柯爾百貨 (KSS) 2005 Q4 法說會逐字稿

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  • Operator

  • Good afternoon, ladies and gentlemen, and welcome to the Kohl's department store fourth quarter 2005 earnings release conference call.

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

  • Later, we'll conduct a question-and-answer session.

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

  • Such forward-looking statements, which reflect management's current views of future events and financial performance, are identified by forward-looking terminology such as plans, believe, expect, may, will, should, anticipate or similar expressions.

  • These statements are subject to certain risks and uncertainties which could cause Kohl's actual results to differ materially from those anticipated by the forward-looking statements.

  • These risks and uncertainties include, but are not limited to, those described in exhibit 99.1, the Kohl's annual report on form 10-K, and other factors as may periodically be described in core filings with the SEC.

  • Also, please note that replays of this call will be available for 36 hours.

  • This recording will not be updated.

  • If you listening after February 23, 2006, it is possible that the information discussed is no longer current.

  • I would like to turn the call over to Mr. Wes McDonald, Chief Financial Officer.

  • Mr. McDonald, you may begin.

  • - CFO

  • Thank you.

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

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

  • Arlene will take us through our financial performance first.

  • I'll follow up with some balance sheet comments.

  • Kevin will walk us through our merchandising and marketing initiatives for 2006, and Larry will take you through our expansion plans and offer 2006 earnings guidance.

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

  • - COO

  • Thanks, Wes.

  • Well first, as you know, our sales for the fourth quarter were approximately $4.7 billion versus $4.1 billion last year, up 14.1%.

  • For the total year sales were $13.4 billion, compared to $11.7 billion a year ago, up 14.5%.

  • In the fourth quarter, you already saw we reported a 2.7% comp store sales increase.

  • That comp was a result of an increase in number of transactions of about 1.7%, an average transaction increase of about 1%.

  • For the year as well, to give you a little color on the comp, the 3.4% comp was comprised of a 2.2% increase in average transaction value and the number of transactions increased 1.2% on a comp basis.

  • From a region perspective, all regions delivered comp store sales increases for both the quarter and the year, and I think you're aware that the Southwest region has been posting the strongest comps.

  • From a line of business standpoint, first for the quarter, shoes, men's and home led the Company.

  • Shoes continued to improve -- the improvement actually started with the back-to-school, the trend-right product and obviously that was led by the launch of Candie's.

  • And at the same time, I think you all saw we had much better in-store presentation.

  • Home much improved in the quarter as well as customers noticed the changes that we were making to the assortment, both with our good, better and best strategy, as well as the increased offerings in the contemporary and updated lifestyles.

  • When you look at the year, men's accessories in shoes led the Company.

  • And as you know, our men's business had the highest comp sales increase in 2005, in particular as we rolled out Chaps at the beginning of the year, and we enjoyed strong business in both the dress and casual areas.

  • Accessories also exceeded the Company comp as we completed the roll-out of beauty in all of the stores during the third quarter, and we've had strength in handbags and accessories throughout the year.

  • As you look at gross margins you'll see that for the quarter and for the year gross margin improved about 30 basis points over last year.

  • And as you've been hearing us say, that improvement, both a quarter and the year, have been a result of our inventory management initiatives, which included more frequent flows of merchandise, improved store allocation, and better merchandise content.

  • Kevin will talk a little bit more about this when he talks about 2006.

  • I'm pleased to say that our 2005 gross margin performance was the highest rate in our history.

  • As you look at expenses for both the quarter and the year, expenses came in just as we had expected and in-line with our new store growth.

  • So as you look at SG&A on the quarter, it increased about 13.7% over last year and for the year, 14.7%.

  • As you look at expenses for the quarter and the year, on a percent of sales basis, for both we were relatively flat.

  • As you look at depreciation and amortization, $91 million for the quarter about $339 million on the year, increased over last year pretty much again in-line with store growth.

  • From a preopening standpoint, preopening expenses in the quarter were $1.5 million, versus $2.6 million a year ago.

  • As you know, Q4 expenses are really related to the stores that will open in the first quarter, and in first quarter we plan to open 17 stores, and Larry will talk further about that when he's talking about the expansion.

  • In total for the year, we opened 95 stores this year in 2005 as well as 95 in 2004.

  • We spent $44.3 million on the year this year compared to $49 million a year ago.

  • When you look at those 95 stores, on average we spent about $485,000 per store.

  • As you look at preopening costs for 2006, I want to tell you that they're going to change considerably.

  • In October, the Financial Accounting Standards Board issued a new statement on accounting for rental costs incurred during a construction period.

  • The directive concludes that leased rental costs that are incurred during a construction period should be recognized as rental expense.

  • Previously, these costs could be capitalized and that had always been Kohl's practice.

  • So this change is actually required to be applied to fiscal 2006.

  • And bottom-line, although it doesn't impact cash flow, it does affect the timing of recognition in the income statement.

  • As a result, these costs will now be reflected as part of preopening expenses.

