柯爾百貨 (KSS) 2013 Q2 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Kohl's second-quarter 2013 earnings release conference.

All lines have been placed on mute to prevent any background noise.

After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions).

Certain statements made on this call, including projected financial results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Kohl's intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements.

Such statements are subject to certain 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 recording will not be updated.

So if you are listening after August 15, it is possible that the information discussed is no longer current.

Thank you.

I will now turn the call over to Wes McDonald, Senior Executive President, Chief Financial Officer.

Sir, you may begin.

Thanks.

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

I will go over some highlights on our financial statement and then Kevin will walk through some of our sales and marketing and store initiatives.

Comp store sales increased 0.9% for the quarter and decreased 0.5% for the year.

The quarterly increase in comp sales reflects a 4.8% increase in units per transaction that was partially offset by a 3.6% decrease in average unit retail and a 0.3% decrease in the number of transactions.

For the year, units per transaction increased 3.6%, but was offset by a 2.4% decrease in average unit retail and a 1.7% decrease in the number of transactions per store.

Total sales increased 2% to $4.3 billion for the quarter and 0.5% to $8.5 billion for the year.

Kevin will talk more about our sales in a moment.

Moving down to gross margin, our gross margin rate for the quarter was 39.1%, which is 2 basis points higher than the second quarter of last year and slightly lower than our expectations of a 10 to 20 basis point increase.

So sales were in the middle of our guidance.

SG&A increased 2.6% for the quarter, which is at the low end of our expectations of up 2.5% to 3.5%.

SG&A as a percent of sales deleveraged approximately 10 basis points for both the quarter and the year.

Credit and corporate operations provided the most significant leverage for the quarter.

Credit revenues increased $7 million primarily on higher late fees.

Corporate expenses leveraged as savings in payroll and benefits, including incentive compensation, were partially offset by increased IT spending related to growth and infrastructure investments related to our omnichannel strategy.

Store expenses deleveraged for the quarter as expense timing related to our remodels and beauty tests differed from last year offset continued strong management of store payroll.

We also incurred expenses related to rolling out our merchandising location system, which should be more than offset by payroll savings in future quarters.

Distribution costs increased slightly for the quarter.

We continued to improve our efficiency in e-commerce fulfillment, which reported significant leverage as a percent of e-commerce sales.

Advertising deleveraged for the quarter has increased our spending in digital and broadcast, as well as added Texas to our loyalty pilot.

Year-to-date, advertising leveraged approximately 10 basis points.

Depreciation expense increased 7% over the second quarter of last year to $225 million.

The increases are primarily due to the rollout of our [e-sign] technology, IT investments and other capital projects.

Net interest expense was $84 million this quarter, $4 million higher than the prior-year quarter.

The increase is primarily due to the September 2012 debt issuance.

Our income tax rate was 37.1% for the quarter.

This is approximately 80 basis points higher than last year's second quarter, which was positively impacted by favorable state audit settlements.

Diluted earnings per share increased 4% to $1.04 for the quarter.

Net income decreased approximately 4% for both the quarter and the year to $231 million and $378 million respectively.

For the year, diluted earnings per share were $1.70, an increase of 4%.

For your modeling purposes, we ended the quarter with 1155 stores, gross square footage of 100,107,000 square feet and selling square footage of 83,536,000.

Our plans are to open three new stores and remodel 30 stores this fall.

Moving on to the balance sheet, we ended the quarter with $592 million of cash and cash equivalents.

Capital expenditures were $284 million for the first six months of 2013, $145 million lower than the first six months of 2012.

This decrease reflects fewer remodels and lower e-commerce fulfillment spending partially offset by higher IT spending.

We generated almost $300 million of free cash flow this quarter and year-to-date, free cash flow was $426 million, more than 3 times that of spring 2012.

Our ending inventory dollars per store, excluding e-commerce, were 6% higher than the end of second quarter 2012.

This is within the low to mid-single digits per store increase that we guided to on our first-quarter earnings call.

As expected, most of the investment is in key back-to-school areas like children's and young men's, as well in areas that were short of seasonal product last year such as men's sportswear.

[AP] as a percent of inventory decreased from 43.5% at quarter-end 2012 to 36.2% this year.

The decrease is primarily due to reducing our second-quarter receipts to manage our inventory levels, as well as slower inventory turnover.

Weighted average diluted shares were 222 million for the quarter.

Earlier this week, our Board declared a quarterly cash dividend of $0.35 per share, which is payable September 25 to shareholders of record at the close of business on September 11.

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

Thanks, Wes.

Let me start with sales.

Comparable store sales increased 0.9% for the quarter.

That increase reflects higher units per transaction and higher e-commerce traffic, partially offset by lower average prices and lower traffic in our stores.

E-commerce sales increased 28% and contributed approximately 160 basis points to our comp.

All of our warmer weather regions, the West, South Central and Southeast, reported positive comps for the quarter.

The Midwest and Northeast reported low single digit declines and the Mid-Atlantic was the poorest performing region.

Looking at our results by line of business, children's was the strongest category.

Footwear and men's also outperformed the company.

Kids and active footwear were the strongest footwear categories and men's was led by tailored and dress, basics and active.

