柯爾百貨 (KSS) 2006 Q3 法說會逐字稿

Good day, everyone, and welcome to today's Kohl's third quarter 2006 earnings release.

[OPERATOR INSTRUCTIONS]

Information provided on this call is related to the press release issued on November 9th for the October fiscal month.

Statements made on this call, including projected financial results are forward-looking statements that are subject to certain risk and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements.

Such risk and uncertainties include those that are described in item 1A in Kohl's annual report on Form 10K and may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.

Also, please note that replays of this call will be available for 30 days, but this recording will not be updated so if you are listening after November 9th, it is possible that the information discussed is no longer current.

I would now like to turn the call over to Wes McDonald.

Please go ahead, sir.

Thank you.

With me today is Larry Montgomery, Chairman and CEO, Kevin Mansell President, and Tom Kingsbury, Senior Executive Vice President.

I'm going to take some time to go through the P&L and the balance sheet before turning it over to Kevin who will talk about some of our merchandising and marketing initiatives.

Tom will follow up with a discussion of our expansion plans, and then Larry will close the call with some comments and our fourth quarter earnings guidance.

With that let me start with sales.

Sales for the third quarter were approximately $3.6 billion versus $3.1 billion last year up 16.6%.

For year to date sales were approximately $10.1 billion versus $8.8 billion last year, up 15.6%.

In the third quarter, we achieved 8.5% comp store sales increase.

The comp was the result of an increase of 5.3% in number of transactions per store and an increase in average transaction value of 3.2%.

Our year to date comp increase was 6.9%, with transactions per store increasing by 4.4%, while average transaction value improved by 2.5%.

All regions delivered positive high single-digit comp store sales increases for the quarter.

The Northeast region posted the strongest comp for the quarters and the Southwest region posted the strongest comp year to date.

From a line of business standpoint, all businesses posted strong results for the quarter.

All lines of business had mid-single digit comp sales increases for the quarter and for the year to date period.

Moving on to gross margin, we continue to see improvement on our gross margin rate with 37.1% versus 36.3% last year for the quarter, up approximately 80 basis points versus last year, and 36.9 versus 36.4 year to date, up approximately 50 basis points.

This includes the effect of the $15 million related to the Company's initial recognition of gift card breakage revenue in September in both sales and in gross margin dollars.

The remaining improvement continues to be a result of our merchandise initiatives as well as the impact of our inventory management initiatives, which included more frequent flows of merchandise and improved store allocation.

Moving on to SG&A for the quarter, $857 million versus $754 million last year.

We continue to see and be pleased with the amount of leverage we are getting on our sales increases.

For the quarter, SG&A expenses leveraged by approximately 60 basis points.

Year to date, SG&A expenses leveraged by approximately 50 basis points, and we continue to see leverage achieved in very many areas of the Company.

Depreciation, $94 million versus $85 million last year for the quarter, up about 11%, year to date $284 million versus $248 million up about 14.5%.

Preopening expenses were $28.5 million for the third quarter versus $26.3 million last year, and our third quarter includes expenses related to the 68 stores opening during the 2006 fall season.

On average, we spent $580,000 per store for the new stores open this year.

Approximately 1.9 million of that was incurred in the fourth quarter of fiscal 2005.

We would expect to incur about $5 million in preopening expenses in the fourth quarter for the stores opening in Spring 2007.

Operating income for the quarter was $369.4 million, up 38% versus last year.

On a percent of sales basis 10.2% versus 8.6% last year, up about 160 basis points versus last year.

Year to date operating income of just over $1 billion up approximately 29% over last year, with an operating margin of 10.2 versus 9.1 last year, up about 110 basis points.

Net interest expense for the quarter, a little over $10 million versus $18 million last year, and year to date, about $30 million versus $51.5 million last year.

The reduction in interest expense versus last year is a result of the interest income earned on the investment of the proceeds from the sale of the credit card receivables.

Provision for taxes, our income tax rate for the quarter was 37.5%, this was due to effect of interest earned on tax-free investments primarily due to the investments of the proceeds I mentioned earlier from the sale of the credit card receivables.

Our expectations for the tax rate for the fourth quarter is for the rate to be 37.7%.

Net income for the third quarter was $224.5 million, up approximately 45%.

