柯爾百貨 (KSS) 2010 Q3 法說會逐字稿

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  • Operator

  • Good morning.

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

  • At this time I'd like to welcome everyone to Kohl's quarter 3 2010 earnings release conference call.

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

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

  • (Operator Instructions)

  • Certain statements made on this call include projected financial results or forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995.

  • Kohl's intends forward-looking terminologies, such as believes, expects, may, plans, or similar expressions to identify forward-looking statements.

  • Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in said forward-looking statements.

  • Such risks and uncertainties include, but are not limited to, those that are described in item 1A, in Kohl's most recent 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will not be updated, so if you're listening after August 12th it is possible that the information discussed is no longer current.

  • I would like to turn the conference over to Mr.

  • Wes McDonald.

  • Sir, you may begin your conference.

  • Wes McDonald - EVP, CFO

  • Thank you.

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

  • I'll start off reviewing some of the financial numbers and then Kevin will go through some of our merchandising and marketing initiatives.

  • I'll follow up with some store operations data as well as earnings guidance, and then Kevin will wrap it up.

  • Total sales for the third quarter were $4.2 billion this year, an increase of 4.1% over last year.

  • Comparable store sales for the quarter increased 1.8%, driven by an 8.3% increase in transactions per store.

  • Units per transaction decreased 3.4%, and average unit retail decreased 3.1%, for an average transaction value decrease of 6.5%.

  • Year-to-date sales increased 7.4% to $12.4 billion, and comparable store sales increased 4.4%, again, on an 8.3% increase in transactions per store.

  • Partially offsetting the increase in transactions was a 3.9% decrease in average transaction value, including a 2.2% decrease in average unit retail, and a 1.7% decrease in units per transaction.

  • Kevin will provide more color on our sales by region and line of business in a few minutes.

  • Our credit share was 52.5% for the quarter and 49.7% for the year, an increase of almost 300 basis points over the prior year quarter, and approximately 235 basis points for the first nine months -- over the first nine months of 2009.

  • Our gross margin rate for the quarter increased 48 basis points to 38.5%, 8 basis points higher than the 40 basis point improvement that we expected.

  • Year-to-date, our gross margin rate increased 42 basis points to 38.9%.

  • We would expect fourth quarter gross margin to increase 20 to 40 basis points over last year.

  • Moving on to SG&A.

  • SG&A, $1.1 billion this year versus $1 billion last year, an increase of 8.4% for the quarter, better than our expectations of a 10% to 11% increase.

  • As we've discussed in prior periods, we've made significant investments in our eCommerce business during the third quarter.

  • As expected, these investments in technology and infrastructure had a negative impact on our ability to leverage in both IT and distribution expenses.

  • Though they didn't leverage for the quarter, both our Advertising and Credit businesses reported expenses notably lower than our expectations.

  • The credit improvement is primarily related to improvement in charge-offs.

  • Store payroll and corporate expenses were able to leverage for the quarter.

  • We would expect SG&A expenses in the fourth quarter to increase 3% to 4%.

  • Depreciation of $165 million versus $150 million last year, an increase of approximately 10% for the quarter, and 8% year-to-date, primarily due to new stores and remodels.

  • Depreciation is expected to be approximately $165 million in the fourth quarter.

  • Preopening expenses were $9 million for the quarter, $14 million lower than the prior year quarter.

  • The decrease reflects a decrease in number of fall store openings, 21 this year versus 37 last year.

  • Also, as a reminder, most of the 2009 fall openings were ground lease stores which had higher rental expenses during the preopening period.

  • Preopening expenses are expected to be approximately $2 million in the fourth quarter.

  • Operating income of $335 million decreased approximately 1% for the quarter, versus last year.

  • Operating income as a percent of sales was 7.9%, a 42 basis point decline over the third quarter of 2009.

  • Year-to-date, operating income increased 15% or $145 million to $1.1 billion.

  • Net interest expense was $31 million for the quarter, and $93 million year-to-date, consistent with both prior year periods.

  • Interest expense is expected to be $31 million in the fourth quarter.

  • Our income tax rate was 36.3% for the quarter, compared to 37.5% in the prior year quarter.

  • We favorably resolved some state tax audits during the quarter, which lowered the effective tax rate.

  • We expect our tax rate to be approximately 37.7% for the fourth quarter, and the blended rate of 37.6% for the year.

  • Net income for the quarter was $191 million, $1 million higher than the third quarter of 2009.

  • Year-to-date, net income increased 16% to $652 million year-to-date.

  • Our diluted earnings per share were $0.63 for both this year and last year for the third quarter, and year-to-date, diluted EPS increased approximately 16% to $2.12.

  • Moving on to some balance sheet metrics.

  • First of all, square footage for your model, we currently operate 1,089 stores compared to 1,059 at this time last year.

  • Gross square footage was 96 million at quarter end 2010, compared to 93 million at quarter end 2009.

  • Selling square footage increased from 78 million at quarter end 2009, to 80 million at quarter end 2010.

  • We ended the quarter with $2.4 billion of cash and cash equivalents, an increase of $938 million over the prior year quarter end.

  • Substantially all the cash and cash equivalents are in money market funds and commercial paper.

  • Moving on to inventory, our inventory is approximately $4 billion versus $3.8 billion last year, an increase of approximately 6%, and inventory per store is up approximately 3%.

  • Year-to-date capital expenditures were $645 million, approximately $100 million higher than 2009, due to increased remodels and the opening of our new eCommerce distribution center as well as an additional call center to service credit card and eCom calls.

  • These increases were partially offset by a reduction in new stores.

  • AP as a percent of inventory was a solid 52.7%, versus 54.4% last year.

  • As we've said in prior periods, we have anniversaried our supply chain financing initiatives so we no longer expect to see the significant improvement in this metric that we have seen in the past.

  • Moving on to weighted average shares, were 308 million for the quarter and for the year, and assuming no share repurchases, we would expect weighted average shares for the year of 309 million.

  • With that, I'll turn it over to Kevin.

  • Kevin Mansell - Chairman, CEO, and President

  • Thanks, Wes.

  • As Wes mentioned, comparable store sales increased 1.8% for the quarter, and 4.4% on a year-to-date basis.

  • ECommerce sales increased approximately 41% for the quarter, and 47% year-to-date and contributed approximately 100 basis points to our comp sales for both the quarter and the year.

  • From a line-of-business perspective, Footwear reported the strongest comps for both the quarter and year-to-date periods, driven by strength in athletic and adult shoes.

  • Men's also outperformed the Company average in both periods, with strength in apparel basics, dress clothing, and activewear.

  • Home and Women's Apparel reported low single-digit comps for the quarter, and mid single-digit comps for the year-to-date period.

  • The Home business was driven by small electrics, seasonal, tabletop, and luggage.

  • Women's strength was in Sonoma, active, intimate, and updated sportswear.

  • The Children's and Accessories business underperformed the Company, posting slightly negative comps for the quarter, and low single-digit comp sales increases, on a year-to-date period.

