柯爾百貨 (KSS) 2009 Q4 法說會逐字稿

Good morning.

My name is Janeka.

I will be your conference operator today.

At this time, I would like to welcome everyone to the Kohl's quarter four year end 2009 earnings release conference call.

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

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

(Operator Instructions)

Statements made on the call, including projected financial results are forward-looking statements that are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected in such forward-looking statements.

Such risks and uncertainties include those that are described in item 1-A in Kohl's annual report on Form 10K and as may be supplemented from time to time in Kohl's other filings in the SEC all of which are expressly incorporated herein by reference.

Also, please note that replays of this call will be available for 30 days but this recording will not be update so if you are listening after June 14, it is possible that the information discussed is no longer current.

Thank you.

I would now like to turn the call over to Wes McDonald, Chief Financial Officer.

You may begin.

Thank you.

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

I will talk about our financial performance and then Kevin will walk through some of our merchandising, marketing and store experience initiatives and then I will conclude with our earnings guidance for the quarter and the year.

From a financial perspective total sales for the fourth quarter were approximately $5.7 billion, this year up 8.5% from last year.

For the year, total sales increased 4.8% to $17.2 billion.

Comp sales for the quarter increased 4.5% driven by a 7.3% increase in transactions per store for the quarter.

Average transaction value decreased 2.8% as our customer continues to purchase fewer items per transaction.

Average unit retail increased 0.3% for the quarter.

All regions and all lines of business reported positive comp sales results for the quarter.

Driven by increasing momentum throughout the year which carried in to the holiday season, we ended fiscal 2009 with a 0.4% increase in comparable store sales.

Transactions increased in eight of the last nine months of the year and ended the year up 2.4%.

Average transaction value decreased 2% as our customer continued to purchase fewer items per transaction.

Average unit retail increased 2.3% for the year.

Our credit share was 47.3% for both the quarter and the year, an increase of approximately 290 basis points for both periods.

Our gross margin rate for the quarter was 36.4% up 162 basis points from last year.

For the year, our gross margin rate increased 88 basis points to 37.8%.

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

We would expect gross margins to increase 20 to 30 basis points for both the first quarter and the year.

Moving on to SG&A.

SG&A for the fourth quarter was about $1.2 billion, an increase of 8% for the quarter and for the year $4.1 billion, an increase of 5%, slightly more than our expectations due to higher than expected sales.

Store payroll, advertising and IT expenses leveraged in both periods.

Distribution centers leveraged for the year but not for the quarter due primarily to increase payroll costs better than planned sales in stores and e-Commerce.

Credit expenses did not leverage for the quarter due to costs incurred to prepare the portfolio for additional legislative changes effective in the first quarter 2010 but were essentially leveraged for the year.

Corporate expenses did not leverage for the quarter and year due to increased incentive compensation and changes made to our non-management compensation structure.

We would expect SG&A expenses to increase 4% to 5% for both the first quarter and the year.

Depreciation expense was $155 million for the quarter and $590 million for the year, an increase of 8% for the quarter and 9% for the year.

The increases are primarily due to new stores and remodels.

Depreciation is expected to be approximately $645 million in fiscal 2010 and $155 million in the first quarter.

Preopening expenses were $3 million for the quarter, $1 million lower than the prior year quarter and $52 million for the year, $10 million higher than fiscal 2008.

We opened 56 stores in 2009 compared to 75 stores in 2008.

Even though we open fewer stores in 2009, preopening expenses increased because a larger percentage of fall 2009's new store were treated as ground leases.

Prepare opening expenses are expected to be $20 million for fiscal 2010 and $5 million for the first quarter.

Operating increased -- operating income increased 26% or $149 million for the quarter to $722 million.

For the year, operating income was $1.7 billion, up 11% from 2008.

Net interest expense increased to $31 million for the quarter compared to $30 million in the prior year primarily due to lower interest rates on long-term investments and reduction in capitalized interest due to lower capital expenditures.

For the year, net interest expense was $124 million, up $13 million over 2008.

Interest expenses is expected to be approximately $125 million for fiscal 2010 and $33 million for the first quarter.

Our income tax rate was 37.6% for both the current quarter and the year.

We expect our 2010 tax rate to be approximately 37.9% for both the first quarter and the year.

Net income increased 28% to $431 million for the quarter and 12% to $991 million for the year.

Diluted earnings per share increased 27% to $1.40 for the quarter and 12% to $3.23 for the year.

Moving on to some balance sheet metrics.

From a square footage perspective for your model, we currently operate 1,058 stores compared to 1,004 stores at this time last year.

Gross square footage was 93 million square feet at year-end 2009 compared to 89 million at year-end 2008.

(inaudible) square footage increased from 75 million in 2008 to 78 million at year-end 2009.

Cash and cash equivalents.

We ended the year with $2.3 billion cash and cash equivalents, an increase of $1.6 billion over last year's end.

The majority the cash equivalents are in money market funds.

