柯爾百貨 (KSS) 2009 Q2 法說會逐字稿

(Audio in progress) 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 as may be supplemented from time to time in Kohl's other filings with the SEC.

All of which are expressly incorporated herein by reference.

Also, please note that this replay of this call will be available for 30 days, but this recording will not be updated.

So if you are listening after September 13 it is possible that the information discussed is no longer current.

Good morning.

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

At this time I would like to welcome everyone to Kohl's second-quarter 2009 earnings release conference call.

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

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

(Operator Instructions)

I would now like to turn the call over to Mr.

Wes McDonald, Chief Financial Officer.

Mr.

McDonald, you may begin.

Thank you.

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

Sales for the second quarter were approximately $3.8 billion, up 2.2% from last year.

Year-to-date total sales increased 1.3% to $7.4 billion.

Comp sales for the quarter decreased 2.3%.

Transactions per store increased 0.3% for the quarter.

Average transaction value decreased 2.6% as a 1.9% increase in average unit retail was more than offset by a 4.5% decrease in units per transaction.

Year-to-date comp sales decreased 3.2%.

Transactions per store decreased 1.1% year to date.

Average transaction value was down 2.1% as a 3.9% increase in average unit retail was offset by a 6% reduction in units per transaction.

Our credit share was 47% for the quarter, up 370 basis points over the prior-year quarter.

Year to date our credit share was 46%, a 270 basis point improvement over last year.

Turning to gross margin, our gross margin rate for the quarter was 40% almost up approximately 40 basis points from last year.

Year to date our gross margin rate has increased approximately 60 basis points to 38.8%.

The increase reflects continued improvement in inventory management, lower clearance levels, and higher penetration of private and exclusive brands.

We would expect gross margin to increase 10 to 20 basis points over last year in the third quarter and 20 to 30 basis points in the fourth quarter over last year.

SG&A of $966 million, up about 4% over last year.

SG&A was also up 4% for the year to date period consistent with our guidance.

Credit, distribution centers, and IT expenses leveraged in both periods.

Store payroll also leveraged for the second quarter and advertising leveraged for the year-to-date period.

We would expect SG&A expenses to increase 3% to 4% in the third and fourth quarters less than our store growth of 5.5% for the fall season.

Depreciation expense was $144 million for the quarter and $285 million year to date, an increase of approximately 8% in both periods consistent with our store growth of approximately 6.8% in the spring season.

The increases are primarily due to new stores.

Depreciation as a percent of sales was 3.8% for both the quarter and year-to-date period, up approximately 20 basis points over the prior-year periods.

Depreciation is expected to be $152 million in the third quarter and $155 million in the fourth quarter.

Pre-opening expenses were $11 million for the order, $5 million higher than the prior-year quarter and $26 million year to date, $9 million higher than the first half of 2008.

We opened 19 stores in the first half of 2009 compared to 28 stores in 2008.

Even though we opened fewer stores in 2009 pre-opening expenses increased because a larger percentage of our fall 2009 new stores are treated as ground leases.

Pre-opening expenses are expected to be $23 million for the third quarter and $5 million for the fourth quarter.

Operating income of $399 million for the quarter or 10.5% of sales versus last year's $406 million, down $7 million.

Year to date operating income was $651 million down 4% from the comparable prior-year period.

Net interest expense increased to $31 million for the quarter compared to $26 million in the prior year, primarily due to lower interest rates in our long-term investments and reductions in capitalized interest due to lower capital expenditures.

Year to date net interest expense was $62 million in the current year, up $9 million over 2008.

Interest expense is expected to be approximately $32 million for the third quarter and $31 million for the fourth quarter.

Our income tax rate was 37.6% for both the current quarter and year-to-date period.

We would expect our tax rate to be approximately 37.8% for both the third and the fourth quarters.

Net income for the quarter was $229 million compared to $236 million last year, and year to date net income was $368 million in 2009 compared to $389 million last year.

Diluted EPS was $0.75 for the current-year quarter and $1.20 year to date.

Last year EPS was $0.77 for the quarter and $1.26 year to date.

Moving on to some balance sheet metrics.

Square footage; we currently operate 1,022 stores compared to 957 at this time last year.

Gross square footage was 91 million at the end of the quarter of 2009 and 85 million at quarter end 2008.

