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Operator
Good day, everyone, and welcome to today's Kohl's third quarter 2007 earnings release.
Please note that today's call is being recorded.
Information provided on this call is related to the press release issued on November 15, for the third quarter fiscal month.
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 replays of this call will be available for 30 days, but this recording will not be updated, so if you are listening after November 15, it is possible that the information discussed is no longer current.
At this time I would like to turn the conference over to Mr.
Wes McDonald.
Please go ahead.
Wes McDonald - CFO
Thank you.
With me today is Larry Montgomery, Chairman and CEO; and Kevin Mansell, President.
I am going to talk a little bit about our financial performance for the quarter and year-to-date periods, then Kevin will go over our merchandise and marketing initiatives, and Larry will wrap up with our store expansion plans, and then some closing comments along with earnings guidance for the fourth quarter.
Sales for the third quarter were approximately $3.8 billion versus $3.7 billion last year, up 4.8%.
Year-to-date sales were approximately $11 billion versus $10.1 billion last year, up 8.3%.
Total sales for the prior year periods include $15 million related to the initial recognition of gift card breakage revenue.
Excluding this item total store sales increased 5.2% for the quarter and 8.4% for the year-to-date period.
In the third quarter comp sales decreased 2.6%.
The comp reflects decreases in average transaction value of 1.8% and in transactions per store of 0.8%.
Our year-to-date comp has increased 0.7% which was a result of an increase in average transaction value of 1.4% and a decrease in transactions per store of 0.7%.
Comparable store sales figures were unaffected by the gift card breakage revenue.
The southwest led the Company for both the quarter and year-to-date periods, and from a line of business perspective, accessories led the Company for the quarter and men's for the year-to-date period.
Our credit share was approximately 45.3% in the quarter and 43.2% in the year-to-date period.
This reflects an increase of approximately 170 basis points over the prior year quarter and 155 basis points over the prior year-to-date period.
Moving on to gross margin, our gross margin rate for the quarter was 37.1%, up approximately 10 basis from last year.
Year-to-date our gross margin rate increased 70 basis points to 37.6.
Excluding the $15 million gift card breakage revenue in 2006, gross margin increased 32 basis points for the quarter and 77 basis points for the year-to-date period.
The improvements were due to the continued impact of our merchandising inventory management initiatives, improved markup, the adoption of markdown optimization and increased penetration of both private and exclusive national brands.
For the fourth quarter we expect our gross margin rate to be flat to last year.
On the SG&A line, SG&A increased approximately 9% for the quarter, faster than sales but lower than our expectations of up 12 to 13% over last year.
Credit and corporate expenses leveraged for the quarter.
Stores, advertising and distribution center expenses did not leverage for the quarter due to lower than planned sales, our desire to maintain a positive customer in-store experience, and incremental marketing suspensions associated with the launch of new brand initiatives as well as our strategy to shift more marketing for new stores to the post trend opening period.
Our depreciation expense for the quarter, was $115.2 million versus $94.3 million last year, an increase of approximately 22%.
We expect our fourth quarter depreciation expense to be approximately $125 million.
For the quarter preopening expenses were $38.3 million this year versus $28.5 million last year.
Current year expenses were higher than prior year as we opened more stores in 2007 in the third quarter than in 2006 with 95 opening versus 68.
Our expectations for preopening expenses for the fourth quarter are approximately $8 million.
Operating income for the quarter declined from $369.4 million to $330.9 million for the current year.
Year-to-date operating income was up 9.1% over last year and operating margin is up approximately 10 basis points.
Net interest expense increased to $18.7 million for the quarter compared to $10.2 million in the prior year.
Year-to-date net interest expense was $39.4 million compared to $30.4 million last year.
Our expectation for interest expense in the fourth quarter is approximately $28 million.
Our income tax rate for the quarter was 37.85%, and we expect our tax rate to be 38% for the fourth quarter.
Net income for the third quarter was $194 million compared to $224.5 million last year, and year-to-date net income was $672.2 million, up 7.7%.
EPS for the quarter was $0.61 compared to $0.68 last year, and year-to-date EPS is $2.09, up 13%.
Moving onto the balance sheet, we currently operate 914 stores compared to 814 stores at this time last year.
Square footage for your models at the end of the quarter was gross square footage 81,224, and selling square footage of 68,833, both up approximately 11%.
Moving to investments we currently have about $26 million in investments compared to $319 million last year.
The decrease is the net result of stock repurchases and investment of $1 billion in new debt proceeds in 2007 and our $1.6 million of credit card sale proceeds last year.
Our inventories at the end of the quarter, $3.9 billion versus last year's $3.2 billion.
On an average store basis we're up 7.6% to last year, slightly higher than our original guidance of an increase of mid-single-digits per store.
Fixed assets year-to-date capital expenditures were approximately $1.3 billion, and we continue to expect capital expenditures of approximately $1.6 billion in fiscal 2007.
