柯爾百貨 (KSS) 2006 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the first-quarter 2006 earnings release conference call.

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

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

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

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

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

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

Also, please note that replays of this call will be available for 36 hours, but this recording will not be updated.

So if you are listening after May 11, 2006, it is possible that the information discussed is no longer current.

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

Mr. McDonald, you may begin.

Thanks.

Good afternoon.

With me today is Larry Montgomery, Chairman and CEO;

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

Arlene will take us through the financial performance first, and then I will go over the balance sheet, we will turn it over to Kevin for merchandising and marketing comments, and Larry will wrap up to talk about our expansion and earnings guidance going forward.

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

Thanks, Wes.

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

As you have already seen, our sales for the quarter were 3.2 billion, compared to 2.7 billion a year ago, so up 16.1%.

Comp-store sales were up 6.9%.

When you look at the components of the comp, it was the result of an increase in number of transactions of 4.8% and an increase in average transaction value of about 2.1%.

We're pleased that all regions delivered at least on a mid-single-digit comp-store sales increase for the quarter, with the South Central region posting the strongest comps.

At the same time, our new stores also exceeded their plans.

When you look at it from a line of business standpoint, which Kevin will spend a little more time talking about later, all businesses posted strong results, with home and men's leading the Company for the quarter.

As you look at gross margin, consistent with our previous guidance, we continue to see improvement in our margin rate, with the result being 36.1% this year compared to 35.8% a year ago.

As a continuation, it is a result of our merchandise initiatives, as well as the impact of our inventory management initiatives, which include more frequent flows of merchandise and improved store allocation.

As you look at the SG&A line, about 760 million of SG&A expense, we leveraged as a percent of sales by about 60 basis points compared to last year.

That leverage, as you would expect from that kind of a comp increase, came throughout the Company.

Depreciation and amortization, an increase of about 16.6% over last year, so consistent with what we're doing from [a new] store growth.

As you look at preopenings, preopening expenses were 11 million for the first quarter, compared to 12.6 million a year ago.

Q1 includes expenses related to the 17 stores opened in the first fiscal quarter.

Just as a reminder, we continue to expect average preopening expenses per store to be approximately $700,000 this year.

From an operating income standpoint, 282 million compared to 217 a year ago, up approximately 30% over last year.

As a percent of sales, 8.9% this year compared to 7.9% last year, so 100 basis points improvement.

As you look at net interest expense, you'll see that interest was about 14 million this year, compared to 17 million last year.

This line did benefit by about 1.3 million from the investment of the proceeds from the sale of the receivables earlier in the month.

When you look at the provision for income taxes, we had guided you for the year to a 37.8% tax rate.

Our rate for the quarter was actually 37.6%.

This is basically due to the effect of some of the interest earned on those investments, [with some] tax-free investments.

So that is what favorably impacted the rate.

As you look at the remainder of the year, that rate could fluctuate by a quarter, just based on what we invest that cash in.

From a bottom-line net income, 167 million compared to the 125 million a year ago, so up 34% over last year.

From an EPS standpoint, that resulted in $0.48 a share.

That is compared to our initial guidance of $0.40 to $0.42, and EPS is up about 33% over a year ago.

At the same time, just from a reference standpoint, we did purchase under the share buyback program approximately 1.4 million shares of stock during the first quarter.

So with that, I'm going to turn it back over to Wes.

Thanks, Arlene.

To give you some idea of the square footage, we currently operate 749 stores, compared to 669 at this time last year.

At the end of the quarter, gross selling square footage was 67,318.

Selling square footage was 57,860.

In our investments, we currently have about $1.4 billion in investments as a result of the sale of the receivables.

From an inventory perspective, inventory of a little over 2.3 billion versus last year's 2.1 billion, an increase of about 11%.

We continue to be pleased with the inventory management initiatives, as Arlene mentioned earlier.

And at the end of the quarter, average store is down approximately 1% to last year.

From a fixed assets perspective, for the quarter, capital expenditures were approximately 281 million.

