柯爾百貨 (KSS) 2010 Q1 法說會逐字稿

Good morning, good afternoon, my name is Jennifer, and I will be your conference operator today.

At this time, I would like to welcome everyone to the Kohl's quarter one 2010 earnings release conference call.

(Operator Instructions).

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

Such risks and uncertainties include those that are described in Item 1A in Kohl's annual report on Form 10-K, and 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 replays of this call will be available for 30 days, but this recording will not be updated.

So if you are listening after June 14, it is possible that the information discussed is no longer current.

At this time, I would like to turn the call over to your host, Mr.

Wes McDonald.

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 our progress in merchandising, marketing, inventory management, and the in-store experience.

And then I'll follow up with our earnings guidance detail for both the second quarter and the fiscal year.

Total sales for the fourth -- excuse me -- for the first quarter were approximately $4 billion, up 10.9% from last year.

Comp sales for the quarter increased 7.4%, driven by an 8.8% increase in transactions per store.

Units per transaction increased 0.4%, but were more than offset by a 1.8% decrease in average unit retail.

All regions and all lines of business reported positive comp sales results for the quarter, led by the southeast and west regions, and the footwear and home businesses.

Our e-commerce business also generated significant growth, achieving a 50% increase in sales for the quarter, and contributing 110 basis points to our comp sales.

Our credit share was 47.7 for the quarter, an increase of approximately 270 basis points over the first quarter of 2009.

Our gross margin rate for the quarter was 38.1, up 48 basis points from last year.

We improved our gross margin through strong inventory management, and successful private and exclusive brand strategies.

We would expect gross margin to increase 20 to 40 basis points for the second quarter.

Moving on to SG&A, SG&A increased 7.3% for the quarter, in line with our increase in sales, over our previous expectations.

Store payroll, advertising, and corporate expenses leveraged for the quarter.

Distribution centers did not leverage, due to initial expenses related to the purchase of our second e-commerce fulfillment center, and higher than expected e-commerce sales.

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 of 2010, as well as a reduction in late fee revenue.

IT expenses did not leverage for the quarter, due to our increased e-commerce investment.

We would expect SG&A expenses to increase 10% to 11% in the second quarter, due to timing of investments in our e-commerce business, both in our fulfillment center and IT infrastructure.

In addition, we expect to incur additional costs to notify our customers, as additional legislation related to our credit card portfolio is finalized, most likely in the second quarter.

Depreciation expense for the quarter was $151 million versus $141 million, an increase of approximately 7%.

The increases are primarily due to new stores and remodels.

Depreciation is expected to be approximately $160 million in the second quarter.

Preopening expenses were $4 million for the quarter, $11 million lower than the prior year quarter.

We opened nine stores in the first quarter 2010, compared to 19 stores in the first quarter of 2009.

Preopening expenses are expected to be $3 million for the second quarter.

Operating increased -- operating income increased 40% to $351 million.

Operating income as a percent of sales was 8.7%, a 179 basis points improvement over the first quarter of last year.

Net interest expense of $31 million was comparable to last year, as higher average investments were more than offset by lower interest rates.

Interest expense is expected to be approximately $32 million for the second quarter.

Our income tax rate was 37.8 for the current quarter, compared to 37.5 for the prior year quarter.

We would expect our tax rate to be approximately 37.9 for both the second quarter and the year.

Net income increased 45% to $199 million for the quarter, and diluted earnings per share increased 42% to $0.64 for the quarter.

Moving on to some balance sheet metrics, first of all, square footage for your models, we currently operate 1,067 stores, compared to 1,022 at this time last year.

Gross square footage was 94 million at quarter-end 2010, compared to 90 million at quarter-end 2009.

Selling square footage increased from 76 million at quarter-end 2009, to approximately 79 million at quarter-end 2010.

We ended the quarter with $2.4 billion of cash and cash equivalents, an increase of $1.5 billion over the prior year quarter end.

The majority of the cash and cash equivalents are in money market funds, commercial paper, and CDs.

We continue to actively negotiate a new credit card agreement, and have several potential partners.

We expect to reach a decision on that agreement in early fall.

After this decision, in consulting with our Board of Directors, we will decide what options to pursue with our excess cash.

Our inventory levels reflect continued strong inventory management.

Total inventory of approximately $3 billion, was up 8% compared to the prior year, and inventory per store is up approximately 3%.

Moving on to capital expenditures, capital expenditures were $191 million for the first quarter, 3% higher than the prior year quarter.

Year-to-date we generated almost $300 million in cash flows from operation, and approximately $100 million of free cash flow.

The decrease in free cash flow is primarily due to increased incentive payments during the current year quarter.

Accounts payable of $1.4 billion, up about 40% versus last year, and AP as a percent of inventory was 46.8%, versus 35.8% last year, an indicator of our freshness of our current inventory.

Weighted average diluted shares were 309 million for the quarter, and we have not repurchased any of our stock since July of 2008.

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

And with that, I will pass it over to Kevin.

Thanks, Wes.

As Wes mentioned, comparable store sales increased 7.4% for the quarter.

All lines of business were positive for the quarter.

Footwear and home, both achieved double-digit comparable sales increases.

Footwear had broad based strength, led by athletic shoes.

All areas of home achieved positive comps, led by seasonal, electrics, and bedding.

The remaining businesses achieved comps between 5% and 7%, with women's being the strongest overall business.

Areas of strength within women's, were special sizes, in both updated and classic sportswear, which all posted double-digit comparable sales increases.