Moving onto accounts payable of $1.7 billion versus last year's $1.6 billion, as a percent of inventory 43.7 versus our guidance of high 40s.
This reflects a reduction in receipts as a result of lower than expected sales, and we will continue this conservatism into the fourth quarter.
Weighted average number of shares, basic for the quarter 316.9 million, year-to-date 319.7 million, diluted 318.6 million, and year-to-date 322.4 million.
As part of the $2.5 billion share repurchase plan we announced in September during the quarter we repurchased 4.2 million shares of our stock at an average price of $56.50 per share for a total of $238 million.
With that I'll turn it over to Kevin to talk about merchandising, marketing, and inventory management.
Kevin Mansell - President
Thanks, Wes.
Let me start with sales.
As Wes mentioned, comparable sales decreased 2.6% for the quarter.
Sales in weather sensitive businesses such as outerwear, fleece, and sweaters experienced significant double-digit declines on a comparable store basis contributing to our sales shortfall.
Accessories led the Company for the quarter with strong performance in beauty, watches, and fine jewelry.
Better performers in home, included home decor, bedding, and food prep.
Men's and footwear outperformed the Company on solid performance in men's casual sportswear and in women's shoes.
In women's apparel the updated and contemporary business which includes Simply Vera Vera Wang and Juniors related separates reported strong comps, consistent with prior quarters, classic sportswear continues to trend downward in brands other than Chaps.
Children's was the one line of business most affected by the weather with weak comps in all age groups in the quarter.
Given the run rate of the business in the third quarter, and being conservative in our view, we would expect the following for the fourth quarter--comparable store sales in the range of flat to negative 2% for the fourth quarter in total.
Our expectation by month would be for November to be positive, high single-digits, December negative mid-to high single-digits, and January to be comparable to the overall quarterly comp.
As we look at our performance in the quarter in spite of the difficult overall business, we were extremely pleased with the performance of our two newest exclusive brands, Simply Vera Vera Wang and Food Network.
The response to the initial launch of Simply Vera Vera Wang in September was overwhelming, particularly in apparel and in handbags.
All of the other categories performed very well at or well above our planned levels.
Food Network was launched two weeks after Vera Wang in September.
Food Network is positioned across a broad range of product categories including cookware, dinnerware, gadgets, and cutlery, and we were also very happy with the performance of that brand versus our plans as well.
In addition, the performance of both our jewelry business and our beauty business continued to stand out against our overall business trend.
As you know, these are two businesses that we are focused on driving long-term growth with continued changes and improvements in our assortments.
There were also a number of additions to our intimate apparel area in the third quarter.
We launched Moments, a private brand in intimates in 200 stores in October with an all-store rollout planned for 2008.
In addition, there are two exclusive brands to target our more updated and contemporary customer in the intimate area with Daisy Fuentes and Simply Vera Vera Wang.
All three of these new brands are performing very well at this point.
The customer continues to respond well to all of our private and exclusive brand initiatives, and their penetration reached almost 39% of total sales for the quarter, up over 300 basis points over last year.
As Wes indicated, this continues to be a driver of merchandise margin improvement.
Finally, earlier this week we announced the multi-year licensing agreement naming Kohl's as the exclusive U.S.
retailer of the Fila Sport collection.
The collection will feature women's, men's, and children's apparel, footwear, and accessories.
It will be available in all of our stores nationwide and on Kohl's.com in fall 2008.
We think it is another strong world class brand addition in an area active footwear and apparel which is one of our strongest growth businesses and a broad-based area of growth industry wide.
Moving on to inventory management, as Wes indicated, we finished the quarter slightly over our inventory guidance of mid-single-digits with 7.6% more inventory per average store.
However, if adjusted for the calendar shift, our inventory levels on a per-store basis were only up 2% per store compared to the actual date last year.
In addition, we were very conservative in our planning of seasonal categories such as outerwear, sweaters, fleece and cold weather accessories for the fall and are essentially flat to last year in these businesses.
Overall I am very comfortable with our levels, and with the continued focus on receipt flow, we will move through it quickly.
Looking forward, 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.
We've adjusted fourth quarter receipts as necessary to reflect our more cautious sales guidance for the quarter and as I indicated continue to look to improve our inventory effectiveness.
As Wes mentioned earlier, we expect gross margin to be flat to last year as we expect a very promotional holiday season.
Finally, on marketing, we continue to be focused on adjustments to our marketing to reflect those things we're seeing the greatest productivity around.
These include an increase in direct mail, particularly to our credit card file, broadcast, and the Internet.
We have seen and expect to continue to see an increase in the overall promotional environment and given our value strategy, have adjusted our promotional plans accordingly.
All of this has been included in the guidance that I gave from a merchandise margin standpoint and that Larry will be giving from an earnings standpoint.
We feel that more than ever there is a clear market share opportunity for gaining additional share of wallet from both new and existing customers.
