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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 fourth quarter and fiscal 2011 earnings 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 believe, expect, may, will, should, anticipate, plans, or similar expressions to identify forward-looking statements. Such statements are subject to risk 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/A 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will not be updated; so if you are listening after February 23, it is possible that the information discussed is no longer current.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 - SVP & CFO
Thank you. With me today is Kevin Mansell, our Chairman, CEO, and President. I will walk through the financial statements for the fourth quarter and the year, and then I will turn it over to Kevin to talk about some merchandising and marketing initiatives. We will give first-quarter and 2012 guidance, and then Kevin will wrap it up with a summary of our outlook for the year.
For the quarter total sales decreased 0.3% to $6 billion and comparable store sales decreased 2.1%. Average transaction value increased 0.4%, reflecting a 7.4% increase in average unit retail and a 7% decline in units per transaction. Number of transactions per store decreased 2.5%.
For the year total sales increased 2.2% to $18.8 billion, and comparable store sales increased 0.5%. Average unit retail increased 6.6%, and units per transaction decrease 4.9%, resulting in a 1.7% increase in average transaction value. Number of transactions per store decreased 1.2%.
Kevin will provide more color on our sales in a few minutes. Our credit share was 53% quarter and 54% for the year, an increase of approximately 320 basis points over the fourth quarter of 2010 and 470 basis points over fiscal 2010.
Moving on to gross margin, for the quarter gross margin decreased 64 basis points to 36.2% of sales for the quarter. The decrease is primarily a result of sales being below our expectations. For the year, our gross margin rate decreased 6 basis points to 38.2% of sales.
SG&A increased 0.3% for the quarter, well below our expectations of a 5% to 6% increase, but deleveraged 12 basis points. Store payroll was able to leverage for the quarter.
Our credit card operations again provided significant leverage. This business reduced SG&A by $347 million for the year versus last year's $180 million, on growth in finance charge and late fee revenues as well as a reduction in bad debt expense. Advertising did not leverage during the quarter nor the year, as our increased spending during the holiday season did not produce expected sales.
Moving on to depreciation expense, it was $194 million in the fourth quarter this year, up $5 million from last year. Operating income was $805 million for the quarter, a 6.4% decrease from the fourth quarter of last year. For the year, operating income increased 10 basis points to 11.5% of sales.
Net interest expense was $76 million this quarter, up $5 million to the prior-year quarter. Our fourth-quarter income tax rate was 37.5% for both this year and last.
Diluted earnings per share increased 9% to $1.81 over the fourth quarter of last year. Fourth-quarter net income was $455 million, 8% lower than 2010. For the year, diluted earnings per share increased 17% to $4.30 per share, and net income increased 4% to $1.2 billion.
Moving on to the balance sheet, some metrics for your models. From a square footage basis we ended the quarter with 1,127 stores, 38 more than at year-end. Gross square footage at year-end was 98 million square feet, 3 million higher than year-end 2010. Selling square footage increased 2 million to 82 million.
We ended the year with $1.2 billion of cash and cash equivalents, a decrease of $1.1 billion from the prior year-end. The reduction in cash is primarily due to $2.3 billion of share repurchases in 2011. The cash equivalents are primarily in money markets and commercial paper.
On the inventory line, inventory per store is 2% higher than last year in dollars but 7% lower in units. Accounts payable as a percent of inventory was 38.5% versus 37.5% last year. The increase is primarily due to expiration of vendor financing initiatives.
Moving on to capital expenditures, capital expenditures were $927 million for fiscal 2011, $126 million higher than the prior year due to new stores, increased remodels, the opening of our third E-Commerce Fulfillment Center, an exercise of a purchase option, and our Texas call center lease. Our capital spending was less than our guidance of $1 billion, and some of that spending will occur in 2012.
We opened 40 new stores during the year, bringing our current store count to 1,127. Approximately 75% of the 40 new stores that we opened in 2011 were small stores, with less than 64,000 square feet of retail space. We also remodeled 100 stores in 2011.
During 2011 we generated $1.1 billion of free cash flow, a 27% increase over 2010. This contributed to our ability to return $2.6 billion to shareholders with a combination of share repurchases and our first-ever dividend.
We repurchased 8 million shares of our common stock during the fourth quarter and 46 million shares during the year. Since reactivating the buyback program in the fourth quarter of last year, we have repurchased approximately 65 million shares. All of these purchases were made pursuant to 10b5-1 plans.
Weighted average diluted shares were 252 million for the quarter and 271 million shares for the year. Earlier this week our Board approved a quarterly dividend of $0.32 per share, a 28% increase over our previous quarterly dividend of $0.25 per share. The dividend is payable March 28 to shareholders of record at the close of business on March 7.
And with that I will turn it over to Kevin to talk a little bit more in detail about our sales and marketing plans.
Kevin Mansell - Chairman, President & CEO
Thanks, Wes. As Wes mentioned, comparable store sales decreased 2.1% in the fourth quarter and increased 0.5% for the year. For the quarter from a line of business perspective, accessories reported positive comp for the quarter on strengths in watches and in accessories.
Home and children's also outperformed the Company average. Home was again led by electrics. In children's, toys reported the strongest growth. Men's was consistent with the Company average and was led by men's furnishings.
Footwear and women's were both below the Company average. Women's casual shoes led the footwear performance, while women's apparel was led by updated sportswear, activewear, and sleepwear.
For the year, accessories and home provided the strongest comps and were above the Company average. Children's and men's also outperformed the Company average.
Women's apparel was modestly positive on strength in active and updated sportswear. And footwear recorded low single-digit declines, with women's athletic shoes as a drag.
We are pleased that our E-Commerce business met its $1 billion revenue goal for the year. And to support this growth we opened our third EFC, a 1 million square foot facility in Maryland during 2011 and expect to open a fourth facility in Texas later this summer.
On the gross margin front during 2011, we passed on higher apparel product costs to our customers. This contributed to an approximately 7% increase in average unit retail for the quarter and the year. We did see resistance from our customer in both units per transaction and in transactions per store as a result of these price increases.