Men's was strongest in basics, tailored clothing and young men's.

Accessories was strongest in fashion jewelry, watches, and sterling silver.

And children's best performing categories were small sizes and toys.

From a regional perspective, the southeast and west region both performed better than the Company.

The remaining regions had comparable store sales increases in the mid single-digit range.

Total e-commerce revenues increased 50% to approximately $128 million in the first quarter, well ahead of our plan.

We continue to see the type of growth in this area, that supports our decision to make major new investments in capital and infrastructure in our e-commerce business to fuel our future growth.

We expect an increase in comparable store sales for the second quarter in the 2% to 4% range, with May being below the quarter, June above the quarter, and July with the quarter.

The difference in expectation from May and June involves shifts in the Memorial Day and 4th of July holidays.

On a merchandising standpoint, we announced at the end of April that we were expanding our very successful ELLE branded lifestyle collection into the home category, with an ELLE decor line of contemporary home finishings.

ELLE decor will be available only at Kohl's, in approximately 350 stores, and at kohls.com beginning in September of this year.

ELLE decor will initially launch with home and home decor products, including decorative pillows, frames, candles and accent items.

We were also very pleased with the performance of our brands that were new to spring 2010, LC Lauren Conrad, our exclusive partnership with Lauren Conrad, Mudd in Juniors and girls, and Helix, our newest private brand in young men.

All three of these brands well exceeded their plans.

Private and exclusive brands continued to increase in penetration overall, up 268 basis points for the quarter to 47.2% of sales.

Private brands had strong performance in our three major brands, Croft & Barrow, Sonoma, and Apt.

9, as well as Jumping Beans in childrens, all achieving strong double digit comps for the quarter.

Strong exclusive brand performance for the quarter included Dana Buchman, ELLE, Fila, Food Network and Simply Vera Vera Wang, each one of which achieved comps of 20% or more.

On an inventory management front, as we mentioned earlier, average inventory per store is approximately 3% higher than last year.

Clearance inventory is slightly higher, but is less than 5% of our total units on hand.

Our merchants, product development and logistics team, worked with our vendor partners to pull receipts forward to support our better than planned first quarter sales, putting us in a great position for the summer.

As a result, our AP to inventory ratio reached over 46% at the end of the quarter, approximately 1,000 basis points better than last year, indicating the freshness of our inventories entering the second quarter.

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

We saw improvement in in-stock levels of about 3% in these programs in the first quarter, leading to increased sales and customer satisfaction.

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

As Wes mentioned, we expect gross margin for fiscal 2010 and the second quarter, to be up 20 to 40 basis points over last year.

We believe our increased penetration in private and exclusive brands, as well as better inventory management will help drive that result.

Our marketing efforts in the quarter continue to be focused around "The More You Know, The More You Kohl's" platform.

As I indicated at the beginning of this year, in 2010 we were planning to intensify our efforts in improving the communication of our total value for consumers.

We also plan to focus on becoming more regionally relevant in the communities we serve.

As part of that strategy, we adjusted our media weight and type by market, and highlighted the regional tailoring of our merchandise content in our events.

We also continued to emphasize with consumers our differentiated customer service practices.

The goals in those efforts was to motivate consumers to shop at Kohl's more often, take market share from competition, and strengthen our customers' understanding of why Kohl's is your smartest choice.

From both a quantitative and qualitative perspective, these efforts appear to be resonating with consumers, driving traffic to our stores in a more meaningful way than our competition.

On the quantitative side, transactions were up almost 9% per store, the highest increase since the second quarter of 2002.

Our focus on regional relevance led to our biggest increases in both, transactions per store and comp sales, in our hot and mild markets in the southeast and the west, where we knew we had continued opportunity to connect more fully with consumers.

And because of the focus on productivity, and the tailoring of message by market, advertising expenses leveraged significantly for the quarter, and contributed to our overall strong expense performance.

On the qualitative side, our research indicates the key attributes known to drive customer choice are strong and improving.

Attributes like getting more for your money, having great sales, and affordable merchandise are associated with Kohl's more than our competitors.

Customers understanding of the value of our no exclusion sales, our great no-hassle return policy, and community support is improving steadily.

In those trade areas that are benefiting from our expanded remodel effort, customers are recognizing the improved experience in a more meaningful way than ever before.

Most importantly, our overall internal customer service scores continue to increase year-over-year, up 4% for the first quarter on top of the significant gain we had last year.

Taken in composite, we feel we continue to make progress broadly in our strategy to differentiate ourselves in a meaningful way to consumers.

We opened nine stores this quarter.

We plan to open the remainder of the approximately 30 new stores for the year this fall.

We completed 17 remodels during March, and we plan to remodel 68 additional stores this year, with 32 in May and 36 in August, for a total of 85 remodels for the year.

This is a significant increase from the 51 stores we remodeled last year.

We've been pleased with the customer reaction to our first wave of remodels.

Marketing initiatives from our market intensification efforts seemed to have attracted first-time shoppers, and former customers who have not recently shopped at Kohl's in our remodels.

In addition, customer service scores from last year's remodels continue to outpace the overall Company's improvement.

Remodels remain a critical part of our long-term strategy, and we believe it's extremely important to maintain our existing strong base of real estate, even in a tough environment.

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

We also continue to be on track for the rollout of our in-store kiosk by fall 2010, and continue to be pleased with the results in the pilot stores, and especially in our new stores.

As you know, we've been very focused on implementing technology to improve the customer experience, and address opportunities that we see in providing better customer service.

Our supply chain initiative, size optimization, and our new kiosks are just a few examples.

