柯爾百貨 (KSS) 2010 Q4 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Kohl's fourth-quarter and year-end 2010 earnings release conference call.

(Operator Instructions).

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

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

Such statements are subject to risks and uncertainties which could cause Kohl's actual results to differ materially from those projected in such 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, that this recording will not be updated.

So if you're listening after February 24, it is possible that the information discussed is no longer current.

Thank you.

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

Wes McDonald, Senior Executive Vice President and Chief Financial Officer.

Thank you.

With me today is Kevin Mansell, Chairman, CEO and President of Kohl's Corporation.

To start off with a financial review of our 2010 performance, talk about some balance sheet metrics, then I will turn it over to Kevin to walk through some marketing, merchandising initiatives, and then we will close with our guidance and take some questions.

On the sales line, total sales for the fourth quarter were $6 billion this year, an increase of 6.3% over last year.

Comparable store sales for the quarter increased 4.3%, driven by a 5.4% increase in transactions per store.

Units per transaction decreased 1.1%, and average unit retail was flat.

For the year, sales increased 7.1% to $18.4 billion, and comparable store sales increased 4.4%.

The number of transactions per store increased 7.4%.

Average transaction value decreased 3% on equal declines in both average unit retail and 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 approximately 50% for both the quarter and the year, an increase of over 200 basis points over both prior year periods.

Moving on to gross margin, our gross margin rate for the quarter increased 38 basis points to 36.8% at the high-end of the 20 to 40 basis point improvement that we expected.

This is our 11th consecutive year -- excuse me, 11th consecutive quarter of year-over-year margin improvement and our third consecutive year of fourth-quarter margin improvement.

For the year, our gross margin rate increased 41 basis points to 38.2%.

We would expect our gross margin rate to increase 10 to 30 basis points for the first quarter and for the year to be flat to up 20 basis points over last year.

Moving onto SG&A, SG&A increased 4% for the quarter, consistent with our expectations of a 3% to 4% increase.

For the year, SG&A increased 6%.

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

Distribution center costs as a percentage of sales were basically flat for both the quarter and the year.

Profitability in our credit business declined as lower write-offs were more than offset by lower late fee revenues.

IT costs deleveraged in both periods more notably for year due to investments in technology and infrastructure to support our growing e-commerce business.

We would expect SG&A expenses to increase 5% to 6.5% for the first quarter.

Included in this increase are additional remodel expenses associated with increasing our number of remodels from 85 stores to 100 stores.

We expect SG&A to increase 3% to 4.5% for the full year.

Preopening expenses are now included in our SG&A expenses, but for your modeling purposes, we expect them to be $28 million for the year and $4.5 million in the first quarter.

The remaining quarters are $3 million in the second quarter, $16 million in the third quarter, and $4.5 million in the fourth quarter.

Depreciation expense increased approximately 4% for the quarter and 11% for the year, primarily due to new stores and remodels.

The increase for the year also includes $25 million of lease accounting related adjustments recorded in the third quarter.

Depreciation is expected to be $690 million in fiscal 2011 and $164 million in the first quarter.

For your modeling purposes, depreciation in the second quarter will be $171 million, in the third quarter $174 million, and in the fourth quarter $181 million.

Operating income increased approximately 14% for the quarter to $820 million.

Operating income as a percent of sales was 13.6%, an 87 basis point improvement over the fourth quarter of 2009.

For the year operating income increased 12% or $202 million to $1.9 billion and was 10.4% of sales, a 44 basis point increase over the prior year.

Net interest expense was $32 million for the quarter and $132 million for the year compared to $31 million for the prior year quarter and $124 million for 2009.

Interest expense is expected to be $115 million for the year and $30 million in the first quarter.

For the remaining quarters, we expect interest expense to be 28% -- excuse me, $28 million in the second quarter, $27 million in the third quarter, and $30 million in the fourth quarter.

Our income tax rate was 37.45% for the quarter and the year compared to 37.6% in the prior year quarter.

We expect our tax rate to be approximately 38% in the first quarter and for the fiscal year.

Net income for the quarter was $493 million, $62 million and 14% higher than the fourth quarter of 2009.

For the year, net income increased 12% to $1.1 billion.

Diluted earnings per share was $1.66 for the quarter, an increase of 19% over the fourth quarter of 2009, and for the year, diluted EPS increased approximately 13% to $3.65.

Moving on to the balance sheet, we currently operate 1089 stores compared to 1058 at this time last year.

Gross square footage was 96 million at year-end 2010 compared to 93 million at year-end 2009.

Selling square footage increased from 78 million at year-end 2009 to 80 million at year-end 2010.

Cash and cash equivalents, we ended the quarter with $2.3 billion of cash and cash equivalents, an increase of $10 million over the prior year quarter-end.

As a reminder, in November we used $1 billion of cash to fund our accelerated share repurchase program.

I will provide more details on our capital structure in a few minutes.

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

Moving on to inventory, our inventory levels reflect continued strong inventory management.

Total inventory was up 4% compared to the prior year, and inventory per store is up just under 1% per store.

Moving onto capital expenditures, capital expenditures were $761 million for the year, approximately $100 million higher than 2009 due to increased remodels, our new San Bernardino e-commerce fulfillment center and IT spending associated with both e-commerce and general corporate needs.

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

We were able to generate over $900 million in free cash flow in 2010.

Our expectations are to spend $1 billion for capital spending in 2011 as we open 10 additional new stores over 2009, add 15 incremental remodels for a total of 100, open a third e-commerce fulfillment center, and roll out electronic signs to approximately half the chain.

Our expectations for free cash flow in 2011 would be to have free cash flow of $1 billion.

Moving on to Accounts Payable, Accounts Payable as a percent of inventory was 37.5% versus 40.6% last year.