  • Watches, sterling silver jewelry, and fashion jewelry were best performers in Accessories, while toys and infants and toddlers performed well in Children's.

  • On a regional basis, the Southeast region reported the strongest comps for the quarter and year-to-date.

  • The Mid-Atlantic and West regions posted positive comps for the quarter, while the remaining regions had very slight negative comps.

  • All regions in the Company have positive comps for the year.

  • We expect an increase in comparable store sales for the fourth quarter in the 2% to 4% range.

  • For the fourth quarter, we would expect November to be toward the low end of the quarter, December to be at the high end of the quarter, and -- partially due to the extra shopping day between Thanksgiving and Christmas, and January to be with the quarter performance.

  • From a merchandise standpoint, private and exclusive brands penetration increased by almost 300 basis points to 48% of total sales for the quarter, and is the same on a year-to-date basis.

  • There is broad success on both the private and exclusive brand side on both the quarter and year-to-date basis.

  • In particular, however, our efforts to extend our key brands more forcefully across the store have resulted in significant increases to some of our most important exclusive national brands.

  • Simply Vera Vera Wang, Elle, Mudd, Fila Sport, and Food Network all had sales increases of 15% or more in the quarter.

  • In addition, LC Lauren Conrad, which is new this year, significantly overachieved our expectations.

  • From an inventory standpoint, as we mentioned earlier, on an overall basis, average inventory per store is approximately 3% higher than last year.

  • Clearance inventory is approximately 10% lower on a per store basis, and is about 3% of our total units on hand.

  • Our Merchants, Product Development and Logistics teams continue to work with our vendor partners to support our sales, putting us in a great position for the holiday season.

  • Our size optimization initiatives continue to develop, and we will have almost all of our sized receipts on the program for fourth quarter deliveries.

  • By leveraging this initiative and other inventory management disciplines that are in place, we saw improvement in in-stock levels of over 3% in the third quarter, leading to increased sales and customer satisfaction.

  • We would expect our inventory per store at the end of the fourth 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 the remainder of the year to be up 20 to 40 basis points over last year.

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

  • On the marketing side, our holiday campaign will continue to leverage our highly effective, "The more you know, the more you Kohl's" platform, which has proven to resonate with consumers, and position Kohl's the smartest choice for holiday gifts.

  • Key messages will be communicated across multiple mediums, including print advertising, direct mail, e-mail, digital and social media, Kohls.com, television, radio, in-store, and, new for the holiday 2010 season, mobile access to Kohls.com.

  • Our marketing efforts are designed to make our customer feel confident that with every visit she makes to Kohl's, she will get what she wants and needs at the best total value.

  • She'll have an easy and guilt-free shopping experience that we believe she won't get at any other retailer.

  • She'll see our amazing exclusive designer brands, like Simply Vera Vera Wang, LC Lauren Conrad or Food Network.

  • She can use our stackable savings tools, like Kohl's cash and the Kohl's charge.

  • And she will be assured with our unbeatable policies, like hassle-free returns and no exclusions.

  • We continue to believe and our year-to-date results prove that the more she knows about Kohl's, the more she chooses Kohl's.

  • I'll going to turn it back over to Wes to touch on our store experience initiatives and comment on our share repurchase as well as provide our earnings guidance.

  • Wes McDonald - EVP, CFO

  • Thanks, Kevin.

  • We opened 21 new stores this quarter for a total of 30 stores this year.

  • We also reopened a store in Virginia which closed in January 2010 for a complete rebuild.

  • We currently plan to open approximately 40 stores in 2011, with a split of 10 stores in the spring season, and 30 stores in the fall season.

  • This is a slight increase over our original thinking, as we were able to secure more attractive sites with favorable real estate costs than we anticipated earlier in the year.

  • All stores now have an in-store kiosk and they are overachieving our plans.

  • The kiosks give the customers an additional way to find a size or color while conveniently shopping in-store and also offer extended sizes in multiple programs and categories across the store.

  • We are excited to deliver industry-leading technology to the customers, enhancing a best-in-class store experience.

  • We installed electronic signs in 50 stores at the end of October, and plan to continue the pilot in another 50 stores by the end of January.

  • We expect to be able to make a decision on a full chain roll-out by the end of first quarter of 2011.

  • Regarding our share repurchase announcement today, we're in a strong cash position at the end of the third quarter, and our cash flow generation is expected to be sufficient to meet our ongoing operating needs.

  • As such, within the next several weeks, we intend to enter an agreement to repurchase $1 billion of our common stock on an accelerated basis.

  • Commencement of this repurchase program will be contingent upon, among other things, market conditions, and on Kohl's not possessing material nonpublic information on the commencement date.

  • These shares will be purchased under a $2.5 billion share repurchase program announced in September of 2007, pursuant to which $1.9 billion of authorization remains.

  • As of October 30th, 2010, we have spent $600 million to acquire approximately 13.5 million shares of our common stock, under the 2007 program, which has no specified expiration date.

  • Moving on to earnings guidance, as previously disclosed, as a result of a detailed review of our historical accounting [for its] leased properties, we expect to record non-cash adjustments, which are expected to increase depreciation, interest, and rent expense for the third quarter.

  • Although we have not completed our review, based largely on the average adjustment required for leases that have been reviewed to date, we currently expect a correction in the range of $25 million or $0.05 per diluted share, to $75 million or $0.15 per diluted share.

  • The errors occurred over a number of years.

  • Upon finalization of our review, we will quantify the impact of the corrections on previously reported periods, and we expect to be complete by the filing of our 10-Q for the third quarter in December.

  • With that, let me share some details behind our updated guidance for the fourth quarter.

  • In summary, for the fourth quarter we would expect a total increase in sales of 4.5% to 6.5%, comp sales of 2% to 4%, and gross margin up 20 to 40 basis points over last year.

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

  • This would result in earnings per diluted share of $1.51 to $1.59 for the fourth quarter.

  • Importantly, this guidance does not reflect any additional share repurchases in fiscal 2010.

  • With that, I'll turn it back to Kevin to close it out.

  • Kevin Mansell - Chairman, CEO, and President

  • Thanks, Wes.

  • We achieved another strong financial quarter in which we made additional progress on our goals to both build on our market share gains from last year, and at the same time, to invest in our future by improving our business processes through technology, investing opportunistically in new stores and accelerating our remodel strategy.

  • Our sales growth continues to come from all regions of the country and all lines of our business.

  • We continue to particularly make great progress in the Southeast region, using marketing tactics learned last year in the West region.

  • Importantly, we have now anniversaried last year's major grand opening effort in California, while achieving a positive comp this quarter in the West region.

  • This was an issue that many investors were concerned about accomplishing.

  • Our increased penetration of private and exclusive brands, along with strong inventory management, continued to benefit us on our gross margin rate.

  • And we see no change in that going forward.

  • We enter the holiday season in great shape from an inventory perspective.

