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Operator
Statements made on this call, including 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 the item 1A in Kohl's annual report on Form-10K and as may be supplemented from time to time in Kohl's other filings with SEC.
All of which are expressly incorporated herein by reference.
Also, please note that replays of this call will be available for 30 days.
But this recording will not be updated, so, if you are listening after March 26, it is possible that the information discussed is no longer current.
Good afternoon.
At this time, I would like to welcome everyone to the 2008 fourth quarter Kohl's earnings release conference call.
(Operator Instructions).
Thank you, I will now turn the call over to Mr.
Wes McDonald, Chief Financial Officer.
Please go ahead, sir.
Wes McDonald - CFO
Thank you.
With me today is Larry Montgomery, Chairman; Kevin Mansell, President and CEO; and myself, CFO.
Starting off with the financial performance, I'll go over that.
Kevin will talk about our merchandising, marketing and inventory management initiatives.
Larry will speak to the store experience and our expansion plans.
And then Kevin will wrap up with our earnings guidance for the year and the first quarter.
Total sales for the fourth quarter were approximately $5.2 billion this year versus $5.5 billion last year, a decrease of 4.6%.
For the year, total sales decreased 0.5% to $16.4 billion.
Comp sales for the quarter decreased 9.1%, driven by a 7.9% decrease in transactions per store.
Average unit retail increased 3.2% but was off set by a 4.4% decrease in units per transaction.
Resulting in a 1.2% decrease in average transaction value.
For the full year, comp sales decreased 6.9%, driven by a 5.9% decrease in transactions per store.
Average transaction value decrease 1%, as a result of a 1.9% increase in average unit retail and a 2.9% decrease in units per transaction.
The south central and southwest regions led the Company for the quarter but underperformed the Company average for the year.
For the year, the northeast, mid-Atlantic and midwest regions led the Company.
Our credit share was 44.4% for both the quarter and the year, an increase of over 200 basis points in both periods.
Moving on to gross margin.
Our gross margin rate for the quarter was 34.8%, up 52 basis points from last year.
For the year, gross margin increased 44 basis points to 36.9%.
The increases reflect continued inventory management, lower clearance levels and higher penetration of private and exclusive brands.
We would expect gross margin for fiscal 2009 and the first quarter to be flat to up 10 basis points over last year.
Moving on to SG&A.
SG&A increased 3.3% for the quarter and 6.5% for the year.
Reflecting our ongoing efforts to control costs in the current economic environment.
As expected, SG&A increased more than sales but less than new store growth.
The fourth quarter growing in expenses was also lower than our 5% to 6% expectation.
Credit and distribution expense leveraged for the quarter and credit leveraged for the year.
As you know, we have a revenue sharing agreement with JPMorgan Chase, relative our Kohl's credit card accounts.
Even though we continue to see an increase in the number of accounts, which carry balances and ultimately charge off, these increases are more than offset by increases in both finance charges and late fees.
So, this business continues to produce positive year-over-year results.
We would expect our SG&A expenses to increase 3% to 4% for both the first quarter and for fiscal year 2009.
Depreciation expense was $143 million for the quarter and $541 million for the year, up 13.5% for the quarter and 19.7% for the year.
The increases are primarily due to new stores.
Depreciation as a percentage of sales was 2.7% for the quarter and 3.3% for the year.
This reflects an increase of approximately 44 basis points over the prior year quarter and 56 basis points over the prior year.
Depreciation is expected to be approximately $595 million in fiscal year 2009 and $146 million in the first quarter.
Preopening expenses were $4 million for the quarter, $1 million lower than the prior year quarter.
For the year, preopening expenses decreased 31% to $42 million, as a result of the decrease in the number of new stores opened in the current year.
As a reminder, we opened 75 stores in 2008, compared to 112 stores in 2007.
Preopening expenses are expected to be $51 million for fiscal 2009 and $15 million for the first quarter.
The increase over last year is primarily due to the requirement to expense step rent seven months prior to the opening of a new store for our ground leased stores.
The mix of our 2009 new stores is much more heavily skewed towards ground leases than normal, with the opening of the acquired Mervyn's locations.
Operating income for the quarter declined from $684 million last year to $573 million this year.
For the year, operating income was $1.5 billion for 2008, compared to $1.8 billion for 2007.
Net interest expense increased to $30 million for the quarter, compared to $23 million in the prior year, primarily due to reductions in interest earned on our investments.
Net interest expense for the year was $111 million, compared to $62 million in the prior year.
This increase was primarily due to the $1 billion in debt we issued in September 2007, as well as reduction in capitalized interest due to the decreased capital spending in 2008.
Interest expense is expected to be approximately $125 million for fiscal year 2009 and $33 million in the first quarter.
Our income tax rate was 38.1% for the current year quarter and 37.9% for the year.
We expect our 2008 tax rate to be approximately 38% for both the first quarter and fiscal 2009.
Net income for the quarter was 336 million, compared to $412 million last year.
For the year, net income was $885 million, compared to $1.1 billion last year.
EPS for the quarter was $1.10, compared to $1.31 last year.
And for the full year, earnings per share was $2.89 this year versus $3.39 last year.
Moving on to the balance sheet.
We currently operate 1,004 stores, compared to 929 at this time last year.
Gross square footage was 89 million at year end 2008 and 82.5 million at year end 2007, an increase of 7.8%.
Selling square footage increased from $70 million at year end 2007, to $75 million at year end 2008, an increase of 7.3%.
Moving on to investments.
We had $841 million in short and long term investments at year end 2008, compared to $483 million last year.
The majority of the short term investments are in money market funds, with a small portion in commercial paper.
As a reminder, we classified our auction rate securities from short term investments to long term investments during the first quarter of fiscal 2008.