And we continue to expect capital expenditures to be in the range of $1 billion for fiscal 2006.

On the Accounts Payable line, our balance was about $869 million.

As a percent of inventory, a major improvement versus last year -- 37% versus last year's 32.5.

Again, the change versus last year reflects the benefits of executing the strategy to flow goods closer to the point that we're going to sell them.

And looking forward to the second quarter, we would expect AP as a percent of inventory to continue to be in the mid 30's.

From a weighted average number of shares perspective, given the minimal buyback we had this quarter, basic was 345,277; and diluted, 347,285.

With that, I will turn it over to Kevin to talk about merchandising and marketing.

Thanks, Wes.

Let me first comment on sales.

Obviously, we feel great about the start to 2006.

As we had forecast at the beginning of the quarter, spring selling in all of our apparel areas strengthened in April, with a late Easter and as the weather became more seasonable.

All areas of the business contributed to our first-quarter comp performance.

Arlene already mentioned home and men's as leaders for the quarter.

Home continues to show strength in bedding, bath and housewares, while men's continues its terrific across-the-board performance.

The footwear business continues its momentum for the fall season, as the customer continues to respond to our fashion offering.

Our children's business also had a very good quarter, as the customer responded to our merchandise content, especially in our infants and toddler area.

In women's, our updated and contemporary businesses and our special size businesses experienced the most significant comp increase.

And finally, the accessories business was led by fashion jewelry and had a strong quarter, in spite of Mother's Day being later in May this year.

In looking at the second quarter, we would expect May to be stronger than June, mainly because of the year-over-year comparisons.

As always, individual months are influenced by weather patterns throughout the country.

We also expect July to be favorable, with the focus we have on transitional receipt flow and both new content and new brands for back-to-school.

As a reminder, our comps last year by month for the quarter were May, 0.2%;

June, 14.4%; and July, -0.5%, with the entire quarter comp at a +5.1.

As it relates to our merchandise initiatives, we're pleased with the performance of all of our new initiatives in the first quarter, including Chaps for our classic customer and AB Studio for our contemporary customer.

We're happy about the initial acceptance of Stamp 10 in our test stores, and will be adding it to additional stores in missy for the fall season.

The largest of these introductions was the exclusive launch of Chaps into our women's, boys' and footwear areas, with girls to be added this fall.

We will continue to pursue opportunities to leverage this brand elsewhere across the store.

Another exclusive brand, Tony Hawk, launched in March in both young men's and boys', and we were very pleased with its initial performance, and continue to expect it to have a similar impact in young men's and boys' as Candie's did in juniors and girls.

As it relates to our inventory management initiative, I'm very comfortable with our overall inventory levels, and very pleased with the freshness and content of our inventory going into the second quarter.

Better inventory management and the right merchandise helped us drive both sales and increased gross margins in the quarter.

We will continue to focus on receipt flow, resulting in better transitions and lower overall level of clearance.

I would expect inventory levels to be up low single digits on a per-store basis versus last year at the end of the second quarter.

Finally, marketing -- as Arlene mentioned, transactions per store increased 4.8% in the quarter.

This is clearly a result of our new brand initiatives, combined with our marketing initiatives.

We feel the higher traffic level shows us that our multimedia approach is drawing new customers into our stores.

Let me turn it over to Larry.

Thanks, Kevin.

We had an outstanding quarter.

We led our major competition on top line for both the month of April and the quarter.

We saw continued gross margin expansion, as well as great leverage on our expenses.

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

And as you can see, it's all paying off on the bottom line.

We're driving in new customers who are giving us very positive feedback, and we continue to develop fashion credibility with that customer.

I believe that we continue to build momentum as a brand, and we have an opportunity to take advantage of the disruption caused by recent retail and real estate consolidation.

Talking about expansion a bit, as we previously announced, we're planning to open approximately 85 stores for fiscal 2006.

We opened up 17 stores in the spring, which included five stores in Oregon in April.

In the fall, we're going to open up 68 stores, with our first entry in the state of Washington, with stores in Seattle.

