柯爾百貨 (KSS) 2012 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Kohl's quarter one 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, anticipate, plans or similar expressions to identify forward-looking statements.

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

Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent Annual Report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.

Also, please note that replays of this call will be available for 30 days, but this recording will not be updated.

So if you're listening after May 10, it is possible that the information discussed is no longer current.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.

Thank you.

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

I will start off by talking about our financial performance and then Kevin will walk through some of our merchandising marketing initiatives and close with some comments and then I will give guidance components for the second quarter.

Total sales for the quarter increased 1.9% to $4.2 billion.

Comp store sales increased 0.2%.

Average unit retail increased 4.9% while units per transaction decreased 3.3%.

This resulted in an average transaction value increase of 1.6%.

Transactions per store were down 1.4%.

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

Our credit share was 56% for the quarter, an increase of approximately 270 basis points over the first quarter of 2011.

Our gross margin rate for the quarter was 35.9%, 220 basis points lower than the first quarter of last year and below our expectations of a decrease of 160 basis points.

Our SG&A expenses decreased 0.2% for the quarter, well below our expectations of a 3.5% increase.

SG&A as a percentage of sales leveraged approximately 50 basis points for the quarter.

Credit provided the most significant leverage, but we also saw positive results in our store payroll and other store expenses.

Moving on to depreciation.

Our depreciation expense was $201 million in the first quarter this year versus $191 million in the first quarter of last year.

The increase is due to new stores and additional e-commerce fulfillment centers.

As a percentage of sales, depreciation was 4.7%, approximately 10 basis points higher than last year.

Net interest expense was $82 million this quarter, up $6 million compared to the prior year quarter.

The increase is primarily due to the $650 million of long-term debt issued in October of 2011.

Our income tax rate was 35.5% for the quarter, compared to 36.3% in the prior-year quarter.

The decrease was primarily due to a favorable settlement of state tax audits.

Moving down to net income, net income was $154 million for the current year quarter and $201 million for the first quarter of 2011.

Diluted earnings per share were $0.63 this year, down $0.06 from last year.

Onto the balance sheet and some metrics for your models, we ended the quarter with 1134 stores.

During the quarter, we opened nine new stores, including one relocated store and closed one location.

Gross square footage at quarter-end was 99 million square feet, 3 million higher than April 2011.

Selling square footage increased 2 million to 83 million.

We ended the quarter with $1 billion of cash and cash equivalents, a decrease of $640 million from April 2011.

The reduction in cash is primarily due to share repurchases.

We have repurchased approximately $2 billion of stock since the first quarter of 2011.

Cash equivalents are in money market funds, CDs and commercial paper.

Moving on to inventory, we ended the quarter with $3.4 billion worth of inventory, a 7% increase over April 2011.

Inventory per store is up 3.7%.

Kevin will talk more about inventory management in a few minutes.

Moving on to CapEx, CapEx expenditures were $177 million for the first three months of 2012, $44 million lower than the first quarter of 2011.

The change reflects lower spending on both remodels and new stores and e-commerce fulfillment centers partially offset by higher technology spending.

We opened nine new stores in both March of last year and March of this year.

As a reminder, we are planning to open approximately 10 new stores this fall compared to 31 last fall.

We have also reduced our remodel plans from 100 last year to 50 remodels this year and we remodeled 40 stores in the first quarter.

We will remodel 10 additional stores in the fall.

During 2011, we also had a lot of spending related to our second and third e-commerce centers.

Spending on our fourth e-commerce center is ramping up right now.

AP as a percent of inventory was 47% versus about 44% last year.

The increase is primarily due to normalized [dating terms] with our import vendors, as well as an increase in March and April receipts.

From a capital structure perspective, we repurchased 6 million shares of our common stock during the quarter and have repurchased almost 71 million shares since reactivating the buyback program in the fourth quarter of 2010.

All of these purchases were made under 10b5-1 plans.

Weighted average diluted shares were 245 million for the quarter.

For your modeling purposes, I would use 241 million diluted shares for the second quarter and 239 million shares for the year.

This assumes $250 million in share repurchases in the second quarter at an average price of $50 a share.

Earlier this week, our Board approved a quarterly dividend of $0.32 per share.

The dividend is payable June 27 to shareholders of record at the close of business on June 6.

I will now turn it over to Kevin who will provide additional insights on our results.

Thanks, Wes.

As Wes mentioned, comparable store sales increased 0.2% in the quarter.

From a line of business perspective, men's, children's and accessories outperformed the Company average.

Men's had strength in casual sportswear, basics, dress shirts and young men's.

Children's was led by boys and by girls.

Notable performers in accessories included fashion accessories and handbags, sterling silver and watches.

The women's area was essentially flat.

Active and updated sportswear were the strongest categories with low double-digit increases.

Footwear was slightly negative despite a low double-digit increase in women's shoes.

Home reported a low single-digit decrease.

Strong performers in Home included tabletop, bath and towels and electric.