Often these initiatives also improve our performance and productivity metrics as well.

I'm excited to share a new initiative with you, that we believe will continue to allow us to provide better customer service and improve our long-term productivity.

As many of you know, we already have electronic signs in our footwear and small electric areas.

We have been testing new electronic signs, across the entire store for the first time, and we will be expanding the signs into 100 store pilot this fall.

Although it will be significant capital investment, we believe we'll see a good return on that investment through elimination of ad set payroll hours, as well as paper signs which support our desire to be a leader in green initiatives.

Assuming success in our 100 store pilot, we would expect to roll out electronic signs to all stores by holiday 2011.

This 100 store pilot was included in this year's capital investment guidance that was given at the beginning of the year.

Just in closing, before Wes takes you through guidance, a few comments.

At the time beginning of 2010, 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, building on the market share gains of last year, and continuing to invest in our future, by improving our business processes through technology, investing opportunistically in new stores, and accelerating our remodel strategy.

We are off to a very good start.

We've gained significant market share nationwide.

Success has been spread across merchandise areas in regions, with each area of business in each region, achieving at least a mid single-digit comp.

Our first quarter net income increase of 45%, reflects the success of our strategies in flowing these sales through to profit.

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

In addition, we continue to experience specific improvements around inventory management, that are leading to improved gross margins, which were up 48 basis points for the first quarter.

We are flowing our receipts more efficient and timely, as witnessed by the freshness of our inventory, and our AP percent to inventory, and as indicated by the improvement in our fount, size and color customer service scores.

Our increased penetration in private and exclusive brands also helped drive our gross margin rate.

I was especially pleased with our ability to manage expenses for the quarter.

We appropriately funded areas, such as distribution and store payroll with the increased sales.

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

We do intend to keep as a priority the customer experience, in order to provide consistency across our stores, and continue to be agressive in the marketing front, to continue our market share gains for the remainder of the year.

With that, I will turn it over to Wes to talk about guidance.

Thanks, Kev.

Let me share with you our initial guidance for the second quarter, and an update to the guidance for the fiscal year.

For the second quarter, we would expect a total sales increase of 5% to 7%, comp sales of 2% to 4%, and gross margin increase of 20 to 40 basis points over last year.

As I mentioned earlier, we would expect SG&A to increase 10% to 11%.

This will result in earnings per diluted share of $0.70 to $0.75 for the second quarter.

Our updated guidance for the year is $3.57 to $3.75 per diluted share, reflecting the following assumptions for the year, which also bakes in obviously, the first quarter actual performance.

Total sales growth of 6.5% to 8%, comparable sales growth of 3.5% to 5% for the year, gross margin, up 20 to 40 basis points for the year, and SG&A growth of 6% to 7% for the year.

This guidance does not reflects 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 Charles Grom.

Thanks.

Good morning, Wes, Kevin.

Just on the 2Q SG&A outlook, can you help us a little bit in terms of, if we were to exclude the fulfillment, the IT, some of the increase, I assume some of the credit reserves and for the late fees, against what the pace of SG&A growth would look like if you were to back those -- back those costs out?

And then also, what would you anticipate the growth, or the pace of growth to look like on SG&A in the latter two quarters of the year?

I think you can back into your last question from the guidance for the year of 5 to 7.

If you look at that, we're looking at SG&A growth in the back half of around 4.5 to 5, if you do the math.

So I guess basically that answers your first question, which is all the extraordinary investment, in terms of e-com, some of the credit card costs to notify folks when the late fee legislation gets finalized.

If we were to back that out, we'd be pretty much with that run rate.

Okay, so that's roughly $50 million.

Is that about right?

It might be a little less than that, but it's somewhere between 40 and 50, when you throw it all together, yes.

In terms of the timing on the e-com, we have to finish all of our investment before the fourth quarter, because that's when we need everything to be ready.

Okay, and when are all the kiosks going to be in the stores?

The kiosks will be in all stores by the third quarter, certainly by the end of the third quarter, actually probably a little bit before that.

Yes.

And then my second question, in regards to sales productivity, obviously the accelerating that continues to be a priority for you guys, and there's some big opportunities in the southeast and southwest.

Just wondering if could you give us a sense for how far below those regions, are relative to the total Company average.

The percentage of, I guess, average stores which is sort of how we look at it runs anywhere between 10% and 15% less.

Now, to be fair, those marks have significantly more new stores that are still maturing.

But there's a clear gap between the performance in those markets and our average market that we are working really hard to make up, and as heard from the first quarter, and I think as you know, Chuck, from last year, we're make up ground pretty quickly.

Okay, great.

And last one, on the credit deal, Wes, with Chase, or with the other banks you're talking to is the Board actually requiring a new deal to be in place.

signed and delivered.

before you guys re-up your share buyback program, or is that you guys just being conservative, and wanting just to save the cash, in case the deal doesn't get done?

I think right now we still have multiple partners involved.

I don't think the Board will require to us have a deal -- let's say we switch from Chase to someone else.

They wouldn't require us, I don't think, to have that transfer occur.

We would just need to have an agreement with someone.

Obviously, it's much easier if we end up choosing Chase, because there's no change there.

So I don't think we have to wait for any kind of deal to be signed.

We just have to know who the partner is, and then we can go forward with deploying the excess cash.

And as I mentioned in my comments, we would expect to have identified a partner in the early fall, so sometime in the third quarter and we'll be talking to you about uses of excess cash at that time.

Great, thanks a lot.

Thanks.