And year to date net income was $624.1 million, up approximately 34%.

Our earnings per share as we mentioned earlier in the release, $0.68 this year, versus $0.45 last year an increase of about 51%.

As a reminder our most recent guidance was $0.56 to $0.59 per diluted share.

Earnings per share for the year $1.85 up 37% over last year.

We purchased approximately 1 million shares of stock during the third quarter at an average price of $66.54 and year to date we have repurchased 20.7 million shares, at average price of $56.24 and the total spending on the repurchase program thus far is approximately $1.2 billion.

Moving on to the balance sheet, we currently operate 814 stores, compared to 731 stores at this time last year.

Our gross square footage is 72,752, an increase of 10.6%.

Selling square footage of 62,141, an increase of 9.9%.

Our investments 319 million in short-term investments primarily as the result of the receivable sales.

Our inventory is approximately $3.2 billion, up about 14% over last year, and on an average per store basis, up approximately 2% versus last year.

Fixed assets for the quarter, capital expenditures were approximately $258 million and for the year capital expenditures were approximately $965 million, and capital expenditures continue to be expected to be in the range of $1.2 billion for fiscal 2006.

On accounts payable, a balance of about 1.6 billion versus last year's 1.3 billion, up about 24%.

As a percent of inventory, we're very pleased to see it in the low-50s, versus last year's 46.6 and for the fourth quarter we would expect AP as a percent of inventory to be in the low to mid-30s.

For your modelling purposes on weighed average number of shares for the quarter, basic shares, 326,904, diluted shares 329,814, on a year to date basis basic shares 335,148, diluted 338,255, and for the fourth quarter the shares used in your modeling should be approximately 331 million shares.

This, again, as has been our previous practice does not assume any additional share repurchase.

We will update you on share repurchase program quarterly.

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

Thanks, Wes, let me talk first about sales.

As Wes mentioned, we achieved a comp store increase of 8.5% for the quarter and a 6.9% comp store increase now year to date.

We're very pleased with the sales performance overall but we're even more pleased by the consistency of performance shown across all six lines of business for the quarter and for year to date.

All six areas had at least a mid-single digit comp for the quarter and year to date.

This is an indication to us that all of our initiatives are working across all of our lines of business.

Men's continues its terrific across the board performance, leading the Company for the quarter with a double-digit comp.

The men's dressy business, combined with the strength in dress shirts, suit separates and neckwear.

In women's active and fitness, our updated and contemporary businesses and special sizes experienced the most significant comp increases.

Children's had a very good quarter as the customer responded to our merchandise content in all age groups, but particularly in infants and toddlers.

Home continues to show strength in bedding, bath, and housewares.

The footwear business showed strength in men's and women's shoes as well as athletics.

And finally, the accessory business was lead by fine jewelry and fragrances.

In looking at the fourth quarter, our comp sales guidance continues to be 2 to 4%.

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

As a reminder, our comps last year by month were November -0.1, December +4.6, and January +2%, with the quarter comp at a +2.7% last year.

Moving on to our merchandise initiatives update, in the third quarter we had strong sales in seasonal categories such as fleece, outerwear, boots and cold-weather accessories as we enjoyed the benefits of our inventory strategies in having more frequent flows to replenish regions effected differently by weather.

Basics in men's, children's, and women's also performed well across the country.

We continue to be pleased with the performance of all of our new exclusive national brand initiatives that we have introduced or expanded this year.

Chaps for our classic customer in men's and women's, continues to outperform in all categories and is currently launching in girl's.

In addition, both Tony Hawk in young men's and boys, and Candies in juniors and girls continue to grow substantially.

Most of you are aware of our new merchandise partnerships that we announced earlier in the third quarter for introduction in 2007.

The two most important are our partnership with Vera Wang, across the store and Food and Network Alliance focused on our home area.

We also announced the opening of a New York design office to help support these brands as well as other exclusive brands that we plan to add in the future.

Our focus in all of these alliances is to not simply add brands to create differentiation, but to add world-class brands that are highly recognized by both our current customer and those that we are broadening our reach to include.

Moving on to inventory management, I'm very comfortable with our overall inventory levels and I'm very pleased with the freshness and content of our inventory going into the third quarter.

As Wes mentioned, our inventory per store was 2% above last year's level.

