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Operator
Good morning.
My name is Brandy and I will be your conference operator today.
At this time I would like to welcome everyone to the Kohl's quarter-three 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, will, should, anticipates, plans, or similar expressions to identify forward-looking statements.
Such statements are subject to certain risk and uncertainty which could cause Kohl's actual results to differ materially from those projected in forward-looking statements.
Such risk 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/A, 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will not be updated; so if you are listening after November 10 it is possible that the information discussed is no longer current.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.
Mr.
McDonald, please go ahead.
Ladies and gentlemen, please stand by.
We are experiencing technical issues.
Thank you for your patience.
Wes McDonald - Senior EVP, CFO
Okay.
Sorry about that technical difficulty there.
I'll start again with financial performance.
Total sales for the quarter increased 3.8% to $4.4 billion.
Comparable store sales for the quarter increased 2.1%.
Average transaction value increased 5.2% and reflects a 9.5% increase in average unit retail and a 4.3% decrease in units per transaction.
Number of transactions per store decreased 3.1%.
Year-to-date sales have increased 3.5% to $12.8 billion and comparable store sales have increased 1.7%.
Average unit retailed increased 6.2% and units per transaction decreased 3.9%, resulting in an average transaction value increase of 2.3%.
Number of transactions per store decreased 0.6%.
Kevin will provide more color on our sales by region and line of business in a few minutes.
Our credit share was 57% for the quarter and is 55% for the year, an increase of approximately 430 basis points over the third quarter of 2010 and approximately 540 basis points over the first nine months of 2010.
Our gross margin rate for the quarter was 38.6%, 10 basis points higher than the third quarter of last year and at the high end of our expectations.
Year-to-date, our gross margin rate increased almost 20 basis points to 39.1%.
Our fourth-quarter expectations are consistent with our previous expectations for the third quarter, down 10 basis points to up to 10 basis points over last year.
SG&A increased 1.1% for the quarter, below our expectations of a 1.5% to 3% increase.
More importantly, SG&A as a percent of sales leveraged 66 basis points for the quarter.
The most significant leverage came for our credit and store organization.
Advertising did not leverage due to planned incremental spending to drive customer traffic and support the Jennifer Lopez and Marc Anthony launches.
We would expect SG&A expenses to increase 5% to 6% for the fourth quarter due in part to increased advertising spend to drive holiday traffic.
Depreciation expense was $202 million in the third quarter this year and $207 million in the third quarter of last year.
Depreciation is expected to be approximately $202 million in the fourth quarter.
Operating income increased 16% for the quarter to $415 million.
Operating income as a percent of sales was 9.5%, 103 basis points higher than the third quarter of 2010.
Year-to-date, operating income increased 10% or $122 million to $1.4 billion.
Net interest expense was $75 million this quarter, down $4 million compared to the prior-year quarter.
The decrease is primarily due to debt repayments in March of this year.
Interest expense is expected to be $82 million in the fourth quarter.
Our income tax rate was 37.8% for the quarter compared to 36.5% in the prior-year quarter.
The increase was partially due to lower trust and municipal income in 2011.
Additionally, we favorably resolved some state tax audits last year which lowered the 2010 effective tax rate.
We expect our tax rate to be approximately 37.75% in the fourth quarter and 37.4% for the fiscal 2011 period.
Net income increased 20% to $211 million and diluted earnings per share increased 40% to $0.80 over the third quarter of last year.
Year-to-date net income increased 14% to $711 million or $2.56 per diluted share, a 26% increase over last year.
Moving on to the balance sheet and some model metrics, our square footage -- we ended the quarter with 1,127 stores, 38 more than at the end of the third quarter of 2010.
Gross square footage at quarter end was 98 million square feet, 3 million higher than October 2010; and selling square footage increased 2 million to 82 million.
Moving on to cash, we ended the quarter with $760 million of cash and cash equivalents, a decrease of $1.7 billion from the prior-year quarter end.
The reduction in cash is primarily due to share repurchases.
We have repurchased approximately $3 billion of stock since the third quarter of 2010.
The cash equivalents are in money market funds, CDs, and commercial paper.
We ended the quarter with $4.1 billion of inventory, a 2% increase over the prior-year quarter.
Inventory per store is down 1%.
Kevin will talk more about inventory management in a few minutes.
Capital expenditures were $755 million for the first nine months of 2011, approximately $80 million higher than the prior year due to new stores, increased number of remodels, the opening of our third e-commerce fulfillment center, and exercise of a purchase option in our Texas call center lease.
Accounts payable as a percent of inventory was 50.4% versus 52.7% last year.
The decrease is primarily due to vendor payment initiatives and lower inventory turn.
From a capital structure perspective, we repurchased 15 million shares during the third quarter and have repurchased approximately 57 million shares since reactivating the buyback program in the fourth quarter of last year.
All of these purchases were made pursuant to 10b5-1 plans.
Weighted average diluted shares were 265 million for the quarter.
For your modeling purposes, I would use 253 million diluted shares for the fourth quarter and 272 million shares for the year.
This assumes $300 million in share repurchases in the fourth quarter at an average price of $53 per share.
Additionally, if you would like to update your models with restated numbers for the fourth quarter of 2010, you can now back into the numbers from the restated filing and today's results.
For your benefit, last year in the fourth quarter restated SG&A was [one] $173 million; depreciation and amortization was $189 million; net interest expense was $71 million; and net income was $494 million.
Diluted earnings per share were $1.66.
Sales and margin were not impacted by the restatement.
Earlier this week our Board approved a quarterly dividend of $0.25 per share.
The dividend is payable on December 28 to shareholders of record at the close of business on December 7.
In October, we issued $650 million of long-term debt with an effective rate of 4.07% which is approximately 250 basis points lower than our other existing debt.
We currently plan to use the proceeds for share repurchases and general corporate purposes.
With that, I will turn it over to Kevin.
Kevin Mansell - Chairman, President, CEO
Thanks, Wes.