  • As we expected, inventory levels are on plan and clearance levels are below last year on a per store basis.

  • I am particularly happy that actual SG&A costs increased much less than our expectations.

  • Every area of the Company participated in finding ways to save money, to help keep our expenses low without affecting the customer experience.

  • Leverage and store payroll expenses continue to be driven by sustainable productivity improvements.

  • Finally, as Wes just shared, we're pleased to announce the restart of our share repurchase program.

  • We're reviewing our future capital structure plans and options and expect to complete the review in the fourth quarter.

  • We intend to share details with you in our fourth quarter conference call in February regarding our longer term plans for both share repurchase, as well as a potential initiation of a dividend.

  • With that, we'll be happy to take questions.

  • Operator

  • (Operator Instructions) We'll pause for just one moment to compile the Q&A roster.

  • Your first question comes from Charles Grom from JPMorgan.

  • Charles Grom - Analyst

  • Thanks.

  • Good morning.

  • Just wondering if you could talk about why the cadence of the comp, Wes, would be lower in November, and then better in December.

  • On a two-year, it looks like your compare gets harder as the quarter progresses, but on a three and four year it gets easier.

  • I'm just kind of wondering if you could give us a little detail on why the low end for November.

  • Kevin Mansell - Chairman, CEO, and President

  • It's Kevin, Chuck.

  • I mean, first of all, the estimates of our particular performance by month are what I would say is less than scientific.

  • We do our best job kind of looking at the overall period and making judgments about where we have more opportunity than less.

  • Frankly, the major factor in the three months is the fact that there's an extra day in December prior to Christmas.

  • And so by default, we lean towards saying that December will probably be a little better than the quarter.

  • There isn't any other issue that would cause us to believe November would be less or January would be less.

  • It's just kind of saying to ourself, if we expect to run in X range, and December has an extra day before the holiday, we'll probably run a little better in December.

  • Charles Grom - Analyst

  • Okay.

  • Great.

  • And then Wes, on SG&A, you came in a couple hundred basis points higher -- sorry, lower than what you expected.

  • Did you still incur the $25 million on credit and the $15 million in advertising that you had anticipated in August?

  • Wes McDonald - EVP, CFO

  • Yes, we still incurred -- the incremental spend in advertising was $15 million.

  • We were able to save money in other areas of advertising, unrelated to the incremental promotions.

  • From a credit perspective, we did incur the late fee revenue drop that we anticipated.

  • We made up for a lot of it with better charge-off experiences, as well as the incident rate in incurring late fees was a little higher than we anticipated.

  • Charles Grom - Analyst

  • Okay.

  • And then so, just to follow up on that.

  • Is your expectation for the fourth quarter to still have $15 million in credit and another $5 million in advertising?

  • Wes McDonald - EVP, CFO

  • That would be correct.

  • Now, whether we can save money in other areas than credit, I expect to have better charge-off rates, but that's kind of implied in our guidance.

  • So, could we do a little better than what we anticipated?

  • Maybe.

  • But I think the incremental $15 million and $5 million still stand.

  • Charles Grom - Analyst

  • Okay.

  • And then just in terms of the ASR, is it your expectation to get that complete in the fourth quarter?

  • And I guess a follow-up to that would be, how should we think about your strategy towards share repurchase once we get that complete into 2011?

  • Wes McDonald - EVP, CFO

  • Well, I'm not sure at this time because we haven't entered an agreement yet, as to what the duration of the ASR will be.

  • What I can tell you, for next year, I would feel comfortable using a reduction in approximately 17 million shares, on share count for fiscal 2011.

  • It's premature to kind of come up with an estimate for the fourth quarter, because we're not sure when we're going to enter the agreement and when we're going to be delivered the initial shares and things like that.

  • When we enter in the ASR agreement, we'll update our earnings guidance for the fourth quarter at that time.

  • And then regarding next year, I think Kevin mentioned we're in the process of reviewing.

  • I think we'll lay out in our February call going in and while we give fiscal 2011 guidance, I think we'll lay out a multi-year plan on distributing excess cash to shareholders, which would involve share repurchase and the possible initiation of a dividend.

  • But I think at this time, we would rather wait until February and lay that all out then, when we have a better idea of what we're going to do.

  • Charles Grom - Analyst

  • Okay.

  • Awesome.

  • Thanks.

  • Operator

  • Your next question comes from Michelle Clark from Morgan Stanley.

  • Chris DePuy - Analyst

  • Hey, guys, it's actually Chris, filling in for Michelle.

  • Kevin Mansell - Chairman, CEO, and President

  • Hey, Chris.

  • Chris DePuy - Analyst

  • Hey, I had a question on the dynamics of your comp.

  • It's being largely driven by traffic as your AURs and EPTs have been trending down.

  • So just a question on how do you think about that playing out over the next 12 months?

  • Is there any risk that we could see some stagnation in your comps as the traffic compares get more difficult?

  • How are you thinking about growing that top line in 2011?

  • Kevin Mansell - Chairman, CEO, and President

  • We haven't made any comments regarding 2011 guidance.

  • I think the guidance that we gave for the fourth quarter sort of dictates that we believe we can continue to achieve the trend, more like the trend, we have on a year-to-date basis.

  • The trends in terms of the mix of where the comps come from, that is, it's primarily being driven by transactions, have been pretty consistent.

  • Transactions have driven our comps the whole year, and they continued to do so in the third quarter.

  • So I would expect that when we get done with the fourth quarter, and we talk about our performance in comp in the fourth quarter, that we'll be talking about transactions leading the way as well.

  • So, no change from that standpoint.

  • As far as next year, though, goes, we'll talk about that in February.

  • Wes McDonald - EVP, CFO

  • Our whole strategy, Chris, is to get back to the sales per square foot productivity that we were a few years ago.

  • The best way to do that is for increasing transactions per stores.

  • We just did an 8.3% on top of a 3.6% last year in the third quarter so we've shown the ability to comp positively on traffic gains.

  • Chris DePuy - Analyst

  • Got it.

  • Okay.

  • And then one on the gross margins.

  • Specifically, your guidance for the fourth quarter.

  • You're looking for up 20 to 40 BPs and that's consistent with what you did in the third quarter, yet your compares are substantially more difficult.

  • So could you talk about how you get there?

  • Presumably you're baking improvements from the size optimization efforts, exclusive -- private exclusive brands.

  • Could you just talk about some of the initiatives, that I presume are moving the needle up year-over-year, despite the more difficult comparisons?

  • And again, do you expect that -- if you could touch on your expectations broadly, if that would persist in 2011 as well.

  • Kevin Mansell - Chairman, CEO, and President

  • Again, 2011 is premature to talk about, but for the fourth quarter the guidance we've given on margins has really been pretty consistent.

  • I think we gave 20 to 40 basis points improvement earlier and we're staying with that.

  • I would say, frankly, that we'll work hard on trying to achieve and overachieve that and we've had a consistent ability to do so.