We are currently in the process of negotiating a new credit card agreement and have a number of interested banks.

We expect to reach a decision on that agreement in late spring or early fall with the timing dependent on finalization of credit card legislation.

Our inventory levels reflect improved inventory management as we refine our processes to better match receipts to sales.

Total inventory was up 4.4% compared to the prior year while inventory per store is down approximately 0.9%.

Clearance units are down approximately 14% per store.

Capital expenditures were $666 million for the year, 34% lower than 2008.

For 2009, we generated approximately $2.2 billion in cash flow from operation and $1.6 billion of free cash flow.

Free cash flow increased $884 million over last year's $684 million of free cash flow.

Our expectation for 2010 for CapEx is now $900 million versus our previous guidance of $750 million.

The increase is due to the addition of 20 remodels for approximately $50 million moving our total from 65 remodels from 2010 to 85 remodels in 2010 as well as the purchase of a second e-Commerce distribution facility on the west coast and significant investment in our website to support the tremendous growth of our e-Commerce business.

E-Commerce revenues increased 38% in 2009 on top of a 48% increase in 2008.

Our projected 2010 free cash flow is approximately $800 million to $900 million

Moving on to accounts payable.

AP as a percent of inventory was 40.6%.

Last year's AP as a percent of inventory was 31.5%.

Weighted average diluted shares were 308 million for the quarter and 306 million for the year.

We have not repurchased any of our stock since July 2008.

With that, I will turn it over to Kevin to talk about some of our merchandising initiatives.

Thanks, Wes.

As Wes mentioned, comparable store sales increased 4.5% for the quarter and 0.4% for the year.

All lines of business were positive for the quarter.

Footwear and accessories outperformed the Company for the quarter.

Women's and home ran approximately even with the Company while men's and kids trailed the Company.

Footwear in women's had the most improved performance in the quarter over the year-to-date trend.

In footwear, this was driven by women's shoes and athletic shoes.

In women's apparel this was driven by substantial improvement in our key private brands performance of Sonoma, Croft & Barrow and Apt.

9.

All three brands achieved very strong fourth quarter increases.

For the year, footwear, accessories and home outperformed the Company.

All regions were also positive for the quarter.

The southwest region achieved a high signal digit comp with the northeast, southeast, mid Atlantic in the 3% to 4% range.

The Midwest and south central regions achieved low single digit comps.

The southeast region had the most improved performance in the quarter over the year-to-date trend.

Many of our initiatives to more effectively tailor our assortments regionally appear to be gaining momentum in this region.

For the year, the southwest was the strongest region with a high single digit comparable stores sales increase.

The southwest benefited our Company comps a little over 100 basis points for the year and due to other strong regional rules nationwide to a lesser degree for the fourth quarter.

We expect to continue to produce strong results in the southwest in 2010 but our other hot and mild regions will benefit much more substantially this year from the merchandising and marketing tactics we developed last year in the southwest.

Total e-Commerce revenues increased 38% to almost $500 million in 2009.

This follows a 48% increase in 2008.

As Wes indicated earlier, we are making a major new investment in capital and infrastructure in our e-Commerce business to fuel future growth.

Based on our research, our testing and our own results, it appears that our opportunity in this business is substantially larger than we originally envisioned.

Moving on to our merchandise initiatives.

The following merchandise initiatives are new to spring 2010 and include the following, LC Lauren Conrad, our exclusive partnership with Lauren Conrad launched in October 2009 in approximately 300 Kohl's stores and on Kohl's.com.

LC Lauren Conrad will be rolled out to all stores nationwide in March.

We accelerated the rollout due to better than expected sales in the fourth quarter.

Our original plans did not call out for roll out until the fall of 2010.

Our exclusive MUDD brand launched in juniors and girls for back to school and also far exceeded our internal plans.

Embraced the brands, the bridge between our opening price point SO brand and our best price point Candie's brand.

Our newest brand, Helix, launched in all stores earlier this month.

Helix is an opening price point brand positioned in our contemporary good lifestyle price zone and will be featured in young men's tops, fashion bottoms and shorts.

This fills a major void in our assortments in these areas.

The success of our recent launches as well as other exclusive and private brands continue to drive increased penetration to these brands.

Exclusive and private brand sales as a percentage of total sales increased approximately 200 basis points to 42.7% for the quarter and 220 basis points to 44.3% for the year.

We saw consistent improvement in our three major private brands, Croft & Barrow, Sonoma and Apt.

9 as all three achieved double digit positive comps for the fourth quarter and positive comps for the year.

Strong exclusive brand performers for both the quarter and year include ELLE, FILA, Food Network and Simply Vera, Vera Wang.

We are also very pleased with first year performance of our Dana Buchman brand as well.

Moving on to inventory management, as we indicated earlier, average inventory per store is approximately 1% lower than last year with clearance inventories down over 14% per store.

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

We were able to pull receipts forward to support our better than planned sales during the holiday season, allowing us to achieve a strong January comp with very little clearance.