As Wes mentioned, comparable store sales increased 2.1% in the third quarter.
After a challenging August we were pleased to report sales in both September and October at the high end of our guidance.
From a line of business perspective, children's reported the highest comp sales for the quarter on strength in both boys and girls.
Men's also outperformed the Company average and was led by dress shirts and basics.
Home, accessories, and women's were generally consistent with the Company average for the quarter.
Notable strong performers were small electrics in home; watches and fashion jewelry in accessories; and active and updated sportswear in women's.
Footwear was the only line of business to report a decline in comp sales for the quarter, as high double-digit increases in women's shoes were more than offset by declines in athletic shoes.
We launched the Jennifer Lopez and Marc Anthony brands in mid-September.
The brands launched in all stores and online concurrently and across multiple departments, making it the largest launch in our history in breadth of content.
It also met our very aggressive sales goals and exceeded the size of any previous brand launch by a substantial degree in sales.
Both brands are performing very well, and we are excited by the newness that they bring into the holiday season.
Our private and exclusive brands continued to increase in penetration, as they were approximately 51% of our sales in the third quarter, up approximately 270 basis points.
In our private brand portfolio, Apt.
9, SO, and Urban Pipeline all reported double-digit increases as did Fila Sport, Food Network, Lauren Conrad, Mudd, and Simply Vera Vera Wang in our exclusive national brand portfolio.
From a regional perspective, the Southeast reported the strongest comps.
The Midwest and South Central regions were consistent with the Company average.
The Northeast and mid-Atlantic regions slightly underperformed the Company average but were positive.
The West was the only region to report a decline in comparable store sales.
Our e-commerce sales year-to-date have surpassed $0.5 billion and remain on target to reach our goal of $1 billion.
During the quarter, we opened our third EFC, a 1 million square foot facility in Maryland.
We are planning a fourth EFC in Texas which we expect to open in the summer of 2012.
Looking at inventory management, we continue to be very pleased with our results.
As Wes mentioned, gross margin as a percent of sales increase 10 basis points for the quarter.
Growth in our private and exclusive brands continues to be a key driver of the gross margin improvement.
These brands now account for over 50% of our sales.
As recently as 2004, private and exclusive brands were only 25% of total sales.
Clearly our customers recognize and appreciate the value and style that these Only at Kohl's brands offer.
As we have been saying for several months, apparel costs have increased approximately 10% to 15% for the fall season, but we have been successful in navigating through that change.
The impact of apparel cost changes resulted in an increase of 9.5% in average unit retail, more modest unit per transaction declines, and a resulting increase of 5.2% in average transaction value.
This was better than our planned 1-to-1 levels of elasticity.
Looking at inventory levels, merchandise content, and receipt flows, we are very pleased in our inventory management results and are very comfortable in our plans going into the holiday season.
Total inventory per store is down 8% in units and 1% in dollars.
Clearance units per store are up slightly, but account for less than 3.5% of our total units on hand.
We would expect our inventory dollars per store at the end of the fourth quarter to be up low single digits on a per-store basis.
From a marketing standpoint, last week we announced an integrated marketing campaign designed to maximize the brand (technical difficulty) sales through the holiday season.
The marketing will continue to emphasize our unprecedented value, our industry-leading hassle-free return policy and no-exclusion sales, and our unbeatable savings opportunities like Kohl's Cash, Power Hours and Early Birds, Kohl's charge benefits, and of course our Only at Kohl's brands.
Our holiday marketing campaign will also include a number of new features.
Our Love to Give, Happy to Save campaign focuses on planning, shopping, and sharing in the excitement of the holiday season.
For the first time in our history our stores nationwide will open at 12 a.m.
on Black Friday and will be open for 24 continuous hours.
Kohl's.com includes new navigation features to showcase things like What's New, Best Sellers, and Customers' Top Rated.
We have invested in additional digital media marketing to help us reach more targeted audiences, while at the same time we have increased our broadcast investment for broad reach as well.
From a store perspective we opened 31 new stores this quarter bringing our current store count to 1,127.
Approximately 75% of the 40 new stores that we opened in 2011 were small stores, stores with less than 64,000 square feet of retail space.
We also completed the remodel of our 100th store during the quarter.
Not only do these remodels result in a fresh and pleasant shopping experience for our customers, they also result in higher customer satisfaction scores and payroll productivity improvements.
We have added marketing to attract customers to remodeled stores and are now targeting a mid-single digit lift in sales following our remodels.
We are currently experiencing low single-digit lifts; but much of our incremental marketing for remodels is ahead of us in the fourth quarter.
We do expect to remodel another 100 stores in 2012, but to slightly reduce new store openings.
We now expect to open approximately 30 stores in 2012, 8 in the spring season and 22 in the fall season.
90% of these stores will be small stores.
In closing, we weren't happy with our sales performance in the third quarter in total.
But we definitely like the improvement that came in September and October.
We are pleased to have achieved our earnings goals as all areas of the Company contributed to the success.
We have strengthened our marketing for the fourth quarter, adding approximately $30 million to our standing, and have the benefits of the biggest brand launches in our Company's history, which we believe will allow us to continue to improve our sales performance in the fourth 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, our third e-commerce fulfillment center in Maryland is online to support the holiday peak season.
We are also very happy with our performance in Texas this quarter as we added that state to our marketing intensification initiatives.
We have much more to do to achieve our goals in these high, hot, and mild markets, but we continue to move forward positively.
Our increased penetration of private and exclusive brands, along with very strong inventory management, continue to benefit us on our gross margin rate; and we see no change in that going forward.
Our inventory remains in great shape.
Inventory levels are in better position than our plans.
In addition, our merchants and planners reacted to demand in seasonal sales.
We have very appropriate levels of inventory in those categories entering the fourth quarter.
We continue to make progress on the SG&A line.
After being a significant headwind in 2010, our credit business provided significant leverage in both the current quarter and on a year-to-date basis as our bad debt expense continues to drop towards prerecession levels and late fee income was restored to more normalized levels.