From a regional perspective, the cold regions -- Mid-Atlantic, Midwest and the Northeast -- significantly outperformed the warmer South Central, South East and West regions.

The Midwest and Northeast regions reported low single-digit increases.

The Southeast and South Central regions reported low single digit comp sales declines and the West reported a mid-single digit decline.

E-commerce sales increased 34% versus the first quarter of 2011 to approximately $250 million in sales.

On the product front, we launched several new exciting brands in the quarter.

Rock & Republic launched in women's, men's and footwear in February.

Sales of this premium denim and sportswear brand have significantly exceeded our internal expectations.

We also expanded the ELLE and Simply Vera Vera Wang brands into our beauty offering.

We are excited about these opportunities that these new expansions bring to our beauty business and the opportunity to grow this underserved business.

We are also conducting a sales productivity test in approximately 50 stores in three markets -- Houston, Atlanta and Salt Lake City.

We have expanded our home selections in these markets.

We expect to add two additional markets with 20 more stores for back-to-school.

Our plans are to read these tests through the balance of the year.

We intend to make changes to our remodels and new stores based on the results of this test and initial plans we have for other areas of the store.

Those changes will not take place until 2013.

Private and exclusive brand penetration increased 300 basis points over the first quarter of 2011.

Approximately 53% of our sales are now in private and exclusive brands.

Several of our largest private brands -- Croft & Barrow, SO and Sonoma -- reported strong sales and Jennifer Lopez, Marc Anthony and Rock & Republic generated higher penetration as did more mature brands such as Fila, Food Network, Lauren Conrad, Mudd and Simply Vera Vera Wang.

On the gross margin side, we are obviously very disappointed in our gross margin performance.

The difference between our expectations and our results was primarily in the depth of our promotional markdowns as we did provide great value to our customers, especially around opening price point private brands.

Clearance levels were very similar to our expectations.

We do understand better how the customer will react to the lower prices and have reflected that in our gross margin guidance for the second quarter, which we expect to be similar to the first quarter.

We would expect gross margin to improve in the fall season, but still be down from last year.

We are seeing cost decreases in the apparel areas for fall season in the mid-single digit range, which will help on the gross margin side.

On the other hand, in expense management, I am very pleased with our expense management again as we leveraged approximately 50 basis points for the quarter.

Our credit business again generated significant leverage for the quarter, but we expect this improvement to moderate in the later quarters of the year as in April, we annualized our new relationship with Capital One.

Substantially all of our operating stores also reported lower costs as a percentage of sales.

The strongest improvement was in our store payroll organization as our technology investments continue to drive sustainable efficiencies.

Other store controllable costs and fixed expenses were also well-managed.

Advertising costs did not leverage due to incremental spend to support the new brand launches during the quarter, and we also invested incremental spend on our spring television marketing campaign.

In our 2012 guidance we discussed in February, we shared our belief that gaining momentum on the top line would be a very gradual process and it certainly has been in the first quarter.

We have been focused on our value, product and promotion, along with providing a great customer experience both in-store and online.

We do believe that value message is resonating with our customer and we are priced in line with our major competitors in executing our promotional strategy while providing extra value with discounts for our credit card customers and through Kohl's Cash and Buy More, Save More events for all.

We believe our product is now more on trend and we are focused on narrowing our assortment to ensure we have enough depth in items we believe in.

We are happy with the feedback in our spring marketing campaign and expect to continue with that theme through the back-to-school season.

Our progress on sales has been hindered by not having enough inventory units in the stores.

We entered the quarter down about 6% in units in the stores and about 9% in the seasonal categories with receipts arriving in late April.

During much of the quarter, some of our seasonal categories were down as much as 20%.

We plan to be close to flat by the end of the second quarter, which is where we want to be positioned for the fall season.

I expect our inventory levels to continue to hinder our sales in this second quarter and our second-quarter sales expectations as a result are similar to our first-quarter performance.

We will continue to look for ways to be more efficient across the Company.

Our expense performance in the first quarter was a result of sustainable improvements in the stores and distribution centers, as well as continued strong credit revenue performance.

We have the continued rollout of our electronic signing initiative in the next two quarters, which should also help our expense performance as well.

And with that, I will turn it back to Wes to provide details on our second-quarter earnings guidance.

Thanks, Kevin.

Our second-quarter earnings guidance is as follows -- a total sales increase of 2% to 3%; a comparable sales increase of flat to 1%.

We would expect May to be below the quarter, June to be approximately with the quarter and July to be well above the quarter.

Gross margin rate decline of 200 to 250 basis points.

SG&A expense should be flat to 1.5%; depreciation expense of $206 million; interest expense of $80 million; a tax rate of 38%; a share count of 241 million diluted shares; and share repurchases of $250 million for the quarter at an average price of approximately $50 a share.

Including these estimated share repurchases, we expect earnings per diluted share of $0.96 to $1.02 for the second quarter.

Our fiscal 2012 guidance remains the same at $4.75 per diluted share.

And with that, we will be happy to take your questions at this time.

(Operator Instructions).

Deborah Weinswig, Citi.