The financial result was a better gross margin performance than our competition, but weak top-line performance. We were able to deliver net income improvement for the year, but it was at the expense of top-line sales growth, which is not something we are happy with.
On the expense front, however, I was very pleased with our ability to manage expenses throughout the year and especially in the fourth quarter. As Wes mentioned, our stores' organizations successfully leveraged store payroll in the fourth quarter despite the 2% decrease in comp sales. Much of that leverage came through process and technology changes in store operations.
Our credit card business reported significant year-over-year growth and was a key driver of our overall SG&A leverage for both the quarter and the year. We are very pleased with our relationship with Capital One and are exploring ways to both growth this portfolio further and to increase profitability.
As we have said in the past, our Kohl's charge customer is our most loyal customer. She shops more often and has a significantly higher average annual spend than our non-Kohl's charge customer.
On the brand front we are very excited about several new brand launches and the newness that they will bring to our stores throughout 2012. As you know, we launched the Jennifer Lopez and Mark Anthony brands last fall. These contemporary best brands are resonating well with our most fashion-conscious customers and should add to our spring performance.
Earlier this month we launched Rock & Republic. Known for its fit, distinctive design, and quality craftsmanship, this Only at Kohl's brand is our first proprietary lifestyle denim brand. Early results have been very strong.
We also just introduced the Van Heusen brand into our men's sport shirt, dress shirt, and neckwear categories.
We are also expanding two of our most successful brands, ELLE and Simply Vera Vera Wang, into some new categories this year. ELLE will expand into cosmetics and in fashion jewelry; and Simply Vera Vera Wang will expand into cosmetics later this spring.
Princess Vera Wang, a juniors contemporary premium lifestyle collection, will be available exclusively in Kohl's stores nationwide and Kohl's.com beginning August of this year.
Overall, private and exclusive brands represented just over 50% of our sales for the year, more than 200 basis points higher than last year. Apt. 9, Croft & Barrow, and Sonoma, our three largest private brands, combined to report 6% sales growth. The exclusive brand portfolio FILA, Food Network, Lauren Conrad, and Simply Vera Vera Wang each reported double-digit sales growth.
With that, let me turn it over to Wes to provide our earnings guidance for 2012.
Wes McDonald - SVP & CFO
Thanks, Kevin. The following metrics are for the first quarter of fiscal 2012. We are projecting a total sales increase of 3%, comparable sales increase of 1%. By month we expect February to be slightly below the quarterly guidance, March to be higher than the quarter, and April to be slightly below the quarter.
We are projecting a gross margin rate decline of 160 basis points. SG&A expense dollars are projected to increase 3.5%. Depreciation expense of $205 million, interest expense of $81 million, a tax rate of 38%, share count of 245 million diluted shares.
And we are also projecting share repurchases of about $305 million for the quarter at an average price of approximately $53 a share. Including these estimated share repurchases, we expect earnings per diluted share to be $0.60 for the first quarter.
The following metrics are for fiscal 2012. Total sales increase of 4.5%. Excluding the impact of the 53rd week, we expect total sales to increase 3.5%. A comparable sales increase of 2%. A gross margin rate decline of 70 basis points. SG&A is expected to increase about 3% for the fiscal year, and 2% if you are excluding the 53rd week.
Depreciation expense for the year is approximately $840 million, and interest expense for the year is approximately $323 million. Tax rate for the year is 38% as well, and we are projecting a share count of 240 million diluted shares for the year.
This would include share repurchases of $1 billion for the year at an average price of approximately $55 per share. Including these estimated share repurchases, we expect earnings per diluted share to be $4.75 for fiscal 2012. This includes the 53rd week with sales of approximately $200 million and an earnings per diluted share contribution of approximately $0.10 per diluted share.
From a capital spending perspective, we expect capital expenditures to be approximately $825 million in 2012. We expect to open 20 new stores in 2012, 8 in March and 12 in October. Substantially all of the 2012 stores will be small stores.
We are temporarily reducing the number of remodels to approximately 50 stores in 2012, as we look to potential changes to our stores to increase sales productivity, as well as provide more efficiency.
I'll turn it back over to Kevin for some thoughts regarding 2012, and then we'll take some questions.
Kevin Mansell - Chairman, President & CEO
Thanks, Wes. First let's just summarize our perspective on 2011. Overall, we were disappointed in our performance last year. That disappointment was driven by shortfalls in what we expected on the top line, in particular in the fourth quarter. We lost some of our leadership on the price element of our value equation; we didn't have enough consistent excitement in our merchandise content; and our sense is our marketing message did not cut through, especially in a highly promotional fourth quarter.
That's not to say there were not successes. Better inventory management, more focus on maintaining our merchandise margin as product costs escalated, and strong expense control led to an increase in both net income and earnings per share for the year.
In addition, we continued to aggressively grow both our sales and market share in the online business, and we reached our goal that we had set at the beginning of the year of $1 billion in online sales. We also successfully opened 40 new stores, remodeled another 100 stores, completed the biggest brand launches in our Company's history, and initiated our first-ever dividend.
Last year's results have clearly helped form our priorities and our focus for 2012. Our priorities have been set as follows for 2012. First and most importantly, improve our top-line sales trends. Our weak performance last year and a changing competitive landscape have created a sales opportunity this year; that is particularly true in the back half of the year.
In order to ensure that we take advantage of that opportunity we are lowering our merchandise margin plans to allow our merchants to take a more leadership position on price points in all of our key businesses. That effort starts immediately.
While I am confident that this will result in improved sales performance, we believe it is important to reflect our last six months' sales trend into our forecast. As a result we are forecasting a 1% comp increase in the first quarter.
Second, continue to drive leverage around SG&A. We have started a process to build further on our expense performance from last year, with an eye to lowering SG&A over time with modest comp assumptions. The purpose of that is to allow us to drive better value for our customers. This expense effort will come through operational process changes and technology-driven productivity changes.
Third continue to build on our online success. Online sales increased almost 40% last year, and we believe we can add another 40% this year on top of that. This will be driven by broader assortments offered online, investments we have made organizationally, and infrastructure investments that are already in place.