Leverage in the store payroll expenses continues to be driven by sustainable productivity improvements such as the rollout of electronic signs, now in 250 stores.
Finally, I think you can see that our capital structure continues to provide a great deal of flexibility.
We believe that our stock is certainly undervalued at its current level, and we were more aggressive about share repurchase, buying approximately $750 million of stock during the quarter versus our planned $500 million.
We would expect to buy back at least $300 million worth of stock in the fourth quarter.
We are committed to being good stewards of capital and 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 40% over last year and the $207 million of cash dividends that were paid so far this year.
With that, let me turn it over to Wes to provide our earnings guidance for the fourth quarter.
Wes McDonald - Senior EVP, CFO
Thanks, Kevin.
For the fourth quarter, we would expect total sales to increase 4% to 6% and comparable store sales to increase 2% to 4%.
We expect November to be toward the low end of our comp guidance; December to be toward the high end of the guidance; and January to be near the middle.
Gross margin as a percent of sales is expected to be between down 10 and plus 10 on a basis point level versus last year.
As I said earlier, SG&A expenses are expected to increase between 5% and 6%.
Including estimated share repurchases of $300 million we expect earnings per diluted share to be $1.93 to $2.04 for the fourth quarter.
As a result of our third-quarter performance and our fourth-quarter assumptions, we are raising our fiscal 2011 guidance from $4.34 to $4.49 per diluted share to $4.41 to $4.52 per diluted share.
With that we would be happy to take your questions at this time.
Operator
(Operator Instructions) Adrianne Shapira, Goldman Sachs.
Adrianne Shapira - Analyst
Thank you.
Kevin, just a few questions.
You spoke about the recent improvements in sales trends, and I am just wondering.
A few months ago we had talked about the lack of loyalty among non-credit card customers.
What are you seeing in terms of where the sales improvement is coming from?
Is it greater share from your loyal credit card customers, or the less loyal customers are coming back?
Kevin Mansell - Chairman, President, CEO
Well, share on credit rose during the quarter, as it has been all year.
So certainly our credit card customers have responded really favorably to the new initiatives.
I think we see that mostly in credit card customers who are less frequent shoppers, shopping a little more over the period of the quarter.
But credit definitely led the performance for the quarter.
Wes McDonald - Senior EVP, CFO
Having said that, we did see improvement in the non-credit card customers versus how they did in the first two quarters.
It is still negative, but it is trending in the right direction.
Adrianne Shapira - Analyst
Great.
Then just talking about the comps cadence, Wes -- that was helpful to walk us through the monthly performance.
November being at the low end, is that a function of a year-ago comparison?
Or maybe shed some light in terms of what sort of trends you are seeing out there currently.
Kevin Mansell - Chairman, President, CEO
This is Kevin.
I think just generally historically on a trend basis we have seen the holiday business come later and later each year.
And we saw it also at back-to-school; we saw it again this year at back-to-school, where a big piece of back-to-school shopping occurred in September instead of in August.
So I think from the perspective of when the businesses come, it is going to come; we just kind of expect it to be a little later.
So it isn't so much about the year-over-year comparison.
There (multiple speakers)
Wes McDonald - Senior EVP, CFO
Yes, you also get an extra selling day between Thanksgiving and Christmas in December, which tends to be worth at least 1 point in comp.
So pretty comfortable with the prediction that December is going to be the best month of the quarter.
Adrianne Shapira - Analyst
Great.
Then just on maybe, Kevin, give us your insight in terms of the landscape out there.
Obviously we always know it is competitive heading into the holiday season, but there is a fair amount of management shifts at some of your peers, rumblings of EDLP pricing out there.
What are you seeing out there?
How does this compare to past seasons, and how you plan to respond?
Kevin Mansell - Chairman, President, CEO
I mean I think generally, just like last year we look at our customer and she continues to be pressured by many of the things that you are well aware of in her life, and so how she spends her money she is very thoughtful about.
And value is really, really important to her.
So as a result we just think providing her better value and communicating that is really important.
That is why we made the decision to invest more into marketing in the fourth quarter so that we could take a real leadership position from a savings perspective for the holiday.
I think from a competitive perspective I don't know that there is anything new to talk about there.
I am really happy, Adrianne, in our inventory levels.
I think that is really important, because coming into the holiday season we wanted to be really well managed in inventory.
So coming in with less dollars of inventory per store I think is in a really good place for us to be, because it allows us to flow freshness into our assortments in November and December.
And that definitely was a very big objective of ours.
Adrianne Shapira - Analyst
Thank you.
Best of luck.
Operator
Lorraine Hutchinson, Bank of America.
Lorraine Hutchinson - Analyst
Thanks, good morning.
Just wanted to see if you could address the SG&A growth rate in the fourth quarter a little bit further.
I know you added $30 million of incremental marketing.
But what are the other incremental costs to drive that rate higher than what we have seen over the past couple of quarters?
Wes McDonald - Senior EVP, CFO
Well, I think if you back out the $30 million from the advertising it is more like 2.5% to 3.5%, which if you remember back in February we guided for the year at 3% to 4.5%, so we are basically doing better than that -- or projecting doing better than that, absent the advertising in the fourth quarter.
We always are conservative.
We hope to do better.
Also, if you also recall in the third quarter last year we had a one-time very large headwind in credit of about $50 million with late fee reductions, as we changed some things to comply with the legislation.
So third quarter was always planned to be the lowest improvement of the year, and you saw that in our actual results.
So I don't think there is anything else other then advertising that is really higher than our trend has been.
And perhaps we will have some upside in credit; that remains to be seen.
Lorraine Hutchinson - Analyst
Can you quantify the benefit that you've gotten from credit so far this year and expectations that that could continue?
Wes McDonald - Senior EVP, CFO
Well, we got at least the $50 million back from last year, because that was, as I mentioned, a one-time thing.
And we got some benefits from continued late fee -- excuse me, continued bad debt expense improvement.