The home business reported a positive comp that was slightly below the Company average.

Notable home categories included luggage, bedding and electrics.

Women's saw strength in active fitness and in national branded bottoms.

And in accessories, bath and beauty was the strongest category.

Private and exclusive brands accounted for 56% of our sales for the quarter.

More than a year after launch, Jennifer Lopez, Marc Anthony and our Rock & Republic brand continued to achieve solid double-digit growth.

In our private brand portfolio, SO and Jumping Beans also reported double-digit increases.

We are also very pleased by the improvement that we are seeing in our national branded portfolio.

Carter's, Lee, Levi, Nike, our four largest national brands, reported mid to high single digit increases for the quarter.

In the area of technology during the quarter, we made substantial progress in several very significant IT projects.

First and foremost, we successfully launched our e-commerce replatform.

The replatform occurred in stages throughout the second quarter.

Second, our ship from store RFID pilot, mobile POS and global inventory visibility projects are progressing well.

Each of these projects represents our commitment to meeting the changing needs of our customer, to strengthening our omnichannel experience and to investing in our future in a strategic and profitable manner.

In store, our goal is to deliver a great in-store shopping experience to our customers on a consistent basis throughout the country at all times of the year, every customer, every time, every store.

A key element of this strategy has historically been an impressive remodel program.

In 2012, however, we temporarily reduced the number of remodels as we evaluated and tested different categories and space allocations in our stores.

We are now returning to remodeling with 30 stores this fall.

In addition, one of the key areas we tested over the last several quarters is cosmetics.

We believe that we are significantly underserving our customer in this multibillion-dollar market.

We are continuing to test both size of the area and location of the area within the store in over 150 stores this fall, including our remodels.

We expect to continue our test and incorporate the changes in more stores in 2014 based on those results.

On the marketing side, as we stated in the last conference call, we increased our marketing spend in the second quarter after successful tests last fall and in the earlier part of this year.

Our marketing remains focused on the great values that Kohl's offers, but also has an increased emphasis on the great brands that we offer.

This includes both our only at Kohl's brands, but also our iconic national brands.

As I mentioned a moment ago, this marketing message has had a positive impact on our national brands, especially our largest ones.

Our marketing dollars have shifted towards channels that we believe will maximize our marketing dollars.

This includes increased TV and digital exposure.

We are significantly increasing our GRPs without increasing our TV marketing dollars.

We also have created new partnerships with some of the most well-known names in the advertising and marketing industry.

We are excited by the opportunities that this multisource and agency approach brings to our marketing strategy.

We are also pleased with the results of the loyalty program pilot that we launched in the fall of 2012.

The program continues to provide significant insights into how our customer shops and more importantly how we are better able to influence her shopping behavior.

We are listening to our customer and modifying that program based on her needs and desires.

We will be rolling the program out to our California stores later this fall after a very successful launch in Texas in May.

In closing, I am pleased with the progress we have made in the second quarter.

Sales improved significantly over the first quarter and our (inaudible) gross margin improved over last year.

Expenses remain well-managed.

The West region is starting to get momentum on the sales line after we improved our store operations there over the last few years.

The region has led the Company in sales for the last three quarters in a row.

We are also extremely encouraged by our early back-to-school business.

Kids, juniors, young men's and footwear are all off to a good start.

We are especially happy though with the improvement in our national brand performance.

We expect this trend to continue and accelerate as we increase our marketing emphasis in the fall.

We know that our customer appreciates the value and style of our exclusive and private brands, but we also recognize the traffic and sales lift that increasing the focus on our national brands can provide.

In order to achieve the type of sales increases we are looking for, we must increase sales levels of all three brand types.

We made a decision to expand our loyalty program to broaden the customer base with access to value-added offers and believe long term that this can be an incredibly powerful tool to broaden our reach, an important tool in our strategy to own savings.

We continue to focus on increasing the number of our non-credit card customers and through better marketing and in addition our loyalty program to give them better value and a reason to shop Kohl's more frequently.

We continue to increase our confidence in Kohl's as she sees the improvement in our in-stock levels on replenishment of goods, noting the improvement in our survey results throughout this first half of the year.

As we enter the fall season, we would expect to improve on that further as we focus on increasing depth of customer choice while reducing the number of choices.

Our organizational changes should have a full impact as we enter the back-to-school season.

We expect to continue to make progress on our inventory levels and I would expect our inventory per store to be down low single digits per store at the end of the third quarter.

Finally, I am excited to welcome Michelle Gass as our Chief Customer Officer.

She is quickly learning the current state of our operations and developing her vision for how we can more fully engage customers.

Stay tuned as I believe great things are on the horizon.

Our number one goal is to drive sales.

In order to do that, we have to continue to improve the quality of our merchandise and offer items at great value.

I am pleased with the progress we have made, but we know we need to continue to progress in order to drive increases in transactions per store.

Drive traffic will allow us to gain the marketshare from our competitors.

And with that, I will turn it back to Wes to provide our third-quarter guidance.

Thanks, Kevin.

