柯爾百貨 (KSS) 2008 Q3 法說會逐字稿

Good afternoon.

My name is Cara, and I will be your conference operator today.

At this time, I would like to welcome everyone to the 2008 Q3 Kohl's earnings release conference call.

All lines have been placed on mute to prevent background noise.

(Operator Instructions)

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 has been released and 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.

If you are listening after December 13th, it is possible that the information discussed is no longer current.

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

Sir, you may begin your conference.

Thank you.

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

I will start off by describing the financial performance; turn it over to Kevin to discuss our strategic initiatives in merchandising, marketing and inventory management; Larry will talk about the store experience and our expansion plans; and Kevin will close with our earnings guidance.

Total sales for the third quarter were approximately $3.8 billion both this year and last year, down approximately 0.6%.

Year-to-date total sales increased 1.5% to $11.2 billion.

Comp sales for the quarter decreased 6.7%, driven largely by lower transactions per store, which decreased 6.1%.

Average unit retail increased 3.2%, but was offset by a 3.8 decline in units per transaction, resulting in a 0.6 decrease in average transaction value.

Year-to-date comp sales decreased 6.0%, driven by transactions per store, which decreased 5.3%.

Average transaction value was down 0.7%, reflecting a 1.1 increase in average unit retail and a 1.8% decrease in units per transaction.

Regionally, the Northeast, Midwest and mid-Atlantic regions led the Company for both the quarter and year-to-date periods.

We continue to experience weakness in the Southern and Southwestern regions of the country.

Our credit share was 46.7 for the quarter, an increase of approximately 229 basis points over the prior-year quarter.

Year-to-date credit share increased approximately 195 basis points to 44.5%.

Turning to gross margin, our gross margin rate for the quarter was 37.4, up 33 basis points from last year.

Year-to-date gross margin increased 34 basis points to 38%.

The increases reflect strong inventory management, lower clearance levels, and higher penetrations of both private and exclusive brands.

We would expect gross margin to increase 20 to 40 basis points in the fourth quarter.

SG&A increased approximately 5% for the quarter.

As expected, this was faster than sales growth, but lower than both new store growth and our expectations of approximately 9% to 10% over last year.

Year-to-date SG&A increased approximately 8% to $2.8 billion.

Credit expenses leveraged for both the quarter and year-to-date periods, distribution expenses leveraged for the quarter.

Stores, advertising, and corporate expenses did not leverage for either period 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 5% to 6% in the fourth quarter.

Moving on to depreciation expense.

Depreciation expense for the quarter was $135 million and $398 million year-to-date, up 17.6% for the quarter and 22.1% year-to-date.

The increases are primarily due to new store growth.

Depreciation as a percent of sales was 3.6% for both the quarter and year-to-date.

This reflects an increase of approximately 60 basis points over the prior-year quarter and year-to-date periods.

Depreciation is expected to be $140 million in the fourth quarter.

Preopening expenses were $21 million for the current-year quarter versus $38 million last year.

Year-to-date preopening expenses were approximately $37 million in 2008 and $56 million in 2007.

The decrease in the quarter reflects the decrease in the number of fall openings: 47 in 2008 compared to 95 in 2007.

Preopening expenses are expected to be approximately $5 million in the fourth quarter.

Operating income for the quarter declined from $331 million last year to $285 million this year.

Year-to-date, operating income was $963 million compared to $1.1 billion last year.

Net interest expense increased to $28 million for the quarter compared to $19 million in the prior year.

Year-to-date net interest expense was $81 million, compared to $39 million in the prior year.

The increases are primarily due to the $1 billion in debt we issued in September of 2007.

Interest expense is expected to be approximately $30 million in the fourth quarter.

Our income tax rate was 37.7% for both the current year quarter and the year-to-date period.

We expect our tax rate to be approximately 38% for the fourth quarter.

Net income for the quarter was $160 million compared to $194 million last year.

Year-to-date, net income was $549 million this year compared to $672 million last year.

Our earnings per share for the quarter was $0.52 compared to $0.61 last year, and year-to-date earnings per share was $1.79 this year and $2.09 last year.

Moving on to some balance sheet metrics.

Square footage, we currently operate a 1,004 stores compared to 914 stores at this time last year.

Our square footage numbers--gross square footage for 2008, 88,979, an increase of 9.5%.