As a result, our AP to inventory ratio reached 40% over the end of the year, the highest since 2002, indicating the freshness of our inventories entering the spring season.

Our size optimization initiatives also continue to develop and we expect significant benefits this fall with the goal of all of our sized receipts on the program by fall 2010.

We saw improvements in in-stock levels 3% to 5% in these programs in fall of 2009 leading to increased sales and better customer satisfaction.

Finally, mark down optimization will continue to benefit us in its fourth year of use even with these lower inventory levels.

We would expect our inventory per store at the end of the first quarter to be up low single digits on a per store basis similar to our expectations for the year.

As Wes mentioned, we expect margin for fiscal 2009 and the first quarter to be up 20 to 30 basis points over last year.

This guidance factors in the following items, we achieved significant improvement in gross margin last year and hit a historic high.

However, we belive we will experience continued improvement in inventory management as well as increased penetration of private and exclusive brands in 2010 which will allow us to continue to grow gross margin.

Some of that benefit expected from those improvements will allow us to fuel sales in market share gains with marketing tactics and pricing flexibility that we believe will be necessary to continue to lead on the top line.

The consumer continues to focus on value and we intend to deliver that value again this year.

From a marketing perspective, throughout 2009 our marketing efforts were based on the highly effective the more you know the more you Kohl's platform.

We will continue to utilize this platform in 2010 with the goal of motivating our customer to shop at Kohl's more often by strengthening her understanding of why Kohl's is a smarter choice.

We'll accomplish this by focusing on our total value, increasing our regional relevance and explaining our differentiating practices.

Clearly we got the message across in 2009 that there are many ways to save at Kohl's.

In 2010 we will intensify our value message nationwide with those tactics that prove to be the most effective.

In 2010 we will also continue marketing efforts to increase customer knowledge and build relevancy by region, especially in key hot and mild markets.

We learned a tremendous amount from our efforts last year in the southwest and plan to deploy some of those tactics to our other southern markets in addition to raising our level in the southwest.

Finally, when it comes to differentiation, we want to amplify what makes Kohl's the smartest choice everywhere.

We have always put the customer first.

No hassle policies and programs are the foundation of Kohl's and how we do business and will continue to focus on that.

We will continue it differentiate ourselves from the competition through our no hassle return policy, our world class exclusive brand, our no exclusions approach to value added offers, Kohl's Cash and our Kohl's charge program.

The efforts we put behind these marketing programs are resonating with our customer.

We see it in our research and from more than 900,000 Facebook fans.

In addition to sharing their experiences with their friends and family, our Facebook fans communicate to us and to each other in real time.

On a store experience front, last year we successfully used our strong financial position to continue to expand in new and existing markets, accelerate our remodel program and focus on delivering value in order to grow market share at the expense of competition.

In 2010 we were planning to do the same.

We will open approximately 30 new stores in 2010 with nine opening in the spring and the balance opening in the fall.

In addition, we plan to remodel 85 stores in the spring season, an increase from the previously planned 65 stores and the 51 remodels in 2009.

These remodels will be split into three ways and reopen in March, May and August.

We have been able to compress the model duration from 16 weeks to nine weeks over the last two years in order to minimize the disruption and the cost to our stores.

We have also learned from our market intensification efforts as to the most effective ways to attract first-time shoppers and former customers who haven't recently shopped at Kohl's.

We think this should help our sales post re-grand opening.

The increase in the number of remodels differentiates us from the competition and we think is a critical part of our long-term strategy.

In addition, remodels and new stores in 2010 will contain a dramatically redesigned home area which will allow us to have more capacity on the sales floor yet provide more flexibility on our fixtures.

We continue to see high customer service scores as a result of merchandise content, inventory management and marketing initiatives as well as the efforts of our store teams to engage the customer and achieve the 7% improvement in our customer service scores in our stores over last year.

The customer will be choosing a select number of stores to shop in this environment.

We want to remain at the top of her list and we will continue to invest in customer service in 2010.

In 2009, we tested in-store kiosks that provide customers with an easy way to order an item that we may be out of stock in her size and color in that store.

She can choose from an expanded assortment of items not available in that store.

In both cases, she can have those items shipped free of charge.

The test was very successful and we are rolling out our in-store kiosk initiative to all stores by the beginning of fall of 2010.

We expect these to be another major driver of market share.

Just in closing before Wes gives you our guidance.

At the beginning of 2009 we indicated to investors we expected to outperform our competitors on a number of metrics but we were most intensely focused on two particular areas, market share gains and continuing to invest in our future by improving our businesses, business processes through technology, investing opportunistically in new stores and accelerating and improving our remodel strategy.

We achieved those results and more.

We gained significant market share nationwide.

Success has been spread across merchandise areas and regions, especially in the most recent fourth quarter.

Our fourth quarter net income increase of 28% and 2009 annual increase of 12% reflects the success of our strategies and our ability to generate sales growth and market share gains and still improve profitability.