We haven't really quantified that.
I suspect from a bad debt perspective it will continue.
The effect from credit in the fourth quarter won't be as great as it was in the third quarter, but it also wasn't as great in the spring season either.
So the third quarter I think is kind of the high mark of our contribution from credit given the year-over-year comparisons.
I suspect bad debt going into 2012 will continue to improve, but at a much lower rate.
Lorraine Hutchinson - Analyst
Thank you.
Operator
Deborah Weinswig, Citigroup.
Deborah Weinswig - Analyst
Congratulations on a great quarter.
Wes, you have now had two quarters in a row where expenses came in better than expected.
Can you talk about some of the primary drivers behind that?
Wes McDonald - Senior EVP, CFO
As I mentioned this quarter for sure, credit was a large driver and has been in the spring.
I think the other major driver has been store payroll expenses.
They have done a phenomenal job of managing to our sales results, which have been a little bit more volatile honestly than they normally are, which is pretty volatile as it is, and have been basically leveraging at a flat comp.
So I am very encouraged by that.
I think we will be able to continue to do that especially as we roll out electronic signing the remainder of the year and into next year.
The distribution centers have also done a good job.
Their leverage for the quarter and for the year, even as our e-commerce business grows, which is a much higher cost.
Advertising as we mentioned, we invested more especially in the fall and hope to see that in improved sales results.
We are not counting on that, as we give you guys the guidance.
We have some room to do a little bit better on corporate.
But we are investing in some key areas in e-commerce and product development which we think is important for the longer term.
So I think going forward it is going to be mainly stores and credit and DCs that provide the benefit.
Deborah Weinswig - Analyst
In terms of -- if we look at the progression of sales throughout the quarter, maybe when we ask the question -- has the halo effect from J.
Lo and Marc Anthony been greater than expected maybe in September and October?
Kevin Mansell - Chairman, President, CEO
I think generally probably no.
We had high expectations, so I guess a little bit depends on where you are coming from.
But we did have high expectations that it would drive more traffic.
I think also as you remember, Deb, we had increased our marketing investment beginning very late in September around the launch, of course, and then more so in October.
So I think that definitely was a tailwind that was something that propelled more visits as well.
So like any other time it is typically a combination of factors that changes things.
And I think it's the combination of newness along with an incremental investment in marketing to drive more traffic that got us a little bit better results.
Deborah Weinswig - Analyst
Okay.
Then last question.
You talked about your store plan for 2012.
As we look at the 30 stores, are those going to be more fill-in locations?
And will those be ground-ups or takeovers?
Wes McDonald - Senior EVP, CFO
They are pretty much all fill-in locations.
We don't have any really new markets.
It depends on how you define fill-in.
Some of them are in a metro area, but probably in the exurbs.
In terms of takeovers versus ground-up, I don't have the exact number in front of me, but I think roughly a third are takeovers.
Kevin Mansell - Chairman, President, CEO
It's definitely higher -- there are more takeovers next year than we have in our current portfolio, that is for sure.
Deborah Weinswig - Analyst
Great.
Thanks so much and best of luck this holiday season.
Operator
Bob Drbul, Barclays Capital.
Bob Drbul - Analyst
Hi, good morning.
Wes, just had a couple questions.
On the gross margin for the quarter, on the e-commerce growth, has the free shipping had a major impact or drag on your gross margin?
And what are the assumptions in the fourth quarter with the big volume you expect?
Wes McDonald - Senior EVP, CFO
Yes; I think short answer is yes.
We have increased -- if you look at merchandise margins year-over-year, before you take into the cost of shipping, we have done a nice job of increasing that as we have increased our penetration of apparel.
I think some of you guys know that our home business is a bigger part of e-commerce than it is in brick-and-mortar -- roughly a third of our e-commerce business versus under 20% of our total business.
But free shipping is definitely a drag.
It's been a drag all year.
It will be a drag in the fourth quarter.
But that is not any different than last year, quite honestly.
In the fourth quarter pretty much between Thanksgiving and Christmas it is free shipping every day for us and most of our competitors.
And so that wouldn't be any different year-over-year.
Bob Drbul - Analyst
Got it.
Kevin, I think in your comments you talked about -- on the footwear business and I think the women's business has been generating double-digit comps.
Within the J.
Lo line the platform wedge mid-calf boots and the over-the-knee boots seem to be doing pretty well.
Are you having any trouble keeping them in stock?
Kevin Mansell - Chairman, President, CEO
Bob, do you want a job in merchandising and footwear?
Because I am impressed with your intuition when it comes to product.
I don't think so.
I think generally women's footwear has had a really good trend all year; and they have just been trend-right on product.
For us it's very fortunate that we are, because we have had to face a drag from last year, as you remember, in the toning business in athletic shoes.
While that pretty much goes away post the fourth quarter, and it is certainly less important in the fourth quarter, the positive improvement in our women's casual interest and dress has been a great offset to that.
So that team is just doing a really good job on product.
Wes McDonald - Senior EVP, CFO
Yes, I think boots overall are up over 30% for the quarter, so it is definitely a boot year so far.
Bob Drbul - Analyst
Got it.
When you look at the AUR expectations, do you think that that peaked in terms of the 9.5% for the quarter?
Or how should we think about that within the fourth quarter?
Kevin Mansell - Chairman, President, CEO
I'm thinking AUR in the fourth quarter is going to be up similar kinds of levels, whether it is exactly 9.5%, I don't know about that.
But high single digits I would expect, because the cost of our product that we'll be selling essentially are up in that 10% of 15% range.
So we are expecting average unit retails to be up probably high single digit.
We have done better than our expected elasticity.
Units are not down 1-for-1, so that is a very good thing.
But I would expect units to be down in the fourth quarter as well, just not as much as retail is up.
Bob Drbul - Analyst
Great.
Thanks very much.
Operator
Michelle Clark, Morgan Stanley.
Michelle Clark - Analyst
Thanks.