At the same time, we continue our expansion in the Southeast and Southwest.

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

We remain on track to open 500 stores over the next five years.

We'd also like to update you on our full-year guidance to include the first-quarter results, as well as the initial effect of the sale of our credit card receivables to JPMorgan Chase.

Our guidance assumes investment of the cash and short-term securities until we actually buy back additional stock.

For the second quarter, our guidance is based on the following assumptions -- a total sales increase of 11 to 13%, comp-store increase of 2 to 4%, gross margin improvement of 20 to 30 basis points and SG&A and leverage at a 2% comp.

This would have resulted in earnings per diluted share before the sale of the receivables in the range of $0.58 to $0.61 per diluted share.

Assuming a modest return on investing the cash proceeds, we would expect to earn in the range of $0.61 to $0.64 per diluted share for the second quarter.

As a result of our first-quarter performance and the benefit of the investment of the proceeds from the sale of the receivables, we are raising our full-year earnings guidance from a range of $2.74 to $2.87 per diluted share to a range of $2.91 to $3.02 per diluted share for fiscal 2006.

This would result in an increase of earnings per share of 20 to 24% over last year.

With that, we would be happy to take any questions.

(OPERATOR INSTRUCTIONS).

Deborah Weinswig, Citigroup.

Congratulations on a fabulous quarter.

Well-deserved.

In terms of the credit card penetration, can you describe what you are seeing with regards to getting new customers in your stores, and any -- are you seeing that you're signing up a lot of new accounts, et cetera?

Yes.

Clearly, we're signing up new accounts from a credit penetration on the quarter.

We were up, I think, from 39% last year, Wes, [40]% this year?

Yes, we were up 130 basis points better than last year.

So clearly, you know what our concept is.

So as we drive new traffic in the store, we are very focused on opening up credit and increasing our direct-mail [message].

So there is an opportunity to continue to communicate with this new customer and to continue to keep them coming back?

Absolutely.

And then, in terms of -- the question is asked every quarter.

Can you give us an update of the size of markdown initiatives?

And when should we start to see the benefits coming through, in terms of gross margins and potentially lower inventory levels?

On the market optimization front, we're continuing to roll out additional stores and we will continue that rollout through the end of the year.

And I think we have talked before that the main benefit there, of course, is sell-through, for sure, and then ultimately, of course, profitability.

I think, realistically, as we said last quarter, that given the rollout strategy, the real benefit of that you won't see in margin until 2007, because ultimately you get the big payback at the very end, when you have less markdown to go to that final really deep discounted price.

But we're continuing the rollout strategy; we feel really good about it.

Size optimization remains totally on track, and we had planned to be rolled out this spring.

We will accomplish that, which will impact a pretty large portion of our overall receipts.

And again, size optimization -- I think, if you think that through, it has its first impact on sales where we have an opportunity to increase sales, because that's what we are first focused on.

But it also does, at a later date, have an opportunity to improve margins as well, because it leaves you less in jeopardy on wrong sizes.

We feel good about both those initiatives.

Would it be accurate to say that there is potentially more benefit from size optimization?

I think there's more benefit on the sales, and as a result, it's more important probably big picture.

You have obviously had more than one quarter now of success in home.

Can you talk about what is driving that, and what you think will continue to drive your success there?

The same things that are driving success in men's and women's.

It's new brands, new initiatives and, of course, new merchandising and marketing.

So you know that we have re-flowed home in about, I think, half the stores or so, Wes?

Maybe a third.

Maybe a third, and we have some more rolling out.

And that has got an impact because it's better organized for the customer.

We have introduced some new brands.

We introduced apt. 9 in the first quarter, into soft home.

We introduced Candie's in the first quarter in soft home.

We introduced Yankee Candle in our candle business, in the hard home area.

And then, there's been substantial improvement, I think, in our marketing, just to better present the new initiatives.

They have also does a fabulous job of implementing the good, better, best price strategy into our assortments, so the customer really is seeing a much more defined and a lot more clarity in our assortments.

Thank you so much and, once again, congratulations.