Your next question comes from Jeff Klinefelter with Piper Jaffray.

Yes.

Thank you.

Couple questions.

One is on inventory.

Wes, I guess Wes and Kevin, what would you anticipate, given the efficiencies from all these system implementations that would you be able to run inventory relative to comp sales growth?

I mean you maintain an inventory level on a per-store basis, multiple points below your planned comp?

Or how do you look at that now, given the systems you have in place?

I think the -- the way I would characterize it, Jeff, it's Kevin, we have an opportunity to improve inventory turnover.

So I think there's consensus on that, here within the organization.

So what that implies, is that we would expect sales to run faster than inventory.

To put a number on that, I think that's difficult to do on a quarter by quarter basis.

But we do have an objective that our inventory has to work harder for us.

We're hoping to continue to have quarters like the last one where we had had 7% more sales per store, and only 3% more inventory.

Yes, I mean, I would say with 1,067 stores, you can look at an average $15 million store, and still get a wide variety of average inventories.

So we have a lot of opportunities, once you get down into the weeds, on a store by store basis to improve.

So I would suspect, for the foreseeable future, we'll always plan our sales plan, higher than our inventory growth.

It's just there's that much opportunity still remaining.

Okay.

Maybe said another way, Kevin, you shared an in-stock improvement this morning, I guess a three percentage point increase.

Yes.

What would be, without sort of sharing -- maybe you don't want to share an overall today, current in-stock rate, but how do you look at that in terms of potential improvement?

How close are you to what you would consider an optimal level?

We're a long way from an optimal in-stock level.

I think the way Wes characterized it, is the right way to do it, it's really about store portfolio, and within the store portfolio, the individual businesses.

So we're getting more improvement actually in areas in which size optimization had taken hold, and we're getting the benefit of that.

We're getting naturally, a little less improvement in other areas of where it's not employed yet.

So I think our biggest opportunity we know, continues to be maximizing inventory turnover, in average to below average volume store,s because they naturally turn slower.

Okay.

That makes sense.

Just lastly, sourcing.

Do you expect anything baked into your 20 to 40 point gross margin improvement on sourcing changes for the second half?

Not really.

I mean, I think we've talked about the fact, that we are seeing moderating price deflation.

And we're expecting for the fourth quarter prices to be pretty flat to last year, in a couple categories, and maybe a little less.

But there's other categories like home or footwear where prices are actually higher already.

So that pricing, is all baked into the guidance that we give you on the margins.

Okay.Thank you.

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

Thank you.

Good morning.

Kevin or Wes, maybe help us think about size optimization potential.

It sounds as if you're talking about significant benefit, yet we really didn't see any change to the gross margin, the 20 to 40 basis points for the second quarter, or for the year.

So help us think about that, as you expect to roll that out by year end?

Well, our original guidance was 20 to 30, and we just achieved 48.

So we did do a little better than what we told you, to be fair.

The size optimization is really going to benefit on the sales line.

We'll get residual benefits because when you go to the sales rack, hopefully they'll be more uniformly distributed in size.

But we're really looking at it as a sales opportunity, not a margin opportunity.

Okay, so --

I think, Adrienne -- that Wes nailed it.

This is a sales strategy.

It's not a merchandising margin strategy.

It's definitely a sales strategy.

Okay, so in terms of the 3.5 to 5 for the year, the slightly upwardly revised comp, there is some lift related to the size optimization there?

well, we don't -- we don't go through, to be honest, we don't go through and item by item try to identify the relative weight of various initiatives.

It's more of the composite weight that we're looking at.

And I think what we're kind of saying is that our own performance in the first quarter and last year, combined with the knowledge that we're getting lift on size optimization where we have it.

And that it's expanding gives us a confidence level to say, let's raise our guidance for the remainder of the year.

And then as always, we're going to work hard to do better than that.

But I think that that's kind of what's in our thinking.

Okay.

Great.

Then on the new initiatives, it sounds pretty exciting, this new electronic signage.

Could you give us a sense in terms of what you would need to see to green light the pilot?

And also, as you think about the full cost savings potential ,in terms of labor hours, signage, how we should think about what that could mean, as you roll that out potentially chain wide?

The main -- the purpose of the pilot naturally is to look at impact on the customer, and impact on the business.

And to ensure that the technology is consistent and serviceable, and no issues of any kind.

So from that perspective, that's really what we'll be examining.

We have a testing model, we have a testing process that we go through on all these things, just electronic signs, another element.

As long as we check all the boxes on that, we would give the green light to move forward.

On the SG&A side, I'll let Wes talk about that.

Yes, I mean, the hard part of the test will be evaluate how customer feels about, and make sure there's no effect on sales.

The SG&A part is pretty easy.

We know exactly how much it takes to set an ad.

We know exactly how much it takes the paper signs cost.

That will be the easy portion of the analysis.

So we'll take out the amount of savings required to earn a return on that investment.

We're not looking for an extraordinary return.

We're going to take the excess savings, which I expect there to be some of those, and reinvest in store payroll to better improve the customer experience.

Okay.

Helpful.

Then, Kevin, just talking about e-commerce, it sounds as if -- clearly you're seeing pretty tremendous growth, clear opportunity to invest there ahead of the holiday season.

Maybe spend some time in terms of how you think about the potential as it continues -- as you continue to see strong penetration, maybe some metrics you're willing to share with us, in terms of the multichannel customer, what you are seeing in terms of spend, what you think this could evolve to, in terms of a part of your business over time.

We haven't gone any further in terms of sharing numbers on e-commerce this year.

