柯爾百貨 (KSS) 2008 Q1 法說會逐字稿

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 1-A in Kohl's' annual report on Form 10-K and these 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 replays for this call will be available for 30 days but this recording will not be updated.

So if are you listening after May 15, it is possible that the information discussed is no longer current.

Good afternoon.

I will be your conference operator today.

At this time, I would like to welcome everyone to the 2008 first quarter Kohl's earnings release conference call.

After the speakers' remarks, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS) Thank you.

Mr.

McDonald, you may begin your conference.

Thank you.

With me today is Larry Montgomery, Chairman and CEO; and Kevin Mansell, President.

I'll start off by describing our financial performance, and Kevin will talk about our merchandising, marketing and inventory management initiatives.

Larry will conclude with a discussion of the store experience, our expansion plans and our future earnings guidance.

Sales for the first quarter were approximately $3.62 billion this year versus $3.57 billion last year, up 1.5%.

Comp sales for the quarter decreased 6.7%.

Average transaction value decreased 2.1%, reflecting a 1.5% decrease in average unit retail, and a 0.6% decrease in units per transaction.

Transactions per store decreased 4.6%.

The northeast region generated the strongest comp sales.

The midwest also outperformed the Company average.

From a line of business perspective, accessories once again led the Company for the quarter, and men's and children's were better than the Company comp.

Our credit share was 44.6 for the quarter, this reflects an increase of 225 basis points over the prior year quarter.

Moving on to margin.

Our gross margin rate for the quarter was 36.8%, down approximately 6 basis points from last year, but better than the 20 to 30 basis points decrease that we had expected going into the quarter.

The improvement versus our expectations was the result of strong inventory management, as well as higher penetration of private and exclusive brands.

We would expect gross margin to increase 10 to 20 basis points over last year, in the second quarter.

SG&A increased approximately 7.5% for the quarter.

As expected, this was faster than sales but lower than our expectations of approximately a 9% to 10% increase over last year.

Credit expenses leveraged for the quarter.

The remainder of our expenses did not leverage for the quarter due to lower than planned sales, our continued desire to maintain a positive customer in-store experience, and ongoing efforts to drive additional traffic.

We would expect our SG&A expenses to increase 12% to 13% in the second quarter, less than our store growth of approximately 15%.

The increase in the run rate over the first quarter is primarily due to increased investment in marketing, in order to gain market share in this environment, an incremental number of stores opened this spring versus last spring.

And as a reminder we opened 28 new stores this spring versus 17 last year.

And eight remodels in the second quarter versus having none last year.

We would expect SG&A to increase 8% to 9% for the full year.

Depreciation expense for the quarter was $130 million versus $105 million last year, an increase of approximately 24%.

The increase is primarily due to new stores.

Depreciation, as a percentage of sales, was 3.6% for the quarter, an increase of approximately 70 basis points over the prior year quarter.

For 2008, depreciation continued to be expected approximately $540 million, and for the second quarter, $133 million.

Preopening expenses were approximately $11 million this year versus $9 million last year, an increase of about 27%.

The increase is consistent with the number of stores that were opened, 28 in the first quarter of 2008, compared to 17 in 2007.

On average, we spent $536,000 per store for our first quarter openings, and expect to spend $579,000 per store in fall 2008.

Preopening expenses are expected to be approximately $48 million in 2008 and $9 million in the second quarter.

Operating income for the quarter declined from $346 million last year to $271 million this year.

Net interest expense increased to $27 million for the quarter, compared to $10 million in the prior year.

The increase is primarily due to the $1 billion in debt that we issued in September of last year.

Our expectation for interest expense in 2008 is approximately $100 million and $28 million in the second quarter.

Our income tax rate was 37.5% for the current year quarter compared 37.8% last year.

We expect our 2008 tax rate to be approximately 38% for the second quarter and for the fiscal year.

Net income for the quarter was $153 million, compared to $209 million last year.

And EPS for the quarter was $0.49, compared to $0.64 last year.

Moving on to the balance sheet.

Square footage.

We currently operate 957 stores, compared to 834 at this time last year.

Our gross square footage is 84,922 and our selling square footage is 71,758.

Investments.

We had $429 million in short and long-term investments at quarter end, compared to $253 million last year.

During the quarter, we reclassified $425 million of auction rate securities from short-term investments to long-term investments.

We also recorded temporary mark-to-market adjustments of $18 million, net of tax, through equity related to our long-term investments.