However, we intend to focus our efforts in that regard around those businesses and events that customers are responding to to the greatest degree.
Let me turn it over to Larry to wrap up.
Larry Montgomery - Chairman, CEO
Thanks, Kev.
Quick update on new stores.
We have now opened 112 stores for 2007.
There was seven in March, ten in April, 80 in fiscal October, and 15 this past week in November, and we now operate 929 stores.
We expect to open approximately 90 stores in 2008 including approximately 28 which will open in the spring season split between March and April.
A majority of the stores opened in 2008 will be our 88,000 square foot prototype with approximately 20% of the total being our smaller 68,000 square foot prototype.
A few comments on the third quarter before I get into the fourth quarter guidance.
Despite a challenging environment, we continue to operate our business in a conservative manner managing inventory investment as we continued our improvement in gross margin while reducing expenses where possible without hurting the customers' in-store experience.
We remain focused on our four initiatives, merchandise content, inventory investment, marketing, and the in-store experience and believe that we continue to make progress in all four areas knowing that the customer continually raises her expectations.
As we've said in the past, we're managing the Company on a time horizon longer than one month or one quarter, and we'll continue to make the necessary investments in people, infrastructure, and stores to achieve our long range plans.
We are well-positioned in our industry with our reputation for great value and our ability to drive business and take market share.
Fourth quarter earnings.
For the fourth quarter we would expect a comparable store sales performance of flat to negative 2%.
That means total sales increase of 3 to 5%, a flat gross margin and SG&A growth of approximately 5%.
This would result in earnings per diluted share of $1.45 to $1.51 for the fourth quarter, earnings per share for fiscal 2007 would be in the range of $3.52 to $3.58, an increase of 6 to 8% over last year.
With that, we would be happy to take some questions.
Operator
Thank you.
(OPERATOR INSTRUCTIONS) We'll take our first question from Dana Cohen with Banc of America Securities.
Dana Cohen - Analyst
Hi, guys.
Can you help us understand cadence of gross margin over the quarter because if I think back to the guidance you gave at the end of September where you were okay with the guidance, your previous guidance, you were looking for significant gross margin improvement, and then came in with the 10 basis points, so it would imply that October was pretty tough, so help us understand that relative to the flat gross margin expectation for the fourth quarter?
Larry Montgomery - Chairman, CEO
Go ahead, Wes.
Wes McDonald - CFO
Our previous guidance for the third quarter was up 10 to 20 basis points, so we did come in at the low end of our guidance, and as I mentioned in the call, taking out that $15 million we were actually out 36 basis points last year, so not as dramatic of improvement versus our trend in the spring, but also remember we started to put stores last year on markdown optimization in the third quarter and we had about half the chain on markdown optimization, that benefited us a little bit last year.
Dana Cohen - Analyst
Well, maybe go at it another way.
We've all seen the commercials with door busters, take another 10% off was something you were running last night.
Should we think that those type of events are now included in the plan?
Wes McDonald - CFO
That's what I think we tried to say on the call.
Our previous guidance for gross margin, if you remember, was up 30 to 40 basis points, so being flat is going to leave us a lot of room to be very sharp in terms of our value message for the fourth quarter.
Dana Cohen - Analyst
Great.
Thanks so much.
Operator
We'll take our next question from Christine Augustine with Bernstein.
Christine Augustine - Analyst
Hi, everybody.
Could you update us on markdown and size optimization initiatives and how much do you think that might have helped you in the quarter?
Kevin Mansell - President
This is Kevin.
Both markdown optimization, size optimization continue to be rolled out.
We, in the third quarter, enhanced markdown optimization by taking it down to store level and continued to improve the percent of our inventory on size optimization.
I would say on the markdown optimization front it was an element of margin, but as we prioritize them, I think we always talk to you about prioritizing them by saying it is our overall level of inventory management, mix, and then prime markdown optimization comes in underneath both of those.
The size optimization piece, Christine, we're focused on more as a sales top line revenue enhancer, not so much as a margin enhancement in the quarter.
Christine Augustine - Analyst
Then, Kevin, I am wondering what you're seeing with regard to the classic traditional women's business.
It does seem to be a problem across channels of distribution.
As you look into '08 and you're kind of placing the forward receipts, do you think there is going to be any break?
When do you think things might start to turn there or what can you do in the meantime to try to offset the weakness?
Kevin Mansell - President
I think the main thing we're doing to be honest with you is trying to give the customer what they want.
They appear to want more updated and more contemporary offerings, so we, as you know we layered on some pretty significant new ones in that regard, and we're rolling out Elle as another new enhanced brand, and as we go into '08.
Not everything in classic is disappointing.
Chaps has continued to perform well.
I think we've got the right style and fashion, with a good value equation.
We've been successful.
So to me that means we need to find some new ideas to introduce, and that's something we're focused on very much on for 2008.