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

All six lines of business had gross margin increases over last year for the quarter.

We were able to accelerate receipt to replenish our inventories after our outstanding September performance, leaving us well positioned for the fourth quarter.

We intend to continue to focus on receipt flow, resulting in better transitions and lower overall levels 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 fourth quarter.

The roll out of mark-down optimization to approximately 400 stores went well this quarter, and we remain on track to move the rest of the Company to this technology in the Spring of 2007.

Finally our margin guidance for the fourth quarter remains unchanged at 30 to 40 basis points over last year.

Finally our fourth initiative marketing, as Wes mentioned transactions per store increased for the quarter 5.3% and are now up 4.4% year to date.

This is the result of our marketing initiatives that continue to build traffic through a wide range of media, including our most important media types, print broadcast and direct mail.

These traffic increases along with our overall 8.5% comp sales results are clear indications to us that we are taking market share from competition.

The successful strategies that have been working have been increased for the holiday.

Most importantly, the use of both direct mail and broadcast to build traffic around our major events will be increased over last year.

In addition, we continue to be focused on opportunities through our credit partnership with Chase to reach new customers that have not shopped Kohl's to any great extent in the past.

Our holiday marketing is very exciting as it revolves around continuing our theme of transformation that we have been executing all year long.

We have put an aggressive marketing calendar together for the fourth quarter in all forms of media to support our events.

We feel that there's a clear market share opportunity for gaining additional share of wallet from existing customers with our new merchandise initiatives, and reaching new customers who may be open to new choices with changes in the malls in many of our markets.

Let me turn it over to Tom Kingsbury to talk about expansion.

Thanks, Kevin.

I would like to give you an update on our 2006 and 2007 expansion.

Full year 2006.

In October we opened 65 stores in 30 states.

This is the largest one-day opening in Kohl's history.

We opened three additional stores this week, which will take us to 817 stores at the end of fiscal 2006.

We had new market entries, three stores in Tampa, Florida, four stores in Seattle, Washington.

Other regions were open new stores, 16 stores in the Midwest region, 11 stores in the South Central region, 11 stores in the Southwest region, 9 stores in the Southeast, 7 stores in the Northeast region, 6 stores in the Mid-Atlantic region, and 1 store in the Northwest region.

We are very pleased with the customer's reaction to our innovation prototype both in our 88K format and our smaller 68K format.

We will continue to collect customer feedback and evaluate the impact of the changes in the design of 2007 stores and in aspects of our remodel program. 2007's expansion, we remain on track to meet the goal of opening 415 stores over the next four years. 17 of the stores will open in the first quarter of 2007 in a blend of new and fill-in markets.

We'll open the Mervyn's stores we purchased in the Pacific Northwest in the fall of 2007, giving us a much greater presence in the Portland and Seattle markets.

Now I would like to turn it over to Larry.

Thank, Tom.

We had another outstanding quarter, we delivered consistent sales performance across all regions of the country in all lines of business.

We saw continued gross margin expansion as we continue to see the benefits of better inventory flow and improved allocations.

Our expenses were well managed the quarter, as we benefited from great leverage provided by our strong sales performance.

We continue to focus on our four initiatives and it's paying off with a third quarter EPS growth of over 50%.

We continue to be one of the few retailers who are driving comp store sales through a combination of both traffic and ticket.

We are driving in new customers who are giving us very positive feedback and we are continuing to take market share.

These market share gains gives us the confidence that we'll continue the momentum during the all important fourth quarter.

Our guidance for the fourth quarter remains the same that we shared with you in August.

For the quarter, we're looking for a comp store sales increase of 2 to 4%.

For the 14-week fourth quarter, we would expect total sales to increase 15 to 18%, a gross margin increase of 30 to 40 basis points, and SG&A leverage at 2% comp store sales increase.

This would result in earnings per diluted share of $1.36 to $1.42 for the fourth quarter, or a 26 to 31% increase over last year.

We're updating guidance for fiscal 2006 from $3.04 to $3.13 per diluted share to $3.16 to $3.24 per diluted share.

This would result in an increase in earnings per share of 30 to 33% over last year.

This guidance reflects our third quarter performance as well as our share repurchases during the third quarter.

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

Thank you.