Our inventories are at $2.8 billion versus last year's $2.7 billion, a change of about 4%.

At the end of the quarter, inventory per store is down 9.1%.

This is better than our original guidance of down mid-single digits per store and shows our commitment to being conservative in our sales and our receipt planning.

Moving on to fixed assets.

Year to date, capital expenditures were approximately $273 million, down 9% from last year.

We continue to expect capital expenditures of approximately $1.2 billion for the entire year.

We generated cash from operations of $355 million this quarter versus $83 million last -- in the first quarter of 2007.

The cash generated more than funded our capital expenditures in the quarter.

AP as a percent of inventory was 33.6% versus 37.9% last year.

AP is down based upon our managing of our seasonal receipts during the quarter to sales patterns through our cycle time reduction initiatives.

Weighted average number of shares.

Basic shares in the first quarter was 308.5 and diluted shares was 309.4.

We repurchased 3.4 million shares of our stock for $150 million during the quarter, at an average price of $43.99 during the quarter.

For your modeling purposes, I would use 310 million shares for the year.

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

Thanks, Wes.

Let me talk first about sales.

As Wes indicated, comparable sales decreased 6.7% for the quarter, with all lines of business reporting a decrease in comparable sales.

Accessories led the Company for the quarter with strength in fashion jewelry, watches and beauty, which had strong positive comp store increases.

Men's, women's and children's apparel all performed relatively in line with the overall Company sales, with slightly more strength in men's.

Footwear and home trailed the Company for the quarter.

Considering the uncertainty in the environment, we intend to continue our conservative planning on both sales and inventory levels going forward.

Our reduction in inventory per store of 9% we have already achieved, puts us in an excellent position to flow fresh receipts, as needed, throughout the second quarter.

Given our run rate on sales over the past six months, our comp expectations for the year have been changed to be down 3% to 5% to reflect our conservative view.

We expect the second quarter to continue to be difficult given the comparisons, especially in May, and are planning comps down 3% to 5% in the second quarter, as well.

By month, May will be worse than the quarter, June should be better and July should be similar to the quarter.

Moving on to merchandise initiatives and an update in that area.

We're very excited by our early results in our 2008 launches.

Jumping Beans is a new opening price point children's private brand targeted to provide the value mom is looking for in her children's apparel and has outperformed substantially.

Gold Toe is a nationally branded hosiery, which holds the largest market share in department stores today.

It is launched in men's, women's and children's hosiery, and that launch helped those areas outperform the Company.

The Elle brand was expanded to the remaining 500 stores, it was not formally in at the beginning of March.

And was launched in a grand opening event in mid-March.

It was part of the reason our missy updated business achieved a positive double-digit comp.

And just this month, we launched the Bobby Flay line, an expansion of our Food Network brand platform that continues to perform very well.

We're optimistic that this momentum will roll into our exclusive partnership with Fila Sport, which will launch in the early fall in all sports in men's, women's and children's apparel, footwear and hosiery.

Our 2007 launches, Simply Vera Vera Wang, Elle, and Food Network, continue to perform extremely well with both our existing and new customers.

We anticipate that each of these brands will have significant growth throughout 2008.

In addition, our Daisy Fuentes and Tony Hawk brands both had strong double-digit growth in the first quarter.

And finally, our Chaps brand, in the face of the launch of a competitive brand, achieved a high double-digit comp growth, as well.

The customer continues to respond well to all of our new brand launches and their penetration continues to increase with substantial room to grow, particularly on the exclusive brand front.

Our research indicates that the acceptance is being driven by the high brand awareness each of these brands has when we launched them.

For the quarter, our exclusive and private brands were up over 400 basis points in penetration to 42% of sales, primarily due to exclusive brands.

As Wes indicated, this had a favorable impact on our merchandise margin and we continue to expect that benefit for the year, given the growth in these brands.

Moving on to inventory management.

We entered 2008 knowing it would be a difficult macro economic environment.

Though we were conservative in all of our planning for 2008, we were especially conservative in our inventory planning.

As we mentioned earlier, average per store is more than 9% lower than last year, stronger than the mid-single digit decreases that we had originally guided towards achieving.

We would expect our inventory per store in the second quarter to be down high single digits per store, as well.

Should business conditions improve, we feel we're positioned to react accordingly.

Inventories have been managed down in all areas but especially in seasonal and fashion categories.

The team has done this in spite of also delivering a large number of new brands, that we just discussed.

In addition to carrying a lower overall level of inventory, we continue to focus on flowing receipts in season, as needed, through our cycle time initiatives.