Good morning, Wes, Kevin.
I had a question for you on your fourth-quarter comp store sales outlook.
Appreciate the fact that you hit the guidance, the low end of the guidance for the third quarter.
But you are going up against a much more difficult compare here in the fourth quarter.
So what are you seeing that gives you confidence for the acceleration in the two-year comp trend?
Kevin Mansell - Chairman, President, CEO
Well, I mean I think as we touched on, Michelle, it's -- typically when we see improvements in our trend they're a result of actions that we have taken to motivate consumers.
So more newness in our assortments I think gives us some confidence that we are getting more visits and we will continue to get more visits.
Definitely, marketing investment was a big part of our strategy beginning in October and right through December.
We just recognize that with a weaker trails sales trend in the first half of the year -- and then of course as you well know, August continued to be weak -- we needed to make a change in terms of how much we invested in marketing to drive traffic.
So I would say those -- there's lots of other things in terms of the way we have mixed out and trends that we have.
But when you really look at high level, two big things I would say -- more newness in our assortments and a more aggressive spend on marketing, which is both broad, around broadcast, but also very defined in digital.
So the combination of those two things I think we are hopeful will drive continued good success.
Wes McDonald - Senior EVP, CFO
I will add a third because good things come in threes.
So e-comm was a much bigger part of the business in the fourth quarter.
It helped the comp 100 basis points in the third quarter; and year to date it's 120.
It is closer to 200 basis points in the fourth quarter.
And we feel real confident in our ability to hit that plan.
Michelle Clark - Analyst
Okay; that's fair.
That's very helpful.
Then, Wes, how do we think about 2012 and your leverage point on SG&A if we factor in credit slowing as a tailwind?
What comp do you need to leverage SG&A in 2012?
Wes McDonald - Senior EVP, CFO
Well, long-term, we have always said that our goal is to leverage at a 2 comp, and that really won't change for next year.
How we get there is undetermined because we haven't really given 2012 guidance.
We are planning an Analyst Day in March, so we will try to share multiple-year guidance, so we will put a lot more thought here in the next 90 days about a longer-term outlook.
But for your modeling purposes that is what I would use, because that is what we are targeting to achieve.
Michelle Clark - Analyst
Great.
Thanks and best of luck in the fourth quarter.
Operator
Charles Grom, Deutsche Bank.
Charles Grom - Analyst
Thanks.
Good morning.
Just for the record, Bob really doesn't want to go into merchandise.
He does want to be a model, though; he has told me that off-line.
So (multiple speakers)
Kevin Mansell - Chairman, President, CEO
But we don't really want to hire him either, so we just were being nice.
Charles Grom - Analyst
All right.
Okay.
Just historically when you have spent the incremental marketing spend, is there a good ad-to-spend -- or an ad-to-sales ratio that you guys typically see on that $30 million?
Kevin Mansell - Chairman, President, CEO
This is a real generalization, but generally when we incrementally add to marketing we don't get the same productivity rate that we would report in our overall marketing.
So if for the year we are 4.5% of sales in our marketing spend, and then we make a decision to add incremental marketing, we don't expect it to return at that rate.
It is going to come at a slower rate, just because these are -- now you are starting to talk about the extra things that don't produce at the same rate as sales, but they are important if you're going to continue to move forward.
So we don't have expectations that it would leverage at the same rate of our regular investment.
Charles Grom - Analyst
Okay.
Just on the elasticity front with a little bit less demand destruction than you probably would have imagined, how do you think IMUs look in 2012, particularly in the back half as we start to see some of these costs drop?
What do you think your AUR will look like relative to the cost that you are going to need to procure those items?
Kevin Mansell - Chairman, President, CEO
It is just too early, I would say, Chuck.
I am not trying to dodge the question.
I think it is just too early for us to comment on that.
Our markup is in great shape, as we talked about.
I try to really reinforce this with investors.
Our inventory is in great shape.
Coming into the quarter with less inventory dollars per store is a great place to be, going into what will probably be a competitive promotional holiday.
So from that perspective I also expect to enter the spring season in great shape, which gives you the ability to navigate more effectively.
But it is just too early to think about fall yet.
I think we might be better prepared in the fourth-quarter call to talk about that.
Charles Grom - Analyst
Okay.
All right; fair enough.
Last question.
Just I think the bear case on the stock is you can't take the sales per square foot up and narrow the gap between the cold and the mild and warm markets today.
And just wondering if you could quantify for us how under-indexed those markets are and what are you doing beyond the new product launches to narrow that gap?
Kevin Mansell - Chairman, President, CEO
Rough number they are around 10% less.
There is no single one in the hot markets probably that is actually 10% less.
Some are better than that, but some are worse than that.
But 10% is probably a good number to use.
Always the tactics involve refining the marketing, tailoring the marketing based on the way media is consumed in each of those markets.
But more and more I would say we are focused around product and refining the product offering, introducing more and more newness into our assortments.
We are going to be very aggressive about that next year.
We are going to start off the spring season with a huge launch with our Rock & Republic partnership with VF, and I would expect to hear us tell you about more new brand launches for the fall season next year as well.
Wes McDonald - Senior EVP, CFO
Yes, one.
This is just a modeling thing, but we don't include e-commerce sales in our sales per square foot calculation.
I don't know about some of the other guys, but that growth is sort of off to the side from a sales per square foot.
So you might want to look at combining them.
Charles Grom - Analyst
Okay, fair enough.
Then just to follow up there, how big an opportunity is it with Capital One now versus Chase to target certain customers in a different way?
Wes McDonald - Senior EVP, CFO
Well, I think we had a good relationship with Chase and it was profitable for both of us.
I think we are starting off very well with Cap One as well.
We are in the process of developing a new scorecard, which should provide some opportunity for us next year that won't get installed until next year when we switch.
We are switching over to a new system in the first quarter with First Data; and after we do that we will put in a new scorecard.
