an inventory management standpoint, as well as the improvements you've seen in merchandise content.

Obviously, we've been running lower clearance inventory levels than a year ago.

When you look at the margin by line of business, all lines of business increased their margin rate over last year, both for the quarter and for the first half of the year.

One thing I want to make note of, if you read the press release, you would have seen that during the quarter, the Company changed its method of accounting for inventory from the last in, first out method to the first in, first out method, so that had a favorable impact on margin of about 2.4 million.

So, obviously on a go-forward basis, you will never see any additional LIFO charge or income, it will totally be on a FIFO business.

When you drop down to SG&A, for the second quarter, SG&A was approximately $673 million.

It increased about 15% over last year's restated $583 million.

That restated number, obviously, reflecting our accounting for stock options.

We leveraged expenses in distribution, credit, corporate, and advertising, and as expected, store expenses did not leverage for the quarter versus last year.

As the quarter progressed, we actually made a decision to really emphasize our fashion in the store, in particular, in regards to back-to-school.

In conjunction with the launch of Candie's, we actually shifted this year our kickoff circular for back-to-school, from August week one last year to July week four this year.

This actually required increasing our July back-to-school receipts for Juniors, Young Men's, and Kids.

At the same time, in order to make the store more exciting, we created new graphics for Juniors, Young Men's, and Shoes.

And I know a lot of you have probably seen those in store, because I've heard a lot of comments about them.

Combination of these factors actually created some unplanned expenses in stores' advertising and distribution for the quarter.

Excluding that, we would have leveraged expenses by about 15 basis points, where what you're seeing on a reported basis is about 5 basis points.

Kevin will kind of go through that in more detail in his remarks, but I think we all feel it was absolutely the right thing to do to increase our investment, and we think it sets us up for a pretty strong back-to-school.

When you drop down to depreciation and amortization, $82.6 million, compared to $74.1 million last year, up 15.7%; year-to-date $162 million, against 138 last year, up about 18%.

Depreciation expense for the back half, we would expect to see similar kinds of increases to go along in line with the number of new stores.

When you're looking at preopening, preopening expenses were $4.1 million for the second quarter, versus $4.7 million last year.

We'll open four stores in August this year, compared to seven stores in August last year.

During the first half of the year, we opened a total of 33 stores, that compares to 47 stores in the first half of 2004.

On average, we spent about $485,000 in preopening per store.

Approximately $3.2 million of that cost, if you recall, was actually incurred in the fourth quarter of fiscal 2004.

As you look at fall of 2005, we expect average preopening per store to be about $520,000, based on the mix of markets that we're opening those stores and the number of stores in each of those markets.

In addition, as a reminder, our store openings are weighted more towards the fall, with 62 openings this year, versus 48 openings last year.

So you're going to see higher preopening expenses this year than you would have seen in third quarter a year ago.

From an operating income standpoint, for the second quarter, operating income was up approximately 23% compared to last year, 10.7 as a percent of sales, compared to 10.1% a year ago.

On a year-to-date basis, operating income is up approximately 22% compared to last year, 9.4% of sales, compared to 8.9% a year ago.

Interest expense, $16 million, roughly, on the quarter, compared to $15 million last year; year-to-date, $33 million compared to $30 million a year ago.

Interest expense should be about $19 million as you're modeling it for the third quarter.

From a provision for tax standpoint, you'll see that in the release, we announced that we reduced our provision for taxes by $4.9 million for the quarter, due to the Company's assessment of the impact of a favorable resolution with a particular state on certain tax matters.

It's a one-time pickup, so as you look forward in fall, we should expect that the effective tax rate for fall season will be 37.8%.

Bottom-line net income for the second quarter was $187 million, up approximately 27% over a year ago.

Year-to-date, net income was $312 million, up approximately 25% over a year ago.

From an EPS standpoint, that resulted in $0.54 a share on the quarter, compared to $0.43 last year, and year to date $0.90 a share, compared to $0.73.

With that I'm going to turn it over to Wes to go through the balance sheet.

Thanks, Arlene.

Before I review the balance sheet, I've noticed some of you guys haven't adjusted your last year numbers in your models for stock option expenses and/or lease accounting changes.

As a reminder, we included those in the first-quarter earnings release all P&L information by quarter that will allow to you make an apple-to-apple comparison this year to last year.

Please let me know after the call if you need that information resent to you.