[OPERATOR INSTRUCTIONS]

We'll go first to Bob Drbul with Lehman Brothers.

Hi, good evening.

Hey, Bob.

Larry, the first question that I have for you is when you look at the results of the department store industry including what you guys are doing and some of your competition, what do you think has changed?

What do you think is driving this strong performance throughout the whole sector?

I think that when you look at the four initiatives that Kevin talked about, our inventory management and flow of goods we've got fresher product, our content is greatly improved and continues to improve almost every quarter.

Our marketing is reaching a lot more customers and the awareness of Kohl's is going up according to our research, and as you look at the stores, the existing stores as well as the new innovation stores that we opened up, we're clearly going in the right direction, so we're clicking on all cylinders.

One quick question on the gross margin did the mark-down optimization hurt you at all this quarter?

Yes, if you remember Bob-- if you remember, Bob, we took that into account from our--when our original guidance when we gave if you guys remember it was 10 to 20 basis points because the original adoption of that caused us to take a deeper mark-downs earlier.

So even despite--despite that fact we were able to have very strong margin performance.

Great.

Nice quarter.

Thank you.

Thanks.

We'll go next to Jeff Klinefelter with Piper Jaffray.

Yes, Kevin, could you talk a little bit more on the merchandising side in terms of your successes with--growing success with home, perhaps with fine jewelry and fragrance as well, are you finding anything in terms of how the market basket is shaking out, like what percentage rate you are having in terms of customers walking in.

Is there any way for you to know if that's a driver of some of the traffic or conversion, if it's an add-on for an average customer, just any sort of metrics to understand?

Because those seem to be very powerful, kind of new drivers over the last couple of years of your business.

I think-- I think what we have learned over the last two years or so is the--adding newness, whether it's a brand, or a category--you mentioned a couple of categories that we were trying to drive new business in, had turned to be incremental and what it does, what it's allowed us to do is the customer who has been shopping in some parts of the store but not in others are broadening the areas in which they shop so we're clearing seeing that in the market basket.

They are adding categories to the purchase they were making.

But secondarily definitely we're getting customers from competition as we look at just from a share standpoint the comp stores that we have year to date, so I think it's doing both.

Though-- though I would say we're primarily focused on getting larger share of wallet from customers who are shopping at Kohl's but not aggressively across the whole store.

Okay.

And then one follow-up would be--I guess for Wes in part, in terms of the inventory turns, and--and the leading margin improvements, there's been dramatic improvements in the last couple of years, and going forward with rolling up mark-down optimization and then other new systems, how much faster do you see turning your inventory?

Or is it more a combination of just some sourcing improvements?

And then also, just sort of isolating pockets of the country where you can turn a little faster on seasonal product?

What would be the biggest contributor to that margin expansion going forward?

I think the biggest contribute to the turn over improvement is going to be the continued improvement in our inventory flows.

Peggy as you guys heard--I guess a couple of months ago down in Tampa--is working on a lot of initiatives in her world to decrease cycle time.

I think that's going to be the biggest improvement.

Mark-down optimization is certainly going to help us in those five-year projections that we gave you down there in Florida.

We built some very, very modest turnover improvement into those numbers.

I certainly would hope to exceed that as we start to see the benefits of these improvements take hold, but we didn't feel like it was prudent to build them into the five-year plan just quite yet.

Thanks, congratulations, guys.

Thanks.

We'll go next to Teresa Donahue with Neuberger Berman, please go ahead.

Teresa, your line is open.

Please check your mute button.

We'll go next to Christine Augustine with Bear, Stearns.

Hi, thank you.

Wes, could you explain why depreciation was down sequentially from 2Q to 3Q, and my second question is are you seeing some benefits from the relationship with J.P.

Morgan Chase, and how is that evolving in terms of how you are doing the marketing to maybe existing customers and potential new ones?

Thank you.

To explain the depreciation, I guess I would have to get more into it, but I mean we just took some--put some more assets into service--in the second quarter, and we had some stuff fall off in the third quarter that we were fully depreciated on, so without getting into the detail I don't have a great answer for you, Christine, I can certainly get back to you on that.

Regarding J.P.

Morgan Chase, we continue to see benefits as we talked to you guys, we had tested some things in June with them and did more extensive testing in August as part of the third quarter and trying to attract some customers in those Fed-May markets that were undergoing some change, and we're happy with the results and we'll continue to do them like Kevin talked about in the fourth quarter.