Thanks so much.

So a few questions.

As we look out in terms of being more efficient with spending, can you talk about if there's any changes in your marketing program?

Our advertising expenses did not leverage in the first quarter.

I would not expect them to leverage in the second quarter as well.

With more units, we obviously expect to do better on the comp line in the back half of the year.

And hopefully, at that point, we will start to leverage.

If you recall last year, we had a big launch of Jennifer Lopez and Marc Anthony in the third quarter.

That was a sort of unique spend, so we won't spend that kind of money in the third quarter this year, so we should do better in the back half.

Okay.

And then also on the expense side, you talked about doing a great job in terms of store apparel and other store expenses.

With store apparel, is that mainly eSign or is there anything else driving that?

And then also can you talk about the other store expenses that were levered?

I think it was a lot to do with eSign and we obviously continue to try to be more efficient in the stores and manage payroll as best we can to sales.

Other store expenses, we have invested a lot of capital to manage electricity usage and that was down about 4% or 5% for the quarter.

So that provided some savings.

We also saved money in terms of [TAM].

Obviously, it was a very light snow season.

That I would expect most retailers to have saved money in as well.

But the majority of it was really with store payroll.

Okay.

And then, Kevin, with just some of the changes taking place on the competitive landscape, can you talk about any opportunities you have in terms of gaining share and maybe how that plays out in the back half of this year as you have more inventory?

Well, I mean I think our big opportunity remains internal, Deb, to be honest with you.

There obviously are a lot of changes happening in our industry, but our inability to generate the kind of store-for-store sales success we have had in the past has really been a function of us not having the kind of value we need to for our customer and not having the inventory levels in the right categories for the customer.

So it is a lot about price; it is a lot about promotion; and it is certainly a lot about products.

So I think the reason that we feel so optimistic about the fall and holiday is that we well understand the changes we need to make to our merchandise assortment in terms of communicating our value and what is happening in the competitive landscape is sort of in the background on that.

Okay great.

Well, thanks so much and best of luck.

Adrianne Shapira, Goldman Sachs.

Thank you.

Kevin, I know you are disappointed with the gross margin performance in the first quarter.

It sounds like we should expect the same in Q2.

But maybe kind of shed some light in terms of what learnings you had in terms of what went well, what didn't and what tweak we should expect to the plan in the second quarter.

Well, I mean the things that were positive, we knew -- we felt we knew that as we brought down our price points, particularly around opening price points on private brands and we illustrated those in our marketing, that we would, in fact, get accelerated unit demand.

And that definitely happened.

So throughout the quarter, there was a dramatic change in the trajectory that we had.

Sell-throughs and actual units around those key items and that was very visible to us in the selling rates across those items.

Unfortunately, we just didn't have the kind of depth of inventory to support it and it didn't, as a result, I think translate to the top line to the extent that it will as we start to build those inventories more effectively.

From a portfolio perspective, we also did well with our new brands.

So it is not all about a focus around opening price point.

We can provide great value around what we would consider kind of our best brands, things like Rock & Republic and Jennifer Lopez or Marc Anthony, which resonated well in addition.

But there is no question that changing the value that we offer to customers is making a difference in how they respond to the product.

And that we think combined with deepening the level and continuing to work on the on-trend nature of what we offer is going to be a tailwind for us as we get later in the second quarter and then certainly into the third quarter.

Adrianne, this is Wes.

I also think the majority of our gross margin pressure was in the private brands because that is where we took the biggest price reduction.

It is also where we have the biggest cost increases.

When we start to get cost reductions in the back half, private brands should perform better.

We still expect our gross margin to be down in the back half, but nowhere near to the extent they are in the spring.

National brands for the quarter kind of were at the same level as what our total Company was from a gross margin perspective and exclusive brands by their very nature since they are a little bit less price-sensitive and more in our better and best price points, gross margin was down still, but significantly less than the Company.

Okay, that's helpful.

And just a follow-on to that, it sounds like the inventory investments you think is key to help sales growth.

Since you ended the quarter with inventory up 7%, how should we be thinking about that inventory to sales?

Obviously it looks like it is going to be outpacing your comp plan in the near term.

Give us the confidence in terms of, as you build inventory, how do you mitigate any sort of markdown liability that might come along with sort of a heavier inventory debt?

I guess from my perspective, you're also starting to see cost reductions.

So units might be up, but costs might be down.

So your dollar increase in terms of inventory won't be as great.

We look at it more on an inventory per store basis versus an overall inventory.

So our inventory was up 3.7%.

I would expect at the end of the second quarter for it to be somewhere in the mid to high single digits on a per-store basis.

That will give us enough units, we think, to do much better.

You have got to remember, last year, we were down significantly in inventory.

So if you go back to 2010, we are probably sort of flattish and it is not going to be across the board.

There are certain areas we are going to be investing in.

Like kids definitely reacted very well to the price reductions we took in the first quarter.

We are going to be very aggressive for back-to-school on that from a unit perspective.

Obviously it is a big season for the kids business.