  • So when you're working on your models for 2006, we expect that average preopening expenses per store will be in the range of about $700,000 per store.

  • So that accounting change is resulting in an average increase of approximately $200,000 per store.

  • Overall, it will negatively impact earnings per share for the year by approximately $0.03 per share.

  • From an operating income standpoint, for the fourth quarter it was up approximately 17% over last year and up 19% for the full year.

  • Operating income as a percent of sales, 10.6% this year versus 10.2% last year.

  • So we're very pleased with that increase.

  • As you look at net interest expense, about $19 million on the quarter, about $70 million for the year, in-line with what we would have expected.

  • Provision for taxes -- you'll see the tax rate on the quarter was 37.8%.

  • And just to give you some guidance for next year, we would expect that that rate would stay the same.

  • Bottom-line net income for the fourth quarter was $375 million, up approximately 18% over last year.

  • And for the full year, $842 million, up approximately 20% over last year.

  • Obviously, we're tremendously pleased with how the year shaped up.

  • When you look at from an EPS standpoint for the quarter, $1.08 and for the full year, $2.43.

  • With that, I'll turn it over to Wes to go through the balance sheet.

  • - CFO

  • Thanks, Arlene.

  • Give you some square footage updates for your model -- as a reminder, we currently operate 732 stores compared to 637 at this time last year.

  • At the end of the quarter, gross selling square feet was 65,855 -- excuse me, that was gross square footage -- selling square footage was 56,625.

  • Accounts receivable, we ended the year with accounts receivable of about $1.65 billion versus last year's approximately 1.4 billion, an increase of approximately 19%.

  • Our Kohl's charge sales for the year were up approximately 19%, as well, roughly $5.4 billion.

  • Our share for the year was 40.6% versus 39.2%, an increase of 140 basis points.

  • And our accounts receivable turnover was roughly equivalent to last year at 3.8 times.

  • While we continue to be pleased with the quality of the portfolio, write-off to the percent of Kohl's charge sales for the year were 0.9% this year, comparable to last year.

  • The reserve at the end of the quarter was approximately 1.6% of receivables compared to 1.7% at the end of 2004.

  • As expected, we experienced a dramatic decrease in write-offs in the fourth quarter as a result of the accelerated bankruptcy filings in the third quarter, caused by the legislative changes in bankruptcy laws.

  • Inventory at the end of the year, $2.2 billion, up about 15%, in-line with store growth.

  • We continue to be pleased with our inventory management.

  • Inventory levels, on an average store basis at the end of the quarter, were flat to last year.

  • From a fixed asset standpoint for the year, our CapEx expenditures were approximately $800 million.

  • Our expectations in fiscal 2006 are for capital expenditures to be in the range of about $1 billion.

  • Also pleased to report that we generated approximately $82 million in free cash flow this year, as defined by cash generated from operations less our capital expenditures.

  • On the accounts payable line, our balance at the end of the quarter was $830 million, versus last year's $705, an increase of about 18%.

  • Our percent of inventory was 37.1% versus last year's 36.2%.

  • Again, a benefit of better inventory management is an increase in the percent of inventory on an AP standpoint and we're flowing our goods closer to point of sale.

  • Looking forward to the first quarter, we would expect accounts payable as a percent of inventory to be in the low to mid 30's.

  • Again, finally for your models, weighted average number of shares basic at the end of the quarter, 344,656, diluted 346,590.

  • And on a year-to-date basis, basic 344,172, diluted 346,772.

  • And with that, I'll turn it over to Kevin to talk about our positioning for 2006.

  • - President

  • Thanks, Wes, I'll going to start with some comments on sales and then we'll move on to touching on each of our four key initiatives.

  • From a sales standpoint, we've been pleased with the initial spring selling in all apparel areas.

  • Chaps for women was advertised in our tab for the first time in our President's Day Sale and we believe it has had a very impactful presence in the store.

  • We also believe it can act as a catalyst to reinvigorate the [misty] classic business, much as it did in men's in 2005.

  • Given the number of the new launches in the first quarter , the shift in Easter to April, and the resulting changes in our marketing calendar, we would expect comparable sales increases to improve sequentially throughout the first quarter.

  • Looking at our four key initiatives; and starting with merchandise content. 2006 will involve even more new brand launches and extensions than last year.

  • These launches impact all six of our major lines of business, and all three of our targeted customer lifestyles, classic, updated and contemporary.

  • The largest of these introductions is the exclusive launch of Chaps into our women's, boys and footwear areas.

  • Chaps is the largest brand introduction that we have ever done in women's, just as it was in men's last year.

  • As I indicated earlier, we're pleased with the execution of both our business partner Polo, and our stores in the launch, as well as the initial customer response.

  • We'll continue to pursue other opportunities to leverage this brand across the rest of the store.

  • Another exclusive brand, Tony Hawk, in partnership with Quicksilver, will launch in March in both young men and boys.

  • We believe this has the opportunity to have the same impact on this customer as the Candie's launch last fall had with the juniors and girls customer.

  • We've also extended some of our recent brand introductions into other areas of the store.