Square footage at the end of quarter 2, gross, 60.395 versus last year's 52.702, an increase of 14.6%.

Selling square footage of 51.831, versus last year's 45.256, an increase of 14.5%.

Accounts receivable of about $1.3 billion, versus last year's $1.1 billion, an increase of about 19%.

Kohl's charged sales increased 22%, $2.2 billion this year versus $1.8 billion last year.

As we continue to grow share, our share for the quarter was 39.6, versus 37.4 last year, an increase of 220 basis points.

And we continue to turn the receivables very quickly, 3.8 this year, versus 3.6 last year.

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

Write-offs as a percent of Kohl's charged sales year-to-date were 1.0% this year, compared to 1.1% last year.

And our reserve at the end of the quarter was approximately 1.9% of receivables, compared to 2.0 at the end of the second quarter in fiscal 2004.

Inventory levels.

Inventory, 2.2 billion, versus last year's 1.8 billion, an increase of about 24%.

At the end of the quarter, an average store was up approximately 9% to last year.

Kevin will talk a little bit more about this later in his review of merchandising.

Fixed assets.

Capital expenditures were $234.3 million for the quarter.

Year-to-date CapEx was $404.2 million, and we continue to expect capital expenditures to be about $875 million for fiscal 2005.

Accounts payable.

Our balance was $967 million, versus last year's 789, an increase of about 23%, and as a percent of inventory, 44% versus last year 44.4.

And our expectation for third quarter is for the AP percent of inventory to be in the low- to mid-40s.

For your modeling, the weighted average number of shares, basic shares of 344.066, diluted shares of 346.772 for the quarter; year-to-date 343.796 for basic, 346.586 for diluted.

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

Thanks, Wes.

Let me start with some comments on sales and inventory management, and then we'll move on to talk about our merchandising initiatives for the fall season.

On sales, as Arlene mentioned, we achieved a comp-store increase of 5.1% for the quarter.

Accessories, Men's, and Women's apparel exceeded the Company's comp.

Accessories continued to benefit from strong sales in fashion jewelry and handbags, as well as our Beauty initiative, which was in 600 stores in the quarter.

Men's Apparel improvement continues to be led by the addition of Chaps, as well as very strong sales in dress clothing.

In Women's Apparel, we continue to be pleased with the performance of our newer and expanded brands such as Daisy Fuentes, axcess, Nine & Co., and apt. 9.

We saw improved performance in maternity, with the launch of our exclusive brand Oh Baby! by Motherhood.

After a slow start to the quarter in May, our seasonal businesses, such as shorts and skirts, swim, tanks, polos and capris achieved strong, positive comparable sales increases across the store, and we ended the quarter very clean in clearance inventory, which helped our gross margins for the quarter.

As it relates to inventory management, as Wes mentioned earlier, inventory levels on an average-store basis were up 9% at the end of the quarter.

As Arlene said, we decided to move our launch of Candie's into July.

We also accelerated receipts of more fashion merchandise in order to increase the level of product we have across the store for back-to-school.

We believe that this more fashion-oriented merchandise will sell early in the back-to-school season.

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

As I mentioned, our clearance inventory levels are in very good shape, and our inventory is very fresh as a result.

We expect to continue to achieve mid-single-digit comp sales increases in the fall.

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

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

Merchandise initiatives for fall 2005.

As I mentioned, Candie's was introduced at the end of July.

The launch was supported by broadcast and was very successful.

We're very pleased with the initial reaction to the product in all areas -- Juniors, Girls, Accessories and Shoes.

With the importance of back-to-school to the August and September months, we will continue the Candie's TV spots through the back-to-school season.

Although it's incremental to our back-to-school advertising versus a year ago, we think it will be a good long-term investment.

At the same time, we have now completed our rollout of Beauty to all stores.

In addition to the three initial brands -- American Beauty, FLIRT! and good skin, we just launched the fourth brand, grassroots, this week in all stores.

In addition in September, we will be launching a fragrance, wonderful, as part of the American Beauty line.

Now that we have a national presence in Beauty, it make sense to begin investing more marketing dollars to promote trial.

You will see a significant increase in its presence in our print advertising, as well as a broadcast campaign for Beauty at Kohl's, targeting the American Beauty brand, and featuring Ashley Judd.

In addition, we have three additional brands in Missy Casual Sportswear -- axcess, which was introduced this spring, and Nine & Co., and apt. 9 in casual, which will be introduced this fall.

