柯爾百貨 (KSS) 2013 Q4 法說會逐字稿

Good morning.

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

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

All lines have been placed on mute to prevent 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 these 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will not be updated, so if you are listening after February 27, 2014, it is possible that the information discussed is no longer current.

At this time, I would like to turn the call over to Wes McDonald.

Thank you.

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

I will walk through our P&L and Kevin will talk a little bit about our merchandising and marketing initiatives and then I will conclude the call with our guidance for our fiscal 2014.

Comp sales for the quarter decreased 2%.

As a reminder, our actual comps in our guidance excluded the 53rd week in fiscal 2012.

Some of our competitors, especially in specialty retail, report on a shifted calendar, which excludes the first week of the 2012 fiscal quarter.

On this shifted basis, our comp sales decreased 0.4% for the quarter.

Our average transaction value increased 2.8%, the largest increase in more than two years.

AUR was especially strong, up 3.6%, partially due to significant reductions in our January clearance sales.

Transactions per store were slightly negative during the holiday season, but fell off significantly in January.

For the quarter, transactions were down 4.8%.

Kevin will provide more details on our sales in his prepared remarks.

Our gross margin rate for the quarter increased 71 basis points, consistent with the low end of our guidance.

We are especially pleased with this performance given the shipping challenges that we experienced in the quarter in our e-commerce business.

A short holiday shopping season, inclement weather and our own operational challenges in our fulfillment centers all contributed to higher shipping costs as we use faster, more expensive shipping methods to fulfill our customers' orders.

We also saw a higher percentage of our online sales during the highly promotional Thanksgiving and cyber weeks.

Our SG&A expenses were 2% higher than last year, which was more than our expectations of a 75 to 125 basis point increase.

Higher fulfillment expenses for our online business were the primary reason for our actual cost exceeding our original guidance.

Marketing expense also exceeded our original plans.

Depreciation expense increased 5% over the fourth quarter of 2012 to $224 million.

The increase is primarily due to depreciation at our e-commerce fulfillment centers and IT amortization.

Net interest expense increased $2 million to $87 million for the quarter.

The increase is primarily due to the September 2013 debt issuance.

Our income tax rate was 36% for the quarter, a full percentage point lower than our expectation of 37%.

The change was primarily due to favorable state audit tax resolutions.

Net income was $334 million for the current year quarter and $889 million for the year.

Diluted earnings per share was $1.56 for the quarter, $0.03 higher than the guidance we provided earlier this month as final gross margin was stronger than expected.

We opened 12 new stores this year bringing our current store count to 1158, our gross square footage to 100.3 million square feet and our selling square footage to 83.7 million square feet.

We expect to open five new stores this spring, including one relocated store.

We also plan to permanently close two stores and temporarily close one store for a complete rebuild.

We expect to open another four stores in the fall, including the rebuilt store.

So for 2014, we will have a net increase of five stores.

We remodeled 30 stores in 2013 and expect to remodel approximately 35 stores in 2014.

We ended the quarter with $971 million of cash and cash equivalents, an increase of more than $400 million over year-end 2012.

We generated $1.1 billion of free cash flow in 2013, almost 3 times the level generated in 2012.

Our capital expenditures were $643 million for 2013, $142 million lower than 2012.

The decrease reflects multiple changes in our capital expenditures, including fewer remodels in new stores and lower e-commerce fulfillment center spending, partially offset by higher IT spending.

We expect capital expenditures in 2014 to be approximately $725 million.

Our January inventory balance was $3.9 billion, a 3% increase over January 2013.

On a per-store basis, inventory at cost increased 1%.

The increase is primarily due to our renewed focus on national brands, which have a higher cost than our private and exclusive brands.

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

AP as a percent of inventory was 35.2%, 30 basis points higher than last year.

The increase reflects lower markdowns and better payment terms, partially offset by slower inventory turn.

Weighted average diluted shares were 215 million for the quarter.

We repurchased 4.6 million shares during the quarter and 15.4 million shares for the year.

To reduce some confusion, we are now separately presenting our share repurchases and shares withheld on restricted stock vesting separately in our statement of cash flow.

On February 26, our Board declared a quarterly cash dividend of $0.39 per share, an increase of 11% over our previous dividend.

The dividend is payable March 26 to shareholders of record at the close of business on March 12.

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

Thanks, Wes.

As Wes mentioned, our fourth-quarter comps were down 2% on an unshifted basis and down 0.4% on a shifted basis.