The third quarter, our guidance is as follows -- total sales increase of 1% to 3%, comparable sales increase of 0% to 2%, a gross margin rate decrease of 60 to 40 basis points, SG&A expenses increasing 2% to 3%, depreciation expense of $229 million, interest expense of $85 million, tax rate of 37.5% and share repurchases of 325 million and estimated average diluted shares of 218 million.

This results in earnings per diluted share of $0.83 to $0.92 for the third quarter.

The low-end of our annual guidance remains unchanged at $4.15 per diluted share.

We have narrowed the high end of our guidance to $4.35 per share.

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

(Operator Instructions).

Deborah Weinswig, Citigroup.

As we are still fairly early in the earnings season, we have heard a lot of color around the consumer.

I was wondering if you could just give us some color around the credit card customer versus the non-credit card customer, what you are seeing and what you are hoping to see over the holiday season.

Well, the credit card customer, we had a positive low single digit comp; noncredit, negative low single digit.

As you guys know, kind of the goal to get back to running better than a 2 comp would be for credit to be up mid-single digits and noncredit to be flat.

Having said that, we definitely saw some improvement in both from the first quarter and are pretty happy with the results there.

In addition, our loyalty pilot in Texas is also driving additional credit applications as they start to realize the value that they can get from Kohl's.

And so that is something we think will give us benefit in future quarters and makes us excited about rolling the pilot to California here in the third quarter.

Great.

And then with a lot of the tech investments that you are making, what will be the biggest changes that we will see year-over-year during the holiday season?

Well, I think -- I mean Wes can add.

This is Kevin, Deb.

I think the biggest opportunity that we have frankly is the replatform that has now been completed in our e-commerce business and as you know, a number of companies have gone through replatforms in the course of the last 12 to 24 months, not always perfectly and our team has done a great job.

Our new platform is available to consumers and it is working.

Our sales in the second quarter in e-commerce dipped a little bit on a relative basis because of it, which we fully expected, but handily beat the plan we had and I am thinking we are going to continue to beat that plan as we go through August.

So I do think the robustness of that platform and the ability that we have to transact over it as we go into the fourth quarter is a huge positive for us.

Yes, when Kevin said dipped, he really meant they were only up 28%.

Great.

And then, lastly, as we look at the remodels you have coming, how are you picking those stores to be remodeled and what has been the experience that you have had with the remodels that you have done?

I mean the remodels continue to be up low single digits.

That has been pretty consistent for a number of years.

We don't expect anything different.

I think the key learning for us in the fall and going into next year will be what we learn from the various beauty tests that we are doing.

We are testing different sizes and also different locations within the stores.

So I look forward to reading those results post-holiday and we will make a decision on further rollouts as we get into 2014.

Great, thanks so much and best of luck.

Bob Drbul, Barclays.

Wes, I don't know if you gave -- did you give credit penetration?

Credit penetration, our share was 58%, up about 130 basis points.

Got it.

And when you look at -- like I think you said the late fees were really driving some of that.

Within the credit business, could you elaborate a little bit more on some of the trends that you are seeing there like health of the consumer as well?

Yes, our finance charges are a little bit less than last year for two reasons.

Our credit sales were a little lower than what we expected, as well as people are paying a little faster than we planned in terms of the payment rate.

And then moving down to bad debt, bad debt is up a little bit, but we also have taken a little bit more risk in conjunction with Cap One.

So we are seeing an overall better yield on those customers as finance charges and late fees offset the rise in bad debt as evidenced by the fact that credit income was a little bit better this year in the second quarter than it was last year.

And Kevin, could you comment a little bit on the promotional environment, sort of how much more aggressive Kohl's is being in this environment or less aggressive and what you are seeing on the competitive front from that perspective?

I don't think there is any new news on that, Bob.

We are sort of investing, as you know.

We talked about investing more in the second quarter in marketing based on the tests that we had done in the fourth quarter and the first quarter earlier and that looks like they are working, many of those changes are working.

We have a whole bunch of more changes as we go through back to school and the holiday season.

Our eye on the target is all -- the target we have our eye on is all about engaging more customers more broadly.

And so you know how important our credit card customers are and they continue to be so.

But we know that the need we have is to drive more traffic into our store and that means engaging more people.

So I think -- I am really excited about the loyalty pilot because the loyalty pilot to me is the future and as you know, California is a really important state for us as a company.

It has more than 10% of our stores in it.

It is not a state historically we have been as successful in and I think the loyalty program rolling out into California is going to be a big plus for that.

So I don't think the environment is much different than it has been to be honest with you.

Thank you very much.

Matthew Boss, JPMorgan.

Good morning.

Can you talk about early indications from your beauty tests and any progress with new brand introductions potentially on this front?

I mean we are not going to talk in detail, Matt, about the test stores other than to say, obviously, we wouldn't be expanding it to 150 stores and if we didn't feel really positive about what we are seeing.

We are making progress pretty much on all fronts.

We are testing different locations within the store.

We are testing different square footages within the store.

We are testing different assortments within those stores.

And I mean I fully expect to be able to say that we have identified the best way forward and the new stores that we roll out next year, because we are going to be rolling out a lot more beauty stores next year, will incorporate all those changes.

Great.

And then secondly, can you walk through the embedded drivers of gross margins down 40 to 60 in 3Q and then should we expect this delta to reverse in 4Q given inventory planned down year-over-year?