  • What's driving that has also been really, really consistent, is primarily being driven by two things.

  • One is, a continued success in growing our private and exclusive brand penetration, which for the quarter and for the year were both up about 300 basis points.

  • That's definitely a plus for us.

  • That's going to continue for sure.

  • And then secondly, a lot of technology investments around inventory management that allow us to really deliver receipts closer to sales, and that's benefited us from being able to allocate those receipts across our store portfolio and make them work harder for us.

  • Things like size optimization are a big piece of that.

  • The elements that drive margin improvement are in place, and we believe will work for us in the fourth quarter as well.

  • Chris DePuy - Analyst

  • Okay.

  • Thanks for your time, guys.

  • Operator

  • Your next question comes from Mark Miller from William Blair.

  • Mark Miller - Analyst

  • Good morning.

  • The credit penetration accelerated faster in the third quarter, and I was hoping you could comment on the drivers of that trend.

  • And then, how much of that was due to the additional marketing?

  • Are you able to quantify the ROI and the additional marketing in this period?

  • Wes McDonald - EVP, CFO

  • Well, the first question is kind of easy because we added a credit event in October where we didn't have one last year, so that's the major cause of the increase in credit share.

  • Because that obviously is a much higher penetration during the credit event than our LPS event which it replaced.

  • As far as ROI on the incremental marketing, I think we think that the specific tactics that we did drove incremental business.

  • It wasn't reflected in the comp for October, primarily due to the fact that it was very warm the first two weeks of the month, and was very tough to do business.

  • The incremental marketing events were really around the back half of the month, and we thought that worked out fairly well.

  • Mark Miller - Analyst

  • And then could you address the outlook for additional exclusive lines going forward?

  • You're obviously getting nice improvement on the existing product you have, but how much more expansion would we need to see in some of these exclusive opportunities for you to keep this penetration rate going next year?

  • Kevin Mansell - Chairman, CEO, and President

  • We're obviously focused on continuing to improve the penetration, given the success we've had and the impact it's had, not only on our merchandise margins, which is certainly a nice benefit, but more importantly, the impact it's had on our sales.

  • We're still planning major new brand introductions for fall of next year.

  • And I would expect that you would hear about them very shortly.

  • We think they'll be significant, as we've said all along, we think they'll impact a large number of areas in the store.

  • And we continue to be focused in our new brand introductions on improving our better and best price point offering for consumers, because that's what they're asking for, and particularly around our modern and contemporary style areas.

  • So you'll be hearing something shortly, Mark.

  • Mark Miller - Analyst

  • Perfect.

  • Thanks.

  • Operator

  • Your next question comes from Bob Drbul from Barclays.

  • Bob Drbul - Analyst

  • First question that I have is, on the eCommerce, are you getting the returns on what you expected, as you look at the contribution to the comp and any sort of early reads from that perspective, would be my first question.

  • Kevin Mansell - Chairman, CEO, and President

  • Yes, I mean, the short answer is, yes.

  • You know, Bob, that we made a very aggressive investment in our eCommerce business this year, not only capital investment, but expense investment and marketing investment as well.

  • eCommerce is running well over 40% up for the year.

  • You know, of course, that eCommerce, the eCommerce platform is a more important element of everybody's business in the fourth quarter so we're really optimistic about the impact it could have on our business in the fourth quarter as well.

  • If you look at it, returns on investment on a short-term basis, yes, naturally our online operating model in this year is impacted by those big investments.

  • But that's just the natural cycle of the business and we would expect it to go right back to the kind of returns we had before.

  • So, we really believe in this business or we wouldn't be making the kind of investments we're making in it.

  • Bob Drbul - Analyst

  • And then, Kevin, on the inventory you seem pretty comfortable with where you are, despite the sales shortfall in the quarter.

  • Are you comfortable with your outerwear inventories?

  • One trend that I picked up on, was you're making a pretty big bet on motorcycle jackets in the women's outerwear.

  • I was just wondering if you can comment on that a little bit.

  • Kevin Mansell - Chairman, CEO, and President

  • Just in general -- you're getting to be quite the merchant, by the way, Bob.

  • There's a future career for you in merchandising, I think.

  • Just in general, the truth is that October was a weaker month for us.

  • No question about it.

  • The facts say so.

  • That was driven, frankly, totally by the first two weeks of the month, and those results were driven totally by exceptionally warm weather that dramatically impacted our seasonal categories.

  • So outerwear was definitely one of those categories.

  • I think we came out of the month of October with more outerwear inventory than we planned as a result of that, but more than comfortable levels going into the November and December selling period.

  • And I think you know that seasonal categories, for us, fluctuate wildly based on weather.

  • And as more normalized weather returned later in the month of October, our business trends returned, frankly, to a much more normalized trend rate for the year.

  • From that perspective, I think we're really optimistic about the fourth quarter.

  • Bob Drbul - Analyst

  • And Kevin, there's a lot of interest in the jegging trend.

  • I was just wondering if you can give us an update on that as well.

  • Kevin Mansell - Chairman, CEO, and President

  • Continues to be very strong.

  • Overall, frankly, denim continues to be very strong.

  • We've had great results in the third quarter with some of our key suppliers, particularly Levi is a great example, one where we've had great success in denim.

  • But jeggings continue to be strong and denim continues to be strong.

  • Bob Drbul - Analyst

  • And then Wes, just one housekeeping question for you.

  • On the fourth quarter, no buyback assumed, what's the share count that you're using on the guidance?

  • Wes McDonald - EVP, CFO

  • It's 309, basically.

  • Bob Drbul - Analyst

  • Great.

  • Thank you very much.

  • Wes McDonald - EVP, CFO

  • Alright.

  • Operator

  • Your next question comes from Adrianne Shapira from Goldman Sachs.

  • Adrianne Shapira - Analyst

  • Thank you.

  • Bob asked my jegging question (inaudible).

  • Wes McDonald - EVP, CFO

  • Getting into the weave --.

  • Adrianne Shapira - Analyst

  • Yes, exactly.

  • Wes, if we could -- I appreciate the full review of the capital structure coming in February, but maybe give us a sense of how you're thinking about maybe a minimum cash level you're comfortable with, in terms of operating the business.

  • Wes McDonald - EVP, CFO

  • Well, I think I've articulated $750 million to $1 billion, that's going to occur roughly in the third quarter.

  • So if you're trying to model on an annual basis, I think you probably need at least $1.5 billion at the end of the year.

  • Obviously, we increase our cash in the fourth quarter versus the third quarter, so if you're doing it on an annual basis I would use $1.5 billion as a minimum.

  • Adrianne Shapira - Analyst

  • That's helpful.

  • Thanks.

  • And then Kevin, a big topic these days is apparel inflation.

  • Obviously, we're seeing AUR down sharply here.

  • Help us think about maybe just what you're -- how you're planning, how you're looking to contend with what seems like an inevitable issue in the back half, how you're thinking about how that impacts margins.