In areas like Missy's [updated] and contemporary, we need more units.

Classic inventories on the Missy side we won't be as aggressive in.

That business is coming back a little bit.

It is probably the best quarter we have had in close to two years on Missy's classic, but you are not going to see the kind of unit growth in that area that you will in the other two I mentioned.

So we are trying to be smart about it.

It is not going to be across the board and we are certainly cognizant of the fact that it is a little bit bigger unit increase than we have had in the past, but we are still trying to normalize where we think demand is.

Private brands definitely were hurt by the lack of units.

We started March in a pretty good shape and then when it got hot those two weeks in the cold weather regions, we blew through a serious amount of units in two weeks and that really dampened our April sales.

Most of our seasonal categories for the month of April were down at least 20%.

That's helpful.

Thanks, Wes.

And then, Kevin, when you talk about the value product and experience, that is what you are focused on to turn things around, obviously we are seeing the change (technical difficulty)

Lost you, Adrianne.

Bob Drbul, Barclays.

Hi, good morning.

To be clear, we didn't --

We didn't cut Adrianne off.

We thought her question was very intelligent, but somehow she fell off.

All right.

Kevin, I guess as you look at the horizon over the next several quarters, from a merchandising perspective, where do you see your biggest opportunities?

And then from like a new brand opportunity, Rock & Republic seemingly gone very well.

How is the opportunities in terms of the availability of new brands or product development from that standpoint?

Sure.

I mean I think as we look at fall and holiday just on a quarterly basis, this is getting a little ahead of ourselves, but clearly our biggest opportunity is holiday and we really underperformed in the fourth quarter last year and that was in particular around categories that were more gift-related.

Across the whole store, of course, but gift-related categories, so that is clearly something we are really focused on being prepared to correct this year.

I think second, as Wes kind of mentioned, opening price point was an area that didn't perform and it was really a function of us not supporting it with the kind of levels of inventory as we navigated through higher costs last year.

So our inventories and opening price points being aggressively planned up and from the positive perspective, it's happening as costs are coming down.

So we are definitely buying into the right time.

There's other things as well, Bob, but I would just say big picture, it is not about the fall and holiday.

Say, hey, they are really focused on building their value assortments, which are a lot about our opening price point, that 30% plus of our business that's our private brands and making it right.

And then as they get into the later third quarter and fourth quarter, they are really, really focused around a lot of different categories in the store, but all around our gift strategy.

New brands continue to be important to us, but I think the last year has pointed out pretty clearly that while we need to continue to introduce new brands and we will, we would expect to have some announcements for you for the fall season to share with you probably later this quarter and be delivered in the fall.

It is almost more important for us to make sure that we have the new styles, new colors, new aesthetic in our existing brands and keep those brands fresh because those are all very important to our sales success.

Okay.

And Kevin, when I was in the stores this quarter, it seemed like the color denim trend was a good trend for you, but it seemed like you guys might not have had a broad enough assortment.

Is that something you are expanding for the fall?

Is that where you see an opportunity?

Yes, I mean definitely we had colored denim.

There is no way we had anywhere near enough depth on it.

It was a big miss and it is definitely an area that, as we looked at our competitive set, particularly in the specialty store world, they did a much, much better job of having depth of inventory there.

That is clearly something we are correcting and as we move into back-to-school, I think that the expectation in colored denim will be really important to the business and we will own it in the kind of depth we want.

Great.

Thanks very much.

Good luck.

Paul Swinand, Morningstar.

Good morning, thanks for taking my question.

I wanted to ask about the credit uptick.

I think you said in the prepared remarks it was up a little over 2%.

What is driving that?

Because some of the other retailers have been flat.

Is it greater penetration with existing customers?

Are you able to get better approvals with the new rules out there or is it actually driving new customers into the store and how is that all working?

If you could give us some color, that would be great.

I think it's definitely not coming from approval rates.

We still have -- with the new regulations, it is more difficult to approve people than it has been in the past.

We have made some changes or are going to make some changes in June and July from our scorecard perspective that should give us a little more increase in approval rates, a couple hundred basis points.

But it is really just I think continued recognition from bank card customers that they can get additional value if they are willing to sign up for a Kohl's card.

So that has been really what we have done since we went public back in '92.

In the nine years I have been here, the credit share has increased pretty significantly.

We have markets that are over 60%, so we still think there is room.

We have markets that are in the 40%s, so we still think there is room there.

So it is just a question of time in the market.

The older markets tend to be closer to 60%; the younger markets tend to be in the 40%s.

So over time, we would expect that credit rate to continue to increase.

Okay, great.

Thanks for that.

And then just to follow-up on Adrianne's -- I think it was Adrianne who was asking about the units.

On a unit basis for store, are you actually down even though the dollar inventory is up, I think you said 7%?

Yes, units were down 6% per store and seasonal categories on average were down 9%.

But that was a latebreaking development with receipts that came late in the quarter.

So like I said in the comments, some of our seasonal categories in March and April depending on the week were down 20%.

So we are going to be in a better place; we are going to improve each month.