Selling square footage of 74,992, an increase of 8.9%.

We had $381 million in short and long-term investments at quarter end 2008 compared to $26 million last year.

As a reminder, we reclassified our auction rate securities from short-term investments to long-term investments during the first quarter of 2008.

We have also recorded temporary mark-to-market adjustments of $38 million net of tax through equity related to our long-term investments.

Inventory.

Total inventory was $3.7 billion at quarter end, a decrease of 5%.

Inventory per store is down approximately 14%.

Clearance inventory per store is down over twice this amount on a unit basis.

This shows our commitment to continued conservatism in our sales and receipt planning.

On the fixed asset side, year-to-date capital expenditures were $843 million, down 33% from about $1.26 billion last year.

We expect capital expenditures of approximately $1 billion for the year.

We generated cash from operations of $821 million in 2008 versus $300 million in the first nine months of 2007, almost entirely funding our year-to-date capital expenditures.

AP as a percent of inventory was 44.3% versus 43.7% last year, an increase of 60 basis points.

We did not purchase any shares of our stock during the quarter.

Year-to-date, we have repurchased 6 million shares of our stock for $261 million at an average price of $43.19.

For your modeling purposes I would use 307 million shares outstanding for the year.

And with that, I will turn it over to Kevin to talk about our strategic initiative.

Thanks, Wes.

Let me talk on sales first.

As Wes mentioned comparable sales decreased 6.7% for the quarter and 6% year-to-date.

All lines of business, and all regions reported a decrease in comparable sales in both the quarter and year-to-date.

Accessories and Children's were the best performing businesses in the store, while Women's and Home were the worst performing.

On a very positive note, our reduction in inventory per store of approximately 14% puts us in an excellent position going into the holiday season to flow new receipts.

Given our October performance and our current run rate, our expectations for the fourth quarter are for comparable sales to decrease 8% to 12%.

By month, November should be negative high teens, mostly due to the Thanksgiving shift and December should be down low to mid single digits.

January should be similar to the quarter.

We continue to be pleased with the performance of our Only-at-Kohl's brand strategy, both our private and our exclusive national brands.

For the quarter, our exclusive and private brands were up over 150 basis points in penetration to 42% of sales, primarily due to our exclusive national brands.

Year-to-date, the penetration is 42.4%, up over 300 basis points.

The customer continues to respond well to all of our exclusive brand launches, including our most recent launch with Fila Sport.

Our research continues to show that the acceptance is being driven by the high brand awareness each of these brands has when we launch them.

That success is embedded into our thinking for our planning of next year's launches of Dana Buckman and Hang 10.

As it relates to inventory management, as we indicated earlier, average inventory per store is approximately 14% lower than last year, stronger than the low double digit decreases that we had originally guided towards achieving.

We accomplished this through significant reductions in fall, seasonal inventories and strong cycle time improvements in our receipt flow.

As a result, some areas like Women's or Men's sportswear are actually down substantially more than the total.

Basic area like Men's, Women's, or Children's underwear and hosiery are much closer to last year's level.

In addition, our clearance inventories are down approximately twice as much as the total, roughly in the 30% decrease range.

We would expect our inventory per store at the end of the fourth quarter to be down mid single digits per store, given that we had pulled inventories back substantially at the end of last year.

As a result of the impact of both our exclusive and private brand mix, more aggressive inventory management, and our mark down optimization program, our gross margins have been very consistent in their improvement all year and are year-to-date up 34 basis points.

We would expect gross margins to be up 20 to 40 basis points over last year in the fourth quarter.

We believe this allows us to be flexible in our pricing as we expect the environment will remain extremely competitive.

From a marketing standpoint, last week, we launched the most aggressive holiday marketing campaign in our history.

The campaign is designed to showcase Kohl's as the one stop destination for shoppers looking to get the most for their money during a challenging economic environment.

Shoppers can look forward to frequent sales events, aggressive discounts on popular merchandise earlier in the season, and an easy online shopping experience, combining to make Kohl's this season's gift destination.

We have increased our overall marketing budget over last year by increasing the investment in our best performing mediums, such as direct mail, internet advertising and e-mail, while at the same time focusing television and radio to align with the largest traffic opportunities.

Additionally, we will take advantage of the three weekends leading up to a late Thanksgiving holiday, infusing one more additional promotion event and additional consumer incentives.