The decrease is primarily due to lower inventory turnover.

Weighted average diluted shares were 297 million for the quarter and 306 million for the year.

These share counts include approximately 18 million shares which were repurchased in the fourth quarter.

For your modeling purposes, I would use 293 million diluted shares for the first quarter and 294 million diluted shares for the fiscal year.

These share counts exclude any additional share repurchase.

And moving on to sales, I will turn it over to Kevin.

Thanks, Wes.

As Wes mentioned, comparable store sales increased 4.3% for the quarter and 4.4% for the year.

From a line of business perspective, footwear reported the strongest comps for both the quarter and the year driven by strength in women's and junior shoes.

Men's also outperformed the Company average in both periods with strengths in basics and active.

Home outperformed the Company for the year with strength in small electrics.

Women's reported low to mid single-digit comp sales increases for the quarter and year.

Strong performers in women's included Sonoma, activewear, and updated sportswear.

Accessories and children's business underperformed the Company in both the quarter and the year.

Watches, sterling silver jewelry, and fashion jewelry were best performers in accessories, while toys performed best in children's.

From a regional perspective, the Southeast region reported the strongest comps for both the quarter and the year.

We are also very pleased with the performance in the West region, given its very strong performance the prior year.

The Midwest, South Central, mid-Atlantic and Northeast regions all posted low, single-digit comps for both the quarter and the year.

Investments in our e-commerce business continue to result in higher sales.

E-commerce sales increased almost 60% for the quarter and for the year increased more than 50% to $720 million.

The contribution to our comparable sales increase was approximately 200 basis points for the quarter and 130 basis points for the year.

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

For the first quarter, we would expect February to be at the high end of the quarter, March to be down high single digits to low double digits largely due to the Easter shift, and April to be significantly higher than the quarter, approximately a high teen's comp store increase.

From a merchandise content perspective, we are very excited about the progress we made last year in both our private and exclusive national brands.

For the year, private and exclusive national brands reached approximately 48% of sales, almost 300 basis points higher than the prior year.

While there was widespread success across both of these categories, some of our very strongest increases came from our exclusive national brands in our contemporary life zone -- ELLE, LC Lauren Conrad and Simply Vera Vera Wang.

While the success of these brands and our other private and exclusive national brands helped propel our topline, they also provided support to achieve the consistent improvement in merchandise margin we reported.

We do expect this momentum will continue to build this year, accelerating in the back half with the launch of our two newest exclusive national brands, Jennifer Lopez and Marc Anthony.

Both brands will launch simultaneously in the fall season in all Kohl's stores nationwide and on kohls.com.

They will launch in a wide variety of categories in women's and men's apparel and accessories.

The Jennifer Lopez brand will include sportswear, dresses, handbags, jewelry, shoes and sleepwear.

The Marc Anthony brand will launch in sportswear, dress shirts, neckwear, accessories, suit separates, sport coats and shoes.

The combination of the two brands is the largest brand initiative in terms of scope and investment we will have ever made.

We continue to work on new brand ideas and do expect to have further news to share with you this spring on that front.

Moving on to inventory management, as we mentioned earlier, on an overall basis, average inventory per store is approximately 1% higher than last year.

Clearance inventory is approximately 12% lower on a per store basis and is only 5% of our total units on hand.

Our size optimization initiatives continue to develop, and we currently have approximately 80% of the applicable receipts on the program.

By leveraging this initiative and our other inventory management disciplines, we saw improvement in in-stock levels of 4% for the year, leading to increased sales and customer satisfaction scores.

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

As Wes mentioned, we expect gross margin for the year to be flat to 20 basis points over last year.

We believe our increased penetration in private and exclusive brands, as well as continued better inventory management, will help drive that result in spite of the expected apparel inflation that is coming.

I would like to spend a few minutes talking about apparel inflation and the changes that we are seeing.

Our apparel product costs in this spring deliveries are up in the range of low single digits.

Those increases accelerate dramatically this fall, and costs are expected to be up significantly across all apparel categories, approximately 10% to 15% overall.

Specific increases are naturally dependent on the category and the fabric content involved, though all categories are impacted by higher labor and higher fuel costs.

We have been preparing for these cost increases for some time and have been working diligently to minimize the impact of these higher costs on a consumer that is still buying cautiously and, therefore, less open to paying higher prices for goods that are really discretionary.

On the sourcing side, we have implemented a number of things as appropriate on a category and item level to minimize the impact to the best of our ability.

Among these are the following -- product reengineering, consolidation and pre-positioning of raw materials, production capacity management, increased use of lower wage markets or duty free markets, reverse auction and vendor consolidation.

We do believe that our sourcing strategies and our longtime partnership with Li & Fung and with our top 10 manufacturers will aid in this effort.

On the merchandising side, we have also focused on a number of things as well to limit the impact to both our margin performance and to the customer's buying power.

Among these are the following -- an increased mix of private and exclusive brands, increased penetration of direct imports, and maximizing inventory effectiveness with our optimization technology platform and allocation strategies.

In addition, chasing business in season will be very important and something we have successfully executed over the last few years as we improved our inventory management.

We do intend to maintain our initial markups and use our promotional levers to drive business as dictated by demand.

We also believe that a mix of price points will be important to be successful in this environment, and that is something with our lifestyle and price point grid that we have very well developed.

And finally, we believe newness is a big positive and are excited to be able to launch both Jennifer Lopez and Marc Anthony brands in this environment in the fall.

In summary, apparel inflation is clearly real.

But we believe we have had the time, the tools and the processes to work through it effectively and have a competitive advantage for both us and our consumer.

We have proven over the past that Kohl's value proposition resonates strongly with our customers.

We have clearly established ourselves as the leader in providing great value and savings and are committed to maintain that leadership position going forward.