Christine Augustine - Analyst
Thank you.
Operator
We'll take our next question from Adrianne Shapira with Goldman Sachs.
Adrianne Shapira - Analyst
Thanks.
We've seen traffic be negative for a few quarters this year, but it looks like ticket this is the first quarter that it turned negative.
Perhaps give us a sense what's going on there.
I know that the shift is moving more into better and best has obviously been driving ticket.
Can you just talk about those categories you're seeing softness there as well?
Wes McDonald - CFO
Well, obviously something that affected the ticket for this quarter was the weather with not selling a whole heck of a lot of outerwear, long bottoms, or sweaters, those tend to be higher retail than our normal retail, so we definitely saw a big shift in mix in both September and particularly in October.
Adrianne Shapira - Analyst
And then any sense in terms of again the shift towards more into better and best, if you can talk about the health of people's spending in those categories?
Kevin Mansell - President
Better and best both improved as a percent of our total business as did updated contemporary as well.
I think the primary driver of a lower, average transaction value in the quarter definitely Wes nailed it.
It was the mix of what we were selling, and the impact of those cold weather categories definitely hurt the overall transaction it hurt the average unit retail.
If you look at the individual components, we saw lift into better and best.
Adrianne Shapira - Analyst
Okay.
That's helpful.
Then just as we think about '08 as we're moving into clearly a tougher sales environment, just give us a sense at what point, what are you working on in terms of the expense structure to perhaps lower or at what point can you start levering expenses?
Are you working at bringing that number down?
Wes McDonald - CFO
Well, if you do the math on the fourth quarter, our expectations would be to leverage at around a flat comp for the fourth quarter.
We are currently working on our spring 2008 budgets, and we'll wrap them up in the next few weeks.
We are attempting to try to leverage at lower than our historical comp and working very closely with advertising in stores which are the two primary consumers of our expense dollars on try to leverage on a comp that's historically lower than they have been.
Adrianne Shapira - Analyst
Great.
Thank you.
Operator
We'll take our next question from Michelle Tan with UBS.
Michelle Tan - Analyst
I was wondering, I remember back in fourth quarter you guys had had some shift with reclassifying some of the vendor and ad support, helping gross margin, and hurting SG&A.
Is that a factor at all in the quarter?
Wes McDonald - CFO
No.
That was I think back in 2005 if I remember.
That was that fabulous EITF 02-16, but that shouldn't really affect our fourth quarter margin.
I mean, as I mentioned earlier, we're giving ourselves a lot of room to be very competitive in the fourth quarter.
Michelle Tan - Analyst
Okay.
Great.
And then the other question I had, there was some reference to being aggressive in terms of managing receipts and addressing inventory issues.
Obviously there has been a lot of recent weakening, and we've heard from some other companies that with lead times where they are, it is difficult to get receipts in line until sometime in '08 unless we see the sales trend improve, so I was curious, your perspective on what you're able to do, your flexibility versus everybody else with regard to lead times on orders?
Kevin Mansell - President
It is Kevin, Michelle.
I can't really comment on what everybody else's ability to do that is, but I think you do know that for the last two-and-a-half years that's been one of our four big initiatives is inventory management, and that's basically been all about managing receipt flow closer to sales, so I think we've done a better job.
We're never going to be perfect.
Some goods do have long lead times, and as a result you're further out on them, but I think compared to where we were two years ago certainly compared to where we were four or five years ago, we have an entirely different process, strategy, and really system support to do so.
So I actually feel pretty good about the way inventories are being managed and the way receipts are being adjusted, and I think it is showing up actually in the numbers.
Michelle Tan - Analyst
That's great.
Thanks.
Then I guess my final question was I know you made mention of the fact that part of the reason inventories are up so much at the end of the quarter is obviously a timing issue.
How should we think about that when we look at an inventory to payables ratio because we're trying to get a sense -- we're hearing from you that the inventory is relatively fresh, and I guess looking at the inventory to payables ratio, it seems like things are getting a little more stale, so I guess there may be a better metric to think about that with or?
Wes McDonald - CFO
Well, think from my perspective you've got to cut floor receipts, right, so that's not going to be in your payables, and so that's one driver of it, and one driver quite frankly of it is we didn't have a particularly good sales quarter, and our vendor partners came through with vendor support, and that affects the payables as well.
Michelle Tan - Analyst
Very helpful.
Thanks, guys.
Operator
Our next question comes from Robert Drbul with Lehman Brothers.
Robert Drbul - Analyst
Good evening.
Kevin, I guess go back to the gross margin, sorry to beat it up, but when you think of the assumptions that you guys are looking at into the fourth quarter, where do you think the risk is in a flat gross margin when you look at the competitive environment and the inventory levels outside of it?
Where do you think you might be a bit aggressive?
Kevin Mansell - President
I mean, honestly, the short answer to that, Bob, is we don't see a risk in that number.