Finally, we are going to reallocate our capital expense spending within our overall capital allocation plans. For 2012 we will fund our online as well as our other technology investments at an accelerated pace from last year. As you are well aware, online sales have grown substantially for all retailers, but a significant amount has cannibalized brick-and-mortar stores.
Reviewing the results and returns on both our new stores and, more importantly, our remodeled stores, we are changing our CapEx plan to open fewer new stores and remodel stores this year. This is part of an overall plan to introduce a new prototype store layout to reflect the need for space allocation changes within the store and the expansion and introduction of new categories and new brands to our customer. We believe that will allow us to achieve more appropriate returns on those investments in the future and improve sales per square foot in our brick-and-mortar environment.
We do expect to generate over $1 billion in free cash flow in 2012, which will fund the growth initiatives I have just described as well as provide the ability to raise our dividend to shareholders 28% and continue to repurchase shares of our stock. Returning excess cash to shareholders will remain consistent priorities for the Company.
At this time we would be happy to take your questions
Operator
(Operator Instructions) Erika Maschmeyer, Robert W. Baird.
Erika Maschmeyer - Analyst
Thanks, good morning. Can you talk a little bit more about what your guidance assumes for AUR in Q1 in 2012? I know you mentioned wanting to focus more on sales and lowering your margin expectations. And then just your thoughts on how you expect AUR and AUC to play out throughout the year.
Wes McDonald - SVP & CFO
I think in the first quarter AUR will still be up slightly. We are still in an inflationary environment. I wouldn't expect it to be up high singles like it was in the back half of the fall; probably be up in the low single digit range and I think we will have to wait and see how it plays out but I would expect in the back half that AUR could be flat to even slightly down and therefore units would be up. That is kind of our thinking right now.
Erika Maschmeyer - Analyst
Can you talk a little bit more about your thoughts on a new prototype layout, where you think you might need more or less space, how you expect to generate greater returns from that?
Kevin Mansell - Chairman, President & CEO
At this point, Erika, we are not prepared to disclose any details on it. The plan is to pilot and test several different types of layouts that would include strengthening space allocations for categories we currently merchandise that we think are underrepresented and have been successful, and also introducing new categories into the store that we don't merchandise today. But at this point we are not prepared to disclose anything more than that.
Erika Maschmeyer - Analyst
Thanks so much. Best of luck.
Operator
Adrianne Shapira, Goldman Sachs.
Adrianne Shapira - Analyst
Thank you. Kevin, really exciting, your efforts to reclaim your price leadership. Maybe you can help us think through how we should be thinking about the lower merchandise plans, in terms of how -- maybe starting with the focus. Is it across the store, specific categories? How should we be thinking about that in terms of -- is this a one-year catch-up and the laser focus, or a broad-based approach?
Kevin Mansell - Chairman, President & CEO
It is broad I would say, though it is very, very intense around our opening price points, which typically are our private brands, of course. I think our summary last year, Adrianne, was our honest perspective on what happened. We do need to make a correction and really improve with the customer the price element of our value equation.
We always talk about value being quality and style and of course experience in the store and also price. And I think our feeling is that we lost some of that price point element. That of course is particularly true at the opening price point, where the customer is very sensitive to price changes.
Adrianne Shapira - Analyst
Then, Kevin how do you plan to articulate this message to your customers? You said you weren't pleased with the marketing efforts during the holiday season. Now as you embark on making a stronger price statement, how will the customer be mindful of it?
Kevin Mansell - Chairman, President & CEO
She is going to see it in all of the elements of our media. On the price point side I think it will be particularly evident in our print tab and in our broadcast. Very, very obvious that we are focused on price points and communicating that to our customer.
As we go through the first quarter, I think you will also see new broadcast marketing that will really try to focus around not just the savings story and excitement of savings at Kohl's, but also the absolute value you get, of which prices are -- as I just said -- a really, really important element. So I would expect to see that in broadcast as well, particularly as we get into the mid to late part of this quarter.
Adrianne Shapira - Analyst
Okay. Then Wes, how should we be thinking about the lower merchandise margin, how that plays over time? How should we be thinking about that, what that translates into gross margin? You have obviously done a nice job continuing to control expenses. What this means as you think about long-term EBIT margin potential.
Kevin Mansell - Chairman, President & CEO
I think we are not at the point where we want to talk about long-term EBIT margins. We are really -- truthfully, 2012 is a tremendous amount of focus on correcting the deficiencies in our business, and we are trying to approach it from all aspects.
We know that our greatest success over time has always been about driving SG&A down in order that we can provide better value to the customer and drive top-line sales. We also know that, while we are excited about our 40% increase in online business, we weren't excited about the deterioration in our brick-and-mortar stores. We know it can't be as simple as creating a new experience; it has also got to be about giving those customers something new to buy at Kohl's.
So 2012 is a lot about really fundamentally focusing on our existing business and making it a healthier business. Then after we put this year behind us, we will start looking a lot more at what does that mean for the future in terms of our possibilities.
Wes McDonald - SVP & CFO
Yes. It is a lot easier to grow your operating margins again when you get your sales per square foot productivity up again. The last three years we have been hovering around $220 range, and we need to get that back up to the $230 or $240 range. Hence the testing of the various things with the prototype.
We are also undergoing a pretty methodical effort here, going through every area of the Company to look for SG&A opportunities and to improve efficiencies through mostly process enhancements as well as technology. We have completed the first wave of that and reviewed some of our areas of the Company, including the Distribution Centers, the EFC, HR, and some of our store planning functions.
We are going to move on to that, and now look at our store organization. We will methodically hit every area of the Company through this year. I would expect to realize some benefits this year, and that it is already built into our guidance. But the majority of the benefits we will get in 2013.
Adrianne Shapira - Analyst
Great. Best of luck.
Operator
Lorraine Hutchinson, Bank of America.
Jess Lebo - Analyst
Hi, it's actually Jess Lebo in for Lorraine. Can you just talk a little bit about your longer-term square footage growth opportunities, especially in light of the opportunities coming out of Sears, given you're paring back your store openings this year? Thanks.