I think we said broadly last year we did about $0.5 billion, and we have a plan to increase that by roughly 40% or so this year.

So that would imply $700 million, I guess.

And then we actually ran 50% ahead in the first quarter, so we exceeded that.

So I think from the perspective of confidence, we have a high degree of confidence hat we have a lot of opportunity.

When we examine our business level compared to a pretty broad array of other brick and mortar, you also can come to the conclusion, Kohl's has more opportunity than others, just given the scale of our business to date.

A lot of the metrics that we see in e-commerce I think, Adrianne, are things that you would hear very broadly.

They're often our best customer.

We do get opportunities to reach customers in markets where we don't have stores, and our markets we don't have many stores.

So that's always a nice thing that customers get to reach into Kohl's that way.

We think the kiosks implementation has an opportunity to lift our trend in e-commerce, because it gives customers another reason to choose Kohl's, if they do get disappointed in the store experience.

So from that perspective, I think a lot of the other metrics, they're not going to be earth shattering to you.

You hear about them from other retailers.

I think the base case is just, honestly, we have a relatively small business with a huge opportunity to grow.

And we wouldn't have put $100 million in capital this year, if we didn't think we were going to get it.

And just following on that, as you see an opportunity to penetrate markets that perhaps don't have a Kohl's store, are you at the point where you're thinking about the growth of e-commerce changes the way you think about store potential over time?

Not really, no.

I mean I think the way we think about it, is another element of customer systems.

It's a choice.

The customer has another choice to make.

Originally she could shop our brick and mortar stores, then she could shop our brick and mortar stores or our on-line stores from her home.

And now she can shop our brick and mortar stores, our on-line stores, or our on-line stores from one of our own stores.

So it's just choices, that's all, we want to give the broadest choice to give us the biggest opportunity for share gain.

Okay, great.

And then just a last one, Wes, could you quantify the Memorial Day shift?

For us in May?

In May, it's probably 150 to 200 basis points, and obviously a little bit less than that positive.

It's a negative effect in May.

And a little bit less than that positive to June, because June is a bigger month.

Great.

Thank you.

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

Good morning.

So in terms of same-store sales guidance, I know that Wes doesn't really believe in the tier stacks, so I'll address the question to Kevin.

Maybe you should ask Kevin, then, yes.

Yes, I'll ask Kevin.

So if we look at the midpoint of your second quarter guidance would it indicate a slow down of the tier stack from first quarter, is there anything we should read into that other than conservatism?

No.

I mean, I think we've tried to be pretty clear on how we look at guidance.

We try to take the ends of our trend runs over a six-month to year basis, and say, hey, broadly those are kind of the low and high end that we feel confident achieving.

We've tried to -- and I think have shown a pretty good pattern of achieving those.

So you are always going to probably say that our guidance might be more conservative than you might like, but we just think, particularly in a continued uncertain environment, just as a rational way to approach things.

You don't want to get ahead of yourself.

So I mean -- we're -- we did take guidance up, to be honest, and I think that's because we ran a little better in the first quarter.

And then with regard to the kiosk, and I know it's still early days, but what trends are you seeing with customers who are shopping the kiosks?

And, again, I think they're kind of broadly not surprising.

They're core customers, because they're in our stores to begin with.

Our customer is -- the kiosk is easy as to use to even easier if after you Kohl's credit card, because it populates the information for shipping and billing for with your card, so naturally Kohl's cardholders are disproportionately using the kiosk right now.

I think we're looking at that the kiosk results, knowing that since's in a relatively small pilot, we haven't had an opportunity to market this to consumers.

So I think for us to give you a better indication, we'd be able to do it after the fall when we have it everywhere, and our marking team gets the chance to include it in our differentiators with consumers.

That will probably be a better time for us to be able to give you a better answer to that question.

Okay.

Then lastly, with regards to the on-line business, I guess it's a two-part question.

What do you think is driving the above plan results?

And then secondly, from a CapEx perspective, as it relates to on-line, when do you think we should think about needing to build another DC?

On the -- what's driving the results, frankly, right, is we have underpenetrated business, vis-a-vis our other brick and mortar retailers.

So we have more opportunity to grow than they do by default.

And then secondly, it's really customer choice.

Right?

I think you're broadly continuing to see most brick and mortar retailers enjoy more success on-line in growth, than they are in their own stores.

And ours is just a much, much greater degree, because of the scale of our brick and mortar business to our current on-line business.

And the rule of thumb is kind of how we are looking at it, is every $500 million we need another DC.

So I guess when we start to approach $1 billion, is when we'll have to start looking to our DC.

If you ask me, I think it's going to be another couple or three years.

If you ask the guy running E-com, it might be next year.

So, he's a little bit more aggressive than I am.

So that's -- that's kind of the rule of thumb.

Okay, great.

Thanks so much.

Best of luck.

Thank you.

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

Hi, good morning.

Good morning.

I guess the first question I have is, can you talk about the comp performance of California in the first quarter, and what the compare is that you are going up against in the second quarter?

I think we group California in the western region.

That ran a high single-digit, of which California was a part of.

So pretty much continued the trend we saw from the fall.

The only difference is the rest of the country did better So we're starting to come up against little bit tougher comparisons.

I would still suspect that the western region would be better than the Company.

The gap may be slightly lower.

And I think we talked about this at the end of last year, in February when we kicked off the year.

We would expect the southeast to continue to lead the region all year long, because of what we've done there from a marketing perspective, taking the tactics that worked for us in the western region in 2009, and putting them in the southeast region in 2010.