From a marketing perspective, our number one customer concern continues to be staying within her budget.

As a result, we will continue to drive home our value message using our highly effective "The More You Know, The More You Kohl's" platform.

We will continue to differentiate ourselves from the competition through our no hassle return policy, our world-class exclusive national brands, our no exclusions approach to value-added offers, Kohl's Cash, and, of course, our Kohl's Charge program.

History has proven that Kohl's charge cardholders are our most loyal customers.

They shop our stores more often and have a significantly higher annual spend than non-Kohl's charge holders.

We will continue to focus on adding to our mailable credit card base, especially in our mild and hot markets.

We will be rolling out a new discount program for our 60-year-old and over shoppers later in the first quarter that will be significantly simplified from the past and which we have tested.

We believe it will be another differentiator from our competitors, particularly so in the environment we are in.

I'm going to turn it back to Wes and have him touch on both store experience, our capital structure, as well as future earning guidance.

Thanks, Kevin.

We opened 30 new stores in 2010, and our current plan is to open approximately 40 stores in 2011 with a split of nine stores in the spring season in March and 31 stores in the fall season at the end of September.

We expect to remodel 100 stores in 2011, more than the 85 stores in 2010 and the 51 stores in 2009.

We continue to become more and more efficient in our remodels from both a cost and a time perspective.

In 2007 the average remodel required 12 weeks to complete.

In 2011 we expect the average remodel to be complete in six to seven weeks.

We also have significantly decreased costs, despite increasing the scope of the remodels.

Our 2011 remodels will include a relocation of the customer service department from the back of the store to the front.

This change has been received very well by our customers in 2010, and we have found that having customer service located next to POS has also increased store operating efficiency.

We installed electronic signs in 50 additional stores during the quarter, bringing the total number of stores with e-signs to 100.

We would expect to have rolled the signs to about 500 stores by the end of the year and with a full chain rollout expected to be completed by holiday 2012.

Regarding our capital structure, I am very excited to announce several new capital structure initiatives.

On February 23 our Board of Directors declared a quarterly dividend of $0.25 per common share.

This is the first cash dividend paid to common shareholders in our history.

The dividend will be paid on March 30 to all shareholders of record as of March 9.

This dividend reflects the board's confidence in our long-term cash flow, and we anticipate using a portion of future free cash flow to continue to pay quarterly dividends.

We will target a payout ratio of approximately 20% to 25% going forward.

Our board also increased the share repurchase authorization under our existing share repurchase program by $2.6 billion to $3.5 billion.

This does not include the $1 billion ASR that we expect to complete here next week.

So it is an incremental $3.5 billion of share repurchase going forward.

We expect to recommence share repurchases in the coming months, primarily in open market transactions subject to market conditions, and expect to complete the program by the end of fiscal 2013 or January of 2014.

Our expectation at this time would be to purchase the shares ratably over the three-year period.

By the end of this month, we expect to complete the $1 billion ASR program which we announced in November 2010.

We expect to receive a total of 18.8 million shares under the program at an average price of approximately $53 per share.

This would include approximately another 900,000 shares in February over what we already have received by the end of fiscal 2010.

We have $400 million of debt which matures this year.

We expect to refinance this debt in the third quarter of this year subject to market conditions.

With that, let me share with you some details behind our initial guidance for the first quarter and fiscal 2011.

For first quarter, we would expect a total sales increase of 4% to 6%, comp sales of 2% to 4%, and gross margin up 30 -- excuse me, 10 to 30 basis points over last year.

We would expect SG&A to increase 5% to 6.5%.

This would result in earnings-per-share of $0.68 to $0.73 for the first quarter.

For the year, we would expect a total sales increase of 4% to 6%, comp sales of 2% to 4%, and gross margin flat to 20 basis points over last year.

We would expect SG&A to increase 2.5% to 4%.

This would result in earnings per diluted share of $4.05 to $4.25 for fiscal 2011.

As always, our practice is to not include any share repurchases in our guidance for the fiscal year.

As I mentioned earlier, if you take the share purchase program ratably over three years, approximately $1.2 billion in 2011, that would equate to probably about $0.12 a share at a minimum, assuming a stock price of approximately $60.

And with that, I will turn it over to Kevin to close.

Thanks, Wes.

In closing, we achieved another strong financial quarter in which we made additional progress on our goals to both build our market share gains 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.

I was especially excited about our e-commerce performance in the holiday season, which justified the significant investment we made this year.

I would expect us to achieve $1 billion in e-commerce sales in 2011.

And in order to achieve that goal, we will continue to invest in the business as we expect to open an additional e-commerce distribution center in this fall.

Sales growth continues to come from all regions of the country and all lines of business.

In particular, though, we continue to make great strides in the Southeast region, using marketing tactics learned last year in the West region.

We expect to continue this progress in 2011 as we continue to focus on improving our sales productivity in mild and hot markets.

Our increased penetration of private and exclusive brands, along with strong inventory management, has benefited us on our gross margin rate, and we see no change in that going forward.

We entered 2011 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.

We also continue to make progress on the SG&A line.

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 continues to be driven by sustainable productivity improvements such as the rollout of electronic signs.

And finally, as Wes just shared, we are pleased to announce our capital structure plans as we institute a dividend for the first time ever and increase the size of our share repurchase program significantly.

We are committed to being good stewards of capital, and we will continue to prioritize profitable growth and reinvestment in our stores while returning any excess cash to our shareholders.

With that, we would be happy to take some questions.

(Operator Instructions).

Michelle Clark, Morgan Stanley.

The first question, going through the store, we have noticed select price increases.

Any learnings there?

I know it is early, but any learnings thus far on elasticity?

I think the short answer is no and just because it is too early.