Wes McDonald - SVP & CFO
I think our run rate now, like we sort of have operated in the past is -- I would use 20 stores a year in your model until something changes. As regarding Sears, there is nothing really been talked about.
They have closed a few stores. We don't have any interest in the stores that they have closed at this time.
That would be the big opportunity that is out there from a square footage perspective, if they were to close a significant number of stores. But I would just continue to use 20 stores a year until we tell you something different.
Jess Lebo - Analyst
Okay, thanks a lot.
Operator
Deborah Weinswig, Citi.
Deborah Weinswig - Analyst
Thanks so much for the color on the call today. In terms of 2011, one of the positive standouts was the increased credit card penetration. Can you talk about how you're utilizing that vehicle to drive greater sales from your existing customers?
Wes McDonald - SVP & CFO
I think part of it is we are obviously trying to stress the value that you get from being a credit card customer at Kohl's. We are also partnering with Cap One.
We will be introducing a new scorecard later in the year; that should provide us some flexibility to grant credit, especially in areas of the country where people may have very thin histories, where they might not have a bankcard but might be a very diligent payer of their utility bills, their rent bills. And it gives us more flexibility in the mild and hot markets that hopefully will help us increase our penetration there.
So we are very excited about that opportunity. That probably won't provide significant benefits until the fall.
Deborah Weinswig - Analyst
Okay. And then I think Kevin mentioned in his prepared remarks about broadening the assortments online. How will your assortment be aligned between stores and online at that point?
Kevin Mansell - Chairman, President & CEO
With the possible exception of some unique category like greeting cards or something, anything that is in any of our stores nationwide would be available online. In addition we expect to offer a substantial increase in extended assortments beyond what we have in our stores, in our proprietary brands.
And of course we also plan to continue to increase the amount of assortment that we offer direct shipped from other suppliers, so literally categories that we don't offer in the store. That is -- I think as you know that has been a strategy in place; it is one of the catalysts for the 40% growth last year.
Deborah Weinswig - Analyst
And then last question in terms of categories, obviously there is a lot that you have done in terms of exclusive label and private label. As we look forward, where do you think you have the most opportunity going forward?
Kevin Mansell - Chairman, President & CEO
Well, I think I mean the honest answer on that is we need to improve across the whole store and while some categories last year outperformed others -- in particular home is a category that did consistently well and has done over the last few years -- there needs to be improvement really everywhere. We know we need to address, as Wes said, the health of our sales per square foot in our brick-and-mortar environment. Not let down at all in the growth of online, but intensify the effort to get our brick-and-mortar stores back on track and back to the sales per square foot that we have had in the past.
That is going to require changes in assortment, broadening of some categories and reductions in others, and introductions of new ones. So it is pretty much storewide I would say, Deb.
Deborah Weinswig - Analyst
Okay, well best of luck and thanks so much.
Operator
Bob Drbul, Barclays Capital.
Bob Drbul - Analyst
Hi, good morning guys. Kevin, when you look at your plans for all of '12, is there a region --? You typically have focused on regions in Pacific Northwest, Southeast, or whatever. Is there a region that you are focused on specifically for this year that you have some plan?
Kevin Mansell - Chairman, President & CEO
The strategies we have had in the past to continue to improve productivity in mild and hot are still in place, and we are look to get continued traction as we have there. Particularly California for instance continues to be an opportunity for us.
But I would say, Bob, generally 2012 -- as I said a little bit earlier to I think Adrianne -- is really about improving the health of our core brick-and-mortar business and to get that business back on track. By definition that means that it is sort of about everywhere across the country. I don't know if you want to add.
Wes McDonald - SVP & CFO
The one area, Bob, that has incremental marketing that would be over and above last year -- you guys recall in August we started a market intensification initiative in Texas; and so for the spring season that would be incremental. But other than that it would be just continued focus, as Kev said, everywhere but particularly in mild and hot.
Bob Drbul - Analyst
Kevin, can you comment a little bit around in terms of the focus on accepting lower merchandise margins, how that compares and contrasts against the overall competitive environment out there and your -- the plans on what you expect competitively in 2012?
Kevin Mansell - Chairman, President & CEO
I don't know that we are in a position to be talking much about competition. We are so kind of laser focused on the elements of our own business.
I would say if you looked at Kohl's over time, the things that have driven top-line sales have always been about finding ways to uniquely operate our stores and manage our corporate environment to drive expense down and give our merchants the tools that they need to take more share. And really that is what this plan on lowering margins this year is all about, is to connect the dots on that and give our merchants the opportunity to get our sales back on track and moving in the right direction.
Wes McDonald - SVP & CFO
I think I want to focus some people. Our operating margin if you do the math is still going to be 11% this year. So it is still the highest in the industry. We are just trying to move things around a little bit to take market share.
So I think long-term we can continue to grow through sales productivity improvements, as well as taking a look at SG&A opportunities. But we have a lot of room to improve everywhere in the Company.
Bob Drbul - Analyst
Kevin, my last question is -- you mentioned new categories that you're thinking about or exploring. Are you seeing new brands that you are excited about that you think could be incrementally more positive to the business?
Kevin Mansell - Chairman, President & CEO
Well, by definition I think as we would pilot, test, and experiment with new classifications and categories we are going to be merchandising new brands as part of that. So I think generally the answer is yes.
We are continuing to drive towards introducing new brands in our existing businesses, in those categories as well, and I would hope to continue to be able to share those kind of things with you this year. But just by definition as we either dramatically expand a category or reallocate space to it and/or move into a business perhaps that we don't currently merchandise, we will be bringing in new partners into the Kohl's store environment.
Bob Drbul - Analyst
Thanks very much. Good luck, guys.
Operator
Richard Jaffe, Stifel Nicolaus.
Richard Jaffe - Analyst
Thanks very much guys. I guess two thoughts. One, as you lower retail prices I am thinking that some of the average unit cost inflation that existed in the second half of 2011 starts to reverse. So is that going to be a helpful part of the gross margin story? Or are prices coming down that dramatically?
Then if you could also comment on how your advertising initiatives might change to be more hard-hitting regarding price.