We've seen dramatic results in Florida where we're running strong double-digit comps down there.

So I suspect you will be hearing us talk a lot about the southeast this year.

Great.

Wes, and on credit card, you talked about some of the legislative changes on the mailings that you have to send out.

Can you talk about how the new legislation is going to impact the profitability of that business for you?

I think that's really an unknown at this point.

It all revolves around the late fees, and the late fees remain sort of in the status quo area.

I don't think there would be a material impact on our business.

What we saw in the first quarter from late fees, was really just a reduction in the number of people who were paying late.

That's a short-term issue for us.

But longer term, we expect to get some of that back in the back half, or into 2011 as you should.

That should lead hopefully to lower bad debt expense.

We are seeing improvement across all buckets of our delinquencies, so I haven't been able to say that for a quarter in a long time.

So hopefully that trend will continue, and we'll start to see some of that benefit in the back half.

But it's really at this point more of a timing issue than anything else.

Great.

Kevin, just have a couple of product questions four.

I think you talked about the Helix tees.

I think those look really good in the stores.

But I wonder if you could comment on the sales of girlfriend jeans, and maybe talk about the Sienna Ricchi handbags that also seem to be doing well?

Broadly, denim I would say is really strong across the store.

The first quarter benefited from warmer weather, so seasonal categories like shorts particularly outperformed.

From a handbag perspective, accessories was one of our strong performing businesses.

It had a -- I think a mid towards the high-end single-digit comp performance, and handbags was exceptionally strong within there.

I think that those, Bob, that's an area in which we think we have a lot of share opportunity, our share in accessories, particularly in handbag categories, not what we think it ought to be given our share in womens apparel.

So I would suspect, whether it's that brand or brands like ELLE, or some of our exclusive brands like Vera Wang and Dana Buchman, you are going to see performance that outpaces the store.

Great.

Thank you very much.

Thanks, Bob.

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

Thank you.

Good morning, Wes and Kevin.

First question is on your gross margin guidance for the second quarter, looking for an increase of only 20 to 40 basis points, yet in the second quarter you're going up against a much easier compare, relative to the first quarter.

So just wondering, is there anything you're seeing in terms of the competitive environment, you need to get more aggressive on price, or should we just view that as a degree of conserve conservatism?

I think -- I wouldn't call it conservatism.

I think it's just basically at the beginning of the year, I think, we said, Wes, 20 to 30 basis points.

We did 48.

So I think we felt like, we looked at that time rest of the year and said there's probably a little more opportunity --

And we're also looking at how the merchants plan the quarter, so sometimes that's a little different.

They may be getting in and out of a business different than last year, so it's something that you guys wouldn't be able to use comparisons from LY on.

There isn't anything special, though, that's for sure.

Okay.

That's fair.

And then you had mentioned, obviously, you expect the credit card deal to get announced in the early fall.

Would love to hear your thoughts on share repurchase versus dividend or potentially both?

I think will you hear our thoughts on that after we meet with the Board in August, during our annual review of the five-year plan.

We have a fairly significant turnover on the Board from the last time we started doing a share repurchase.

So I suspect that will be part of the discussion, dividend will be part of the discussion.

We've been soliciting our shareholders' feelings on that, like anything else, there's some in the repurchase camp, and some in the dividend camp.

And we'll talk to the Board and make the best decision we can for the majority of the shareholders.

Okay.

Last question on the remodeled stores.

It sounds like very positive early reads there.

Any metrics you can share with us in terms of lift to sales productivity margins, et cetera?

It's too early to tell, because obviously we have a pretty consistent drop.

We've been able to mitigate that down to about between a 1% and 2% drop the last couple of waves.

We obviously get a big bump from re-grand opening.

So for me to quote you a number now, it would be way too high.

We have to really see how we do through the rest of the year.

But I guess I will tell you we were very happy with our last wave of remodels, and the marketing we associated with that from last year, and seeing a lift there.

We took those learnings, and are applying them to 2010 remodels.

But I'm not going to tell you it is going to be a huge lift because we're not really changing the mix of what we sell, like some of the guys like Target that put in p-fresh and things like that.

They are going to get a bigger lift than we will.

We are doing it partly as a cost of doing business, and partly as a differentiating factor.

Any sales lift would be a bonus for us.

All right, great.

Thank you.

Thanks.

Your next question comes from Lorraine Hutchinson of Banc of America.

Thank you.

Good morning.

Good morning.

When you think about your inventory purchases, I know you spoke about flat pricing in the fourth quarter, if we do see inflation start to creep in in early 2011, are there any things you can do to try to offset that?

Or will you have to try to take some price, to offset and keep your margins stable?

I don't think threes any question we're going to see some inflation in 2011.

And A I mentioned in the call, there's already been inflation in some categories, categories like home have already experienced that, but we're -- to some extent as well.

So the way I would characterize it, Lorraine, just like when prices were coming down rapidly, which they have over the last three years, as prices start to moderate upwardly, it's our challenge to mitigate that for the consumer.

I think the team did a really good job of mitigating the downward impact of deflation over the last few years.

Our average unit retailers have actually held up really well.

We've been up in this kind of environment.

I suspect they will do a good job the other way.

I mean, there are things that can be done certainly selectively, committing earlier for fabric, certainly looking to -- from a percentage of business standpoint, mixed in, lower wage markets to a greater degree, a market like Vietnam or Indonesia, choosing duty free markets, where we can, markets like Jordan would be a good example.

