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Operator
Good morning; my name is Brent and I will be your conference operator today.
At this time I would like to welcome everyone to the Kohl's fourth-quarter and year-end 2012 earnings release conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers' remarks will be a question-and-answer session.
(Operator Instructions).
Certain statements made on this call, including projected financial results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Kohl's intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements.
Such statements are subject to certain 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 as expressly incorporated herein by reference.
Also, please note that replays of this recording will not be updated.
So if you are listening after February 28, it is possible that the information discussed is no longer current.
Thank you.
I would now like to turn the call over to Wes McDonald, Chief Financial Officer.
Please go ahead, sir.
Wes McDonald - Senior EVP & CFO
Thank you.
With me today is Kevin Mansell, President, Chairman and CEO.
I will walk us through the balance sheet and P&L and give you some forward-looking guidance, and Kevin will take you through some of our merchandising and marketing strategies for 2013.
As a reminder, the 2012 fiscal year was a 53-week year for accounting purposes.
All results reported today are 53-week results with the exception of comp sales metrics.
Details on the impact of the 53rd week are available in the text of the earnings release.
Comp sales increased 1.9% for the quarter and up 30 basis points for the year.
The quarterly comp increase reflects a 4.2% increase in units per transaction offset by a 2.5% decrease in average unit retail.
Transactions were essentially flat for the quarter.
For the year average unit retail increased 1.8% and transactions per store decreased 1.5%.
Units per transaction were flat for the year.
Total sales increased 5.4% to $6.3 billion for the quarter and 2.5% to $19.3 billion for the year.
Kohl's charge sales penetration increased 80 basis points to 54% of total sales for the quarter.
Our annual credit share was 56%, an increase of 130 basis points over fiscal 2011.
Kevin will provide more color on our sales in a few minutes.
Our gross margin rate for the quarter was 33.3%, approximately 290 basis points lower than the fourth quarter of last year.
SG&A increased 3% for the quarter, better than our expectations of up 3.5% to 4.5%.
SG&A as a percent of sales leveraged approximately 40 basis points for both the quarter and the year.
Depreciation expense increased 10% over the fourth quarter of 2011 to $214 million.
For the year depreciation increased 7% to $833 million.
The increases are primarily due to IT investments.
Net interest expense was $85 million this quarter and $329 million for the year.
The increases are primarily due to debt issuances in September 2012 and October 2011.
Our income tax rate was 37.1% for the quarter, 70 basis points below our expectation of 37.8%.
The difference is due to tax credits that were extended when the fiscal cliff deal was finalized.
Diluted earnings per share decreased 8% to $1.66 for the quarter.
Net income was $378 million for the current year quarter and $986 million for the year.
For the year diluted earnings per share were $4.17 this year versus $4.30 last year.
The 53rd week increased our current year EPS by approximately $0.06.
Some information for your models; we currently have 1,146 stores with gross square footage of 99.57 million square feet and selling square footage of 83.09 million.
Square footage is 1% higher than last year at this time.
Moving on to some balance sheet metrics, we ended the quarter with $537 million of cash and cash equivalents.
Our CapEx expenditures were $785 million for 2012, $142 million lower than 2011.
The change reflects changes in our capital expenditure mix, including fewer remodels and new stores partially offset by higher IT spending.
As a reminder, we opened 12 new stores this fall compared to 31 last fall.
Our projected CapEx for 2013 is $700 million.
Our January inventory balance was $3.7 billion, a 16% increase over January 2011.
On a per store basis inventory dollars are up 12%, consistent with our previous guidance.
And compared to February week one, which is a more apples-to-apples comparison, inventory is up 6% per store.
Kevin will talk more about inventory management in a few minutes.
AP as a percent of inventory was [330] basis points lower than last year at 35.2, primarily due to slower inventory turnover.
Weighted average diluted shares were 228 million for the quarter and 237 million year to date.
On February 27, 2013 our Board declared a quarterly cash dividend of $0.35 per share, a 9% increase over our previous dividend of $0.28 per share.
The dividend -- or $0.32 per share, excuse me.
The dividend is payable March 27, 2013 to shareholders of record after the close of business on March 13, 2013.
I will now turn it over to Kevin who will provide additional insights on our results.
Kevin Mansell - Chairman, President & CEO
Thanks, Wes.
Let me start by adding some color first to our sales results.
From a line of business perspective, children's reported the strongest comp for the quarter primarily on strength in toys.
Women's and men's apparel were both above the Company average for the quarter.
In women's active apparel was the strongest category with an increase in the high teens.
Updated and contemporary sportswear and classic sportswear also outperformed the Company.
As we expected, the junior business continued to be challenging.
Notable performance in men's included both basics and active.
Footwear was slightly below the Company average; athletic shoes were by far the strongest category.
Home was also below the Company average.
Notable strong categories included housewares, bedding and small electrics.
And finally, accessories was the only line of business that did not report a positive comp for the quarter.
Sterling silver jewelry, watches and bath and beauty were the strongest performers in the accessories category.