Stacy Turnof, Merrill Lynch.

Any update could you provide us with interest in some of the Federated stores?

There's still another 36 stores left.

And is that something you're still looking at?

We keep our eyes peeled on all that stuff, but that's just going to take a while to work out.

My second question is a broader question regarding women's apparel.

I know that that had done better for you, but in the industry it has been relatively weak compared to some of the other areas.

I was curious to see what your viewpoint is on this area and, more specifically, what the trends are between missy versus juniors and some of the other subcategories?

A, we feel really good about the women's apparel business.

We've had a really solid comp for the quarter.

You know where we kind of got the growth, based on the brands that I talked about in the more updated contemporary area.

But we had a great introduction with the classic customer with the Chaps introduction.

And it really, I think, had an overall impact on the sales.

We feel good about it for the rest of the year.

I know there has been talk that women's has not been as good as other areas, but it has certainly been great for us.

And I think a lot of it is the same answer is with home -- new brands, new initiatives.

We did a re-flow in there to better present goods to consumers, and it has definitely been positively received.

And as Arlene mentioned, we're getting a broader and a larger audience to look at women's apparel.

Now that you have got Chaps and Tony Hawk in your stores, if you had to compare the two, is there one that you are more pleased with over the other?

Well, they are so different.

Chaps is, by default, going to be much, much bigger, because the audiences is men and women, and women in our core demographic target.

And Tony Hawk is much more defined to a young man and boy customer.

So they are really kind of apples and oranges.

They are both important in their own way, but Chaps is clearly much, much larger in total.

Dana Cohen, Banc of America Securities.

Hey, guys, congrats, nice to see.

I think you're translating the number of transactions to traffic.

Is that from credit information, just because it could also be existing customers buying more as well?

It is just the number of transactions going out the door.

Right.

But I am just saying, you are converting that into traffic is up.

But I'm just trying to get a better measure for the traffic.

Are you using credit card information to say these are new customers?

Those are just our POS -- what we gave you was transactions per store, so it's just what our POS transactions are.

We don't really measure traffic as it's people that came in and out of the store; you have to buy something.

Okay, but are you starting to see in the credit card information that you are attracting new customers?

Yes, we clearly are opening a lot of new credit accounts, so obviously that's a new customer coming in the door.

We have been very focused on that.

When you look at the marketing and everything that we have changed and adjusted to ensure that we're attracting a new customer, we are clearly seeing that with the number of credit accounts we are opening.

And then, you said that all categories of merchandise were at least mid-single-digit comp.

That included juniors and women's?

Yes.

We have the six business groups -- men's, women's, children's apparel, footwear, home, accessories.

And all six business groups were at least mid-single-digit comps.

And can you give us any feel, drilling down a little bit -- obviously, within women's, contemporary was better.

How did traditional women's and juniors do?

I think what we said was that the updated contemporary business -- not surprisingly, given the new introductions and initiatives -- was very strong.

Special sizes was also very, very strong.

And Chaps as a brand in women's in the first quarter was great as well.

And then, Kevin, I think this is the first conference call in a while you have not talked about a new brand introduction.

Is it just there's nothing to announce today?

Can you just give us any sense of where your focus is now?

There's no definitely nothing to announce today.

We clearly recognized and realized that a lot of the market share gains we're getting right now are because we have been really focused on new brands and new initiatives, so we're not going to stop that.

And you can certainly expect to hear about new ones coming down the pike; we just don't have any one for you today.

David Cumberland, Robert Baird.

Do you still expect to open 200 stores in 2006 and 2007 combined?

Yes.

And, Arlene, you said new stores exceeded plan.

How did the productivity compare to the 70 to 80% plan?

Right within the same range we have always been, so there hasn't really been any change.

And then one for Wes.

Wes, can you confirm that the guidance does not include buybacks that might happen in Q2 and beyond?

That's correct, based upon just investing the cash in short-term investments.

Teresa Donahue, Neuberger Berman.

Congratulations on the marketing.

First of all, on the gross margin, terrific performance.