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

Much of that improvement was driven by sustainable improvement business model through implementing new technology and by continuing to open new stores in an opportunistic real estate environment as well as expanding the impact of our remodel strategy.

We intend to accelerate those improvements with the expansion of our remodel effort and a new investment in e-Commerce and store experience infrastructure elements like the kiosk strategy.

In addition, we continue to experience specific improvements around inventory management that are leading to improved gross margins which were up 162 basis points in the fourth quarter and 88 basis points for the year.

We are flowing our receipts more efficiently and timely as witnessed by the freshness of our inventories and as indicated by our found size and color customer service scores.

These improvements helped us achieve significant free cash flow of approximately $1.6 billion, almost $900 million better than last year.

Additionally, to create a differentiated brand portfolio around exclusive brands that have strong existing equity have led to a significant increase in the 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, Lauren Conrad and MUDD.

These brands had high consumer awareness to respective launches and this mix improvement will continue to benefit gross margin results and position us for future new brands.

The recent doubling of our design office in New York is a testimony to our view of the these opportunities for the future.

Our partnership with Li & Fung has also dramatically aided in this process.

I was pleased with ability to manage expenses for the year.

Most importantly, our improvement in key areas like stores and advertising was driven by sustainable productivity improvements, not one-time cutting of expenses.

While we continue to look for ways to become more efficient, we intend to keep priority the customer experience in order to provide consistency across our store base and continue to be aggressive in the marketing front to gain market share again in 2010.

With that, let me turn it back to Wes to share our initial guidance for 2010 and the first quarter.

Thanks, Kevin.

Implied in our guidance is the fact that we expect demand to continue to be weak throughout 2010 with comps being driven by taking market share from our competitors as we expect average transaction value to remain under pressure.

We will use the advantages we describe to intensify our value position to maximize our sales.

We would expect to continue to outperform our competitors in both total sales growth and comp sales growth and gain market share in 2010 just as we did in 2009.

For both the quarter end year we would have the following assumptions.

Total sales increase of approximately 4% to 6%.

Comp sales increase of positive 1% to 3%.

Gross margin increases of 20 to 30 basis points over last year.

And SG&A dollars to increase 4% to 5% over last year.

Our sales expectations by month for the first quarter are for February to be ahead of the quarter, March to be high single digit to low double-digit positive comparable store sales increases and April to be negative high single digit to low double-digit comp sales decreases.

Disparity of the March/April comps is due to the timing of Easter and our grand opening event.

This would result in earnings per diluted share of $3.40 to $3.63 for fiscal 2010 and $0.48 to $0.52 for the fiscal first quarter.

As always, this guidance does not reflect any additional share repurchases in fiscal 2010.

With that, we'd be happy to take some questions.

(Operator Instructions) Your first question comes from the line of Mark Miller of William Blair.

Development capabilities having substantially bolstered the organization, where do you think that infrastructure can take you long term in terms of exclusive and private label penetration, and then in terms of cycle times if you could update us where you are there and what your objectives are going forward?

Sure, Mark.

In terms of the future on private and exclusive brands, I think we would limit it to just say we are very confident that in 2010 our private and exclusive brand penetration will continue to rise and that's just the factor of the rate of growth of those brands throughout 2009, the fact that there are a number of new brands that aren't annualized in 2010.

It doesn't contemplate any additional future brands to be added to our roster but I would expect that that is something that will happen.

In terms of cycle time, I think we have made really good progress.

From my perspective, the best metric to look at in that regard is our inventory turn and the freshness of our inventory and the level on how to season the inventory we have.

And all those metrics we are improving consistently.

We have probably made the most improvement, as you would expect, in areas that are more fashion related and that are longer term cycle supply days.

We continued to fund inventory basics and so our turn improvement hasn't been as strong there.

Them on the gross margin improvement, how much does that contemplate with exclusive penetration gain this year?

It is just a factor.

I mean, we said in the closing remarks that our gross margin guidance implies several things.

One, of course, we did achieve a very high margin last year.

Two, we know this year we have a strong tail wind with more private exclusive brands and we believe more improvement in inventory management.

We are going to use some of that though just as we did last year because we still are focused primarily on market share gains.

So, it factors in all of those things together, the positive side and then using some of that benefit to drive sales.

Terrific.

My other question is would you be willing to share with us some perspective on the tactics that were so successful for you in the southwest and how you will be using those in the other warm weather markets?

Thanks.

No.

Sorry.

The answer is no.

All right.

Thanks.

The whole time you were asking that question.

Thanks, Mark.

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

Hi, this is Chris Quomo filling in for Michelle.

If we could dive a little deeper on SG&A.

I think you said in the past you need about a flat comp to leverage SG&A and there were obviously head winds in the fourth quarter.

Can you talk about the leverage points going forward and the sensitivity around that?

You are right, we didn't -- our goal is to leverage flat out.

We deleveraged for the year at 0.4 at 11 basis points.

Our goal for 2010 is to try to continue to get to that flat point.