We are very pleased with the results in the November and December holiday season.

By extending our hours on Thanksgiving, we were able to be the first stop for our customers and she responded well, driving significantly higher sales on the Black Friday weekend.

We set record levels of both transactions and sales, both in stores and online, on individual days several times over the holiday period.

Sales for the combined November and December period were well above plan.

This momentum did not carry into January as lower levels of clearance inventory resulted in sales, which were significantly lower than our expectations.

Earlier this year, we completed our e-commerce replatform.

The replatform provided the backbone to support current and future omnichannel initiatives.

From a customer-facing perspective, the replatform provided an improved checkout experience and effectively handled the incremental holiday traffic.

E-commerce sales increased 16% for the quarter.

The customer responded very well to our offerings and we posted strong results during two of the most important weeks of the year at Thanksgiving.

For the year, e-commerce sales totaled $1.7 billion.

Our e-commerce sales have now almost doubled since 2011 and have increased at a compounded annual growth rate of almost 40% over the last five years.

On a regional basis, the Southeast, West and South Central regions reported the strongest comps for the quarter while the more weather-sensitive regions, the Northeast, the mid-Atlantic and the Midwest, underperformed the Company average.

Looking at our results by line of business, apparel categories outperformed non-apparel categories.

Men's reported the highest comp on strength in outerwear and active.

Women's also outperformed the Company on strong outerwear and active sales as well.

Children's apparel was consistent with the Company average.

Toys was slightly positive after posting a 25% increase in the fourth quarter the year before.

In the home business, the customer responded well to our new premium electronics offerings, which included Beats headphones and speakers and LG televisions.

In accessories, strong results in our bath and beauty categories as a result of our beauty remodel program and the new brand launches were offset by lower jewelry sales.

And finally, in footwear, footwear saw strength in both juniors and active.

Our renewed emphasis on national brands continues to generate positive results.

In recent years, we introduced many successful new private and exclusive brands, Jennifer Lopez, Marc Anthony and Rock & Republic as examples.

We continue to aggressively support these brands, but believe it is important to rebalance our product offering between our quality only at Kohl's brands and our iconic national brands to drive maximum customer traffic and to maximize sales.

During the fall season, national brands consistently outperformed the Company total.

On the inventory side, we are very pleased with our efforts to bring down our inventory levels in 2013.

We decreased our fall receipts significantly in order to ensure we ended the season clean.

On a unit basis, our inventory per store, excluding e-commerce, is down 4% with our clearance units per store down 15% from last year.

National brands are flat on a unit per store basis while private brands are down 7% and exclusive brands are down 10%.

Moving over to marketing, during the holiday season, we focused on delivering strong value while finding new, exciting and more disruptive ways to reach our customers in the channels they use most.

From powerful broadcast integrations to exciting new product offerings in-store and online, our efforts resonated.

This spring, we are building on that positive momentum with Wink of Pink, an omnichannel campaign that leverages the trend color of the season to tell a compelling story, from a broad assortment of merchandise, to meaningful, new national initiatives that build on our commitment to women's health.

We expanded our loyalty programs in California and the Pittsburgh market in the third quarter of 2013 and plan to roll to additional markets.

After that spring rollout, the program will be available in approximately 30% of our stores.

We continue to be very pleased with the sales lifts that we are seeing in our current loyalty markets and we now expect to have loyalty rolled out to all markets in the Company by the end of the fiscal year.

In closing, as we look forward to 2014, we do so with a renewed focus on connecting with our customers and providing their families with the amazing product, easy experience and incredible savings that they expect from Kohl's.

This year, we will add several new brands to our portfolio.

In the spring, we will combine the magic of Disney, one of the most recognizable brands in the world, with our highly successful Jumping Beans brand.

In only five years, the Jumping Beans brand has become our fourth-largest brand with annual sales in excess of $600 million.

We will also launch the next DesigNation designer, Peter Som.

We will roll out two new brands in the fall, IZOD and Juicy Couture.

The IZOD rollout will be one of the largest menswear rollouts in our history.

The Juicy Couture brand will be part of our efforts to capture more of the athleisure market.

We also will continue to strengthen our current mega brands.

In 2013, Croft & Barrow, Sonoma and Apt.

9 reported a combined $3.7 billion in sales.

Almost three-fourths of all Kohl's consumers purchased one or more of these brands last year.

We continue to see good results from our national brands as investments in inventory and in-store presentation and marketing led to their outperformance in the fall season.