This benefited us greatly in achieving both our inventory and gross margin goals.

Our ongoing markdown and size optimization initiatives that we have focused on extensively in the recent past, continue to develop and positively impact results.

As a result of this improved inventory management but also due to the positive impact of our increased penetration in private and exclusive brands, we continue to expect our gross margin for the year to be flat to up 20 basis points over 2007.

As Wes mentioned, for the second quarter, we would expect gross margin to be up 10 to 20 basis points over last year.

And finally in marketing, as a result of the difficult retail environment, we are more focused than ever on making our customer's life easier, continuing to differentiate our offerings with lifestyle brands to make shopping at Kohl's unique.

The brand launches that I discussed earlier will be critical to that effort this year as we expand our focus on cross-shopping.

Direct mail vehicles, weekend events, Web-based advertising and broadcasts continue to be particularly important in producing more volume.

As Wes mentioned, we will be making an investment in marketing in order to gain market share in the back half of the second quarter.

We will invest more in the vehicles that performed well in the first quarter, while continuing to ensure that our value message is heard in what should prove to be a very competitive environment.

From an in-store perspective, our focus continues to be around these new lifestyle brands, and delivering a presentation in-store, particularly in the area of strikepoints and visuals that improves the customer perception of the Kohl's brand.

Let me turn it over to Larry to close out our comments and discuss guidance.

Thanks, Kevin.

We opened 28 stores in the quarter, 14 in both March and April.

We currently operate a total of 957 stores in 47 states.

We expect to open approximately 47 stores in the latter half of 2008, including our 1,000th store and eighth stores in the Miami, Florida, West Palm Beach major market.

We will also open a new distribution center in Iowa, Illinois, to support our store growth, as well as reduce future transportation and operating expenses.

We will utilize our strong financial position to continue to expand in new and existing markets and continue our remodel program in order to grow market share in a difficult environment.

We continue to expect 2008 to be a challenging year from a macro economic perspective.

Our first quarter results reflect strong management of inventory levels and expenses in this tough environment.

We remain conservative in our sales expectations for the balance of the year and we'll manage our business accordingly.

We are investing in our long-term growth.

Many of our investments we've made over the past years have already had significant impact on our results in the first quarter.

Our new POS system, launched last fall, helped reduce training costs and time in line.

Our investment in product development, both in talent and technology, led to significant increases in both private and exclusive brand penetration.

Our investment in technology around inventory management including assortment planning, cycle time reduction, markdown and size optimization, have and will help us reduce our inventory per store and maintain our gross margins.

All of these investments, plus our commitment to supporting new brand rollouts in-store, with compelling presentations, has led to significant increase in our customer service scores.

We will continue to make investments in our future throughout the year to support our four initiatives, merchandise content, marketing, inventory management and the in-store experience.

With that, let me share with you our updated guidance for fiscal 2008 and our initial guidance for the second quarter.

For the year, we would expect total sales increase of 2% to 4%.

Comp store sales of negative 5% to negative 3%.

Gross margin, flat to up 20 basis points.

With respect to SG&A, we expect to increase 8% to 9%.

Wes already gave you guidance on the other lines of the P&L and this would result in earnings per diluted share of $2.95 to $3.15 for the year.

For the second quarter, we would expect total sales increase of 4% to 6%.

Comp store sales of negative 5% to negative 3%.

And a gross margin increase of 10 to 20 basis points.

We would expect SG&A to increase 12% to 13% over last year.

This would result in earnings per diluted share of $0.70 to $0.74 for the second quarter.

This guidance does not reflect any additional share repurchase in fiscal 2008.

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

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Liz Dunn with Thomas Weisel.

Hi, good afternoon.

Looking at the gross margin results in the first quarter, with gross margins down 10 basis points, that was even better than your original guidance of down 20 to 30 basis points.

And I sort of want to get a sense of what went on there.

Obviously, you're managing inventories extremely well but that just seems really exemplary.

And so I just wanted to get a little more detail there.

And then, as you look out at the month of May, I'm sorry, maybe I missed it, I was bouncing back and forth between calls.

But what -- why are you expecting May to be more disappointing or more negative than the rest of the quarter and do you have a read on May month to date?

This is Kevin.

On the gross margin, I think that the two key areas of focus would be definitely the benefit in margin from us getting out in front of inventory levels and managing those inventory levels down early in the year.

And really overachieving the goals we set for ourselves, which were kind of in the mid-single digit decreases per store.