We'll probably accelerate the use of reverse auction.

We use reverse auction now, but I suspect we'll accelerate it in an environment where prices are going up.

Re-engineering is always an opportunity, though I would emphasize to you, we won't downgrade quality.

So they're clearly strategies that can be employed that are contemplated, and in impact right now.

Thank you.

Thanks.

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

Thanks very much, guys.

And really excited about your success direct.

And wondering if there's changes we should anticipate in terms of marketing to that direct channel, things we should watch for in terms of reduction of mailings, or perhaps increase in other ways to reach the direct customer?

Wondering what your thoughts are there, both in terms of dollars and venues?

Clearly we're spending more money broadly on digital marketing, it's different in different areas, but as a category of he investment is way up this year, and will continue to be way up for the rest of the year.

Some of that is just the trends in consumer use of media.

Right?

People are using digital more than they used to, so we're just responding to that.

And some of it is the to support the on-line environment as well.

I think generally, Richard, the way I would think about it is, we just see this all as choice for consumers.

So we really have kind of one marketing message, and we're highly to focused on productivity.

And so we're going to put more and more dollars behind the things that are growing in importance, and giving us better productivity rates, and less dollars and the things that aren't, and hopefully get a better result because of that.

But it's kind of one big effort.

Got it.

Just a quick question for Wes.

Given the remodels, how many stores are left to do, or how many stores have been remodeled in the last three years, or new in the last three years?

If you take the combination, I think the way we each couched it, over the last five years, over 50% of our stores have been either opened in the last five years or have been remodeled.

So that's the kind of way we look at it.

If you want to go back, we did 51 last year, I think we did 29 the year before that, 2006 we didn't really do any.

So we probably were in the 20s to 30s for 2007 and 2008, and then last year with 51, this year 85.

I would suspect, going forward, we'll probably remodel 100 stores a year.

That will keep us on a path of having a store remodeled every nine to ten years.

Got it.

Is there a significant cost attached to electronic signage, electronic price signage?

There's a capital investment nationally, primarily hardware, but also software development.

But as I said, for this year, we had contemplated the pilot 100 stores in the guidance that Wes gave at the beginning of the year.

So there's nothing new to tell own that.

We still have the same guidance on capital as we had before.

For future years, it's going to all to have do with how the pilot does.

We're excited about it, but we'll see how pilot does.

And the benefit there is really twofold?

Obviously less labor to change price and signage, but also perhaps an ability to maximize gross margin dollars to get the price just right?

Well, I think the benefit is really on the expense side is definitely ad set.

No question, we don't have to send people around the store changing all the ad signs, several times a week.

And paper.

Paper is a big deal.

The customer service benefit of course would be the confidence that they have that the price that they see on the sign is the price they're going get at the register, since it's driven by the same technology.

Right.

And the margin side of things?

I don't know that you can really say there's any margin impact.

Right?

We're not changing the way we do business, we are just changing the way we communicate by employing electronic signs, we're really not changing the way we do business.

We're just changing the way we communicate what we do to customers.

Okay, and just some nimbleness maybe, and ability to react more quickly that's all?

Yes.

No.

I mean, to be honest, right, if you think about the way we drive our business through marketing, and I think we're pretty anymore nimble in marketing, but we're not that nimble that we could use the e-sign pricing to change dramatically.

I would expect that there will be cases, particularly in the heat of the season, like holiday, that if these signs works well, that it will give us the opportunity, you're right, change prices within the context of ranges that we might be doing.

But that's not really a driver here.

Right, we're not going to raise the price of shorts if it's hot, or anything like that.

That's not a bad idea, Wes.

Thanks very much.

Thanks.

Your next question comes from Dan Binder with Jefferies.

Hi, good morning.

Good morning.

My question is regarding private brand and exclusive brand penetration.

You guys have just done a tremendous job taking that higher.

Any thoughts on how high is high, and maybe just limiting that to the next two years or so, where do you think you can get that?

And then similarly, on credit share, that's been marching higher.

Do you see a ceiling on that?

It's Kevin, Dan.

I'll answer first part, and Wes can talk about the other.

On the private and exclusive brands, I think that there's just no question if we deliver the right product, the penetration is going to continue to march higher over the foreseeable future.

Just the weight of the growth in the classifications we're selling, many of these private exclusive brands is driving that.

And then, of course, we continue to have new brand,s like this spring we had three huge new brands that weren't in our assortments last year that will help it.

We also, to be honest, looking at our performance in the last couple years, some of our really big private brands, Sonoma, Croft & Barrow particularly, have not enjoyed the success that we would have expected.

We are starting to get that now.

I think I mentioned those brands actually ran a double-digit comp in the first quarter, which was pretty exciting.

So that will probably help.

There's probably some limit on private brands.

We want to continue to be about brands people know and recognize, so highly focused on national brands.

But that doesn't preclude us from continuing to add national brands that are exclusive at Kohl's.

So the next couple years are going to be positive I believe.

On the credit card side?

Yes, on credit side, I mean, credit share 47.7 I guess it was this quarter.

If we talk about the regions externally, we have regions that are in the mid-50s.

So I guess that's kind of a ceiling, but I still would expect them to get some growth, because within the markets that are in the mid-50s, we have some that are close 60.

And we also have regions that are newer, that are in the low 30s.

And so as we continue to get share of mind, and get the marketing message through of the value that the Kohl's charge card provides, I think we can continue to grow share indefinitely.

Can you give us any color on the economics of that credit transaction?