  • Candie's, entering its first spring season across the whole store, will expand into Soft Home this March along with Apt. 9.

  • After an initial test this past fall in 300 stores, we have rolled out two other new brands in women's sportswear company-wide.

  • For the classic customer, we will be launching a brand called West End And in targeting the more contemporary customer, we will be introducing a brand called AB Studio.

  • In addition, another contemporary brand, Stamp 10, will be initially in 300 stores in women's as well as men's.

  • Stamp 10 is a Claiborne partnership and is inspired by the success of their Lucky brand.

  • Finally, we've completed the repositioning of our three biggest private brands, Croft and Barrow, Sonoma and Apt. 9, and target three distinct customers across the store.

  • Combined with the other new introductions I just mentioned, the impact on the women's business will be dramatic and we expect women's to outperform the Company in 2006.

  • We also plan to continue to introduce newness storewide, and will have some additional initiatives to share with you during the year.

  • Looking at our second initiative, inventory management;

  • I'm comfortable with our overall inventory levels and I'm pleased with the freshness and constance of our inventory going into spring.

  • As you saw in the results, better inventory management and improved content resulted in significantly improved margins again in 2005.

  • For 2006, we will continue to focus on improved receipt flow, resulting in better transitions and lower overall level of clearance.

  • We also feel we have an opportunity in improving our management of our highest and our lowest volume stores through that process.

  • We shared with you during last year two new areas of focus that we were in the process of implementing; mark-down optimization and size optimization.

  • During the first quarter of this year, we will be making a determination on a roll-out schedule of mark-down optimization for the Company.

  • Mark-down optimization has the potential to improve both sell-through and the profitability of our clearance.

  • Our size optimization strategy will be rolled out to all departments this spring, impacting a substantial part of our overall receipts.

  • The focus there has been of realizing benefits by creating size profiles for individual stores to take advantage of the positive impact that better receipt flow will give us.

  • Looking at the third initiative, our in-store shopping experience; in 2005 we focused on improving how our merchandise is presented to make it more exciting and easier to shop across the store.

  • Significant changes occurred in footwear, juniors and in young men's in the fall season.

  • In addition, a substantial number of stores were impacted with reflows and fixture changes in the home areas to make the presentation more sensible, as well.

  • An improvement that we implemented in the beginning of this month in all stores was the reorganization of our entire women's sportswear area to present our content according to our three key lifestyles; classic, updated and contemporary.

  • This was done in conjunction with our roll-out of Chaps.

  • We will also continue to roll-out of the changes in home to more stores in the second quarter.

  • Finally our fourth initiative, marketing.

  • Our marketing strategies for 2006 go hand-in-hand with our merchandise content.

  • We will put major efforts in all media around our new brand launches and extensions, particularly those that are only at Kohl's.

  • These include new brands like Chaps, and Tony Hawk, but also brands we launched last year like Candie's, Daisy Fuentes, and our beauty brands.

  • In addition, there will be a substantial marketing investment and a repositioning around our three key private brands, Croft and Barrow, Sonoma, and in particular, Apt. 9.

  • We saw substantial improvement in receptivity to our broadcasts and direct mail campaigns last year, which helped to drive increases in transactions per store.

  • We intend to build on that this year with further investments in both of these media, along with continued use of our insert strategy, as well.

  • A year ago, we introduced our tag line 'Expect Great Things'.

  • Last year is a long-term strategy to move from good to great in everything that we do.

  • We intend to build on that momentum this year.

  • I'm going to turn it over to Larry who is going to touch on our expansion plans and our guidance for 2006.

  • - Chairman, CEO

  • Thanks, Kevin.

  • We're pleased, again, to deliver 20% net income growth for the year.

  • I'm very pleased with the progress that we've made in 2005.

  • It was a solid year from an earnings and operational perspective.

  • All of our initiatives are working, from our new-store initiatives to the in-store and marketing, as well as inventory management.

  • It is all paying off on the bottom-line.

  • It is driving in new customers who are giving us very positive feedback and we're developing credibility from a fashion perspective.

  • I believe that we're building momentum as a brand and that the new merchandising initiatives Kevin discussed will continue to help us drive top and bottom-line.

  • We're always going to continue to focus on the four initiatives; merchandise content, marketing differentiation, in-store shopping experience and inventory management.

  • We believe these are the building blocks to a great retail strategy.

  • Talking about expansion over the next five years; as you know, our plans are to open up 500 stores over the next five years.

  • We expect a lot of changes in the retail landscape as recent acquisitions are digested and we believe further rationalization is possible over time.

  • This provides us market share opportunities as well as real estate opportunities.

  • As an example, Mervyn's recently announced their exit from Pacific Northwest, we've acquired 13 of those stores to supplement our ground-up strategy that was already in place in Oregon and Washington.

  • Two of the stores will open this fall.

  • It will give us a great entry point into this region over the next couple of years.

  • As we look beyond 2006, we see huge opportunities to continue to grow, both from the ground up and through acquiring and refurbishing pre-existing building.