Our renovated beauty department brings an exciting new shopping environment to customers in approximately 280 stores.

Early sales results continue to be very promising with increases in beauty sales of 20% to 30% and we expect to roll out an additional 200 plus stores this year.

We continue to experiment with different in-store environments for beauty in order to maximize our return on investment.

With these renovations and the national beauty and fragrance brands that we launched this September, we believe Kohl's is becoming top of mind as our customer chooses where to shop for their beauty products.

We are making significant investments to create an exciting omnichannel experience for the customer, whether she is shopping in one of our stores, from her phone or from her laptop, we are creating a consistent experience to ensure she can connect with us wherever and however she wishes.

With that, I'll turn it back to Wes to provide our annual guidance.

Thanks, Kevin.

For the fiscal year, our guidance is as follows -- comparable sales flat to up 2%, total sales up 50 basis points to 2.5%, gross margin improvement of 10 to 30 basis points, SG&A expense dollars increase 1.5% to 2.5%, depreciation expense of $950 million, interest expense of $342 million, tax rate of 38% and share repurchases of $1 billion and estimated average diluted shares of 204 million shares.

This results in earnings per diluted share of $4.05 to $4.45 for fiscal 2014.

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

(Operator Instructions).

Neely Tamminga, Piper Jaffray.

Well done navigating this, you guys.

Obviously, November, December, I'd love to talk a little bit more about that.

In terms of the loyalty program and some of the initiatives you said, could you give us a little bit more color as to maybe just isolating November, December, how that new loyalty program performed relative to balance [the chain] or some sort of control group?

And just one other big picture question for you, Kevin, if you will, on mobile for 2014, I would imagine mobile continues to be the significant source of additional growth for your e-commerce business.

Are there any sort of key initiatives we should be looking for in 2014 as it relates to mobile?

Thanks.

Yes, I'll take the loyalty one and then Kevin can take the mobile one.

Loyalty, we've just been seeing relatively consistent results.

I'd say the lifts in our market have ranged from 1.5% roughly on the low end to 3% on the higher end.

Interestingly, our biggest lift has come in Pittsburgh, which is our highest credit penetration market in the test so far.

So that is very encouraging.

In some of the markets that we are rolling out in the spring, we are going to roll it out to additional high credit penetration markets to see if we can replicate that lift.

But we are very encouraged with the loyalty program thus far.

We're making some tweaks to it in terms of making it more than just about encouraging transactions at Kohl's to make a more emotional connection and Michelle has been working on that quite feverishly over the last few months and that will be something that will be integrated in the loyalty program as we roll it out by the end of the year.

On the mobile side, the largest percentage of our total investments in CapEx for this year are in technology and within the technology investment, the largest percent by far is in omnichannel and personalization initiatives that we are launching this year.

There is a whole bunch of mobile-enabled customer experiences that we plan to begin to roll out.

They include things like the next chapter of loyalty and effort to create a new tablet-centric site, enhancing our mobile wallet experience and then developing and launching a whole series of in-store experiences around location-based marketing, personalized offers and more product information.

So we are highly focused on it.

Obviously, mobile is driving visits and it is important that we have best-in-class mobile experience.

Thank you.

Good luck, you guys.

Bob Drbul, Nomura.

I guess the first question is on the mix versus the gross margin, can you just give us updated thoughts around how you see this playing throughout 2014 around some of the mix shift with the national brands and gross margin implications, the current thinking on that?

Sure.

First of all, national brands increased in penetration in the fall season both in the third quarter and the fourth quarter.

So we are very happy to see that take hold.

I reran the numbers yesterday, so it's a good question.

If 100 basis points goes up in national brands in terms of penetration, if it comes out entirely of our private brands, which we would not expect, we would expect it would be more likely from the exclusive brands, it would be 7 basis points of headwind.

If it came out entirely of our exclusive brands, it would be 4 basis points of headwind.

The shifts were not going to be dramatic on an annual basis from our penetration in national brands.

We are certainly going to pick up quite a bit in 2014 in the back half when we roll out IZOD, but I don't think there is going to be any gross margin pressure at all from any shift in terms of moving more to national brands.

It will be offset by the fact that we are going to try to improve our gross margin through inventory management in all three types of our brands.

Got it.

And on the fall brands, the Juicy line, is that a line that the men's piece will be a big portion of and Wes, would you be expecting to use your employee discount on a lot of the Juicy product?