We wouldn't have given it as a guidance if we felt it was.
We've given ourselves room to ensure that we come in on that, and yet still provide the kind of value promotionally that we need to provide.
As I said, if you think about inventory management, categories like the seasonal categories really entering the quarter with essentially the same level as last year is a really good place to be, and those are areas that you know I think are very high risk, and they do have a tendency if sales don't happen to be more draining.
I think the fact we've managed those levels down, we were conservative in planning to begin with is putting us in a good place, but we've built into that margin guidance what we think is necessary to promote aggressively to get share of wallet, and so we feel pretty confident about it.
Robert Drbul - Analyst
Okay.
And then just a question on Vera.
When you look at -- how much data mining have you done around maybe new customers that you've drawn into the store on Vera and the opportunity there?
Kevin Mansell - President
To be honest with you, not a whole lot at this point.
We've now had the product in our stores for about 45 days.
We definitely looked at the customer baskets.
We definitely have come away with the conclusion that we're both drawing new customers, witness that they're not on our files before then, and secondly, attracting more affluent customers that were in our file but down to the kind of level I think you're thinking about for the future, not yet.
I think we want to see the business continue to develop in the fourth quarter when there is a lot more consumers in the stores, and then we're going to use that information to really strategize against in spring, but every single number we look at on both Simply Vera Vera Wang and Food Network is very positive from a customer demographic perspective.
It is doing exactly what we set out to do.
Robert Drbul - Analyst
Okay.
Just one final question on Fila.
Will you be editing other areas in activewear, other brands out of that side of the business?
Kevin Mansell - President
There will definitely be editing done in active.
I do believe that active, and I think you would probably agree, active apparel and footwear is a growth category overall in the store.
If you think about the brands we carry in there, there are two really key brands, and one spectacular brand in Nike that of course won't be affected at all.
We're growing both Nike and Adidas at a pretty good clip and will continue to do so even with the addition of Fila, but there are other opportunities within there to cut.
And then it will benefit from the fact that it is a growth category.
Robert Drbul - Analyst
Good luck.
Kevin Mansell - President
Thanks.
Operator
We'll take our next question from Mark Miller with William Blair.
Mark Miller - Analyst
Good afternoon.
Question on your plan for inventory up low single-digit per store at the end of the year.
I guess it seems that in times past that would be equivalent to a sales plan of 2 to 4, and I am assuming that you're expecting sales to be somewhat more moderate than that.
Would you be looking at positive comps at the start of 2008 if you could run the inventory the way you wanted it?
Wes McDonald - CFO
I think we're being very conservative in our sales planning for 2008.
Our expectation is at some point the business will get better.
If we do better in sales in the fourth quarter, obviously we'll have less inventory at the end of the fourth quarter.
I think the theme of the day for the fourth quarter if it hasn't come through clearly at this point is we're being very, very conservative about what could happen in the fourth quarter, and hopefully business will improve as the weather gets cooler, and we'll be able to do a little bit better than we anticipated, but right now as Kev said, this is the run rate of our business, and given that run rate, this is what we think we can achieve.
Mark Miller - Analyst
I guess it is probably somewhat obvious at this point, but could you just comment on where we are in November?
It sounds like you would be somewhat lower than you wanted to be.
Wes McDonald - CFO
Well, I think -- we're not going to comment on the current business, but obviously our business is very seasonally related, and with the weather getting colder, usually things get better.
Mark Miller - Analyst
Okay.
Then you -- you did talk about share repurchase in the fourth quarter.
Wes McDonald - CFO
In the third quarter.
Mark Miller - Analyst
I am sorry.
Going forward, then, I know it doesn't impact it dramatically right away, but how should we think about share repurchase going forward?
Wes McDonald - CFO
Well, as normally we try not to give you guys any guidance on that, and all of our guidance is based upon no share repurchase assumed.
Mark Miller - Analyst
Okay.
Wes McDonald - CFO
So that's what our guidance is based upon.
We'll make a decision in the next few days as to whether or not we're going to buy back shares, and we'll have to file a plan as our -- we basically are blocked out of trading windows until we report fourth quarter earnings after Thanksgiving.
Mark Miller - Analyst
Okay.
Thanks.
I will look for that.
Operator
We'll take our next question from Liz Dunn with Thomas Weisel Partners.
Liz Dunn - Analyst
Good afternoon.
My first question, what's behind the reduction in guidance for store openings in 2008?
And then second question is can you talk in a little bit more detail about how you've changed in the last four years?
Obviously there is a lot more process in place versus 2003 when you had a comp slowdown, but maybe if you could address what you didn't do then that you are doing now, what you would have done then if you had the same process and a little bit better mindset in place, if that makes sense?
Larry Montgomery - Chairman, CEO
That's a really long question.
This is Larry.
I will take the first one.
We haven't adjusted our guidance for stores for next year.