  • There remains a significant amount of real estate available as merged entities rationalize their real estate and private equity firms with the monetized assets after acquiring retailers.

  • We have a very minor presence in two of the fastest growing areas in the country, California and Florida.

  • Although California has more Kohl's stores than any other state, we're pretty small compared to our major competitors and have a significant amount of room to grow.

  • As Arlene mentioned earlier, the Southwest region continues to lead the Company in comps.

  • And this performance indicates that we have to be more aggressive in our expansion in the Southwest over the next five years, particularly in California.

  • Our entry into Florida last fall with our openings in Orlando and Jacksonville, has exceeded expectations and we'll be aggressive in Florida, as well.

  • Our previous guidance for the number of stores for 2006 was 70 to 80.

  • And I'm pleased to announce our current plans are to open approximately 80 to 85 new stores.

  • We'll open 17 stores in the spring season; in March, nine stores, and in April, eight stores, with our first entrance into Oregon with stores in Portland.

  • In the fall, we'll make our first entry in the state of Washington with stores in Seattle.

  • At the same time, we'll continue our expansion into Florida.

  • The remainder of the stores will be in existing markets and smaller markets.

  • The stores are going to be a mix of both prototype and small-store formats.

  • In 2006, approximately 20% of the stores are going to be small stores.

  • And we continue to invest in urban prototype and experiment by converting a Macy's store in Jersey City, New Jersey, in the fall.

  • Over the next five years, the primary vehicle for expansion is going to be our workhorse 88,000 square foot prototype.

  • All three formats will be key elements to our growth.

  • We continue to remain very flexible in obtaining real estate we -- where we can operate successful Kohl's stores.

  • Some forward earnings guidance for fiscal 2006 on a comp store sales increase of 2% to 4% and a total sales increase of 12% to 14%, with gross margin improvement of 20 to 30 basis points and SG&A leverage at a 2% comp; if you use these assumptions, we would deliver net income growth of 13% to 18% for fiscal 2006 or in the range of $2.72 to $2.85 per diluted share.

  • This incorporates the $0.03 per share effect of the accounting pronouncement that Arlene mentioned to you earlier.

  • Our first quarter guidance; we would expect comps of 2% to 4% and net income growth of 13% to 18% or $0.40 to $0.42 per diluted share.

  • Thanks.

  • At this time, we'll field some questions.

  • Operator

  • Thank you. [OPERATOR INSTRUCTIONS] The first question comes from Deborah Weinswig from Citigroup.

  • Please go ahead.

  • - Analyst

  • Congratulations on a great quarter.

  • Kevin, you went through some of the details in terms of your new launches.

  • Can you also maybe talk about the progress you've had on the opportunities in the non-group box?

  • And what should we think about in terms of what is left?

  • - President

  • Sure, Deborah, I think -- if you remember back to the presentation we did on that, we identified last year -- particularly updating contemporary as an area in which we are going to focus on, and I think we did a very good job on that part.

  • We also talked about trying to improve and strengthen our better and best price points.

  • And we did see this Chaps opportunity in classic as a way to both, fulfill that and kind of fulfill a pretty dramatic strengthening with our core customer, our classic customer.

  • So we're definitely better balanced than we were before.

  • I would say we still feel we have more opportunity to broaden offerings in updated and contemporary.

  • So as you look at future opportunities, they'll probably come in one of those two areas, and in the better and best price points.

  • - Analyst

  • Okay.

  • And then last question.

  • What was -- what ended up being different in the quarter than when you gave the $1.06 to $1.07 guidance?

  • - CFO

  • I think we just came in a little bit better on margin than we thought and a little bit tighter on expenses.

  • We knew the sales number, that was the easy part.

  • But when we were going through -- it was a little bit of everything.

  • - Analyst

  • Great.

  • Thanks so much.

  • Operator

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

  • Please go ahead.

  • - Analyst

  • My question is regarding gross margin potential.

  • I don't know, Kevin, if you want to tackle this?

  • Given your merchandising initiatives -- the systems initiatives that you have coming in, maybe you can clarify through this mark-down optimization.

  • It sounds like you'll start looking at a roll-out plan in the first quarter?

  • Is that how I read that -- and then May roll-out after that?

  • Clarifying that and then also putting that in the context of gross margin.

  • You've done a really terrific job of driving gross margin over the last several years.

  • Just kind of curious, given the structure of your Company and your merchandising plan, is there a limit to how high you can drive this, given your business and expansion plans?

  • And how can we think about those upward limits?

  • - President

  • Boy, that was a lot, Jeff.

  • I think from the gross -- from a high-level standpoint on gross margin, we are always, I would say -- and I would reinforce the sensitive to the fact that we want to be the value alternative.

  • We should provide great value.

  • So if you look at the performance and the improvements, when you get right down to it, what it has been driven by is better inventory management, better strategy on receipt flow, and frankly, I think in many, many areas, better merchandise content.

  • That's what led to better margin.