In other words, in terms of average ticket multiple of what would you see off credit, and EBIT dollar on an average transaction versus -- of more off credit transaction?

I mean the average delta between a charge card transaction and a bank card is about $10.

So you're talking about a transaction that's in the 60s, and the bank card is kind of in the low 50s.

That's very similar to debit.

And obviously, cash and check are very low, kind of in the 20s.

So it's a combination not only of ticket but frequency.

Obviously, your Kohl's charge card holder is more loyal, and is going to come more frequently than bank card shoulder.

Okay.

Then from a competitive standpoint, do you envision the environment getting any more competitive than what we've seen in the last quarter?

Are you anticipating that, at least in your marketing plan?

I think more of the same, is the way we're thinking about it.

It's still an environment, where if you compare what people are spending now to what they spent on our categories two, three, four years ago, a there's substantially less dollars being spent.

And so the fight for share is intense.

But I wouldn't call it any more intense or any less intense, I think it's just kind of more of the same.

Great.

Thanks.

Thank you.

Your next question comes from Erica Maschmeyer with Robert W.

Baird.

Hi, thanks.

Just a follow-up on the e-commerce investment.

Do you expect to have anything up and running for back-to-school in terms of the new platform?

Is that necessary from a volume perspective?

And then do you anticipate e-commerce and credit investment to continue into Q3 at all, and how much would that be kind of relative to Q2?

I would say a lot of the investments will be done in e-com in the second quarter, but we'll have more done in the third quarter.

We basically lock our systems down in October, and don't make any changes going into the fourth quarter.

So everything has to be done by then.

In terms of a split, a lot of it -- we're obviously going to try to get as much as we can done in the second quarter.

So I don't want to start projecting the third quarter.

We'll have a much better idea, once we get through this quarter.

But I think I gave you guys SG&A guidance, kind of implicitly for the fall season that you can use to model out the year.

In terms of credit, I hope this will be the last notification of our customers regarding legislative changes.

So I don't expect to have any of that in the third quarter.

Any additional revenue pressure from a credit perspective, we'll have to evaluate after the results, the late fee legislation come out,and what we think will be kind of late June, early July.

What about a longer term perspective?

Could you talk about other areas where you think you could see benefits on SG&A going forward?

Like advertising, distribution center, payroll?

We're going continue, I think broadly, and maybe Wes can give a couple of specific examples.

But broadly, the areas we're focused on naturally are the big areas, and the two big areas we have that are variable are advertising and store payroll.

So Wes talked earlier about one of the things that we're -- one of the reasons we're so strongly looking at electronic signing is that it could have to have benefits for us on store payroll, which we will probably reinvest into better customer service, but we give a better result because of that.

And on advertising, it's really all about productivity.

It's about making our dollars work harder.

The best analogy I would give you, Erica, is to think about as to how we've approached inventory management, use technology to drive better productivity to get better results.

That's how we're thinking about advertising.

Yes, at the end of the day, I think we've talk about this many times, in a lot of cases, it's all about market share and growing sales, because a lot of our costs are fixed.

So we talk about it every call.

We probably bore you guys to death talking about it.

But it's the way we're going to get to where we want to be, from a sales per square foot perspective, and also that, obviously, would flow through to operating margin and then return on investment.

So we don't have a lot of areas that need a lot of slashing.

We have very efficient distribution centers.

We have a pretty lean corporate culture.

And I think we run our credit card portfolio pretty lean as well.

So it's really going to be about those two big areas Kevin mentioned, but more importantly, just getting sales productivity back to where it should be.

All about the sales.

And then can you remind us, do you have any costs that you took out last year, that you would expect to come back this year?

Nope.

We tried to be smart last year, and not do anything that was one-time that would have to come back.

So I don't have anything I can think of off the top of my head, that was a one time that's coming back.

Thanks, great quarter.

Thank you.

And your last question comes from the line of David Glick with Buckingham group.

Yes, good morning.

Just a couple quick questions.

Just to follow up on Dan's question on the private and exclusive, what areas of -- in terms of categories are you really focused on for additional private and exclusive?

Men's really hasn't seen anything, particularly new in awhile.

And then secondly, we've seen really strong retail sales trends in the month of March, and into early April.

It seems to have kind of cooled off literally and figuratively.

As the second half of April unfolded, and just curious, your thoughts on that, is it just kind of the ebb and flow of the weather, and business that you see at this time of year?

If you can give us some sense of what you saw over the Mother's Day period would be helpful.

On the private and exclusive, I mean the way I would characterize that our probably main focus is on taking the really broad array of brands we've rolled out in the last two to three years, and ensuring that we maximize the scale of those brands, within the areas we launched them in.

And more importantly, into areas in which they have opportunity.

So a really good example would be, ELLE has been incredibly strong in apparel.

We added it into hand -- accessories and handbags, it's been incredibly strong as well.

And the ELLE decor expansion into home, we think is going to be more of the same.

So there's lots of examples of that.

So that I would say is our main focus, David.

In terms of categories, men's has probably got more opportunity maybe than others, but there's nothing to report there, and our men's business continues to be good.

and the exclusive and private brands we have in there are doing really, really well.

Sales, we don't comment on sales during the month.

The guidance that he we gave you contemplates all the things we think about always, which is year-over-year weather patterns, and particularly holiday changes with us, because we do drive our business with advertising.

But beyond that there's nothing to comment on in May.

Great.

Thanks.

And good luck the rest of the way here.

All right, David.

Thank you.

Thanks, everybody.

Thank you for joining today's Kohl's quarter one 2010 earnings release conference.

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