We expect to end the quarter on a unit per store basis sort of flattish.

We obviously also have -- one of the things that you guys have to take into account when you were looking at our inventory total growth, we are buying inventory now for four EFCs versus basically two last year.

So that is going to require a little additional inventory to support the 40% growth we expect in e-com.

Got it.

Okay, thanks again and best of luck.

Adrianne Shapira, Goldman Sachs.

I think we can go to the next one, operator.

Michelle Clark, Morgan Stanley.

(technical difficulty) -- been a key reason for the recent comp weakness.

How much of recent comp weakness is attributable to the fact that Penneys having to significantly step up promotional activity as sales are coming much weaker than they expected there?

I'm sorry.

We didn't hear the whole --

Your first part of the question cut off.

(multiple speakers)

Sorry.

Okay, so I am just trying to get at -- you had mentioned that not having enough value price points and then not having enough units are the key drivers behind the comp weakness for you guys as of late.

I am wondering how much is stepped-up promotional activity at JCPenney weighing on your ability to comp?

It would be hard to answer that question, Michelle, without knowing how their sales were.

I mean being honest about it, if their sales in the first quarter were up over last year, then I think we have to say, okay, we maybe lost some share to JCPenney.

If their sales in the first quarter are less than last year, then I am thinking it would be hard pressed for us to convince ourselves that we lost some share to JCPenney.

So without knowing how their business is, it's really difficult to answer that question.

So I would imagine whenever they do release sales, you will have a better insight into, [A], if Penneys' sales were better than last year, then maybe part of Kohl's weakness is due to that and you will be able to make a better judgment.

It is impossible for us to make that judgment right now.

Okay, but you don't see -- we have noticed significantly stepped-up promotional activity there throughout the quarter, but you don't think that that's a big negative to you guys?

The negative to us is exactly what we have been discussing on the call so far.

That is what is driving the lack of sales.

Okay, that's helpful.

And then, Wes, you had mentioned that credit was a big benefit to SG&A expense in the first quarter.

Just wondering if you can give us incremental color there.

How much was the stepped-up credit income year-over-year and how should we be thinking about that as we go through the rest of this year?

I mean it wasn't the entire bead.

I would say credit was the majority.

Stores all in was very close to credit; we had things that were below.

In terms of millions of dollars, it was around $20 million.

I would expect that to not be as good in the rest of the year, but it is still going to be a benefit.

We don't have the situation that another competitor talked about where they had a big one-time situation last year where they had a big influx of income and credit.

Ours will be more consistent throughout the year.

I mean credit is a tailwind in the first quarter and the way Wes is describing credit for the rest of the year is built into the guidance we give you.

Yes, there is no upside to what I just told you.

I mean it went from 3.5% to flat and I just guided flat to 1.5%.

So if you're looking at an upside, it is already built into the guidance.

Right, it is included in the guidance.

Got it.

And then you mentioned on the comp cadence during the quarter that May would be well below the quarter average and July well above.

Can you --

I didn't say -- I just said May was going to be below, not well below.

Okay, below and then July above.

What are the drivers of that?

Well, the biggest thing was actually, last year, we thought we missed a lot of business in July.

We had a very good June.

We ran two credit events in June and then eliminated LPS and we think we pulled some business forward.

That is now normalized and we have a -- at calendar July, that hopefully will be a much stronger July.

And then the reason for May?

It is just really more -- I mean the whole quarter is really just more about the cadence of --

Of unit.

-- what we know about our inventory position and promotional support to that.

So as we are looking at each month and of course, last year plays into this, as Wes said, as well.

But as we are looking at each month, there is a much higher confidence that we will be positioned to drive our sales by the time we get to the later part of the quarter and we also have more of an opportunity on a year-over-year basis as well.

Great, that's very helpful.

Thanks, guys.

Paul Lejuez, Nomura.

Thanks.

It's Tracy Kogan filling in for Paul.

Two questions.

The first one for Wes, I was wondering about the performance of the e-comm business from a margin perspective.

With your EBIT margins down overall, I was wondering if e-comm was also down or was it just bricks and mortar.

And then secondly as you anniversary the JLo/Marc Anthony launch in the third quarter, I know you said marketing you did not expect to be up, but just wondering what you have planned to go up against that.

Thanks.

From an e-comm perspective, it was obviously down.

When you are down 220 basis points in gross margin, it is hard to be up in either area of brick-and-mortar or e-com.

As relative to marketing goes, we are still finalizing our marketing plan.

My point is we are not going to spend $20 million launching JLo and Marc Anthony in the third quarter.

We might spend $15 million of that on something else, but I don't think we are going to spend the entire $20 million.

Any type of launch to go up against that?

We are planning new introductions for the fall season and I would expect to be able to share that with you probably in the middle part of this quarter or so.

Newness is important to us, and we are not going to slow down on introducing new brands where they are appropriate and new partnerships.

But it is also clear from our sales trajectory in the last two quarters.

In September of last year, we had the most successful and largest branch launch in the Company's history.