  • Some of these other areas of opportunity for margin enhancement; size optimization or mark-down optimization, that's really to come.

  • Size optimization hasn't had any impact, and really won't until fall.

  • And mark-down optimization, to clarify what we said -- we've been in test mode, and during the first quarter we'll make the determination on what the roll-out schedule will look like from a timing perspective during the course of the rest of the year.

  • But we do think that there's a lot of opportunity there, without changing any of the value equation.

  • It doesn't do anything to change value at all.

  • - Analyst

  • Okay.

  • So you would say over the last couple years has it been split between mark-up or product margin improvements, and inventory management?

  • Or has it been more than inventory management driven?

  • - President

  • It has definitely been focused on inventory management.

  • And I think -- I'd also add that I think this past year, particularly the improvements in content, led to better sell-throughs with less clearance --

  • - COO

  • Less clearance, yes.

  • - President

  • -- and therefore, better margins.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Next question comes from Adrianne Shapira from Goldman Sachs.

  • - Analyst

  • Thank you.

  • Larry, as you mentioned, the -- you expect 80 to 85 stores to be open in '06.

  • Is that still under review?

  • Could we see some -- potentially more stores opened?

  • - Chairman, CEO

  • [Inaudible - laughter] I thought you guys would be excited with the 80 to 85.

  • We are.

  • We're getting down to -- pretty close to having to have all those deals ready to roll.

  • I think we're pretty tight on the 80 to 85.

  • Upside to that would be very doubtful.

  • - Analyst

  • Okay.

  • And then as you mentioned, it seems like it is a blend between smaller stores and your prototype stores.

  • So what is the square footage growth next year?

  • - Chairman, CEO

  • Did we quote that, or not?

  • - President

  • We don't really give them that.

  • - COO

  • The store growth is around 11%.

  • - Analyst

  • Just on your credit card business.

  • I know we talked about it in the past and you said you're obviously very focused on maintaining control of the relationship.

  • We've seen many arrangements throughout that do just that.

  • Is there any other reason to own it?

  • - COO

  • No, we are -- in light of the deals that have been out there, we are actively exploring our alternatives.

  • And I would say at this point, there's clearly some possibilities there that we could do something that allows us to retain the types of controls we're looking for.

  • And get some advantages from financing it through a partner.

  • - Analyst

  • Arlene, is there a timing on that?

  • - COO

  • Nothing that I can share with you at this point.

  • - Analyst

  • Okay.

  • Thank you.

  • Operator

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

  • Please go ahead.

  • - Analyst

  • Sure, hi, guys.

  • Couple questions.

  • Kevin, can you elaborate a little bit on some of these brands -- AB Studio, West End, who is making them and are they in the -- when will they be in the stores?

  • - President

  • Sure, they're both in the stores.

  • They were in the stores last fall -- in roughly 300 stores.

  • I think one was in a few more.

  • West End is classic from -- probably the closest inspiration to it would be a sort of Chico's-like.

  • It is made by apparel partner called Notations and it is exclusive at Kohl's.

  • And then, AB Studio is very contemporary.

  • It's also in the stores right now, and it was tested in about the same number of stores in the fall.

  • It was very successful.

  • And it's in partnership with one of our largest resources in juniors and girls, Byer.

  • And so we've got a really good relationship there built out over a lot of years -- that we just know that this is really going to be good.

  • But the 300 store test frame was fantastic.

  • - Analyst

  • Okay.

  • And then on your comments about Q1 business -- I guess I understand the March, April swing, but can you just discuss why -- it sounds like it should get sequentially better throughout, which implies February.

  • Just what are the issues here?

  • - President

  • Yes, I don't think we were trying to imply anything about February.

  • We're trying to say, as you look at the quarter, for the obvious reasons that we talked about in terms of calendar, particularly with the apparel business, Easter location.

  • And you know, Dana, that we drive our marketing based on that, that there is more opportunity later in the quarter than there is earlier in the quarter.

  • But you shouldn't read anything into February about that.

  • - Analyst

  • Okay.

  • And then my last question is; can you just talk about the execution of the revamp of the women's space?

  • Because it has seemed, in the stores, that there has been glitches with product on the wrong fixtures, Apt. 9 on a Daisy fixture -- and I've seen that on a lot of stores in different regions.

  • Why does that happen and how do you sort of perfect that over time?

  • - President

  • To be frank with you, last week, all three of us actually spent the week traveling the country as part of our annual KSS conference with our stores.

  • And to be honest with you, Dana, what I saw was pretty well done.

  • I think anytime you do the size of relay we're talking about -- I mean, it is incredible, it is the entire women's sportswear area in Kohl's was relayed.

  • Every fixture was touched.

  • You are going to have, in the week or two afterwards, some issues with the visual and the brand name fixture, et cetera.

  • But I feel pretty good about where we're at.

  • And it'll -- and the things that are wrong, I will guarantee you, are going to be fixed very quickly.

  • - Analyst

  • Great.

  • Thanks so much.

  • Operator

  • The next question comes from Stacy Turnof from Merrill Lynch.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • I know it is really early, but any other color on Chaps?