We will continue to target our most loyal customer, the Kohl's charge customer.

New this year, Kohl's charge customers, as well as other selected Kohl's shoppers, will receive a two-day shopping pass that will provide additional discounts during November and December.

Also new this year, selected Kohl's charge customers will receive a gift guide, highlighting special December values and popular gifts at tremendous deals.

We have enhanced our online retail environment, making it faster and easier for customers to see the best sale offers and find the most relevant merchandise.

Kohls.com will also periodically feature special buys that will be available only online.

And finally, we will also emphasize our industry leading flexible return policy with no hassle and no need to explain.

With that, I will turn it over to Larry to discuss both the store experience and our expansion plans.

Thanks, Kevin.

We opened 46 stores in October and one in November that included our 1000th store and also our entry into the Miami/Ft.

Lauderdale/West Palm area with seven new stores.

In 2009, we're going to continue to utilize your 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 very difficult environment.

We are planning to open approximately 50 stores in 2009 with about 20 opening in the spring.

In addition, we plan to remodel 60 stores in the spring season, which is an increase from 36 this year.

We will continue to invest in our long-term growth.

We believe it is extremely important to maintain our existing store base in a tough environment with significant competition for customers whose disposable income is shrinking.

We are seeing improvement in our customer service stores in all of our stores due to improvements made in the fiscal environment at all stores and a focus on engaging customers both on the sales floor and at point-of-sale.

We will not sacrifice customer experience during the holiday season.

We have started to see what we think is the beginning of a consolidation across many retail sectors.

With our financial strength and track record of reviving others' failed locations, we believe that we will benefit through increased sales not only as in existing stores, but through disciplined acquisition of selected real estate across the country, as other chains enter bankruptcy or liquidation.

We will maintain flexibility in our real estate pipeline to take advantage of any opportunities that may arise.

With that, I will turn it back to Kevin, who will give you our earnings guidance for the fourth quarter.

Thanks, Larry.

Our third-quarter results reflect strong management of inventory levels and expenses in a very challenging environment.

They also reflect the importance of differentiating our merchandise content and marketing as seen in the strong growth in our private and exclusive national brands.

Our investment in product development in both talent and technology continues to provide benefits and increases in both private and exclusive national brand penetration and gross margins.

You have seen the results in our investment and technology around inventory management, including assortment planning, cycle time reduction, mark-down optimizations, size optimization, all impacting our inventory per store and our positive gross margin results.

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

We expect the holiday season to be the most difficult environment for the consumer in years.

We remain realistic but conservative in our sales expectations for the fourth quarter and beyond and will manage our business accordingly.

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

For the fourth quarter, we would expect a total sales decrease of negative 4% to negative 8%, a comp sales decrease of negative 8% to negative 12%, and a gross margin increase of 20 to 40 basis points.

We would expect SG&A to increase 5% to 6% over last year.

The result of lowering our sales guidance would result in earnings per diluted share of $0.90 to $1.05 for the fourth quarter.

Our sales guidance takes into account our current run rate as well as adjusting by month for the Thanksgiving shift and two additional pre-Christmas selling days in December.

We were able to maintain the previous fourth-quarter gross margin guidance of an increase of 20 to 40 basis points due to entering the quarter with inventories below our projections and a very strong merchandise mix.

We have also maintained the previous 5% to 6% guidance on expenses by reducing sales-related expenses in order to fund advertising.

Achieving these objectives in the fourth quarter would result in earnings per diluted share for fiscal 2008 of $2.69 to $2.84.

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

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

(Operator Instructions).

Your first question comes from the line of Lorraine Maikis with Merrill Lynch.

Thank you.

Good afternoon.

Just looking forward on the SG&A line, are there any further opportunities to cut here?

And secondly, related to the topic, do you plan to step up marketing for holiday?

In terms of--this is Wes, SG&A, I think that's where we're going to be for the quarter.

Obviously, if you have seen our performance this year, sales are a little bit lower than that.

We have the ability to flex down.

We have done that in the first three quarters.

I will let Kevin take the marketing question.

We definitely stepped up our marketing efforts in the fourth quarter.

I covered some of the things that we have done.

We actually increased our marketing budget and we did that by reducing some other sales-related expenses to fund it.

So that allowed us to continue to maintain the previous guidance of the 5% to 6% increase.

But we have a significant increase in investment and marketing because as I said, I think we believe it's going to be a very promotional and very challenging environment.