Yes, sure.

I mean I think we have built in negative gross margin way back in February for the third quarter given our performance last year.

If you recall, we were only down 40 basis points in the third quarter.

In the first and second quarter, I think we were down over 200 in the first and about 150 or 160 in the second.

And obviously, third quarter was a disappointment being down 300.

So we are a little worse than what we thought in the beginning of the year.

We have a little bit more summer carryover in terms of shorts and sandals that we will work through in the third quarter, but our expectation for gross margin -- you guys can all back into the fourth quarter now that you have three quarters worth of results and guidance.

We are going to be up somewhere between 80 and 100 basis points for the third quarter, which is -- fourth quarter, excuse me -- which is not heroic given our performance last year.

But with a shorter calendar, we are leaving ourselves plenty of room to be competitive for the holiday season.

Thanks.

Good luck.

Charles Grom, Sterne Agee.

Kevin, could you address the opportunity to attract more national brands to the portfolio?

What hurdles are out there, if any and I guess what the margin implications could be if you were to increase your exposure in that subcategory?

I think we still have opportunity.

We are -- obviously based on the way we discussed the performance in the second quarter, we are very focused on national brands because we do recognize that perhaps one of the things that we have done over the last couple years as we have developed new exclusive brands is put too much attention on them and we haven't been well-balanced across all three brand types.

So I think it kind of shows you the commitment we have to national brands.

We are kind of excited about it because we are seeing the results and we just talked about some of those results particularly around our biggest brands, which gives us a lot of confidence going into the fall and holiday.

So we are focused on looking for new national brand opportunities and I would expect actually to have opportunities to talk about it as we go through the fall and holiday season for the future.

The margin implication of that, obviously a lot depends on what classification categories they are in, how they impact the overall mix, but I think the key thing that we are focused on, Chuck, is really driving traffic because, if you go through the numbers we just laid out for the second quarter, we had basically a 1 comp, but it was driven not by increases in traffic.

We need to get increases in traffic for the long term.

And I do think that one of the components of that has to be a really strong national brand portfolio.

We are happy with our improvement in traffic.

In the third and fourth quarter, we were basically flat.

This quarter, we were basically flat.

First quarter obviously was disappointing, but we are moving in the right direction.

Overall, I think we haven't managed our inventory perfectly.

No retailer does, so we have plenty of opportunity to improve our gross margins in the future just from better inventory management.

I'd agree.

Okay, good.

And then just a follow-up, just wondering, with Don's focus on removing duplication within the private and exclusive offerings, kind of where you guys are on that process today, what it means for opportunities to attract different categories within private and exclusives down the road.

I think we are pretty far along.

It has been a focus since last fall holiday.

You probably know that we have new leadership in place under Peggy Eskenasi's direction.

We have a new head of our New York design office.

We have a new head of our private brands here in Milwaukee.

We just finished our sort of annual strategic meeting with our Board yesterday and one key thread that went through all of those presentations was a really key focus on avoiding duplication, eliminating duplications with the objective of providing a lot more brand clarity so that each of our brands stand for something different and therefore we can maximize inventory effectiveness.

And I think the team -- it's probably their number one focus frankly.

Okay, great.

And then last question from me, Wes, just wondering if you can give some color on how the comp trended during the quarter?

Do you have any sense for how much the calendar shift helped you guys out here in the last week?

And then any thoughts on August trends to date or early back-to-school?

Well, the trend -- we had a very good May obviously as there was pent-up demand from the weak weather in the first quarter.

June was a little tougher and then July was better.

In terms of back-to-school and into August, I think Kevin mentioned we are very pleased with our start to back-to-school, especially in the back-to-school categories, which are key for us like kids and juniors and young men's and then athletic and kids footwear.

So we are off to a good start.

It is 10 days of a quarter.

Hopefully it will continue.

And then in the back half of the quarter, we obviously have hopefully some benefit from the shift of November week one, which everybody remembers was Superstorm Sandy and there was a lot of business lost there.

Hopefully we will get some of that business back this year.

Okay, great.

Good luck, guys.

Thanks.

Paul Lejuez, Wells Fargo.

Hey, guys.

With inventory up a bit, payables down and having to cancel some orders or reduce purchases, how fresh do you feel your merchandise is at this point?

Do you have the freshness that you are hoping for?

And then just secondly, from an inventory perspective as we think out to the fourth quarter, how do you drive the positive comp given that you are up against a pretty heavy inventory position this next year, do you feel that you can and if so, what are the drivers?

Thanks.

This is Kevin, Paul.

I mean on the inventory positioning, I mean my best parameter in that truthfully is always sales and one of the things that makes us feel really good is we just came off of a better second quarter.

Granted it was a 1% comp, but we feel like it is a step in the right direction.

July was better than the quarter.

August has started out well and started out well particularly in the areas that are important to get good sales results during the month -- kids, young men's, juniors, footwear.

So I think one thing we have all learned, of course, is the quality of what we have is a lot more than the quantity of what we have and being more effective and how we make color and style and size choices in our store is what really drives customer purchasing, not having more inventory.

