柯爾百貨 (KSS) 2011 Q1 法說會逐字稿

完整原文

使用警語:中文譯文來源為 Google 翻譯,僅供參考,實際內容請以英文原文為主

  • Operator

  • Good morning, my name is Christie and I will be your conference operator today.

  • At this time I would like to welcome everyone to the Kohl's first-quarter 2011 earnings 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, 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 certain 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 but this recording will not be updated.

  • So if you are listening after May 12 it is possible that the information discussed is no longer current.

  • Thank you.

  • I will now turn the conference over to Wes McDonald, Senior Executive Vice President and Chief Financial Officer.

  • Wes McDonald - CFO

  • Thank you.

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

  • I will start off with the financial performance and Kevin will talk about our marketing and merchandising initiatives.

  • I will talk a little bit about our store experience and give you some guidance for the upcoming quarter and year.

  • Kevin will make some closing comments and then we will take your questions.

  • Financial performance; total sales for the first quarter were $4.2 billion this year, an increase of 3.1% over last year.

  • Comparable store sales for the quarter increased 1.3% driven by a 1.1% increase in transactions per store.

  • Average transaction value was up 0.2%, reflecting a 2.9% increase in average unit retail that was largely offset by a 2.7% 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 for the quarter was approximately 53%, an increase of 535 basis points over the first quarter of 2010.

  • Moving on to gross margin, our gross margin rate for the quarter was 38.1%, 3 basis points above last year.

  • This was below the guidance of the 10 to 30 basis point improvement that we expected, primarily due to aggressive clearing of transitional merchandise and low demand for seasonal spring merchandise.

  • For the second quarter we expect our gross margin rate to be flat to last year to up 20 basis points over last year.

  • SG&A increased 3.2% for the quarter, below our expectations of a 5% to 6.5% increase.

  • Credit and store payroll expenses leveraged for the quarter.

  • The remainder of our expense areas -- advertising, DC, corporate, store, other, and IT -- did not leverage for the quarter, but did grow slower than we had planned.

  • We would expect SG&A expenses to increase 3% to 4.5% for the second quarter.

  • Depreciation expense increased approximately 3% for the quarter, primarily due to new stores and remodels.

  • This was significantly better than our guidance due to timing of in-service dates related to our investments in e-sign, e-commerce, and other IT projects.

  • Depreciation is expected to be approximately $167 million in the second quarter.

  • Operating income increased approximately 3% for the quarter to $362 million.

  • Operating income as a percent of sales was 8.7%, flat to the first quarter of 2010.

  • Net interest expense was $29 million this year and $31 million last year.

  • Net interest expense is expected to be $28 million in the second quarter.

  • Our income tax rate was 36.5% for the quarter compared to [37.8]% in the prior year.

  • The reduction was due to favorable settlements of various state tax audits.

  • We expect our tax rate to be approximately 38% in the second quarter and for the remainder of the year.

  • Net income for the quarter was $211 million, $12 million higher than the first quarter of 2010, an increase of 6%.

  • Diluted earnings per share was $0.73 for the quarter, an increase of 14% over first quarter 2010.

  • Moving on to some balance sheet and other metrics.

  • We currently operate 1,097 stores compared to 1,067 stores at this time last year.

  • Gross square footage was 96 million at quarter end 2011 compared to 94 million at quarter end 2010.

  • Selling square footage increased from 79 million at quarter end 2010 to 81 million at quarter end 2011.

  • Moving on to the cash.

  • We ended the quarter with $1.7 billion of cash and cash equivalents, a decrease of $720 million from the prior-year quarter end.

  • The reduction in cash is primarily due to the retirement of $300 million in debt during the quarter and our share repurchases during the current quarter as well as the fourth quarter of 2010.

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

  • Our inventory levels reflect continued strong inventory management.

  • Total inventory was up 5.8% compared to the prior year and inventory per store is up just under 3%.

  • Our capital expenditures were $226 million for the first quarter, approximately $35 million higher than the prior-year quarter due to new stores and increased re-models.

  • Accounts payable as a percent of inventory was 43.8% versus 46.8% last year.

  • The decrease is primarily due to lower inventory turn.

  • And for your model calculations, weighted average diluted shares for the quarter were 290 million and for your modeling purposes I would use 282 million for diluted shares in the second quarter.

  • Moving on to Kevin, who will talk about our sales, marketing, and merchandising initiatives.

  • Kevin Mansell - Chairman, President & CEO

  • Thanks, Wes.

  • As Wes mentioned, comparable store sales increased 1.3% for the quarter.

  • Our apparel businesses were significantly affected by the drop in our seasonal categories.

  • In first quarter 2010 seasonal businesses comped up mid teens in supporting our 7.4% comparable sales increase last year.

  • This year those same businesses were down mid-single digits.

  • Non-seasonal businesses comped the same in both years.

  • From a line of business perspective this year, home reported the strongest comps driven by strength in tabletop, food prep, electrics, and bedding.

  • Men's and accessories also outperformed the Company average.

  • Men's was led by active, dress clothing, and basics while accessories was led by watches and sterling silver jewelry.

  • Children's and women's also achieved positive comps.

  • Children's had strength in toys and infants and toddlers, and strong performers in women's included activewear, updated sportswear, and intimate.

  • Footwear, which has consistently outperformed the Company in recent years, reported a low single-digit comp sales decrease.

  • Women shoes where the strongest category in the footwear business and athletic shoes were the most difficult, driven by drops in the toning category.

  • Our private and exclusive brands continued to increase in penetration as they were 50% of our sales in the first quarter, up approximately 240 basis points.

  • Private brands, such as Sonoma, SO, and Apartment 9 performed very well while exclusive brands, like Fila, Food Network, Lauren Conrad, Simply Vera Vera Wang, and Candies continued their strong double-digit sales increases.

  • From a regional perspective the Southeast region reported the strongest comps for the fifth consecutive quarter.

  • The South Central, Mid-Atlantic, and the West regions reported low single-digit comp increases.

  • The Midwest region reported the lowest comps for the quarter with a negative single-digit comp decline.

  • Our e-commerce business continues to report significant sales increases and is well on its way to becoming a $1 billion business this year.

  • For the quarter, e-commerce sales were $187 million, up 47% over last year.

  • Looking forward we expect an increase in comparable store sales for the second quarter in the 2% to 4% range.