But I guess, given the strength of your comps and what we saw in the store, I might have expected to see it a little bit higher.

Is part of this a strategic investment in pricing?

And secondly, with respect to share repurchase, I was just wondering if you could talk a little more philosophically about what your strike points might be, and what sort of things you might look for?

I can tell you we won't talk any more philosophically about the strike points on the share repurchase, but I will let Kevin answer the other question.

I think what we said coming into the year, and Larry I think reiterated it again for the rest of the year, is we feel comfortable in that 20 to 30 basis points improvement in margin, and we are always going to be more focused on getting market share.

And I think we got that done in the first quarter, and we intend to get that done the rest of the year, too.

Bob Drbul, Lehman Brothers.

Is there an update on the timing of naming Arlene's replacement, anything that we should know?

No.

Okay.

And the second one is --

She is still here, by the way.

I know.

I'm just curious if there is anything you can share with us on the search.

Were you asking me to exit, or --?

No, I am just curious.

On the store base this year and next year, is there an idea in terms of the breakdown between small stores, suburban stores and urban stores that we might be able to work with?

I think we have said in the past that over the next 500 stores, it's going to be between 20 and 25% small stores.

And urban stores is something we are still testing right now.

It's only a few stores each year.

Any comment on the update in beauty, in terms of the thought process around business today?

Not any more than we've talked about before.

We're feeling very happy with the progress we are making.

We're continuing to grow the business.

We're focused on expanding it in the third and fourth quarter this year.

And we think it just ties in great with all of the other new initiatives we have in place.

And then, on the inventories and the sales, how much clearance selling was there in the quarter?

And in terms of total inventory, like where is clearance inventory as a percentage?

Any trend that you can talk about?

Clearly in its percentage of the business is so small it's not even worth discussing at the end of the quarter.

It's just such a nothing number.

The business was definitely driven with very, very strong (multiple speakers) regular-price business.

When you look at the sales performance in the first quarter, could you talk a little bit about how you think the Federated-May business impacted your sales trend as well as some of the Mervyn's store closures?

Can you just put a little bit more color on that for us?

Well, they ran a lot of going-out-of-business sales in the first quarter, so they generated quite a bit of business for themselves.

I think it's something that has to shake out over a period of time, and I would think that there's a couple of retailers out there that are going to be able to take advantage of some of those store closings between now and next year this time.

It's way too early to say.

Adrianne Shapira, Goldman Sachs.

We were clearly impressed with the SG&A leverage we saw in the quarter.

And if we are right, this quarter we saw a ramp-up in marketing related to the Chaps and Tony Hawk launches.

So maybe, Wes, could you give us a sense how much marketing actually pressured SG&A, and how much better it might still have been?

Well, I wouldn't say marketing pressured SG&A.

All that stuff was sort of in our plan, and we launched Chaps for Men last year, if you remember, in the same timeframe that we launched Chaps for Women.

So there wasn't really any incremental spend there.

When you have the performance that we did, all areas have to contribute on the SG&A line, and that is really what we saw.

Obviously got a lot of good leverage in the store fixed area, because it's fixed.

But everybody kind of came to the party.

So it was really a function of just the better sales, no real other bucket of opportunity there?

Yes.

That's really -- [fixed-line comp] cures a lot of things.

And since the last call, we heard JC Penney obviously has announced store plans to ramp up their off-mall expansion.

Could you just help us understand what happens to one of your stores when JC Penney opens in the same market?

We have had a little bit of experience with it.

There's a little bit of a hit, and then the store bounces right back to its normal trend not too long after that.

But we have not had significant experience that way, and I would suggest that probably when we open up, we probably hit them harder than when they open up.

Going forward, since obviously they will be a lot more aggressive looking for sites, how would you characterize it, Larry, in terms of competition for good real estate out there?

Obviously, there's a fair amount of supply available.

But since they are sort of a new player on the team, has it intensified?

Well, we have been at this for a long period of time.

And in looking at the stores for the next couple of years pretty closely, myself, there hasn't been a whole lot of competition from them for space in the trade areas that we want to do business in.