I'm suspecting that by the end of the first quarter we would be able to give you some sense of that, and we definitely would be able to give you a lot of sense of it early in the second quarter.

Okay.

That is helpful.

And then maybe if you could just discuss a little bit more your pricing strategy, where you would look to take price increases this year?

Well, there is pretty broad cost increases, so the breadth of pricing impact is across all apparel categories.

Naturally they are not equal by area of the business, and strategically they are not equal across our good, better and best price points.

And that is just I think the nature of pricing.

But they are pretty broad.

I don't want to give you any sense that they are not pretty much everywhere.

They are pretty much everywhere.

Okay.

And then you had mentioned inventory per store up low single digits for the year, how are you planning units?

With prices up in the low single digits in the first half of the year, units are with inventory up low single digits, units are pretty flat to modestly down.

In the second half of the year, we have bought to units or bought to dollars, so our units naturally are down relatively a large amount with prices up 10% to 15%.

Units are down probably in the 10% range or so.

And, again, that is one of the reasons why we emphasize our feeling that there is a strong need to be able to effectively chase the business in season and manage to that.

That is just going to be required.

And it is something I think we have exhibited a good ability to do in the last few years.

Said differently, our expectation would be to continue to improve our inventory turn, which means sales dollars have to grow faster than inventory dollars.

Deborah Weinswig, Citigroup.

Kevin, can you discuss the opportunities in children's and accessories as you see them?

Both categories underperformed.

We called that out.

I don't want to give you the sense that they were dramatically underperformed.

The range of performance in any of our six lines of business is pretty tight.

Accessories is only about 100 basis points off the Company for the year, and children's is only 250 to 300 basis points across -- less than the Company for the year.

So I don't want to give you any sense that they were very, very different.

I think in the accessories category, it is really accessory classifications outside of jewelry that were disappointing.

So a good category to call out, for instance, is handbags.

That was a disappointing performer for the fall season in the fourth quarter.

I would expect and we do expect accessories outside of jewelry to improve in the first half of this year.

Jewelry was strong throughout third and fourth quarter and pretty much driven by the fashion side in watches.

On the kid's side, generally I would say we are focused on trying to build more value in our assortments, and we recognize that is particularly important with pending cost increases.

So I think there was not anything particular within kids.

So boys and girls were kind of both underperforming the store, so there was not any unique category in there.

Okay, great.

And then can you talk about what you're seeing with the kiosks and specifically the performance over the holiday season?

Kiosks were very, very broadly positive everywhere.

We had certain hurdles which we had established to give us acceptable ROI, and on a companywide basis, we exceeded those hurdles.

We beat our plan that we were looking to achieve, and we actually have in a number of stores this year about 100 stores this year, we have rolled out an additional kiosk because those stores have performed exceptionally well.

So I would not be surprised to hear us talk about rolling additional kiosks into stores as we see them perform well during the year.

But very broad success.

And the last question, it seems like e-commerce is exceeding your expectations.

What do you think is driving that?

It is the things we have talked about.

We have broadened our assortment pretty significantly.

We have improved the amount of goods that are available online that we either don't have room for in our stores, extended sizes, for instance, our categories and price points that we don't sell in our stores.

From a marketing perspective, we have been very aggressive in the digital world and in social media to market aggressively our online business.

And then maybe most importantly, we made, as you know, a very significant capital investment in both technology to drive the customer interface and in fulfillment to -- we expanded our capacity, essentially doubling it this year, and all those things work together to give us the sales increase.

And then when you look at the data, is a greater portion of the sales coming from existing customers or new customers?

A large part of our business online is our core Kohl's loyalist, I would say.

For instance, our credit card customer is a heavy user of kohls.com.

But it definitely gives us the exposure to customers, particularly in markets where we don't have the same convenient store experience that we do in other markets.

We get both, but there is no question that the Kohl's brand lover uses kohls.com a lot.

Great.

Well, thanks so much, and best of luck this year.

Lorraine Hutchinson, Bank of America.

I was hoping that you would elaborate a bit more on your SG&A guidance.

You did have some one-time expenses coming through in the back half, the guidance of 3% to 4.5%.

It looks like what you would give for a normal year.

So can you just talk about where the incremental investments are for 2011?

Well, I would say for the first quarter primarily the SG&A growth over what you would expect is due to the incremental remodels.

We have put a lot more remodels in what we would call wave one than we had last year.

Our expectations will be for the remainder of the year kind of Q2 and Q3 will be below what we guided to for the year, and Q4 will be basically in line with the year.

So there were additional one-time things in the fall, as you mentioned.

I would say in Q3 we talked about the credit late fee revenue, which will not repeat this year.

What we never did talk about too much is we also got a lot of favorability in both the third and fourth quarter from bad debt expense.

So that helped mitigate some of the loss and late fee revenues.

And, as Kevin mentioned, we have J.Lo and Marc Anthony launching in third quarter.

If you guys remember, when we launched Simply Vera Vera Wang, we put a significant amount of marketing behind that.

I would expect us to continue to do that for Jennifer Lopez and Marc Anthony.

So that would help mitigate some of the benefit that you saw that we would expect to see in late fee revenues in the third quarter.

I guess said differently, every year is one-time stuff, and it is just different stuff.

So, at the end of the day, we think it is a good investment in marketing to launch that brand.

That may think that your -- you guys might think our SG&A is a little higher than what it should be, but it's a good investment.

Charles Grom, JPMorgan.

Just on the AUR being flat in the fourth quarter was a big improvement relative to the prior three quarter trends.

Can you walk us through how you got there?

I think mix has something to do with it.

Yes, nobody bought jackets in October; they bought them in November, so that helped.

Wes is right at it.

Mix has definitely got something to do with it, and then also we talked a little bit about brands that sold well.