  • We expect all months to be consistent with quarterly average.

  • Moving on to our merchandise initiatives.

  • We are very excited about our new partnership with VF Corporation and becoming the exclusive provider and marketer of their Rock & Republic brand.

  • This contemporary lifestyle brand will launch in men's and women's apparel as well as footwear in spring 2012.

  • The collection may expand into children's, accessories, and home over time.

  • Our team also continues to work diligently on this fall's Jennifer Lopez and Marc Anthony brand launches.

  • Jennifer continues to generate positive news with her appearances on American Idol and her recently released album, and we are very optimistic about the excitement that this publicity will add to the launch this fall.

  • We also plan to invest significantly in the third quarter to support the dual brand rollout.

  • Moving on to inventory.

  • Total inventory per store is down 2% in units and up less than 3% in dollars, while clearance units per store are down approximately 20% in units and approximately 30% in dollars.

  • We continue to closely monitor apparel inflation.

  • Spring apparel product costs are often in the low single digit.

  • As we had indicated previously, we continue to expect significant increases across all apparel categories this fall, approximately 10% to 15% overall.

  • We do have a few data points in denim, men's basics, and children's in the first quarter where out-the-door price increases in the high single digits resulted in unit declines in the low single digits with resulting sales dollar increases of mid-single digits.

  • We have more widespread testing in place to run through June to give us time to react for the back-to-school season.

  • Apparel inflation is clearly real, but we do believe we have had the time, the tools, and processes to work through it effectively and as a result 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 we are committed to maintain that leadership position going forward.

  • Looking forward, we would expect our inventory dollars per store at the end of the second quarter to be up low single digits on a per store basis, similar to our expectations for the year.

  • As we indicated earlier, we expect gross margin for the second quarter to be flat to 20 basis points higher than last year.

  • We believe the increased penetration of private and exclusive brands, some pent-up demand in our seasonal businesses, as well as continued better inventory management will help drive that result.

  • On the marketing front, 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 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.

  • As a result, we continue to focus on adding to our mailable credit card base, particularly in our mild and hot markets.

  • We have recently made changes in our incentives to open a Kohl's charge account that will hopefully attract more occasional shoppers and help them turn into Kohl's brand lovers.

  • Finally, we are pleased with the launch of our new discount program for our 60 and older shoppers at the end of the first quarter.

  • We believe it will be another differentiator from our competitors going forward.

  • Let me turn it back to Wes to touch on our store experience and provide some earnings guidance.

  • Wes McDonald - CFO

  • Thanks, Kevin.

  • We opened 9 new stores this quarter and plan to open another 31 stores in the fall season in September.

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

  • We continue to become more and more efficient in our remodels.

  • In 2007 the average remodel required 12 weeks to complete.

  • In 2011 we expect the average remodel to be complete in 7 weeks.

  • This reduction has reduced the sales drop in our first wave of remodels this year during construction to less than 1%.

  • In the same wave of openings we have experienced a high single-digit lift post re-grand opening, better than any performance we have seen in the past few years.

  • We have added marketing to attract customers throughout the year to our remodeled stores and expect to see the benefit of -- and the majority of that benefit fall in the fall season.

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

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

  • We would expect SG&A to increase 3% to 4.5%.

  • This would result in earnings per diluted share of $0.96 to $1.02 for the second quarter.

  • As a result of our first-quarter performance as well as our second-quarter share repurchase estimate, we are raising our fiscal 2011 guidance from $4.05 to $4.25 per diluted share to $4.25 to $4.40 per diluted share.

  • It is important to note that this guidance does not reflect any future fall share repurchases.

  • I know there has been some question about that, but it does reflect what we expect to repurchase in the second quarter.

  • With that I will turn it over to Kevin for some closing remarks.

  • Kevin Mansell - Chairman, President & CEO

  • Thanks, Wes.

  • In closing, while we weren't happy with our sales performance in the first quarter, we were very pleased to achieve the high end of our earnings goal.

  • We have strengthened our marketing for the second quarter and believe that we will see some pent-up demand for seasonal businesses, which would allow us to achieve a better comp in the second quarter.

  • We continue to be excited about our e-commerce performance as we remain on track to achieve $1 billion in e-commerce sales in 2011.

  • In order to achieve that goal, we will continue to invest in the business.

  • We just purchased this quarter a third e-commerce fulfillment center in Maryland that will be online to support holiday 2011 peak season.

  • Our biggest sales opportunity remains in our mild and hot markets.

  • We are happy to see the Southeast continue to lead the Company in comp sales.

  • We have much more to do to achieve our goals in those markets, but we continue to move forward positively.

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

  • And we see no change in that going forward.

  • Our inventory level also remains in great shape.

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

  • In addition, our merchants and planners reacted to the sluggishness and seasonal sales and we have appropriate levels of inventory in those categories entering the second quarter.

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

  • After being a headwind in 2010, our credit business provided significant leverage in the first quarter as our bad debt expense continues to drop towards pre-recession levels.

  • Leverage and store payroll expenses continue to be driven by sustainable productivity improvements, such as the rollout of electronic signs.

  • And many of our other areas experienced just slight deleveraging with our below plan comp as they actually manage their expense dollars below plan.

  • Finally, I think you can see that our capital structure provided flexibility in a quarter where the top line was less than we had hoped.

  • We believe that our stock is undervalued at its current level and we were more aggressive about share repurchase, buying approximately $445 million of our own stock during the quarter.

  • We would expect to buy at least this amount in the second quarter.

  • 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.

  • I think this is evident as you see our earnings per share increase of 14% over last year as well as the initiation of a dividend.

  • With that Wes and I would be happy to take some questions.

  • Operator

  • (Operator Instructions) Jeff Klinefelter, Piper Jaffray.

  • Jeff Klinefelter - Analyst

  • Thank you.

  • A couple questions, first on SG&A.

  • Wes, in terms of the controls demonstrated an Q1, despite coming in below your sales plan, and given the stepped up marketing efforts for the second half of these -- this launch, the significant Jennifer and Marc launch, can you help us appreciate what sort of levers you have to manage through the sales volatility going into the second half?

  • And then the second one would be on the Jennifer and Marc launch, in terms of the marketing dollars year-over-year are you stepping those up on a net basis?

  • And also, how about the price points relative to average?