And they are going to open up next year -- I think they said they were going to have to 50 new stores.

I'm sure some of those are going to be replacement stores and some of them are going to be new ones.

But it's fairly small expansion relative to ours, and we have become pretty much the experts in the off-mall expansion in the moderate-priced apparel and soft home business.

We'll come across them now and then, but it certainly isn't anything that is going to sway us from our expansion strategy over the next 500 stores.

And of the 200 over the next two years, you have kind of detailed those sites already, and the pipeline is pretty rock solid there?

We're rolling.

Jeff Klinefelter, Piper Jaffray.

Just one quick question on the brands.

I know someone already asked about new brands that you might be announcing soon.

But more generally speaking, Kevin, in terms of your strategy to bring in national brands, would you consider it more of a there are unique needs in certain divisions or unique opportunities in certain divisions?

Or is this more of an opportunistic strategy at this point -- as they become available through consolation you would entertain them?

How are you looking at it?

I think honestly, the honest answer is both ways.

There are definitely opportunistic situations that have been created, that are going to continue to be created by changes in competition.

But also, we clearly see areas in which we have needs, and we are trying to address those needs, either with sometimes existing brands that we have that we can leverage into another area of the store or, other times, adding something new.

And certainly, the women's area is a good case in point, I'd say.

So women's at this point, you would say, is the greatest opportunity for branded product to be added to your assortments?

No, I don't know that I would call it any particular area in the store has a greater opportunity.

I think there's opportunity in almost every one of the six major business groups to continue to broaden the customer base and, as Arlene said a couple times, really reach out your new customers that we have not been attracting and take marketshare.

And that is how we're looking at the brand strategy.

In terms of your southern market stores, I know that the southern half of the country is probably going to be the fastest actual growth rate of new stores, I would think, in terms of the next couple of years.

Outside of just the performance of new stores, what is the performance of southern new stores, year to date and over the last couple of quarters?

It is going to be a big focus of our growth, and the performance in the South has been great.

Florida to Texas to California.

Nothing relative to the new stores in the North, Larry?

No.

I mean, we are going to continue to backfill markets, and like I said, we're making our first entry into the Northwest, which I think is going to be a great market for us.

So we are in Oregon already, and we are going to be in Washington this fall.

But we have significant opportunity to grow in warm weather climates, and our performance there has been great.

Daniel Binder, Buckingham Research.

A couple questions.

One, last few quarters you have done a great job on the SG&A if we look at it on a per-square-foot basis.

And I realize you don't have the cost of beauty rollout this year, but it has been an impressive performance, nonetheless.

Where are you finding cost pressures in the business?

Is it kind of where we are hearing other retailers are finding it, in terms of wages, utilities?

And how are you managing to offset that elsewhere?

Well, utilities is probably, Wes, right --?

Yes.

-- the fastest growing.

That's where we saw opportunities to offset.

It's hard to get ahead of that one.

We're all kind of using the same electricity we did last year.

We're trying to come up with capital investments to use less, but that is not an area that we have been leveraging on in the last three quarters, probably.

But clearly, we have opportunities and we have seen productivity improvements in other parts of the Company.

And then you have to realize that when you're growing sales at the rate we are -- so we are going to grow sales 15 to 16% -- that gives you an opportunity right there, when you're looking at corporate (technical difficulty) in some of those areas that obviously do not need to grow at the rate of the top line.

But being a growth retailer helps you quite a bit on SG&A.

And clearly, getting ROI up is an opportunity, it looks like, in inventory even from here.

I'm just kind of wondering if you can give us maybe a sense of how much more you think you can get the inventory per store down, without endangering the business?

Our goal is to grow it toward a low single digits.

If it comes, turnover is going to happen because we are going to continue to run comps like we're running today. (Multiple speakers).

The other thing I would add to Wes's comment is our focus on the inventory is also a lot about flow.

It's about improving the flow of merchandise into the stores so that it comes much closer to sales.

I think that's really important.