I would add to what Wes said, Christine that from an 8.5 comp perspective anything we did with Chase this quarter really wasn't meaningful to performance.

That's true.

I'm sorry you said was not--

Was not, yes.

I would think about the Chase partnership paying off for Kohl's in 2007 and 2008.

Yes.

It really didn't have any impact on our third quarter performance.

Okay.

Thank you.

We'll go next to Mark Miller with William Blair.

Hi, my first question is on the very impressive gross margin performance here which showed acceleration in the rate of improvement in the third quarter.

Can you talk about what improved from the prior quarter trends?

Was this just stronger comps resulting in less mark-downs or--if you can also provide some more color on initial mark-up and then also the mix as compared to improvement in mark downs, thanks.

It's Kevin.

I think the--remember we did have an adjustment because of the gift card breakage--

Right.

--in the third quarter specifically.

So if you look at it in the context of the year, it did accelerate a little bit in the third quarter even without that gift card breakage number, but it came via, I would say three or four components.

It came through managing our clearance levels more effectively, our overall inventory, I think we managed well.

Second, we did have continued strong mix.

We have had that all year, and we had it again in the third quarter.

Wes touched on improving inventory turnover by managing our inventory by grade of stores.

We've talked to you about that in the past.

That definitely had a positive influence in the third quarter so we were better able to allocate--both through new technology, but also better receipt flow overall, we could make better decisions on allocating, and that meant managing our inventory on lower-volume stores more effectively, which ended up resulting in improved margins as we transitioned from season to season so there were three or four really solid elements, and then probably the last one is private and exclusive brands continued to grow as a percent of the business.

Are there any of these things which at some point in the near term become harder to either anniversary or things that start to work against you?

I mean, it seems like--the current outlook is a little bit below the run rate particularly given the size optimization, negative impact.

I gather you don't want to plan for all the favorable developments you've had, but is there anything that starts to work against you?

The short answer is no.

I think most of the things that we're thinking are going to result in improved margin over the longer term the next three years, really haven't--we haven't benefited from yet.

So whether it be size optimization or the impact of mark-up optimization over the longer term, those things really haven't impacted our margin to date.

I think we expect that we're going to continue to improve inventory turn over, we've got a really clear objective on that.

Wes is talking to me about that every day, so I'm very focused on it as well, and we know if we do that, we will get better merchandise margins and then certainly exclusive and private brands, we intend to grow.

You heard us talk about some of the new exclusive brands coming in 2007.

Those are big, and those are not brands that we created because we felt we needed a brand for differentiation, we created them because they were a national brand that had incredibly high consumer awareness, but I think it's going to give us the positive benefit of being a better margin as well.

Terrific, my final question is on the 2007 store growth, are you still comfortable with your prior outlook for 115 stores or is that possibly stronger or should we expect something a little less?

Thanks.

This is Tom.

As I stated, we remain on track to meet our new store goals for the next four years.

We're opening 17 stores in Spring 2007 and we are still working through the Fall 2007 stores, but we are committed to hitting our original goals.

We'll go next to Dana Cohen with Banc of America Securities.

Hey, guys, congrats.

Just want to make sure my math is right.

The gross margin would have been up 40 basis points X the breakage?

It might be a little--a little higher than that you have to take it out of both the sales and the margin.

Okay.

So I guess just going back on the last question, because just trying to understand the cadence here, you had gone into the quarter thinking gross margin would be up less, the run rates better, and yet you don't think you are seeing the benefits yet of the size optimization, or the mark-down optimization, so I'm just trying to put that together, help me out.

We definitely haven't seen the benefits of the mark-down optimization and then size optimization I think gets hidden probably to some extent in the sales number and the sales number drives everything as you well now.

Yes.

I guess I would tell you in the short-short term to kind of elaborate on Mark's question was in the fourth quarter it's a very competitive quarter, and we want to make sure that we're going to get our value message across and this is a unique opportunity for us to take market share so for us to continue to think--we would like to surprise our margin if it's better, but part of that margin as to Kevin's point earlier, running a 16 comp in September certainly helps you with better margin out because you are selling the goods a lot earlier in the quarter.