We feel very good about all the new launches and the extensions of successful contemporary and updated brands.

We're very focused on using this to build awareness with our existing customers of our continually improving merchandise content and drive more frequent trips, as well as gaining new customers.

Last fall, we introduced a fall fashion advertising campaign to highlight of new brands Missy Career that was very successful.

This year, we will dramatically build upon that campaign to raise the profile of our new fashion strategies across the whole store with our customer.

This will include significant additional investment in print, direct mail, broadcast, magazines, and in-store presentation.

This will initially support the back-to-school season, but more dramatically affect the fall, as this investment will create awareness of the new brands before she makes a decision on where she wants to shop for the holidays.

We're being very aggressive in order to gain more market share as we enter of all-important holiday season.

As a reminder, initiatives yet to come in spring 2006 include Chaps for Women and Boys, in partnership with Polo Ralph Lauren, and Tony Hawk in Young Men and Boys, in partnership with Quiksilver.

We intend to continue to introduce newness and will continue to have new additional initiatives to share with you periodically.

In summary I'm very pleased with the progress we made in both merchandising and marketing in the second quarter.

We are very excited about our assortments for back-to-school and fall and believe our marketing to support the merchandise is very strong.

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

Thanks, Kevin.

I'm very pleased with the progress that we made in the second quarter.

Our projections were for a 4 to 5 comp-store sales increase, and net income growth of 20%.

We achieved both of those goals.

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

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

And their new brands in both Men's and Women's continue to perform well, and as Kevin said earlier, we've been very pleased with the initial acceptance of Candie's.

The stores look great and the changes we've made in merchandise presentation to make it easier for our customer to find what she wants have been very successful.

Talk about expansion for a minute.

During the first half of the year we successfully opened 33 stores.

We're pleased with the sales performance of our new stores as they continue to run in our first year sales productivity expectation of 70 to 80% of an existing store.

As we announced earlier, we're planning to open 62 stores in the fall season, four in the month of August and 58 in October.

That will take us to 732 stores by the end of fiscal 2005.

The new stores for fall 2005 are as follows -- the new market entries -- we're heading into Florida with 7 stores in Orlando and 3 in Jacksonville.

Other markets include 15 in the Midwest region, 9 in the South Central, 9 in the Southwest, 8 in the Mid-Atlantic, 7 in the Northeast, and 4 in the Southeast.

Talk about fall guidance for a minute.

This is the first time we've really given guidance for the fall season by quarter.

As we look at the fall season, we're looking for comp store sales increases in each quarter of 4 to 6%.

In the third quarter, I would expect comps to continue to strengthen throughout the quarter.

As Kevin mentioned, we're very focused on using new brands and new marketing initiatives in order to drive market share.

In light of the success of our inventory management initiatives, we would expect gross margin to improve between 20 and 30 basis points in each quarter.

As we look at expenses, as Kevin mentioned, we've decided to invest more incrementally in marketing and in-store presentation to support the launch of Candie's, promote the presence of Beauty in our stores, and build on the success of last year's fall fashion campaign.

We feel strongly that this is going to help drive new customers.

The incremental spending is primarily focused in the third quarter, but is expected to drive traffic into the holiday season and beyond.

As a result, we now expect our SG&A to increase at 15 to 16% over last year for the third quarter, and 14 to 15% in the fourth quarter.

SG&A should leverage for the fall season at approximately a 3% comp.

Bottom line, this will result in earnings of $0.43 to $0.48 in the third quarter and $1.10 to $1.14 in the fourth quarter.

We expect to increase net income from the -- for the year by at least 20%.

This would result in earnings per share in the range of $2.42 to $2.50 per diluted share.

I'm going to turn it back to Wes for a quick announcement, and then we'll take questions.

Thanks, Larry.

Just wanted to say, as you guys saw on the release, we're having an analyst day in Boston next Wednesday.

We sent out a lot of invitations.

We'd like to get all those invitations and your replies back in via e-mail or fax by the end of the day today.

We need to make a call on transportation, as well as lunch, I want to make sure everybody has something to eat next Wednesday.

So, thank you.

With that, we'll take some questions.

Thank you. [OPERATOR INSTRUCTIONS.] The first question comes from Emme Kozloff from Sanford Bernstein.

Please go ahead.

Hi, there.

I've got a question for Kevin.