  • And then, also how that impacts sort of AUR, what the plans are.

  • Is that an opportunity?

  • Are you looking to pass some on?

  • How should we be thinking about inflation in the back half of next year?

  • Kevin Mansell - Chairman, CEO, and President

  • Well, I mean, just to set the facts first, costs are going to be up for fall 2011, across all apparel categories.

  • There's no question about that.

  • I would say that what we see right now is that the range of increases are fluctuating quite a bit, and they're wide.

  • And they're naturally -- they're very dependent on the category you're talking about, the fabric content -- of course, cotton's getting a lot of attention -- and the country of production.

  • We haven't made, Adrianne, enough firm commitments to comment specifically about a cost estimate beyond saying that.

  • I would tell you, as you know, every retailer and every wholesaler is going to be impacted by this.

  • So like many other things, I think the winners will be those that best navigate the situation, they figure out how to mitigate that environment most effectively and they execute better.

  • And on that basis, I like our chances being able to deal with this issue better than our competition.

  • Having said that, we've had plenty of time to prepare for this.

  • So this is not something that's unexpected and not something that's new.

  • And we're employing all the things that we know how to do to mitigate this ultimately for our customer, because that's really what it's all about.

  • I think you, like we, believe that we still have a consumer that's buying cautiously.

  • And so they're apt to be less open to having to pay higher prices for goods that are really discretionary.

  • So, I like our chances, being able to deal with that, and as I've said we've had plenty of time to prepare for it, and we're executing strongly against it.

  • We're going to go out of our way to figure ways that the customer doesn't have to see the impact of those higher costs.

  • Adrianne Shapira - Analyst

  • Maybe, Kevin, give us a sense this year if you're seeing some perhaps cost pressures already this year, what you've done across categories, how you've been testing some pricing elasticity this year, in terms of how able to pass it on, What the consumer is willing to accept.

  • Kevin Mansell - Chairman, CEO, and President

  • I would say two things.

  • First of all, if people are worried about the impact of higher costs and potentially, some cases, higher retails on sales, I think it's difficult to draw a straight line relation on that.

  • I mean, if you think about two categories, that in the last 12 months I would say have universally been impacted by higher cost, that's Footwear and Home.

  • And I think you probably are hearing that from all the companies you cover.

  • Footwear and Home are leading the Company in terms of sales increases for the year, and they're running slightly contrary to the Company's trends in average unit retail, because they are living with higher cost.

  • But the team, through a lot of different ways, have been able to sort of mitigate that impact and prepare the customer for it.

  • We're doing things obviously like reverse auction, which we've been a leader in, and I think on the early cycle on and we're expanding it.

  • That's a really aggressive way to try to get costs to the lowest level.

  • Holding raw material shipments as long as we can, while at the same time giving raw material commitments on categories which we expect to be in shortest supply.

  • Continuing to consolidate our vendor structure overseas.

  • We have a very concentrated supplier base as it is.

  • That benefits us now more than ever because they are able to better navigate this as well.

  • The fact that we're growing is a really big weapon.

  • We're one of the few companies that have seen consistent growth through the last two-and-a-half years of a tough economy.

  • And so we've been there for our supplier partners, and I think we'll be apt to be able to deal with that more effectively.

  • Naturally, product reengineering is always something you look at, what materials do we use, how do we fabricate it, how do we construct it.

  • You always are looking at your countries of production.

  • Some countries are under more pressure than others, because they not only have the raw material issue, but they might also be dealing with either currency or labor issues.

  • In that case, I really think our partnership with Li & Fung comes in, in a big way, to the positive, because it gives us more flexibility than much of our competition has.

  • So there are a whole series of steps that are real, and we've used in the last 12 months in categories like Footwear and Home.

  • And at the same time we've been successful in Footwear and Home.

  • Adrianne Shapira - Analyst

  • Great.

  • That's helpful.

  • Then just last question, Wes.

  • It sounds like you saw an opportunity to accelerate the store openings.

  • You found 10 more sites to get to that 40.

  • Maybe give us a sense of what changed, to open up those incremental sites.

  • And then how we should be thinking about going forward.

  • Are we seeing better opportunities and perhaps a ramp on a go-forward basis in terms of square footage growth?

  • Thanks.

  • Wes McDonald - EVP, CFO

  • I'd say it's a very fluctuating situation.

  • So I wouldn't start changing your models to 40 in the out years right now.

  • I think the reason we increased to 40 was, quite honestly, was mainly due to real estate cost favorability.

  • So, deals got a lot better that we've been working for a while and started popping into a favorable NPV.

  • And so, that's why we kind of pulled the trigger on a lot of those.

  • Whether or not that continues is really going to be a function of the real estate costs remaining low.

  • If they start to remain high and sales are -- our sales estimates are still sort of sluggish, then, you might see it going back to 30.

  • But for now, 40 for next year and we'll see how 2012 goes.

  • Adrianne Shapira - Analyst

  • Thanks.

  • Best of luck, guys.

  • Kevin Mansell - Chairman, CEO, and President

  • Thanks.

  • Operator

  • Your next question comes from Deborah Weinswig from Citi.

  • Deborah Weinswig - Analyst

  • [What are] the opportunities that exist in the Accessories business at this point?

  • Kevin Mansell - Chairman, CEO, and President

  • They continue.

  • I think that would be the same.

  • We've had great success in our bridge and fashion jewelry categories, for a number of quarters now and that continued into the third quarter.

  • So we're highly focused on improving our penetration in that business.

  • I think it works well with where the consumer's mindset is today, in terms of what they're willing to spend.

  • And then beyond that, in particular I would say our Handbag business is a high area of focus.

  • It's a category that we're looking to improve our performance on, and we're doing that in a great way by intensifying the amount of our exclusive brands that we have in those categories.

  • So that's been part of the strategy in not just Footwear but also Handbags, to improve the penetration of some of the brands that are successful in the Apparel area.

  • So I think those are probably the two biggest ones.

  • Deborah Weinswig - Analyst

  • And then, of the new stores that you're opening, how many of those are in the newer small format?

  • Wes McDonald - EVP, CFO

  • Yes, it's hard to say.

  • We'll give you some more information on that.

  • I would say there's more smalls for next year, than there have been in the last few years, just given some of the strategies we're doing from a real estate perspective.

  • For example, we're testing a small store in New Jersey, right across from Manhattan.

  • That's a 64K, where normally we'd put an 88K, and there's just no place to put an 88K.

  • So, we're going to try to do a small store in a more urban area, and see how it works.

  • Deborah Weinswig - Analyst

  • And then, with the same store sales -- in terms of same store sales to leverage at this point, with some of your technology investments, has that come down?

  • Wes McDonald - EVP, CFO

  • I would say the goal would be to leverage on a one comp next year.

  • That would be versus our reported 2009.

  • We'll give you a lot more clarity on that in February.