And we've -- actually achieving the 9% had a real positive impact on margin.

And then the second piece is clearly our exclusive and private brands do provide higher merchandise margin rates.

And the fact that the penetration of those brands continues to climb, it's got a positive impact on our margin, as well.

As far as comps in the quarter go, just in looking at year-over-year comparisons, we had an exceptionally strong quarter -- or exceptionally strong month of May last year.

We had double-digit comp, 10.5%.

I think we recognized that's an a difficult comparison from last year and so we're trying to, as we look at the quarter this year, look at where our opportunities are.

And we see a lot more opportunity in the back half of the second quarter than in the month of May.

As far as business goes right now, it's just way too early in the month to be talking about that but May is really more a function of year-over-year comparisons.

Do you expect to get any benefit from stimulus checks?

Well, we definitely have strategized stimulus checks into our marketing investment over the quarter.

But we also focused a lot of that, as I mentioned in the call, more on the back half of the quarter, so June and July.

I think we think there's a convergence of weaker performance on our basis last year.

We actually were negative last year in June and the stimulus checks.

And what we see is some opportunity to do some more aggressive marketing, as I mentioned, to -- in direct mail.

All of those things I think gives us a little better confidence about spending in June and July.

Got it.

Thanks.

Good luck.

Your next question comes from the line of Charles Grom.

Thanks.

Good afternoon.

Wes, on the guidance, you're basically keeping your gross profit margin guidance.

Your SG&A looks a little bit more favorable, yet, you're lowering the mid-point about $0.28.

Is that just largely a function of the lower comp assumptions?

And is that just essentially, based on what the trends you've seen to date, you'd rather just take a more conservative approach to the year?

Yes, I think it's totally based on the comp assumptions.

Our original guidance was predicated on a flat to down 3% comp and that was range of $3.15 to $3.50.

So we held the lower end of the range at the negative 3% comp and then are just really more conservative based upon our performance in the first quarter and our expectation that the rest of the year is going to be very difficult.

All of the other lines in the P&L, as you pointed out, remained fairly constant to our original guidance.

And then we did improve in the SG&A.

Okay.

And then for Kevin, obviously, inventory per store down 9.1%.

Very impressive.

How do you manage the risk of being out of stock on certain items?

And as you head into the back half of the year, can you give us a little bit of more of feel on a per-store basis, where you think you'll see inventories?

I know at the end of the 2Q, I think you said down high singles.

Well overall, I think we still think throughout the year we've got opportunity to have lower inventories and still be very much in stock.

I think the key point for you to take away is being down 9% is certainly a total store number but those numbers were managed more at the business level.

So we were much more aggressive about managing levels down in seasonal apparel categories, where we both didn't see a sales pattern and also have higher risk, our fashion categories.

And if you looked at a year-over-year comparison in the more basic categories, the accessory categories we talked about, for instance, hosiery is a good example; those inventories actually are pretty similar to last year.

So basics are being managed differently than fashion and being managed differently than seasonal.

And we're just trying to judge and guide that risk accordingly, and in a way we think is an intelligent way to do it.

The other thing that's definitely worked in our favor is the work that we've done over the last year to two on cycle time and receipts closer to sales, meant that we were able to make adjustments in the quarter and in the season to get the inventories down.

Okay.

And then one more, if I could.

Larry, could you just give us a little feel for what you're thinking on new store plans for 2009 at this point?

I'm sure you're halfway through planning for next year.

You've already ratcheted it back for '08.

Do -- should we expect a similar ratchet back for next year?

I think what we're going to do, Chuck, is on our second quarter earnings call, give you guys a much better flavor for 2009.

We'd like to get another quarter under our belt and have some internal discussions as to what 2009 is going to look like.

So, in three months, you'll have a real clear picture of 2009.

Great.

Fair enough.

Thanks.

Your next question comes from the line of Jeff Klinefelter with Piper Jaffray.

Yes, thank you.

Congratulations on your inventory management.

That's really impressive in this environment.

And my question there relates to maybe more specifically again, how your systems are rolling out and implementing?

Because we've noticed your out-the-door pricing on your promoted items in your circulars have been trending up the last several months on a year-over-year basis.

So even in this environment, you seem to be getting better pricing.

And would you point to that -- back to Larry commented on the allocation down to the store level and just getting better turns at the store level?

And then could you just again remind us on your major system implementations, your software this year, where you stand year to date, when it started implementing and when you'll be finished?