From a regional perspective the West was the strongest region for the quarter.
All other regions were slightly negative.
eCommerce sales increased 43% for the quarter.
For the year eCommerce sales were $1.4 billion, 42% higher than the prior year.
ECommerce contributed 320 basis points to our quarterly comp and 230 basis points to the annual comp.
From a brand perspective, 48% of our fourth-quarter sales were private and exclusive only at Kohl's brands, an increase of approximately 30 basis points over the fourth quarter of 2011.
The increase was the result of our newer exclusive brands, Jennifer Lopez, Marc Anthony, Rock & Republic, DesigNation and Vera Wang, as well as strong sales in more mature brands such as Chaps, Lauren Conrad, Vera Wang and Fila Sport.
On the gross margin side, as Wes mentioned, our gross margin rate for the quarter was approximately 290 basis points lower than the fourth quarter of 2011.
While this was lower than planned, we were able to clear much of our seasonal merchandise in order to make way for our spring assortments.
We believe that our value equation is now right and we expect gradual improvement in our gross margin throughout 2013 as a result of lower cost.
Moving on to expense management, on the SG&A line we performed slightly better than we expected.
Our store organization continues to drive payroll efficiencies.
Our fixed costs generally were flat as a percent to sales.
And we also reported significant leverage in our corporate operations primarily due to lower incentive costs.
Marketing costs as a percentage of sales were flat for the year.
Our credit operations leveraged again this year.
Our future performance will be driven by our ability to grow the portfolio and to manage the customer service and marketing functions more efficiently.
We would expect more modest contributions from credit in 2013.
Finally, distribution centers did not leverage as we continue to develop the infrastructure for our growing eCommerce business.
However, we were very pleased with our improvement in shipping costs and eCommerce fulfillment expenses as a percentage of eCommerce sales versus the prior year.
Moving on to the store experience, we ended the year with 1,146 stores, 19 more than the year-end 2011.
During 2012 we open stores in 20 new locations, relocated one store in Michigan and closed one store in Ohio.
Our current plans are to open 12 stores in 2013 -- nine in the spring and three in the fall.
Consistent with 2012 new stores, we expect all but one of the 2013 stores to be small stores with less than 64,000 square feet.
We remodeled 50 stores in 2012 and we expect to remodel 30 stores in 2013.
Most of these remodels are expected to occur in the fall season.
As of year-end, approximately one third of our stores now have customer service in the front of the store.
This change has been received extremely well by our customers who appreciate the convenience of having this service at the front rather than at the back of the store.
Additionally, all stores now have electronic signs.
Relocating customer service and installing electronic signs are key contributors to the payroll savings which allow our store organization to consistently deliver store payroll leverage.
Last year we tested several sales floor productivity ideas in selected markets across the country to drive sales.
In general the sales lift in those departments that were expanded, primarily home, did not exceed the loss of sales in the departments reduced.
As a result the test will not be rolled out.
However, several ideas developed from the test around more emphasis on certain categories, again particularly in home, that will be pursued company wide.
We believe strongly in the importance of testing new ideas and concepts and will continue to do so this year as well.
Those tests, whether product display ideas, technology or marketing, all help us to ensure our ROI goals are met and reduce the probability of mistakes with the customer experience.
Moving on to our investments in eCommerce and in IT.
Since its inception in 2001, our eCommerce business has grown at a compounded annual growth rate of more than 50%.
In 2011 we reached $1 billion in revenue and this past year revenues exceeded $1.4 billion.
Growing sales and improving profitability in this channel has acquired investments and we are going to continue to make those investments.
On the human side, we're investing in eCommerce merchants, planners and technology positions.
We are also improving the foundation of the website and expect to be in a new, more versatile platform this summer partnering with Oracle.
We continue to stress the value of the Kohl's credit card to our online shoppers.
Kohl's charge penetration is higher online than in our store which has improved profitability.
We've also made significant progress in reducing shipping costs and continue to identify ways to improve EFC processing costs.
We're also making the necessary investments to ensure our customer has the omni-channel shopping experience that she desires.
All of our stores are now equipped to WiFi so she can share her shopping experience real-time with her friends.
We have replaced our gift registries with more modern kiosks and have plans to further improve the kiosk and the gift registry experience on it later this year.
We will pilot mobile POS in the third quarter.
Through our global inventory visibility project we will be able to better track our in-store inventory, the first of many steps necessary for us to offer in-store pickup for online orders.
During holiday 2012, we tested fulfilling online orders from stores and expect to expand this test to 100 stores by holiday of this coming year.
We've also expanded our RFID pilot to additional stores as well.
Finally, we're making investments in the infrastructure which supports our operations.
We will be implementing a new master data management system which facilitates seamless inventories across all channels and staged deliveries within the period.
We are investing in price management, the second generation of markdown optimization which focuses on promotional and permanent markdowns.
And additionally, we are investing in new purchase order and new data warehouse systems.
Moving on to marketing, on the marketing front our objective is to re-energize the Kohl's brand to drive more engagement and ultimately traffic.