Realistically for the modeling purposes, I think it would be prudent to use a 1% leverage point and then our normal around 8 basis points above that for every 1% above the 1.

The other thing, and I think Wes mentioned this in the call, but one of the factors on SG&A we made a very conscious decision to invest in customer service in our store and keep the level of service at what it needed to be throughout the 2009 year.

And I think that was a piece of the reason the results were what they were.

Got it.

Okay.

If I could, one other on square footage growth.

When we think about 2010, we are getting in the neighborhood of about a 4% square footage growth.

It is a little bit lower than the 6% you did in 2009.

Do you think there is more opportunity above your intended square footage growth in 2010 perhaps as a result of competitor failures?

Do you see that number potentially going forward, I should say going higher if there are no incremental opportunities arising from competitive failures?

Not for 2010.

We needed to have taken possession really in February to open the store this year.

Hopefully, we continue to put pressure on the competitors as they rationalize the fleet and could be opportunities in the future 2011 and beyond but nothing additional for this year.

Thanks for your time.

Your next question comes from the line of Adrianne Shapira of Goldman Sachs.

Good morning.

Kevin, just on the comps.

Appreciate the breakdown on a monthly basis, but it seems like you are up against your easiest year ago comparison of the first quarter.

Kind of help us think about that 1 to 3 for the quarter seems if it would suggest a deceleration from where you have been running in the back half.

Perhaps shed some light on that for us.

If you can tell us when it is going to stop snowing in New York, that would be helpful.

To be honest, Adrianne, we kind of looked at it on an annual basis first and foremost and really took a hard look at our trends in the third and fourth quarter.

You are right, our actual trends in the third and fourth quarter comp were better than the guidance given for the first quarter.

We still know we are facing a strained consumer.

We still know we are in a very tough economic environment and we know we are turning a leaf into a new year and we felt more comfortable being conservative about our view.

Our guidance is based on our trends which are, of course, adjusted for the economic environment and typically I do not think it is not unfair to say we would be conservative just to ensure our shareholders and investment strategies are protected.

That's what is factored in to the sales guidance.

There isn't any thought in our mind that there is something in the first quarter that would decelerate.

Okay.

It is not as if any of the strong traffic trends or even improvements that you saw have moderated even in February from what you were seeing in the fourth quarter?

No, we don't report until next week.

We have two days left in the month and Wes just indicated on the guidance that February will be higher than the quarter.

Right.

Okay.

Understood.

Then just on the point about you have been gaining share at expense of others as you have been doing last year.

Others seem to be gunning for share too.

That seems to be sort of a popular play book this year.

I'm wondering, it sound as if you are looking to perhaps invest some the margin opportunity to drive sales.

Maybe comment in terms of what you have been seeing out there in terms of the competitive environment.

Have you seen any more aggressive stance as others are going after share as well?

There isn't anything specific that I could call out.

I think we are aware of what other companies strategies are.

Ours is pretty succinct.

We have, as you well know, long term, not just last year, major market share gain so strategies in Kohls to drive market share is nothing new.

It is not unique to last year and it is not going to be not unique for this year.

We are focused on driving top line sales so that long-term view kind of plays into our future view as well.

The key element for us for 2010 is we did have enormous success in the southwest, particularly on the west coast, and we did employ a lot of merchandising tactics and a lot marketing tactics that we saw are really successful.

We are now able to take those particularly to markets where we think there are more opportunity, the southeast might be a great example of one, and deploy those same merchandising and marketing tactics and that's why we feel good both because of long term trend of share gain and our shorter term tactic success that 2010 is going to be another year for market share gains for both.

Great.

And then just, Kevin, on the remodels.

It seems like obviously you are pleased with what you are seeing accelerating that to 85 this year.

Give us a sense of how to help widen the competitive mode as you, what you are seeing on those remodels.

Sounds like a lift helping with the pre grand opening but any sort of sense of returns and how that is continuing to improve?

I think we learned a lot in our third wave of remodels.

We were able to take some of the tactics that Kevin mentioned that we used in the southwest and employ them in our remodeled stores.

We were actually able in our third wave to get a lift post re grand opening that offset the drop during construction.

We have been able to mitigate the construction drop by shortening the duration the construction but not eliminate it.

That's the first time we have had any significant lift in total.

We are going to take that and intensify it for three ways in 2010 and hopefully improve on it.

It is not the same return as a new store.

We don't change the mix of merchandise like some of the other guys do to drive comps.

It is really just an investment in the future but by getting an overall lift through the period of remodel, it is an big improvement from where we were and that is one the reasons we decided to do more in 2010.

The other thing, Adrianne, is that we really try to focus investors around this.

When we do these 85 models, of course we have one new wrinkle this year which is a completely new home area and of course the implementation of the kiosk strategy, but I think you would be hard pressed to see the difference in those 85 remodels from a new store.

Everything that you have seen in a new store and in those remodels, there isn't any part of a remodel that isn't touched or changed and updated.