  • Is boy's doing better than women's?

  • Have you looked to see what that -- who that customer is that is purchasing it?

  • And what is also in her basket besides that product offering?

  • - President

  • The short answer on that statement is it's just too early.

  • We ran the ad last Wednesday.

  • We were kind of focused -- because it is the biggest thing we ever did in women's and it was a new partner with, could we execute it all effectively?

  • Deliver it right?

  • Can the stores execute it in-store?

  • And I think the Company and our partner nailed that.

  • It will be another four to six weeks before we could give you any color on, is the customer different, are we attracting more new customers, those pieces of the puzzle.

  • - Chairman, CEO

  • What do you think of it?

  • - Analyst

  • I thought the merchandise looked really good, it was a nice quality.

  • Price point still a little bit high, but very well assorted compared to the rest.

  • - Chairman, CEO

  • Buy any?

  • - Analyst

  • I did not.

  • - Chairman, CEO

  • I think -- remember from a pricing perspective, Stacy, that the kind of quality that we're putting on the floor with Chaps, in comparison to that quality offered in our competitors, is pretty dramatic value, and it is in our best price point.

  • It is supposed to be in our best price point.

  • - Analyst

  • One follow-up question.

  • You mentioned earlier about the 13 stores from Mervyn's -- could there be more to come, particularly in California?

  • - Chairman, CEO

  • Gee, I'm not sure.

  • We'll have to see what happens.

  • - Analyst

  • So it is not that -- it is not that you've gone through their portfolio and only taken 13 so far?

  • - Chairman, CEO

  • I wouldn't say that that's the case.

  • - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

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

  • Please go ahead.

  • - Analyst

  • Thank you.

  • Kevin, could you talk a little bit more about size optimization?

  • Is that something that you can roll-out for spring across all of the various brands?

  • Or is it something that you're starting off with only your in-house brands?

  • - President

  • No, it's broader than that.

  • It is -- without getting into a lot of complicated details that I would also do a lousy job and botch it up anyway on, it has been rolled out across all of the departments that are sized.

  • But it's been rolled out only on a certain percentage of receipts, based on whether those receipts are bulk or prepack.

  • And without going into all the detail on that, Christine, what that means is -- it is a large percent of our total sized receipts, but it is not all.

  • It will be all by the time we turn the corner into the third quarter.

  • But it is not just private brands.

  • It is branded and private brands.

  • - Analyst

  • Okay.

  • And what percentage is the Midwest now, of your comp base?

  • - CFO

  • I think at the end of the year it was about 33%.

  • That will continue to decrease, obviously, over time.

  • - Analyst

  • And finally, are you -- what sort of trends are you seeing on line items like healthcare and utilities and how about real estate costs across the -- where you're -- sort of the regions that you're focused in on?

  • - President

  • I don't think we're a lot different than anybody else out there.

  • Energy costs continue to be a challenge.

  • And depending upon what part of the country you're building in, if you're building in Southeast, the demand for labor and raw materials is significantly higher than other parts of the country.

  • I think it depends on where you are.

  • We don't face any other different challenges than anybody else that's out there building new stores or operating existing stores.

  • - CFO

  • And on healthcare and utilities.

  • Healthcare we actually had a good year in.

  • We switched providers to a larger provider that -- who had broader national distribution with better discounts and things of that nature.

  • So that helped mitigate inevitable healthcare increases that are out there.

  • Utilities, I'm sure everybody has gotten a gas bill already.

  • I mean, they're up.

  • But again, we're being -- trying to be very creative in our stores in order to save costs where we can on that as well.

  • - Analyst

  • Based on all of that and your outlook then, you do firmly believe you can leverage a 2% comp?

  • - CFO

  • Yes.

  • - Analyst

  • Thank you.

  • Operator

  • Next question comes from Bob Drbul from Lehman Brothers.

  • Please go ahead.

  • - Analyst

  • Hi, good afternoon.

  • - COO

  • Hey, Bob.

  • - Analyst

  • The first question is for Kevin; when you look at what you saw in '05 with some of the new brand launches that you had and how the comp shook out -- looking to '06, how much cannibalization do you expect from some of the new brands versus incremental sales on Chaps women's, et cetera?

  • If you maybe could talk to that a little bit?

  • - President

  • Sure.

  • There is always cannibalization, there is no question.

  • You don't count on all the dollars being incremental.

  • If you think back to, I think it was Arlene's discussion about our 2005 results, she mentioned men's as the leading business in the store, footwear and accessories.

  • It is pretty easy to connect the dots between that and where were some of our biggest new brand launches -- accessories, the entire beauty business, footwear had Candie's and a lot more, and men's had Chaps, along with a whole new suit separate business.

  • No question that those do lift.

  • It is about newness and new initiatives.

  • I think that is why we feel so good about women's sportswear for 2006.

  • - Analyst

  • Okay.

  • And next question would be -- in the prepared remarks you also talked to the ability to get some new customers in.