But we have made some changes to improve the approval rate a couple hundred basis points, which has really helped us in areas like Texas as we have included them in the market intensification program that Kevin mentioned earlier.
That has been helpful to try to get more credit card customers down there, as that is an area where we are under-penetrated from a credit perspective.
Charles Grom - Analyst
Okay, great.
Thanks very much.
Operator
Dan Binder, Jefferies & Company.
Dan Binder - Analyst
Dan Binder.
Just following up on your comment, Wes, about the approval rates.
As they go up, is it due to Capital One's acceptance of a slightly lower FICO score customer?
And if that is the case, wouldn't it -- it would seem that bad debt expense could be going up in the future at some point.
I don't know if it is six months out or nine months out.
Is that fair, or no?
Wes McDonald - Senior EVP, CFO
No, I mean I think we are looking at a variety of different things and trying to approve -- a lot of reasons we can't approve people is because their credit history is very thin.
So we are looking at different ways to approve them.
We're looking at utility payments, apartment rent payments, things like that.
We may take a small dip, a little bit lower in the FICO score, but -- we don't use FICO scores, we use Vantage scores.
But it is not material; it is a very small part of the population.
I would just say look at our track record.
Our profitability in credit has been very good even through the recession.
It was one of the reasons that people were so interested in our portfolio when we put it out for bid.
We are not going to make decisions that are going to get us short-term sales just to have to write them off 180 days later.
Dan Binder - Analyst
Credit penetration is pretty high.
I think you said 57% earlier in the call.
Directionally, where do you think that can go to?
Wes McDonald - Senior EVP, CFO
Well, we have markets that are over 60%.
I wouldn't say we will get all the way -- everybody over 60%; but we also have a lot of markets in the 40%s.
So do I think the total share will go over 60%?
I find that unlikely.
But I definitely think we can continue to improve it in out-years probably at a slower rate than what we have done so far.
Dan Binder - Analyst
How did that credit customer comp this quarter?
Wes McDonald - Senior EVP, CFO
Like Kevin said earlier, it was very strong.
I think we got more visits from more of the infrequent customers; but the non-credit card customer improved as well.
I mean they both have to improve, to be honest, for us to get better comps.
That can't be driven by just one or the other.
Dan Binder - Analyst
Great, thanks.
Operator
Erika Maschmeyer, Robert W.
Baird.
Erika Maschmeyer - Analyst
Thanks.
Nice quarter.
Could you talk about just the drag that sharper pricing was for you versus your plan for this quarter?
And then on the pricing front, I know you have said before that it is easier to raise prices on newness and fashion items and harder on some of the opening price points.
Are there any trends by category where you have seen greater success?
Kevin Mansell - Chairman, President, CEO
You know, I wouldn't refer to pricing as a drag.
I think the results, to be honest with you, the results that we got from an average unit retail perspective were pretty much right on the target that we had set and sort of expected when we implemented the new costs and reflected those in our retails, and then incrementally added to our advertising as well.
So, I think we are pretty on-target from that perspective.
I think pricing is kind of where we expected to be.
Certainly you are 100% right when you say that pricing has been much less of an important factor in the success of things that are new or more on target.
And I think the perfect example of that is Jennifer Lopez and the Marc Anthony brand, both of which ran at significantly higher average unit retails than the categories in which they operated and even the price zones in which they sit, which were our best price zones.
So that tells you that customers look past a little bit higher price because of the excitement around the newness and on-target fashion.
Erika Maschmeyer - Analyst
Then can you talk a bit about the drivers in strength for children's and men's?
It seems like that accelerated from last quarter.
Kevin Mansell - Chairman, President, CEO
Men's has been pretty good all year, to be honest with you.
Marc Anthony was definitely a positive for the men's business as well.
Jennifer Lopez brand probably gets a lot more attention than the Marc Anthony brand does.
Naturally, Jennifer Lopez brand is going to be bigger because the women's business at Kohl's is significant bigger.
It's almost 50% bigger than the men's business.
But in terms of impact on the business, Marc Anthony brand had just as big an impact on the business as Jennifer Lopez did in women's.
Really what happened in both of those businesses, I would say, as we launched the new brand, the brands that surrounded them -- which you always want to watch carefully, because you don't want to get new sales with the new brand and then lose sales with the old brand -- that really didn't happen in either of men's or women's worlds.
The brands around them were very successful in the quarter.
A great and best example of that is the Vera Wang brand in women's; it continued to produce a double-digit increase in the third quarter right in the heart of the launch around Jennifer Lopez.
So from that standpoint I think we feel pretty good.
But men's has been strong I think, Wes, right?
All year?
Wes McDonald - Senior EVP, CFO
Yes, men's has been better than the Company.
And kids -- I mean kids had a really great quarter.
Obviously some of that was driven by favorable weather as it is more of a need-based business.
But I think the merchants in that area have done a good job managing through the cost increases.
That is obviously one of the most price-sensitive customers we have.
And for them to lead the Company for the quarter with a mid-single-digit comp, they did a nice job.
Erika Maschmeyer - Analyst
Great, thanks.
Best of luck.
Operator
Paul Lejuez, Nomura.
Paul Lejuez - Analyst
Hey, guys.
Paul Lejuez.
Just on that last comment, Kevin, what did the UPTs look like on the transactions that included a J.
Lo or a Marc Anthony item?
Then second I just wanted to go back to expand on a question that was asked earlier on the cost environment.
I am just wondering what you are seeing now in terms of your costing; and when do you think that you will see decreases on a year-over-year basis running through your P&L?
Thanks.
Kevin Mansell - Chairman, President, CEO
On the first part of the question, the basket units with the two new brands in them, I don't have that in front of me.
I know for sure that the average value of the basket was higher.
But I can't tell you whether that was also higher on units.
It clearly was higher in average transaction value.
And clearly the two brands produced the highest average unit retail in the worlds in which they sit.
We can try to get you the other thing, Paul, and get back to you on it.
On cost going forward, I think currently our assumptions are that for the spring season we are going to still see increases in spring 2012 over spring 2011, but much more modest; more in the low to mid-single digit range.