Selling square footage increased from 72 million at quarter end 2008 to 76 million at quarter end 2009.

We had $1.5 billion in short-term and long-term auction rate securities investments at quarter end compared to $461 million last year.

A majority of the short-term investments are in money market funds.

We have also recorded temporary mark-to-market adjustments of $45 million net of tax through equity related to our long-term auction rate security investments.

Inventory of $2.7 billion, approximately flat to last year versus the prior-year quarter, and these inventory levels reflect our continued commitment to conservative sales and receipt planning.

Our inventory per store is down approximately 6% and clearance inventory per store is down significantly lower than total inventory per store.

Moving on to fixed assets.

Year to date capital expenditures were $336 million, 40% lower than last year.

We generated more than $1 billion in cash from operations during the first half of 2009 and free cash flow was $676 million, over two times higher than the $316 million generated in 2008.

We are in the process of correcting an error on the cash flow statements.

The deferred tax line was missing from a conversion to the PDF file and, for your records, this year the effect from the deferred taxes was $15 million and last year was $28 million.

Moving on to accounts payable.

Accounts payable of approximately $1.15 billion, up about 13% over last year and AP as a percent of inventory was 42.3% versus 37.6% last year.

Weighted average diluted shares were 306 million for both current year periods.

We have not repurchased any of our stock since July of 2008 and 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 306 million shares for the balance of the year.

With that I will turn it over to Kevin, who will make some comments about our merchandising and marketing initiatives.

Thanks, Wes.

As Wes mentioned, comp sales decreased 2.3% for the quarter with accessories, home, and footwear achieving positive comparable sales increases.

Accessories reported the strongest performance for the Company led by sterling silver and fashion jewelry as well as handbags.

In home small electrics, bedding, and food prep performed best.

Footwear was led by children's footwear and athletic shoes.

Men's was led by active, basics, and casual sportswear.

Children's was driven by infants and toddlers in boys and in Women's intimate and updated sportswear were the strongest categories.

By region the Southwest was the strongest region with a high single-digit comp store increase and the Southeast remains the most difficult.

The remainder of the regions had mid-single-digit comp store decreases.

Given our trend in the first half of the year, we have adjusted our plans for the third quarter to a comp decrease of negative 3% to negative 5%.

By month, August should be in the middle of the range, September should be toward the worst end of the range, and October should be at the better end of that range.

Those expectations are primarily driven by last year comparison levels and our October grand opening of the former Mervyn's stores.

From a merchandise update, we have been able to launch our new Mudd brand just in time for back to school.

The addition of Mudd to our portfolio of world-class brands furthers our mission to offer customers quality, exclusive brands at exceptional value.

We are supporting the launch with an integrated marketing campaign utilizing tab, broadcast, direct mail, e-mail, and Kohl's.com as well as in-store strike points and graphics.

Our partnership with Candie's and Britney Spears is also especially important in the back to school season.

The combination of Candie's, Mudd, our Avril Lavigne initiative, and our own opening price point SO brand has given us a strong platform in both juniors and girls to operate from this back-to-school season.

We also continue to beat our plans in the recent launch of Dana Buchman, which is in women's apparel, intimate accessories, and footwear.

We were still able to enjoy significant growth with Chaps at the same time.

April saw the launch of Hang Ten in nearly 240 Kohl's stores and on Kohls.com.

Hang Ten is a California lifestyle collection for young shoppers which we hope to expand to all stores in the spring of 2010.

Launching this October is our exclusive partnership with Lauren Conrad for LC Lauren Conrad, a contemporary lifestyle brand that will launch in approximately 300 Kohl's stores and on Kohls.com.

The brand is ultimately planned to expand to all stores nationwide.

The success of these brand launches as well as our other exclusive and private brands continues to drive increased penetration at the total.

Exclusive and private brand sales as a percentage of total sales increased approximately 230 basis points to 45.6% in the second quarter.

The consumer continues to recognize our private brands at the absolute best value in our stores, offering quality and style at a competitive price.

The credibility of our exclusive brands with consumers has ensured that there is immediate acceptance and awareness with our customer at the launch, and we think it has been a major reason why each has had so much immediate success.

On the inventory management front, as we mentioned earlier, average inventory per store is approximately 6% lower than last year in line with the mid-single-digit declines we had forecasted at the beginning of the quarter.