It would be fair to say that despite--the mark-down optimization was probably needed less in light of how much you sold at full price or relative full price in September.

Yes, I think that's fair.

Okay.

Thanks so much.

Okay.

We'll go next to Stacy Turnof with Merrill Lynch.

Good afternoon.

Could you talk about the impact that you might have seen in your business from the Federated National Advertising campaign.

Pendant made some comments they saw a pick-up in mall traffic and I was wondering what you guys have seen?

This is Larry.

We-- we watch it pretty close, and we come away at the end of every month and at the end of the third quarters and it's--we had this same comp increases running in stores that have absolutely no May Company or Federated influence at all, so it's a pretty small number or us.

My guess is that the guys that are in the mall are getting taking advantage of or getting some of that business that the May Company stores are giving away.

Great.

At the end of the day, we had a 16 top-line increase for the third quarter, so we're clearly taking market share for the third quarter.

That's great.

My second question--and a lot of people have asked about the benefit from the mark-down optimization.

Is there any time period that you could give us?

Is it more that you might see it in the spring of next year, when we'll start to see more of a peak impact from that benefit?

It's coming, it's basically over the year in 2007.

Great.

Thanks so much.

We'll go next to Michael Exstein with Credit Suisse.

Thank you so much.

First off I was looking at your website, I noticed that you have a presentation to consumer electronics there, flat panel TVs and so forth like that, and I was wondering what that was all about, if you're testing that for the stores going forward?

And secondly, just following up on this--on the question on depreciation, what do you think depreciation is going to look like going forward?

Will there actually be growth in depreciation as expense dollars or do you think it flattens out just in terms of what is going on there?

And finally is there more gift card breakage coming that will benefit the numbers going forward?

Thanks.

It's Kevin, I'll just answer the electronics thing, I'll let Wes deal with the other two pieces.

Just on electronics, Michael that is not new.

We have had electronic items both online and in-store for sometime.

We've primarily used them as traffic builders around key events, and that will continue.

It's not a meaningful percentage of the business, and it won't be a meaningful percentage of the business going forward either, but we do use them as great value drives on individual events.

I think on the depreciation I think we had some ITS that's fall-off which is the cause of the depreciation being a little bit less than our store growth.

I would continue to expect depreciation to be at least--growing going forward on store growth and maybe a tick higher.

Some of the things you guys have seen in terms of presentation as you guys saw down in Tampa, we rolled out to all stores so we're reinvesting the capital not only in new stores but in the remodel stores as well.

And I'm sorry Michael, I forgot your third question.

Oh, gift card breakage, we'll certainly continue to see some benefit from that, going forward, it will be nowhere near the magnitude of the $15 million catch-up.

We were relieving the breakage on--on the gift card through a different method before, and so it's not really that much of an incremental benefit to us, really, going forward.

Okay.

Thanks very much.

Okay.

We'll go next to Adrianne Shapira with Goldman Sachs.

Thank you.

Wes, first on the preopening it looks as if about 580,000 a little bit lighter than the 700 we had expected per store what is going on there?

Well, I think our preopening team does a pretty good job of managing expenses.

I think we also may have done some changes on how we open new stores in terms of the percent of advertising that's done preopening versus the amount of advertising that's done post-opening.

One of the things that we have been looking at as a company is we try to get a lot of hoopla behind the new stores opening and sometime there's too much hoopla, so we're trying to make it smoother for not only the new stores but also the fill-in stores to have a great experience those first few weeks of grand opening, so we're shifting some stuff that used to be in preopening into post-opening where it would hit SG&A normally.

So 580 is a better run rate going forward?

We'll tell you what the run rate is probably next quarter.

You might want to put it a little higher for your modeling purposes, just for inflationary purposes.

Okay, and then my next question really for Larry, with so much still it sounds like in terms of margin improvement by year end it sounds like we're going to get very close to that 12.5% long-term EBIT margin target for 2010, so what are you thinking, Larry?

We're moving in the right direction.

All of the metrics say that we're continuing to improve in operating margin, and our goal is to get to that goal that we stated to you in Tampa last month in an orderly fashion.

Thanks.

We'll go next to David Cumberland with Robert W. Baird.

Thanks, one question for Kevin.