Wes, just looking out beyond the fourth quarter into 2009 on the SG&A side, are there any areas that you can work on there?

Yes, we are working on finalizing our spring budgets right now.

We were--historically we have been able to leverage at a 2% comp.

We were able in the fall to take it down to a 1.5% comp.

And we are looking for more opportunities to try to bring that down further.

We will share with you guys some more details at the end of February when we get through the process.

Thanks a lot.

Your next question comes from the line of Robert Drbul with Barclays Capital.

Hi.

Good evening.

I guess the question is on the marketing side, Kevin, is there a dollar number or percentage increase that you could share with us in terms of just how aggressive you are going to be going into this fourth quarter?

Not really, Bob.

I mean, we did talk about that but I think to be honest with you, we gave probably quite a bit more transparency in to what we are doing in marketing in the fourth quarter than we typically do.

But we felt it was important to make sure you were aware that we were active in trying to generate traffic for the holiday season, and at the same time assure you that we were still able to do that and maintain the SG&A guidance we had given all along.

So without going--we gave quite a bit of detail to be frank with you, but I wouldn't want to get into the dollars involved.

Okay.

And then the question on the stores on the opportunities that are out there.

Larry, can you talk maybe a little bit about exactly how competitive it is for the new stores or lack of competition out there for the new stores when you look at the opportunities and liquidations, etc., are the choices yours or do you feel like it has heated up at all for any of the specific sites that you guys might be interested in.

I'm sure you have heard some comments out there about liquidations that have gone on prior to the ones that are going on today and there is not as much competition out there as you would think.

So I would have to say that we are not encountering a whole lot of resistance to talking with landlords about locations that we want.

Okay.

And, Wes, last question for you, on the credit business, can you just maybe put a little bit more color around what you experienced with the business in the third quarter and the level of--the dollar number that you took in versus your plans and how you are thinking about that for the fourth quarter in the SG&A?

I would never share the absolute number on the credit--let me just say it continues to be beneficial to the business.

We are seeing, like everybody else, increases in people revolving increases in finance charges and late fees, and also increases in bad debt.

The bad debt increase in terms of percent of A/R has not deteriorated from the second quarter, and we continue to think that credit will be a benefit to our results in the fourth quarter.

Thank you very much.

Good luck.

Your next question comes from the line of Charles Grom with JPMorgan.

Good afternoon, or good evening at this point.

Wes, just to bump on Bob's point, can you just give us a little color on where your utilization rates are for the credit card and if that has changed at all year-to-date?

It has been pretty consistent.

The open to buy average utilization rates is between 30% and 40%.

We don't have very big lines.

We don't have very big balances, so it's a private brand card, not a co-brand card.

Right.

Okay.

And then switch gears a little bit, when you look at the 2007 and 2008 store openings in the four troubled states that you talk to, how many of the store openings were in those four states relative to the number of stores you've opened so far?

And then when you look to '09 and 2010, does the mix change at all?

The number in our new and noncomp base this year in those four states was about 25%.

And we will talk more about '09 and '10 and we'll give you some more color on that in February.

But the mix -- we are committed to, as Larry mentioned, opening the 50 stores.

We have already said we're going to open some additional stores in Florida to fill in the Miami market that we just opened this year.

That's the smart thing to do to reduce the advertising expense when you get into a market in the beginning it is double digits, we can't afford that very long, so we will be filling back there.

But a lot of the other stores are moving around a little bit right now.

Okay.

And just to follow-up, historically, your comp waterfall in year two would be roughly 8% if I recall.

Is it safe to assume that those stores are comping somewhere down mid single digits in year two?

I'm just trying to back into how much of a comp drag the store openings in those markets have had on your overall comp?

It would be safe to say all the stores are performing historically.

We're not going to get into the year two to four, but they are obviously running negative given that we are running a negative 6 comp for the year.

Okay.

Thanks very much.

Good luck.

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

Yes.

My first question is on the Mervyn's liquidations.

Could you guys talk a little bit about that on maybe specifically how many direct store crossovers you have; any evidence you are seeing so far of an impact on your doors and how you're going to respond to those opportunities going into spring '09?

This is Larry.

We have had strategies relative to Mervyn's for quite some time.