We then proceeded to have the worst quarter in the fourth quarter that we have had in many, many years.

So you don't want to get so fixated on new brands to drive the business.

It's got to be overall brands that drive the business and the new brands are just a little bit extra.

So there will be a new introduction in the third quarter.

Thanks.

Good luck, guys.

Matt Boss, JPMorgan.

Hey, good morning.

Any update on a new store prototype or any tweaks to the remodel program to look forward to?

We have kind of talked a little bit about that in the script.

We are testing the expansion of home on those three markets we mentioned -- Atlanta, Houston and Salt Lake City, so if you guys want to travel down there and check them out.

That is part of what we are looking that.

We are also looking at other areas of the store where we are not as productive as the overall store.

That will be sort of in a test in a couple stores in terms of just trying to figure out how it will look, but you won't see any of that really until 2013.

My expectations for 2013 new stores, kind of what we have been telling you, 20 new stores until we tell you something different.

And then in terms of remodels, depending on the results of the tests, I think we will probably stick with 50 remodels for next year and get some of the kinks out of what we are trying to do in some of the other areas of the store other than the expansion of home.

And then from an SG&A perspective, looking past 2012, how should we think about 2013 from an online infrastructure?

Where do you stand today and should we be thinking about a ramp-up in SG&A around that longer term?

No, I think we have kind of guided to an SG&A leverage point of 2%.

We obviously did much better than that this quarter.

I am not signing up to leverage at a flat comp in a multiyear plan; that would be pretty difficult.

So I would use 2% for your modeling.

We are undergoing a very methodical sort of profit improvement project through the entire Company.

We have split it up into five waves.

We are through two of them.

We expect to finish it by the end of the year and hopefully, we will have some savings that we can bank on in 2013 and '14.

I am not at liberty to tell you the details, but it is not an insignificant amount.

How much we choose to reinvest in driving the top line kind of remains to be seen, but I would just use the 2% for now.

Okay, great.

Thanks.

Jeff Klinefelter, Piper Jaffray.

Yes, thank you.

Kevin, I just wanted to follow up a little bit on the inventory, Q1 inventory.

I mean in light of -- I think you are suggesting or Wes suggests seasonal inventory down like 20% when you get into April, significantly outperformed in March.

Put that in context what the overall business delivered in the first quarter.

I mean clearly there was more demand for seasonal products across the industry, but in hindsight coming in, you came in to low on that inventory.

What sort of back-up plans do you or did you have for seasonal?

How fast can you get back into it?

And the same for the colored denim or any other fashion products that are trending well right now.

Well, I mean I think that the conversation around inventory for us is a very important one because it is definitely a key element of why we have not been able to recover on the top line as quickly as we would like.

Seasonal product, which is a very important part of our business, as you know, Jeff, because we are definitely a buy now, wear now kind of retailer with our customer, did not recover to the degree that we would like.

It's just taken it longer than we would have expected.

And even as we did recover and we were able to pull forward, it occurred at the same time as we were driving lower prices on those products.

So we went through, from a sell-through perspective, a lot more units than we had expected.

And I think you are right in asking about trends like colored denim.

I think generally we are dissatisfied with the speed to which we are recovering on that.

It is going to happen.

We feel really good about what we see coming in in May and June to prepare us for July/August back-to-school and we will be in a much, much better place.

But it is taking a little longer than we would like and so it is certainly an area of focus for us.

How do we move more quickly and how do we identify those opportunities more quickly so we can react to them?

High level though, we made a calculated decision as we went into the fourth quarter last year about where we wanted to position our inventory.

And that was also true for the first quarter this year and we are living with the result of that.

We can't afford to airfreight things.

So when you make a decision in January to be more aggressive on price, it is going to take you till June to get the number of units you want to be where you want to be and that is just the reality of the private brand supply chain and how fast we can get things in.

Okay, that's helpful.

Just thinking back on -- I seem to recall we went through a cycle like this back in the '03/'04 time period.

I think there was a skew toward basics, product basic inventory kind of in your assortments.

And I believe you started talking then a lot more about exclusive brands and getting a little more fashion content.

It just feels like maybe we are going through another one of those cycles.

Is the organization -- has there been a change in the organization the way you're set up to react and respond to these fashion trends as they move faster today?

Yes, I mean the short answer, and we don't obviously have enough time on conference calls to go into that kind of detail, but there is no question that the experience we had in the fall and holiday season caused us to really rethink the entire buying, planning, product development structure we have.

It is not dissimilar to nine years or so ago where we had to rethink certain parts of our Company and support it with more infrastructure, both technology and people.

It is similar in thinking to that.

There have been a tremendous amount of changes as a result of the experience we have had and so we've made relatively for us massive changes in our buying organization and then, of course, planning kind of parallels, as you know, buying.

So those changes spilled over into planning.

And our focus around exclusive brands and our focus on the need to move more quickly and be more trend-right has also caused us to make a lot of changes in our product development area as well.

So there is pretty significant changes, and as I said, Jeff, we can't get into the detail on those on the call, but they are new positions.