For instance, in women's, our contemporary brands, which while they were across the price spectrum, better and best price point brands definitely lifted AURs as well.

And then I think inventory management was a benefit, wouldn't you say, Wes?

I mean it definitely helped.

Oh, yes.

No, we did a clearance, like I said, earlier I think in the down double digits per store.

So that was a big benefit as well.

And then when we look at the comp guidance for the year 2% to 4%, you are expecting your Internet business to be up, I guess, close to $280 million year over year.

That would give you about a 100 -- roughly 150 basis point lift to the comp.

Can you walk us through the balance of how you get to the 2% to 4%?

How much is traffic versus ticket?

Well, I think we are probably thinking broad -- we don't necessarily think about the 2% to 4% comp the way you just described it.

I understand what you're saying, but generally I think we still believe that this is all about market share, and it is all about driving transactions and driving customer traffic.

So I would expect and I'm hopeful that customer traffic will drive our comps.

They will lead.

But I would like to see and I think Wes would agree we would like to see a better balance between average transaction and customer transactions themselves.

So, as you know, this year it has been all about transaction growth, and in the coming year, I think we would like to see transaction growth still lead, but average transactions start to moderate or move upward.

Okay.

Wes, just for the new capital structure, I think you finished the year at about 1.9 times adjusted debt to EBITDAR.

Is that where you guys think you want to keep your balance sheet --?

Yes, well, about 2.

So if we refinanced the $400 million in the third quarter, that is basically where we are are going to be for the year at least using our calculation.

So going forward, assuming debt markets remain kind of where they are, it is possible we could add additional debt, but we would want to definitely maintain that 2 times debt to EBITDAR.

I would not want to go above that.

Okay.

So you will be willing to leverage up maybe not this year.

But if you go out to 2012 and 2013 and assuming your EBITDA continues to grow, obviously that ratio at is going to fall so you would be willing to take on more debt?

We certainly would evaluate at that time.

It is hard enough to live 90 days at a time much less one year with you guys.

So we are going to stick to the 2 times and refinance in the $400 million this year.

We will see what happens next year.

Okay.

And then the last question just near term, you guided February to be the high end of the range.

With a few days left in the quarter, or the month, can you give us a little sense for how the past few weeks have been?

It sounds like they have improved relative to the prior two months.

Yes, I mean obviously we are pretty confident about where we are going to finish February.

That's why we guided where we did.

And I think it's -- the nature of February given the weather is that you get ups and downs a lot during the course of the month, and this one has been no different.

But overall I would say right now we are going to be pretty happy in February.

Adrianne Shapira, Goldman Sachs.

On the SG&A clarification, Wes, in the early part of the call, you had mentioned for the year SG&A up 3% to 4.5%, but maybe we misheard you.

At the end when you talked about guidance as more 2.5% to 4%.

I don't know.

Did we get that wrong, or was there a difference?

I would say we guided first quarter 5% to 6.5%.

What I was trying to articulate is the fourth quarter would basically be with the year 3% to 4.5%, and the second and third quarter would be below the year.

Okay.

So for the year sort of 2.5% to 4% is where we should think about for the year?

For the year, I thought we said in our -- I'm sorry, 2.5% to 4% for the year.

Yes.

Okay.

I just wanted to be clear.

Can you maybe help us think about the electronic --?

No, wait, I'm sorry.

It should be -- for the year, it should be -- I misspoke.

It should be 3% to 4.5% for the year for SG&A.

Okay.

For the year?

Yes.

Maybe talk a little bit about the electronic signage.

Obviously you liked what you saw as you are planning to roll it out.

Maybe give us a sense of quantification, some of the benefits there?

Well, we are happy with the 100 stores that we have right now.

We are planning to move forward on the rollout.

It will be paced over the course of the year.

Naturally the two really big benefits first and foremost is it is a better customer experience because accuracy is 100% given that the price on the signs and the price at the register always agree.

That is a big benefit for sure.

And then secondarily, naturally there are payroll savings because we don't have to change several thousand signs in each of our stores any time we run a new promotional event.

I think we have tried to be clear that we are going to try to use some of that savings to give a continued improved customer experience, and some of it over time we think we can take to the bottom line.

So we will try to do both.

But the test so far have been very positive, and we are very happy we are planning to move forward.

Okay.

So are you working to find some cost savings?

Let's maybe just revisit your comp leverage points?

I think we tried last year to do a 1%.

I don't think that is realistic.

Going forward I think a 2% comp is pretty realistic.

We are going to try to get roughly 8 basis points of leverage.

It might be a little less with some of the things we have got going on in the fall from an investment perspective, so it might be closer to 6%.

I just want to make sure everybody -- I misspoke there.

So SG&A for first quarter is up 5% to 6.5%.

For the year, it is 3% to 4.5%.

For the fourth quarter, it would be 3.5% to 4% -- or, excuse me, 3% to 4.5%.

And then for the second and third quarter, it would be below the year guidance.

So it would be less than the 3% to 4.5%.

I mean the one thing on SG&A I think we are trying to point out throughout our comments as we look forward is we are trying to use productivity enhancements -- the electronic signage question you had is a good example of it -- to allow us to manage SG&A effectively, but also allows us to reinvest to drive topline sales.

And I think we don't want to get away from that story.

The story is still about driving topline sales and market share.

And so when Wes starts talking about the third quarter, for instance, which I think most analysts would expect to see an opportunity for us in SG&A savings, we are going to try to be very aggressive in the launch of our biggest ever brand initiative and market very aggressively to support that.

So examples like that.

That makes tremendous sense.

And on that note, when you think about the comp outlook of 2% to 4% and given how online is succeeding, you are accelerating the remodels, you have got new launches, and maybe even ticket can continue to improve, kind of help us think about 2% to 4% in context of all those things that potentially could help?