We have also recorded temporary mark to market judgments of $46 million, net of tax, through equity related to our long term investments.
Moving on to inventory levels.
Our inventory of $2.8 billion is 2% below last year in total.
And inventory per store is down just over 9%.
Our inventory levels reflect our continued commitment to conservative sales and receipt planning.
Clearance units per store are significantly lower than total inventory.
Moving on the fixed assets, we generated cash from operations of $1.7 billion in 2008, approximately $700 million more than last year's generation.
Capital expenditures were $1.0 billion in 2008, down 34% from $1.5 billion last year.
Our free crash flow was $687 million, almost $1 billion better than last year.
We expect capital expenditures of approximately $800 million for fiscal 2009 and free cash flow similar to this year.
Accounts payable of $881 million versus last year's $836 million, up about 5.4%.
Our accounts payable as a percent of inventory was 31.5% versus 29.3% last year.
Terms of weighted average number of basic shares for the quarter was 304.6 million; year to date, 305.9 million; diluted shares for the quarter, 305.1 million; year to date, 306.7 million.
We have not repurchased any of our stocks since July of 2008.
We will continue to evaluate market conditions but do not currently expect to repurchase any shares in 2009.
For your modeling purposes, I would use 308 million shares for the year.
And with that, I'll turn it over to Kevin, to talk about merchandising, marketing and inventory management.
Kevin Mansell - President, CEO
Thanks Wes.
As Wes mentioned, comparable sales decreased 9.1% for the quarter and 6.9% for the year.
All lines of business and all regions reported a decrease in comparable sales in both the quarter and the year.
Accessories, footwear, men's and children's outperformed the Company for both the quarter and the year.
Accessories was led in the fourth quarter by sterling silver jewelry, handbags and beauty.
In footwear, children's and athletic shoes reported the strongest performance.
men's was led by basics and casual sportswear.
Children's was driven by infants and toddlers.
Women's and home underperformed the Company for both the quarter and the year, In women's, updated sportswear and intimate were the strongest categories.
In home, bedding and small electrics performed best.
Given the run rate of our business in 2008, our expectations for 2009 are for comparable sales to decrease 5% to 8% for the both the first quarter and the full year.
For the first quarter, February will be better than that range.
March should be within that range.
And April, at the more negative end of that range.
Moving on to our merchandise initiatives.
We continue to be very pleased with the performance of brands introduced in 2008.
Jumping beans, an opening price point children's private brand, targeted to provide the value mom is looking for in her children's apparel, is driving the infants and toddlers success.
The Gold Toe hosiery business continues to help men's, women's and children's basics outperform the Company.
The ELLE brand has been an overwhelming success.
It's part of the reason our missy updated business has been the leader in women's sportswear.
The expansion of our Food Network brand platform to include Bobby Flay has helped housewares and small electrics outperform the rest of home.
And our exclusive partnership with FILA Sport, launched in September in men's, women's and children's apparel, footwear and hosiery, we are very pleased with the results so far.
All of our other exclusive brands continue to perform very well.
For the quarter, our exclusive and private brands together were up 105 basis in penetration to 40.3% of sales.
Primarily due to our exclusive national brands.
For the year, penetration is 41.8%, up over 260 basis points.
The customer continues to respond well to our new brand launches.
And as you just heard, their penetration continues to increase and has substantial room to grow, particularly on the exclusive brand front.
Our research continues to show that that acceptance is being driven by the very brand high awareness each of these brands has when we launch them.
That success is embedded into our thinking for our planning of this year's launches of Dana Buchman, launched President's Day; and Hang 10 in 300 stores in April in our hot and warm markets.
We would also expect to have further news on new exclusive brand partnerships to share with you shortly.
On inventory management, as we mentioned earlier, average inventory per store is approximately 9% lower than last year, stronger than the mid-single digit decreases that we had originally guided towards achieving.
The level of reduction in clearance inventories is substantially larger, approximately 30% less than last year on a per store basis.
Within on our regular priced inventories, the actual changes by area year over year vary widely, based over how we have positioned inventories and receipt plans for each area.
Some areas, like women's sportswear are down more than the total store.
Basic areas, like men's, women's or children's underwear and hosiery are actually higher than last year per store.
Receipts are flowing by area, much tighter to where we see sales occurring.
We would expect our inventory per store at the end of the first quarter to be down mid single digits per store, with additional investment in basics.
As I just mentioned, in addition to carrying a lower overall level of inventory, we continue to focus on flowing receipts in season, as needed for our cycle reduction initiatives.
This benefited us greatly in achieving both our inventory and our gross margin goals in 2008.
Markdown optimization will continue to benefit us in its third year of use, even with these lower inventory levels.
And our size optimization initiatives continue to develop.
And we now expect significant benefits this fall, with a goal of 70% for our sized receipts on the program by the end of fiscal 2009.
As Wes mentioned, we expect gross margin for fiscal 2009 and the first quarter to be flat to up 10 basis points over last year.
We believe this allows us to be very flexible in our pricing, as we expect the environment will remain extremely competitive.
On marketing, as we've indicated, we believe the economy will continue to be very challenging through 2009 and thus very difficult for our customer.
Our marketing strategy centers on the opportunity already inherent in the Kohl's brand.
Positioning us as the smartest customer choice and ultimately to continue to gain share in 2009, just as we did in 2008.
Marketing expense is being planned in line with our total sales on a rate basis.
We intend to continue to optimize our marketing mix, increase our investment in direct mail and digital advertising, while still maintaining strong support in inserts, television and radio.
These vehicles are all going to carry a very relevant message to our customers.
We know they're working hard to manage their households and are assessing all of their expenditures very carefully.
As such, we're positioning Kohl's as the smartest customer choice, by helping them stretch their budget and get more for their money through a very simple message.