The level of reduction in clearance inventories is substantially larger, about 23% less than last year.

Cycle time process improvements on fashion categories and a focus on replenishment to basics have allowed us to consistently flow receipts very evenly to sales and improve our inventory effectiveness by merchandise area and by store location.

We would expect our inventory per store at the end of the third quarter to be down mid single digits per store.

For the third quarter we would expect gross margin to be up 10 to 20 basis points over last year.

We recognize this is less than our rate of improvement for the first half of the year.

However, all of our primary research and our own response rates on events have continued to indicate the consumer is very focused on stretching their dollar, making their budget go further, and seeking optimum value.

We intend to utilize the changes we have made to our business model that have produced more effective inventory management and the opportunity for higher gross margin to continue our effort to further improve our value equation, drive traffic, and accelerate our market share gains.

This spring we launched 'The More You Know, The More You Kohl's' marketing campaign.

The focus of the campaign is to compel her to make Kohl's her choice more often by clearly demonstrating that Kohl's is the smartest choice.

The campaign evolved out of marketing research which identified all the key value triggers that have made Kohl's the superior choice in an environment of reducing trips and spending.

It helps our customer connect the dots on all the ways Kohl's provides great value and we think inspires her to shop more at Kohl's.

Those key triggers include Kohl's charge benefits, Kohl's Cash, sale events with no exclusions, easy return policies, and of course exclusive "Only at Kohl's" world-class brands.

We recently completed a national research on this campaign.

The findings indicate that we have gained a tremendous amount of traction with the customer.

Consumers are taking away three key messages -- there are always great ways to save at Kohl's, Kohl's has elevated their merchandise and their shopping experience, and Kohl's is the better place to shop.

It has had significant impact on both intent to shop and, as you saw, frequency of visit and improves her perception of Kohl's as well.

From a store expansion and experience front we will open up 56 stores in 2009; 19 of those stores were opened in the spring and the remaining 37 stores, mostly former Mervyn's stores, will open in late September.

Former Mervyn's stores will put us in a stronger position to be the retailer of choice in California and in the Southwest.

We have gained a tremendous amount of traction this spring in that effort prior to the opening as California and the Southwest led the Company in comparable store sales.

We plan a leveraging the new store openings across the existing store base to highlight our improved convenience and raise top-of-mind awareness levels of Kohl's.

We would expect the opening to be positive for both comp and total sales for both the region and the Company.

By the end of August we will have completed all of our 51 remodels for the year.

Each of the remodels reflects the latest thinking in our new store environment.

The combination of our merchandise content, inventory management, and marketing initiatives combined with the efforts of our store teams to engage the customer have led to a significant improvement in customer service scores year over year.

Second-quarter customer service scores are up almost 8% over last year very similar to the first-quarter results.

At the beginning of year we indicated to investors we expected to outperform our competitors on a number of metrics, but we were most intently focused on two particular areas -- market share gains and making sure our results were driven by continued improvements to our business model.

We knew this would ensure that the results were sustainable and of high quality.

For the first half of the year we have had a significant market share gain nationwide.

Sales were better than our plan and our guidance and the success was spread across merchandise areas and across regions.

As I indicated earlier, the sales gains were driven by improved perceptions of Kohl's value equation compared to competitors.

In addition, we continued to experience improvements around inventory management that are leading to improved gross margins, which were up 60 basis points for the spring season.

This has also led to a significant improvement in cash flow which will continue to be a focus this fall.

We have moved well beyond cutting inventories and have improved the quality and the effectiveness of our inventory.

These results can be seen in the significant reduction in clearance levels and the improved customer service scores overall, but particularly around things like found, size, and color.

Our efforts to create a differentiated brand portfolio around exclusive brands that have strong equity have led to a significant increase in penetration of these brands to our total sales.

While that has had a positive impact on gross margin, more importantly it has differentiated us from our competitors and created a platform for us to introduce new brands in the future.

Our expense performance matched our expectations, even though we delivered better sales results.

While we will continue to look for ways to become more efficient, we intend to keep as a priority the customer experience in order to provide consistency in service across our store base.

We believe there will be continued to be more consolidation, which may open up more real estate opportunities, and our balance sheet and cash flow will allow us to act aggressively if that happens.

Our current plan is to open approximately 20 to 25 new stores in 2010.

