柯爾百貨 (KSS) 2006 Q4 法說會逐字稿

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

Please note that today's call is being recorded.

Information provided on this call, is related to the press release issued on March 1st, for the fourth quarter and year end 2006.

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

Such risks and uncertainties include those that are described in item 1A in Kohl's annual report on form 10-K, 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 the replay of this call will be available for 30 days, but this recording will not be updated so if you are listening to the call-- the recording after March 1st, it is possible that information discussed is no longer current.

At this time, I would like to turn the call over to Mr. 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'll start off with a review of our financial performance, turn it over to Kevin to talk about merchandising and marketing initiatives, Tom will talk about our expansion plans as well as the store experience, and Larry will wrap it up with some closing comments and our earnings guidance.

Let me first start with the P&L at sales.

As a reminder, fiscal 2006 consisted of 53 weeks resulting in a 14-week fiscal fourth quarter.

To provide a better measure of the Company's business trends the reported comparable sales results for quarter and year compare the period ended January 27th, 2007 to the period ended January 28th, 2006.

The impact of the 53rd week on total sales was approximately 200 million.

Sales for the fourth quarter were approximately 5.4 billion versus 4.7 billion last year, up 16.7%.

For the year, sales were approximately 15.5 billion versus 13.4 billion last year, up 16%.

In the fourth quarter, we achieved a 4.1% comp store sales increase.

The comp was the result of an increase of 2.9%, a number of transactions per store, and an increase in average transaction value of 1.2%.

For the year we achieved a comp increase of 5.9% with transactions per store increasing by 3.8%, while average transaction value improved by 2.1%

Every quarter throughout the year had increases in average unit retail, average transaction value, and transactions per store.

All regions delivered comp store sales increases for each quarter, including the fourth quarter and year.

The southwest region posted the strongest comp for the quarter and year.

From a line of business standpoint, all businesses achieved positive comps for each quarter including the fourth quarter.

All lines of business had at least mid-single-digit comp sales increases for the year, and men's lead the Company for the quarter and the year.

Our credit share for the year was 41.4%, an increase of 80 basis points over last year.

Each quarter had credit share increases over the previous year.

Turning to gross margin, we continued to see improvement in our gross margin rate, for the quarter 35.3 versus last year's 33.9.

Up approximately 140 base points, and 36.4 versus 35.5 for the year, up approximately 90 basis points.

As a reminder, the year to date gross margin included the effect of the $15 million related to the Company's initial recognition of gift card breakage revenue in the third quarter.

The improvement in the fourth quarter was due to the continued impact of our merchandise and inventory management initiatives, improved markup and the adoption of markdown optimization.

Our improvement in gross margin was really into overall improvement in markup, better receipt flow and improvement in inventory management across all store volume levels.

Increased penetration of private and exclusive national brands also helped our gross margin.

Private and exclusive national brands increased 450 basis points from 30% of our sales to 34.5% of our sales, primarily due to growth and the exclusive national brands.

Turning to SG&A.

SG&A increased approximately 19% for the quarter with approximately $1 billion in SG&A spending versus last year's 864 million, and 15% for the year, 3.4 billion versus last year's 3 billion.

Stores, credit, and distribution centers leveraged for the quarter and the year.

Expenses grew faster than sales in the fourth quarter primarily due to a shift in our mix of marketing investment towards more branding and direct mail.

In terms of depreciation, 104 million, versus last year's 91 million for the quarter, an increase of 14%. 388 million for the year versus 339 million, again, an increase of approximately 14%.

We would expect depreciation and amortization expense of approximately 465 to $470 million for fiscal 2007.

Turning to preopening expenses.

Fourth quarter 2.1 million versus last year' 1.5 million.

Year to date, approximately 50 million versus last year's 44 million.

The fourth quarter expenses include expensed related to the 17 stores opening during the 2007 spring season.

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

Approximately 1.5 million of that was incurred in the fourth quarter of fiscal 2005.

We would expect to incur about $10 million in preopening expense in the first quarter for the stores opening in spring 2007, and would again expect to spend approximately $580,000 per store in fiscal 2007.

In terms of operating income for the quarter, 788 million versus last year's 622, an increase of approximately 27%.

Our operating margin for the quarter was up approximately 110 basis points.

Year to date operating income was up approximately 28% over last year, a little over 1.8 billion.

Operating margin for the year also increased 110 basis points to 11.7%.

This is a new all-time high for Kohl's.

This puts us ahead of our goal of achieving a 12.5% operating margin by 2010.

Net interest expense of 10 million versus last year's approximately 19 million.

And year to date interest expense of approximately 40 million versus last year's 70 million.

The reduction in interest expense versus last year is the result of the interest income earned on investment of proceeds from the sales of our credit card receivables back in April.