When you talk about fashion specifically, and then being aggressive on fashion strategies, can you give us some additional color on the product and styling you're making important inventory bets on for fall?

And then I just got a follow-up for Wes.

Sure, and even before I answer that Emme, real quickly, I want Wes to just correct one thing that I think we said wrong at the very end.

Wes?

Yes, I think Larry might have given guidance for the third quarter of $0.43 to $0.48.

The actual guidance is $0.43 to $0.46 in the third quarter.

So I just want to make sure everybody has the right numbers out there.

It's not often that Larry misspeaks, but --

I didn't have any glasses on.

Okay.

So, Emme, your question is about fashion direction, more in terms of specifics, I think.

And I think on a broad-scale basis, we're kind of focused, as we've been saying, in the update and contemporary zones more so than in the classic zone.

That will continue.

In terms of key areas of direction, there are some fabrications that we feel good about.

Things like, in bottoms, corduroy or things like, in bottoms for back-to-school, you see a very dramatic increase in what we would call premium denim -- or we're marketing as premium denim.

So it could be anything from destructed denim or embellished denim to items that may have additional essential tied to them.

So I think from a third-quarter perspective, those are probably the key pieces.

Okay.

Great.

Well, I'm now clear on the guidance question.

But just as a follow-up, is -- are you guys going to be able to provide with us with any more clarity on the expense pressure from Estee Lauder?

I mean, we don't really have any kind of gauge for it, and since we don't really have much of a gauge on the sales performance as well, would the analyst meeting be a forum for that?

Or how should we think about it?

I think the best way to think about it is we're not going to go through that level of detail, nor would we on any type of a product launch, to be honest with you.

It is incorporated, the expenses, to be able to support it and advertising -- advertise it are all incorporated in our SG&A guidance.

Okay.

So -- last quarter you said -- or in this quarter leverage you can on a 3% comp, but with a 5 comp, you only leveraged about 5 basis points?

That's correct.

And as I said as we went through SG&A, we did make some decisions after we gave you that guidance to move up back-to-school, begin to actually launch it in July rather than the original plan of August 1st.

With that, we did bring in more receipts, so it cost us within DC in stores to process receipts.

We also introduced -- and hopefully you've seen them by now -- the brand-new graphics packages in the store in Junior's, Young Men's, and Shoes to support back-to-school.

Those were not in our initial plans when we came into the quarter.

So combining those additional expenses, as I said, cost us about 15 basis points.

But we think it's a pretty wise investment, Emme, when you look at the importance of back-to-school.

Okay.

Great, thanks.

The next question comes from Adrianne Shapira from Goldman Sachs.

Please go ahead.

Hi, thank you.

A question on the traffic.

Clearly, you are seeing better traffic trends this past quarter.

Can you just give us a sense -- it seems as if you are starting to attract more than your loyal customer.

Can you just give us an update on that?

And if so, where do you think she's coming from?

Well, I think we continue to -- our non -- the way -- the best way to look at that is really for us, is our non-credit customer, and those comps continue to improve over what we've seen last year.

Its our fourth consecutive quarter of increasing comps.

I think it also bodes well for the back half that we have some easier traffic comparisons then we have had in the spring season.

So that should help us as well.

As to where the customers are coming from, I think Kevin can probably address that.

I mean on a broad basis, I guess we'd say since the strategies seem to be working in almost all areas, we're getting pretty broad acceptance with our core customer, who's spending a little more.

And what we would kind of refer to as probably our non-loyal or occasional customer, clearly seen an increase with.

And I think that with the new, which Wes is referring to, we kind of target the non-charge business metric to follow that.

I think we kind of feel, Adrianne, that we're getting really strong acceptance and increases across the board.

And all along, when we started down this path, we kept saying that's what we're looking for, is we don't want to lose the loyal customer, we just want to build up a little more with the non-loyal and then add new.

And right now, we feel like we're getting all three.

Great.

And, then, I had a question.

Last quarter, you had mentioned that you were launching a markdown optimization test in the second quarter.

Can you just give us an update and any thoughts of a rollout?

It is Kevin.

We launched the test in June, and we're planning to continue to test right through the fall season throughout the country.

And I'd say, with a perspective that whatever learnings we have from it that would be rolled out, would roll out and impact 2006.

Okay.

And, then, just a last question.