We just -- we're on plan to -- as we discussed in our investor conference at the beginning of October, we're going to be at the end of 2012 over 1,400 stores, and that's going to fluctuate a little bit by year based on a lot of different things going on out there.
Liz Dunn - Analyst
Of the 90, 90 is what you have signed for now, but we may see -- is it possible that we could get to 100 or?
Larry Montgomery - Chairman, CEO
I don't think that we're prepared to comment on that.
I don't have any -- we don't have a definite number in mind.
We're just being opportunistic and making sure we're able to take advantage of all the opportunities that show up out there, but we're very comfortable with our long range plan, and as you recall over the past three years, we've had some lower years and some higher years, and still ended up being exactly where we said we were going to be.
Okay.
Kevin Mansell - President
Liz, on the inventory thing -- it is Kevin.
I think first of all you know that five years ago we made inventory management one of our four key initiatives to focus on, and when we did that, we pretty dramatically increased the structure of the planning and allocation organization both in terms of numbers and strength.
We also implemented a whole series of technology enhancements including things that you're seeing that come to fruition the last couple of years like markdown optimization, size optimization, but most importantly we started down a path working to continue to reduce our cycle times across the whole store so that we could do a better job flowing receipts closer to sales, less up front, more as we needed it, and I think it has allowed us to more effectively manage our inventories and our business in a way that we just couldn't have done four or five years.
We didn't have either the capability in people or the skill set or I think even the technology to do so.
We're just in a different place today.
Having said that all of us would tell you we have opportunity to improve in that regard.
We've got -- I am never happy with the way we're managing in our inventories.
I think we have got a lot of room to improve there.
We're going to continue to focus on it next year, but we're doing a much better job than we have ever before.
Liz Dunn - Analyst
Okay.
I know it was sort of asked in a way before, but can you comment, has business improved with better weather because I think all of us are having a hard time figuring out how much of this is weather and how much is consumer.
Larry Montgomery - Chairman, CEO
So are we.
And you know, Liz, we don't comment on business during the month.
But you have seen what's happened to our business when weather changes.
Liz Dunn - Analyst
Okay.
Thank you.
Larry Montgomery - Chairman, CEO
For a lot of years.
Operator
We'll take our next question from David Cumberland with Robert Baird.
David Cumberland - Analyst
Thank you.
Kevin, can you talk about any holiday season specific in-store merchandising initiatives either related to in-aisle displays or elsewhere?
Kevin Mansell - President
In terms of opportunities I think two key categories that we called out in the call itself that I am very excited about both because of the trend of the business for the year and the trend that actually, to be honest with you accelerated in the third quarter, are jewelry and beauty, and within beauty, particularly fine fragrance.
I think you know fine fragrance is a category we dramatically expanded and as we enter the fourth quarter both of those businesses penetration as a percent of our store climbs pretty dramatically.
Both of those categories if you look at our table and power programs in the store are much more aggressively merchandised.
Our inventory levels are up compared to last year, and that's working for us, and we think that's a big upside potential for us in the fourth quarter.
Then the other thing would be our new initiatives.
Consistently the Vera Wang initiative, the Food Network initiative, and the Elle expansion initiative are working, and I think they're going to contribute to a greater degree in the fourth quarter as well.
David Cumberland - Analyst
On the monthly comps guidance for November and December, is the difference versus the full quarter plan entirely due to the calendar shift?
Wes McDonald - CFO
Yes.
David Cumberland - Analyst
And, Wes, to clarify on the buybacks, it sounds like you might be establishing a 10B5 type plan that will allow buybacks after Thanksgiving?
Wes McDonald - CFO
That would be correct.
David Cumberland - Analyst
Thank you.
Operator
We'll take our next question from Steve Kernkraut with Berman Capital.
Steve Kernkraut - Analyst
Yes, guys, I was going to ask a question, but it is probably beaten up on the inventory, but I guess you guys are comfortable with what you're seeing where even though the inventories are up 7% and on a per store basis, 20% overall, you guys still think you get flat margins based on how you assess the world out there?
Kevin Mansell - President
Short answer is yes.
Wes McDonald - CFO
Yes.
Kevin Mansell - President
I think honestly the way you you got to think about that inventory is we knew all along we were going to be mid-single-digits up to last year in inventory.
That was early, way before the third quarter started, and that was because of the calendar shift.
The way I look at the inventories is more on a year-over-year calendar date basis what do our inventories look like.
Those are up basically 2% and in the categories in which you have to manage risk more aggressively, seasonal categories, they're essentially flat to last year.
A lot of our margin guidance being flat to last year is about us being aggressive to get market share.
It is not about clearing inventories out that we're too heavy in.
It is more about getting sales.
Steve Kernkraut - Analyst
You obviously listen to what Penney's is saying, what Macy's is saying, everyone else is saying, that they're going to be highly highly promotional and do everything possible, so that's all factored into your game plan where you're going to be competitive price for price, promotion to promotion, whatever.