They have had 26 stores in liquidation since Labor Day and they started the rest of the chain a couple of weeks ago, and it is a typical going out of business sale; and our strategies remain in place versus Mervyn's, and there is quite a bit of overlap with stores in Arizona, Nevada and California.

Larry, could you get any more specific?

Do you have a number that you consider within your direct trade area of competitors and how much of a comp impact have you seen where there is a store directly in your trade area?

There's really been no comp impact that we would comment on and we're not going to comment until we see how it shakes out as to how many exact stores are in our trade areas and how many stores we would be interested in?

I was just thinking more just to give us a sense for what your direct overlap is with them, not what you would be interested for real estate.

I don't know that we would even give you what the direct overlap is because then you'll try and figure out exactly how many dollars that means in spring of 2009.

Okay.

One other question is on operating costs, as energy costs are coming down, both for your own logistics and transportation, distribution as well as what you are hearing from your suppliers, I would imagine the threat of inflation is reversing going into '09.

Could you give us your thoughts right now on energy as it relates to both your business and the inflation with suppliers?

It is Kevin.

I think generally '09 spring versus '08 spring relatively big basket is still up.

But the rate of up that we're thinking we're going to be facing certainly with our merchandise suppliers as it relates to fuel related costs isn't anywhere near what we thought it would have been even as recently as three months ago much less six months ago.

So on a trend line basis, there's been a pretty dramatic change in a positive direction for us, Jeff.

Okay.

And you would say both for your own operations and then also what you are hearing from suppliers for their own costs?

Yes, definitely.

Thank you.

Your next question comes from Dana Cohen with Banc of America Securities.

Hi, guys.

A couple questions, the CapEx number for next year that goes along with the new stores you have outlined and the increased renovations, to the December comp that you are looking for, can you just help us a little bit on the calendar shift in terms of why comps would get back to low to mid--of course, we are all hoping they get back to low to mid.

And then in terms of what you said, Wes, on the card in the third quarter, that it was beneficial, directionally though, what direction is the profitability going?

Does that mean it was still up year-over-year?

I just wanted to clarify.

Thanks.

I can ask the December comp.

Wes should answer the CapEx and the other hard thing.

I think the way we are thinking about in November and December is the move of the holiday roughly is about a 600 basis points change to our numbers.

So we are kind of thinking about the trends being relatively equal when you adjust for that 600 or so basis point.

So when we say down high teens, that's being impacted in the range of about 600--

Yes, 600 or 700 basis points, which is going to help December by about 450 to 500 and then you have got the benefit of the two extra days, which is another big bonus.

I think the other two, Wes, are CapEx.

Yes.

CapEx for next year is going to probably be very similar to this year.

We are looking for opportunities to reduce it, but we're going to--with 50 stores, same as this year, and an increase in remodels we are funding the increase in remodels through some reductions in our base capital and it should be about $1 billion for remodeling purposes.

And then credit, I would say continues to be, as I mentioned it leverages versus last year, and I would say it increased from the second quarter in terms of benefit.

Year-over-year?

Year-over-year it was better.

That's what leveraged.

Thank you.

You are welcome.

Your next question comes from the line of Deborah Weinswig with Citi.

Good evening.

Kevin, you spoke about the benefit from private label and exclusive label in the quarter with regards to gross margin.

Can you talk about the white space there and how we might think about penetration going forward?

Well, we are planning--we are continuing to plan it up.

It has been pretty consistently up each and every quarter, really for probably the last seven quarters or so.

You know we have a couple new brands entering the mix next year.

We are planning to be able to announce other new brands entering our mix next year as well.

Most of the new exclusive national brands have been performing on a model that looks a lot like a new store model, where in the years two, three and four, we get better than normal growth rates as we make adjustments in assortment, expand the brand into new areas, or correct mistakes when it comes to sizing.

So I think we feel pretty good about the future when it comes to the penetration of both exclusive, national brands, and private brands.

Private brands we would expect that we would probably continue to see the positive impact of people looking for value.

So I think that's liable to rise as well.

Last question, I'm not sure how much you can talk about this, but you certainly discussed some of the marketing plan with regards to some of your most loyal customers.

Can you talk about the shopping patterns you are seeing with your MVC customers and based on that, how do you think about any--further increasing your business with them in 2009?

We work hard to take our noncard customers into our card, and our card customers into our MVC card, simply because there is a pattern that those customers increase their total purchases over the course of time with Kohl's at the expense of other retailers.