The more you know about Kohl's, the more you will shop there for yourself, your family and your home.
Areas of focus for this message will be additional savings events like Power Hours, our Kohl's cash events to use around our world class exclusive brands.
Another key area will be educating our customers on the significant savings opportunities that come with having a Kohl's charge card, whether it be a secret sale or our pick a day savings event.
We'll capitalized on our industry leading, no hassle return policy, as well.
So they shop with confidence every time they come in.
Bottom line, we're confident that the more the customer knows about the Kohl's value proposition, the more she's going to shop Kohl's and the more market share we'll gain in a challenging economy.
Larry is going to take you through our store expansion and store experience.
Larry Montgomery - Chairman
Thanks Kevin.
In 2009, we'll 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 very difficult environment.
We're planning to open approximately 55 stores in 2009, with 19 opening in the spring, including our entry into Alaska, our 49th state.
The balance will open in the fall.
This is a slight increase from our previous projection of 50 stores, as we were able to secure an additional five Mervyn's locations after the auction where we obtained the rights to 31 locations.
The vast majority of our fall openers will be these former Mervyn's sites.
Our decisive action in obtaining these Mervyn's sites is an indication of our financial strength and experience in obtaining valuable real estate and improving the performance of those sites.
Many of these sites are irreplaceable, as they are in highly populated areas where there's no ground up alternatives.
This acquisition puts us in a stronger position to be the retailer of choice in California.
In addition, we plan to remodel 51 stores in the spring season, an increase from 36 in 2008.
These remodels will be split into three waves and reopen in March, May and August.
We've been able to compress the remodel duration from 16 to nine weeks over the past two years, in order to minimize the disruption to the stores and the cost of the remodels.
The increase in the number of remodels differentiates us from the competition and is a critical part of our long term strategy.
We believe it's extremely important to maintain our existing store base in a tough economy, with significant competition for customers whose disposable income is shrinking.
We saw an 8% improvement in our customer service scores in our stores over the last year, due to the improvements made in the physical environment of the stores and a focus on engaging our customers on the sales floor and at point of sale.
We also scored number one on the American Customer Satisfaction Index, a survey done by the University of Michigan and that includes all of our peers.
The customer will be choosing a select number of stores to shop in environment and we want to be at the top of her list.
We will continue to invest in customer service in 2009.
The consolidation has started in retail.
We believe in 2009 that this trend will continue.
We should benefit through increased sales in existing locations such as California.
And we will maintain flexibility in our real estate pipeline to take advantage of any opportunities that may arise as other chains enter bankruptcy or liquidation.
With that, I'm going to turn it back to Kevin, who's going to give you our earnings guidance for the first quarter and year.
Kevin Mansell - President, CEO
Thanks, Larry.
And first, I'd like to make a few comments on our performance in 2008.
On both a fourth quarter and 2008 annual basis, we have outperformed our competitors on a number of metrics.
We've proactively and aggressively reduced our inventories and receipts for 2008, as we saw trends indicating a weakening demand cycle back in the fall of 2007.
This was a positive for us in our gross margin performance, which was up 52 basis points for the quarter and 44 basis points for the year.
It also impacted our free cash flow results very favorably.
Free cash flow improved by almost $1 billion over last year.
Those gross margins results were also aided by the investments we had made previously in technology, including assortment planning, markdown and size optimization.
As a result, we have moved well beyond just cutting overall inventories but are increasing inventory effectiveness by flowing receipts closer to sales, aided by our cycle time initiatives.
We believe that that will be both a short term and a long term advantage for us.
Additionally, our efforts to create a differentiated brand portfolio around exclusive brands that have strong existing equity, have led to a significant increase in penetration of these brands to our total sales.
There has been immediate acceptance by consumers around brands like Simply Vera Vera Wang, Chaps, Candie's, Tony Hawk, Food Network, Daisy Fuentes, ELLE, FILA Sport, and new this year, Dana Buchman and Hang 10.
These brands had high consumer awareness at their respective launches.
This mix improvement as continued to benefit gross margin and position us for future new brands, as well as creating a marketing platform for us to create separation from our competitors.
We also feel strongly that our partnership with Li & Fung on sourcing has been a significant competitive advantage for us, in both private and exclusive brands and aided and will aid our margin improvement as well.
On the new store front, while we're cautious in our opening plan, we believe that there will continue to be consolidation and failures, which may open up attractive real estate opportunities, such as the Mervyn's stores we able to absorb this year.
And finally, and very importantly, we're beginning to get traction on managing expenses using lower comp assumptions.
While SG&A was up 6.5% for the year, it was only up 3.3% in the fourth quarter.
We would expect to achieve this same type of result in 2009, despite adding 55 more stores this year.
With that, let me share with you our initial guidance for fiscal 2009 and the first quarter.
Implied in our guidance is the fact that we expect demand to continue to be weak throughout 2009.
We'll use the advantages I just described to drive our value position to maximize our sales, We would expect to continue to outperform our competitors in total sales and gain market share in 2009, just as we did in 2008.
For both the quarter and the year, we would have the following assumptions.
Total sales decrease of 1% to 4%.
Comp sales of negative 5% to negative 8%.
Gross margin performance of flat to up 10 basis points over last year.
And SG&A dollars to increase 3% to 4% over last year.
This would result in earnings per diluted share of $2 to $2.30 for fiscal 2009 and $0.27 to $0.34 for the fiscal first quarter.
This guidance does not reflect any additional share repurchases in fiscal 2009.
With that, we'd be happy to take some questions.
Operator
(Operator Instructions) Our first question comes from the line of Jeff Klinefelter with Piper Jaffray.
Please go ahead with your question sir.