Should other opportunities emerge, we have the flexibility to adjust up accordingly.

You saw this happen in a dramatic way late last year with our Mervyn's acquisition.

We also plan to increase the number of 2010 remodels up to 65 from this year's level of 51.

As we said at the beginning of year, we think that an aggressive approach to reinvest in our existing store base is a very clear point of differentiation compared to competition that the customer will recognize as she makes her choice as to where to shop now and even more in the future.

By the end of October over one-third of our store base will have been built new or completely remodeled in the last three years.

With that let me share with you our updated guidance for fiscal 2009 and our initial guidance for the third and the fourth quarter.

We recognize that our spring results overachieved our expectations in both sales and earnings per share.

At the same time both our primary and our secondary research indicated consumer continues to face economic challenges and intends to continue to shop less and looks to seek ways to stretch her dollar.

We would expect the second half of this year to continue to be a fight for market share.

With that in mind we are focused on driving our value position and becoming the clear choice for consumers.

For the third quarter we would expect total sales to range between negative 1% to 1%, comp sales of negative 5% to negative 3%, and gross margin up 10 to 20 basis points over last year.

We expect SG&A to increase 3% to 4%.

This would result in earnings per diluted share of $0.40 to $0.44 for the third quarter.

For the fourth quarter we would expect total sales to range between negative 1% to 1%, comp sales of negative 5% to negative 3%, and gross margin up 20 to 30 basis points over last year.

We expect this SG&A to increase 3% to 4%.

This would result in earnings per diluted share of $0.99 to $1.06 for the fourth quarter.

Our updated guidance for the year is $2.59 to $2.70 per diluted share.

The guidance doesn't reflect any additional share repurchase in fiscal 2009.

And with that we would be happy to take some questions.

(Operator Instructions) Adrianne Shapira, Goldman Sachs.

Just, Kevin, maybe just focusing a bit on gross margin; obviously, tremendous performance in the first half.

And if you could kind of walk us through the three buckets of that performance -- the inventory management, lower clearance levels, and higher private brands.

If you were to prioritize, what drove the upside?

And then perhaps help us think about as you kind of somewhat raise guidance in the back half as it relates to margins, where do you see the most opportunity coming from?

I think it was a balance actually.

We kind of think about the margin improvement all as inventory management, because they are decisions we made to improve the opportunity for customer to choose only a Kohl's brand in an increasing way.

The inventory management has an impact not only on our regular priced selling and the resulting mix, but also the transitional level of inventory we have when we move to clearance.

So I would say between the obvious things of closer receipts to sales and the improved penetration it's pretty even balanced.

And I think as we think about the second half we are thinking about it the same way.

Okay, great.

And then as it relates to the better comp in the back half of down 3% to down 5%, help us think about inventory.

What is the right level of inventory?

We were seeing for down mid-singles per store.

It sounds like where you would like them in the third quarter, but should we expect that to build as we are looking for better comps in the back half?

I mean, high level our focus is flowing receipts to sales and we think we have changed our business model sufficiently enough that if there is upside on the sales we can flow additional receipts to support it.

If the sales aren't as good, we will flow less receipts.

We have an opportunity to improve inventory, so we are going to continue to focus on an improvement in inventory turnover all.

That is why we still think at the end of the third quarter, even with negative 3% to 5% comps our inventory would probably be down a little more than that.

Great, perfect.

And then just lastly on traffic, it seems like obviously a big reversal from the first quarter.

We have seen continual improvements but in the positive territory.

We see what is happening in the Southwest as you are picking up that Mervyn's business, but perhaps talk about beyond that region what you are seeing as traffic is obviously coming to you?

There is a few areas of the country -- obviously, the Southwest was a big driver of that given the comps out there, but a few other reasons we are slightly positive.

And the other reasons we are less negative, sort of in the low single -- negative one or negative two type range for traffic.

So the range is tightening up?

It's tightening up, yes.

Charles Grom, JPMorgan.

Wes, just looking at your balance sheet, your accrued liabilities are up 16% from the first quarter, year-over-year they are up I think 6.5%.

Can you just sort of discuss what is causing the rise in your accrued liabilities?

Yes, I usually don't get balance sheet questions so it's good to get one here.

Most of it is in -- well, obviously we have got more accrued bonus this year than last year given our performance.

Sales and property taxes are up a little bit more than our store growth.