  • Can you talk a little bit about the success that you've had with non-Kohl's credit card customers, in terms of bringing in some of those newer customers?

  • And if you can maybe put any numbers around that?

  • - COO

  • Well, obviously, that is a part of what is driving those increases in transactions that I mentioned.

  • And as soon as we get them in store, Bob, Wes mentioned what the Kohl's charge share business was for the year, which continues to increase.

  • And that for the greater part, is actually because as we bring in new customers, we do convert them to Kohl's charge.

  • So the marketing initiative Kevin has been talking about -- a lot of that is influenced from branding and broadcast is intended to appeal to, not only existing customers, but in particular, attract new customers.

  • We clearly think that is working.

  • - Analyst

  • Great.

  • Just one final one.

  • On the first quarter, can you talk about how much is the accounting change impacting the first quarter results -- in the guidance that you gave?

  • - CFO

  • It is probably about $0.01 Depending on rounding, it could be a little higher, but I think I would say it is $0.01.

  • - Analyst

  • Great.

  • Thank you very much.

  • Operator

  • Next question comes from David Cumberland from Robert W. Baird.

  • Please go ahead.

  • - Analyst

  • Thanks.

  • Larry, are you still expecting to open 200 stores in '06 and '07 combined?

  • - Chairman, CEO

  • Yes.

  • - Analyst

  • Great.

  • Wes, on the CapEx of $1 billion, why is that expected to grow from about $800 million with fewer openings?

  • And could some of that be related to do the '07 openings?

  • - CFO

  • Some of it is related to the '07 openings.

  • Some of it is also related into a shift in mix -- we're owning and ground leasing more of our stores in '06 and '07, obviously, because of some of the timing of the CapEx spend for spring openers will really happen in '06, than we have in the past.

  • And those are obviously much higher capital expenditures on a leased store.

  • - Analyst

  • Thank you.

  • Operator

  • Next question comes from Dan Binder from Buckingham Research.

  • Please go ahead.

  • - Analyst

  • Thank you.

  • I had a question with regard to the new store productivity.

  • I was wondering if you could give us a sense of how we should think about this for next year, given that 20% of the stores will be small markets, small format.

  • Does that change your outlook for that 70 to 80%?

  • - CFO

  • No, I think it is still going to be between -- the last couple of years it's been between 70 and 80%.

  • Usually for the year it ends up between 70% and 75%.

  • I don't expect that to change for 2006.

  • - Analyst

  • Okay.

  • And I guess the follow-on to that is, why wouldn't it change if 20% of the stores are smaller and -- ?

  • - CFO

  • We're only opening 17 stores in the spring.

  • So you've got stores that are not comped that we opened this year, and you only had the stores open for four months, in the back half, the majority of the stores.

  • - Analyst

  • Okay.

  • And I wondering if you could give us update on what total credit income looked like for the year?

  • What the contribution was to EPS?

  • And when you expect the write-off rates to normalize again?

  • - CFO

  • You can get all that information on March 17th, when we file the K.

  • - Analyst

  • I figured I would try.

  • - CFO

  • Good try, Dan.

  • - Analyst

  • The last question had to do with Chaps for women's.

  • In the some of the stores recently, I saw it was only about four fixtures.

  • Just wondering, when does that -- how does that ramp-up through the spring?

  • And then, as we move into the back half of the year, does it become a bigger and bigger piece of women's?

  • - President

  • I think it is actually five fixtures, and of course, a back wall.

  • And next week -- therefore, for the first week of March in the store, we bring that number up by two more fixtures.

  • So essentially, presentation and inventory goes up by about 30 to 40% based on that.

  • - Analyst

  • Okay.

  • And just one more question.

  • If you give us an update of what's been happening in beauty and jewelry since the changes you made just prior to the holidays?

  • - President

  • Both businesses are built into that accessory number which we talked to you about.

  • It is one in the leading areas and I think we continue to be pleased with pretty much all the aspects of both.

  • There in the jewelry area were a lot of changes, not only content changes, but in-store presentation changes.

  • So not surprisingly, I think that thing built.

  • But as we got deep into December and then into January, we really began to see a lot of benefits from the changes in content that were made.

  • So it is very positive.

  • - Analyst

  • Great.

  • Thanks.

  • Operator

  • Your next question comes from Patrick McKeever from SunTrust Robinson Humphrey.

  • - Analyst

  • Okay.

  • Thanks.

  • On the smaller markets -- smaller format store, I know you're not opening up a huge number in 2006, I guess it would be something -- somewhere around 15 or little bit more than that.

  • I was wondering what the thought process is there?

  • And wondering if you might share some of the -- kind of the basic dynamics of that store?

  • - Chairman, CEO

  • Cliff Notes version.

  • There is a lot of sites that came into our real estate approval committee over the past ten years that we just couldn't figure out how to get the same internal rate of return on smaller-volume stores.

  • We couldn't build our 88,000 square foot prototype.