  • Thanks.

  • Wes McDonald - CFO

  • Yes, I will take that.

  • You were fading out a little bit, Jeff, so I will take the SG&A question.

  • If you flow through our second-quarter guidance, our guidance for SG&A growth for the year remains at 3% to 4.5%.

  • It may move across quarters as we go throughout the year, but that is our guidance for the year.

  • The levers I see from a SG&A perspective, the store's organization did a great job this quarter with the volatility that we saw in sales by month.

  • They basically leveraged at a flat comp in store organization and got a few basis points of leverage there.

  • So I suspect they will be able to do that going forward as well.

  • The other thing I think that has been a big benefit, kind of mentioned it a little bit on the call, is credit.

  • Last year it was nothing but a headwind with all the legislative changes.

  • This year we are seeing very nice results in our bad debt expenses.

  • People are starting to pay down debt and feel better about themselves and the economy.

  • I suspect those results will continue moving forward and I expect that will provide us some flexibility as well.

  • I am sure advertising productivity will be much better the remainder of the year than it was in the first quarter.

  • I will talk to Jennifer and Marc.

  • That is included in our guidance.

  • It will be a step up in third-quarter spending.

  • We are not going to quantify it, but it's very significant, similar to the launch of Vera Wang that we did a few years ago.

  • And I will let Kevin address the merchandising side of that.

  • Kevin Mansell - Chairman, President & CEO

  • Price points on Jennifer and Mark are positioned to be in our contemporary best category.

  • So for purposes of comparison in women's apparel contemporary best are brands like Simply Vera Vera Wang, so you can think about price points to be pretty much the same as those are.

  • Jeff Klinefelter - Analyst

  • Great, thank you.

  • Operator

  • Dan Binder, Jefferies & Co.

  • Dan Binder - Analyst

  • Good morning, a couple questions.

  • First, I was curious in the tests where you have had some price increases going through with only low single-digit unit declines, has there been any specific regional differences that is worth noting?

  • Kevin Mansell - Chairman, President & CEO

  • I think the short answer is no.

  • I don't have all the specifics on that, to be honest with you, Dan.

  • But I did have a chance to look at the totals and, no, I think it has been pretty consistent.

  • Dan Binder - Analyst

  • Okay.

  • And then the second question if I could.

  • You mentioned on the call that you have made some changes to the card program to attract more users.

  • I was just curious if you could provide a little bit more detail about what you are doing there.

  • Kevin Mansell - Chairman, President & CEO

  • Well, we are not -- I don't want to get into all those details, but we have improved the amount of investment we have made in our stores in order to solicit charge card holders and time it according to our marketing calendar.

  • Then we have also improved the incentive for our customer to sign up for a charge card.

  • So we have given them a better offer.

  • Dan Binder - Analyst

  • Okay, great.

  • Thanks.

  • Operator

  • Adrianne Shapira, Goldman Sachs.

  • Adrianne Shapira - Analyst

  • Thank you, good morning.

  • Wes, maybe on the gross margin I think your original plans have been for flattish for the year but better in the first half versus the back half.

  • Maybe in light of Q1 slightly lower than your guidance, what your thoughts are for gross margin for the year.

  • Wes McDonald - CFO

  • Our thought for gross margin in the year are really unchanged.

  • We consider it be still flat to 20.

  • We were a little disappointed in our performance on gross margin, but given the fact that we ran down mid-teens in seasonal products which will carry a higher margin at this time, I think the performance was pretty good.

  • Sure, one of our competitors reported down margins yesterday and I am sure that is going to be the remainder of the case as other people report.

  • So it's not where we wanted to be but we don't see any reason to change the guidance.

  • Adrianne Shapira - Analyst

  • Great.

  • And then, Kevin, just on the sales, it sounds as if the culprit for sales is really the seasonal swings.

  • Maybe help us think about, as you have obviously grown to be much more of a national player, how it does still seem to be quite -- Kohl's results much more weather sensitive than we would expect.

  • Maybe kind of talk us through.

  • Obviously, we all saw the weather and it wasn't a help but how you are thinking about perhaps mitigating the weather sensitivity going forward.

  • Kevin Mansell - Chairman, President & CEO

  • Sure.

  • I think it's true that over the years our sales have been much more spiked when weather is favorable and less so when weather is unfavorable than I would say the peer group that we compete against.

  • And I think the first quarter last year compared to the first quarter this year is a perfect example of that.

  • I think it's driven by two things, Adrianne.

  • One is we still do have a relatively higher level of stores in the Midwest and Northeast, which of course are most weather sensitive in the spring season in swing periods like March and April.

  • That is the smaller of two factors.

  • The bigger factory is I think our customer is very focused on buying close to need.

  • And so when she doesn't have need, which she really didn't have in March and April, she delays buying.

  • And then we historically have seen that when that need comes she will buy really aggressively.

  • So I think those are kind of the two factors.

  • I would say the buying close to need is the bigger of the two, but the proportionate number of stores by region is also definitely a factor for us.

  • In terms of how we are approaching that for the second quarter, we are really -- we are thinking that we are probably going to get some pent-up seasonal demand, but to be honest that is not factored into our guidance.

  • If we did get that that would be great, but we are looking at the second quarter independently of that.

  • I mentioned that we have strengthened our marketing.

  • I don't want to get into the specifics on that because I think it's more proprietary, but we have made sure that we have included in our marketing calendar, particularly in June and July, ways to drive traffic into our stores more aggressively.

  • Adrianne Shapira - Analyst

  • Great, that is helpful.

  • Then maybe on the e-signage, maybe give us an update where that is -- how the rollout is progressing, what you are learning, what the benefits are, and how you see that helping SG&A going forward.

  • Wes McDonald - CFO

  • We still expect to have around 400 stores by the end of the year.

  • It's working very well in the stores that we have piloted in and that we have initially rolled out towards the end of last year.

  • We are achieving savings that we expect but -- I mean, it will reduce SG&A but it will also increase D&A.

  • So from a P&L perspective we are not really viewing it as a positive at this time.

  • We are going to reinvest the excess savings back into the stores to put more people on the floor, more people in the fitting room.

  • But we are very pleased with the results thus far.

  • Adrianne Shapira - Analyst

  • Okay.

  • And then, Wes, lastly, just if I could ask on the buyback.