Kevin Mansell - Chairman, President & CEO
Well, on the cost level I would say we definitely have seen lower cost as we get into late in the second quarter. And for sure in the fall season we are looking at costs that are substantially lower than last year, and to some extent we have included that implication in our thinking. It is one of the reasons why, even though the first quarter is down over 100 basis points of margin, the year is only down 70 basis points.
Also obviously, Richard, we had a very weak performance in merchandise margin in the fourth quarter. So some of that is built into that assumption.
From a marketing perspective, I want to make sure that we balance our message. We are talking a lot about value and particularly the price element of value as a communication tool to our customers. But it is also, as I said at the beginning, it is also a lot about merchandise content; that we have more newness in our existing brands and introduce continued new brands. We talked about some of those new brands today, and there are more to come.
It is also about just the message in our marketing, so making that message cut through and be a little more effective with our customer is really, really critical. And there are changes that are happening now that I think you will notice and you will see, and there are new campaigns coming that we are really going to focus that message around.
So price is a part of it for sure, but it is also really important to get the message right and get the product right. And those are make things that we are equally focused on this year.
Richard Jaffe - Analyst
And we should see that on print, on the electronic, on TV?
Kevin Mansell - Chairman, President & CEO
Yes.
Richard Jaffe - Analyst
Across all channels?
Kevin Mansell - Chairman, President & CEO
We use multiple media and we need to be balanced in that.
Richard Jaffe - Analyst
Great. Thanks very much.
Operator
Jeff Klinefelter, Piper Jaffray.
Jeff Klinefelter - Analyst
Thank you, good morning. A couple questions. One would be on your expectations for marketing dollars. Wes and Kevin, I guess combined, as you look at 2012, think about the flexibility that is inherent in the model as you go into the second half I guess in particular, last year you poured some more marketing dollars into Q4; didn't get the return you were looking for; turned out to be more directly related to pricing; you added pricing.
What sort of flexibility do you have built into the model this year? If sales do track a little better than expected, do you have more leverage in the back half? Or do you plan on moving in lock-step and making sure that you are pouring gas more or less on to the sales fire and not getting as much leverage in the second half?
Wes McDonald - SVP & CFO
Marketing dollars for the year will be up. We obviously would like them to be more effective in the back half than they were in the back half of 2011. I would expect that to be the case.
But if we leverage in advertising, it is going to be because the marketing is more effective. Because we are going to grow it faster than our sales dollar growth that we just gave you.
Jeff Klinefelter - Analyst
So you'll grow sales dollars faster than marketing dollars?
Wes McDonald - SVP & CFO
I hope so. But right now our plans are -- from a sales perspective, we haven't gotten to a 2% comp in a little bit. If we can do better than that, we will leverage. If we run a 2% comp for the year, we will probably deleverage.
Jeff Klinefelter - Analyst
Okay. In terms of the plans here for the spring, summer season, the first half, continue to hear good things out here in the marketplace about spring product sell-throughs. Kind of the flipside of having a warm end of the winter here. Also hearing very, very good things of course about accessories that you highlighted today.
Can you talk a little bit about the composition of what you're seeing in your sales trends, opportunities there, accessories? Do you have enough inventory and space allocated to the category?
Kevin Mansell - Chairman, President & CEO
I think generally we know, as recognized in the guidance that we have given you, we don't feel like our inventories are as well positioned as they should be. Not, I mean, from a breadth or color or style, but in terms of the depth behind that.
So to some extent one of the things that is implied in how we think about the spring and year is that we are going to be in a building process. We are probably seeing many of the same things you are hearing about, which is definitely really good selling in certain spring categories, certain styles particularly. As we start to ramp up our price point emphasis on the opening price point, we are seeing accelerated sell-through. So I doubt that we are different in that regard.
But again what I would say, Jeff, is we are just trying to be realistic. After coming off a difficult fall and particularly fourth quarter we think it is going to be building process, and that is the expectation that we want to set with people. And we would be delighted to overachieve those and get better results.
Jeff Klinefelter - Analyst
That's helpful, Kevin. One last clarification on your cost of goods for the year, all things considered, blended first-half/second-half together. Give us a sense for how you are viewing your cost environment this year versus maybe '11 or the last couple years.
Kevin Mansell - Chairman, President & CEO
I don't know that I could answer all blended together. Definitely for the second-half prices on a year-over-year basis are down a lot. And they are very similar or I would say in some cases even lower than 2010. I think that is right.
Wes McDonald - SVP & CFO
Yes, that's fair. And obviously with the guidance of 160 down in the first quarter and only down 70 for the year, we are obviously banking on cost favorability in the back half. But we haven't really completed all the fall receipt plans yet, so I couldn't give you a blended number.
Jeff Klinefelter - Analyst
Great. Thanks, guys.
Operator
Charles Grom, Deutsche Bank.
Charles Grom - Analyst
Thanks, good morning. Just, Wes, on that 160 bp decline here in the first quarter, is there anything from clearance that you guys still have to -- any carryover from the fourth quarter? Or is it mostly price investment actions?
Wes McDonald - SVP & CFO
It is mostly price investment, because we're still seeing cost up mid-single digit. So that it's really reflective of that and being aggressive especially on opening price point, as Kevin said.
Our clearance units going into the month were actually down double digits per store and continue to be down in February as well.
Charles Grom - Analyst
How much of the price action are you anticipating it to weigh on your comp, just with ticket coming down?
Kevin Mansell - Chairman, President & CEO
That is a tough question. We are looking to reverse the trend, so we are looking -- what we are really looking to do is change the trajectory of both the units per transaction and of course most importantly the number of transactions -- or in other words the customer traffic that comes in our stores.
So again we are being much more cautious in our sales in the first half of the year. Then by definition we are thinking about particularly I would say the fourth quarter as a big opportunity for us. So I guess if you think about it that way, we are thinking it is going to take a little while to get traction.
Wes McDonald - SVP & CFO
We are also chasing units. We're trying to pull units in from second quarter into first quarter to -- obviously if you are dropping prices you need to have more units behind it to drive the comp, and we are doing that.