So, we kind of feel like we are giving those customer a new store.

That's why we feel so good about it.

Great, makes sense.

And just last question, Wes.

The free cash flow generation clearly very strong.

Help us think about the ideal capital structure and where a dividend fits in potentially?

I think for right now we are focused on renewing our credit deal and until that happens, I think it is premature to talk about what to do with the free cash flow.

It is certainly conversations we will have with our Board in the future this year.

At this point we haven't contemplated a dividend.

Great.

Best of luck.

Thanks.

Your next question comes from the line of Deborah Weinswig of CitiGroup.

If you are so confident on cycling in the south west from a year ago and performance of private and exclusive brands and (inaudible) performers versus competition, can you help us understand the comp guidance which is in line/below most of your competitors?

I haven't seen anybody who is really got higher guidance.

To be real honest with you, Deb, the way we are looking at this is first and foremost, there is a very difficult economic environment and nothing has really fundamentally changed about that and the consumer is continuing to be incredibly strained.

So, we are always going to take the approach that we are going to give guidance that we are going to work hard to overachieve but we are going to give guidance in which we are confident in achieving.

That's what we owe our investors is to not to stretch that and not be caught in a position where we get ahead of ourselves or get, more importantly, ahead of our consumers.

It is our best view, we are going to work real hard to do better.

I will spend a lot of time describing the tactics that we have to do that.

I think if you are honest in analyzing those and you look at it from a long-term movement perspective, we have been the clear winner.

And so, I think the odds of us achieving are very strong.

But we are going to always stay conservative in our view.

Okay.

I just wanted to make sure.

It felt like you were being conservative, I wanted to kind of flush that out.

And then if we think about, the marketing plan which obviously was extremely successful in the fourth quarter, I know there has been a big focus on increasing cross shopping.

Can you talk about the success you are having there and anything else you are doing to drive that?

Sure, I mean, the biggest success obviously impacts the accessory area.

Accessories led the company in terms of sales for the year and I think with footwear we have led the Company in the fourth quarter and you are seeing that particularly in two key areas, primarily jewelry, uniquely fashion and sterling jewelry.

Those areas get big benefits from a cross shopping standpoint throughout the women's and junior area.

Second, handbags again one of the leading categories in accessories.

You are seeing cross shopping success basically directly in our business performance by area.

We are seeing it in areas as well that are not statistically related, but we are clearly seeing it drive our jewelry market share gain.

We have very strong performance for the year and in the fourth quarter in accessories and jewelry and a big chunk of that was driven by these cross shopping tactics.

On the gross margin front.

I think you are one of the only retailers we followed that actually had positive gross margin performance in the fourth quarter of 2008 which makes your performance in the fourth quarter 2009 even more notable.

Can you discuss how the gross and exclusive brands and you also have lower inventory levels but can you dive in to some more of the details with size optimization, mark down optimization.

It feels like you have tools which maybe have been rolled out for some time but maybe you are deriving greater benefits as the buyers continue to utilize them more but also there is additional functionality, if we could maybe have some additional color on that.

The two things that are aiding margins, obviously we made a lot of content changes to improve what we are offering customers.

That is most important, the style and the value of what we sell.

I think the way Wes and I look at it, most successful margin strategies are going to be supported with a broad number of different tactics to achieve them so that we don't ever get ourselves in position to rely on one of them.

For instance, just relying on improved private and exclusive brand penetration.

You named four or five and every one of those aided our performance.

On the technology front, I would say we have consistently seen that after we roll technology out, we get a lift but we usually get a number of years lift after that because you refine the tool and the tool improves on itself.

That's kind of what we are seeing.

We are certainly hoping the size optimization will do the same thing when we eventually get it all rolled out in the fall of 2010.

We are looking forward to several years of improved performance because of that.

It is a factor of a lot of different things.

Great.

Thanks so much for all the color and best of luck in 2010.

Thanks.

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

Thank you.

One for Kevin first.

Not to beat a dead horse in the guidance, but given the acceleration that you are hearing from other competitors as they are looking out in 2010.

Do you needing to take a more conscious approach to reserving promotional activities, proactive promotional activity in order to maintain your share gains?

Is that something considered in this guidance?

The other thing is the productivity of southwest stores after the strong comp last year, are they still below the average productivity of your chain?

Back to the guidance, don't forget, Jeff, there is a difference between guidance and actual results, right.

Guidance is just some company's view of what they think will happen.

You actually have to achieve that.

In our view, we have a track record now that supports our ability to deliver comp store sales increases.

And at the same time we recognize it as a very competitive environment and there is a very strained consumer.

And so, we are going to be realistic about the level of those increases so the investment decisions that Wes allows the team to make are related to the level of increase.

And as we over achieve, I think a lot of people will be happy, but we will be very safe in the guidance we get.

You know how we do it, Jeff.

We ran a point forward and that is the low end, is the 1.

We achieved the 4.5 which had the benefit of the extra day in December which was worth about 100 basis points in the quarter, that's the 3 and change and so we guide to what we already achieved.