Jeff Klinefelter - Analyst
Yes, first question is for Wes on the credit.
I heard you at the beginning, just caught the end of your comments on, it's still profitable with the write-offs going up but offset by some higher fees.
And I think that's the summary that you led with.
But can you give us any more insights on your expectations for receivables next year?
Are they going to be with tighter underwriting standards?
Are you anticipating those receivables dropping any pressure from that on comps?
And again, just remind of the mechanics of how this flows through your income statement?
And when it might start deteriorating the contribution that you've receiving?
Wes McDonald - CFO
Sure, you asked a lot of questions.
I'll try to answer them all.
I think we've seen approval rates deteriorate quite a bit in the fall, particularly in the fourth quarter.
And we've built that expectation in our guidance.
We've tightened our standards a little bit, especially in high risk states.
The states that most folks are continuing to mention, California, Florida, Arizona, Nevada.
We're also seeing some deterioration in some other states in the midwest related to the auto industry.
I continue to believe it's going to be a benefit to us in terms of leveraging next year.
I don't expect it to be as big a benefit as it was this year.
However, that's built into our guidance and SG&A.
We treat it as a contra-SG&A account.
And we settle up with Chase on a monthly basis.
And it's really a net revenue number, which takes into account finance charges, plus late fees, plus any other revenue, less bad debt expense.
As you probably remember, Jeff, we also do all the customer service and marketing on that.
That's all on our nickel and all built into the SG&A assumptions we gave you earlier.
Jeff Klinefelter - Analyst
Thank you.
And then, Kevin, in terms of the marketing plans, I can't remember if you mentioned this at the beginning.
But the budget for 2009 in terms of the actual marketing dollars, what direction it's going?
And then, shipping between mediums, we're seeing, obviously, online frequency kick up.
Or it seems to have kicked up for everybody this last couple of quarters.
Is there an efficiency that you're starting to gain by leveraging the online medium a little bit more so than print and can that drop your dollars?
Kevin Mansell - President, CEO
From a total basis, the guidance we would give is that marketing is planned essentially in line with sales, on a rate basis.
So think about it from that perspective.
As it relates to the mix, yes, we're definitely increasing our investment in direct mail but the largest increase in investment on a mix basis is, in fact, in digital advertising.
So while we're going to continue to have substantial support in our more traditional advertising like our tabs, or our broadcast, both TV and radio, digital advertising has got the largest single increase in the marketing budget.
Jeff Klinefelter - Analyst
Okay.
So, while the total dollars might not drop any faster than sales, you're getting more imprints for the same dollars by using digital?
Kevin Mansell - President, CEO
Yes.
Jeff Klinefelter - Analyst
Okay, thank you
Operator
Our next question comes from the line of Lorraine Maikis-Hutchinson with Bank of America.
Please go ahead with your question.
Rick Patel - Analyst
Hi, good afternoon, this is Rick Patel in for Lorraine.
Could you just update us on where you see opportunities for cost cutting this year?
How much have you done already and what do you have left to do?
Wes McDonald - CFO
Well, I think we kind of covered it in the call.
We gave guidance at the beginning of the year that our SG&A would be up 9% to 10%.
We achieved an increase of 6.5% and an increase in the fourth quarter of 3.3%.
That gives us confidence that the SG&A benefit, our increase will be around that much for 2009.
Having said that, we continue to look daily at opportunities to continue to reduce expenses.
And we've done a nice job, I think, in the store's organization, trying to flex store payroll down with sales where appropriate, without hurting the customer service experience that Larry mentioned earlier.
Rick Patel - Analyst
All right.
And then, can you provide some color on what you're basing your negative 5% to 8% comp on?
Is that reflective of the current trends that you're seeing?
Wes McDonald - CFO
It is reflective of the year trend, which was down 6.9%, as we mentioned.
And reflective of the quarter trend, which was down 9.1%.
It doesn't have anything to do with our February trend.
Rick Patel - Analyst
Thank you very much.
Operator
Our next question comes from the line of Charles Grom with JPMorgan.
Please go ahead with your question, sir.
Charles Grom - Analyst
Thanks, good afternoon.
Wes, could you just remind us what your comp hurdle rate is looking like for 2009?
And also, the sensitivity to the margin line, for every 1 point comp move up or down?
Wes McDonald - CFO
It's basically flat for 2009.
We hope to do better as we get through the year.
And as it goes down, it's probably around 15 basis points on the down side.
And probably on the upside it's around 8 to 10.
Charles Grom - Analyst
Okay, all right, that's helpful.
And then another one, Wes, you on the -- could you just flush out this step up in rent that you're going to see that's going to increase the preopening?
I think you said $51 million, which was higher than what we thought.
Actually, about $0.08 higher.
Wes McDonald - CFO
It's really a function of the fact that on ground leases, you have to start expensing them seven months ahead of time.
So, if we open all of those Mervyn's stores in October, a vast majority of those are ground leases.
We have to start taking expense on that in February.
It's not a cash expense.
It's just how you have to account for straight line rent, when you factor that in.
Charles Grom - Analyst
Okay.
And then --?
Wes McDonald - CFO
It's possible -- we also kind of want to make a little bit of a splash in October when we're opening 30-some stores in California.
Charles Grom - Analyst
Okay, so is your actual preopening going up or is it just the way it accrues through the model?
Wes McDonald - CFO
It's the way it accrues through the model.
The actual cash out the door is actually down.
Charles Grom - Analyst
Okay, I understand.
And then, one for Larry and Kevin.
Could you guys discuss a little bit about any trends you've seen in California over the past couple of months?
And any benefit you've seen from that consolidation in retail?
And how much of that you're assuming will continue in your guidance or if you're not assuming that you're going to get that benefit?