In 2013 our advertising will continue to emphasize our value proposition, but will be especially targeted at mom, particularly in the 35- to 54-year-old age group.
We will also shift our marketing towards channels that we believe will maximize our marketing dollars.
This includes significantly increased TV and digital exposure.
In addition we'll have a more balanced presentation between our private and exclusive national and our national brands in our both broadcast and circular efforts.
In fall of 2012, we piloted a loyalty program in 100 stores which provided additional flexible value to shoppers who either don't qualify for a Kohl's credit card or who simply prefer not to use credit in payment.
As with our other pilots, this loyalty program pilot has provided us with significant insights into how our customer shops and how we are able better to influence her shopping behavior in the future.
While we still have more to learn, we are pleased with the initial results of this pilot and will be expanding the pilot to more markets in this spring season.
Before Wes provides 2013 guidance, I'd like to make some overall comments regarding the year.
From a strictly financial results perspective, 2012 was a disappointing year for our Company.
While sales grew for the year in total there were a number of categories where our growth was not at the rate we had planned and some where we actually lost market share.
Just as importantly, our growth came at a higher cost to profitability than is acceptable.
We didn't serve our customer at the standard we have set for ourselves.
It's also been a year of tremendous change and transition.
From a business standpoint we struggled to find the right delivery of value in our prices, the appropriate level of inventory in each of our key businesses and to evolve our marketing message to engage the customer more consistently.
As a result of that we had a mix of successes and failures and a series of fits and starts throughout the year.
Some changes we tested took hold quickly with the customer and we implemented them, some needed to be revised and continued to be adjusted throughout the year.
On the organizational side we have gone through a significant amount of change as we put in place new structures and added new talent to leadership positions in many of our key areas.
Frankly, it is probably as much change as we have ever had in my time at Kohl's.
We entered 2013 as a smarter and more focused organization.
Our strategies are clear and they're more precise as is our plan to achieve them.
We will own savings, we will focus on moms; our most important customer, and we will increase her confidence in Kohl's from all aspects.
On the saving strategy, we believe strongly that savings isn't just about the lowest price.
It's about price, quality, style and the experience the customer gets at Kohl's.
Owning savings includes focusing our marketing message to consistently position Kohl's as the savings leader.
It includes ensuring that our prices are competitive first and then even better with our value added offers.
It includes building increased style and quality into the products that she buys.
And finally, owning savings includes leveraging our interactions with our customer in our stores every day.
Our second strategy, increasing her confidence in Kohl's, is about providing the assurance that Kohl's will always come through for her and that she knows we are the store for her, having what she wants and when she wants it whether it is in our stores or online.
And the third key strategy is focusing on mom.
Though moms are our most loyal and highest spending customers, we believe we have significant opportunity to capture a larger share of her wallet.
We know that the customer has a lot of choices.
They will only choose us if we provide the best value, the assurance we have that they need every time they shop and show we are their store through our message, our merchandise and the experience we provide.
We are committed to doing that this year.
And with that, I will turn it back to Wes to provide our first-quarter and fiscal-year guidance.
Wes McDonald - Senior EVP & CFO
Thanks, Kevin.
Our 2013 earnings guidance is as follows.
Total sales increase of flat to 2%.
The reason -- comparable sales will also be flat to 2%, the reason is due to the 53rd week in fiscal 2012.
Our gross margin rate increase will be 15 to 30 basis points.
SG&A expenses are expected to increase 1.5% to 3%, depreciation expense of approximately $910 million, interest expense of $330 million and a tax rate of 38%.
Our guidance assumes 216 million diluted shares for the year.
This assumes $1 billion in share repurchases in 2013 at an average price of $50 per share.
Including these estimated share repurchases, we expect earnings per diluted share of $4.15 to $4.45 for the year.
For the first quarter our guidance is as follows -- total sales increase of 0.5% to 2.5%; comparable sales increase of flat to 2%; gross margin increase of flat to 20 basis points; SG&A expenses increasing 2.5% to 3.5%; depreciation expense of $221 million; interest expense of $84 million and a tax rate of 38%.
This should result in earnings per diluted share of $0.55 to $0.63 for the first quarter.
And we will be happy to take your questions at this time.
Operator
(Operator Instructions).
Matt Boss, JPMorgan.
Matt Boss - Analyst
As we progress through the year what should we be watching in stores from a merchandising standpoint?
You know, I thought the smaller Coach fragrances and Spanks were moves in the right direction on the national brand side, but can you talk about any initiatives or categories that we should be focusing on?
Kevin Mansell - Chairman, President & CEO
This is Kevin, Matt.
Generally the focus is pretty broad.
As we mentioned in the script itself, we have essentially a new merchandise team across the entire company.
They have been charged with really delivering on ensuring that we have in stock for the customer what she wants, so there's a high degree of focus around basics and in stock.
So our service levels in those areas need to improve and remain consistent.
I think that is one thing you should look for.
I think a second thing, Wes sort of mentioned it, we have been focused on improving our performance with our key national brands.
We made some progress on that, particularly in the first -- fourth quarter.