By the time we get to summer those could actually be flat to low.
And then as I said earlier I am a little hesitant to say anything firm around fall.
But I think it is not out of the question that we would see flat to modestly down in some cases for the fall season.
But it is just a little early to say.
But the trends are clearly going in that direction.
Paul Lejuez - Analyst
Okay.
Sounds great.
Thanks and good luck.
Operator
Liz Dunn, Macquarie.
Liz Dunn - Analyst
Hi, good morning.
Thanks for taking my question.
Just a couple of short ones.
I was wondering, just a little bit more information on the decision to open just 30 stores next year.
Is that the development environment, or what is behind that?
Then if you could, refresh me on what has been your experience if competitors close stores?
How much pickup do you get if that were to happen?
Then on gross margin, what -- well, maybe I will start there and then I will follow up with my gross margin question.
Kevin Mansell - Chairman, President, CEO
I mean the 30 new stores is pretty much what we have been indicating to investors for a while now, that you should plan on approximately 30 new stores.
Seems like the right level.
I know you have heard us talk a lot about how happy we are with the success of the small stores in terms of their productivity, their operating margin, their return on invested capital.
So I think Wes indicated 90% of the stores for next year are small stores.
It just seems like the right level.
They're deals that are proportionally higher in takeover, which isn't a surprise either.
We are thinking that there's going to be more takeovers because there is more flexibility with the smaller prototype to fit into boxes that are empty than with the bigger prototype.
So I think 30 is what we expected, and I wouldn't read anything into it any more than that.
Wes McDonald - Senior EVP, CFO
Yes, in terms of competitors closing, it depends on a lot of factors.
Whether -- most of the competitors I think that are closing are in the malls these days, so it depends on how close our store is to the mall.
When Mervyns went out of business that was probably the biggest share we picked up, and that was depending on how close the store was to their location.
Somewhere between 20% to 25% of their sales, at least from the way we estimated it.
If a Gap store closes, it would be a heck of a lot smaller than that -- from a hypothetical perspective.
Kevin Mansell - Chairman, President, CEO
I mean generally if you think about it, as those stores who overlap the most in terms of customer demographic and like kinds of merchandise assortments, that is where we will get the biggest lift.
We will get the least lift where stores close who have a very different demographic target or a very different merchandise mix.
Liz Dunn - Analyst
Okay.
Then in terms of gross margin, does it still philosophically make sense that going forward you won't really push for gross margin gains, but you will use some of the levers that you have that are driving gross margins higher to give that back to the customer and drive share?
Is that still where you are philosophically?
Kevin Mansell - Chairman, President, CEO
It is certainly for sure a fact for the fourth quarter.
That is how we have thought through to our fourth-quarter guidance.
We have not given guidance for next year or beyond.
But I think philosophically I think we know that the benefits of better inventory management which we are enjoying and the improvement in our exclusive and private brand portfolio, which enhances our merchandise margin rate, those positives should be used to drive more traffic.
So yes, I think it is probably good to assume that going forward we are not really planning much in the way of margin improvement; but we will use that to drive more traffic.
Liz Dunn - Analyst
Okay.
Just one final one.
I know a couple years ago we talked about $250 per foot in sales per square foot productivity.
Is there any kind of update around that as a goal?
Kevin Mansell - Chairman, President, CEO
Well again, we haven't -- beyond the fourth-quarter guidance -- one of the -- let me back up for a second, Liz.
One of the things that Wes mentioned in the call is that we are planning in March an Analyst Day for the first time in several years.
And the purpose of that is to set the stage for the next few years and give you more insight into our thinking.
Certainly we are doing all the things we can to get productivity in our brick-and-mortar stores back to the level they were at pre the recession.
So the focus hasn't changed, that is for sure.
In terms of an absolute number, I think we will talk about those kinds of things probably at that March meeting.
Liz Dunn - Analyst
Okay, great.
Thank you.
Operator
Matthew Boss, JPMorgan.
Matthew Boss - Analyst
Hey, guys.
Can you talk about trends in the home category during the quarter?
Any changes you have seen within the category?
Anything that is outperforming, or any new laggards worth noting?
Kevin Mansell - Chairman, President, CEO
No, I mean I think first of all home has led the Company, led it again for the year.
I think we're up (multiple speakers)
Wes McDonald - Senior EVP, CFO
Yes, home is the best Company for the year; it was pretty much with the Company for the quarter.
I think trending -- small electrics has obviously been very good.
Everybody likes coffee.
I think bedding has also been a very strong category.
The categories that have been a little weaker had been in the home decor area, the knickknacky type stuff that you don't necessarily need; it is more discretionary.
The stuff that is more on a replacement cycle is stronger.
Kevin Mansell - Chairman, President, CEO
I mean the other thing that is similar in home to the rest of the store, but has definitely been a big positive for home is the partnership with Food Network.
Our Food Network business is up dramatically on a year-over-year basis from what it was a year ago; and of course that is in a lot of different categories beyond small electrics.
It's in tabletop and others.
But I think the impact of the proprietary brand relationship we have with them has been really positive in the home area.
Matthew Boss - Analyst
Great.
On gross margin, just to follow up on some of the questions that have been asked, the drivers looking forward.
Inventory like you said is in great shape heading out of the quarter.
From a technology standpoint, any initiatives and further room to go there?
And then from a longer-term perspective, where could private and exclusive brands go as a percentage of the mix, do you think?
Kevin Mansell - Chairman, President, CEO
Well, I think the drivers of margin improvement, which of course you don't always see in total -- because as I said earlier we do use some of those to drive more traffic -- they are still the same.
We are very, very, very focused on inventory management.
Probably the biggest initiative we have there in the next two years is around assortment planning.
We have talked at length about the need to improve how we tailor our merchandise more appropriately by market so that it's on-target to the customer that lives in that market.
A lot of that has to do with having the right tools for our merchants and planners to use so that job becomes easier for them.