The Company has restructured the pyramid in the Company, so we are more efficient and more streamlined, more focused around categories that we think are opportunity businesses for us because everything you are touching on was clearly apparent in our results.

And it made it clear to us we needed to act quickly.

From a CFO's perspective, '03 and '04 was a different problem.

We had too much ugly woman stuff back then.

Now we are chasing units, so it is a good problem for the merchants to have; it is a good problem for the vendors to have.

We are trying to buy more product that is on trend.

So that is a very inspiring message for the merchants to go out there and get more inventory.

They like that.

I appreciate the perspective.

One last thing.

On the prototype, what is motivating that new prototype?

Is it kind of learnings from e-commerce, is it competitive environment?

Anything else you can add to that?

Well, I think it is all of the above certainly.

Certainly number one is the recognition that online, which continues to grow at a very high rate across the industry and as you know for Kohl's, at a much, much higher rate is a potential cannibalization of brick-and-mortar retail that -- sales that could be happening.

And so it has caused us to just think about the longer term.

It is not a short-term thing.

It is a longer-term thing of, hey, if these rates of growth continue, what does that mean about what should be inside our stores in terms of what we sell to maintain, if not return to our sales per square foot?

And so we've looked inside our store and looked at categories that we believe have opportunity for us either as it relates to a lower share of market compared to our core business or categories which have been running at a higher rate of growth over the last five years, or in some cases both where we have a low share of market even though we have been running at a higher rate of growth.

And all those things are kind of playing into rethinking how we allocate space in the way our stores are presented.

We are fortunate, as you know, Jeff, in that we have historically allocated a significant dollar amount to capital around remodeling our stores.

And so what we really are able to do is simply rededicate that capital in a different way.

So I think we feel like we have a marvelous opportunity.

We don't have to spend more money; we just have to utilize the money we are already spending in a different way.

Yes, I mean the goal is really to try to get $10 more a square foot.

(inaudible) from $220 to $230.

Home is not the highest productive square foot we have in the Company, but we think it is an opportunity from a line-of-business perspective.

Categories that sell online very well we think could sell in the store very well.

We are taking a little bit of space away from children's; that is our lowest productivity on a sales per square foot basis.

Now part of that is because obviously the AURs in kids are a lot lower than some of the other areas, so we have to be careful that we are driving the overall business of the store and hence the reason we are testing it through the balance of the year.

Great.

Thank you very much, guys.

Charles Grom, Deutsche Bank.

Thanks.

Good morning, Kevin.

Good morning, Wes.

It may be kind of difficult to answer, but when you look at the first quarter as a whole, how much do you think your comp softness was really kind of self-inflicted because of the price investments and because of the lack of inventory?

And I guess how much of that do you expect to kind of bleed into May and into the second quarter?

I mean those are -- it is always a hard question to answer because you don't want to ignore competition.

I don't want to pretend like it's not real, but I think our judgment is that as we look at our performance over the fourth quarter and the first quarter, that almost all the results that we got were purely self-inflicted.

They were -- we have nobody to blame but ourselves and we understand that.

We understand the things we have to correct to change that.

That is not, as I said, to minimize the intensity of the competition or the changes that are happening in our industry or other retailers performing and executing better.

That's always the backdrop, but I think the vast majority of our disappointment is our own execution.

And we've, as you know, Chuck, tried very hard to take those head-on in not just a small way, but across the Company organizationally and process-wise to drive change.

And I think our feeling is that we are seeing the change coming.

It's coming, but not surprisingly as we expected, it is just taking a long time.

And so, yes, it is certainly -- our guidance that Wes gave you for the second quarter is certainly predicated on the fact that this change is coming slowly and it is not going to change quickly and as a result, it would be foolish for us to set expectations that we might have difficulty meeting.

Right.

And then where you have reduced prices, you alluded to this I think earlier in the Q&A, and so where you have reduced some of the prices and you do have the inventory, could you maybe give a couple examples of the elasticity or the response rates that gives you the confidence that when you get into the back-to-school period your sales will accelerate?

Yes, I mean, too, without giving you a specific item example, I mean two places that it is very clear very quickly that by adjusting our value we changed the trajectory of demand.

One was children's apparel for sure.

It was dramatic and it was phenomenal.

It was very strong and the response from the customer was very, very strong.

And then, secondly, broadly across the store in a small way in the first half, but in a much bigger way we will be in the second half, we focused around what we call great value items or key items.

And they are not in one particular area; they could be in home, they could be in apparel, they could be in footwear.

And on those items, those great value items, as we implemented changes to our pricing structure, we saw the sell-through rates accelerate consistently across all the items.

So it wasn't a one-business phenomenon.

It was very clear that there was a lot of elasticity as we changed the prices.

So we have got pretty good solid bases in making the decisions we are making for the fall.

Okay, okay.

That's good color, thank you.

And then just one for you, Wes.

When we -- you're keeping the full-year $4.75 view.

It sounds like the former gross profit margin guidance of 70 basis points maybe a little bit worse.