  • It sounds as if by Q2 it seems as if you would probably be on track to achieve about $900 million of the buyback.

  • I think at the start of the year we were assuming about $1.2 billion for the year.

  • Are you still on track for the $1.2 billion for the year or could there be some further opportunities given that --?

  • Wes McDonald - CFO

  • We didn't give any -- since you guys all build repurchases into your guidance I was tired of you guys telling everybody what our earnings per share should be, so we updated it for second quarter repurchases.

  • And you are correct that run rate would be about $900 million by the end of the second quarter; however, our guidance doesn't include any future fall repurchases.

  • I would expect us to be more aggressive than the $1.2 billion since we are already going to have roughly $900 million done by the end of the second quarter.

  • But one quarter at a time.

  • Adrianne Shapira - Analyst

  • Thank you.

  • Best of luck.

  • Operator

  • Bob Drbul, Barclays Capital.

  • Bob Drbul - Analyst

  • Good morning.

  • Kevin, I guess the first question is wonder if you could clarify, when you are talking about some of the price tests and price experience so far was the unit decline in inflationary categories was that a same-store number or a total number?

  • Kevin Mansell - Chairman, President & CEO

  • Those are same -- everything we talk about is same-store essentially, so we are -- each of these examples is a little different, Bob.

  • And I don't want to have to go through every single case because we have some children's examples in our private brand, we have some denim examples, we have some basics examples.

  • But the consistency in them so far is that we have had cost increases which haven't been anywhere from I would say low single-digit up to and including low double-digit, which have resulted in lower unit sales per store.

  • But the increase in average unit retail was greater than that drop in units and the resulting sales dollars were very positive.

  • Again, it's a positive -- I would say they are all positive in their examples but they are relatively small when you consider what we will be looking at in fall where price increases are kind of across the whole store.

  • Bob Drbul - Analyst

  • Got it, thanks.

  • Then I have one merchandising question and then one marketing question for you.

  • On the merchandising side, in the stores there seems to be a theme around crochet front woven tops and back tops and handbags and sweaters.

  • Is that a theme that is gaining any traction and something that can carry your women's business here?

  • Kevin Mansell - Chairman, President & CEO

  • I don't know if it can -- first of all, I am stunned by your fashion knowledge always, Bob.

  • You have got me on it.

  • I doubt that it can carry our women's business given the scale of our women's business, but it is a positive trend.

  • So I think you have identified something that has been good in our business for sure.

  • Bob Drbul - Analyst

  • Okay.

  • And then just a marketing question.

  • On the JLo launch would it be possible -- are you picking out your favorite JLo song in terms of what will be playing in the stores or on the commercials when that launch rolls out in the fall?

  • Kevin Mansell - Chairman, President & CEO

  • I am not thinking that Julie Gardner, Head of Marketing, is going to allow me to pick anything out in marketing.

  • So, no -- the short answer to that is no.

  • Bob Drbul - Analyst

  • Right.

  • Thanks very much.

  • Operator

  • Lorraine Hutchinson, Bank of America.

  • Lorraine Hutchinson - Analyst

  • Thank you.

  • Just another question on the price increases.

  • Have you noticed any difference in customer acceptance between good products versus better and best?

  • Kevin Mansell - Chairman, President & CEO

  • There is examples, I would say, in each.

  • So in denim the brand is our more premium brand right now and in children's it's our opening price point private label.

  • Again I would emphasize to you, Lorraine, these are relatively small -- they are important categories.

  • I mean Jumping Beans is the brand I am talking about; it's the most important brand we have in that business.

  • But the scale of these changes are not broad enough that I would jump to any conclusions.

  • It's always good to be positive, though, and it has been positive so far.

  • Wes McDonald - CFO

  • We have more extensive testing that we are doing now that will run through the end of June to allow us to make pricing decisions for back-to-school.

  • And those are in a much broader range of categories in terms of good, better, best as well as lifestyles in terms of classic, modern -- classic and contemporary.

  • So we are basically testing into what you guys hear us refer to from time to time as our 9-box grid, and so we will be able to better draw conclusions at the end of June.

  • Lorraine Hutchinson - Analyst

  • Okay.

  • And then what are you hearing from your vendors about your ability to chase best sellers in the back half?

  • Kevin Mansell - Chairman, President & CEO

  • I think generally chasing bestsellers is difficult always; doesn't matter whether it's a wholesale relationship or it's our own in-house developed relationships.

  • We are more in control of our own private and exclusive brands, so that 50% of our business I think you will hear us generally talk much more confidently about our ability to chase.

  • When you are not in control and you have to depend upon a partner then the execution is going to be more varied I would say.

  • Lorraine Hutchinson - Analyst

  • Thank you.

  • Operator

  • Deborah Weinswig, Citi.

  • Deborah Weinswig - Analyst

  • Good morning.

  • Can you discuss the performance of your remodeled stores in terms of returns and is it in line with your expectations so far?

  • Wes McDonald - CFO

  • It's actually about our expectations so far as I mentioned on the call.

  • We are up about 7% post re-grand opening.

  • It's the biggest lift we have gotten in the last three years for sure.

  • We have marketing programs in place to affect that wave.

  • It could actually kick in here with the credit event in May and then will be running through the remainder of the year.

  • So we have always gotten a pretty good lift in pre-grand opening or, excuse me, post re-grand opening, never this big.

  • But what I am most excited about is we have a good program to touch this customer multiple times throughout the year to get him to become, as Kevin mentioned, move from occasional Kohl's shopper to Kohl's brand lover.

  • That is going to be really critical to getting the lifts.

  • If we get this lift that we have gotten that would exceed -- if that continues throughout the year it would exceed our expectations.

  • We need about a 5% lift to hit where we want to be.

  • Deborah Weinswig - Analyst

  • And then, Kevin, I know you don't want to dig too much into the details in terms of the marketing plan in the second quarter, but can you just elaborate?

  • Is it focusing on your core credit card customer or is it a more broad focus?

  • Kevin Mansell - Chairman, President & CEO

  • No, it's definitely broader.

  • Our credit card business is 50% of our business so it's an important part of what we have strengthened, but we definitely are looking beyond the credit card business.

  • So it's also strengthening vehicles that would be more appealing to the non-Kohl's credit card customer as well.

  • Deborah Weinswig - Analyst

  • Okay.