Larry had mentioned about 4 to 6% comps for the third quarter with strengthening through the quarter, but I'm just wondering since you did launch an earlier back-to-school, why -- could you give us some sense of how, I would think that would benefit August this year, and sort of some granularity into the months of the quarter?

We're not going to get into too much granularity.

But if you listen to the -- our approach to anniversaring that fall fashion campaign from last year, we're going to be very aggressive from the middle to -- middle of September on.

We think the timing is perfect.

We think it's a great time to really showcase a lot of new stuff that's going on.

Beauty's been rolled out to the whole store.

We're going to introduce a new fragrance.

There's a number of different things going on.

We think the timing is right to take market share and it builds a lot of momentum going into October and the fourth quarter.

So we see, because of that, we see the strength really of the quarter starting to pick up some intensity, the second half of September.

Thank you.

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

Please go ahead.

Oh, hi, guys.

A couple of questions.

I guess I'm still confused on the SG&A inventory issue at the end -- or, I guess, it was intra-July that this product came in; is that correct?

As far as additional inventory, Dana?

[Inaudible] Correct.

It's additional inventory, and, then, I guess it was SG&A to back it for back-to-school launch?

Right, in part.

We did increase our levels of receipts of back-to-school in July, and we do -- what we will bring in in August.

We felt as we moved and decided to launch back-to-school the end of July, Dana, that it was important to really make sure that we had all markets across the country well set for back-to-school, and particularly, from a fashion merchandise apparel standpoint.

So that would have been, what, the last week of July that this would have happened?

Over the course of the month, because we made the decision fairly early in the quarter as we got excited about Candie's and what that product was and how we wanted to launch that, that we felt it would be very exciting to be able to do that at the end of July.

Okay.

So, I guess it would not, then, have materially impacted the July comp?

Correct, correct.

Okay.

But I guess with respect to the previous question, shouldn't it have some beneficial impact, then, on August if -- just -- so that the -- I guess, what I'm trying to understand is, I fully understand the idea of the investment.

I guess the question is, why do you think it won't start to impact business until late September?

I think what we're seeing, and Kevin you can talk about from a fashion content.

I think it's what the content of how we expect fashion to sell and timing versus, maybe, basic core bottoms.

Kevin, maybe you want to speak to that?

Yes, I mean, I'd reinforce that.

Honestly, you shouldn't read anything into our feeling about August.

When we say there is strengthening that we see during the quarter, it's just, frankly, as we look at all the initiatives we have, back-to-school is one key period for us in fall fashion, and Women's Apparel is another key period for us.

There are a lot of good things in place for back-to-school.

I think what we're seeing is fashion selling early.

Basics, which are still a big part of our big are going to sell later in the month.

And, then, as we get into September and October, the sheer weight of Men's and Women's to our business gives us a lot of confidence about the strengthening going on.

So there isn't any -- I don't think any of us have any negative feeling about August at all.

We feel really --

Oh, no, not at all.

-- about what we've got going.

Okay.

And, then, if you can just maybe give us better insight into the reason for changing the inventory accounting methodology?

Simply as you looked at how little we had on the books from a LIFO standpoint, and as you look at how much more we're focused on apparel and, in particular, fashion apparel, the first in, first out method more appropriately reflects, really, what our merchandise is today.

As fashions come in, that's got to be the first thing being sold, not the last thing that came in.

So it's just how the business has evolved, really, Dana, over the last 15, 16 years.

Although I guess it's true under this methodology you don't take a markdown until the product is sold versus prior, you would have -- ?

No, no, no.

No, no, no, no.

That's not true at all.

No, it does not change at all how we compute gross margin, how we take markdowns, and how that goes through that margin calculation.

No, all that LIFO versus FIFO was, is really more taking into account, inflation.

And since we're in a deflationary environment and have been for a number of years and expect it, because you guys were all asking that about six months ago, the effect of deflation on apparel, seemed like the prudent thing to do.

Okay.

I'll follow up with you later, Wes.

Thank you.

Okay.

Your next question comes from Kevin Boler from Merrill Lynch.

Please go ahead.

Yes, speaking of deflation, Wes, I think at this time last year you were saying you're expecting to see about a 5% rate of deflation, something around there.

I was wondering if could you give us an update on what you are seeing with respect to your spring buying and what kind of deflation you're seeing?

Well, I think we said it was more like 3 to 5.

But I think -- we -- it's hard to break out the apparel deflation because we're always going to get better costs because we're growing.