We would expect interest expense for fiscal 2007 of approximately 40 to $45 million.

Provision for taxes.

Our income tax rate for the quarter was 37.7% this was due to the effect of interest earned on tax-free investments.

Our expected tax rate for 2007 is 37.8%.

Net income for the fourth quarter was 485 million, up approximately 29%.

And for the year, net income was 1.1 billion, up approximately 32%.

Our earnings per share for the fourth quarter of $1.48 is up 37% over last year's $1.08.

As a reminder, our most recent guidance was $1.36 to $1.42 per diluted share.

And earnings per share for the year is up 36% over last year at $3.31a share, versus last year's $2.43 a share.

During the fourth quarter, we purchased approximately 6.7 million shares of stock at an average price of $68.44.

Year to date we have repurchased 27.5 million shares at an average price of $59.23, and the total spending on the repurchase program is approximately $1.6 billion.

With that, let me turn it over to the balance sheet a little bit.

Square footage [or] growth we currently operate 817 stores versus 732 at this time last year.

Gross square footage this year 73,027 and selling square footage 62,357.

Both approximately increased between 10 and 11% over last year.

Investments, we had 431 million in investments primarily as a result of receivables, where I mentioned earlier, and the resulting increase in our free cash flow.

Inventory is approximately 2.6 billion versus last year's 2.2 billion, up 15.7%.

We continue to be pleased with inventory management initiatives.

Our inventory levels on a per-store basis are up approximately 3.6% to last year.

For the quarter, capital expenditures were approximately $178 million, and for the year, capital expenditures were approximately $1.15 billion.

Capital expenditures are expected to be approximately 1.6 billion in fiscal 2007.

The increase is due to opening 25 to 30 additional stores, more of which are owned, 24 additional remodels, and an investments in IT, such as the roll out of our new point of sales system and a new warehouse management system for e-commerce.

In addition we anticipate a more balanced store opening schedule for 2008 with 35 to 40% of the stores opening in spring 2008, resulting in more capital spending on those stores in 2007.

Our accounts payable balance of 934 million is up about 13% over last year's 830 million, and our AP as a percent of inventory met our expectations of being in the range of low to mid-30s.

For your modeling purpose, [the weighted average number of shares for the quarter, basic of 324454 dilutive of 327782, and for the year basic of 332323, and diluted 334771.] [sic]

And with that I'll turn it over to Kevin to talk about merchandising and marketing and our our positioning for 2007.

Thanks, Wes.

Let me start first and touch on sales looking forward.

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

The calendar shift due to last year's 53rd week will affect our monthly comps throughout the year.

Our expectations by month for the quarter would be for February to be similar to our quarter guidance.

With an Easter shift, you need to look at March and April together, March should be stronger than April.

As always, individual months are influenced by weather and patterns throughout the country, and as a reminder our comps last year by month were February 3.4, March 3.7, and April 13.4 with a quarter at 6.9.

On the merchandise initiatives update, we're obviously very excited about our new initiatives for the spring season and for the year, this is the largest number and by far the largest volume of new and expanded offerings the Company has ever launched.

We continue to implement our strategy of extending proven brands across the store with the launch of Tony Hawk in footwear this February, and Chaps in home in May.

Chaps will also have a larger footprint in missy for spring, and is being expanded to plus size as well.

As a reminder Chaps is already in men's, [nifty], accessories, jewelry, handbags, intimate, footwear and childrens.

We also rolled out Stamp 10, an exclusive brand by Liz Claiborne, to all stores in missy in February after testing it in 300 stores last year.

We have added Casa Christina in our home area which will launch in March in all stores.

Our recently announced partnership with Elle is an example of the progress we've made in our cycle time initiatives since last October.

Our historical development timeline was 10 months.

We have since brought many items three to four months.

Elle is a first brand where we will handle in its entirety on a three to four-month cycle, and we hope to use this as a model with our other exclusive national and private brands.

Elle will be in 300 stores at the end of April and will roll out to all stores by spring of next year.

In addition, our experience has been the new brands by Daisy, Apartment 9 and Chaps for Men, experienced major growth in their second year.

As a result we would expect to see the same as a result of brands introduced last spring, such as Chaps in missy, Tony Hawk and AB Studio.

As you know, the two most important initiatives for 2007 are our partnership with Vera Wang across the store, and the Food Network alliance in our home area.

I want to reinforce that the Vera Wang launch will be very widespread.

You'll see this exciting brand in sportswear, accessories, jewelry, footwear, intimate apparel, and soft home beginning in the third quarter.

The Food Network brand is focused on kitchen essentials and will be in cookware table top, food preparation and small electrics.

Our efforts with our exclusive brand strategy is to not simply focus on differentiation, but to add highly recognized national brands, meaningful to our customers.