  • And then lastly can you talk a little bit about the performance of the small format stores and how are you finding availability of real estate?

  • Wes McDonald - CFO

  • The small stores continue to perform better in terms of an ROI, which is really what we are measuring against, because obviously they are not going to be as helpful on the top line because most of them are in smaller markets with less sales potential.

  • Real estate availability remains good.

  • We are excited about some of the smaller stores that we are opening in more suburban markets.

  • Those are going to come next year.

  • But that has given us a lot more flexibility I think than we had in the past, maybe three or four years ago when we were predominantly focused on the 88ks.

  • It's also, I think, a smart strategy going forward as the e-comm business for both us and others increases.

  • That business is an incremental, so as more people shop at home and get it delivered to them at home you might not need as big a footprint going forward.

  • Deborah Weinswig - Analyst

  • Well, thanks so much and best of luck.

  • Operator

  • Michelle Clark, Morgan Stanley.

  • Michelle Clark - Analyst

  • Thanks.

  • Good morning, Kevin.

  • Good morning, Wes.

  • In terms of the seasonal markets, have we seen a bounce back here in May as temperatures have warmed in the Northeast and Midwest?

  • Kevin Mansell - Chairman, President & CEO

  • We don't -- obviously, Michelle, we don't comment on sales in the month in which we are in.

  • But I would stick with what I said to you earlier which is we have got a pretty consistent historical pattern that as sales -- as weather moderates more into the zone where customers are motivated to buy these categories our sales do improve a lot.

  • Michelle Clark - Analyst

  • Okay, that is fair.

  • Then, Wes, in terms of the credit expenses, wondering if you can provide us with a little bit more detail in terms of how much was it down in the first quarter year-over-year and what should we be looking for for the full year?

  • Kevin Mansell - Chairman, President & CEO

  • We don't really get into the detail.

  • I would suspect it will continue to be a positive.

  • We are building more of it into our expectations, but I suspect that the bank card continues we will continue to beat what we forecast internally.

  • But we are not going to get into to the level of detail.

  • I hope to make back what I lost last year in the big picture.

  • Michelle Clark - Analyst

  • That is helpful.

  • Then lastly, maybe touch upon the productivity of hot and mild markets.

  • Where we stand today, how much they are off the Company average, and then the opportunity go forward?

  • Kevin Mansell - Chairman, President & CEO

  • On the mild and hot markets I mean broadly you probably want to think about them as 90% of an average store.

  • They obviously vary by market and age of the market that we are in.

  • So we have still -- as we kind of indicated in the call, we know we still have a hill to climb here where we have 10% more sales that should be coming in every one of those stores across the country.

  • On the positive side, for the fifth consecutive quarter Southeast lead the Company in performance and sales.

  • So we are making headway on the goal of getting those stores to the average level.

  • I think broadly, as it was last year, this is going to be a tailwind for us going forward because we are very focused on that.

  • Michelle Clark - Analyst

  • Great, thank you.

  • Operator

  • Richard Jaffe, Stifel Nicolaus.

  • Richard Jaffe - Analyst

  • Thanks very much.

  • Wes, can you just remind us how many stores you have remodeled and how many stores you think you will accomplish this year and, therefore, how many will be left to remodel?

  • Then if you could comment on marketing spend on dollars you anticipate this year versus last year or at least a percent change.

  • Wes McDonald - CFO

  • I think I will take the remodel question first.

  • I think from a remodel perspective we are going to remodel 100 this year.

  • That is going to be basically our run rate going forward.

  • Over the past 4 or 5 years we have probably remodeled 300 stores, I guess, all-in but it's an ongoing process.

  • So the way we like to characterize it is that every year we are going to remodel 100 stores.

  • So that will mean in any 5-year rolling period half our chain will be either opened in the last five years or remodeled in the last five years, and we think that is a competitive advantage.

  • But the run rate going forward is 100 remodels, approximately $270 million a year in capital.

  • Kevin Mansell - Chairman, President & CEO

  • It's Kevin, Richard.

  • On the marketing, I think the way you want to think about marketing is we are clearly spending and going to spend more marketing dollars than last year.

  • That assumption that we are going to spend more marketing dollars, though, is within the overall guidance on SG&A that we have given you for both the quarter and for the year.

  • The marketing team, which has been very successful at this, have been able to use those dollars to still continue to improve productivity.

  • So our expectation is we still, on the year, will get improvement in productivity.

  • We mentioned two things strengthening marketing in the second quarter, which is in the guidance we have given you in the SG&A.

  • And we have mentioned the launch of Jennifer Lopez and Marc Anthony being a major effort as far as the third quarter, but that is also within the guidance we have given you for the year.

  • Richard Jaffe - Analyst

  • Got it.

  • Thank you.

  • Operator

  • Erika Maschmeyer, Baird.

  • Erika Maschmeyer - Analyst

  • Good morning.

  • Could you talk a little bit more about your strength in home?

  • Is that really more about the recovery or some specific internal initiatives that you have going, like an extension of Simply Vera Vera Wang into that category?

  • Kevin Mansell - Chairman, President & CEO

  • No, I think it's -- first of all, it's a continuation of a trend I would say.

  • As you know, home is a category that is not so susceptible to the big weather swings and so naturally in the first quarter their trend of business sort of continued along a pattern that had been one.

  • That trend is being driven, I think, by just strength broadly in home across the country.

  • I suspect we are not unique in that.

  • But also that team has merchandise initiatives where we are extending brands, the example you gave was Vera Wang, into home that has helped that sales trend as well.

  • Erika Maschmeyer - Analyst

  • Great.

  • And then could you just clarify a little bit more, give a little more detail on how you are thinking about your planning for back to school?

  • You mentioned that you will be able to test price increases through June to help you position yourself.

  • What is your drop-dead date to make a decision?

  • And with your lead times does that vary by category?

  • Also, any update or thoughts on the competitive environment?

  • Kevin Mansell - Chairman, President & CEO

  • The pricing strategy doesn't really vary by category.

  • It's more driven by our marketing calendar and what the timetables are that we have to reach to get into the print schedule and the direct mail schedule and the broadcast schedule.

  • That is why we have been kind of focused on doing these tests from mid-April to early June so that we can make all those dates and use the information we gather from the test and pulling the marketing triggers that need to happen for back-to-school.