So it's hard to understand how much is the deflationary environment and how much is just our growth.

Okay.

And, then, I guess on the reverse side of that, it sounds like you want revaluation.

It looks more like a new peg, but if these changes and you see appreciation in the yuan, what makes you think -- or, I guess, the question is -- What's break point, there, with the appreciation of the yuan?

And at what point do you start to see a material impact on your private label business?

This is Kevin.

I think one of the strategies we've had in place for a some time is pretty broad global sourcing.

And while, certainly, China is an integral part of our sourcing strategy, there are also many, many other very large sources of -- countries of production that we deal with, not the least of which, for instance, is Central America and quick response strategies we have there.

So I don't -- I think big picture, we're looking at 2006, regardless of what happens in China, that there'll be some decreases in our cost in apparel, some due to leverage in size, some due to competitive pressures from factories fighting for our business.

And we're kind of targeting increasing the quality of our private brands to offset that, because we have absolutely no intention of lowering our average out-the-door retails.

And, finally, just a last question, I guess, I was just curious if you could give us kind of a -- some color on the results of your small store concept and your thoughts there?

Any plans maybe to ramp up growth there or not?

I tell you what, we've only got a few small stores out there, and I think we'll be able to give you some color on that and how they fit into our expansion strategy next week at the investor conference.

And honestly we feel good about it, because, as you know, we started with four, and we added --

Yes, we're opening six this year.

One of them we opened in the spring down in Iowa, and we have five more slated for this fall.

Thank you.

Your next question comes from Deborah Weinswig from Citigroup.

Please go ahead.

Good evening.

Can you talk a little bit about the impact that Peggy Eskenasi is having after been there for, I guess, a little less than a year?

It is Kevin.

She's been here for about eight or nine months or so.

I think her -- all along we had said the order of priority for her was really organizationally first.

She's had a pretty dramatic impact that we're significantly strengthened the organization, brought in a number of new players, not only on the product side, but also on the trend and design side and on sourcing as well.

So we have a larger and much more experienced organization in place.

Secondarily was really opening up sourcing to include more quality makers and to try to make that synergistic with our merchandise strategies, which was to try to really target opportunities for us to raise our out-the-door retail by improving the quality of our goods.

So, she's clearly having an impact.

Private brands is a really critical part of our future success, and it's going to continue to build in terms of her impact, but I'd say, if I had to rank them right now, are organizationally a lot, and in terms of improving quality, pretty significant as well.

Okay.

And, then, also, can you give us some additional color in terms of what's happening in a customer's basket when they're also buying Beauty?

I don't know if you can compare us size or there is anything you can give us in terms of traffic, et cetera?

I think it's a little early.

We've just completed the rollout, and as Kevin said, we'll finally begin in third quarter to really start to market Beauty in our tab through broadcast, through a number of vehicles.

So I'll feel better about probably starting to talk about some of those things as we get into fourth quarter.

Okay.

And last question.

Larry, you spoke a little bit earlier about kind of taking market share.

Can you talk about what might be potential benefits from the consolidation we're seeing on the retail landscape?

And maybe just help us understand what you're thinking in terms of real estate side?

And, also, we've heard that there might be some potential brands available as well?

I think we're -- we built our -- all of our strategies to really go after taking market share with all these guys being on their A game, the fact that you got a big consolidation between May Company and Federated, most likely with May Company trading up and they're vacating a number of sites.

I think that's an opportunity for ourselves.

I think it's an opportunity for Penney's.

And we have always been on the lookout for real estate opportunities where we can take advantage of somebody else's situation and expand through using their box and turn it into a Kohl's box.

So we have always been pretty aggressive with that, but there's a lot of different things going on out there right now.

A lot of moving parts in the real estate part of retail today.

Great, thank you so much

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

Please go ahead.

Thanks.

Questions for Kevin.

Following up on the incremental marketing.

How has the response been on the fashion chemistry direct mail piece for back-to-school?

Do you expect a piece like that to benefit sales throughout the back-to-school season?

Or is that a shorter-term driver?

And, then, do you expect to make more use of that specific type of direct mail piece in upcoming seasons?

I think from a -- from a strategy standpoint, the direct mail concept was positioning, for sure, with a core basic customers.

So we see it as a longer-term return.

It's not something that we expect to go into somebody's home and they were going to rush in in the next seven days and buy something they saw.

We saw it as setting the tone, that Kohl's has some great new fashions.