We are not looking for any improvement.

Answering your question about California.

Depending on the market, they run around 85% and 95%.

San Diego is actually above the average store now.

So we still feel like we have opportunities to get those to the average store which means I know there is a lot of concern out there about our ability to lap the [Murman's] benefit but those stores are still below the average in the Company.

We still believe we have more customers to to attract.

So we believe we are not going to run 20 comps out there like we did in some quarters last year, we can overachieve the company comp out there certainly.

Wes, one other on your credit.

This process pretty important given to how strong the penetration is for the customer.

Can you just share a little bit more on that process on multiple banks considering.

Is JP Chase one of them and how is this impacting your cash utilization during the year in terms of buy back and other things?

Chase is still very much part of the process and very good partner.

I think the process itself is, we are still in the preliminary stages.

So, I don't want to talk a lot about it.

We do have more than one bank interested.

And as far as the cash goes, I think realistically until we get an extension signed with Chase or a new deal with someone else, it would be prudent to keep our cash around until that is completed.

Thank you.

Good luck.

Thanks.

Your next question comes from the line of Lorraine Hutchinson of BofA Merrill Lynch.

Hi.

Good morning.

This is [Rick] in for Lorraine.

Can you talk about your target store count, perhaps give us an idea of what number you are working for and how should we think about the pace of new store openings beyond 2010.

We don't really have any guidance beyond 2010.

I think Wes and I both have the same point of view which is in the past we have looked out in the future and identified significantly more store locations for closed stores than we have at the end of this year coming 2010 but the path to get there is going to be totally and completely by determined by consumer demand and performance of our competitors, our own performance and the ability for us to identify real state locations that give our investors a good return.

Those are the factors.

We certainly expect growth in the future and are planning for growth in the future but we are not prepared to give you numbers beyond 2010.

Can you update us on what are you expecting in product cost as we go through 2010?

Are you still expecting inflationary pressure as we exit this year?

No.

Our 2010 view has evolved naturally.

Most of the first half of the year has already been placed.

General view and would be down we are down in cost of goods mid single digits or so.

For the fall it looks like we are going to be down in the low single digits or so.

We don't have as visibility specifically in holiday receipts but we have a big chunk of the year visibility and costs are down again this year.

Great, thank you very much.

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

Wes, I just have a followup question on the credit card business.

I know it is at the early stages but do you think the economics, even with the legislative changes that are in place on the renewal side of it will be equal to what you were able to achieve in the last deal?

We are in a preliminary stage am and I am not really confident at commenting on that.

And the legislative effect I think as some of our competitors talked about on their earnings call as well remains to be seen.

The biggest remaining piece out there is late fees.

That has to be decided no later than August, which is kind of the reason of the timing I gave late spring, early fall.

Once that is decided, clarity on the economics, the deal will be a lot better than it is today.

It would be a local to speculate at this point until that is decided.

Kevin, just a quick question for you.

On the footwear business, when you look at the strength of the footwear, especially in the fourth quarter, can you tell us how much versus like average ticket the footwear sales were and how much that benefited you and if as you look forward over the next few quarters does that concern you on your ability to comp in such a strong cycle for the footwear, the boots business?

No.

I don't think so.

Seasonal was good obviously.

I think it was good for many people, not just Kohls.

We had pretty broad success in our athletic footwear business, incredibly strong.

Our kids business was very, very strong.

Footwear outpaced the store significant in the fourth quarter, outpaced the store for the year, not as significantly but did outpace it as well for the year.

I think the footwear success to be totally frank with you, Bob, is primarily about better style, better value.

Wes is mentioning SKU reduction.

We have a strategy in there that is part of our inventory management tactic which is to reduce the number of SKUs in the footwear area in order to focus on inventory investment behind fewer offerings but guarantee in stock as a result of that.

All of those tactics and strategies are working.

We benefited like a lot of people did in the fourth quarter.

Boots were good but footwear was good the whole year.

Right.

Thank you very much.

Thanks.

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

Thanks.

Just a couple of questions on gross profit margins.

First, Wes, can you just dig in a little bit on the details of 162 basis point rise in the fourth quarter, what was clearance, what was mix, what was IMU?

If you can help us out there.

I mean it is was kind of all the above.

I would say private and exclusive mark up was probably a little more than mark down only because, somebody's point earlier, we had a higher gross margin in the fourth quarter.

We already cut clearance in the fourth quarter tremendously last year, so we didn't get as much benefit as we did in the first three quarters, but that was really kind of a contribution all over but more in IMU in the fourth.

The other thing that was not insignificant, Chuck, was the fact that we purchased to and guided towards a lower comp performance and then significantly exceeded it.

So the percentage of goods we sold at various points in the life cycle were very favorable.

Got it.

Makes sense.

And then can you help us understand size optimization for you guys.

We talked about it for a couple of years now, what's the timeline here.

You are talking the fall.