  • So I am pretty confident that we will know from the tests those changes we need to make and we will be on a timetable to be able to do it.

  • Erika Maschmeyer - Analyst

  • Any update on the competitive environment things you are seeing?

  • Kevin Mansell - Chairman, President & CEO

  • Overall?

  • Yes, I think it's more of the same.

  • It's a market share fight and it requires us to be aggressive, which is what we are trying to tell you that we are going to be aggressive in the second quarter and the third quarter to continue the trend that we have had.

  • And I don't see that changing at all.

  • This layering on of increased apparel prices is just another element that gets kind of thrown into the mix.

  • We just want to make sure we are fully prepared to understand that.

  • Erika Maschmeyer - Analyst

  • Great, thanks so much.

  • Operator

  • Liz Dunn, FBR Capital Markets.

  • Liz Dunn - Analyst

  • Good morning.

  • I guess just a couple of questions.

  • First, would you buy more than $1 billion this year?

  • Would you consider levering up to buy back stock because you seem to be underlevered relative to the other department stores?

  • Wes McDonald - CFO

  • We don't need to lever up; we are going to refinance the $400 million.

  • We have got a significant amount of cash.

  • We already said we are going to buy $900 million, at least, in the spring.

  • We have ample capacity to do that in the following, which is not giving guidance for fall share repurchases yet.

  • We want to see what unfolds.

  • But we certainly have the capacity to buy back more than $1 billion without adding to our leverage ratio.

  • We want to maintain that 2 times debt to EBITDAR ratio.

  • By refinancing that $400 million we will basically be there at the end of the year and that will give us capacity, assuming continued income growth of adding leverage in the future years as well.

  • Liz Dunn - Analyst

  • Okay, okay.

  • So you wouldn't -- so you may in future years think about optimizing your balance sheet a little bit more by incurring debt?

  • Wes McDonald - CFO

  • We are going to refinance the $400 million that we paid back this year, most likely in the third quarter assuming interest rates remain similar to where they are.

  • We happen to believe that 2 times debt to EBITDAR ratio is the right ratio for us as a company.

  • It provides us a lot of flexibility in a downturn.

  • People seem to have forgotten 2008 already when banks didn't necessarily want to lend to other banks, let alone other people.

  • So I think that is prudent to be conservative.

  • Liz Dunn - Analyst

  • Okay.

  • And then just on your credit share, how high is high?

  • Where do you think it can go from 53%?

  • And then also, I apologize if I missed it, but how much did e-comm add to the comp?

  • Wes McDonald - CFO

  • E-comm added about 150 basis points to the comp.

  • In terms of credit share, it is somewhat affected by the quarters.

  • We don't expect it to be 53% the entire year.

  • In the fourth quarter we get a lot of people shopping, not just people that hold our credit cards.

  • The non-credit card people shop more in the fourth quarter.

  • But we do have markets that are north of 60% and we have plenty of markets in mild and hot markets that are newer that are in the mid-30%s.

  • So we have a lot of opportunity to continue to grow that share.

  • Liz Dunn - Analyst

  • Okay, great.

  • Thank you.

  • Good luck.

  • Operator

  • Bernard Sosnick, Gilford Securities.

  • Bernard Sosnick - Analyst

  • Good morning.

  • Following up on e-commerce, you were up 47% and I am wondering if you could give us a little bit of color with respect to the categories that are strong.

  • E-commerce started well with home and you have been building, I presume, in apparel.

  • Could you just give us color on that?

  • Kevin Mansell - Chairman, President & CEO

  • I don't have it right with me right now, Bernie, but it was very broad.

  • We had big increases across the entire spectrum of our merchandise offering.

  • I think, and I am pretty sure I am right on this, home ran a little faster still than the apparel categories.

  • But I think that was more influenced by the same things that are brick-and-mortar business were influenced by.

  • So the thing that makes us excited about the e-comm opportunity is the consistency of the growth and the breadth of the growth.

  • So it's not in one particular category, it's not being driven by one particular business.

  • It's really across the whole store.

  • Bernard Sosnick - Analyst

  • I can see your confidence there.

  • What I am curious about is whether or not you are running ahead of -- ran ahead of plan in the first quarter and feel very confident about meeting or perhaps beating the $1 billion number.

  • Kevin Mansell - Chairman, President & CEO

  • You never -- you know especially, Wes and I never want to get ahead of ourselves, but I think that at the beginning of the year we qualified our e-comm opportunity for the year as around $1 billion.

  • That would have implied a growth for the year of about 40% roughly.

  • We actually ran up 47% in the first quarter and we have strategies in place we think to actually accelerate the rate of growth.

  • So you don't want to get ahead of yourself again, Bernie, but certainly the actual growth in e-comm in the first quarter was well ahead of plan.

  • Bernard Sosnick - Analyst

  • I am impressed with that.

  • With regard to new store openings, I think you said that the new stores are getting started very well.

  • I know you are not ready to talk about future growth plans, but from what you are seeing does it appear that there is some opening for an acceleration of growth going forward?

  • Kevin Mansell - Chairman, President & CEO

  • Well, I think the way you described it is the right way.

  • We don't want to get ahead of ourselves in talking about next year's number of stores, but what we have tried to reinforce with everybody is this great confidence we have in our small store prototype and concept.

  • And that is built on real results over the last few years.

  • Those results are getting reinforced in the opening of the stores we are having now.

  • We are trying to focus everybody around the fact that we think that concept provides a lot more flexibility and real estate for us.

  • It does give us at least a platform to open up more stores faster.

  • There are a lot of other factors, as you know, as well but the small store concept we think is a really solid concept that we have built up a lot of history on.

  • Bernard Sosnick - Analyst

  • Would it be correct to say that future growth in units would be more likely skewed to the hot and mild markets, because those are your newer ones, and they might start out slower than average but you are encouraged by the developments in the region?

  • Kevin Mansell - Chairman, President & CEO

  • Well, I can't really talk beyond this year, Bernie.

  • And so to talk about 2012 and after and start discussing what percentage of our stores that we are going to open are going to be in mild and hot versus our core markets is definitely getting way ahead.

  • We are definitely very happy with the results and the trend of business in our mild and hot markets.

  • So we are not where we want to be yet.

  • But the progress that the team has made has been very significant over the course of the last two years, so it does start to give us a little more confidence in our ability to have more stores in those markets going forward.