I think the fourth quarter was the first quarter to be honest in several years where national brands actually grew on a comp store basis.
I think that is another thing to look for.
Our key national brands improving in the presentation in the store, in the breadth of assortment and in how much space and attention they get to in our advertising as well.
I would say the last thing is about clarity in assortment.
We are working hard to remove duplication, that is probably particularly so in our private and exclusive brands.
As you know, we've expanded the number of private and exclusive brands a lot over the last three years.
What has happened as a result of that of course is that there has been some redundancy in things that are carried in one of our private or exclusive brands sometimes show up as well in another and we want to definitely eliminate that.
That was part of our effort in our reorganization, adding new talent and new leadership in the private and exclusive brand product development organization is going to help us do that.
So I would say those are probably the big four things.
Generally those things apply to the whole store.
So it is less about one particular area.
Matt Boss - Analyst
Great.
And then on the gross margin side, I mean to believe the pricing and the depth of promotion today?
Is it where you want it?
And aside from easier comparisons, how should we think about the primary drivers of expansion this year?
Kevin Mansell - Chairman, President & CEO
Yes, I mean I think we are -- as you know, we are a very promotional store, that is what drives our traffic and drives our business.
I don't see us really changing that, certainly not in a downward way.
But I also don't see us increasing either the level or depth of promotion.
I think, again, much like our merchandise assortments, providing more clarity, paying more attention to the product and to the brands in our advertising.
And most importantly probably, as I mentioned in the call, putting more emphasis around media that will reach a broader audience for us.
And of course television is a key one and with our growing online presence our digital efforts is a secondary key one.
Those areas are going to get significantly higher spend.
That is going to come at the expense of areas that have traditionally gotten more of our weight, particularly newspaper advertising and direct mail outside our credit card business.
Matt Boss - Analyst
Great, thanks.
Good luck.
Operator
Bob Drbul, Barclays.
Bob Drbul - Analyst
Kevin, can you talk a little bit just on your confidence level around the fact that you have the pricing right in the stores now?
After a lot of changes last year sort of coming out of the fourth quarter, what gives you that confidence right now?
Kevin Mansell - Chairman, President & CEO
Well, I think -- I mean the metrics that we watch on that are the underlying metrics to make up our comp sales.
So obviously average unit retail is a key one of those.
We report to you average unit retail for the Company, so that can sometimes be affected by mix as one business grows and another one shrinks.
But generally for the year, average unit retail was up, it was up quite a bit in the first half of the year.
In the fourth quarter average unit retail was down.
And when we look at it on a trend basis there was a real consistency to it.
As we brought our prices down we started to reach levels that were more similar to 2011 on an AUR basis.
So I think our sense is that you are never going to be perfect on prices, we always have opportunities to improve, but the combination of the AUR metrics looking this year versus last year and this year versus historical gives us a lot of confidence.
And secondarily of course we are pretty aggressive in understanding how our prices look compared to competition and we try to look at that on the basis of what our sale prices are compared to competitive sale prices not including our value added triggers.
So we have, as you know, really big value added triggers that we think put us in a premier price position.
So that is probably a long-winded answer to say to you, yes, my confidence now is pretty high that our value equation is pretty well set.
I mean I don't know if you --.
Wes McDonald - Senior EVP & CFO
Yes, I mean I think in November/December -- obviously we had a lot of clearance in January that drove the AUR down.
But if you look at November/December combined, our AUR was down about 1% and our units remained up 4%.
So that means the customer, in my opinion, felt like they were getting some value.
Bob Drbul - Analyst
Okay, thanks.
And on the new 0% to 2% comp assumption for the quarter, for the year essentially, what do you expect the growth of credit card sales on a comp basis versus non-credit card -- like how does that flow through as the year progresses given the penetration level of your credit business right now?
Wes McDonald - Senior EVP & CFO
Well, I think from my perspective I think the non-credit card business has to be sort of flattish and the credit card business will kind be up mid- -- or low- to mid-singles.
4% and flat would get you to 2% roughly and we have seen that in the fourth quarter.
Our non-credit card business actually in the fall season was basically flat versus being down 6% in the spring.
So that in my opinion gives you some additional ammunition to support Kevin's confidence in the fact that we are priced right.
Bob Drbul - Analyst
Great, thanks very much.
Operator
Deborah Weinswig, Citigroup.
Deborah Weinswig - Analyst
Thanks so much and thanks for all of the color on the call.
Kevin, you discussed some of the changes to your marketing plan, a move towards more digital and TV.
Can you expand on that as well?
Kevin Mansell - Chairman, President & CEO
You know I think we -- let me back up on it a little bit, Deb.
As we went through last year I think one of the efforts that we did talk to you about was Wes' effort around improving SG&A efficiency and improving costs.
As part of that we partnered with outside help to really try to dive into a lot of our key expense areas.
Naturally one of the biggest expense areas we have is marketing; we spend almost $1 billion a year in marketing.
And as we did that and really more finely looked at efficiency, one of the things that became very clear is that our share of voice and our impact with a broader swath of customers reaching a larger audience was not where it needed to be.