What has come down quarter over quarter is mostly in accrued capital.

Given the fact that our store openings are roughly 25% less than last year, that is what is causing it to go down from the first quarter to the second quarter.

Okay.

All right, great.

And then just on the comp outlook, suggests about a 400 basis point downtick in the third quarter and then another 200 basis point downtick in the fourth quarter relative to what you did in the second quarter.

Just trying to see why you are being so cautious.

Is it something you are seeing in the business in August or is it just simply conservatism?

I think you guys I know you guys run out those two-year stacks and three-year stacks and that works sometimes.

But they way we are really viewing it is we just finished the season where we were down 3% for the spring, we took our guidance up from down 5% to down 8% to down 3% to down 5% reflective of our current run rate.

I think we have shown the ability to chase business better than what we have projected if it materializes, but we are going to be conservative.

We will have the inventory there to do better if the traffic is there.

Okay.

And then last one again for you, Wes.

Just the credit card deal with Chase expires I think in 2011.

I am sure to sometime next year you are going to start to address that can you just discuss maybe some preliminary thoughts on what your options that you may consider?

Well, I think it's way too preliminary to start talking about that.

We are very happy with our current deal with Chase.

They have been a good partner and we hope to continue that relationship.

Okay, thanks very much.

Michelle Clark, Morgan Stanley.

Wes, the first question, your pre-opening expense came in below plan, $11 million versus your guidance of $14 million.

Are you able to negotiate better leases on the stores?

That was really just a function of timing on some stores that we originally had opening in the fall and that have been pushed to spring 2010.

Given the fact that on a ground lease you have to start expensing rent approximately 8 months prior to opening that really was the biggest cause of the favorability.

Okay, so it was timing.

Then the second question, anything in terms of sourcing-related gains?

Are you starting to see anything, have you started to see anything in the second quarter and then what is embedded in your guidance for the back half?

The answer is there have been gains; prices are down roughly in the range of 5%.

We see prices continuing to be down well through the end of the year and into next year.

All of which, as we always do, we try to reflect in a better quality product and a better style product for customers to give them more value.

So certainly underlying everything we do is an assumption that our acquisition costs in clothing are going to be down year-over-year in the range of 5% or 6%.

Great, thank you.

Bob Drbul, Barclays Capital.

Couple questions for you.

First, when you look at the sales plan for the back half of the year, how do you think the California grand opening of the Mervyn's stores that you bought will impact the sales run rate?

And then the other question that I have is on the gross margin side.

Can you talk a little bit about the gross margin performance at your mid-volume stores and sort of the improvement that we are seeing there?

Sure.

Bob, on the sales line I think Wes really described it the right way.

We are trying to reflect in our guidance the run rate we currently have.

I suspect that people may think we are being very conservative, but I think underlying our assumption is we see a weak consumer continuing through the back half of the year.

The Mervyn's stores and the Mervyn's opening, we think, are a positive.

There is just no way they are not going to be.

We think they are going to accelerate the share gains we are experiencing already in the Southwest and we are definitely going to try to leverage that across our existing store base in a big way.

But in the backdrop, always in the backdrop, is a very weak consumer.

And I think that weak consumer -- we just want to be planning very conservatively all the aspects of our business.

And as Wes said, I think we are going to be able to respond accordingly.

On the margin in the mid-volume stores, we have made a lot of progress this year.

I think if you guys remember a lot of our progress in prior years on margin were in our lower-volume stores and our small stores.

That progress continues to be made but our mid volume stores are starting to run margins increases very similar to the Company, which is a very good development.

And then just one follow-up question is when you look at the transaction levels that you saw, what do you think led transactions to turn positive this quarter versus the past few in terms of the business?

Obviously, the big effect was the Southwest given the strength of the business out there; sequential improvement as some of our initiatives in California started to really take hold in the second quarter.

But we are seeing and starting to get some pockets of improvement in some of the other areas of the country.

I would say the Southeast is still the weakest region from both a traffic and a basket perspective, but even that is starting to moderate slightly.

Year-over-year through traffic improved the second quarter everywhere.

It just improved by the most in the Southwest.

And I think, obviously we believe, that customers are starting to recognize that our value is superior and we are getting the market share gains we think we deserve.

Great.

Thank you very much.

Lorraine Hutchinson, Bank of America-Merrill Lynch.