Should we be thinking about this to be conservative guidance?

How do we think about that comp estimate?

Well, I think, you know we always try to provide guidance that we think is rational based on the trendlines in which we have run over the last several periods.

So I think 2% to 4% is a reasonable level of guidance to give.

We have a lot of positives to drive our topline sales.

I mean a tremendous amount.

You just named a few.

There are a number of other ones as well.

But I think we are also cognizant that our industry is facing for the first time inflation in prices, and no one knows for sure how customers are going to react to that from a demand perspective.

I'm optimistic.

I think it is good for our business to have some modest inflation, but we have to prove our ability to manage that and deliver it to the top line.

So generally we try to be conservative in our view of sales guidance that we give you, and I think our guidance this year is in keeping with that.

Yes, I think the big unknown, especially in the back half, is what is going to happen to ticket.

We know AUR is going to be up, but we don't know what is going to happen with units.

So that will remain to be seen.

I think we will get more answers as we go through the year.

And so then, Kevin, on your point on the marketing as you are going after share more aggressively, in the back half, you kind of tested some things with marketing.

Maybe help us what you learned from the marketing initiatives of last year and how you're thinking about taking those learnings to really enhance the return on your marketing, especially as you launch the J.Lo and Marc Anthony in the third quarter?

Yes, we have had a lot of learnings.

The best example I can give to you is two years ago in 2009, as we've launched more stores on the West Coast, we aggressively invested in marketing in a different way, and we got phenomenal results.

As you know, we ran double-digit comps throughout that period.

We used those learnings, and at the beginning of this past year, we [probably did not out to] everybody that we expected to take those marketing learnings into the Southeast.

And, as a result, we expected the Southeast to outperform the Company.

They did.

And we are essentially taking the learnings from both the West and the Southeast now more broadly companywide and trying to use them whether they be media techniques, pricing techniques or communication techniques, and use them on a companywide basis.

We have had a lot of brand launches over the course of the last three years, and certainly our Jennifer Lopez and Marc Anthony launch is going to incorporate all the good things that we have learned, as well as the things that did not work so well in the past.

And it is one of the reasons that we are so excited about those two new brands coming in the fall.

So from that perspective, we are very focused on marketing productivity, but we also think we have a big opportunity in marketing to drive our topline.

Great.

And just one last thing.

Kevin, it sounded as if there is a little bit of a teaser about perhaps new brands into spring.

Any more clues of what that could be?

What part of the store and the timing of it?

No, I mean nothing I would want to share with you now, but I don't -- I just wanted to make sure investors knew that just because we are going to have the biggest brand launch in our history this fall that we were not going to continue to offer up new brands to customers.

I do expect to be able to share new brands with you still this year.

We have had the most success, I think, I mentioned in the women's world, particularly in our contemporary zone, so that is an area that we will continue to focus on.

Great.

Best of luck.

Bob Drbul, Barclays Capital.

Kevin, I guess when I listened to your plans for 2011 overall, one of the things when you talk about all the uncertainty and pricing and inflation, when you look at your gross margin guidance for the year, can you just maybe give us your confidence level given all of these uncertainties in that flat to up 20?

We don't -- I think you know, Bob, we don't provide any indication in our guidance that we are not very confident of achieving.

I think the management team that Wes and I work with have exhibited an ability to deliver on what we do say.

And so we would not be guiding flat to 20 if we did not have confidence in delivering that.

We do have two things which are working very positively for us in our favor, which is continued improvement in inventory management that we expect to see and continued improvement in the penetration of our private and exclusive brands, both of which run at higher merchandise margins.

I don't know any other way to answer it than that.

That is very helpful.

And then just on, just like a merchandising question for you, Kevin.

I think you called out the LC Lauren Conrad line.

That line seems to be flying off the shelves.

One of the trends running throughout that line is the ruffled detail trend.

Do you think that is enough to carry the women's business this year?

It seems to be in a number of your other brands as well.

You are going in my Merchandising Hall of Fame, Bob.

You consistently come up with the unique trends that nobody else seems to see.

In all seriousness, LC Lauren Conrad has been a wild, runaway success.

It has been spectacular across every single classification that we have in apparel.

We just introduced it in footwear, and I expect to see more of the same.

The trend you are talking about is very positive, but I think I would focus more on the overall brand, which has really been embraced by our younger missy consumer.

Jeff Klinefelter, Piper Jaffray.

Just a couple of quick questions.

First, Kevin, just with respect to these pricing changes and inflation, I mean outside of the near-term impact that I think everyone is clearly focused on and should be, what do you think structurally if we go forward with higher pricing, higher labor and maybe higher cotton, what does this mean to your business model?

If you think about just fewer units trading off for higher dollars, what does it mean when you think about and plan your markdown cadence as a company when you think about the leverage, your operating leverage in your stores, payroll hours, etc.?

I think a little longer term what does this do?

Does it turn into an advantage at some point?

And then secondly, on your West Coast, I think some of this ties into your Southeast or Florida comments.

But part of the strategy of going out and getting those Mervyns locations was to build that -- or fill into those markets and then provide an opportunity to leverage your marketing, add a little bit more marketing out to those markets.

Is that what you see paying off at this point, and is that a case study for other markets?

On the pricing thing, I think, first of all, it is really premature to go forward and start forecasting what higher average prices and perhaps lower units carried would mean on all of the expense lines and the customer experience.

You can certainly probably paint a picture that would say, well, that could be positive for those things because there's fewer units to handle, and you're selling fewer units.

You know, what I suspect is going to happen is those companies who manage that the best who keep inventories very lean, particularly in units and chase business in season and have a more sophisticated supply chain and also have a solid price point strategy, so everything is not opening price point or not only all best price point but a good mix.