Kevin, for the fourth quarter, is there any change in strategy in the use of your end aisle displays compared to last Q4 either in terms of number of towers or the content on the displays?

Not really.

I mean there's adjustments made in content every year.

There's adjustments this year.

We have tried to address things that did better and build them, and obviously the things this year that we have learned we have incorporated into it.

But overall, other than some adjustments--I'd say the probably biggest single thing would be maybe some adjustments to make the shopping experience in the aisle particularly at the front of the store easier.

Great.

Thank you.

We'll go next to Richard Jaffe with Stifel Nicolaus.

Thanks very much guys and congratulations as well.

Just a quick question on marketing [inaudible] for the fourth quarter versus last year end expenses incurred this year versus last year for the marketing or advertising effort.

Will they match up pretty closely?

And a comment also on TV as an opportunity?

Overall marketing is planned similarly to last year from an investment standpoint.

I think we have been talking to everybody about us making our marketing work harder productivity wise as we analyze results and so there are areas of marketing, specifically direct mail and specifically broadcast television around our big events and we have ramped up, that's just because we are continuing to learn that those have been more productive for us, but if you were looking at it big picture, overall very similar to last year.

Yes, and Richard remember it's always going to be growing because we're adding stores, so in terms of dollar spending it's going to be increased over last year, probably--approximately with our store growth.

Got it.

Thank you very much.

Go next to Deborah Weinswig with Citigroup.

Thanks.

First question is for Kevin.

Can you talk about where the biggest opportunities on the nine box grid are?

And do you think that those will be achieved more through exclusive brand performance or kind of acquisition?

Or would you see that to be more on the private label side?

I think the opportunities that we have been communicating have generally been more in better and best price points and a little bit more in updated and contemporary.

Having said that, there's none of the nine box on the nine box grid we don't anticipate adding new brands and editing out old ones.

So I wouldn't exclude our opening price point grid from getting some new attention next year.

I would say that what we're learning about private and exclusive brands is that we have opportunity to grow private brand penetration through better product primarily and better positioning of the brands we have.

But that customers mostly will respond positively to brands that they know and brands they recognize, not brands that are created or made up, but brands that have real true consumer awareness, so that's why you have seen so many new brands from Kohl's that are what I consider to be national brands that just happen to be exclusive so Chaps, Tony Hawk, Candies, Vera Wang, The Food Network.

Because our customer is saying to us, if you call it a brand it needs to have true brand awareness and have credibility with me.

That gets the best traction.

So I think we'll continue to go down the road of identifying new exclusive brands but probably very focused on ones that the customer is aware of and recognizes and believes in.

And then with regards to size optimization, I know it's early, but can you share initial incites and I believe that it has been rolled out to 50% of size product in '06.

Can you remind us when it will be rolled out to the remaining 50% as well?

You are right about the 50% of size receipts in '06, Deb.

And we--we haven't really committed to a more detailed schedule other than the balance of the vendors will be through '07.

We'll maybe give you a better idea of that when we report our fourth quarter earnings, but I think we're learning more and more about it every day.

I think it's been a big help in getting us replenished back and in stock quicker as evidenced by our ability to pull the receipts up, so we didn't end up too light at the end of the quarter and the inventory's fresher.

And we're seeing pretty consistent sales growth across all six of our regions, which is another point that--that I would like to say in terms of size optimization because we have certainly different size variances across different regions as we have gone in, so the ability to replenish has been very good.

Last question.

JC Penny actually stated on their call today that they believe that you, Kohl's, would see a pick up in stores which--let's say are in close proximity to the Penny's off mall locations due to a concentration of customers in a particular shopping area.

I know it's still early, but can you talk about that, is it possible that this could actually be a positive for your business?

They are saying we should have a pickup because they opened a store by us is that what you are saying?

That is what they are saying.

That's interesting.

That's why I asked the question.

First of all there's not that many stores.

Right.

And I would like to say the same thing I'm expecting that they would have a pick-up if we open around them.

Thank you guys so much and congratulations again.

Thanks.

We'll go next to Dan Binder with Buckingham Research Group.

Hi, it's Dan Binder.

Couple of questions.

First, I was pleased to hear that you can still leverage expenses on a 2% comp in Q4.

Given the above-average performance all year I would have thought maybe bonus accruals would have eating into that a little bit.