And when we dove further into that it became really apparent that broadcast was an area that we needed to really make a more significant investment into and carry more weight with the customer, make us more appealing to a wider audience.
Mainly that is going to be event broadcast and it is going to be more timed around our big events.
So it is trying to support other efforts that we have in media as well.
But I would say that is the biggest single learning was we needed to raise our share of voice in broadcast because we need to reach more customers outside of our core customer, particularly our credit card customer, and that is a way in which we are going to be able to compete more effectively.
Obviously this is a zero-sum game.
So, there were other areas that provided lower productivity and were also sort of over reaching the same customer over and over and over again and those areas have been scaled back as a result of that.
Hopefully that gives you the answer you are looking for.
Deborah Weinswig - Analyst
Yes, that is helpful.
And then as we think about the 0% to 2% comp for the quarter and also for 2013, I mean there is a lot of it sounds like very positive changes taking place.
Are those more back-end loaded or how should we just think about all of the different initiatives in place and the comps you're guiding to?
Kevin Mansell - Chairman, President & CEO
I mean we haven't given any specific quarter comp beyond the first one.
The first quarter I think Wes just said he is forecasting 0% to 2% as well.
I don't know -- unlike last year, I would say last year at the beginning of the year we really kind of felt that the year was more back-end loaded because we were just recognizing that there were just so many changes that needed to be made that we weren't going to get traction until late in the year and that turned out to be true.
I mean, our best comp -- it wasn't what we would like it to be, but our best comp was in fact the fourth quarter of the year.
I think this is more even.
We do have, Deb, as you know, essentially an entirely new merchandising team and they've joined our organization at various times during the course of the year.
So I recognize in some cases it takes time to get traction there, but I don't know that I see that particularly affecting the individual quarter comps.
Deborah Weinswig - Analyst
Okay, great.
Well, thanks so much and best of luck.
Operator
Erika Maschmeyer, Robert W. Baird.
Erica Maschmeyer - Analyst
Could you talk a bit into your gross margin plans for Q1?
What proportion of the hit from clearance inventory did you take in Q4 and what do you think is remaining into Q1, and how does that play into your gross margin guidance?
Wes McDonald - Senior EVP & CFO
Well, we obviously took what we thought was appropriate and in Q4 we didn't need to raise our markdown reserve at the end of the quarter.
We continue to sell outerwear in the first quarter, that will have additional markdowns.
All of the markdowns we need to clear the remaining fall inventory are in the flat to 20% gross margin.
A lot of the impact that our inventories are up are because we have more transition merchandise in there than we did last year.
I think I spoke to some you guys about that when we did our January comp call.
So we feel much better about where we are positioned for spring selling.
Erica Maschmeyer - Analyst
Great.
And then actually just a follow up on that point.
Could you talk a little bit more about the areas where you've got -- where you have increases in inventory for the first half of this year and how that really is different from your merchandising strategy in Q4?
Kevin Mansell - Chairman, President & CEO
The areas that have come in this year, and I think Wes described our inventory position in two different ways.
One was just the absolute number that we reported fiscally and the other was to try to provide a more apples-to-apples consideration.
So that number I think was more in the mid-single digits up to last year.
So using that as a context, if the Company was running mid-single digit inventories higher than last year, it was pretty broad across the store.
I mean there were a couple of exceptions on the high side due to business trends and a couple of exceptions on the low side due to business trends.
So an example I would give you is juniors I think actually on that apples-to-apples comparison had less inventory than last year and that was a result of the fact that we've had very difficult business in juniors, so they need to run with less inventory.
An area like athletic footwear or athletic apparel across the whole store, which has been very, very strong, has been running with much higher than average inventories than last year.
So, I think we actually feel pretty good that the balance of our inventory is sort of directed to the places that are either driving our business or if they are not driving our business they are not being funded with inventory.
Wes McDonald - Senior EVP & CFO
I mean, I think in comparing that to fourth quarter -- I think that was another part of your question -- we obviously went very deep in gift strategy.
As Kevin mentioned in his comments, we had some successes and some failures.
Big successes were toys; we were up 25 comp in toys for the quarter.
Small electrics was another big success up mid-teens.
Some things that didn't work out as well were our investments in seasonal apparel and some of our jewelry and accessories categories.
Those obviously being fourth quarter and very seasonal related have very short shelf lives.
Our inventory in the spring has a very long shelf life.
It's obviously not very warm out here in Milwaukee.
We just had 7 inches of snow yesterday, so we are not selling a heck of a lot of shorts right now.
But we have a long time to get through all the short inventory and it will get -- eventually get warm in the Midwest.
And the stuff we are carrying now doesn't have a lot of markdown risk in the first quarter.
Erica Maschmeyer - Analyst
That makes a lot of sense and is very helpful.
Thanks so much.
Operator
Richard Jaffe, Stifel.
Richard Jaffe - Analyst
Thanks very much, guys.
I guess a question about marketing and the mix and the margins.
Wes, you touched on some of the successes such as toys and small electrics, but a more modest margin business.