Good morning.

Kevin, you had talked about the back half being a fight for market share.

Can you just discuss your strategy for trying to take market share aside from the new store openings?

Are you planning to ramp up advertising spending, lower your price points?

What is your most effective way to make sure you keep gaining share?

At a high level value is more and more important with the customer, so we are highly focused on providing the best value.

We tried to talk about throughout the earnings call the fact that we have worked hard in the last two years to change our business model.

We have a platform, we think, that is superior in terms of the way we flow inventory to our stores, the way we reach out to consumers in marketing, and as we said in the call the fact that we think we have the newest and freshest store base in retail.

All of that is part of the value equation.

In addition, the changes in terms of how we manage our inventory overall have allowed us to benefit and being able to fuel sales and traffic with some of that upside.

We have certainly still gotten improvements in merchandise margin, but the wins we have gotten in that regard are telling us that we should accelerate it.

So as we go into the fall and holiday season with the weak consumer and market share really being what it's all about, we are going to use those positives to fuel traffic and drive more sales.

Ultimately, that is where we think we need to be for the holiday season.

Thank you.

Jeff Klinefelter, Piper Jaffray.

One question first on credit, Wes.

Can you give a little bit more color on is this new customers helping to fuel the gains there?

Is it existing customers just increasing share?

Any details on FICO scores and thinking along the lines of is this some read into the trade down or the customer coming into your store from maybe a higher channel of distribution?

And then in general, as credit continues to increase -- I am sure you are monitoring it closely -- but anything you can share on the quality of that credit?

Any troubling trends out there?

Well, those are a lot of questions so I will try to get them all in.

In terms of share, I think the biggest reason it's improving is, as you guys know, our credit card customer is obviously our most profitable customer.

As Kevin mentioned value, we are putting more value into our credit events which I think is causing people to do more shopping during those events.

We are getting new customers; we are always continuing to get new customers.

We are making a concerted effort in California to get some of those customers that are looking for a new store onto our credit card and being aggressive in terms of soliciting them in the stores and trying to get them to understand the benefits of the card.

However, we are not doing that at the expense of lowering any of our standards.

Our approval rate, as I think I have talked to some of you guys in the past, year over year is down 800 to 900 basis points.

We are reducing the initial lines that we offer people by approximately 25%, so we are being very conservative from a risk management perspective.

Trends in terms of the credit business; I think I have been -- I want say they are positive.

But I think they are leveling off and kind of becoming the new normal, which is the rate of increases in terms of delinquencies and things like that are starting to moderate.

But, overall, the credit business has been a very good business for us not only to drive the sales, but also in terms of just creating more royalty.

That is helpful.

Just one other thing, in terms of comp trends are you seeing any other pockets around the country that you can identify as smaller examples of these Southwest share gains through consolidation?

Well, we have gained share in every single region so business has improved sequentially every where.

It's just that the Southwest stands out and it obviously stands out for some obvious reasons, but we are trying to fuel that.

But there has been improved trends, particularly around traffic, everywhere.

Okay, thank you.

Deborah Weinswig, Citi.

Morning; a few questions.

Starting on the pre-opening side, I think in every quarter of last year you came in below your guidance as you did this quarter.

I think in the first quarter of '09 you were in line.

What is driving the consistently lower pre-opening costs versus guidance?

Well, some of it might be a level of conservatism on my part, given the fact that a lot of it's having to do with how much spending we need to do to attract people to work at the store.

Obviously in this environment there is not a lot of advertising required to get people working in the store.

A lot of it is movement, as I mentioned earlier in the call, when stores flip out on one season to the next with the pre-opening expense with the ground rent.

So there are a couple reasons.

Is there any change in processes or is there anything you are doing to kind of increase efficiency?

No, not particularly.

I just think it has been -- I am a conservative guy, as you know, so I think a lot of it is just to do with the fact that our store team have been more efficient in terms of getting people hired at a lower cost.

Okay.

And then, Kevin, I think there is two categories that I wanted your insights on.

On the home category what do you think is driving your outperformance versus your peers?

And also I know it's kind of buried within accessories, but on the handbag front most retailers we are hearing from are having a tough time in that category and it seems to be one of the strongest for you.

So if you could help us there that would be great.

I think we suspect in home it's a combination probably of two things.