Kevin Mansell - President, CEO
This is Kevin, Charles.
I think the short answer is we're not making any assumptions about business going forward, as it relates to the elimination of Mervyn's as a particular competitor in California.
I think Wes described it well, when we put guidance out of negative 5% to negative 8%, it's basically based on our 2008 actual results being negative 6.9% and in the fourth quarter, 9.1%.
So, there really isn't anything about that in there.
More recently, we have seen upticks in particular stores that are closely located to former Mervyn's locations.
I'd leave it that way.
Charles Grom - Analyst
Okay, thanks very much.
Good luck.
Operator
Our next question comes from the line of Robert Drbul with Barclays Capital.
Robert Drbul - Analyst
Hi, good evening.
The first question that I have is on the gross margin, you talked about the gross margin guidance giving you some flexibility to respond to the competitive environment.
Can you talk a little bit more about what you're seeing in the competitive environment and sort of how much flexibility you think you have with the guidance that you just gave there?
Kevin Mansell - President, CEO
Well, I don't think -- it's not so much about the competitive environment, it's about the customer environment.
And I think what we're saying is that the initiatives that we had in place last year, which we covered kind of in-depth, that definitely helped improve margin are still in place.
But we want to make sure that we have the flexibility to use that potential lift to drive and deliver great value because we recognize that the customer is facing a very difficult economic environment.
So, it's more about the customer environment.
It's not really about the competitive environment.
Robert Drbul - Analyst
Okay.
And when you look at the inventory and the levels that you guys are running at now, how much more room do you think you have to take inventories down throughout this year?
Kevin Mansell - President, CEO
Well, we're planning -- we're essentially planning to flow receipts appropriately in line with sales.
And I think our big focus, which we tried to call out, Bob, in the call itself, is we're not going to simply cut inventories.
Our inventories are going to be lower but they're going to be lower because we're more effectively flowing receipts to the sales demand.
And having the dramatic or knee-jerk reactions to cutting inventory, I don't think is a good strategy.
We made cuts proactively last year in advance of the demand weakening and it served us well.
They're actually down further than our actual sales performance.
Right?
We ended the quarter with 9% plus less inventory per store in a quarter in which we expect sales to be down 5% to 8%.
So, I think we're really well positioned.
The inventory is actually down further than the sales are.
And we're going to receipts based on sales demand.
That's really what we're saying and hopefully, make more effective use of the inventory.
Wes McDonald - CFO
Yes, and as Kevin mention too in his comments, we're making an investment in basics, which has very little markdown risk and our clearance inventories are down 30% on a per store basis.
And we expect to continue to have clearance inventories down to last year each quarter.
Robert Drbul - Analyst
Thanks and just one more final question is, so when you look about at a conservative outlook for '09, I think as you said in the comments and the press release, where do you think you're being most conservative in your outlook across the board?
Kevin Mansell - President, CEO
Well, I think to be honest with you, I think we're being reasonable in our assumptions, based on the run rate of the business that we've seen.
So, to be frank if you took each number.
right?
The run rate of the business on a comp store basis was down 7.
So we've guided 5 to 8, we think that's reasonable and rational.
The run rate of the margin was actually up 44 basis points, 50 in the fourth quarter.
We're only guiding flat to 10.
But the reason we're guiding that is what we just discussed.
We want to have a lot of flexibility to drive demand because the customer has told us is that her budget is smaller than it used to be.
Therefore, if we're going to be more sales, we got to get more share.
And from an expense perspective, basically, I think Wes described it well, we're guiding 3% to 4% increase in SG&A, which is what we achieved in the fourth quarter and better than the whole year.
So I kind of feel like, while we're being conservative from the perspective of just the overall snapshot, because we have exceeded our estimates before, it pretty much matches up to what we're experiencing in 2008, including the fourth quarter.
Robert Drbul - Analyst
Sounds good.
Thank you.
Operator
And our next question comes from the line of Uta Werner with Bernstein.
Please go ahead with your question.
Uta Werner - Analyst
Good evening, I was wondering if you could please comment on a little bit on the store renovations, in terms of how much CapEx per store you think that might take?
And also, I wondered if you could be a little bit more specific, maybe about these innovations that you're seeing through the course of the year?
What categories might they be in, in particular?
Wes McDonald - CFO
Well, I can address the remodel, we spent about $2.3 million in remodels on a per store basis last year.
So 51 remodels this year, you can just do the math on that.
That's been a huge reduction over the last two year.
I think a couple of years ago, we were spending a lot closer to $3 million a store.
So we've become more efficient, as well as shortened the duration.
That's important because, obviously, during the disruption in the construction period, you're not -- you're losing sales because people are trying to find out where everything has been relocated to.
So, the shorter the duration, the more chance you have to pick up sales after the construction, when we do the re-grand opening.
And I'll let Kevin answer the other question.
Kevin Mansell - President, CEO
What was the other question, Uta?
Uta Werner - Analyst
What kind of new products innovations or introductions you were thinking of?
You alluded to them but I was wondering what categories they might be in?
Kevin Mansell - President, CEO
You know what, we're not -- I don't want to forecast something that we haven't finalized yet.
I would say, if you look at past history, over the course of the last three years, we've had a pretty consistent rollout of new legitimate brands each and every year.
And we intend to have some this year as well.
And there will be a couple this spring.
Uta Werner - Analyst
Right.
Two more little questions at the end here.
One, maybe you could comment on new store productivity and also how the Internet has been doing?
Thanks.
Wes McDonald - CFO
New store productivity, for the year, was sort of in the mid-60% range.
Obviously, some of our new stores were affected by the fact that we opened an awful lot of stores in those four states that have been most affected by the economy, Arizona, Nevada and Florida.
Some of that's also a mix, as we've opened more small stores this year than we have in the past.