I'm trying to understand how some of the marketing initiatives for fall or for 2013 become clearer and more compelling to the consumer and also perhaps more focused on higher margin categories?
And could you also talk about mix through the online channel and opportunity to shift that to higher margin product?
Kevin Mansell - Chairman, President & CEO
We'll try to take that one piece at a time.
I think part of your question had to do with how marketing will target categories or businesses that we think are opportunities and might even be higher margin.
The way we are thinking about our marketing efforts this year is that we are really adjusting the balance of our investments by media type pretty significantly.
And that adjustment, beyond obviously spending a lot more dollars on broadcast and digital, there are two elements to that effort.
One is just our media weight, more, a lot more to increase share voice and presence; and second is message.
And the message is going to be broader, so not so targeted to individual items or categories, but broader, a broader message of savings and value across the store.
And it is targeted to brands because we think our key national brands should be part of that.
And our very key most important exclusive national brands should also be part of that.
So the message is definitely very different than it was last year.
When it comes to the category investment, that gets into a lot of detail that is probably not good for the call.
But I think just stepping back you would say, okay, they definitely are going to spend a lot more on television and a lot more in the digital platform.
And that investment is going to be a broad message across the whole store about savings for mom and getting her confident again that we have great prices that she can actually believe in, and that we give them to her all the time.
Wes McDonald - Senior EVP & CFO
And from an eCom perspective I think you're in against a headwind there because home is a very highly penetrated area there for us for a couple reasons.
One, it is really where we started the website, was the majority of home for a number of years.
And two just the giftable nature of a lot of those things for weddings and things like that makes it easy to ship it online.
Having said that, one of the things our eCom folks are focusing on is more direct ship categories and to broaden the assortment which is going to be in higher margin categories and also carry a much higher AURs.
One of the issues with our eCom profitability is our AUR is a lot lower than our competition's.
And to ship a T-shirt for $10 is the same cost as to ship a T-shirt for $30.
So from that perspective we need to raise the average ticket to reduce the drag on our margins from shipping costs.
Richard Jaffe - Analyst
Will that initiative be reflected on the eCommerce advertising?
Would that be integrated into that?
Wes McDonald - Senior EVP & CFO
Well, I mean it's going to be on the website obviously with the broader assortment and we'll be able to offer more categories.
I mean we're going to try to sell what sells; we are not going to just hang the high AUR things.
We have to have a good mix just like we do in the tab.
Richard Jaffe - Analyst
Sure.
Okay, thank you.
Operator
Liz Dunn, Macquarie Capital.
Liz Dunn - Analyst
Yes, thanks for taking my question.
I guess as a follow-up to the last question, do some of these efforts around shipping cost change your viewpoint on eCommerce profitability over the long term?
Because I think in the past we've talked about it being sort of a mid-single-digit operating margin in that business.
Do you think you can get it higher?
Wes McDonald - Senior EVP & CFO
Yes, I mean we've made about a 100 basis points improvement this year and we are not fully automated in the four EFCs that we have.
The key is you have to look at operating margin and return on investment.
I think the guys out in Washington don't have a real high operating margin, but they have a really good ROI from a -- talking about Amazon.
So one of the things we've got to do and continue to grow, and we tested it last year, was a shift from store initiative.
That allows us to service the customer during the four to six week peak which is really where you need it.
The rest of the year we can comfortably accommodate growth for a number of years in our four existing EFCs to crack the code in raising it from mid single-digit profitability to high single-digit profitability is really going to be able come down to how do we service that customer in that peak period without a lot of capital investment.
And that is what we are going to try to do with the shift from store initiatives.
Liz Dunn - Analyst
Do you currently have a position on price matching?
I mean if somebody shows you a lower price online?
Kevin Mansell - Chairman, President & CEO
Sure.
Not a specific position on price matching, online it's different than in our stores.
We have a service promise, which we are very good at I think, in our stores and online which is yes, we can and we are going to take care of the customer.
So not to the extent you are talking about.
Obviously, a very large percentage of our business, Liz, comes from our own private and exclusive brands.
I mean it is definitely one of the strategies that we thought that was really important for us to drive over the last five years because we just anticipated that transparency in pricing was just going to grow and more and more we needed to be unique in our offering.
So, I think to some extent this is a smaller issue for us.
And it is, secondarily, I think a smaller issue for us because, as you know, over 80% of our business is apparel and accessories.
Liz Dunn - Analyst
Okay.
And then just finally, I'm sorry if I missed it, but what is the reason that the SG&A growth rate is higher in the first quarter versus the full year?
Wes McDonald - Senior EVP & CFO
A lot of it is in terms of shift of remodel expense.
So we have more remodel expense in terms of writing off things and preparing for the remodels in first quarter where last year we would have done more remodels in spring and taken the SG&A hit in the fall.
Liz Dunn - Analyst
Great, thanks.
Good luck.
Operator
Alex Fuhrman, Piper Jaffray.
Alex Fuhrman - Analyst
Thanks for taking my question.