So I don't think any of us see inventory as a preventer or a limiter of positive comp growth or acceleration in this quarter or the fourth quarter frankly at all.

We are being somewhat conservative as we look at the holiday season because, as you know, there is a shorter number of days between Thanksgiving and Christmas.

And so I think we are just trying to be sensible about that and say, hey, between the period, can we do the sales?

Yes, we feel like we can do the sales, but we want to be conservative from an approach standpoint.

But inventory won't be the limiter on that for sure.

Yes, I think the receipts we caught in the second quarter are more related to the spring/summer receipts.

We didn't cut transitional receipts that we needed for back-to-school.

We were able to make the cuts early on in the quarter.

So the cargo shorts are still cargo shorts, there are just fewer of them than there would have been if we went ahead and ordered them.

So I don't think that is going to be a problem.

Thanks, guys.

Good luck.

Paul Swinand, Morningstar Investment.

Good morning and thanks for taking my questions.

I just wanted to continue kind of the private label national brand discussion.

Is it true that your national brands are still offering you something that is somewhat different or not exactly the same as what they are offering the other retailers?

I mean the short answer to that is no.

Every relationship we have is obviously unique and different and so it varies broadly across the spectrum.

I mean national brands are obviously a very large percentage of our business, so we deal with a lot of different types of partnerships.

But I think in a broad sense, the answer to that shortly is no.

What becomes different with a national brand, a sorting process, is that those assortments are always going to be tailored to the customer demographic of a particular distribution point.

So Kohl's is very focused on a moderate consumer who really appreciates value and accordingly is buying into price points that reflect that.

And so our assortments naturally are going to reflect that and we are going to be highly focused on that part of our assortments where the same brand with a different retailer, a more perhaps upscale retailer is going to sort of align their assortment to their own customer demographic.

But there is no universal answer to your question.

I am not dodging it; I am just telling you the truth and it differs greatly by brand.

But the key strategy really is how do we assort so that the Carter's assortment or the Lee or the Levi or the Nike or the Adidas assortment reflects what our customer wants.

Okay, fair enough.

And just so I understand, you are going to use that to drive -- to advertise and drive the traffic more.

That's part of the strategy.

And I guess I would also assume that you would maybe advertise it a little different in different areas depending on whether it is a more urban customer or rural customer depending on the region.

Is that fair enough or --?

Yes, I mean I think generally.

I think on this issue of balanced portfolio across private brands, which are basically our opening price point, exclusive brands, which are sort of, for the most part, our better price point and national brands, which are typically our best price point, all we have -- all we are trying to say is, as we have looked at our performance over the last two years or so, two to three years probably, we have put an inordinate amount of emphasis on our private and exclusive brands.

Rightfully so because we have introduced so many of them, we have created so many of them and they have all been in sort of evolution phases.

And in that process, we have recognized through both our own results and through customer research that the customer feels that we are not focused enough on all the great national brands we do carry.

And so whether it is inventory emphasis, presentation emphasis in our store, marketing emphasis as well, we are just trying to more balance that across these three types of brand categories.

Okay, great.

Very interesting.

Best of luck.

Thank you.

Dan Binder, Jefferies.

Hi, good morning.

It's Dan Binder.

I had two questions.

First, if you could just address the comp performance across the region.

Was it primarily weather hitting the Midwest and Northeast versus the other regions?

Yes, I mean basically the Northeast and Midwest regions, which underperformed the warm weather regions of the West, South Central and Southeast, the delta by far was the biggest in all of our seasonal classifications.

The delta there was significantly larger than the delta between the overall business in the various regions.

So yes, if you had to look at a culprit and say, hey, if you did well in the warm and hot regions like the West, South Central and South East, why didn't you do well in the Midwest and Northeast?

The short answer is that seasonal categories, which are an important driver of our business, and in those regions, May, June, July are a very important driver, did not perform well.

The assortments were the same, so it really was a weather factor in those cases.

And then on the reduction of the high end of the guidance, obviously, the first half of the year, you weren't at the high end, so that is I think about $0.06 or so, but the other $0.04 looks like it is coming out of the back half.

Just curious what the change is?

Primarily the Q2 margin guidance?

You mean the Q3 margin guidance?

Yes, Q3.

Sorry.

Yes, I mean that is probably most of it and again, as Kevin mentioned, I mean, I hope everybody realizes we are going into the fourth quarter.

That has 14 weeks last year and 13 weeks this year.

So it is going to be very hard for people to run a total sales increase and I think with the shorter calendar, we are being very conservative on what our comp expectations are going to be for the fourth quarter.

If we do better than that, we should be able to beat the high end of the guidance, but we are being very conservative on comp expectations for the fourth quarter.

Great.

Thanks.

And one last one, if I could, on credit card approvals.

How is that looking?

Our approval rate has gone up about 300 basis points since the changes we put in.

I guess it was now a few months ago.

That is an improvement.

The overall rate is still not where you would like it to be, but it is moving in the right direction.

So hopefully that will also give us some benefits in the fall season, as well as we are in the middle of a reissue on our credit card and hopefully that will give us some benefits as well.

Thanks.

Neely Tamminga, Piper Jaffray.

Thank you.

Wes and Kevin, could you answer a few questions here on the loyalty program for me, if you will?