One is certainly similar to the Southwest there has been the elimination of a major competitor in the home market with Linens 'n Things gone and I think to some extent probably everybody is benefiting.

It looks like to me like maybe we are benefiting a little more.

It's an area of focus for us inventory management, as I mentioned on the call.

On the cycle time initiatives in fashion we have made a real commitment to basics.

Home is a really basic category and that is a category we are supporting with inventory, and I think we are getting higher rewards for that.

On the handbag front beyond the overall trends apparently there has been a pretty seismic shift in the way consumers are looking at handbags.

They recognize they can get an incredible amount of style and quality for a much better value than they might have been willing to spend a year ago.

We are pretty well-positioned in that regard.

Secondly, we have made a lot of improvements in our merchandise content.

So I think we are really happy with the way our content looks today.

And I think, as you know Deb, all of our new and innovation stores have essentially a new, completely new customer experience in the handbag world and it's far superior to what we have had before.

I think that is also fueling the growth.

Okay.

And then I think one of the key things of this call today has been gaining market share.

Do you think it's new customers or a greater share of wallet from your existing customers or a bit of both?

It's definitely both.

We are definitely gaining share of wallet with our existing customer.

But as Wes mentioned we can see through the credit card data and the opening of really solidly financially sound new accounts that we are gaining new customers from competition department stores, I think, in a lot of cases, but also specialty stores in a lot of cases.

And I think they are recognizing Kohl's, as we said in the call, kind of the smarter choice, but particularly so in an environment in which they need to stretch their dollar a lot further and value becomes a more important component.

And then those customers where you are gaining greater share of wallet is it that they are shopping more categories or a greater penetration within existing categories?

They are definitely shopping more categories.

I mean one of the most exciting things for us in the business that has happened in the first half of the year and sequentially improved, I think, in the second quarter is that we have got improvement in our sales trends across all regions in the country, but also across all merchandise categories.

So as you know we definitely like to see a tight spread in our performance between the worst performing category and the best performing category because that indicates most fully that she is shopping the whole store and it's not dimensionally about one particular business.

Same thing in regions.

Certainly the Southwest is the stand out, but when we get improvement everywhere it kind of tells us that while the Southeast consumer is a lot weaker she still is recognizing Kohl's as a better choice.

Great.

Well, thanks so much and best of luck.

Bernard Sosnick, Gilford Securities.

Good morning.

With the opening of the Mervyn's stores you are going to significantly flesh out your presence in California.

But even so, how would you rate your positioning in California versus what you would foresee as optimal?

We have a lot of growth opportunity still in California.

If you look at it on a per capita basis or compared to some of our competitive set, even though our store base has risen roughly 50% in the last year to two years we still have a lot of room to grow.

So I think we see California as a major growth opportunity for Kohl's in the future.

I think it's definitely a part of the country where when we talk market share you are going to see some very significant shifts in share as we raise our store base.

Great.

Thank you.

I appreciate that.

Richard Jaffe, Stifel Nicolaus.

Thanks very much, guys.

Just a quick follow-up question on the real estate.

Do you see the real estate opportunities for you guys being more inclined to be leases, raw land and build out, or acquisitions of existing stores?

And if you could tie that in to your cash position and then your cash position related to some of the debt that is coming due at the end of this year.

Our cash position allows us the flexibility I think to buy real estate if that is the option that presents itself.

But we are really indifferent to the type of deal; number one priority is to get the best location.

And then on the debt question, we expect when that debt comes due in early 2011 to just retire it.

I think we have $300 million due in April and $100 million due in October.

And so you will just use the cash reserves to pay that off?

Yes.

A quick question on -- any qualitative comments on the credit card portfolio, the quality of borrowing you are seeing?

Obviously it's up a lot (multiple speakers)

Well, the share is up a lot and I think that is because people like the discounts that we are giving in the secret sales.

So part of the strategy to gain market share is perhaps the discounts have gotten a little steeper and it's a lot better to get 20% off and use your Kohl's card then to use your airline mile card and get nothing off.

We haven't changed the metrics in terms of the quality.

As I mentioned earlier, it's actually a lot tougher to get a Kohl's card this year than it was last year and people's scores are going down naturally with the economy.

But we have actually tightened our standards over the last 12 months.

So are fewer cardholders spending more or is it that you are still signing up a lot more people?