Our New York design office will open this spring to help support this growth.

Brands like Chaps, Daisy, Tony Hawk, Elle, Vera Wang and Food Network bring with them high consumer awareness and acceptance, in addition to helping consumers recognize Kohl's differentiation in the marketplace.

These initiatives as a result will augment the collection of well-known and trusted national brands that we have been known for throughout the years.

On the inventory management front, we'll continue to concentrate on receipt flow resulting in better transitions and lower overall levels of clearance.

Our cycle time initiatives will also us to make decisions closer to need, which should also have a positive effect on clearance levels.

As Wes mentioned, we saw improved gross margins across all store volume levels, with great improvement in our lower-volume stores.

We believe we have continued opportunities in all volume levels in 2007.

Size optimization is affecting approximately 50% of our sized units and we have the ability to create a single optimized prepack today.

By fall of 2007, we'll have the ability to create multiple optimized prepacks for an item within an [arter].

We'll continue to work with our suppliers in this initiative, and are excited about the sales opportunity this will provide, as well as the improvement we should see in our in-stocks in conjunction with improved receipt flow.

Approximately 400 stores were on markdown optimization in the fourth quarter, and the remainder of the Company rolled out this February.

We saw significant improvement in our clearance average unit retail in the optimization stores in the fall.

We're currently optimizing at a market level, but we'll move to a new store level in fall 2007, a major enhancement, which should bring more improvement.

Our margin guidance for 2007 is for a 30 to 40 basis point improvement over last year.

However, as you remember, adoption of markdown optimization causes a slight deterioration in margin as permanent markdowns are taken earlier, so our guidance for the first quarter is for a 20 to 30 basis improvement in gross margin over last year.

Our guidance for the second quarter is for a 50 to 60 basis point improvement over last year.

Finally, on the marketing front.

Our focus in 2007 will be to continue our 'Only at Kohl's' theme not only concentrating on our private brands, but those nationally recognized brands found only at Kohl's.

In 2007 we'll continue to use both direct mail and broadcast to build traffic around all our major events.

And as Wes mentioned earlier, we'll continue to increase our investment in terms of dollars and share in branding across all of our forms of media.

We continue to reach out to the customer who may have shopped us more last year during the changes in the malls in many of our markets.

We believe we have developed a better relationship with that customer and will ensure she remains aware of the brands, value and convenience that Kohl's brings to her shopping experience.

We feel that there's an opportunity to increase our share wallet, not with only that customer, but all of our customers, but encouraging her to shop other areas of the store she may not be as familiar with.

One of our major marketing efforts in 2007 and beyond will be to expand share of wallet from new and existing customers through an effort we call 'Explore the Store'.

The majority of our current customer transactions contained purchased from only one of our six lines of business.

As we both improve and better balance our content offerings across each of those lines of business, and exploit our opportunities in our nine-box grid, we believe we have the potential for significant additional market share gain.

We know that the impact of very small changes and customer behavior through this effort has enormous impact on both the number of transactions, and the average transaction value.

We'll be talking more to you about this initiative throughout the year.

Now let me turn it over to Tom Kingsbury.

Thanks, Kevin.

Good afternoon.

I would like to talk about our full-year 2007 store expansion.

Total openings for 2007 will be 110 to 115 stores. 17 of the stores will open in the first quarter.

We'll open 93 to 98 stores in the fall.

We will continue to grow through both ground-up opportunities, and through acquisitions.

Our 2007 expansion has grown in every region, and we expect that to continue.

Now I would like to turn to the store experience.

We have received customer feedback about the innovation stores.

We're very happy with the feedback, as well as the sales performance in novation stores versus the non-innovation stores.

Clearly the customer is noticing the differences, and it is showing up on the top line.

As a reminder, all of our 2007 openings are innovation stores.

We will complete our 29 remodels in the first quarter, and we'll test different elements from the innovation prototype in these stores to further refine our remodel strategy.

We'll add strike points in Mens in all stores for Apartment 9 in Q1 and Chaps in Q2 to better depict merchandising by life-style similar to Misses.

We will support 2007 launches of Vera Wang, Food Network and Chaps in jewelry and home with enhanced fixtures and strike points in all stores.

You will see an intensification of graphics to encourage our customer to browse new areas of the store.

In addition we'll roll out way finding signs through all stores at third quarter to ease their navigation around the store.

An important area of opportunity for us to is to improve our productivity in what we call the center core area, including jewelry, accessories and intimate apparel.

We'll be testing innovative ideas in store design and [fixtures] in this area in a select number of stores this fall.

From an infrastructure standpoint, we will complete the rollout of our next generation POS to all stores by the third quarter.

Now, I'd like to turn it over to Larry for some concluding remarks.

Thanks, Tom.