Any significant changes in timing or intensity of your marketing events this quarter?

In the first quarter?

No.

I mean, it's (multiple speakers).

Well, I meant (multiple speakers).

Actually in Q2.

In the second quarter (multiple speakers).

In the first quarter, other than the fact that there was a seasonal shift in the business with Easter, the marketing calendar was very similar to last year.

Michael Exstein, Credit Suisse.

Can you give us an update on the new store prototype that you're building in the fall, and how that is going and what that will look like?

Secondly, of the new stores you're going to open over the next five years, how many do you think -- what percent will be infill and what will be new markets?

In terms of the prototype, about half the stores we are opening up in the third quarter are going to be the new prototype.

And it would take me way too long to explain all the things about the new prototype.

It's going to have to be one of those things that we show you one of these days.

But there's a lot of things based on customer research that we have done that we think will make the environment a more exciting and easier place for the customer to shop.

And so, we're excited about getting that rolled out to half the stores this fall, and then get the true customer reaction and then determine how many stores, going forward, we're going to roll out like that.

And in terms of percent of stores in new markets, we actually have a percent on that, but it's obviously over the next several years we're going to continue to grow the fill-in, because we are in 43 states, going to 44 states.

The big focus is going to be on fill-in, and, like I said, between 20 and 25% of the stores are going to be small type stores.

I suppose you could call that new market, but it's not.

But it's not really major new market like there's no more L.A.'s, you know, out there right now.

But there's some bigger cities in Florida that we have to go into yet, and like Seattle.

But we're going to be a much larger percentage of fill-in stores with our prototype buildings.

And following up on the credit issue, when do we start seeing changes in the way you promote credit and so forth, now that it's been sold?

I don't know why you would think you would see changes in the way we would promote credit.

Credit is integral to our whole marketing program, and we have been very successful in what we have been doing.

So we will continue to do that, and obviously with our partner, with Chase, as they come up with other new ideas, we will clearly entertain other new ideas to help drive sales.

I wasn't suggesting that you had a bad credit program, but I know part of the rationale behind selling it was that Chase could add new promotions and so forth to it.

Yes, we're always looking for new ideas.

Christine Augustine, Bear Stearns.

I wanted to ask you about the average transaction size of 2.1% increase in the quarter.

Can you provide any more detail on what drove that, whether it was units per transaction that were up, or average unit retails?

And then, Wes, could you just repeat that inventory number that you're targeting for the end of the second quarter?

Well, the inventory number -- we are up low single digits on a per-store basis.

So that was actually our goal in the first quarter.

We did a little bit better than that.

And as far as average transaction value, it was driven primarily by average unit retails.

Units per transaction were down slightly.

And just to clarify, the cosmetics business is part of the accessories category when you talk about your six major businesses, right?

Yes.

Bernard Sosnick, Oppenheimer.

You had a wonderful June a year ago, and knowing how we behave on the street, there may be concern about comparisons.

You had a great contribution from Chaps for Father's Day was the best in seven years.

Could you give us a little bit of color on what you plan for June?

And I know you're not going to give us a number, but do you expect a positive comp for June?

You are right; we will not give you a number.

I think, honestly, the way we are looking at May and June is the way I described it, which is, given the year-over-year number you just quoted, May has probably got a little more opportunity than June does, by default.

I would say you are right, we had a good Father's Day event last year, and that's participated.

But men's led the Company's business in the first quarter, and that was anniversarying last year's launch of Chaps, which was the biggest launch men's ever had.

So we feel really good about men's going into Father's Day.

Even given their strong performance last year, there's no reason for us not to feel that way.

And if Chaps helped you so greatly for Father's Day last year, can I assume that you're sensing that it may help for Mother's Day this year?

I would certainly hope so, yes.

And Wes said that there is expense leverage when you are running sales the way we are now.

So can we assume that what now looked like -- no, I'm just kidding.

No, definitely not.

Well, thank you and good luck in the months ahead.

Thank you. (Multiple speakers).

Thank you for participating in today's teleconference.

This concludes the conference for today.

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