At the end of this year, once you get through California, where will you guys be with respect to the total penetration on the loyalty program across the chain?

And if anything you can do to share with us around metrics of how the pilot is performing relative to the balance of the chain, whether it be comp, profitability, e-commerce behavior.

Something like that conceptualization would be helpful.

And then related to this as well, have you done anything with your mobile engagement on the loyalty program, specifically pilots to kind of really better engage with your customers through the mobile engagement?

Thank you.

Okay, yes, it's Kevin.

I will give you the answers that I know and Wes will correct me when I say something wrong.

I think that the total number of stores that will now be on the pilot are about 300.

We started with about 100.

Texas was about 100 and California, as you know, is a little more than 100.

Second question I think you had is on that pilot what are you seeing in terms of results.

The fall test was different than the Texas spring test and we incorporated the learnings from the fall into the Texas spring.

And in Texas, since it was an entire state, which involves some major metro markets, we were actually able to go to market with a customer so that that was different than in the early stage test where we did it much more randomly and we couldn't market.

So the performance in Texas accelerated a lot over the original pilot and naturally we are now going to go back in the original group of stores and add in the same elements that we have done in Texas.

We are really pleased by the Texas results.

It's three months, but fundamentally what we are looking for, right, was to engage a lot of people.

That has definitely happened.

We have enrolled a significant number of reward or loyalty customers that we didn't have before and those are all potential customers for us to engage with going forward with great ideas.

Second obviously was what is due for the overall results in that state and I think Wes would tell you we are pretty rigorous in our pilot and testing phases on things.

So we established control markets and control groups to look at the performance.

Texas handily beat the control markets much better than the other markets.

And now what we are moving on to is harvesting the new enrolled customers and also continuing to build.

So what is exciting about Texas to us is we are continuing to add each and every week a significant amount of new accounts to the rewards program.

And that says a lot of positive things for what is going to come.

Obviously, as we add more stores to it, it gives us the opportunity to engage a lot more.

We can start to create new opportunities and mobile is a key element of that.

So mobile has always been sort of part of the plan.

You have got to get the loyalty program installed.

You have got to get the customers signed up.

Those boxes were checked.

And you have got to look to see if those customers are responding.

That box definitely got checked and now we can start engaging more fully.

And as you heard during the call, we are investing a lot across technology platforms, e-com included, mobile included to sort of prepare for being able to do that.

One of Michelle Gass's key priorities that I have given her is to really make this rewards program world-class.

And I think she is fully focused on it.

So we are definitely op -- I'm sure you can hear in my voice I am very optimistic.

Wes is always trying to temper it, but I think we have a great program that is going to service for years and years and years.

No, I mean one of the things that we are trying to evaluate in the test is obviously how it affects our different customers, so we are looking at lifts we get from our MBC customers, those who spend the most with us, our burgundy -- our normal credit card customers and then obviously the bank card customers.

We are getting lifts in all three categories, which is very good.

We are obviously getting a bigger lift from the bank card customer because other guys have value already.

The one thing that would make me be just as excited as Kevin would be to see how it tests in some of our higher credit penetration markets, which we are doing in the third quarter as well.

Texas is, from a credit share, is in the mid-40s, so it is pretty low relative to our total.

We are testing it in a couple of high credit penetration markets and that will give us some good data on whether or not it will be successful chainwide and we will decide to roll it out next year after we look at the test.

I mean the other thing that -- one of the reasons that I am so bullish on this is I do have the benefit of being here long enough to have seen us grow our credit card loyalty program from frankly in the teens in penetration to, as Wes just said, I think (multiple speakers) 58%.

And that credit card loyalty connection is what drove our business over the course of the last 20 years.

And rewards, the loyalty pilot, the loyalty rewards program that we are launching has the possibility of doing all the same things for just a much, much larger audience of customers who aren't either qualified or maybe more importantly frankly interested in carrying a department store credit card.

So I just see that possibilities are incredible and technology being what it is today, we can use those platforms, which didn't exist when we grew the credit card program to make it even better.

So I am very positive about it.

We share your enthusiasm indeed on this as well.

I just want to clarify one thing.

Wes, you said that pending the California rollout, you could go balance the chain next year.

Is that --?

Yes, I mean I think we are going to evaluate it and we are going to make a decision probably in the first quarter next year.

Okay.

I mean really mainly what it is about is timing.

Wes wants to, and Michelle, I think, are going to want to look at how customers behave so that when we pull the trigger on the remaining 900 stores, the program is fully developed the way we want it to be and we are not still testing and piloting, but we have discovered all the triggers.

Yes, I mean the guys that we rolled it out last October, we don't want to have them have four different flavors of program.

Once we go through California, we want to make sure we have got it the way we want it before we roll it chainwide.

Fantastic.

Thank you, guys and good luck.

Richard Jaffe, Stifel Nicolaus

Thanks very much, guys.

A question on e-commerce or the launch of the new platform.

Are you seeing a change in the mix or offering a broader mix of merchandise and also a change in the outlook for the profitability of e-commerce versus stores?

I think it is too early for us to answer the first part of the question, which is the change in the mix.

It is just too early.

It is not that we don't know, but I think we are really early.