The Internet business has been very strong.
We saw, I think it was, $340 million for the year, so up about a little over 40%.
And continued to make a lot of progress there.
Those combination customers with brick and mortar and Internet are obviously our most profitable customers and also lead to high sales.
So, we're very encouraged about that and I expect that to continue to grow substantially better than the industry as a whole, on the Internet.
Uta Werner - Analyst
Perfect, thanks very much.
Operator
Our next question comes from the line of Adrianne Shapira with Goldman Sachs.
Adrianne Shapira - Analyst
Thank you.
Kevin, just following up on the conversation you had earlier in terms of taking some of the initiatives to improve margins.
And it sounds like, if I understand, investing in price.
So, help us understand, should we expect a sharper IMU in 2009?
Kevin Mansell - President, CEO
Honestly, Adrianne, I'm not going to get into the details of how we're competitively positioning our value equation.
Just suffice it to say, that we're going to use the tools that have led to improved merchandise margin to our benefit by driving better value.
And that's the objective because we do think the environment we're in gives us a huge market share opportunity.
And we think as we look at the competitive set, given their own performance last year and with their position, they don't have those tools in place to be able to do it.
Adrianne Shapira - Analyst
Okay.
And then maybe just help us think about when you look at your positioning with good, better and best across the nine box grid, where would you expect to focus your attention when we step back and look at the assortments?
Kevin Mansell - President, CEO
We're going to have balance.
Balance is really important.
We've had -- when you think about the successes we've talked about in our exclusive brands, they're generally better and best.
And they've been very, very well accepted, I think, because they're legitimate brands.
But we also are very focused on value.
And as a result, brands like Jumping Beans that we introduced last year have been a wild, runaway success.
And that's opening price points.
So, I would say, my answer to you is we are going to have balance.
We're going to have a strong opening price point and we're going to use the tools that we have that are lifting our margins to drive that.
And then we're going to balance in there new better and best brands because we think we have competitors who we can take market share from.
Adrianne Shapira - Analyst
Okay, that's helpful.
Thanks.
And then just Wes, you've done a great job in terms of taking down clearance levels.
Where do you think that can go to as a percentage of the mix?
Wes McDonald - CFO
We're going to continue to manage the inventory.
It varies by month in July and January and February, it's still a significant part of the mix.
But I still think we can still reduce clearance.
The great thing about our plan allocation team and our merchants, is, in some of our lower volume stores where we've made the best progress in gross margin, we actually had higher sales per store and lower inventory per store.
So, I'ld like to continue to improve that across all grades of our store.
We can continue to reduce clearance and continue to get increased sales per store and drive better gross margins.
Adrianne Shapira - Analyst
Okay.
So when do we start to anniversary some of those big declines?
Kevin Mansell - President, CEO
Let me just get on it for Wes.
We're looking at inventory first in total.
So, you're carving out the part that we call clearance because we're trying to show you that we're making a lot of progress in both transitioning through and selling through it.
But we expect to continue to run with lower clearance levels all year.
This is not a short term strategy or a one-time strategy and we expect to run with lower inventory total levels all year.
That's the plan.
Adrianne Shapira - Analyst
Okay, great, thank you.
Operator
Our next question comes from the line of David Glick with Buckingham Research Group.
David Glick - Analyst
Good afternoon.
A couple of questions.
First, in the traditional women's sportswear area, I know that's been a bit of a challenge.
And you hope certainly, to have at least a partial answer in the introduction of Dana Buchman.
And I was wondering if you could give is some color, now that you have President's Day behind you, is it big enough to be a difference maker?
And just your initial reaction to the launch?
Kevin Mansell - President, CEO
I think the short answer is yes.
It's definitely big enough to be a difference maker.
It's been on the floor for basically less than a month but it's been an incredibly successful launch.
It's far exceeded the plan that we had for it.
And the most exciting news I think we saw, was that the other major brand that we have on that same pad, which is Chaps, has also performed exceptionally well compared to last year.
So, as we said when we talked about sales guidance, the month of February is not over, but the month of February will be, in fact, better than the guidance of negative 5% to 8% that we gave.
And some of those things like Chaps and the success of the new Dana launch are a key component of that.
David Glick - Analyst
I think that's segue into my question because when I look at your monthly sales flow, I would not have guessed that February would have the highest relative plan.
I would have thought that April would be better than March because of the Easter shift.
I know you have -- there's an extra day in March relative to April.
Can you help us understand the Easter shift?
And you just answered the first part of my question, that February is ahead of your original expectations.
But if you could walk us through the Easter shift, that would be helpful.
Kevin Mansell - President, CEO
Well, it's definitely implied in the fact that we expect a little better performance within the 5% to 8% in March versus April.
There really isn't much more to say than that.
David Glick - Analyst
So the extra day is worth more than -- you have that pre-Easter week falling into April.
Kevin Mansell - President, CEO
Right, it's not really just about the extra day, it's just how we look at our promotional calendar and our year-over-year events strategy.
We think there's a bit more opportunity in March than there is in April.
David Glick - Analyst
Got it, great.
Thanks for the color, I appreciate it.
Good luck.
Operator
Our next question comes from the line of Erika Maschmeyer with Robert W.
Baird.
Please go ahead with your question.
Erika Maschmeyer - Analyst
Thank you.
Could you please give an update on your current average cycle time from concept to customer and your goals for improving that in 2009?
Kevin Mansell - President, CEO
Well there's a -- the answer to that, Erika, is a really broad answer because of course, the cycle time initiatives are very different depending upon the specific brand.
But the cycle time initiatives that we have, that have been employed in the more recent new brand launches are working well.