We are going to continue to fuel that effort.

We also find that that customer, particularly the MVC customer, is a much stronger and better customer online as well.

So we get the added benefit that they shop from a multi-channel perspective.

So we're going to continue to focus on that.

I don't want to minimize what we are doing on a broader basis, but certainly, that customer is really, really important to us, Deb.

Thanks so much and best of luck.

Your next question comes from the line of Michelle Clark from Morgan Stanley.

Good evening.

Was wondering if you guys are seeing any change in the willingness of vendors to provide mark-down support?

No.

The basic answer is no.

I think--if you think about how we are running our business, Michelle, we are spending--we have invested and we are spending a great deal of money to run our business more effectively and we're doing that by managing our inventory levels to a much lower degree, focusing on cycle time as a solution to not put goods that aren't going to sell in our stores and focusing on size optimization in a very strong way to manage the by-size allocation more effectively.

When we do then have to take a markdown, markdown optimization has been clearly accelerating sell-throughs and lifting average unit retail.

So the composite end of all of that is I think those are all positive things to have a healthier merchandise margin when you get done.

And as a result, we have been very, I think, we've had very good partnerships with suppliers on managing our margin through that.

Last question, are you guys seeing an opportunity to renegotiate lease terms with your landlords?

There are those conversations being had.

We are--as leases come up for renewal and as we are looking at new real estate opportunities, we are starting to see more flexibility on the part of the landlords.

Great.

Thank you.

Your next question comes from the line of David Cumberland with Robert Baird.

Kevin, can you comment on your in approach on in-aisle fixtures during the holiday season and how that compares to past fourth quarters, particularly with your conservative inventory approach?

I mean on a high level, David, amount of in-aisle is reduced year-over-year and that has been reduced, to be frank with you, less on the basis of lowering inventories per store and more on the basis that the research says that the customer experience is better with fewer in-aisle fixtures.

That probably will continue, so as we go into 2009, you will see fewer in-aisle fixtures than you see in 2008.

And again, it is much less about we are looking to get inventories down, and it is much more about the consumer feedback and the research saying it is a better shopping experience.

Thank you.

Your next question comes from the line of Steven Kernkraut with Berman Capital.

Just a quick question.

Obviously, this is a real difficult holiday season that we are facing.

But in terms of your marketing plan for the next six weeks, I hear you are talking about trying to be a one-stop shop and get all the value of customers shopping in your store.

Could you give us an idea of what kind of big ticket items you're going to have in your tower?

Are you going to have flat screen TVs, are you going to have more jewelry, are you going to have a lot of those kind of items to drive your average ticket?

Definitely no on flat screen TVs.

Jewelry is an important element of our merchandise mix.

It is a significant contributor to sales all year and at holiday it is a significantly larger contributor.

Not surprisingly, fine jewelry this year, given the economic environment has not been a high growth classification.

So we are not planning it to be a high gross classification in the holiday either, but it is still a really big and important part of our mix.

But, I mean, in past holidays you have sold opening price point TVs, TV screens similar to what a Wal-Mart would do kind of thing, $150 to $200 kind of items.

Steve, when we have individual items that we do aggressively promote as special items for early birds or special holidays and they range from GPS items to DVD players to cameras, and we will continue to have those.

But we aren't broadening it per se and we are not stepping out on it.

Okay.

Okay.

That's fair enough.

Thanks a lot.

Thanks.

Your next question comes from the line of Liz Dunn with Thomas Weisel.

Hi.

Good afternoon.

I guess my first question relates to just the environment overall and the fact that we are looking at some companies going bankrupt.

Do you have or feel that there is any risk if some of your vendors go bankrupt, what sort of risk does that present to you or any landlords if they happen to go bankrupt, is there any risk that you see as a result from either of those things happening?

It is Kevin.

From a supplier perspective, we have always had a philosophy of a very narrow and deep vendor matrix; and as a result, we do have a tendency to do a disproportionate amount of our business with larger, better capitalized more well-funded suppliers.

There are always people that are going through difficulties and we are sensitive to that and we are aware of that, and if we've had a long-term relationship with them we're going to work hard to see them through the tough times.

But we know how to manage around that.

I would say secondarily, the dramatic improvement in our mix of private and exclusive special brands has meant that we have taken on more and more of the sourcing and supply chain that we used to depend on wholesalers for, particularly smaller and more highly vulnerable wholesalers.