The main thing we are seeing is when we look back at other retailers' experience with replatforms, it certainly is a -- it is a big challenge and so the team has built into the plan the possibility that there would be mistakes and errors along the way and we would suffer from a top-line perspective as we went through the replatform.

That team, the IT team along with their e-commerce partners, have done an incredible job and so we are benefiting from the fact that we planned the softness and we are starting to get a lot of acceleration over that plan.

So I think that, we are seeing, Wes, I think consistently.

No, I agree.

I mean as far as profitability goes, to be honest, Richard, it is getting so blurred now and it will get even more blurred as we start to do 200 some ship from store locations in the fall.

Next year, we are going to be doing pick up in store.

As you know, we have kiosks in store, which generated roughly 10% of our e-commerce sales.

95% of the returns go to the store from e-com, but then they buy other stuff.

So it is getting more and more blurred.

We are just looking at total profitability as a whole and as long as we can continue to grow that, that is really what we are looking at.

Got it.

Thank you.

Michael Binetti, UBS.

Hi, good morning.

Just a couple of modeling questions for you.

Could you help us try to fine-tune what the implied guidance on the comp is for the fourth quarter?

Just maybe the range there so we can -- there's, obviously, some differences and comparisons there.

We want to make sure we get the model right.

That is an interesting question.

I mean I kind of gave you the margin guidance.

I won't evade it.

We are not planning a positive comp for the fourth quarter.

The implied guidance is kind of down 2 to flat.

If it is better than that, they will be generating a lot of upside in terms of earnings, but the shorter calendar is a little -- it is a pretty big hurdle to overcome.

It means you have got to do more business prior to Thanksgiving than you did the previous year obviously and that is going to be how excited you can get the customer to think about Christmas before Black Friday.

And I am glad that is marketing's job and not mine.

But I think we will do a good job on that, but we are just being conservative and hopefully that is the case and we will do better than that.

Okay.

And then on the -- within the guidance of 0% to 2% same-store sales, can you just talk about what you expect on AURs as we move through the year considering the comparisons we are looking at here?

I still think you are going to see AUR down third quarter and units up.

That will probably reverse.

We had a pretty slow AUR last year because of all the clearance we had to go through.

So I suspect in the fourth quarter you will have AUR could be up and units could be down.

And then as we kind of continually have said, traffic will be the determinant on whether or not we are at the low end or the high end.

Got it.

And then you guys obviously talked a lot about being fairly weather sensitive and we all know how last two winters went.

How are you thinking about planning inventories for winter this year?

Well, we have been conservative, but I mean the weather forecast is looking favorable for the fall.

It is not going to be dramatically colder than it was last year, but it is going to be slightly colder.

Nowhere the difference we saw in March, for example, where, in a lot of areas of the country, it was 10 degrees colder on average this year versus last year.

But colder in the fall always helps a little.

All right.

So conservative.

It sounds like you plan conservatively, but maybe hoping for some positive catalysts that could help in the second half from a sales perspective.

We are definitely planning conservatively.

Okay, thanks, guys.

Have a great one.

Thanks.

Liz Dunn, Macquarie Capital.

Hi, thanks for taking my question.

Relative to the rebalancing of private, exclusive and national, is there a percent you are targeting in terms of national or is it just really about getting a little bit louder about the message to consumers that you do have national brands I guess is my first question?

Yes, I mean I don't -- it's Kevin, Liz.

I don't think there is a percent that we have in mind.

The customer basically always decides that for you.

It is really more direction and a focus across all of our areas that when a customer sees Kohl's in an ad, the customer visits a Kohl's store, the customer sees and visits our e-commerce site, that national brands are a meaningful part because they are almost 50% of our sales of what they see.

And so that can be visual enhancements in a store, space enhancements, fixture enhancements, more inventory investment, a focus on a higher in-stock by size and color.

It can be on our site, a bigger focus around national brands.

So there are so many ways to do that and that is really what we are looking for so that the customer walks away going, hey, they carry great national brands and we own them [in depth] and we show them in both our ads and in our store accordingly.

So we are getting progress and most of our efforts frankly are sort of in the future.

So it is really kind of this third quarter where a lot of those things are coming to fruition, but we are already getting progress.

National brands are doing significantly better.

Yes, I also think you will see maybe some this year, but more next year, a lot more investment in partnership with some of the national brands in terms of in-store presentation.

We had spent a lot of money over the last five years on exclusive brands, as Kevin said earlier.

Rightfully so we think because we were introducing them.

But now that we have got a pretty good balance, it is time to go back and refresh some of those national brands and a lot of the partners are helping us with that.

Okay.

As I think about your stores, it seems like some brands are merchandised by brands and others areas are merchandised by category.

So is it about maybe pulling out some of those areas -- brands that are merchandised as categories like, I don't know, just Levi's as an example and maybe creating more of a branded pad for them?

Yes, I mean I think the best example you could see right now that is complete is we have implemented a new presentation strategy for our most important children's brand, which is Carter's.

And that exists in our stores right now.

So fixturization improvement, pad improvement, visual improvement and it is significant.

So obviously Carter's fits within a pretty large world from newborn and infant up in kids, but Carter's is presented altogether.