Our results in ELLE, a big function of the reason that has been a runaway success is that the cycle time initiatives have allowed us to buy and deliver much closer to when the customer is interested in buying.
And those same cycle time initiatives were employed in the Dana Buchman launch as well.
So I think that over the course of the year, will also have a positive impact on the Dana Buchman sales.
Erika Maschmeyer - Analyst
Okay.
And is Simply Vera along those lines, as well?
Kevin Mansell - President, CEO
Well, we're employing the same concepts to every one of our exclusive and private brands.
But as I said, it varies greatly depending upon the brand and the type of merchandise within the brand.
So, I wouldn't want to make a blanket answer to Vera because home is going to be different than jewely, which is different than handbags, which is different than apparel.
Erika Maschmeyer - Analyst
That makes sense.
And then, on the Q3 call, you mentioned playing for 60 remodels and today you said 51.
Were there any specific reasons for that reduction?
Wes McDonald - CFO
Just really managing the total CapEx.
As we also mentioned in the call, we originally thought we'd have 50 stores opening next year and we're going to have 55.
So we're just kind of managing the CapEx spend we wanted to have.
Erika Maschmeyer - Analyst
Perfect.
That seems smart.
Thank you.
Operator
Our next question comes from the line of Dan Binder with Jefferies and Company.
Dan Binder - Analyst
Hi, good evening.
A couple you have questions for you.
On the interest expense guidance, you guided $125 million for the full year, if I heard you correctly.
If you just generated $687 million in free cash this year, most of which was at the end of the year, and $687 million or so next year, I'm a little confused on why interest expense would be up that much year-over-year?
Wes McDonald - CFO
Because we were earning a heck of a good rate during that little dislocation in the third quarter.
Some of our auction rate securities, we were earning 15% on.
Interest rates don't look so great right now.
We don't expect it to be any better going forward.
So, it's really a function of the rate, not the cash.
Dan Binder - Analyst
Okay.
That seems like a lot of cash generation.
Wes McDonald - CFO
Cash is good.
Dan Binder - Analyst
Yes.
Wes McDonald - CFO
More cash is better than not as much cash.
But we're just making real conservative estimates on the interest rate.
Dan Binder - Analyst
What kind of rate assumption do you use?
Wes McDonald - CFO
It's like 1%.
Dan Binder - Analyst
Okay.
And then, any color you can give us on what you think the credit penetration and private label penetration will look like as a percentage of sales for the coming year?
Kevin Mansell - President, CEO
Well, the -- Dan, on the private and exclusive brand penetration we expect it to be up.
We don't ever get into trying to forecast the amount because it's going up to the customer to decide that.
But given the new brands, the success of the new brands, the new launches that we have this year, the total percent of private and exclusive brands will be up over last year.
Wes McDonald - CFO
And I'll piggyback on Kevin's answer because it was a good one.
We expect it to be up too but we're not going to quantify it.
I think it's going to be a function of, obviously, new customers are going to struggle to get approved, if they've never been a Kohl's customer before.
But I think we'll start to see more sales on our Kohl's card as the value messages come through in our marketing and we'll pick up share that way.
Dan Binder - Analyst
Okay.
And then lastly, on the -- in terms of benefits that you think can accrue to -- or accrue from markdown optimization and size optimization, can you put any numbers to that?
Kevin Mansell - President, CEO
Again, we don't get any quantifying any individual initiatives.
But we believe that all of the initiatives that we've talked about give us the wherewithal to be aggressive in our marketing and flexible in our pricing.
And all of that is implied in the guidance of flat to up 10%.
Dan Binder - Analyst
Okay, thanks.
Operator
Our next question comes from the line of Liz Dunn with Thomas Weisel.
Liz Dunn - Analyst
Hi, thank you.
First, just a clarification.
So, the only reason that February is expected to be better than the trend you're expecting for the full quarter is just you're running above plan?
There's nothing -- there's no sort of shift or anything that's happening?
Wes McDonald - CFO
No, we're 26 days into the month.
So we've got a pretty good idea of what February is going to be.
Liz Dunn - Analyst
Yes, I understand that.
But there's nothing that led to --?
Kevin Mansell - President, CEO
No, there's no event shift, it's similar events to last year.
We have President's Day sales, credit events, same things.
Liz Dunn - Analyst
So, you're feeling like, obviously, it's running ahead of plan but it's early in the year.
So, no reason to get excited and change your outlook versus what you experienced in the first quarter.
Wes McDonald - CFO
Yes it's early in the year, it's even early in the quarter.
We're not even through.
A relatively small month --.
Liz Dunn - Analyst
Okay.
I just wanted to make sure I understood.
The private brands as a percentage of sales, I heard you mention that it's up but I didn't get the amount year-over-year.
If you could share that?
Kevin Mansell - President, CEO
I think that what we actually said, Liz, is that the total was up both for the quarter and for the year.
For the quarter, it was up a little less than for the year.
In both cases, for the quarter and the year, most of the pickup was actually in the exclusive brand side.
And the pickup was less on the private brand side.
But they were both up.
Liz Dunn - Analyst
Okay.
Now, is there any risk at all associated with private and exclusive brands in that, there's no vendor in some cases on the back end to support you on the margin?
Or is the margin differential on those brands versus national brands so great that, under almost any scenario, you'd still come out ahead?
Kevin Mansell - President, CEO
I think a short answer is that as long as we've -- because we didn't do this in a vacuum.
Right?
We built an entire set of technology and cycle time and flow initiatives that supported all of the private brand and exclusive brand initiatives.
We've built a product development organization and launched a new office in New York, which has been expanded dramatically.
Once all of those fundamental bases are in place, then I think the private and exclusive brand penetration is always going to be a positive for us.
And it's just a question of how quickly consumers embrace the brand.