In some cases, some new brands that they hadn't seen before, and that that would mean that they might make either an incremental trip or maybe consider us when they didn't consider us before.

So I would look at that back-to-school piece as, what's the impact of it over the six to eight weeks of back-to-school -- from the last week of July all the way through the second week of September?

And we judge its results based on that.

And we are planning to continue in that direction.

I mentioned about fall, that we would, in fact, include, as part of our marketing for fall fashion, a direct mail piece that's very similar to the one you saw back-to-school.

Anecdotally, on the fashion chemistry thing has been very positive.

I mean, the -- we've gotten a lot of positive response and feedback from consumers.

I think our store organization is always a good barometer for that, and they think it's great.

So I think it's going to be really well accepted.

Notice the theme beyond that direct mail piece, because you see that theme in the broadcast.

You will see it in our Sunday circulars.

You'll see it in the graphics in store.

And it's a theme that's tying the whole back-to-school program together for us.

So I think it's hard to look at just one piece by itself.

I think you have to look at the whole package.

That helps, thank you.

The next question comes from Bob Drbul from Lehman Brothers.

Please go ahead.

Hi, I just had a couple questions on the inventory.

First, I mean, in absolute basis, can you talk a little bit about units versus dollars on the inventory as you head into the fall season?

And, then, second one would be -- You guys talked a lot about how the clearance levels of inventory are way down.

Can you maybe give us an idea on a dollar basis where you are versus year ago or on a unit basis?

On the clearance, I can tell you we're down double digits on a per-store basis.

In both units and dollars.

Right.

From a total inventory I think units [inaudible] comparable to --

Yes.

If your question was is there a big difference between a 9% increase in units versus a 9% increase in dollars, they were almost the same.

And it is as well on clearance.

That double-digit reduction in clearance was about equal of dollars and units.

Okay.

And, then, as you talk about the increase in the marketing spend for the fall, should we think of this as a permanent change to your marketing strategy and investment plans as you look into the future years as well?

I think we've always had a pretty strong approach to marketing driving our opportunity for market share.

I think we'll -- we're just suggesting is both -- through the results we got through our initiatives in spring and what we were reading into what customers were buying, when we looked at the opportunity that we had in the third quarter with the amount of newness, the amount of new initiatives that were working really well and some of the new concepts that we were launching and marketing, we felt there was, like, -- there was an opportunity to really step forward and take more market share, and we had plenty of tools to do it, with a new brand, a new category, some the exclusive strategy.

So, it's always kind of been a long-term strategy of the Company, but I think as it relates to the third quarter, particularly so, we feel like -- you know what, we're positioned to take share right now.

We've great content.

Our stores are really well conditioned from an in-store experience standpoint.

And the marketing that Arlene mentioned just a second ago is really cohesive and it's comprehensive.

There's not a single touch point that consumers are having with Kohl's where they're not getting the same message reinforced over and over again.

Great, thank you.

The next question comes from Jeff Klinefelter from Piper Jaffray.

Please go ahead.

Yes, a couple quick questions.

Just in terms of the marketing spend or SG&A for the second half, any sense -- can you give us a magnitude for kind of dollars, specifically focused on brand marketing this second half versus last year?

And, Kevin, are you finding that the most -- there is a most effective vehicle to get these new brand launches communicated?

Is it the TV or the print campaign?

And, then, just a quick follow-up on this current fashion cycle.

Well overall marketing I can't specifically about the dollars in brand versus event, just because that's something from a proprietary competitive standpoint I wouldn't want to get into.

In terms of things that are working better than others, yes, there are definitely learnings that we had throughout the spring season that we incorporated in the back-to-school and fall.

And, again, the big message I think we'd all give you is we fixed everything.

I think the good thing is, is that we need to hit them from a number of different fronts.

You can't focus on one, because you are facing customers in a lot of different ways today.

Okay.

And, then, just in terms of your comments on the fashion selling well up front, basics later, pretty consistent across the retailers that are reporting right now.

Just curious if your feeling is that this is something somewhat unique in terms of the current fashion cycle -- there's more fashion content out there, more premium and embellishment.

Is that driving, kind of, earlier sales of that product and pushing basics toward later?

Or is this something that's just been evolving over the last few years?

I think it's been evolving.

It's kind of always been that way that fashion sells first and basics sell later.

But I think it's been evolving in terms of [inaudible.]