A second great example would definitely be Levi's.

That is not fully implemented in the stores today, but will be.

I think that is another great example.

So it should be very visible.

Certainly, right now, if you were trying to say to yourself, hey, how do I see this come to life in a Kohl's store, go look at our Carter's shops in our stores right now in kids.

Okay.

And then finally just on guidance for the fourth quarter, as I think about inventory being down, the shorter calendar, maybe a little bit less promotion, it sounds to me like the conservative stance for the fourth-quarter comp is appropriate.

But as we think about the balance and the potential risk, is it better to walk into the fourth quarter with less inventory sort of always in an environment like this or are you worried at all about missing some sales?

No, I think the position that we have going into this quarter even, but certainly going into the fourth quarter is the right place for us to be for sure.

And we are getting -- as inventories come down, if you just think about a really high level, inventories are coming down and sales are actually going the other way.

It is definitely much more about being positioned right from an inventory investment standpoint, more clarity, less color choice, more depth.

That is what's going to get us better results.

So I actually feel really, really good about where our inventories are going to be at the end of the third quarter.

Yes, I do too and you will never hear a CFO say we need more inventory.

All right, good luck.

Thanks.

Mark Altschwager, Robert W. Baird.

Great.

Good morning and thanks for taking the question.

A quick follow-up on the beauty tests.

We have seen the setup and it looks great.

The customer service approach seems a bit different with more emphasis on product testing.

Just curious how that has gone over so far and then how the labor model in that department may evolve relative to other areas of the store?

Well, there definitely is a different labor model in test stores that we have done so far and that labor model is being implemented in the 150 stores we talked about for the fall holiday.

All those things are obviously built into the guidance we give you.

That is all part of the overall SG&A that we provide in terms of forecasting.

We are seeing good results from it, but we know we need to get a larger number of stores to get -- as we do in all these things.

Testing is really important.

We are big believers in it, in using test and control to look at so you are making the right decisions is really important.

So I think this fall holiday expansion to a pretty significant number of stores is going to tell us a lot both about the top story at the top line, which we think is significant, but also how the whole model will work and translate to the bottom line.

Yes, I mean the key to all this is really getting the extra trip.

Beauty in and of itself isn't going to excite you guys as a strategy.

We certainly expect the beauty sales per square foot to grow significantly.

But getting the customer to come to us for beauty versus somewhere else, that is really going to be the big win.

So I mean I know you, I think, got a chance to look at one of the stores, so you have got the benefit of also seeing the experience and the experience is pretty exciting.

Yes, I would agree.

Kevin, now that Michelle has been onboard for a couple of months, any thoughts she has developed on the business that you can share?

Specifically be interested in any opportunities she sees in loyalty, e-commerce and evolving the brand message?

Yes, she has been with us about a month actually and I think what I see is somebody who is incredibly enthusiastic about what she sees Kohl's really is as a brand.

Obviously, she knew what Kohl's was as a brand from the outside, but as she gets inside the Company and understands better how we do things, she is incredibly excited.

She was very successful in her career in this area of customer engagement, of loyalty, rewards.

She had great learnings she can build on for sure.

I think she would say to you if you spoke to her right now, boy, I love the fact that we already have something in place that is being evolved, but the things she loves the most is that she can get it to evolve.

So she is in a unique position in that she is looking at a couple hundred stores with the loyalty program, what I call loyalty program basic 1 and she can make it whatever she wants to make it.

But I think she would tell you she is very, very excited about the opportunity here.

And as I said, I go back and I just -- I know what happened over the years as we evolved our credit card program.

When we started, it was not what it is today.

It was a transactional kind of a card where people paid for things.

Today, it is incredible, the relationship we have with credit card customers and I think we can do the same thing with loyalty.

So she and I have sort of agreed on what her priorities are.

Loyalty is at the top of the list.

Thank you and best of luck.

David Glick, Buckingham Research.

Good morning.

Thank you.

Most of my questions have been answered.

Kevin, I just had a follow-up on the center core area.

You talked about some exciting initiatives in cosmetics.

I am wondering what other opportunities you guys see in further developing the assortments, how you present in the front of the store and whether your national brands you are looking at will help augment the growth of that category.

I think we are earlier on some of the other categories.

The business that we are most focused on in there is probably handbags.

I think the jewelry business generally broadly -- this isn't a statement necessarily unique (technical difficulty) has been a tougher category for sure.

I don't think we are unique in that.

That doesn't mean we don't have opportunity, but it is just a recognition of a slower trend business.

You know, David, that part of our strategy at the beginning of this year was sort of reorganizing our merchandise team, so we had more focus.

So we do have a GMM who is entirely focused on the center core and footwear.

And I think that is going to serve us well.

We haven't talked a lot about the organizational changes more broadly, but we have a new team and I am really excited about the new team and every single one of those executives is going to make this business better.

And I think the merchants are a key part of that for sure.

So I can't really get into the detail outside the beauty piece in the center core other than to say to you it remains an opportunity and I think handbags is our GMM's focus right now.

Great, thank you very much.

Good luck.

Thanks.

Thanks, everybody.

Thank you.

This does conclude today's conference call.

You may now disconnect.