As a company, we couldn't have performed like we did last year without having broad-based successes.

We had consistency in both comp store and total store sales growth across all lines of business, all region, each and every quarter.

We saw improvement in every major line on the P&L, and significantly increased our cash flow for the year while returning cash to our shareholders through our share repurchase program.

As Kevin and Tom shared with you, we have a tremendous amount of new initiatives going on to keep the momentum going this year.

The opportunity to continue to increase our share of wallet with our customers as well as introduce them to new areas of the stores is enormous.

As we continue to make progress in balancing our assortment by filling in the nine-box grid, we'll continue to attract new customers on top of our traditional customers.

With these initiatives we believe we can continue to achieve industry-leading comp store sales increases.

I'm more comfortable than ever with our real estate strategy.

We're working further ahead in our site selection, which will create a better balance of store openings scheduled between spring and fall in future years, as Wes mentioned.

We're obtaining high-quality sites that will allow us to continue to earn healthy returns on our investment.

We're very happy with the early results of both our remodeled and October new-store openings that involved innovation.

We'll be very aggressive in incorporating innovation in our new stores and future remodels.

I'm particularly proud of the fact that we achieved a new all-time high in industry leading operating margin of 11.7% last year.

We continue to invest in talent and technology.

We believe we can continue to increase this metric in the coming years and stay well ahead of our competition.

With that, let me share our guidance for fiscal 2007 and the first two quarters of the year.

For the year we would expect total sales increase of 9 to 11%, comp store sales increase of 2 to 4%, 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 $3.68 to $3.84 for the year.

For the first quarter we would expect total sales to increase 10 to 12%, comp store sales 2 to 4%, a gross margin increase of 20 to 30 basis points, and due to incremental expenses associated with our increased number of remodels we would expect SG&A to increase with sales for the quarter.

This would result in earnings per diluted share of $0.57 to $0.61 for the first quarter, or 19 to 27% increase over last year.

For the second quarter, we would expect total sales to increase 10 to 12%, comp store sales to increase 2 to 4%, a gross margin improvement of 50 to 60 basis points, SG&A leverage at less than 2% for the quarter.

This would result in earnings per diluted share of $0.81 to $0.85 for the second quarter, or a 17 to 23% increase over last year.

This guidance does not reflect any additional share repurchases for fiscal 2007.

With that, we'd be happy to take any questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll go first to Bob Buchanan with A.G. Edwards.

Yes, good afternoon, and congratulations on a marvelous quarter and a marvelous year.

Thanks, Bob.

Just first of all on the personnel front, if you could help us out understand that there was one departure in the home area, also understand that you have been hiring some folks there in New York to work with Vera Wang and on multiple other initiatives, if you could just update us there?

Sure.

It's Kevin, Bob.

On the-- in Milwaukee we named about two weeks ago a new Executive President for home and footwear his name is Rick Seeger.

Rick has been with the Company for about eight or nine months.

He came to us after very long and successful background with May Department Stores Company, and had very broad responsibility at that GMM level before.

Okay.

Secondly, we just promoted a new Executive Vice President of Marketing, our Chief Marketing Officer Julie Gardner, who has been with us for about seven years, and was very successful in helping us differentiate the marketing, and launch, obviously, a lot of the new initiatives and the 'Only at Kohl's' strategy.

And then we were successful in hiring the head of our New York design office, which we're very happy with, and that office is beginning to build out.

We have about half the staff hired with the remaining to be hired in the next month or so.

So we're well on target there.

Any name available on that New York person?

No, we really usually share just at the EVP level.

Okay.

Just, [seegars] how do you spell that.

S-E-E-G-E-R.

Okay.

Fine.

And then secondly and finally for me, the software that you will be using at the fulfillment center, I was just curious about that.

And then also just curious about the timing on the POS rollout that you mentioned earlier.

On the POS rollout we should be complete in the June, July time frame, well in time for back to school.

Okay.

And the software package for the warehouse management system.

Yes.

Implementation--

We don't really talk about the software vendors, so we'll be ready in time, certainly for back to school and holiday on the e-commerce initiative.

Okay.

And just one follow up, the multiple prepacks, Kevin, that you mentioned, what will that do for you besides what the single prepack that I presume that you have now on the size optimization program?

Yes, I mean ultimately what it was does, Bob, is with the differences that we talked about with you in site selling by region of the country.

It allows us within one distribution center to give the right size prepack to the individual store location.

So it just gives us more flexibility, ultimately.

Okay.

Thank you very much.

Yes.

We'll go next to Liz Dunn with Thomas Weisel Partners.

Hi, thank you.

First just a point of clarification, what-- what share count are you using for your 2007 guidance?

Because-- I mean, based on my model what you've done in 2006 there's a significant-- should be a significant pickup in 2007 just from flowing that through and averaging it.