Trying to take that one step at a time.

I think we're doing a better job managing our pricing strategies.

I think that's true, both certainly from a clearance perspective, markdown optimization is driving that much more effectively than it ever did in the past.

So I think that's been a positive benefit.

I think the cycle time strategies and the receipts closer to sales strategies have allowed us to be in a position where we don't have to be as aggressive promotionally on seasonal categories because they've backed up.

Because we're able to manage the inventories more effectively, we don't get in a position where we have to do that.

From a system perspective, I think you know where we're at on markdown optimization.

We're basically rolled out.

We've taken it and enhanced it down to store level.

There's going to be a relatively long period, a long tail and a positive benefit of that because it gets refined and tweaked over the course of the next 12 to 24 months.

So, I think we feel good about that for the future.

Size optimization is in place.

It's piloted in a number of different areas.

A particular area of focus for us is our private brands, those are, resources where we have a lot of control.

And so we're aggressively rolling size optimization there first with other domestic brands coming later.

And I think you can -- we're looking at that really as the 2009 impact.

Assortment planning has been ongoing, there's no changes there.

Definitely managing our inventory levels has helped us improve margin by grade of store.

So we focused a lot on smaller volume stores because we think there was an opportunity to lift the margin in those smaller volume stores through the use of technology and manage inventory that way.

So I think all those things are working.

Larry touched on all of those and it's the benefit of spending that we did in the last two years is really coming home this year.

So outside of the size optimization being in '09 really true implementation, going forward, it's going to be just harvesting the benefits of all of these other implementations you've already had.

There are no new ones planned for '09?

No, our assortment planning, without going into so much detail that you don't want to hear in the call, but the assortment planning technology changes we're making are long-term.

So they're going to go on really over the course of the next two to three years.

And they'll impact how we tailor our assortments down to individual markets across the country.

And we see that the major benefit of that, Jeff, will be on top-line sales, as we are better able to allocate our assortments more appropriately by market.

We think we've got a top-line sales opportunity.

So no, that -- of all the systems from a merchandising standpoint we're doing, that was probably the biggest.

It's the longest time and it's got the most potential impact.

Okay.

Thank you.

One other question, Wes, on your option rate securities that you reclassified.

You also noted on your share forecast for the year, it doesn't look like your buyback would be all that aggressive for the balance of the year.

Does that have to do with the ARS balance?

No.

We never give you guys forward guidance on the share repurchase.

We purchased $150 million in stock this quarter.

We have ample liquidity to continue the share repurchase program.

And we'll continue to update you guys quarterly on how much we buy back.

Okay.

Any updates on the ARS, anything you're hearing about the market?

Nothing yet.

We're working with some of our investment banks.

But I don't see anything on the short term horizon.

But we're earning a lot more on the ARS than we are in either borrowing the money against the revolver or than the long-term debt we have.

Okay.

Great.

Thank, guys.

Good luck.

Your next question comes from the line of David Glick.

Good afternoon.

I was wondering if you could talk about any progress that you're making or if you see any light at the end of the tunnel in the women's sportswear business, particularly in the classic zone?

Obviously, you're adding Dana Buchman, which hopefully will energize that area.

But any strategies you can give us some color on to energize that business?

Yes, overall certainly as we mentioned on the call, updated has been driving the business in women's.

Women's performed basically at the Company level for the quarter.

However, I don't think it's just about a classic business because there are individual brands in there and probably the most obvious one is Chaps, which had phenomenal performance during the quarter.

So women's Chaps had a double-digit increase for the quarter.

And I think that was really, as I said in the call, kind of in the face of a pretty big competitive brand launch.

So not only did it do well but it did well in a competitive environment.

We also would agree that the reason Dana Buchman, we're excited about coming to Kohl's, it's going to add a whole new level of excitement.

And the last time we added had a major classic brand in women's was Chaps.

It's been a huge success and we think Dana has got the same kind of opportunity.

And then the third piece that we're definitely focused on, David, is improving our own Croft & Barrow brand, which sits at opening price point in classic.

And we do think that there's opportunity to grow that brand, as well.

The home area, similar question, any new strategies you can give us some color on?

Any ways to improve that business?

Yes, we have, obviously, a couple of new initiatives in there.

Food Network being the most obvious one and the expansion of Food Network with Bobby Flay.

But frankly, home is clearly the weakest business we have.

Of the six business groups, it had the worst performance in the first quarter.

We don't see that turning around dramatically in the near term.