I just want to talk a little bit about shipping and handling revenues and costs as that becomes a bigger part of the business.
If I am interpreting your prepared remarks correctly, it sounds like shipping and handling costs as a percentage of sales, or at least eCommerce sales, was down year over year.
I would be curious to know how the net shipping margin, if that was also improved year over year or if that might have been offset by lower shipping and handling revenue collected from customers as a percentage of sales.
And then if you can just talk about what are the longer term -- as this channel grows to a double-digit penetration what are the opportunities to contain that net shipping margin over the next couple of years?
Clearly with the growth in that, are there certain scale levers that you will hit over the next few years that will enable you to bring shipping costs down or perhaps be a little bit more dynamic in how you fulfill those orders.
Or is there anything we should be thinking about as the eCommerce business scales that might mitigate the gross margin impact?
Thanks.
Wes McDonald - Senior EVP & CFO
Yes, I think I partially answered that question with my remarks to Liz.
But I mean, our shipping costs in the fourth quarter improved about 270 basis points, that is on a net basis, and for the year, it improved about 100 basis points.
So we are definitely making progress.
It is on the cost side, it's not really on the revenue side.
We don't make a whole lot of money from a shipping revenue perspective.
We have free shipping pretty much at $75 most days; sometimes we do $0.99 an item, but primarily it's $75.
And then in the fourth quarter we take it down to $50 to be competitive with the rest of the folks.
So our focus on net shipping is going to be really on the cost side and it's going to be augmented and helped improved when we automate the fourth EFC, balance the inventories a little bit better.
And then obviously in the fourth quarter it's going to be real important to be able to ship from store to help offset the peak.
Alex Fuhrman - Analyst
Great, that's really helpful.
Thank you.
Operator
Michael Binetti, UBS.
Michael Binetti - Analyst
Hey guys, good morning.
Thanks for taking my question.
Last night we heard J.C. Penney talk about switching back to becoming more promotional.
I'm wondering how you think about that as you think about the guidance for the year.
Anything that you have kind of withheld in guidance to say if we need to switch back to be more promotional to defend share, anything like that you could talk about with maybe some changes ahead on the competitive landscape?
Kevin Mansell - Chairman, President & CEO
No, I mean I think as we sort of covered in the call, last year was not the kind of year we would like to see.
We didn't -- while we grew, we didn't get the growth rate that we were looking for.
But more importantly, profitability really suffered as a result -- in some cases I think of poor execution on our part and in some cases of us being very aggressive in going after share that essentially didn't come.
Our promotional positioning is plenty aggressive.
We have great voice with the customer.
We kind of touched on the fact that we are reallocating that voice to areas that we don't feel as strong in.
But overall we have very aggressive marketing, so we definitely drive traffic to our stores; people know what Kohl's stands for.
We know from our own research, from independent survey price data, that our prices are more than competitive, that Kohl's stands for savings but also stands for great value.
So I don't think there really need to be any tweaks on that.
That is really not where our focus is.
We need to hone our position more effectively by improving all these other things, which to a great degree is about presenting better product and better ways for the customer and reaching more customers.
So what's happening in other competitors, first of all, is obviously outside of our control, but it is not really what our focus is.
Our focus is internal.
Michael Binetti - Analyst
And can you just help us think about the composition of how you are thinking about the same-store sales guidance for the year between transactions and AUR?
I think historically you have done better in an environment where you have been able to drive sales through transactions.
I only see one year looking back when your total comps went the opposite direction of transactions.
So is this a positive trend (multiple speakers) continue?
Wes McDonald - Senior EVP & CFO
I think every year for us sets out to be a transaction year.
We are not usually making a comp assumption based upon an increase in ticket.
So a lot of what we talked about today is to driving the customer into the store and broadening our media mix to reach more non-credit card customers, that is going to be the key.
So I think if we have a good comp this year it's going to be mostly driven by transactions.
Michael Binetti - Analyst
And just for the models, is there any reason why there is such a big jump in D&A this year?
It looks like it is up 9%, is there anything in there, Wes?
Wes McDonald - Senior EVP & CFO
We're spending a lot -- a hell of a lot of money on IT, which has life of three to five years.
And also more money on remodels and new stores are coming down, remodels are depreciated over about an eight-year period and obviously new stores much longer than that.
So as that becomes a smaller part of our mix, new stores, you are going to see D&A is going to grow faster than sales.
Michael Binetti - Analyst
Okay.
Thanks a lot.
Operator
Paul Trussell, Deutsche Bank.
Paul Trussell - Analyst
The eCommerce business drove the entirety of the comp growth last year with in-store sales down.
With a kind of a modest remodel program, can you provide a little bit more detail on how you expect to actually drive traffic in the doors?
I mean, you mentioned a different advertising strategy; maybe you could elaborate a little bit more on that.
And also, while I notice you are opening fewer stores this year, have we kind of potentially reached the point of where you think your store count will be kind of in the future?
Wes McDonald - Senior EVP & CFO
I mean from a marketing perspective, I think we spent a big part of the call talking about it and we are not really willing to get into any more detail than we already have.