Obviously it is not reflected in what we have guided for, for February. We guided below the quarter and we have only got a couple days left. But we expect to see that occur in time for that spring-break/Easter selling season at the end of March.
Charles Grom - Analyst
Then did you guys test this at all here over the past month? I guess, how do you know that that is the right steps to stabilize the sales?
Kevin Mansell - Chairman, President & CEO
Yes, I mean we tested a whole bunch of things. All the things -- none of the things that we do haven't in some way, shape, or form been tested against customer reaction. So we are being -- we are very optimistic I would say, Chuck; but we also just think that rationally we have to be rooted in the trend of our business.
So I don't want to give you any impression that we are not optimistic and we don't have a base case to lean on from a testing and pilot perspective that says these strategies will work. But we are coming off a very difficult trend, and it is going to take time. We just want to be direct about that and set expectations at a level which we can achieve.
Wes McDonald - SVP & CFO
Some of it the customer told us, to be honest, Chuck. The first three quarters of the year private brands were up high single-digit comp; in the fourth quarter they were flat. Now, some of that could have been content, but a lot of it had to do with price.
We can argue about whether or not the pricing environment in the fourth quarter was rational or not, but kind of is what it is. So we took a position that we are going to be very aggressive on opening price point and drive unit growth and drive value.
Kevin Mansell - Chairman, President & CEO
I mean I would also say, again as I said to perhaps Jeff, this is a balance. If we felt for a minute that the issue that we have in our sales was strictly about having lower prices on opening price point merchandise, we would say that. That is not at all what we are describing. We think that there has to be improvements in fundamental changes in the newness and the excitement and level of our merchandise content.
We have to change our marketing message, and included in there is a focus around strong price point illustrations in our opening price point goods to reestablish our value perspective. So it is just one piece, and I wouldn't want to get it out of whack, but it is an important piece.
Charles Grom - Analyst
And just to kind of clear the air because a lot of confusion out there; these actions our offensive. In other words, these are you guys trying to correct your business, not trying to react to what your competitor down in Plano is trying to do, right?
Kevin Mansell - Chairman, President & CEO
No. First of all, we operate in a much bigger environment, right? You never want to develop strategies based on a competitor. You want to develop strategies based on what your customer is reacting to what you do.
So all the things we are doing our about our business. It is about making our customer happy; it is about making our stores more efficient; it is about investing in our future. These are all things about Kohl's. They really have nothing to do with any other specific retailer.
Wes McDonald - SVP & CFO
Our strategy has always been about taking market share, and that's what I think these actions are going to give us a position to do.
Charles Grom - Analyst
Okay. Then just my last question. Just the past maybe three or four months, the credit events you have been doing have been met with a little bit less than enthusiastic response to what you typically have seen. I guess why do you think that is, and is there any change -- you talked about the three changes coming; the newness, the marketing, the price. Is there any change in the promotional intensity up or down or alterations?
Kevin Mansell - Chairman, President & CEO
I don't know that there is any unique change for the credit customer. I mean the credit customer as you know, Chuck, is by far our most loyal customer and she is by far the one who is the most sensitive and aware about whether or not what we are selling her in our store is exciting or not.
So she has clearly said in the last three to four months anyway for sure that what she sees in our store from a product perspective is not what she expects. She expects more. So that is why I try to emphasize to everybody that we are kind of focused on improving our core business, and that's got a lot of elements to it. And what we sell is always by far and by definition the most important one. We have to improve the product in our store.
Charles Grom - Analyst
Great. Thanks very much.
Operator
Michelle Clark, Morgan Stanley.
Michelle Clark - Analyst
Great, thanks and good morning. A lot of my questions have been asked but, Wes, a question for you. Obviously, credit a big tailwind here in 2011. How do we think about it in 2012?
Wes McDonald - SVP & CFO
I think it is going to continue to be a tailwind but a much more modest tailwind. You are not going to be talking about certainly hundreds of millions of improvement as we saw in 2011, but I do expect it to improve primarily through growth in the portfolio.
Michelle Clark - Analyst
So any dollar amount in terms of range that you have embedded in your outlook that we can use for our models?
Wes McDonald - SVP & CFO
It is included in our SG&A guidance. I don't want to get into much more detail on that, but it would be in the tens of millions of dollar range.
Michelle Clark - Analyst
Okay, great. Thank you.
Operator
Wayne Hood, BMO Capital.
Wayne Hood - Analyst
Yes, Kevin. Could you talk a little bit about which of the private brands will see the greatest style of content change in '12, so we can kind of watch as that develops? Then you sit back and reflect on this and you say, well, is the management team within merchandising around private brands where they need to be? Do you have the right team in place to pull off these changes that you are talking about?
Kevin Mansell - Chairman, President & CEO
Sure. Our three biggest private brands of course are Sonoma, which is sort of a modern updated brand; Croft & Barrow which is very classic; and Apt. 9 which is more contemporary. I would say the two brands that we are most focused on improving the trend of business on based on results are probably Sonoma and Croft & Barrow, both in terms of their impact and in terms of the opportunity.
From a merchandising perspective, we are making a lot of changes. I don't know that we need to get into all of the detail of that on the call, but for sure there is significant amount of organizational changes in our merchandising team that we are trying to -- that we are implementing; we are not trying to implement them; we are actually implementing -- that involve changing the structure of the organization and most importantly strengthening the talent level.
Wes McDonald - SVP & CFO
And it is just tweaks. Remember I said we were up 9% through the first three quarters of the year. So it is just some tweaks, not transformation.
Wayne Hood - Analyst
Okay. Wes, as you look at the year and it rolls out here, you talked about 160 basis point decline in gross margin in the first quarter. Should we be thinking more like in the second and third quarter a 100 basis point decline, and then you get a spike in the fourth quarter so it is kind of back-end loaded, the margin improvement?
Wes McDonald - SVP & CFO
Well, I think it's back-end loaded but it is probably both in the third and the fourth quarter, not just the fourth, given the fact that we do expect to see product cost down. I don't want to get too far ahead of myself. I want to see how first quarter plays out.