We're very focused in home on managing in-stocks properly and keeping our in-stock percent up.

So, I was trying to make that point earlier, that our inventory reductions aren't equal across the store.

So home inventories are running much closer to last year's level because we're committed to have a good customer experience in terms of an in-stock.

I appreciate it.

Good luck.

Your next question comes from the line of [Uda Warner.]

Good afternoon.

I wonder if maybe you could comment a little bit on inflation and sourcing going forward, especially since cycle time reduction and receipts closer to sale matters so much?

Overall for 2008, Uda, the pricing picture basically is the same as it's been.

So we don't really see any impact for this year from overseas on pricing.

There are categories.

Leather, we're definitely seeing price increase on.

Sweaters, some price increases on.

But overall, big picture across the whole store, the big numbers, really no impact.

As we look at '09, at least the visibility we have into the first quarter and first half of the year, because as you said cycle time shrinks these lead times pretty dramatically.

I also think we can either eliminate or mitigate price increases overseas.

We do have a pretty aggressive partnership with Li & Fung, which allows us to manage and move countries of production on a lot of our key programs to make sure that if there are increases, for instance, in a country like China, we have the ability to move the production elsewhere.

So we're not anticipating any impact from price increases in the first half of next year either.

That's helpful.

Thank you.

I have two other small questions.

One is to what extent are you seeing any impact of credit card receivable write-offs in your financials?

And secondly, how has the Internet been?

Credit expense actually leveraged for the quarter.

We're seeing bad debt expense rise slightly.

It's still under 4% of our average account receivable but finance charges and late fees are growing much faster than the bad debt expense, so that's actually helping us.

And the Internet, it basically grew about 29% this quarter.

We're feeling very good about the investment we made.

And back-to-school will have almost the entire assortment online that's in our store, as well as direct shipped SKU's.

So we're very excited about back-to-school.

Thank you.

Your next question comes from Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone.

Can you talk a little bit about the performance of product in the opening better and best price point categories?

What are you seeing?

And as you have new brands that are coming in into the space, which price category do you see them going into?

And also, new store productivity, given this year obviously has been a challenging year, how you are evaluating new store productivity and any adjustments to return metrics?

Thank you.

Thanks, Dana.

I'll answer the first part on the, and then it's Kevin, on the good, better, best.

I think that while you might think that in this kind of environment, opening prices is shifting down to opening price point.

I think the reality that we're seeing is business in our stores is moving to where we've launched new brands and have new success.

And so we are having, as I mentioned, just as much success at the best price point with Chaps and with Vera Wang as we are at the opening price point when we launch a brand in kids like Jumping Beans.

So it's more about the product and it's more about the brand.

Where we can find a great brand with high awareness, regardless of whether it sits in good or it sits in better or it sits in best, we can hit a home run.

It's very much about the product.

And I think even some of the existing brands like Chaps would sit in our best price point, as I said, performed incredibly well in what we all would agree is a really tough economic environment.

So it's a lot about the product.

Wes, you were --?

Yes, in terms of new store productivity, given our mix of going forward of pros and smalls, our new store productivity should be somewhere in the mid-60% range, given the mix.

Smalls tend to open at about 55% of the productivity of an existing store.

And pros are around 70% to 75%.

It is a little bit lower than that this quarter, it's closer to about 63%.

Reason being is about 25% of our new stores that we have opened in the past year and in this quarter are in California, Arizona, Nevada and Florida, whereas you know, there's a very difficult economic environment relating to the housing bubble.

So those areas have performed a little bit less than our expectations.

The stores that we've opened in the midwest, northeast, mid-Atlantic, have been very comparable to our normal opening pattern.

And in terms of return metrics, we're not changing our return metrics, we're keeping them as we have been, since we started to grow the public Company.

Thank you.

Your next question comes from the line of Bob Drbul with Lehman Brothers.

Hi, this is [John Carmen] I'm filling in for Bob.

Just a quick question for you.

Around the promotions, have you seen sales of traffic responding any more significantly to promotions than you have in the past?

I think we've continued to see the same strategy that we saw in the fourth quarter, which has been around big events, around holidays, around big direct mail, we do get a larger lift to traffic.

And then the tougher times are in those in-between periods.

So I think that's been pretty consistent and I think that's kind of how we're anticipating the business is going to go for awhile.

It requires a more meaningful effort to drive traffic and it naturally drifts into those periods where there is a lot of marketing.

All right.

Thank you very much.

Your next question comes from the line of Christine Augustine with Bear Stearns.