  • Bernard Sosnick - Analyst

  • Thank you.

  • That is very helpful.

  • Operator

  • Mark Miller, William Blair.

  • Mark Miller - Analyst

  • Good morning.

  • So beyond this quarter I want to understand more of your thinking about the new product launch with JLo.

  • Based on your market research do you think your bigger opportunity is to expand the appeal to a broader demographic, so a new customer in the store, or do you anticipate more of the sales lift coming from increased share of wallet?

  • Kevin Mansell - Chairman, President & CEO

  • Just because we do have almost 1,100 stores there are a lot of customers who are aware of Kohl's that are within driving distance of a Kohl's store, so it's going to be a mix of both, Mark.

  • I suspect that though, given we touch so many consumers in America already, that our biggest dollar opportunity is going to be converting shoppers who were maybe infrequent or casual shoppers of Kohl's who haven't believed to date that we have offered enough from a style and aspirational aspect in our assortments to consider Kohl's.

  • We have seen that in the growth of some of the brands like Vera Wang and Dana Buchman and Chaps that we have launched.

  • So I suspect that is probably the bigger opportunity but attracting new customers is also very important.

  • There is a whole bunch of customers who probably don't consider Kohl's a true alternative for their apparel needs that are currently shopping in the mall specialty stores or perhaps in a traditional anchor store in the mall.

  • These kinds brands will start to consider Kohl's.

  • Mark Miller - Analyst

  • So then with that perspective, can you share any more about your marketing plan behind this launch?

  • Because there seems to be a disconnect with your enthusiasm and share repurchase relative to the valuation of the stock.

  • Implicitly, investors don't seem to share that.

  • So given what you have, can you say anymore about how you are going to try to communicate the newness you have in the second half?

  • Kevin Mansell - Chairman, President & CEO

  • The short answer is, no, not really.

  • We are trying to say to everybody this is a very important launch for us.

  • It's the biggest launch the Company has ever undertaken in both the breadth of the categories and, therefore, it's going to get support from a marketing perspective to the greatest degree that we have ever done.

  • And we think it, from a timing standpoint, couldn't be any better for both of the individuals involved in the brand, both Marc and Jennifer.

  • We have been very consistent on the share repurchase.

  • From any perspective, Mark, historical performance we have outperformed so we have a track record.

  • Looking at opportunities to grow our earnings in the future; we have had a theme with investors of making sure they understand our earnings per share growth is more solid, we think, than other retailers because it's fundamentally built on a number of factors.

  • Not just top-line growth but margin expansion, SG&A leverage, share buyback, and from a total shareholder return perspective a dividend that we hope to grow over time.

  • So I think Wes has been as aggressive as he can been in saying that when our share price is $53 or $54 we are going to be buying back shares very aggressively.

  • Wes McDonald - CFO

  • Our pace went from $1.2 billion to $1.8 billion if you want to do the math.

  • So I think if the stock stays where it is -- that is what we think today if the stock stays where it is we will be even more aggressive.

  • Kevin Mansell - Chairman, President & CEO

  • Put it another way, if you think about it in looking backwards, in the last two quarters we have bought back almost $1.5 billion of our own shares.

  • So we are telling people that it is clearly undervalued in our estimate based on our future growth expansion and we are trying to act accordingly.

  • Mark Miller - Analyst

  • Okay, that is clear.

  • Thanks.

  • Operator

  • David Glick, Buckingham Research.

  • David Glick - Analyst

  • Thank you.

  • Most of my questions have been answered.

  • Just a quick follow-up, Kevin, on the JLo launch.

  • I am wondering how you look at this with respect to your productivity in the West and the Southeast where you are underdeveloped relative to the rest of the chain and whether you think these brands will have a particular appeal in those regions and a net positive impact on your overall comp.

  • And then secondly when might we start seeing the merchandise in your stores?

  • Kevin Mansell - Chairman, President & CEO

  • Yes, we are definitely -- we suspect that those two brands will even outperform further in the markets in which we have the most opportunity to grow our per store productivity, which are the mild and hot markets.

  • Just the style aesthetic of the two brands and, of course, the two personalities involved in the two brands are really on target for that consumer in a huge way.

  • We also have historical perspective to look back at which is how do we perform in contemporary best brands in those markets and they totally outperform.

  • So I think it gives us a lot of confidence from that standpoint.

  • Wes McDonald - CFO

  • I forget, what was the second part of your questions?

  • David Glick - Analyst

  • When are we going to start seeing the merchandise?

  • Kevin Mansell - Chairman, President & CEO

  • You should see it very late in August, early in September.

  • The planned target launch is mid-September.

  • David Glick - Analyst

  • Okay.

  • And then just a quick follow-up for Wes.

  • Just to put into context these seasonal businesses and the trend impact on your overall comp, what percent of your business in the spring do the seasonal categories represent?

  • Kevin Mansell - Chairman, President & CEO

  • It's Kevin.

  • It's roughly -- in the spring season, I was going to say in the first quarter.

  • In the first quarter it was roughly around 20% of the business, a tad less, but roughly about 20% of the business.

  • I don't actually have the answer for you in terms of last year for the spring.

  • David Glick - Analyst

  • Obviously higher.

  • Kevin Mansell - Chairman, President & CEO

  • Second quarter would be higher, yes.

  • David Glick - Analyst

  • Okay, great.

  • Thank you very much.

  • Good luck.

  • Operator

  • Ken Stumphauzer, Sterne Agee.

  • Ken Stumphauzer - Analyst

  • Good morning, guys.

  • Just a couple of quick questions.

  • I want to follow up on the price elasticity questions you guys were answering earlier.

  • I am just curious, when you look at the actual sales growth on the items in which you took price increases, did they accelerate from the prior quarter or are you just saying that you did not see a sales decline?

  • Wes McDonald - CFO

  • No, they accelerated in all the cases that we have.

  • Ken Stumphauzer - Analyst

  • Okay.

  • Secondly, as far as the e-commerce trajectory goes, do you guys feel that that might slow, say, when we get to 4Q and you guys are anniversarying the kiosk installations?

  • Or do you think that is not an issue?

  • Wes McDonald - CFO

  • No, it's a non-issue.

  • We did $30 million for the fall season in kiosks.