Hold on a second.

I can get you that.

The average we would use for the year is 325.5.

Okay.

You mentioned that you are ahead of your guidance in terms of your margin target, but it doesn't seem like we're really expecting margin to advance very much in 2007.

I mean, is there something other than the gift card breakage that we might be sort of missing or maybe we should factor in this going to pressure margins?

I think mostly you are missing the 53rd week, that I can tell just from the sales models for the fourth quarter.

I mean our tendency has been to be conservative with our guidance.

We certainly would hope to do better than what we have, and we'll update you with a new five-year plan at our analysts meeting later this fall.

Okay.

And then my final question.

Given that you are saying 2 to 4% for the first quarter and we should expect February in line with that, is that just the plan?

Or are you saying that's where you are running?

Given that we're almost finished with the month at this point.

We don't release February sales until next Thursday, Liz, but the guidance for February, essentially is the same it's for the quarter.

And that's what expect to achieve in the quarter and in February.

Okay.

Thank you.

We'll take our next question from Jeff Klinefelter with Piper Jaffray.

Yes, congratulations everyone on a great year.

Couple of quick questions, Kevin, back on your discussion of the average customer buying-- or the majority, more than 50% of your customers buying from one of six business lines within our store.

Could you comment a little bit more about the No. 1 space that your customers tend to shop and then maybe also the least common place that they tend to shop, and give us a perspective on what the key opportunities are across those six business units?

And also in terms of the spring selling trends, while it's early, some people had been concerned about weather trends across the country and storms, [inaudible] some early reads on the same product.

Anything you want to share with us, in terms of what you are excited about in key categories and what opportunities you have for new spring product?

Yes.

One in the time on the average transaction conversation, I think what we're trying to say there, is that as we look at our transactions, most, and you are right, more than 50% of the transactions that occur, happen with purchases out of only one of the six areas of business.

Naturally the biggest business in the store is women's apparel, so the largest of those would be women's apparel.

As we look at the opportunity, now that we feel we have got our merchandise content moving in the right direction, Tom talked about our store experience moving in the right direction, and our marketing focused around those Only in Kohl's brands that are very widely across the store, we know if we communicate that better to customers we have got chances to move them in to those other areas, and it only takes very small changes in that regard to have a big impact on comp store sales.

So we think it's a big idea.

We're going to share more details on that as we go in to the year.

I think it will be more obvious to everybody.

But it's a very exciting idea from our perspective.

On the spring season our guidance, as I said for the quarter is 2 to 4, and our guidance for February is 2 to 4.

I think we faced probably similar things to other retailers.

Definitely been bad weather in places across the country, and calendar shifts and everything else, but we're comfortable and confident of achieving the February number I gave you.

Any call-outs at all, Kevin, in terms of key catagory opportunities that you see for the first quarter?

No, I think we're still focused in the same areas.

Tom, alluded to the fact that we're going to be making investments and improving our presentation in the center core.

That's definitely an area in which we think we have got a lot of opportunity to grow, both as we move customers out of the transactions in women's apparel and convince her to buy also in accessories and also as we've improved our content and now our presentation.

Okay.

And just one other quick question for Larry in terms of your real estate strategy and Wes's comments, about '08 being more balanced toward [inaudible] spring end of the year, any block acquisitions that is pushing that higher now for this upcoming-- or a year from this spring season and any particular market that will be a focus?

Yes, we're expanding across the country.

We're filling in in every major metro area, as we've done all along.

There's no big block purchase of anything.

We've very opportunistic, when we see an opportunity to take an existing building and fill in a particular trade area.

We're just working a lot further out, and we're able to balance it easier between first half and second half.

Thanks, everyone.

Good luck.

Thanks, Jeff.

We'll take our next question from David Cumberland with Robert W. Baird.

Good afternoon and congratulations.

Based on the SG&A discussion, it sounded like advertising may have increased as a percentage of sales.

Was that the case, and if so by how much?

It's Kevin, David.

No what happened in marketing is we made-- I think a strategic decision to shift more of our investment in dollars into branding advertising.

So things just support the whole store.

And in doing that, a chunk of our cooperative advertising that we have in partnership with suppliers moved to support gross margin and-- instead of offsetting SG&A and advertising.

So it was really a shift in the way we spent our money, but we think it was a shift that was very strategic and long-term in thinking, because it's about supporting the future of the store and the future of the business.

That makes sense.

Is there a way to quantify the impact of that, roughly.

Just to say that had we not done that we would have leveraged on SG&A.

That's the way I would put it to you.

That helps, and one other question on inventory, what was the level of clearance per store or the change in clearance per store at the end of the quarter?

We don't provide levels in units by store location or averages.

All I can tell you is-- as Wes mentioned, our inventory was up very low single digits, and our clearance inventory was less than that.