  • But I think there's still some inflationary pressures out there that aren't really under control -- our control in terms of utilities, fuel, anything -- same kind of things that are causing cotton prices to go up are going to cause other commodities to go up as well.

  • We'll have a much better feel for that in February.

  • Deborah Weinswig - Analyst

  • And then I just want to ask -- we talked about expenses quite a bit, but I just wanted to hone in on it.

  • You had guided for 10% to 11% expense growth, you came in at 8.4%.

  • What would you say was kind of the biggest delta in terms of driving that better than expected expense growth?

  • Wes McDonald - EVP, CFO

  • It was really across the board.

  • If I had to pick one area, it would probably be credit, just because of the charge-offs.

  • But we got favorability in advertising, in store payroll, and corporate expenses.

  • We didn't do anything with a bonus accrual, or anything like that, that would cause what I would call more one-time favorability.

  • It was just kind of consistency across the board from all the areas.

  • It was really a team effort.

  • Deborah Weinswig - Analyst

  • Thanks so much and best of luck this holiday season.

  • Wes McDonald - EVP, CFO

  • Thanks.

  • Operator

  • Your next question comes from Daniel Binder from Jefferies.

  • Daniel Binder - Analyst

  • Hi, good morning.

  • It's Dan Binder.

  • Couple of questions.

  • First, on the brands that you're planning for the fall of next year, I was just curious, does that include addressing some of the weakness in the Juniors business that you saw this year?

  • And then my second question was related to promotional cadence and marketing through the holiday season, how that compares or what you're expecting, not just in your own, but in the industry versus last year?

  • Kevin Mansell - Chairman, CEO, and President

  • Take them one at a time.

  • It would be premature for me to talk about the new brands for next year, other than to continue to say to you that we're probably most focused on our modern and contemporary dressing area, and obviously our better and best price points, because that's where we see continued opportunity.

  • On the promotional cadence, our promotional cadence is basically similar to last year, though we've intensified, as you know, our investment in certain types of media, things like digital, certainly social, for the first time mobile, and our effort in those areas is up way, way over last year.

  • I think we're seeing a promotional environment.

  • I don't know that it's uniquely different than last year, Dan.

  • I think it's, to a great extent, been like that for a while.

  • The one thing that we've continued to see a strong trend in terms of consumer behavior around, is that as we sort of exited the worst parts of consumer spending in these discretionary categories last year, consumers spent more and more time thinking about what they were getting for what they were paying.

  • So it moved from being lowest prices to really being what's the overall value that I get.

  • So a lot of the incremental marketing we're doing and a lot of our intensification is around convincing and communicating to consumers why what we give them for the price is a better overall total value.

  • Daniel Binder - Analyst

  • Okay.

  • And then as a follow-up, Wes, I think there's probably been about $100 million or so of expenses that we saw this year, that maybe we weren't anticipating at the beginning of the year.

  • Can you just give us a rough idea of how much of that actually reverses, if you will, next year, stuff that's not sort of ongoing?

  • Wes McDonald - EVP, CFO

  • I mean, it was in our -- some of it was in our original guidance, but not to quibble.

  • I'd say there's no one-time expenses in the spring.

  • Much of what we invested in eCommerce in the second quarter will be reflected in additional eCommerce expenses going forward.

  • The buckets will just change from outside services to equipment, rent, and hardware and software maintenance.

  • In the fall, I'd say $50 million related to credit, $35 million in the third, and $15 million in the fourth.

  • Assuming that the fourth quarter incremental advertising spending of $5 million will be successful, the $15 million, and the $5 million, that we spent in the fall for advertising will be repeated.

  • And then, whatever the accounting adjustment, I would view as unusual and not to be a go-forward expense.

  • Daniel Binder - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Operator

  • Your next question comes from Erika Maschmeyer from Robert Baird.

  • Erika Maschmeyer - Analyst

  • Could you talk some more about the sustainable productivity improvements at the store level that you talked about?

  • I know you've been able to lower payroll, and where you think you could see additional improvements going forward.

  • Kevin Mansell - Chairman, CEO, and President

  • There's a number of different initiatives in place, but to be honest with you, the one we're probably most excited about, is our electronic signing technology and the impact that that might have on both saving payroll, and improving productivity as a result, and also redeploying payroll into sales-getting efforts as opposed to simply changing signs around in the store.

  • So we finished our first 50 store implementation of and installation of our e-sign technology in the third quarter.

  • We're rolling out the next 50 stores now.

  • Our plan is to do a complete and thorough analysis on the fourth quarter results of those 100 stores, as we turn the corner into next year.

  • And if the results look like they're trending, and look like they have in the early going, we would aggressively move forward on expanding the technology to all stores.

  • If we did that, that would be a substantial payroll save, productivity improvement.

  • And as I said, we may make the decision to redeploy some of that payroll into things that will actually drive sales more effectively.

  • There are a lot of different initiatives, but that's one that really kind of stands out to me.

  • Erika Maschmeyer - Analyst

  • And then in terms of eCommerce, could you just clarify the contribution of eCommerce to your Q3 comps and expectations for Q4?

  • I know you had talked about closer to a 200 basis point benefit in the back half.

  • Wes McDonald - EVP, CFO

  • I think it was 200 basis points in the fourth quarter.

  • And the third quarter was about 110.

  • Erika Maschmeyer - Analyst

  • Thank you.

  • Operator

  • Your next question comes from Liz Dunn from FBR.

  • Liz Dunn - Analyst

  • Hi, good morning.

  • Just a few follow-up questions.

  • I apologize if I missed it, but of the 40 stores for next year, are any takeovers?

  • And if so, or if not, what are you seeing in the environment relative to takeover opportunities?

  • Wes McDonald - EVP, CFO

  • 12 of the 40 are takeovers.

  • A few more Mervyn's, a couple of Wal-Marts, a couple of Lowe's.

  • Liz Dunn - Analyst

  • And do those continue to have better return characteristics than other new stores?

  • Wes McDonald - EVP, CFO

  • Well, they're existing (inaudible) -- they're cheaper to open because the building already exists.

  • We have to remodel to our specs, but I'd say it really depends on the area.

  • We can have ground-up stores that are just as good as returners.

  • Takeovers aren't in general a better return than a ground-up store.

  • They're just cheaper originally to open.

  • Liz Dunn - Analyst

  • Okay.

  • And can you discuss sort of your thinking around dividend?

  • I know Kevin referenced it at the tail end of his prepared remarks, but I think some were expecting an announcement sooner rather than later.

  • Can you talk through your thinking regarding a dividend, and why we're not hearing that announcement now?

  • Kevin Mansell - Chairman, CEO, and President

  • Well, I mean, I think first of all, we've never had a dividend.

  • Our thought process is that when we implement and institute a dividend, it's for good.

  • It's permanent.

  • And we would certainly like to grow it over a period of time.

  • So from my perspective, and I think Wes agrees, this is a long-term strategic implementation.