Thank you.

The first question I wanted to ask you is on the women's apparel business, I think the split used to be updated and versus classic was about 50/50.

Is that still about where you are?

No.

Updated has become a larger part of the business just because there's been so much growth and so many of the initiatives over there, as you go down the list of brands, are all working incredibly well.

Okay.

Because I was trying to back into classic ex-Chaps, and it seems like it's probably going to be down like 15% to 20%.

Is that right?

Honestly, Christine, I don't have the number at my fingertips.

But clearly, women's apparel overall, if you kind of go down the list, women's apparel overall performed about equal to the store for the quarter.

Updated performed very strongly, double-digit comp I think last -- yes, which means rest of the business was off of that number pretty significantly.

And since Chaps was a big success, you can see the difference there.

So there's definitely weakness and it's why, as I said earlier we're excited about Dana Buchman coming in.

And we have put attention on focus and intention in improving our Croft & Barrow brand because we do think that's an engine that can grow.

So do you think -- would you expect to some of those changes in Croft & Barrow by the fall or is that going to be more '09?

No, it's going to mean changes for the fall for sure.

We've made a considered effort to improve both product and also manage our assortments more effectively.

And then what sort of impact, if any, are you seeing from higher utilities and fuel surcharges in terms of the margins?

Well, it's not good.

But we've been able -- in the distribution centers, we have a very good distribution team.

They've been able to offset any fuel surcharge issues with increased productivity and units per hour.

So I've challenged them to do that for the fall.

It's in the budget negotiating process.

But I'm sure they'll come through for us in the fall.

And finally, any new brands that you might be looking at on the men's side, maybe something kind of equivalent to Vera?

I don't know if there's anything out there or if you've thought about doing that internally.

Do you have an idea you want to --?

Well, I am looking for a job so maybe.

There you go.

No, there's nothing specifically to tell you but men's is definitely an area of focus for us in terms of new brand introduction, 100%, particularly updated and contemporary.

There's an opportunity and when we find the right opportunity, we'll definitely go after it.

But as I said earlier, one thing we're learning very clearly in both results and our research, exclusive brands are all about the brand name.

Make enough on a name on Kohl's side to launch a brand does not mean anything to consumers.

So we are not going to introduce a new brand in men's unless it's legitimately something that customers recognize.

They see there's value in it.

When we can do that, then we'll deliver it.

And you've seen those kind of results around the Tony Hawk and around Vera and around Chaps.

But we're not going to introduce new brands just to introduce new brands.

They have to have legitimacy with the customer.

Thank you.

Your next question comes from the line of Richard Jaffe.

Guys, just a quick question on ad and sort of the chase for the customer in these tough times.

You talked about taking advantage of the rebate checks.

Could you talk about ad spend, both in changes this year over last year and in the channels you're pursuing?

And if you want to break out dollars, that would be great, too.

Well, this was a good try.

We'll do that at the end of the year.

We just did a -- at a high level, I think the things we're still trying to call out for the quarter are we are going to -- Wes covered our view on SG&A for the second quarter.

And one of the reasons it's a little bit up more than the trend in the first quarter is we have made a decision in the second part or the back half of the second quarter, to invest more in marketing and try to drive more business.

A lot of that investment is going to be around our direct mail effort.

And it's going to be around big event marketing because as I said, we are seeing a better lift when we do that.

And it means we will spend more.

We also think there's a big opportunity because we do think there's a chance to get some of that stimulus money with an aggressive marketing campaign.

And we also think we have a year-over-year comparison opportunity.

June was coming off of an incredibly May and we had a very weak June.

And we do think we are set up to potentially have a good June.

Thank you.

Your next question comes from the line of Dan Binder.

Good afternoon.

A couple of questions.

First on expenses, you've done a great job of managing that.

I'm just curious, as you look across the store base, what percentage of the stores are at minimum staffing levels and how much more can you take out?

That's the first question.

The second question was on free cash flow.

You've done a great job this quarter on cash flow, given your current earnings expectations, where do you think free cash could come out for the year?

We've made a -- this is Larry.

We made a pretty conscious effort, Dan, to make sure that we don't sacrifice the shopping experience.

So we don't have a lot of stores unless they're very small stores on minimum staffing.

We've been able to, with things like the new POS system and training people at POS, be able to become much more efficient per hour that we spend down at the store.

We've been able to do that for a long time, whether it's the electronic signing and a lot of different initiatives that we have in terms of handling freight.