So we are planning to roll out a new assortment planning tool in the next two years with our technology partner, SAS, and we do expect that that would have a positive impact on our ability to tailor more effectively.
Size optimization has just really come into being.
So we do expect and hope that that is going to have a positive not just on margin rate but also on sales, as we more effectively tailor our sizes by market and by store.
Because as you know, those are very, very different as well.
Matthew Boss - Analyst
Final question.
From a competitive standpoint, Ross Stores recently announced their first move into the Midwest with 12 stores in Illinois.
How do you guys compete with Ross in some of the off-mall shared value centers?
Is this any concern?
And are you seeing anything else from a competitive standpoint worth noting?
Kevin Mansell - Chairman, President, CEO
You know, I would say Ross is a large retail player in our categories in the West Coast now.
They are growing.
When you look at share gains broadly, Matt, the winners in the last five years have been very consistent there.
In the apparel worlds they are Kohl's and the off-price stores; and I would say we don't see any change in that.
Those are the stores who are growing.
We are opening 30 stores next year as well across the country, I think in many different regions.
But we definitely compete against Ross.
We compete against off-price stores like TJX.
They are part of the landscape, and we have to consider them in our merchandising strategies.
Matthew Boss - Analyst
Okay, perfect.
Thanks.
Operator
David Glick, Buckingham Research.
David Glick - Analyst
I just wanted to follow up a little bit on digital marketing, Kevin.
I was wondering if you could give us some color on -- is there a philosophical change there to step that up?
Do you feel like you perhaps have been behind your peers and catching up?
And on the flipside, do you see this as one of the key comp drivers both online and in-store?
Kevin Mansell - Chairman, President, CEO
I don't know that I would say we are particularly behind competitors in terms of the level or the effectiveness of our digital marketing campaigns.
It is just as we thought through decisions that we were going to need to make for the future, we want to stay ahead of the curve on that.
I think generally, David, I would say that emerging media types, like digital marketing, are harder to get the same productivity levels from a sales results standpoint than more traditional methods that we have.
So we recognize that spending money in categories like digital is very, very important for the future, but we can't expect to get the same A-to-S that we would get in, let's say, more direct mail or print.
But it is the future and so we want to be better positioned for the future.
So we made the decision to invest more.
It also does a better job targeting, so we definitely are going to leverage that.
One of the reasons we also invested in broadcast is because that does give us a really wide reach.
That does reach a lot of people.
It certainly is not as refined as digital can be, but it's important to do both.
David Glick - Analyst
Right.
Just to follow up on the e-commerce business hitting an important milestone this year, how quickly can you get to multiples of that?
I don't recall if you have defined a specific target and time frame; that may be an Investor Day conversation.
But I was just curious if you can give us some idea of how much more you need to build out that organization from a merchant and technology perspective, and how much more beef you need to -- how much more you need to beef up in that organization?
Kevin Mansell - Chairman, President, CEO
I think the short answer is that will definitely be probably a large piece of our Analyst Day come March.
Because I think we do owe everyone what our vision is in terms of the growth rate of that business over the next few years and the investment that that business will require.
I would say infrastructure-wise, that has already been reflected in our thinking to a great degree.
We just opened up our third EFC.
We are opening up our fourth next year.
That is already built into our capital assumptions.
The area that I think will get a lot of investment in, which we are planning for and we'll share the details with you, will be the e-commerce organization corporately.
That is everything from marketing to planning to buying to product development to IT.
That is going to be an area in which we are going to really invest in.
The best analogy I would give to you, David, is if you looked back a few years and you thought about where Kohl's was from a product development perspective, and the decisions we then made to invest in product development in places like New York, and the return and results we got from that.
That is how we are thinking about digital -- is that we are going to make a big investment and we expect to get a big return in the next few years for it.
David Glick - Analyst
Thanks for that color and good luck in the holiday season.
Operator
Richard Jaffe, Stifel Nicolaus.
Richard Jaffe - Analyst
Just a bookkeeping question.
How many stores or what percent of your stores are in warm weather regions?
Kevin Mansell - Chairman, President, CEO
It is over half now.
Richard Jaffe - Analyst
You had commented about the sourcing opportunity really in the second half.
Should we assume that would translate into margin improvement?
Or do you anticipate trimming retails as pricing gets better for you guys?
Or some combination?
Kevin Mansell - Chairman, President, CEO
Well I think, again -- and I am not try to dodge it.
I think we just don't have -- we are not fully informed enough yet about where pricing is going to land to be able to comment directly.
I expect we will definitely be in a position to do so in February.
I think it is important to note when you think about what happened to cost in this fall season, I think people, investors, were suspect that we would be able to continue to maintain and improve our merchandise margins in the face of higher costs.
Facts are, we did and were able to do it.
So we are just kind of thinking about it, whether costs are going up or costs are going down, it is just our job to manage through that, get the customer the best result, but effectively manage it so that we come out whole at the end.
Richard Jaffe - Analyst
Got it.
Thank you.
Operator
Dana Telsey, Telsey Advisory Group.
Dana Telsey - Analyst
Hi, good morning, everyone.
Can you talk a little bit about -- as you think about products for 2012, you had J.
Lo, Marc Anthony, Rock & Republic is coming up.
How do you think of the brand and product initiatives, and what percentage of the business, exclusives and private, and how it impacts margins?
Thank you.
Kevin Mansell - Chairman, President, CEO
Yes, I mean generally, we are expecting to be able to announce more newness for next year, for the fall season -- back-to-school and fall season, I would say.
I think our results just have reconfirmed what we already knew, which is it's very important for us to introduce newness and create new ideas to generate excitement and generate traffic.
Generally as long as we execute well, our exclusive brand portfolios produce higher merchandise margin rates than the store in total.
So that is a tailwind as long as the product is on target.
Wes McDonald - Senior EVP, CFO
Thanks, everybody.
Operator
This does conclude today's conference call.
You may now disconnect.