  • And it's not something that we do lightly and we just think it's more appropriate at our year-end, when we're able to better kind of also describe our future view of capital repurchase, because while we're making this one-time very large repurchase, as you know, you probably have models that show Kohl's creating quite a bit of cash over the next few years.

  • And I think both of us feel investors, while they might want to hear more details quicker, they really would rather ultimately hear the long-term strategies.

  • So they really understand what are we going to be doing with our cash, each and every year over the next few years, as we produce a lot of cash.

  • So, it's a little bit of a long answer for you, Liz, but honestly we just think it's more appropriate at a year-end kind of a call, when we can really give you a lot of details about the future.

  • Liz Dunn - Analyst

  • Okay.

  • And then I guess a final question that's sort of related to that.

  • Do you envision having an Analyst Day next year to sort of unveil sort of a new long-term plan?

  • Kevin Mansell - Chairman, CEO, and President

  • Haven't really had the discussion.

  • It's probably something we will have a discussion about, but not prepared to give you an answer right now.

  • Liz Dunn - Analyst

  • Okay.

  • Great.

  • Thanks.

  • Good luck.

  • Kevin Mansell - Chairman, CEO, and President

  • Thank you.

  • Operator

  • Your next question comes from Wayne Hood from BMO Capital.

  • Wayne Hood - Analyst

  • Wes, I guess in your prepared remarks or during the Q&A, you mentioned that you felt like you needed $700 million to as much as $1.5 billion, in cash on the balance sheet to run the Company.

  • Wes McDonald - EVP, CFO

  • $1.5 billion is at the year-end.

  • The third quarter would be $1 billion, that's our peak use of cash.

  • I don't want to go into the revolver, so.

  • Wayne Hood - Analyst

  • Right.

  • So, why would you say the business needs such a large cash balance to run it, at say even at year-end, when you have an opportunity to take your turns back up to where they were, and drive your payable ratio higher?

  • It would seem to me that, that number would be closer to $500 million to $600 million on a normalized basis rather than even $1 billion.

  • Kevin Mansell - Chairman, CEO, and President

  • Let me interject one thing, because Wes is looking at me.

  • I think the one factor in there is, we're going to be conservative in what our estimates are.

  • So I think that's a big factor, to be honest with you, Wayne.

  • And of course Wes is acutely aware of what we need and the numbers that we need, and he's given you his best estimate, but he's going to make it a conservative estimate.

  • Wes McDonald - EVP, CFO

  • Yes, and I would say if you do the math on the $1.5 billion, you'll still see the opportunity to do significant share repurchase going forward.

  • At least that's what my numbers show.

  • So whether it's -- I don't know how many billion you're looking for from a share repurchase program over a multi-year period, but --.

  • Wayne Hood - Analyst

  • Well, that affects how you look at that, because it depends on how much you want to carry without becoming Kohl's National Bank.

  • Wes McDonald - EVP, CFO

  • (multiple speakers) $1.5 billion, and I think you've got to be really happy with the share repurchase program, based upon the excess cash flow and that, we'll talk about it in February.

  • We can argue about what's the comfortable cash level.

  • The way we look at it is on a down side scenario, where we're not running at the comp that we expect, what do we need in our peak cash usage period, which is the third quarter, without having to ever dip in the revolver.

  • Now, we've gotten more conservative in the past.

  • We've dipped into the revolver halfway in those calculations.

  • But after living through 2008 when banks wouldn't lend to banks, I don't want to be held hostage to having to go into the revolver at all.

  • Wayne Hood - Analyst

  • Right.

  • And one other question related to capital structure would be, I think in the past you had mentioned that the credit rating agencies may get nervous if your debt-to-EBITDAR was 2.5.

  • So, as we think about guardrails, would the low end of that ratio be 2 and maybe 2.3 as kind of a way to think about where those numbers should fall out, without putting your credit ratings at risk?

  • Wes McDonald - EVP, CFO

  • We're going to manage to a 2 times debt-to-EBITDAR level.

  • That's what we've kind of talked about with the rating agencies and the Board, and that's where we feel comfortable.

  • Because if you manage to that and you have a bad year, it can go up -- like, to your point, it can go up to 2.2, 2.3, and you still won't be in danger of getting downgraded.

  • At 2.5, they get nervous.

  • Wayne Hood - Analyst

  • Okay.

  • And my last question, I guess, is for Kevin.

  • You mentioned in your prepared remarks the Kids' business was down and below the Company average.

  • So, could you just speak to how you plan to restore growth there, particularly in the spring of next year?

  • And how you're derisking any kind of markdown risk in that business?

  • Kevin Mansell - Chairman, CEO, and President

  • First of all, on the margin risk, I don't think we believe there is any.

  • We've managed inventories effectively there, just as we have in the rest of the Company.

  • So I'm not concerned about that at all.

  • From a performance basis, our focus is around improving our boys' and girls' performance.

  • Our infants and toddlers performance, newborn, our small sizes, have consistently done well and there hasn't really been any traildown in sales over a period of time.

  • That's not true in boys' and girls'.

  • We've had weaker performance, particularly on the girls' side of that equation.

  • So, we've got a very intensified effort, Wayne, to try to improve that, and naturally it always comes back to product, and the marketing of that product.

  • And that's what we're going to try to correct, both not just the fourth quarter but certainly for next year.

  • Wayne Hood - Analyst

  • All right.

  • Thanks, guys.

  • Kevin Mansell - Chairman, CEO, and President

  • Thank you.

  • Operator

  • Your next question comes from Lorraine Hutchinson from Bank of America.

  • Lorraine Hutchinson - Analyst

  • Thank you.

  • Good morning.

  • Was just hoping to hear a little bit more detail about your long-term CapEx plans.

  • As you get your store count up, should we expect some increases there?

  • Or how are you thinking about 2011 and 2012?

  • Wes McDonald - EVP, CFO

  • Well, I think to Kevin's point, we'll talk more about 2011 in February.

  • I guess if you're looking for a number to use in the interim, I would take the $900 million we talked about this year and add $100 million to it for the 10 extra stores.

  • Lorraine Hutchinson - Analyst

  • Okay.

  • Thank you.

  • Kevin Mansell - Chairman, CEO, and President

  • Thanks.

  • Operator

  • Your next question comes from Sean Naughton from Piper Jaffray.

  • Sean Naughton - Analyst

  • Hi, thanks for taking my question.

  • On the AUR front, Wes, I think you talked about there was a 3.1% decrease.

  • That's obviously the biggest decline we've seen in the last few years.

  • Can you talk about the decline a little bit, and was this a change from your initial expectations in the quarter, due to competitors' promotions or was it more mix shift related?

  • And how we should think about that really moving into the fourth quarter.

  • Wes McDonald - EVP, CFO

  • I think it was probably a little bit promotional, but more importantly, we didn't sell a whole lot of outerwear and sweaters, which are much higher ticket items for us.

  • Sean Naughton - Analyst

  • Okay.

  • So, not too much on the competitor front then?