Kevin Mansell - President
I don't think -- it is not even about what they say.
I think we watched the promotion activity in the third quarter and that's become much more heated, and that's just a fact, and so we have got to be prepared to do so well.
Steve Kernkraut - Analyst
Because the way you describe it, there doesn't seem to be downside to it, only upside if the consumer is better, we'll have upside to your numbers, but you seem to -- the way you describe it you've been very conservative creating almost a worst case scenario in terms of what your margins are?
Kevin Mansell - President
We think the margins are going to be flat to last year.
Steve Kernkraut - Analyst
Okay.
Thank you very much.
Operator
We'll take our next question from Bernard Sosnick with Oppenheimer.
Bernard Sosnick - Analyst
Yes, I know you're working on your plans for '08 and I don't mean to get too specific, but the first quarter as you look at it, would there be opportunities in terms of the merchandise assortment that you're going to have versus a year ago to improve gross margins assuming that inventory controls are as careful as you expect to have them?
Kevin Mansell - President
Honestly, Bernie, this is Kevin, we're not talking about 2008.
Obviously we're working on it internally, but we're focused on exceeding -- achieving and exceeding our guidance for the fourth quarter, and when the fourth quarter happens, and we get more information about consumer behavior, we'll share with you our view on 2008.
We're definitely looking at it conservatively.
I think that's the smart thing to do right now.
We're not prepared to talk about our view about the spring of 2008 yet.
Bernard Sosnick - Analyst
Well, let me ask it in a different way.
You were very savvy in terms of your foresight with respect to seasonal inventories, and spring is usually a shorter season but more volatile in terms of when the weather changes, so in terms of planning conservatively, could you just give us an idea without talking about gross margins, how you're going about thinking of conservative planning other than just containing the inventories?
Kevin Mansell - President
I mean, I think the way you said it, that was well said, Bernie, the spring season is even more volatile from a weather perspective than the fall season, and I think that's how we're approaching our inventory planning particularly on seasonal categories.
We're trying to be smart about it and not put ourselves in a risk position, and then chase the business as it happened if it happens, and if it doesn't, we're going to be in a good place, and I think that's how we're looking at spring.
Wes McDonald - CFO
In terms of merchandise categories, Simply Vera Vera Wang, Food Network, and Elle will all be new for spring.
Bernard Sosnick - Analyst
All right.
Well, get to spring on the heels of a good holiday season.
Wish you the best.
Kevin Mansell - President
Thanks, Bernie.
Operator
We'll take our next question from Richard Jaffe with Stifel Nicolaus.
Richard Jaffe - Analyst
Thanks very much.
I think you guys have done a good job addressing the margin and inventory issues, so just one follow-on question in terms of marketing.
Is there some powder dry to spend more on marketing whether it is direct mail or TV or radio if things are incrementally tougher than you thought?
Is there any powder kept dry on the marketing side?
Kevin Mansell - President
We always have -- there is always some contingency factor, but there is certainly nothing that I can think of too much that was positive about the third quarter with one exception, the fact that the third quarter developed slowly from a sales standpoint, put us in a position to be up front, aggressive in our plans, and we kind of talked about that in the call, increasing direct mail, particularly around our credit card portfolio, increasing broadcast around our big events.
So I think the one thing we were able to do is be proactive in front which was the smarter way of doing it than in an emergency basis at the last minute.
So I think we feel like we have put those plans in place already.
There is always still a little bit of flux you can do, but we feel pretty good what we got in place right now.
Richard Jaffe - Analyst
Okay.
Thanks a lot.
Operator
We'll take our next question from Michael Exstein with Credit Suisse.
Michael Exstein - Analyst
Two quick questions.
One is you ran a beauty promotion a couple weeks ago, can you talk about that, what the response was?
You added some sales help and direct mail.
And number two, can you give us an idea how you're balancing your increasing penetration exclusive brand and private label with the gross margin issue?
Is there so much gross margin that you can act fast enough?
If not is detriment that we might think on the outside?
Thanks.
Kevin Mansell - President
On the beauty thing, generally this is more of a general statement than a specific one to that event, but generally we've had good (inaudible) when we've intensified help in our stores around specific events.
Not in a general rule, but when we know we have a big opportunity around a big event, intensifying the marketing on beauty has clearly helped sales.
That's for sure.
I am not sure to be honest with you, Michael, I understand the second part of that, if you can maybe repeat it on the private and exclusive brands?
Michael Exstein - Analyst
Sure.
I think many of us are somewhat concerned that as the whole industry, yourselves included, have increased exclusive and private label merchandise as a percent of the assortment, that in any slowdown it perhaps would be more detrimental to margins than nationally branded goods and how you're dealing with that?
Is there so much gross margin you react earlier that you don't have that potential?
Kevin Mansell - President
I see.
I don't think about them any differently than I do the national brands.