Okay.

And, just, lastly, in terms of your Q3 and Q4 comp guidance, what's inherent in that guidance?

What's particularly strong in terms of your departments within your store versus others that are kind of driving that 4 to 6 range?

We wouldn't want to get into forward, and I'd only refer back to what's been driving our second quarter and first-half, which is Men's Apparel, Women's Apparel and Accessories.

Okay.

Great, thank you.

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

Please go ahead.

Thank you.

How much of the store-for-store increase in the inventory was due to early receipts?

And, in terms of your outlook for the quarter, are you -- are you basically saying August is 4 and October 6?

Or are you thinking August will be something below the mid-single for the quarter and that October will be the biggest month?

Thanks.

On the inventory, it was about $70 million we brought in early.

So absent that, we would have been within the 4 to 6 range that we told but earlier.

In terms of the trend --

Nobody's going to answer your August versus October.

The range we're expecting as you look at each of those months is just 4 to 6%.

So it's not like we're looking at huge swings from month to month.

As Larry said, we just expect we're going to build a little bit as we go through the quarter.

So you -- so each month, you should be able to do a mid-single?

That's what we're looking for.

Yes, absolutely.

Otherwise, we would have used the words up modestly.

Well, thanks for the clarification.

You bet.

The next question comes from Bernard Sosnick from Oppenheimer.

Please go ahead.

Thank you on the clarity of your guidance, it's approved and appreciated.

Could you say a few words regarding the Home business, and changes there?

Sure, Bernie, it's Kevin.

I think you know that we added a new head merchant in Home late, late last fall, and I'd say we had a decent spring season in Home.

You notice we didn't mention it as one the three leading businesses, so it wasn't in the top three.

I think we believe that a lot of the strategies which, frankly, we'll be talking about at the analyst meeting next week in Home are going to get people excited about the opportunity in fall, particularly as we turn the corner from third to fourth quarter and, then, for 2006.

So I'm very excited about what Chris Capuano has put together in terms of merchandising strategies and presentation strategies, in addition to our marketing ideas as well.

I think you have a lot to be proud of in terms of the presentation of the store.

You cleared up all the clutter, the merchandise content is better, but could you talk a little bit about the overall improvement in the efforts to raise the quality in retailing to maintain the pricing, if not improve it, as you see it across the board?

And how that might influence the competitive environment?

I'm not -- are you -- I'm not exactly sure what you're asking, Bernie, to be honest with you.

Well, Target is -- Target is improving the quality of its product, Penney is doing the same.

Everybody wants to avoid lowering prices as -- in a deflationary environment, so the customer is getting better quality than ever before from a lot of other retailers.

Yes, I think that's -- it was well said.

That's 100% true.

I think it's very positive in terms of apparel demand, because what it means is that at the end of the day, the customer's going to get more for her money.

You just -- you still have to be positioned right in terms of where you're putting product.

We're not abandoning opening price points.

Basics are still a very important part of our overall business.

But I think customers are winning.

There's no question, and I would say, overall, that's probably good for the apparel business.

Basically, you're saying that you think you might be able to gain market share faster from department stores?

I think that's -- I think we've been saying that consistently for some time, and we wouldn't change that tune right now.

Okay.

Thanks, very much.

The final question comes from Dan Binder from Buckingham Research.

Please go ahead.

Hi, good evening.

A couple of questions for you.

First, just with regard to the earnings guidance, I don't want to split hairs here, but if you did $0.90 in the front half and you've got $0.43 at the low end and $1.10 at the low end in Q3 and 4, to get to $2.43, am I supposed to be leaving a penny out somewhere on the two numbers?

It's the way you calculate the year-to-date shares, it rounds back down to $2.42.

Okay.

If it wouldn't have, I would have been happy to put the $2.43 in there, but --

Okay.

And, then, just one other question with regard to, just, the weather has been pretty tough from the heat standpoint.

I mean is that -- is that playing into any of the guidance you've given on the -- on the monthly comp aggression at all?

I mean, it seems to have worked that way each quarter for you and it's panned out fine.

I'm trying to figure out what's in there.

No, I think weather's a factor in demand always.

But the guidance you're hearing is about what we believe our marketing merchandising strategies are.

Okay.

Great, thanks.

Okay.

Thanks.

Thanks very much.

This concludes today's teleconference.

Thank you for your participation.

You may all disconnect at this time.