Can you give us a little bit of complexion of the outlook for the full year both on the margin front and also on the buyback?

Would you still expect to do $1 billion or could we see a little bit more?

Well, I am not getting into the fall season because most people don't even give guidance anymore, so I will stick with my second-quarter guidance.

We not done with the fall plans yet; we are wrapping them up.

Margin is going to be down in the fall.

Could it be down more than I originally thought in February?

Yes.

Is SG&A going to be better than I originally thought in February?

Yes.

So we get paid to get to the guidance in different ways.

So we are just going to try to get to the guidance and we will give you guys the details as best we can when we are fully informed.

Right now, I am not fully informed about margin for fall.

So from that perspective on the buyback, 250 is probably on the conservative side.

Depending on where the stock is for the quarter, we could buy back more.

Depending on where we are and where interest rates are, we could issue more debt in the third quarter.

Modest, we're not talking a huge lever, but maybe 250 or 300 and use that to buy back stock.

We haven't made a decision on that.

We will talk about it at our next Board meeting and probably talk to you about it next quarter as to whether or not we are going to do that or not.

I mean generally I think, Chuck, that the pressure that our lack of sales in the last couple quarters has put on our share price, the only positive outcome of that is that it put us in a buying position because we have a pretty good feeling about the fall and holiday in the future and we just think that the current trading price is -- it's a buy.

So as (inaudible), he sets the guidance on the buyback, but we are certainly going to be aggressive about it.

Okay.

And then if I could sneak one more in.

I know you did make some changes in the merchant team, sort of diverging the responsibilities up amongst I think a few more people.

Can you shed a little bit of light on how quickly you think that can lead to better trends in some of the categories where you have been underperforming?

I think the answer is going to be by area.

We expect that a new executive team driving our online business moves onboard and up and running is going to have an impact to accelerate online sales even further for the fall and holiday.

We have named a new executive to run our young female businesses, our junior and children's businesses.

And I feel really good that she's going to have a major impact for back-to-school.

So the answer is going to depend by area, Chuck, based on when the team started and how quickly the timeline is from a process standpoint to make an impact.

Certain areas are going to be faster than others.

Okay, great.

Thanks very much.

Liz Dunn, Macquarie.

Hi, thanks for taking my question.

I guess a few questions.

Starting with the marketing, you mentioned that you didn't leverage marketing and I understand that is a -- or advertising -- I understand that is a little bit because of the sales shortfall.

But what is it that you are pleased with?

Is it these ads featuring Dana Torres and that kind of thing or can you just talk a little bit more about the marketing strategy and what is leading you to think that that is headed in the right direction?

Sure.

As you said, if you strictly look at it on a leverage perspective, we didn't leverage in marketing.

We increased marketing more than sales increases, but I think our judgment is that's primarily the product and the depth of inventory.

When you look at it from a more qualitative standpoint and say, okay, what were we looking to do in the first quarter with marketing, we were looking to change the way our print and direct-mail ads look so that our price points were much more prominent and much -- provided much more clarity to customers around our value.

I feel like while we are not there, we have made a tremendous amount of progress there and it's very visible to me and the ads look different and they feel different and the customer is seeing the price points clearly in the ad and they are going to see it clearly in the store.

When it comes to message behind that, our message really is it's exciting to shop at Kohl's.

Our sales are absolutely amazing and if you shop those sales and watch our value, you are going to have a great feeling and a great experience.

And I think the broadcast campaign that you are referring to does a good job of saying that in a very overt way.

So from a qualitative perspective, I think we have taken some steps that to me are in line with what our objective was.

If you're looking at it strictly on a quantitative standpoint, advertising didn't leverage.

I didn't expect it to leverage.

I don't think Wes expected it to leverage.

Okay, that's helpful.

And then why not at this point just, and perhaps the answer is there is not any opportunity to do so, but why not reaccelerate store growth?

Is that something that is off the table for the foreseeable future?

Well, I don't think anything -- we are continuing to open stores, which is probably a bit unusual in our industry to be honest.

If you're objective about it and look at our competitors, there is really nobody who continues to open up the number of stores we are.

So we are continuing to open stores, but I think we also are pretty objective about this and we are saying we have some issues to solve internally.

We need to focus most of our attention around improving the message of our business.

And once we feel better about that when we can produce results, not just talk about it, then we would be in a better place to consider new opportunities to grow.

Yes, and we are not -- to be totally honest, we are not happy with the performance of our new stores in the last few years.

And when we opened them in the recession, they are not hitting our pro forma because the economy is not where it was when we developed the estimates.

In a lot of cases, in some of the mild and hot markets where there are housing issues, housing growth stopped.

So we are not getting the kind of lift that we normally would get as a trade area matures because there is still open lots there.

So from that perspective, I think 20 stores a year is what I would use going forward.

If we start to do better and our results are better, certainly could accelerate that.

Okay, great.

I will take the rest offline.

Thank you.

Thank you, ladies and gentlemen.

This does conclude today's conference call.

You may now disconnect.