I think those companies are well positioned.

Obviously we think we are one of those companies.

That is why we have been trying to explain it that way.

But I do think it makes sense if you think about it a balance across price points is a good place to be in this environment.

On the regional perspective, yes, no question.

The learnings from the West transferred to the southeast.

And both cases worked and have built their business and improved out A to S in those regions, and some of those tactics are being used in the Company as a whole.

And we will continue to do that.

And we do have a goal of continuing to improve our advertising to sales percentage, and we have made great progress in that.

That particular team, the marketing team, has done a very good job of leveraging.

Are there other regions in particular that are targets now for that same leverage?

I mean we still are very focused on mild and hot.

I mean even today our mild and hot markets, which would include the West region and the southeast region, those stores continued to underperform on a per store basis the average store in the core are colder markets.

And there is no reason for that in our mind.

It is just a question of continuing to improve awareness, continuing to be able to invest more in our marketing so customers understand why Kohl's is a good place to shop, and, of course, improved convenience by adding new stores.

We are doing all three of those things.

Okay.

And just one last thing.

There is some concern about labor in China.

They are literally coming back after the Chinese New Year.

Is there anything that you are hearing or sensing out of your sourcing channels yet about that in the last couple of weeks?

Nothing new because that is not a new phenomenon, and it is not something that we were not unprepared for at all.

So, no, nothing new over and above what we already knew.

Daniel Binder, Jefferies & Co.

I had a couple of questions on the inflation front.

I think you said at one point that you were seeing some inflation in footwear and home in the past year.

I was just curious how that ended up panning out, and maybe if you learned anything about the customer's willingness to take on some of that inflation, what it may have done to unit demand destruction, if any, and ticket?

Just to give us maybe a little bit of a preview of what might happen in the year ahead.

Sure.

I would not want to forecast what did happen on a different category like apparel.

But certainly you know that footwear has led the Company for both the year and the quarter in terms of sales increase.

They came close to a double-digit comp for the year actually, and that was an area that incurred significant price increases over the past 12 to 18 months.

Home as well has performed well consistently.

A little bit weaker fourth quarter, but for the year, very, very strong results.

They also had a very strong 2009.

That was a category that went through a pretty significant period of price increases as well.

So we have had experience in categories where prices have gone up, and sales results have been very good.

That makes you feel good, but I think it is wrong to just automatically project that out onto a new category like apparel.

I'm hopeful that we can manage it, but I think it would be wrong to jump to that conclusion.

Fair enough.

At this point it does not sound like you're really building in much in the way of ticket from inflation.

Is that fair?

Yes, that is fair.

Yes, we are not -- you mean in terms of our sales?

Yes.

Yes, we are not.

And Wes, thanks for the color on the share buybacks since many of us are building it into our models --.

Yes, I figured you guys basically forced my hand on that one.

So --.

On the exclusive and private label penetration, as well as credit penetration, I'm not sure if you covered this, but any sense of what that may end up looking like based on the programs you have for this year, and what it may look like by the end of the year?

On the brand thing -- Wes can answer the credit card thing.

On the brand thing, we finished the year just under 48% penetration.

We expect to get good growth on our base brands that we have, and then, of course, in the fall season -- so for the last five months of the year -- that penetration would be enhanced by the launch of the two new blockbuster brands.

So we are expecting it to go up.

We never put a number on it because that would be wrong to do.

But it's going to go up for the year.

And on the credit side, I mean we wanted to grow more than 50.

I'm not sure if we will get another 200 bps or not.

We are going to continue to focus on mild and hot.

That is really, as you know, the bigger our credit file for a particular store, there is a good correlation between mailable accounts and sales.

And so we are focused on mild and hot mostly.

But I would expect to continue to grow.

It has been one of the reasons our comp has been good over the last five years at least.

And, as Kevin mentioned, the e-commerce business with that growth, that's even higher than a 50 share credit business.

So that is going to help us as well.

Wayne Hood, BMO Capital Markets.

The credit, just a second, Wes.

Can you talk a little bit how you might be able to use the credit offer to offset some of the product cost increases?

I mean you have got a tailwind from -- in credit from lower losses.

Why not reinvest that from a marketing standpoint as we go into the fall season?

And I had two other additional questions.

This is actually Kevin.

I think it is probably less about credit -- I don't want to say less about credit.

Credit is just a part of it.

I think what we're trying to say is we intend to use all the marketing levers we have to drive demand, and that gives us the flexibility to do it as we see the need to do it.

Credit is one of those things, but there are many other whether it be things like Kohl's Cash that are real lever as well, our weekend events, our mailables, direct-mail to our e-mails to our 25 million e-mails holders.

So there are a lot of different pieces of the marketing that I would use.

I would not want to focus just on the credit though it is an important part.

Okay.

And along those same lines, on the e-commerce side, it seems like as that business grows, it becomes more important, and some of your competitors are offering free shipping on certain price points or orders above $99 or $100.

How do you, as you get into the fourth quarter and those kind of change, how do you plan to react to some of those free shipping offers from your standpoint?

I mean I don't want to forecast into next year's fourth quarter, but just in general, free shipping is an important part of our marketing effort in e-commerce.

It was last year.

It was dramatically in the fourth quarter last year, and I would expect free shipping promotions -- aggressive free shipping promotions -- to be an important part of our strategy for the year this year.

Free shipping is an everyday offer in-store on our kiosks.

So it is one of the reasons why we know that the kiosks are dramatically outperforming the plan we set, which had aggressive hurdles from an ROI perspective.

We are increasing the number of kiosks that we have in our stores just to give you a sense of how strong that is.

And that is free shipping every day all the time.

Okay.