No, I think it is pretty much just going to be on the women's side of the business, but it is athleisure, so who knows.

All right.

Good luck.

Thank you.

Oliver Chen, Citigroup.

Hi, thanks for all the details.

Regarding your gross margin outlook, what are the main drivers for the nice look forward to the upside there?

And also as we look at the comp going forward, and you engage in the national brand and beauty side, what are the main enthusiastic drivers in terms of what will support the comp in terms of unit versus transaction and traffic?

This is Kevin, Oliver.

On the margin, I think the way you want to think about the margin is, as Wes said, the move to more aggressively support our national brands is really sort of neutral.

I don't think we expect really any significant change in our margin performance because of that.

We are working, as you can tell, really hard on managing our inventories more effectively.

So I think the tailwind that we see on margin would be the continued execution of our inventory management strategies, which would lead to improved sell-through, lower clearance levels and therefore better merchandise margins.

The headwind that, of course, we are facing is the impact of the growth of online because our online business does operate at lower merchandise margins, primarily due to merchandise mix more than anything else.

So the improvement in our merchandise margins in brick-and-mortar is obviously more substantial than the overall improvement we are guiding to because of the headwind from the other side.

On the comp performance, there is a series of initiatives that we think we really have been talking about probably now for the last two quarters that we think are going to drive sales.

National brands is obviously one of them.

A recommitment to that is important to get the customer more engaged.

Our loyalty program is working.

It is being expanded and we fully expect to have it completely rolled out by the end of the year, but more importantly a more comprehensive program that would enable us to engage on more things other than just a better transaction for the customer, a lower price transaction.

Beauty is working, as we said.

Comp increases in beauty and the beauty stores compared to the non-beauty stores are anywhere between 20% and 30%.

New brands, we have been in the last couple of years deficient on new brand introductions.

You heard about a whole bunch of new brand introductions beginning this spring and then more aggressively in the fall.

All of those things I think are really positive from the sales side.

I don't know if I missed anything, Wes?

Yes, I mean I think the biggest thing that is going to drive comp, we have to get transactions per store moving in a better direction.

The average transaction value that was up this quarter, we fully expect that given our performance last year, especially on clearance in January.

So we knew AUR was going to be up pretty significantly this quarter, but that is not going to be an ongoing thing.

In order for us to drive comps better than what we have been running the last few years, we have got to get transactions per store, more visits per store moving in the right direction.

Thank you.

Thank you very much.

Best regards.

Matthew Boss, JPMorgan.

-- comp at the higher end of the range for this year.

What would be the underlying traffic and ticket components as we think about it?

Should we think about the year as second-half-loaded and any comments on February so far?

Yes, I mean I think we are obviously thinking that comp is going to come mostly from traffic.

I can't tell you if it is going to be one and one or traffic is up 2%, ticket is flat.

I am hoping that we get a slight ticket benefit just from better management of our inventory.

So AUR is going to be up slightly, not to the extent that it was in the third quarter.

Definitely with the new brands coming in the back half with IZOD and Juicy, we would expect fall to be a little bit better than spring and in terms of February, our business hasn't been any different than everybody else that has reported already.

It was pretty slow in the beginning of February and it has picked up recently.

Okay, great.

And then on the marketing front, can you talk to some of the things that Michelle is working on and what we should look for as the year progresses on that front?

Yes, I mean we tested out a few of them frankly during the course of the call.

If I was prioritizing them, I would say number one priority that Michelle has been focused on is to evaluate our current loyalty program and create a more improved platform to go forward with.

And so I think she is happy about the fact that she has something to work with, but she also knows that it needs to be enhanced substantially for it to be most effective.

So we are getting lifts, so that is really encouraging, just the fact that we are getting lifts.

We are definitely highly focused on identifying new customers.

So there is a whole series of initiatives that Michelle is focused on from the way we deliver our marketing, literally in our print and in our broadcast, to the loyalty initiatives and other initiatives that she is working on.

And it is highly targeted towards expanding our reach.

So as I said, her number one priority is to identify ways for us to broaden the reach, to improve transactions and loyalty is probably right now the number one way we are going to get there.

But there are a whole series of other ideas that she is working on and we have had some success.

She had some great success in a few instances in the fourth quarter, particularly around the Thanksgiving day period and we benefited greatly from it as you saw our November, December sales were almost up 1% comp, so we had some great success.

Great, best of luck.

Paul Trussell, Deutsche Bank.