I'm just kind of curious how you are still able to do that?

Second question was on the expansion, with 17 stores opening in Q1, it implies quite a bit of openings in the back part of the year.

Do you still think you can get 115 open or does it look more like 100?

I think we have done a great job for a long period time leveraging expenses.

I don't--I think that we're very comfortable being able to leverage payroll in the stores and the corporate office and our advertising is continuing to give us good returns, so I don't see an issue with leveraging at 2% in the fourth quarter we're comfortable with that.

That's been guidance that we have given out now for the past 18 months and been able to deliver on that.

To be honest, Dan, you have to book the bonus as you go along based upon your projections so you are not waiting to book it in the very end in the fourth quarter.

Okay.

In terms of--we don't have every single detail wrapped up on Fall 2007 stores, but we're very committed to making sure that we deliver the numbers that we said we would a couple of years ago, and most recently in Tampa last month over the next four years to hit--averaging 100 stores a year.

I think that we'll be able to refine that a lot more once we get towards the end of the year which is similar to what we did last year.

Great.

And just a follow-up in terms of the buy-back, what drove your decision to back off a little bit of the pace in Q3, and then second question, was in term of the promotional posture overall it sounds like it might be slightly more aggressive than last year.

Is that accurate?

Well, I would--let me take the buy-back question first and then I'll kind of turn the promotional one over to Kevin.

The buy-back we bought most of the quarter was under a plan, so you put your plan in place and let it execute sort of on auto pilot, so this--it just didn't really kick in because of the way we designed the plan, and the stock had a pretty tremendous run during the quarter, so we'll certainly relook at the parameters and file a new plan for the fourth quarter.

Okay.

Great.

On the marketing thing, the way I would think about it is with the growth that we have in new stores, we are obviously planning to spend substantially more in total dollars in marketing this fourth quarter than last fourth quarter.

And we're going to invest that in things that have given us the best results.

As it compares year-over-year, it's overall similar to last year, but 14% more dollars gives you a lot of ammunition to go drive business, and we think we have got a big market share opportunity.

Okay.

Great thanks for all of the answers.

Ladies and gentlemen, we have time for one final question.

We'll go next to Bernard Sosnick with Oppenheimer, please go ahead.

Yes.

With profits running ahead of plan and cash flow developing similarly, why wouldn't you be considering accelerating your expansion rate beyond what you announced two years ago?

I think that--Bernie, this is Larry--I think that we're just looking at a very controlled method of growth.

We feel very comfortable in that 100-store range.

Quality real estate is available, but one of the things that we told you a couple of years ago and we told you again, there's a lot of people that are very proud of their real estate out there today, and we're not going to do something that we think diminishes the return that you guys have expected from us, and we think that that kind of growth is something that--that we can do in conjunction with a pretty aggressive remodel plan going forward.

Actually one of--the reason I ask is I-- I wonder if you would put to rest the notion that may have arisen at least on my part that there might be some greater difficulty putting together the program for '07 than perhaps you had envisioned earlier?

Because at one point you were thinking about 125 stores, and right now you don't have it all put together.

Is it becoming a little bit more difficult?

No, I don't think it's more difficult because I think when it was going to be 125 stores, 2006 was going to be 75 and that turned out to be 85.

I think one of the things that I want to make sure everybody understands is the opportunity is to take advantage of real estate deals move around a little bit as evidenced by going from 75 to 85 last year.

And we're concentrated on the long- term, and whether that goes up five or down five is something that's going to be determined by how the real estate market responds in areas that we want to expand in.

There's going to be opportunities.

We have always had a combination of taking over other people's distressed real estate as well as building up from greenfield, and we're going to continue to do that.

So in terms of difficulty, no, we're not seeing any more difficulty than we have seen for the past three or four years, really.

Finally, just another clarification, I think that Penny's was really referring to retailers benefiting from general concentration in particular areas, and that all retailers benefit accordingly, and I think you would agree with that.

I think in some cases, yes.

Okay.

That could be said where you have got more people coming and you are creating a designation shopping area, yes.

All right.

Well good-- good fortune on the holiday season.

Thanks, Bernie.

Thanks, everybody.

Ladies and gentlemen, this concludes today's teleconference.

We appreciate your participation.

You may disconnect.