I think that they're -- I view them the same in terms of how we manage our margin opportunity.
It is all about building receipt flows that we can adjust, and certainly in some private brand categories the receipt time lines are a little longer, some of the exclusive brands not so much, but it's more about building the organization and the structure and the systems to manage the overall receipt flows.
So I don't really see it as a big difference.
We have the same challenges with our partners, with our brands, that we do with our exclusive brands, and our private brands as well.
We kind of have one strategy that we apply to all of those elements.
Michael Exstein - Analyst
Okay.
Thanks a lot.
Operator
We'll take our next question from David Glick with Buckingham Research.
David Glick - Analyst
Good afternoon.
Just a quick question on the men's business.
That's a business that increases in importance pretty significantly in the fourth quarter, particularly December, and it sounds like it has weakened relative to the success you were having earlier in the year.
Also it seems like there is not as many exciting new brand initiatives as you're seeing in home and in women's and accessories.
Can you comment on some signs of life there that maybe you're seeing recently with the weather change?
Is there a reason to be more optimistic about that fourth quarter business?
Kevin Mansell - President
Sure.
I mean men's did actually in a negative environment in the third quarter, I would say.
In that negative environment men's did do better than the store did, so they continued to do better in the third quarter than the store did, and on the year basis they are also doing better than the store did.
So I think that's to get one thing clear, they clearly are outperforming the store.
Number two, casual sportswear in men's was actually very strong, and that, in the face of some pretty tough numbers in categories like sweaters and fleece and outerwear.
So we'll see if the weather turns in our favor in the fourth quarter, but I think overall we feel pretty good about the men's performance.
It has outpaced the Company and continues to outpace the Company.
David Glick - Analyst
Okay.
Great.
Appreciate that clarification.
Thanks.
Good luck.
Operator
Our last question comes from Deborah Weinswig with Citi.
Deborah Weinswig - Analyst
Thanks.
I guess I have to make it good.
So first question in terms of your credit card portfolio, can you just talk about the experience that you saw there during the quarter?
Wes McDonald - CFO
Yes, Deb, it is Wes.
I would say like other guys that have reported obviously our share has increased quite a bit over last year.
I think it is probably the most significant share increase we've had in a couple of years.
In terms of revenue we're seeing good increases there.
Our bad debt expense, it is not really on our books, it did uptick a little bit in the third quarter, but nothing alarmingly and on a year-to-date basis we're actually below our plan in bad debt.
So I don't think that that's going to be an issue for us going forward.
I would expect it to rise a little bit, but not significantly.
Deborah Weinswig - Analyst
Okay.
And then, Kevin, you had spoken a little bit earlier on the call about beauty.
Can you elaborate a little bit more in terms of the strength that you saw there during the quarter?
Kevin Mansell - President
I am sorry?
Repeat that.
Deborah Weinswig - Analyst
Just the strength that you saw there during the quarter.
Wes McDonald - CFO
Beauty.
Kevin Mansell - President
Well, the fragrance part of the overall beauty business was spectacular, but it has been spectacular all year.
I think you know we expanded it quite a bit.
We essentially doubled the scale or the footprint in our stores, and that continues to perform really, really well.
We're pretty optimistic about that for the fourth quarter given the importance of that with the consumers at holiday, but the core beauty business also was positive again comp for the third quarter which we feel really good about.
It continues to do better than the store, and do better than the categories around it, so it is not just about fragrance.
It is the overall beauty business did very well in addition.
Deborah Weinswig - Analyst
Great.
Then last question, can you also talk about the earlier response to holiday?
Kevin Mansell - President
No.
I don't think so.
Deborah Weinswig - Analyst
Can you talk about what you saw through the end of the quarter?
Larry Montgomery - Chairman, CEO
That's a better way to phrase it, Deb.
Thank you.
Kevin Mansell - President
I think there are -- even, it is hard to find a lot of positive things in a quarter in which we had a negative 2.6 comp or a negative 3.8 in October, but there were clearly things that customers loved, and those are things we're trying to build on.
We just talked about a couple of them.
I can't emphasize enough the jewelry piece.
Jewelry was -- jewelry has been strong all year.
Jewelry way outpaced the Company in the third quarter again, and we feel we've got a really good strategy in jewelry both in case and out of case on table and tower for the fourth quarter.
It is a business opportunity for us.
It is a market share opportunity for us.
Those are things we definitely saw, and that was true in October as well, Deb, that jewelry did very, very well in October.
So there are good things.
The brands we've talked about, Simply Vera has been spectacular, and the Food Network thing has been spectacular as well.
There is definitely positives.
There is no question about it.
Deborah Weinswig - Analyst
Thanks so much and best of luck for holiday.
Kevin Mansell - President
Thanks.
Larry Montgomery - Chairman, CEO
Thanks a lot, everybody.
Operator
That concludes today's conference.
Thank you for your participation.
You may now disconnect.