My last question relates to the electronic signing.

There has been some chatter in the supply channel that glass availability is constrained, and so some that have tried to do this are not able to get glass.

Have you locked in those items or that supply chain to make sure you can get to 50% of the chain over the coming 12 months?

Yes, I feel pretty comfortable on the 50%.

I mean you are absolutely right.

It is one of the reasons we could not get the full chain rollout this year, and we have had -- length in that.

It truly is a supply chain issue with everything that's going on over there.

But we feel pretty comfortable we can get the 500 in this year.

Erika Maschmeyer.

As you add J.Lo and Marc Anthony, what areas do you plan on reducing?

I know you have emphasized that you want a mix of good, better, best.

Are you planning on any minor shifts between those categories?

It depends upon the business.

So women's is going to be different than men's, I would say.

Generally if you look at our floor in either women's or men's, the presentation is dominated on the contemporary side with our own Apt.

9 brand.

And, as we have added these new brands, while Apt.

9 remains a really important part of our mix, I think it was up for the year double-digits in sales.

The presentation on the floor will be priced slightly less in order to accommodate Jennifer Lopez in women's and Marc Anthony in men's.

In each of the other categories, it differs a little bit, but generally I would think about it that way.

And so it's fair to say there is no major shift towards the good from better and best?

No, definitely not.

Better and best continues to contribute a larger percentage of our total sales.

It did last year, and I would suspect it probably will do the same this year just because of the high growth to the better and best brands that we have launched in the last couple of years and the new ones coming.

Great.

And then can you talk about the factors that helped you successfully cycle the Mervyns grand openings on the West Coast?

It sounds like you have been executing better there.

Could you talk about your efforts, how much is merchandising and allocation compared to marketing?

It is definitely a mix.

The marketing improvements that we made, and of course of increase in the number of stores really raised the level of awareness that we had on the West Coast.

So we became I think a legitimate alternative for the first time to many consumers out there.

At the same time, I think you know that we have had these two strategic initiatives Companywide.

One was to improve the tailoring of our assortments so they were more appropriate in markets like the West Coast, and the other was to improve our customer service in those same mild and hot markets.

Both of those initiatives made progress last year, so I think both of them were contributing factors.

So I would say increased number of stores, improved awareness, increase investment in marketing, improved motivation and awareness, and then improvement in both customer service and the product tailoring effort.

Great.

And then a quick clarification.

Have you said how much of your back-half purchases you have already made?

No, and it varies so much by category.

If I gave you a number, it would not really be appropriate because it would be dramatically different depending upon the classification.

Liz Dunn, FBR.

Most of my questions have been answered, but just some clarification on a couple of points.

The D&A looked higher than I had anticipated.

It looks like it's growing faster than the store base.

Also, preopening, I am assuming that is when you're taking possession of the stores.

And then also, can you just address the average size of the stores that you will be opening for this coming year?

Sure.

While I think D&A is growing faster than store growth because our mix of capital investment is changing somewhat.

We are putting more money into remodels.

We depreciate them over a 10-year period.

We are putting more money into IT investments, most of which get depreciated over a three to five-year period.

So that is really what is driving that.

Pre-opening in most cases is just a function of the fact that we are opening 10 more stores, and it's slightly more backend-weighted than it was in 2010.

So I think I gave you guys the numbers by quarter.

That will be included in SG&A as we report.

That was a change we made at last year.

And in terms of the mix of stores, I would say it is probably split two-thirds small stores and one-third prototype stores.

So two-thirds on the 64 and one-third on the 88,000.

Bernard Sosnick, Gilford Securities.

Thank you.

There is one clarification I would appreciate.

Wes, you said that if the buybacks were to occur ratably over the year you mentioned an earnings-per-share benefit.

Could you repeat that for me, please?

Sure.

So if you take $1.2 billion and we were using in our modeling an average price of $60 a share, you get roughly $0.12 a share.

So if you were to add that to the top end of your guidance it would bring (multiple speakers) over the consensus on the street?

Yes, if you add that to what we guided to.

We never guide with consensus, but it seems like everybody else has put the share repurchase into their expectations as they put numbers out there.

I just wanted to clarify that because the news stories are saying otherwise.

Thank you.

Richard Jaffe, Stifel Nicolaus.

Just a quick follow-up question on inflation and average unit retail.

While you have mentioned that an increase in average unit retail is not part of your guidance or thought process, is it reasonable to think that if costs in the second half are going to increase 10% to 15% that some of that should show up in average unit retail?

That would be -- you hope so.

But you cannot project that, Richard, because we are just saying to ourselves, well, you don't want to go there because that ignores the fact that maybe people will buy less or maybe in order to get the demand we want, we will have to, as I said, use more marketing levers than we would have last year.

Right.

It is an unknown but --.

Yes.

Yes, it is logical, I agree.

It is logical to say that.

Rob Wilson, Tiburon Research.

Kevin, you mentioned that there is a lot of changes to your supply chain, consolidation of vendors, things of that sort.

I'm wondering how this changes your leadtimes from the time you order the product to the time it arrives at the store?

Has that elongated the leadtimes this year?

No, I mean generally I would say no.

There's certainly categories, categories where we needed to get out in front core basics where we needed to pre-position raw materials or we needed to take advantage of available capacity in a downtime environment.

In those cases, yes, it lengthened our lead time.

But I would say, frankly, if anything, the environment where we are in where we are buying to dollars and, therefore, on higher costs buying fewer units is going to put more premium on responding more quickly in season, and that actually could very well improve our lead time.

Sort of offsetting impacts there, you believe?

Yes, I think in those cases that is our hope is that it would offset.

Thanks, everyone.

I will be around all day if you have other questions.

Thanks.

This concludes today's conference call.

You may now disconnect.