  • Wes McDonald - EVP, CFO

  • No, nothing really incremental from the spring season.

  • Sean Naughton - Analyst

  • Okay.

  • And then just secondly, is there any update on the -- I'm not sure if you've mentioned this -- but is there any update on the credit receivable transfer that you recently signed?

  • Wes McDonald - EVP, CFO

  • No.

  • I mean, the negotiations are ongoing on the purchase and sale agreement, and we have a contract with Chase until April of next year, and when we have something finalized, we'll announce it.

  • Sean Naughton - Analyst

  • Okay.

  • So it sounds like end of the first quarter would be the last possible deadline there?

  • Wes McDonald - EVP, CFO

  • It's not for me to say.

  • It's really between -- it's up to those guys from a purchase and sale agreement and when that gets done.

  • Sean Naughton - Analyst

  • Lastly, on the eCommerce growing nicely, is there any change -- you've obviously seen rapid growth in this channel.

  • Is there any change in your long-term real estate plan, as this becomes a bigger and bigger portion of the absolute total of Kohl's?

  • Kevin Mansell - Chairman, CEO, and President

  • Not specifically.

  • I mean, I think it's a very good question.

  • As online sales become a larger portion of our business, and our own in-store kiosk sales are running well ahead of the plan that we had, what does that imply for not only store count, but also more for store size?

  • And so, some of the things we're experimenting with are to try to find out a little bit more about that.

  • But as we said during the remarks, we have an incredibly strong trend online and we really believe in the business and we're investing a lot to keep that trend going.

  • Sean Naughton - Analyst

  • Okay.

  • Best of luck through the holiday.

  • Thanks.

  • Wes McDonald - EVP, CFO

  • Thank you.

  • Kevin Mansell - Chairman, CEO, and President

  • Thank you.

  • Operator

  • Your next question comes from Richard Jaffe from Stifel.

  • Richard Jaffe - Analyst

  • Thanks very much, guys.

  • Just a quick follow-up on the kiosk business, which is an exciting development, in terms of fueling the eCommerce.

  • Just a question of how you account or credit those sales.

  • Are those retail store sales, comp store sales, or do they fall into the eCommerce bucket?

  • Wes McDonald - EVP, CFO

  • They are eCom sales which fall into the comp stores bucket, like they have been since, I think, we did that starting in '05 or '06.

  • Richard Jaffe - Analyst

  • Got it.

  • I guess a follow-on question regarding the smaller stores, and the opportunity there, and the 40 new stores next year.

  • How many of those will be traditional formats?

  • And how many will be the smaller store?

  • Wes McDonald - EVP, CFO

  • It really depends.

  • We obviously have a bunch of them in the hopper.

  • I don't want to give a number now, because it's going to move around.

  • We have more than 40 stores in play.

  • The only thing I would tell you is there's more smalls than there have been in the past.

  • We have a little over 100 smalls right now.

  • We'll give you an exact breakdown in February.

  • Richard Jaffe - Analyst

  • But I should interpret that as the small store experiment is much more than an experiment, there is some positive feedback here that's --?

  • Wes McDonald - EVP, CFO

  • Yes, I'd say we're pleased with the return.

  • We're able to do similar volumes, for the most case.

  • It's not something that you're going to do in a high-density population area, except for the example I mentioned.

  • We're doing a test.

  • But we think we can run -- we've run up to $17 million in that size building, and done it fairly effectively.

  • So I think it's something that's certainly worked for us, and it will be a big part of what we do going forward.

  • Richard Jaffe - Analyst

  • And the cost to build out presumably is less as well?

  • Wes McDonald - EVP, CFO

  • Oh, yes.

  • It's about 20% less.

  • Richard Jaffe - Analyst

  • Great.

  • Thanks a lot.

  • Operator

  • Your next question comes from the line of Ken Stumphauzer from Sterne Agee.

  • Ken Stumphauzer - Analyst

  • Good morning, guys, thanks for taking my questions.

  • First, can you give us the breakout between private label versus exclusive?

  • Kevin Mansell - Chairman, CEO, and President

  • We don't break down the distribution.

  • I mean, private label continues to be the larger percentage of the total, though exclusive is the faster growing percent of the total.

  • Ken Stumphauzer - Analyst

  • Okay.

  • And then, obviously the changes you guys made, first in the Southwest and then secondly in the Southeast, had pretty remarkable success.

  • And I was just wondering if that's something that you're looking to replicate again in 2011 in a different region.

  • Kevin Mansell - Chairman, CEO, and President

  • Yes, I mean, it's definitely in our thinking to continue to take the tactics that work and apply them more broadly across the country, and also particularly in any regions where we think there's market share opportunity.

  • Having said that, to be honest with you, the mild and hot markets, including the Southeast, and the West, continued to underperform the average store, and so we have a lot of opportunity in those markets.

  • So expect -- I would expect us to be talking more about continuing to fuel the Southeast and the West next year with new, enhanced marketing.

  • Ken Stumphauzer - Analyst

  • And then just one last question, I guess it's strategic, albeit maybe a little bit early.

  • There's obviously a fair amount of speculation that the runup in cotton may be transient in nature, and that would most directly impact second-half deliveries for Apparel.

  • I'm just wondering how you would think about the second half should cotton persist in that $1.40 to $1.50 range, if you'd be willing to cede some portion to gain market share, in the back half?

  • Or would you look to correct it through pricing action?

  • Kevin Mansell - Chairman, CEO, and President

  • I mean, our concept as a store, Ken, is all about market share, so we're always going to lean towards market share as our primary weapon.

  • Having said that, we've been able to have both so far.

  • And so, we'd like to think we can figure a way to continue to get both, but we will always lean first to getting more sales.

  • That's really what drives our equation.

  • Ken Stumphauzer - Analyst

  • Okay.

  • Thanks.

  • Best of luck, guys.

  • Kevin Mansell - Chairman, CEO, and President

  • Thank you.

  • Operator

  • Your next question comes from David Glick from Buckingham Research.

  • David Glick - Analyst

  • Good morning.

  • Wes, just a clarification on your comment on the reduction of 17 million shares for fiscal 2011.

  • Is that on top of the ASR, which based on today's price would reduce it by around $19 million -- is that in addition to or is that reflecting just the ASR?

  • Wes McDonald - EVP, CFO

  • That is what I'm willing give on the ASR, because you don't know when the ASRs are going to be finished.

  • David Glick - Analyst

  • Got it.

  • So that doesn't assume any incremental repurchases next year, which you'll give us more detail (multiple speakers).

  • Wes McDonald - EVP, CFO

  • Correct.

  • We'll give you more color on future share repurchase outside the ASR at the end of February.

  • David Glick - Analyst

  • Great.

  • Thanks and good luck, guys.

  • Wes McDonald - EVP, CFO

  • Thank you.

  • Thanks, everyone.

  • Operator

  • That concludes our Q&A session.

  • This does conclude today's conference call.

  • You may now disconnect.