Good morning.

Wes, if you can just go back and talk about some of the hurdles in the fourth quarter with shipping and just maybe kind of outline to us how you plan to improve upon that.

This upcoming year, any investments that need to be made on the shipping side.

Sure.

Well, I think the issue really comes into two different buckets.

I guess the first thing I would say is our peak I think is a little bit different than other retailers.

The week of Thanksgiving, we get 10 times our average volume.

So that creates a pretty big spike and we plan for that backlog.

We just didn't execute in all of our distribution centers.

We did a really good job in one of them.

On the West Coast, we did a -- we were affected by weather in our Dallas DC as other people were in that area.

But we have to solve the throughput problem.

So in order to do that, a couple different things we are doing.

We are taking our Ship From Store number of stores up to at least 500 for this year.

That will help significantly.

We are also moving more units to our regional distribution centers.

That is our brick-and-mortar.

They are going to handle the more bulky stuff that has to do ship alone anyway.

So those are two things we focusing on.

We are also looking at a bulk -- another bulk distribution center, whether we run it temporarily or we use a third-party service provider to do it to again alleviate that peak demand.

We are also really working on practicing peak every day in the off-season where we are trying to drive as many units as we can on a daily basis out and getting as many units out in one day as we possibly can.

The shipping costs, that was really -- so that was really all about expense.

The shipping costs really just occurred as we had to use more expensive units or methods of shipping with FedEx and UPS as we got closer to Christmas.

I don't think we were alone at that.

I think we are all going to have to, in retail, rethink the cutoff dates because there is only so much capacity in the pipeline that FedEx and UPS can provide.

And I think everybody read about some of the issues they had on the shipping side with just meeting the demand that is out there.

So we all have to be in the business more realistic as to what we can get delivered those last few days before Christmas.

That's helpful, thank you.

And then just on the balance sheet, I know this past fall you went to the markets and got some debt.

Is there any expectation to lever up this year in order to complete the $1 billion in buyback?

No, I mean the function of really completing the $1 billion in buyback this year, we were late.

I have to put in a 10b5-1 plan the third week of November and it just runs automatically and the way that we built the grid, it wasn't able to complete what we thought would given the movement of the stock price.

No, I don't expect to go to the markets.

We ended the year with almost $1 billion in cash.

We are going to generate another $1 billion in free cash flow next year, I believe, as well.

So I think we will use the free cash flow to buy back the shares and then take the cash balance down a little bit towards the end of the year.

We don't need to necessarily have $1 billion at the end of the year.

I think we have been targeting somewhere around $500 million or $600 million.

So no need to go to the markets in 2014.

Thanks.

Best of luck.

Lorraine Hutchinson, Bank of America.

Hi, good morning.

It's Heather Balsky on for Lorraine.

I was hoping you could just talk about your outlook on inventory over the course of the year and also for the long term in addition to addressing some of your plans to better manage inventory during the year?

Yes, I mean I think our goal really over the next three years, we have been pretty consistent with this, is to try to take inventory down roughly 5% -- mid-single digits on an annual basis.

So we are a little high now due to the mix of the business.

We will work through that and we will be more aggressive as we move through the year.

I would expect, at the end of the year, if we are talking a year from now, we should be -- our inventory should be down somewhere, ex-e-com, mid-single digits.

Great, thank you.

And can you also just talk about your strategies in terms of pickup-from-store and how you are thinking about that for this year?

Sure.

From Ship From Store, I mentioned earlier, we are doing about 500 stores.

Pickup-from-store, we are doing tests in two significant markets.

What we would expect to do is read those tests, and we will have the ability to do it in more markets, just is a question of reading the tests.

One of the things we want to make sure we can do is deliver obviously on the promise to the customer on the pickup and make sure they can identify -- our store associates can identify the items in the store and pick them quickly.

We just have to figure out as we test that whether that is one hour, that is four hours, whatever the right level is.

We want to make sure we have it figured out before we roll it out to more than just those few markets.

Thank you very much.

Michael Binetti, UBS.

Can we talk a little bit about the e-com, I think you said 16% growth in the quarter?

Was that right, Wes?

Yes.

Okay.

So obviously there were some fulfillment issues and I just want to think about how that trend should stretch into early 2014 both on the top line.

Is that where you think the throughput issues were contained in the quarter and just due to capacity or should we think about a more muted growth rate than we saw in the early part of last year?

No, I think the throughput issues were really a two-week issue.