I think it's a little of both.

We are getting more new customers that recognize the benefits and people are concentrating their overall spending at Kohl's more towards the credit card events than the non-credit card events.

Despite the higher -- (multiple speakers)

We are really, I mean I don't want to say indifferent, but to a great extent it's just the customer's choice how she wants to pay for the merchandise.

And right now she wants to pay a little more with her credit card because she recognizes that she gets a little better value and value is a little more important.

Sure.

You make it very worthwhile for her to use that card.

I understand.

Great.

Thanks very much.

Dan Binder, Jefferies.

Good morning.

A few questions for you.

I guess first on the store growth plan for next year, it seems conservative.

You guys are obviously taking share at a pretty rapid pace, comps are turning in the right direction.

Just kind of curious why you wouldn't be pushing on the pedal a little bit harder and then just curious what your flexibility is in terms of taking that store count up.

What would you envision in a best case scenario?

I don't think we have a best-case scenario.

I mean, the short answer is that we are comfortable with the 20 to 25 stores that we currently have essentially planned or committed for.

I think that we tried to use the example, Dan, of what happened last year.

Essentially it wasn't until the end of December last year, actually probably even early January of this year, before we made the decision to go ahead with the Mervyn's acquisition.

And that it is over 75% roughly -- right, Wes -- of our store openings this year so it gives you an idea of the flexibility that that allows us.

I think if you just think about the real estate market right now it's an environment where we think there are going to be more opportunity, it makes sense there are going to be more opportunities, and we are winning in a big way from a share perspective.

So I think existing landlords and developers are going to be more apt to be thinking about Kohl's than they ever were before and we just want to have flexibility.

We tried to make the point from all aspects very strong balance sheet and an enormous increase in cash flow that we have had that we have got the ability to do it.

So if the opportunity presents itself we will be aggressive.

And even with the 20 to 25, quite frankly, I think versus our competitive set that might be the high store opening of all of our competitors as well.

And we have plenty of room to improve.

I think we have talked to you guys many times, Kevin and myself, to improve our sales per square foot on our existing stores and that is a big focus of what we are trying to do as well.

Okay.

And then just two quick follow-ups or separate questions.

Anything you can tell us about what we should be thinking about in terms of new brands in the back half of the year in terms of what categories you are working on?

And then secondly, as you see some deflation in the pricing in the fourth quarter what should we expect to happen to average ticket?

On the new brand front for this year there won't be any new brands.

Our last launch scheduled -- we just launched Mudd two weeks ago and our last launch, which we are really excited about, is the Lauren Conrad launch at the end of September/first of October.

We think those are going to be pretty spectacular.

As you know, we have had a lot of new brand launches this year and they have all been successful from day one.

We definitely are looking for new brand ideas for next year.

We would expect to have new brand ideas for next year and as we get further into the fall and holiday season we will tell you about those.

From a deflation perspective it's continuing, so it's not new.

We are continuing to do the same thing we have done, which is try to put it in the quality and the style of the garment and keep our average ticket moving in the right direction, and we have had a lot of success in that regard.

So we are giving better value not necessarily by lowering the price because we don't think that is the sensible way to approach it, but by giving the customer a much better product than she got before.

Given the traffic numbers, given the comp numbers, given the total numbers it looks like she thinks that is a good idea.

All right, thanks.

Erika Maschmeyer, Robert W.

Baird.

Good morning.

If you could talk a little bit about the proportion of your receipts that are on size optimization, do you still think that you could get to 70% by spring of 2010?

Short answer is, yes.

We are in the 40% to 50% range right now of new incoming receipts.

And we still have the same objective which is at the end of the year as we go into spring of 2010 about three-fourths of the inventory would come in from a size optimization perspective.

Great.

And in terms of your real estate pipeline for next year, are there any specific retailers or opportunities that you have your eye on in particular?

And then are the 20 to 25 stores that you have planned right now new developments?

The 20 to 25 stores are mostly new developments.

There is a few takeovers in there, but a majority are new developments.

In terms of other retailers, we obviously have a list of locations we would like to get but that is just all dependent on what happens with competition.

Well, see how it shakes out.

That makes sense.

Thanks so much.

That concludes the question-and-answer session.

Gentlemen, do you have any closing remarks?

This concludes today's conference.

Ladies and gentlemen, you may disconnect at this time.