Our new store slowdown is really a function of our performance of our new stores over the last few years.
As we have grown our eCommerce business that has come out -- of the stores.
By our best estimates about a third of the eCommerce growth has come out at the stores and we are not getting the same kind of returns on our new stores that we used to.
That is why we are bringing it down and focusing more on IT investments to help make the existing stores more productive and focusing more on remodels to try to add some different things to them from a category perspective to make those more profitable.
We talked about the sales force productivity test, we've learned a lot there.
Some of the stuff we'll roll out to all the stores going forward.
There are some different nuances in the remodels that we are doing this year, which should help us grow sales per square foot.
But again, they are just testing, so that is why -- that is what we have to do.
Paul Trussell - Analyst
Okay, thanks.
And then maybe I missed this, but does your buyback plans for $1 billion this year, does that include adding debt similar to what we saw this past third quarter?
Wes McDonald - Senior EVP & CFO
No, our target is a BBB+ rating.
We've communicated to the rating agencies that we will manage a range of [2 to 2.25].
If you do the math on this year's results it gets pretty close to the [2.25].
If our results are better than what we said it is possible we would add a little debt, but at this point if we are within the 0% to 2% range we will not be adding any debt this year.
Paul Trussell - Analyst
And then just last, you spoke, Wes, earlier about the snow and certainly weather has been unfavorable this month.
Could you just speak to where trends are quarter to date and are they at the low end of the range or a little bit below with the expectation of just seeing some improvement as the quarter progresses?
Kevin Mansell - Chairman, President & CEO
This is Kevin.
I mean obviously we can't talk in any detail about what the performance is for the month of February specifically.
The trend of the business is incorporated in the guidance that we give you.
I will say that I think, like many other retailers that I have listened to, trends of business late in January continue to be weak into February.
So I think that's definitely accurate in our case as well.
I am sure that that -- it looks to be a combination of factors from economic factors like the payroll tax change to probably gas prices --
Wes McDonald - Senior EVP & CFO
Late tax refunds.
Kevin Mansell - Chairman, President & CEO
-- late tax refunds to unfortunately weather not favorable for selling forward merchandise.
So it is probably a combination of things.
But I think our experience late in the month of January and continuing into this month and February has probably been like many other retailers, which is that business has gotten a lot weaker.
Wes McDonald - Senior EVP & CFO
But the beautiful thing about moving the quarterly comps is we can actually look more than 30 days ahead of time.
Paul Trussell - Analyst
Thanks a lot, guys.
Operator
Kimberly Greenberger, Morgan Stanley.
Heather Balsky - Analyst
This is Heather Balsky filling in for Kimberly.
Just returning to merchandising strategy, I was wondering if you could talk about some of the progress you have made in the juniors in terms of improving merchandising and then any learnings that you may have had from the Narciso Rodriquez launch in November.
Kevin Mansell - Chairman, President & CEO
Sure, I mean I think generally, as you know, juniors trailed the store by a lot last year.
It is part of our women's overall line of business.
So we don't break out juniors specifically but it trailed the rest of women's apparel significantly.
I think we are starting to feel a lot better about it.
As we look at the trend of business in the last four to six weeks in juniors, it has changed pretty dramatically.
It looks a lot, I think, less more like the store right now which would be a huge change in trend from what it was in 2012.
I think that impact is being driven by better merchandising decisions, new merchandising team, new leadership team in place and a real focus on more clarity in our assortments being faster but more edited and deeper around the things we believe in.
So we are not -- we don't want to get ahead of ourselves at all, but it certainly feels better.
So I think some of the things that we talked about on the call that apply to the whole store, eliminating duplication, eliminating redundancy, getting more focus around the brands that matter are working in juniors, I would say.
And we are starting to feel better about the results.
Wes McDonald - Senior EVP & CFO
No, I think in January the regular price business in juniors I believe was flat, which was a big improvement of trend for last year.
So we are looking forward to better things out of those guys this year.
Heather Balsky - Analyst
Thanks.
And the Narciso Rodriguez, were there any learnings from the roll out?
Kevin Mansell - Chairman, President & CEO
Yes, I'm sorry.
The Narciso Rodriguez launch was our first launch in our DesigNation effort which continues this year.
I think there were some significant learnings, not surprisingly probably our -- the impact of that business online was out of proportion to our typical apparel penetrations, I think by multiple times if I remember right, Wes.
So the amount of goods we sold online as a percentage of our brick-and-mortar business was way more than we would typically have in the overall brick-and-mortar business.
I think we learned a lot about breadth of what we offer and depth of what we offer.
And we learned a lot about making sure we have clarity in that in our store from a presentation perspective.
I think generally our in-store experience on the brand was pretty good right at the launch.
And we need to do a better job of maintaining that then through the period as well.
I think those were probably the two big learnings I would say.
Heather Balsky - Analyst
Thank you.
Wes McDonald - Senior EVP & CFO
Thanks, everyone.
Operator
Thank you.
This concludes today's conference call.
You may now disconnect.