Thank you.

We'll take our next question come from Debra Weinswig with Citigroup.

Good evening and congratulations on a great quarter.

Can you provide a little bit more color on the gross margin improvement in the quarter?

I'm not sure if you can give us specific basis points or just help up with a breakdown in regards to privately [inaudible] markdown optimization, et cetera.

It's Kevin.

No, we wouldn't go-- I don't think we ever have, Debra, provided incremental number of points as it relates to each of the initiative, but honestly every single one, I think Wes mentioned improved markup and clearly that was a critical factor.

The increase in our private and exclusive brand-- national brand strategy was naturally a big factor, and the technology impact of size optimization, markdown optimization, and our receipt strategy, [inaudible], all were big factors as were our overall management of inventory, if you think about each of the quarterly calls, we were constantly focused on flat to little less or little above last year's levels.

Each of those, I would say pretty closely, had equal kind of weight against the margin.

Would you say the technology impact is different, ie better than you expected?

I think we're pleased with the impact of both size and markdown optimization.

It's hard to say if it was, quote, better than expected.

I think we had really high hopes for it.

But I guess the way I would leave with you on the margin is, what makes us most optimistic, I think Larry kind of summed it up in the recap is, the broad base of contributions, so it's the fact that we got the margin from like six different places.

As a result I think that makes us think it is long lasting rather than from just one thing.

With regard to the 50% of your sized products, [inaudible] optimization, can you talk about differences you seeing in either rate of sales or markdowns on those items?

[I already] answered no, we wouldn't go in to detail on what kind of lift we got--

Just more broadly, maybe?

Yes, we definitely are seeing a lift.

I would emphasize to you, particularly as it relates to the new part that we're rolling out on multiple optimization prepacks, because I think that's kind of the important enhancement.

That's really the big win.

Yes.

That takes place in fall of this year, and I think you know, that receipts impact sales later, so it's going to flow into our sales.

It's not like somebody turned on a spigot, and when we implement multiple optimized prepacks then next month our sales get better, it happens over a period of time.

But I do thing we all believe that's a big enhancement.

Okay.

Last question for you, Kevin, actually is that you mentioned that Vera Wang will be a very wide-spread rollout this fall.

Can you compare it to other brand rollouts so we can envision what to expect?

It's the largest in terms of its scope.

Obviously, Chaps was a major launch, but we did it in men's one year, women's another year, this is the largest in terms of the breadth and the scope of the launch.

Should we expect the marketing to be different as a result?

We're definitely going to approach it from a new brand that customers are going to see across the whole store.

So it kind of ties in to that comment we made about trying to broaden our share of wallet by communicating all of the offering we have in the whole store.

We're going to be very aggressive about it as a result.

Thanks and best of luck in '07.

Thanks, Deb.

We'll take our next question from Bob Drbul with Lehman Brothers.

Hi, good afternoon.

The question I have is around the 115-- 100 to 115 stores.

Can you talk a little bit how many were your new sites versus acquisition sites?

And about the square footage expected-- how many small stores how many large stores?

Can you elaborate a little bit more?

I think that almost all-- those lion shares of the stores there are ground-up stores, and I think, I think there's 25 small stores. 29 small stores.

Okay.

And then, Wes, when you look at '07, and when you ended '06 can you talk about the potential for free cash flow and what your expectations might be.

For free cash flow for '07, I would expect us to be modestly positive, with the increase in CapEx I mentioned, I wouldn't expect it to be as much as this year, but I still would expect it to be modestly positive.

Okay.

Great.

Thank you very much.

We'll take our next question from Christine Augustine with Bear Stearns.

Thank you.

For the shift into the gross margin of the co-op ad dollars, and the shift of those dollars out of SG&A, what was the basis point impact?

Well, you guys know what we didn't leverage by, and so if we would have leveraged with it that would be the basis entry point, point of impact.

The difference.

Like 30 basis points is what we're saying.

So do you anticipate that being more of the split going forward?

In other words will you continue to allocate those dollars to gross margin support out of SG&A?

It's Kevin.

You know, I think-- the honest answer on that is-- Christine is that we're going to make the decision on a basis of what we think will get us the best overall results, and so we'll make those strategically over the course of the year.

There isn't any right answer on that.

I think we just felt that we have so many great new initiatives.

We have a great way to communicate them, and we tried to utilize that to our advantage.

It would be highly unlikely that we would share the details of our mix in something like this.

That's something we think is a strategic nature, and we would probably just keep it to ourselves as to what we are going to do, and explain it if we had to if there were significant shifts like there were in this quarter.

Overall what is your expectation for the economy in '07?

How do you think your core consumer will fair?

I think we look at it like-- from a market share perspective.