  • Kevin Mansell - Chairman, President & CEO

  • I mean I think actually -- and again you never want to look forward too far.

  • But fundamentally the building blocks we have put in place around fulfillment, because we have now automated completely our second fulfillment center and have now opened and will have running our third fulfillment center for this holiday, give us the ability to service the customer to a much greater degree, which gives our marketing team the ability to be much more aggressive in terms of how they reach out to the customer.

  • Ken Stumphauzer - Analyst

  • The implication being is you guys had stock outs in the e-commerce (multiple speakers)?

  • Kevin Mansell - Chairman, President & CEO

  • Not call it stock outs.

  • It's just we -- to put it simply we held back our marketing to the online customer because we really didn't feel we had the capacity and fulfillment to serve them properly.

  • We want to be right there in terms of being able to service the customer always and so we were never going to let marketing get ahead of that.

  • So we really held back marketing and to some extent merchandising.

  • That will not be the case this fourth quarter.

  • Ken Stumphauzer - Analyst

  • That is helpful.

  • And then just one last question.

  • Trying to scale what the potential contribution could be from Marc Anthony and JLo, could you guys give us an idea maybe something like Vera Wang, how big it was at launch or what it contributed to the comps?

  • Any kind of scaling or parameters?

  • Kevin Mansell - Chairman, President & CEO

  • I am not being smart when I say this, but the short answer is no.

  • We don't provide detail on individual brand volume.

  • I have tried to put it in the context for everybody that just because this is both a women's and a men's at the same time and the breadth of the categories is the greatest number of categories we have ever done, we expect it to be the biggest impact.

  • Beyond that there is really nothing to say, Ken.

  • Ken Stumphauzer - Analyst

  • All right.

  • Thanks, guys.

  • Best of luck.

  • Operator

  • Wayne Hood, BMO Capital Markets.

  • Wayne Hood - Analyst

  • Continuing on this topic of e-commerce a second, from a marketing standpoint I was curious how you think you will respond to the growing free shipping programs that are in the marketplace on lower minimum orders for back-to-school and holiday.

  • And what dollar level of order is it no longer profitable or dilutive to returns on capital when you think about that segment of e-commerce and how you increase share?

  • Kevin Mansell - Chairman, President & CEO

  • Well, at a high level, Wayne, we know that shipping is going to become a bigger and bigger tool used to drive online business.

  • We are prepared for that and we have got it in our thought process in terms of how we go to market, how we are going communicate to the consumers, and we recognize that.

  • Beyond that to get into the detail of how the P&L breaks down and at what free shipping is good and at what point it's not as good, that is the kind of level of detail we wouldn't want to get into.

  • But all of this is in our thinking on our online business.

  • We know we are not in a vacuum here and we need to be very competitive in order to continue to grow the business.

  • Wayne Hood - Analyst

  • Okay.

  • Two other questions and I will get off here.

  • As you approach the back-to-school season what kind of out-the-door price point spread on key branded product do you expect to achieve when you take into account the cash rewards or credit offer?

  • In other words, everybody is going to come at the same branded price but you can show a better value proposition with the cash rewards and credit.

  • At what level spread do you think you can get out the door compared to your competitors to take share?

  • Kevin Mansell - Chairman, President & CEO

  • It's almost impossible, honestly, to answer that.

  • We have tried -- the research that we have done on our average unit retails historically have pretty consistently shown, not ours but secondary research, that Kohl's price points are below the department stores we compete against and clearly way below the specialty stores in the mall.

  • We want to keep that spread, so we want to keep that value proposition.

  • Because as I said in our marketing comments, our number one customer concern today still remains that she wants to and needs to stay within her budget.

  • So we know that.

  • Wayne Hood - Analyst

  • Okay.

  • Wes, just you, I guess I was curious when you think about Texas, the Pacific Northwest, and California, those less productive stores, I know it's still early with Capital One but did they see an improvement in the approval rate and credit penetration so that gives you some confidence as Capital One flows on more programs that you can even accelerate that penetration in the back half of the year?

  • Wes McDonald - CFO

  • That is a great question, Wayne.

  • We made a few changes thus far that has raised our approval rates roughly 300 basis points.

  • Wayne Hood - Analyst

  • Okay.

  • Thanks, guys.

  • Operator

  • Dana Telsey, Telsey Advisory.

  • Dana Telsey - Analyst

  • As you think about the cost increases, besides raw materials what is happening with the other buckets in terms of labor and transportation, and how are those being managed?

  • If you think beyond JLo, is there another new product initiative that we should be watching for in 2013?

  • Thank you.

  • Wes McDonald - CFO

  • From a labor and transportation cost, we just finished our ocean freight negotiation and we feel pretty good about the outcome of those.

  • I think there will be modest impact and not a big deal from that perspective.

  • Labor rates, we have -- especially in apparel, our production is less China-centric.

  • We do significant business in Indonesia, Vietnam, Bangladesh, some other countries, Central America, various countries down there.

  • So we have been able to mitigate somewhat the labor pressures in China, but the increases are the majority -- like you mentioned all about the raw material increases.

  • Hopefully, some of the things we are seeing in futures will play out so spring will be a little better than what fall is looking like.

  • But that is a little early to tell.

  • Kevin Mansell - Chairman, President & CEO

  • On the brand side, Dana, you know obviously we have talked a lot about Jennifer and Marc's new brand launch.

  • We do have a new brand launch for next spring which we think could be a blockbuster because while it's a lifestyle brand it's fundamentally anchored in our denim category which is the biggest single category that we sell in our store.

  • And we think that that could be a big factor of our sales next year.

  • We know that brands are important to our growth and so we are working hard at developing new strategies, both for next year and for 2013.

  • I would say that we believe that the whitespace that is still available for us is definitely in the modern and contemporary area.

  • We have introduced, especially with Jennifer and Marc and Rock & Republic coming, a lot of contemporary brands coming and so we are probably more focused in the modern area, the modern category.

  • So if you think about our lifestyles as classic to modern to contemporary, modern has a lot of room to grow.

  • And so we are trying to put a lot of attention on that.

  • Dana Telsey - Analyst

  • Thank you.

  • Operator

  • There are no further questions at this time.

  • Wes McDonald - CFO

  • Thanks, everybody.

  • Operator

  • This concludes today's conference call.

  • You may now disconnect.