So I think it is much less of a concern than you might normally expect it would be.

I think Larry would probably better equipped to answer the real estate question.

We are just looking at it from the perspective that we are--we are a more desirable tenant than a lot of our competition out there and a lot of the retailers in general.

So we think that that is going to play to our benefit no matter what kind of shape the developer or landlord is in.

Okay.

And then my second question is your inventory control has been really impressive.

How long do you think you can continue to manage inventories down?

Is there a point at which you will need to sort of stabilize inventories?

At a very high level, Liz, we still have dramatic opportunity to run with leaner inventories without sacrificing sales.

We still carry too much inventory per store in my estimation and we can reduce it without really sacrificing customer service or in-stock by using cycle time more effectively and by using size optimization technology more effectively, and our allocation programs more effectively.

So I'm anticipating that as we go into next year, we will continue to manage inventories down.

It won't be at the same level as this year because we have made dramatic reductions this year, but we're looking to continue to improve next year.

Can you share with us how much you're managing spring down?

Not yet.

We're going into spring, as we said in the call, at the end of the fourth quarter we'll go in around mid single digit down, which relative to the 14% decline sounds like a big change; but you have to remember that we were very aggressive and early in pulling back our inventories last year.

So that decline is on top of a decline in 2007.

Okay.

Thank you.

Best of luck.

Thanks.

Your next question comes from the line of Richard Jaffe with Stifel Nicolaus.

Thanks, guys.

Just a follow-up question, you made a comment about repurchase, and I took it to assume that there is no repurchase activity planned for '09 or for the fourth quarter.

We never give you guys repurchases in our guidance.

So we just report them.

So we haven't given any thought to repurchases in '09 at this point and we will tell you if we buy back any stock in the fourth quarter.

I wouldn't put any in your models at this point.

Great.

Just a question on add spend in 3Q and increase year-over-year and should we anticipate the similar level of increase for 4Q?

For the fourth--the fourth quarter marketing spend is up over last year.

We are trying to make the point to all of you that we are being very aggressive and we have taken money from other areas in order to do it.

The increase year-over-year is a modest increase.

It is not a big dollar increase, but you have to look at a line like marketing when our comp assumptions are down 8 to 12 and our total assumptions are down 4 to 8 and we tell you we're actually going to increase advertising, it is a pretty aggressive move.

But as I said, that money is coming from other lines, where we've worked hard to leverage better.

In total, Richard, the increase on marketing is very small relative to last year.

That was the same for 3Q?

It was the same for third quarter as well.

Great.

Thank you very much.

Your next question comes from the line of Bernard Sosnick with Gilford Securities.

I know that marketing to the best customers has always paid off the most, and that's what you are planning to do.

And yet, in report after report from retailers such as yourself, the penetration of credit card to total sales has been going up in companies where sales have been going down.

And so there is a loss of customers along the way.

And I'm wondering whether or not there are things that can be done to hold on to your existing customers better through different marketing methods?

It's too late for the holiday season, but have you given any thought to that going forward?

Yes, Bernie, it is Kevin.

At a high level, I think the point you are making is pretty relevant.

We spent a little time in the script talking about what we were doing in all of our marketing efforts.

So you listened, it sounded like some of the things about the credit card customer, but we also talked about some very aggressive marketing, more frequent sales events, more discounts on property and merchandise that had nothing to do with our charge customer.

They were going to be available for everybody.

I think what you'll see happening is that the customers who shop a store like Kohl's in an environment like this are going to be very aware and sensitive to how they can get the most for their money; and as a result, holding a Kohl's charge card, by its nature, gives you the ability to stretch your dollar a little further and they are drifting to use it more, I think, as a result of that.

But I don't want to give you any impression at all that we are not working really hard on broadening our customer base in total.

I would say we are doing equal amounts of improvements with our non-charge customer as we are with our charge; and I think generally, Bernie, that's the biggest and most challenging issue for all of us is to generate more traffic.

When Wes went through the numbers with you, the third quarter was a continuation of the year.

The comp decline is all about less shopping trips and we know we have to change that.

I think, Bernie, you are also seeing some shift--not everybody uses a Kohl's card every time when they shop our store.

So you are seeing the combined Kohl's charge customer and bank card customer concentrate more of their spending during our credit events because, I think, they are finding the extra percentage off a better value than collecting bonus points for airline miles or things like that.