Because we think that we have all of the ammunition necessary to satisfy the customer's needs better than anybody else.

I don't think that people are going to be spending more on moderate priced apparel out there at Kohl's like merchandise, but we're going to have the best chance to capture market share.

So if the economy is tough, I think we're going to fair better than everybody else because of that.

And do you think that there's still opportunity-- is the market share as you see it coming from just the continued tail wind of consolidation, or do you see picking up some share from-- maybe the specialty sector?

I think-- this is Larry.

I think that our overall strategy is to take market share from a broad base of retailers out there, and I don't think that-- we had very small impact on our sales from any consolidation that has happened in the industry over the past year.

So, just because of our initiatives, merchandise content, marketing and the store experience that we're taking market share.

And just finally, when you think about your mix between national brands, private brands, exclusives.

Do you foresee over the next few years, getting to maybe sort of 50/50.

Could it be even greater in terms of the private plus exclusive piece?

We haven't put a number on it, honestly, Christine.

It's Kevin, and the truth is on that, the customer is going to vote on that, she'll dictate to us what the right ratio should be.

Obviously, in '07 with the number that I talked about in new initiatives, it's going to go up, but she's tell us what the right balance is.

Thank you.

And we have a question from John Rouleau with Wachovia Securities.

Hi, Kevin, just kind of keeping along those-- that last question there, certainly the initiatives this year are-- seem like they are as many if not more as what you did last year, so, I mean, could we see a similar type of basis point move or shift in the private and exclusive brand?

I know you're not talking about anything longer term, but how do you look at it this year versus last year?

Honestly, I'm not trying to be a smartalick on that, but the customer will decide what the right penetration is, John.

Sure.

It definitely will go up, just as I listed for you, Food Network and Elle and of course, by far the biggest one Vera Wang.

Those are huge brands that are all being implemented this year and we're expanding others.

So it's going up.

It will reach the level that the customer tells us was the right level.

She always ends up voting.

Plus you've got year two of a couple of big initiatives last year too that should really, kind of --

We definitely did.

We just anniversaried the launch of our Chaps women initiative and very successfully this month, in February actually.

Switching gears a little bit.

Wondering if you could just touch on the relative performance of the smaller stores, and whether that potentially opens up from a real estate standpoint?

The opportunity to open up a few smaller stores or does that change your strategy in the small-store market at all?

Performance on the smaller store, what is our point of view on it.

We're pleased with the performance of the smaller store.

That's why we are going to roll out 29 more of them this year.

We're pleased with it and we're pleased with the innovation stores that we rolled out last fall.

Our new store program, we're pretty excited about.

In terms of return on investment it's very similar to the prototype stores this year, so.

That's what I was getting at four-wall contribution and return on investment.

It's very similar.

Obviously, the dollars are less with it being small, it's even got 11 million in year one versus the 14 or so that a proto would do in year one, so.

Okay.

Last.

In the past you've commented, occasionally on the conference calls about our ability to attract some new customers, maybe some data that you have gotten on the credit card side?

Any update there?

Any special mailings or targeting that you're doing through Chase, or any commentary on the ability to attract-- continue to attract that new customer?

We definitely mentioned, I think Wes mentioned too, that we raised the investment in both direct mail and branding, and the direct mail increase was focused on attracting new customers with a lot of the new initiatives, so.

And I think you also mentioned that our credit share increased as well, and we opened up a significant number of new credit card holders.

Yes, the only other thing I would throw in there, with Kevin's comments is, our non-credit card holder comp, which is what I consider a good metric for brand new customers that we're getting in o the store, that will eventually convert to Kohl's card holders, that metric was also positive each and every quarter.

So, the news is good on that front as well.

Great.

Keep it up, thanks, guys.

Thanks.

We're take our next question from Charles Grom with JPMorgan.

I look at the Vera Wang offering later this year, which lines or projects in the store today will be replaced?

And wondering if there's going to be any markdown pressure along the way as this transpires?

The Vera Wang launch is integrated into the overall strategy, so it's built into those guidelines we gave you for gross margin for both the year and first and second quarter, it's all built into that.

And from an editing standpoint, obviously, that brand is going to be very important, and there's editing that's been done.

There isn't any specific brand that's been completely eliminated from our assortment, but we have adjusted offerings in a number of different brands to make room.

Obviously, we have a floor that's only X big, so you can't stretch it, there's some other things went away to make room for Vera Wang.

That's helpful.

Second question.

Clearly, better you are at helping your comp and the merchandise margin line, can you quantify your average ticket today?

How this compares to last year?

And really how high you think it can go over the next year or so?

We quantified the increase in the call.

For the year we were up about 2.1% for the quarter up about 1.2.

AUR is up a little higher than that.

Units were slightly down, a lot due to our continued inventory management methodologies.