We will give you guys second quarter guidance when we report in May. But if you were trying to model out, I definitely would look for a deceleration, a decline, in both the third and fourth quarters.
Wayne Hood - Analyst
And then my final question, what is the level of cash that you expect on the balance sheet at year-end or what you need to operate with, and where do you think your inventories will be at the end of '12 on the balance sheet?
Wes McDonald - SVP & CFO
We are going to stick with the $1 billion at the end of the year. We were a little higher than that this year. We guided to the $825 million in CapEx and the $1 billion in share repurchase. Our guidance did not contemplate any additional debt issuance. That is a possibility in the back half, in which case if we did that, that could possibly fund additional share repurchase but that is not implicit in our guidance.
And in terms of inventories, I would expect inventory to be up at the end of the first quarter somewhere around 4% or so. As we start to build some of the units at the back-half, you could see unit growth certainly up. As to where dollar growth is going to be, it is a little too far to project. If you had to stick a number in there I think low single digits per square foot, because hopefully the units we bought we would sell through, would be a good place to end it.
Wayne Hood - Analyst
All right. Thank you, guys.
Operator
Liz Dunn, Macquarie.
Liz Dunn - Analyst
Hi, good morning. I guess as I look at the fourth quarter -- you know I looked at your prepared comments -- you didn't mention weather once. And obviously you have a very sensitive business to weather. So you are coming off of what could probably be described as one of the more difficult quarters in a long, long time but from a weather perspective, and then making changes to your business model as a result.
So why aren't we just looking at this and saying it was the warmest winter on record, and not something that needs a wholesale change in the business model?
Kevin Mansell - Chairman, President & CEO
Well, I would say a couple things. First of all, we are not making a wholesale change in our business model. We are strengthening -- hopefully -- strengthening in content that our customer is seeing in our stores. We are strengthening and really trying to clarify our message more effectively and grab her attention more effectively. And we are ensuring that our price points that we illustrate to her in our advertising are strong and powerful and really show her the value.
You know, if you think about the year in totality, Liz, you know even going into the fourth quarter we had only a 2% comp. And certainly while that is far better that we ended up the year, it is probably short of what our expectations were. So we had weaknesses in our business going into the fourth quarter that, of course, became much worse.
Weather certainly was a big factor in that. There is no question about it. But we look at our business in the context of the overall market, and in the context of our past performance versus the overall market. And generally I think our judgment is that we were deficient; that is we looked at the 12-month period and we compared our performance to others. And we put in sort of all the factors that we know, including the hurt in weather, because we probably get hurt a little bit worse than others when weather turns adversely for us because we do have a very buy now kind of shopper. Our sense is that we do need to make adjustments.
But I would emphasize to you by no means would I describe this as a wholesale change. I think actually what it is is really a focus around looking at the overall trend over time. One on the big things we tried to call out in the call, in the prepared script, is our feeling that we need to really take a step back and examine our brick-and-mortar environment and find ways through remerchandising and new categories and new businesses to get that performance better. Because we are pretty confident we will get the 40% growth in online sales again this year, but we need to have it cannibalize less of our brick-and-mortar sales. And going forward we need to continue to execute the same.
So hopefully that addresses it. We don't want to call out weather because everybody deals with the weather. We do as well. Yes, it probably hurts us a little more relatively, but it is a longer-term time that we are looking at.
Liz Dunn - Analyst
Okay. Is there any change to your thought about promotional model being the right way to go for your customer base and your stores?
Kevin Mansell - Chairman, President & CEO
No.
Liz Dunn - Analyst
Okay, great. Thank you. Good luck.
Operator
Dana Telsey, Telsey Advisory Group.
Dana Telsey - Analyst
Good morning, everyone. As you think about the remodeled stores that you did in 2011, what changes did you make -- as you think about those stores and how they performed, how did they perform relative to the base? And the new changes that you're making about the new remodeled stores, should we expect those to be significantly different?
And secondly on the merchandise change you've talked about, I believe you've opened a new Santa Monica, California facility. Is that where we should we should see some new brands coming from? And just lastly your plans for credit and how you're thinking of that income in 2012 versus '11. Thank you.
Kevin Mansell - Chairman, President & CEO
Thanks, Dana. On the remodel stores, basically the remodel stores had lifts in sales compared to the non-remodel stores in tests. Obviously, we compare remodel stores against like kinds of stores. So they definitely had lifts, but the challenges that the relative lift compared to what is necessary to justify the investment that we make, because we make significant investments in the stores, really doesn't pan out.
So fundamentally, we have worked really hard at improving that experience and marketing it a little differently. We are getting lifts, but it is not to the great degree it needs to be. And so it really says to us, hey, we need to step back and think about what is inside the store that would actually improve that.
For the future, yes, the remodel, we are pulling back the number of remodels this year for the sole and only purpose to really redesign it and to reallocate. So we wouldn't be doing that if we didn't expect that that would improve the performance based on the analytics we have done in the existing remodels.
From a content perspective, the expansion of design and additional design office beyond the New York facility, out in California in Los Angeles and Santa Monica, is definitely a signal that we think more and more there is opportunity for us to develop new brand relationships that would be sort of rooted out there.
It is also a recognition, though, that from a style standpoint that styling, categories like graphic tees need to be developed more strongly out on the West Coast, and we can kind of control that more effectively from out there.
Wes McDonald - SVP & CFO
From credit I kind of already think I answered that question, maybe not to the satisfaction of everybody. But we think income is going to go up in terms of tens of millions of dollars, so certainly nowhere near the benefit that it was in 2011. But at least from what I read from others that have credit businesses, everybody is kind of thinking the same thing.
Bad debt certainly came down quite a bit in 2011, but it won't go to zero. So I think everybody will have modest tailwinds in 2012.
Dana Telsey - Analyst
Thank you.
Operator
Dan Binder, Jefferies & Company.
Dan Binder - Analyst
Two questions. First a store question. You talked a little bit about this return on investment and the remodels. I think you have been pleased with the smaller format returns. Is your intention as leases come up on older stores to replace them with smaller stores, is my first question?