Because still, the most important thing, whether it's private or national or exclusive, is the merchandise.
If the merchandise is great looking, they're going to buy more.
Liz Dunn - Analyst
Okay.
And then final question, is there any way to kind of break out, with the 52 basis point gross margin improvement in the fourth quarter, how much of that was due to sort of your markdown rate versus IMU?
Kevin Mansell - President, CEO
We -- really, the initial markup versus markdown rate doesn't really matter.
I think we're kind of saying that the balance of a positive lift due to better inventory management, a positive lift due to a better mix of private and exclusive brand, and the impact of technology improvements; all played a role in the improvement of merchandise margin.
Liz Dunn - Analyst
So, both were favorable?
Kevin Mansell - President, CEO
Yes.
Liz Dunn - Analyst
Okay, thank you.
Operator
Our next question comes from the line of Michael Exstein with Credit Suisse.
Michael Exstein - Analyst
Kevin, you mentioned something about the budget of your customer getting smaller.
Is that information just intuitive or are you getting directly from focus groups?
Kevin Mansell - President, CEO
No, we're getting that from both our own primary research throughout the third and then the fourth quarter.
And obviously, there's secondary research as well, But our own primary research is clearly saying that consumers don't expect the strong economy in the next six months to a year.
That they intend to spend well within their budget.
That's the most important thing that they have in their mind, is they have to stay within their budget.
And that overall, they expect to spend a little less on clothing.
So all of those things tell us that value is very important.
And we think that, and we know through our research, that Kohl's clearly has the best sales.
And consumers recognizing us for that and we think that because of that, we have a huge market share opportunity.
Michael Exstein - Analyst
And do they say in terms -- do they break down further, their intentions in terms of apparel sales?
Do they give preference to the kids or to the men or the women?
How do they break that down?
Kevin Mansell - President, CEO
We do research on all that.
To be honest with you, we'd be getting into a lot of more proprietary information.
But in general, I don't think it's unfair to assume that she will cut back for herself, probably before she'll cut back for her children.
Wes McDonald - CFO
That's evidenced in our lines of business performance this year.
Kids and accessories and men's have led and women's have trailed the Company?
Michael Exstein - Analyst
And then, finally, you mentioned that cosmetics was relatively strong.
Is there -- what's going on in that business?
What are your plans for it and so forth?
Thanks very much.
Wes McDonald - CFO
Yes, it's grown faster than the store, it outperformed the store pretty handily.
That was driven both by our traditional beauty business but also by a more increased emphasis on fragrance.
We provide great value there.
We have reallocated our space allocation within the beauty department.
It's working.
And I'd say inventory effectiveness has improved a lot in that area.
So generally, across the board, while small, it was definitely a big success story.
Michael Exstein - Analyst
And your future plans?
Kevin Mansell - President, CEO
More of the same would be good.
I'd be happy with that.
Michael Exstein - Analyst
Okay.
Good luck, thanks.
Kevin Mansell - President, CEO
Thanks Michael.
Operator
Our final question comes from the line of Deborah Weinswig with Citi.
Deborah Weinswig - Analyst
Under the wire.
So, Kevin, you spoke about size optimization and I feel like we've been hearing lots of details around the rollout for quite awhile.
Why does it -- and I don't think this is specific to Kohl's but why does it take so long to realize the benefits?
Kevin Mansell - President, CEO
It takes so long because every single supplier that we deal with, all the way back to the factories in Asia, must have systems in place and processes in place in order to accommodate multiple different pre-packs, our shipping packs, per our needs.
And that takes a long time to convince them about the need for the investment, the need for the change in their processes.
And why, ultimately and eventually, actually, it's going to be a big benefit for them.
Because it will mean less markdowns at the end because our size, weight or value across the size spectrum would be more appropriate by store.
It just takes a long time to get people to accept that and make the investment.
And then of course, there's a lead time involved in the product to begin with.
And of course, it's not a small task, Deb.
So we have to do it area by area by area and brand by brand by brand.
Deborah Weinswig - Analyst
And then with regards to the fourth quarter, you had guided most recently to earnings of greater than $0.99.
And $1.10 is obviously greater than $0.99 but obviously --?
Kevin Mansell - President, CEO
That's correct.
Deborah Weinswig - Analyst
But what happened there that was so different than your original expectations?
Wes McDonald - CFO
I'd say the margin was a little better than we thought.
And as we were closing the books, the expenses were much better than we thought.
So, we have to write all that stuff like to Wednesday and we don't close the books for a couple of days after that.
So, just trying to be conservative.
Deborah Weinswig - Analyst
Okay.
And then last question, Kevin you had said on the third quarter earnings call that you were launching the most aggressive holiday marketing campaign in the Company's history.
What did you learn from it?
Kevin Mansell - President, CEO
Well, I think what we learned as much from the marketing campaign, as well as the research, is that, as I alluded to with Michael, the consumer is going to have to be very highly motivated to spend.
Because they have it in their mind that they have a budget and that budget is smaller than it used to be.
And they're not going to open up that budget beyond the total that they have.
And the decisions they make about where they're going to get merchandise is certainly about multiple things.
We call it everything from delivering value, to respecting her time by making sure we have what she wants in stock and size and color, to delivering exciting brands and merchandise, all the way to inspiring her with phenomenal marketing.
And I would say, through the fourth quarter and even more so as we go into spring, we think we're coming to the party on all four of those pillars and delivering on each of those four things in our stores.
And I think we've learned that in the fourth quarter, we knew it from the research.
And it's incorporated into our strategies for spring.
Deborah Weinswig - Analyst
All right, well thanks so much and best of luck.
Kevin Mansell - President, CEO
Thank you.
Operator
Ladies and gentlemen, this concludes today's conference call.
You may now disconnect.