We're able to keep that store experience there.

So we don't plan on cutting a lot more out of store payroll.

We think we've got the formula that works right now.

And we think that that's going to be quite a bit different than some of our competition.

Now, on the free cash flow side, I think, we guided it with the higher earnings guidance of like $300 to $500 million number.

I'd feel pretty comfortable at that $300 million level, given the lowered earning guidance.

Okay.

And then I just want to follow up on the credit question.

Just coming at it from a different angle, credit is a fairly high penetration in the sales.

With higher finance fees, it kind of sounds like the open buy on consumer credit is shrinking a bit, do you expect that to have an impact later this year?

And then also on the higher late fees, it sounds like it's probably some portion of that will end up in default.

Do you have a pretty good visibility in what the impact will be on that front, as well?

Yes.

I think we have pretty good visibility on that.

First of all, let me just say that I think our customers use the credit card more as a loyalty program than a financing tool.

A majority of them use it for the value and we're seeing strength in that credit event because they're liking the extra value of getting the 15% off.

In terms of late fees, some of that's more of a rate than an increase in the number of late fees.

When we sold the receivables to Chase.

But we have visibility, we're working with Chase very closely.

And I consider our credit portfolio to be of very high quality and I'm not really concerned about it.

Our shares continue to grow every year and it actually is growing at a faster rate over the last six to nine months, as a percent of sales.

Okay.

And then, last question on the topic.

I think on the last call, you talked about the customer approval rates on credit had fallen off in some of the housing states.

Any updates on that?

Has the trend changed or --?

That would continue to be the case.

In those states that traditionally have a slightly lower rates than the midwest and the northeast and that has not changed.

Okay, great.

Thanks.

Your final question comes from the line of Wayne Hood.

Yes.

Just a couple of questions.

Larry, first for you on the store side.

If you do decide in 90 days from now to slow store openings in '09, I'm wondering just longer term, how that affects the business model?

In the sense that you have fewer stores in a market, so you wouldn't necessarily be able to leverage advertising spend in that market, payroll spend in that market the way you would have, let's say 12 months ago.

So that would affect how you think about where you think operating margins could be over time.

And kind of related to this, is that some of the developers, all of the malls are having trouble getting capital.

I'm wondering whether any of the developers that you do business with are having capital issues, to an extent that you might have to put up capital in '09 or '10 to support the growth?

And then I have two quick questions for Kevin and Wes.

Well, first of all, I think that when we do come to the conclusion as to what's going to happen in 2009, it's going to be well thought out in terms of how many fill-ins versus new market, etc.

But we're so well penetrated in most of the new markets anyway, I don't see any deleveraging of payroll synergies or anything like that out there.

So, that's not a threat.

In terms of the long-term growth, we still see well over 1,400 stores.

If we get there a little bit later than we outlined at the investor conference last year, then that's what it will be.

And I think it's prudent for us now to make that sure we have -- we continue to grow but that we also are cognizant of what's going to happen in the competitive arena over the next several years.

And there may be opportunity for us to expand in a way that's cheaper.

And I think that when you talk about what's happening with the landlords out there, most of the places that we're looking to put up stores, it's like the corner of Main and Main.

And people that own those properties aren't necessarily coming into issues with capital.

And you see one here and there but we've always seen one here and there.

So there's no real increase in people running short of cash at this particular moment.

That may change but we haven't seen it what we're looking for 2009 and '10.

And Kevin, if you could just maybe answer this question.

I was curious, in the first quarter and maybe even in the coming quarters, marked down support dollars that you might have gotten from vendors in the first quarter, its impact or accruals that you might be thinking about in the quarter that were taken, or in the coming quarters?

Yes.

There really is no change year over year to be honest with you.

It --.

It's actually less.

Well, less year in '08 versus '07.

But there isn't any change in the dynamics, if that's what you're getting at, Wayne.

Okay.

And then finally, Wes, just had a question about bonus accruals.

How you would -- I'm assuming they might have been down in the first quarter but I'm not sure.

And then, how are you thinking about that in the coming quarters?

Thank you.

They were down versus last year in the first quarter.

We like to have bonus accruals and we hope to continue to have them in the remaining quarters of the year.

Do you care to comment how much it was down or its impact on the SG&A dollars?

It was not significant.

All right.

Thank you.

Okay.

Thank you.

There are no further questions.

I would like to turn the call back to management for any closing remarks.

We're good.

Thanks.

That concludes this evening's teleconference.

You may now disconnect.