Wes McDonald - SVP & CFO
Well, our leases tend to run 20 years, so I think you and I will be long gone by the time that happens. At least I will; I can't speak for you. But I think when those come up, that certainly would be something we would look into. But we don't have any plans to convert prototypes into small. To do that is very expensive, and the resulting rent you would have to get for the extra 20,000 some square feet would be kind of cost prohibitive unless it was a really good market where real estate was scarce.
Dan Binder - Analyst
Okay. And then on the content versus price discussion, you have had some great brands that you have introduced in the last few years, several years, including last year. And they seem to have done well overall. But as you review your content, I am wondering, one, if you can give us a little bit more color on what you think is changing in these private labels? Is it color; is it the quality of the goods? And further, do you think there is a need to strengthen the national brand side of the business?
Kevin Mansell - Chairman, President & CEO
Yes. I mean by definition I think it was more people on the call who asked questions about private brands. When we talked about improvements in our content, what I talked about was improvement across the whole store. So by definition that means inclusive of the 50% of our business that is national brands, we need to improve both the style of what we are choosing and, as Wes alluded to, also the depth in many cases where we lost sales because as product cost inflation hit we brought down units probably to a greater degree than we should have, frankly.
When we think about our improvements in content on the 50% that we completely manage, it is definitely always going to be about the combination of quality and style. So improving the quality and style and then maintaining as appropriate, lowering the price if necessary, is really the definition that we have of value. So it is going to be a combination of both the quality and style aspects.
Wes McDonald - SVP & CFO
I think Kevin is right. If you look at the whole year, private and exclusive brands were up mid single digit; national brands were down mid single digits. So I think there is opportunities across the board to improve content.
Dan Binder - Analyst
Including adding new national brands?
Kevin Mansell - Chairman, President & CEO
Yes, and our strengthening. We talked about we did just add in January the Van Heusen brand into our men's business. We think it is actually going to be very, very successful, well known, strong brand in those categories. So I think more of that I think is definitely appropriate.
But is probably even more about ensuring that we have the depth and the right styles of those power brands that we do have. And to some extent we have seen in our results that there were too many cases where we didn't have the kind of depth we needed for the customer.
Dan Binder - Analyst
My final question was related to the noncredit customer. Some of the circulars we have seen over the course of the last, I don't know, six weeks, maybe a little bit more, some of the deals for the noncredit customer looked better in some circulars. Presidents' Day, I thought maybe not so much so.
What is your thoughts on sort of an across-the-board consistent improvement for the noncredit customer, and how do you go about it?
Kevin Mansell - Chairman, President & CEO
Well, the value has got to be strong for everybody. Our noncredit customer who generally doesn't shop up quite as much and is a little bit probably less loyal, I would say, probably will notice more quickly price point changes that bring the value equation to a stronger place.
Our credit card customer understands shopping at Kohl's, uses her credit discounts that she gets effectively. And while she is going to notice them, I suspect that she has always kind of realized the full value of Kohl's. So it is not surprising to me that you might notice that impact.
I would say again, though, price is just an element. We have to improve on a lot of areas if we are going to get our sales back to where we would like to be. I would reemphasize to you as I think we did with somebody earlier, this is a company that makes 11% operating margin, and that has typically been driven by strong sales on the top line and good SG&A expense control on the bottom line. And that is where we want to get back to.
Dan Binder - Analyst
Great, thanks for answering the questions.
Operator
Michael Exstein, Credit Suisse.
Michael Exstein - Analyst
I just want to thank you all for a really lucid and in-depth conversation today about strategy. And following up on Dan's question, you continue to emphasize the 11% operating margin. Is it possible that you are sort of focusing too much on that at the expense of the top line, number one? And number two, how do you get penetration; how do you get new customers in the door because everything seems to be geared still at your most loyal customer?
Kevin Mansell - Chairman, President & CEO
Well, I would say two things. On the operating margin issue, I think that has only come up as an answer to a question because I think Wes felt a little bit that we were headed down a direction that there was something wrong. And I think all we were pointing out is this is a company that makes 11% operating margin.
We are never, Michael -- I think you know this for sure -- we have never been focused on operating margin. We are focused on driving top line and driving our expenses down. And wherever the operating margin should be to get the best top-line performance, that is where we will go. So we are not focused on it at all.
I think it came up only in the context of trying to answer somebody who sort of was headed down a path of, hey, is there something more here; and the answer we feel is no. So I think that is the answer to that.
In terms of new customers, yes, this is all about new customers. Basically the things that we are talking about, which is to step back and say, inside the 1127 Kohl's stores we have, we are not happy with the productivity. And the reason we are not happy is we are not generating enough new customers.
Credit card penetration actually went up a little last year, I think several hundred basis points. So our loyal customer, she continued to be overall very happy. But we are not attracting enough new customers, and by definition to us that means we have to improve what we sell inside the store. We have to communicate it more effectively.
And we are also saying we probably have to consider allocating our space within that store differently to make it more attractive, and probably offer categories that we don't offer today or expand categories that we do offer that we think have growth opportunity. So this is definitely all about new customers.
Michael Exstein - Analyst
That's terrific. It has been a really good call. Thank you.
Operator
Patrick McKeever, MKM Partners.
Patrick McKeever - Analyst
All right, final question. So on the Rock & Republic line, I was just wondering if you might elaborate a bit on just the early read there and tell us how big a business that might be, and whether that could have a material impact on sales in the first half of this year or really in 2012?
Kevin Mansell - Chairman, President & CEO
Well, within the context of the reality that we don't ever talk about volume on specific brands, Rock & Republic is a pretty broad brand. It is a lifestyle brand, so by definition it includes a lot of different categories, and includes both the men's and women's business.
The launch has been very successful. I think to date it's essentially exceeded our expectations, and I would expect we will be in scramble mode particularly in certain elements to make sure that we satisfy customer demand going forward. So just from the perspective of that unique brand, we are really, really happy with the early results.
Wes McDonald - SVP & CFO
Thanks, everybody.
Kevin Mansell - Chairman, President & CEO
Thank you.
Operator
This concludes today's conference call. You may now disconnect.