We are just shifting that.

I think you were right.

There was selective listening on my part and I appreciate the answer.

I didn't say that, Bernie.

May I also ask this: you have outlined very clearly the strategic steps such as cycle time, size allocation, markdown optimization that helps you improve your inventories.

But you have also been particularly adept with certain tactical measures that have brought down seasonal inventories and markdowns so much.

Could you perhaps give us a little bit more color on how you approach the tactical judgment season by season that enabled you to come out so well during the fall and winter?

I think at a high level, as you well know, more seasonally related merchandise regardless of whether it is apparel or accessories, footwear, or home, inherently has a higher risk factor because there is clearly a season and it's got a cycle to it and when it is over, it has to be marked down aggressively.

So we made a decision as we looked at all of our merchandise categories, because when we talked to you about being down 14% per store or down 12% in some other quarter, that's just a company number.

And we are not applying the same rules to all the merchandise in the store, and we have been more aggressive on seasonal because we think there is a higher risk and lower return success factor in betting more inventory in those categories.

It is always a judgment call, but I think to date the team has done a pretty good job of making the right call on that, Bernie.

Thank you.

Your next question comes from the line of Dana Telsey with Telsey Advisory Group.

Good afternoon, everyone.

Can you talk a little bit about the opportunity on the gross margin side given the more intense value message, how do you see that developing, is it IMU, is it product cost, what are you seeing?

And then lastly on the online business, can you give any color on the internet sales trends given the aide of online-only promotions?

I think what you are asking, I hope you are asking about the fourth quarter, are you asking about the fourth quarter, Dana?

Yes, I am.

For the fourth quarter, we have tried to use some of the benefits from all the things that we have touched on, the inventory levels, the technology improvements, the cycle time and we've tried to use those benefits to put a marketing calendar and a pricing calendar together to fuel sales.

Obviously, we want to be realistic about the sales.

Our trend line indicates we should guide 8 to 12, so that's where we are guiding, but we are doing everything we can to use the benefits of the other side to drive more sales.

That 20 to 40 basis points improvement is basically where we have been trending all year and I think we are comfortable we will hit those numbers for the fourth quarter as well.

As it relates to online, we had a very successful third quarter in online; sales were up substantially.

We are planning a very large increase in the fourth quarter as well in online.

We have had a lot of success in reaching all of our customers through that effort.

The idea of creating more online specials is relatively new.

We just implemented that actually within the last week.

So I think it is a little too early for us to judge, but I suspect based on some of the tests we did earlier in the season it's going to be a really successful tactic to drive business.

Thank you very much.

Your final question will come from the line of Adrianne Shapira with Goldman Sachs.

Thanks.

Kevin, you've done a great job of cutting our clearance activity and it is reflected in the margins, but it would seem that traffic becomes vulnerable as the customer is being trained to reject full-price selling and focus on extreme promotions.

So how do you think about the right balance to drive traffic and yet, obviously, deliver the margins that you have been doing?

Well, I think that we try to make that balance judgment based on our--obviously our most recent experience, which we constantly update, Adrianne.

We know that there is a certain amount of sales that we probably sacrifice by having so much less clearance, but we think the benefits in profitability and the benefits in risk to our earnings and the benefits from a customer service perspective, particularly the store experience.

Customer service scores are way up year-over-year for the year and they are way up in the third quarter, and one of the main reasons they are up is that the inventory levels in the stores have created a better shopping experience, and much lower levels of clearance and units.

Customers are a lot more pleased about the way our stores look.

So I agree, it is a balance.

We think there is always a time at which you're going to get more aggressive and we just think right now is definitely not that time.

So we're going to continue to manage levels down and continue to keep clearance way down.

So the fact that clearance has been cut by 30%, how much farther can that go?

It is like every other metric.

It all depends on how successful you manage through the seasonal use at regular price.

Right now clearance levels are down so far, obviously, partly because the total store inventories are down but also because the technology in markdown optimization is generating much higher sell throughs more quickly.

Any time you start cycling around to that, you're going to get less of a benefit, but the answer to me is a lot like the total inventory.

We have improvement to continue to lower inventories.

We still carry too much inventory.

Good luck.

Thanks.

Thank you.

Thanks.

Thanks.

That concludes today's conference call.

You may now disconnect.