But the average transaction value is probably in-- depending on the form of tenders, somewhere between 50 and $65, whether it's a bank cord or a Kohl's credit card on the high end, and all of those forms of tenders had some form of increase this year.

Thanks, Wes.

We have a question from Adrian Shapira with Goldman Sachs.

Thank you.

Just following up on the comments you'd made about the credit card penetration, I think you had mentioned it is up 80 basis points.

Is that a function of working closely with the Chase relationship?

Is that starting to bear some fruit?

Where are we in that relationship?

Well, I think it's certainly-- they have been a good partner.

As luck can be, our credit share has gone up every year that I have been here, and probably many years before that, so, as you guys remember we are the ones that are servicing the portfolio in partnership with Chase and also are the ones that kind are controlling the marketing.

Where they have really, I think have helped us quite a bit, has been on the prospecting side of trying to target customers that were not traditional core customers, as we like to say, on either end of those spectrum of those new customers we're trying to track.

I think that's been very helpful as well as entry into new markets.

Thanks.

On the innovation prototype you had mentioned, Larry, that the customers are responding well.

What percent of your stores do you expect to be in the new prototype the end of '07?

And how do you expect that to rollout, any targets in terms of what percentage of stores?

And any thoughts of perhaps accelerating the pace of remodels, given the strong reception to that prototype?

All of the new stores for 2007 will be innovation.

And we got 29 remodels going in the first half of the year, and we're testing different innovation elements in those stores to find out from a remodel perspective what really works best.

And then as soon as we do, we're going to be using innovation as aggressively as we possibly can.

One of the things that Tom mentioned is we're going in and looking at innovation in the center core and in juniors, which we'll show you when we get together for our third quarter investor conference, and that's really sort of the final piece of innovation that will be incorporated in all of the stores for 2008.

So we're very pleased with the results.

I can tell you that.

Okay.

Thanks.

And then for Kevin, just, can you give us an update on the classic performance?

Obviously we're hearing great things about Chaps, but in light of the repositioning effort that JC Penny went through and the LIZ and co-brand, any thoughts there and opportunities to perhaps revamp some of the lines in the classic offering?

We're going to continue to revamp lines in all of the life-styles.

The 6% comp we had, Adrian, we had comp increases in all three life-style segments, classic, updated and contemporary.

Naturally, contemporary had the biggest percent increase.

Updated had the biggest dollar increase but classic had a solid positive comp increase as well.

Thank you.

We'll take our next question from Stacy Turnof with Merrill Lynch.

Good evening.

Could you give us more color on depreciation?

It looks like it has gone up a bit more than what we were looking for.

After looking at some of your guidance, now, I doubt very seriously if any of you guys had 1.6 billion in our CapEx spending, but I think if you adjust your models for what I would consider the increase in CapEx spending, it would help there.

I also think you'll find our CapEx is more back-end weighted with the, obviously, opening 93 to 98 stores in the third quarter versus last year's 68, it's going to be a big increase in the third quarter.

And we also are rolling out that POS system to all of the stores by the end of the second quarter, so that will be in the quarter as well.

And if you recall, back-- in this year's third quarter we had some assets fall out so the depreciation actually went down from the-- in the third quarter from the second quarter.

That will not occur again.

Great.

That's very helpful.

Could you tell us how many stores you guys are planning to close this year?

I know we have got the number of openings.

We're not planned to close any.

Nothing.

Okay.

So that's a total net number?

Yes.

Anything that we would relocate, anything we open and close a store would be a relocation but not a closure.

Right.

My final question is, could you give us an update on how the junior's business is doing for you guys?

Juniors had a solid performance.

I think if you look at it in the context of overall women's, the missy business and special sizes were better for the year and for the quarter.

Great.

Thank you.

And we'll take our final question today from Dan Binder with Buckingham Research.

Hi, Dan Binder, nobody gets it right. [laughter] Anyway, could you give us a sense of what the extra week-- what kind of impact that may have had on gross margin SG&A and what the, I guess you quantify it as the EPS impact, I think you were originally saying $0.06, but with the upside--

I think that's probably a fair characterization.

I guess what I would do is take the $200 million and run it really through at our quarterly operating margin rate, that would give you a pretty good estimate.

We, obviously, have less SG&A because nobody here gets paid extra, that extra week we work for free, and then the gross margins a little bit lower during that clearance period.

So, but that's just a fair estimate, I think.

Okay.

Any quantification on what the gross margin and SG&A might have looked like without the extra week?

No, I don't want to get in to any kind of pro forma, I think what I just told you is good enough to recalibrate your base for building next year's model.

Okay.

Great.

Thanks.

Okay.

Thanks a lot, everybody.

That does conclude's today's conference call.

We appreciate your participation.

You may disconnect at this time.