Can you give us how many vendors are on board or the number of SKUs where you are at today so we have some guideposts for the next year?

I think in the spring we might have mentioned, and sorry about not giving you the continuity, but we have about 70% of the size receipts on the program for spring.

The fall is really where we get all the size receipts on.

We have seen, like I said, in stock improvements 3% to 5% which translates into better sales.

Big picture overall, we are increasing the penetrations of smalls and extra smalls more than larges and extra larges as we enter some of the west coast regions where more smalls are in demand.

That's very high level and very simplified.

Okay.

Fair enough.

Last one, the double digit comp in the three private brands in the fourth quarter is impressive I guess.

Can you remind me what the trend was to the first three quarters of last year and broadly speaking what the margin hierarchy is between private and exclusive and national.

I know the direction but if you can get granular with us that would be helpful.

Well, trends in 2008 third and fourth quarter on each of the private brands were generally kind of like this.

In 2008 we had a pretty good fall season in Apt.

9.

We had mid lean fall season more like the store in Croft & Barrow, remember the store was down.

And Sonoma we were disappointed and I think we were very transparent about that.

It's kind of a mix.

Apt.

9 was coming off a pretty good year.

Croft & Barrow was coming off a year that looked like the store and Sonoma was coming off a year which was less than the store.

This year they all had very strong performance and Sonoma, probably on the trend basis, had the biggest turnaround.

It was a dramatic turnaround in Sonoma's performance.

I think that is definitely one of the reasons why you heard that the women's business in the fourth quarter was basically about equal to the store.

And with footwear the most improved trend in our whole business in the fourth quarter.

It made us feel good we are making better decisions from our value and style perspective.

On the margin, Wes.

Do you have that?

I mean, the difference.

We have consistently said between private and national is around 400 bips and depending on the exclusive arrangement, the more it looks like a private brand the closer it is to that, the more it is like Chaps on the men's side where it is basically a wholesale deal it looks more like the national brand.

Okay.

Great.

Thanks a lot.

Thanks.

Your next question comes from the line of Wayne Hood with BMO Capital.

Kevin, I was just wondering, when you look at the performance in California of the acquired stores and maybe even some of the nonacquired stores and you look at smaller versus larger markets and the performance differential between the two, are you seeing much of a difference that would cause you to rethink about potential markets you could go in there and being larger?

In other words, going into markets, smaller markets that you originally thought you couldn't based on the performance of some of the smaller stores you are seeing right now?

Short answer is no.

What we saw in the west coast, particularly in California, was the biggest improvement in the existing store base came in northern California to be fair.

That's where we had the biggest opportunity.

And from a performance versus planned perspective, it was relatively equal both northern and southern on the new stores basically after the opening began to make plans across the new stores.

Some did better and some did worse just like they always do.

So I think the big learning from the southwest experience in 2009 and in particular California was that the tactics that we employed from a constant perspective to tailor our stores more effectively by region, make our assortments look right in California and then drive customers in to those stores with those new assortments with tailored marketing tactics that appeal to that customer worked.

That is why we gained share to a great extent in California and it was pretty much across the portfolio.

It is also why you heard us talk a little bit about being very focused on other mild and hot regions this year because we think that we can do some of those similar things in those other regions.

As you know, those regions typically have not performed as well as a percent of average store so we have opportunity.

Just to follow along with that, Wes has talked to us I think about 30 stores for the foreseeable future.

What's the probability and what would have to happen for it to fall below 30 or even be above that.

What are the metrics beyond funding that you are looking for that would cause that to move one way or another in a material way?

For beyond 2010 if Wes --

That's more my thing.

If you have the model, pick our current run rate and blow it out how many ever years you want.

I think in order to accelerate from that, we have to see an improvement in the economy and more development is getting done.

A lot of us are being conservative with our developments.

No secret we tend to partner with guys like Target, Wal-Mart and Best Buy and Lowe's and Home Depot and all of us are being relatively conservative.

And the other factor we would be helped with which is what happened last year is that there were other failures of competing concepts and those stores became available for a better concept which was ours and we were able to acquire real estate really opportunistically.

I think that will still happen for sure.

It may not happen in one big lump sum like it did in California situation.

That's the other thing that we would expect might propel the number.

Wes, just my final question around SG&A growth.

It may be a peak remodel period here as well as some other initiatives going on.

As we look to 2011 and 2012, would it be fair to assume the SG&A dollar growth, not the rate, might move back down closer to 3 to 4 rather than 4 to 5?

How much is this activity really putting pressure on SG&A dollar growth that normally kind of wouldn't be there?

Obviously there is some expense associated with ramp of the remodels.

For now I would use 4 to 5 until we can prove that we can do better.

Your final question comes from Dan Binder with Jefferies.

Dan, you on?

I guess Wayne was our final question.

Thank you, everybody.

I will be available if you need me the rest of the day for followup questions.

Thanks.

This concludes today's Kohls quarter four year-end 2009 earnings release conference call.

You may now disconnect.