  • As you may recall, about three years ago we experimented with a few small stores, and built a 62,000 square foot store, that if the store came out and did $9 or $10 million, could it give us the same kind of internal rate of return as 88,000 square foot store, $14, $16.

  • After a couple of years of experimentation, it does, and it offers a group of cities and towns throughout the country that normally wouldn't be able to hold a Kohl's store -- it gives us one more avenue to grow in.

  • - Analyst

  • That sounds good.

  • - Chairman, CEO

  • It is pretty simple.

  • - Analyst

  • On the gross margin guidance for next year, after just a record year this year -- another record year, I think, in terms of gross margin, you expect it to go up again.

  • Is that a -- how does -- how do exclusive lines, and how does private label play into that?

  • Are you able to generate better gross margin -- better gross margin rate from those items?

  • - President

  • Overall, if we were to point at one thing that we feel like has most positive impact on our margin, it's inventory management initiatives.

  • Regardless of what pieces they are -- we touched on new strategies to manage inventory and receipts of big volume stores, but also in very small stores, receipt flow, size optimization -- all these initiatives are targeted to simply come out with better results and get a better sell-through in season.

  • So that is really still the primary driver.

  • - Analyst

  • Do those products, though -- because you have done a lot more with exclusive lines recently, do those lines hold their margin better than national brands?

  • - President

  • Generally, I think the fact that exclusive and private brands are only at Kohl's, allows us to be a little insulated being as price value as you would have to be with another more widely-distributed brand.

  • But it still depends on the content, got to sell-through.

  • - Analyst

  • Okay.

  • And then just a question for Arlene on the fourth quarter, Arlene, did you say ticket was up 1.7% and traffic up 1.0%?

  • - COO

  • For the quarter, 1.7% was the increase in number of transactions and the average transaction value was up 1%.

  • - Analyst

  • Okay.

  • Very good.

  • Thank you.

  • Operator

  • The next question comes from Bernard Sosnick from Oppenheimer.

  • Please go ahead.

  • - Analyst

  • Yes.

  • Could we revisit your five-year plan?

  • If I'm correct, you're looking for 15 to 20% growth in net income on average over that period.

  • Is that correct and still in force?

  • - President

  • Yes.

  • - Analyst

  • Are you looking for 12.5% operating margin?

  • - Chairman, CEO

  • I think that was the goal that we laid out for you in our investor conference.

  • - Analyst

  • I want to be sure that all these targets are unchanged.

  • - Chairman, CEO

  • Yes.

  • - Analyst

  • Because we're -- I think everybody is well aware of the urging for you to offer conservative guidance for this year, and I'm glad you did.

  • But it doesn't imply, as you just said, any change in your longer-term objectives.

  • - Chairman, CEO

  • No, it doesn't, Bernie, you're right.

  • - COO

  • That is very fair.

  • - Analyst

  • And did I hear you correctly -- could you repeat the guidance range for the year on EPS.

  • - Chairman, CEO

  • 2006 fiscal year, 2 to 4% comp.

  • - Analyst

  • No, that I got.

  • The EPS.

  • - Chairman, CEO

  • The EPS, $2.72 to $2.85.

  • - Analyst

  • Okay.

  • - Chairman, CEO

  • Which includes that $0.03 FASB hit.

  • - Analyst

  • Great.

  • Thank you very much.

  • - Chairman, CEO

  • Thanks, Bernie.

  • Operator

  • There is time for one last question.

  • The final question comes from Michael Exstein from Credit Suisse First Boston.

  • - Analyst

  • Just Credit Suisse these days.

  • Anyways, a couple quick questions.

  • Number one, you didn't talk about the new store prototype and the 88,000 square foot -- when will we see that on the street?

  • Number two, you've converted, it looks like, to positive cash flow from operations from this point on.

  • Can you give us some framework as to what you might do with that, going forward?

  • Number three, interest expense is actually up a fair amount, even though your cash balances and short-term borrowings went down.

  • Interested in what was going on there.

  • Thanks.

  • - Chairman, CEO

  • New prototype will be on the street this fall.

  • I can't remember off the top of my head exactly how many there are.

  • It's about half of the stores [inaudible].

  • - CFO

  • Interest expense is up because interest rates are up.

  • That is the short and sweet of it.

  • Way up versus last year.

  • Regarding cash flow, it is not significant enough to do anything dramatic at at this pint.

  • If we continue this pace, in a few years we would be able to do something with the cash, and whether it is a share repurchase or dividend or combination of both, certainly it is a little premature, at this point, to talk about.

  • - Analyst

  • Arlene indicated that the credit card -- you're looking at that alternative.

  • That would speed up the whole issue of cash flow, wouldn't it?

  • - CFO

  • If anything happen with that, that would certainly help our cash flow.

  • - Analyst

  • Okay.

  • Just wanted to check.

  • - CFO

  • Okay.

  • All right.

  • Thanks everybody.

  • We appreciate it.

  • Operator

  • Thank you for participating in Kohl's department store's fourth quarter 2005 earnings release conference call.

  • This concludes the conference for today. [OPERATOR INSTRUCTIONS]