So we won't have any throughput issues for sure.

I think we need to regain some trust from the customer and we are working on that.

We disappointed some people and we've tried to make them whole the best that we can.

But we won't be limited in terms of throughput any time in the first three quarters.

It is really about getting them to the site.

Kevin talked about mobile.

One of the things that we worked on last year, as you guys all know, was our replatform.

We did not put a lot of effort into enhancements on our tablet app and our smartphone apps because we were focused on doing the replatform.

You will see a lot more change on both tablet and smartphone this year, which is going to help our conversion rate.

Desktops have a better -- higher conversion rates than tablets, which have a higher conversion rate than smartphones.

With a lot of the traffic moving to mobile, we have to develop a much better app for both tablet and smartphones in order to drive the conversion rate.

Okay.

And then I get guess just bigger picture and longer term as you think about so much of the world shifting to e-commerce and online and certainly we get a lot of questions about whether the consumer hit a tipping point with how they are going to conduct their holiday shopping going forward.

As you guys think about the store portfolio at 1100 stores, is that still the right number of stores for you guys long term?

Yes, we talked about we are closing a couple of stores whose lease came up.

I think you will see that more in the future.

We have a watchlist of stores that are negative cash flow.

There are about 5 to 10 that we look at on an annual basis.

A lot of those have improved over the last year and it is not significantly cash flow negative.

What I think we need to do a better job of is utilizing those stores as multipurpose assets, if you will.

Ship From Store is certainly going to be used in more and more stores.

I am not sure if it needs to be in every store.

There are some very high-volume stores that we have where they are probably busy enough servicing the customer in those stores to worry about shipping from the store.

But, at some point, Buy Online, Pickup in Store is going to be everywhere and that is going to be, I think, a big help because it drives traffic to the store.

And as I have read through some of the notes from our other competitors, they are seeing store visits and store shopping from those pickups as well.

So I think we just have to do a better job of making our stores multipurpose.

Finally, as you think about the CapEx for the year, and maybe some of the planned-in spending in stores and the investing that you guys do in the stores, is the composition of what you think you will be spending on this year in the stores, how is it different from prior years or what are the priorities in store?

Well, the majority really is -- not the majority, but we are spending about $275 million in IT.

That is actually a little bit less than this year, but we don't have the replatform.

I think a lot of what you will see in store is more about merchandise presentation.

So obviously with the IZOD and Juicy rollout, you are going to have some pretty impactful strike points in the stores as well.

We have put in the infrastructure to do Ship From Store and to Buy Online, Pickup in Store in those couple markets I talked about.

We are also doing RFID in certain merchandise categories in most of our stores now.

Those are -- and then obviously beauty we are rolling out to over 200 stores.

I think it is 214.

We are testing in beauty, as I think we mentioned it in the script, a sort of in-between concept.

We have a full shop and then a relatively inexpensive retrofit.

What we have seen so far is, in our high-volume stores, the full shops are doing very well.

In our lower volume stores, what we need to do is put more of those less expensive retrofits.

What we are trying to figure out from an investment perspective is, in the middle volume stores, what is the best way to treat beauty.

So we have developed a prototype that is kind of in-between in terms of cost and we are going to be testing that as part of the 214 stores and that should give us a good read as to how quickly we can roll out beyond this year.

Charles Grom, Sterne Agee.

Good morning, guys.

Just on the omni questions, at what point will your inventory systems be able to speak to one another so you can essentially do all that, including site to store to door?

They do today.

They do today.

Okay.

So at some point in the next couple years, you will be able to do the whole platform, site to store to door, pick up in store?

Well, the truth is, Chuck, that we can do that right now and we have the capability of doing Buy Online, Pickup in Store and Ship From Store now.

What we are feeling our way through is how many stores do we want to use Ship From Store on that would give us the highest level of productivity because, as Wes said, high-volume stores are probably not the stores we are going to use for that.

We will use stores that are in the more middle of the pack or lower end of the pack of stores to Ship From Store because they are geographically across the whole country anyway and they will make those stores a lot more productive, we believe.

At least in the initial test that is what we are finding.

And then on by online, pick up in store, that is just how fast are we going to move on it.

We are going to launch it, we are going to do it in major markets and we can roll it out as aggressively as we want based on what we learn in the findings.

Okay, great.

And then on the fourth quarter, the shipping -- the higher shipping costs and the higher fulfillment costs, any sense of magnitude that you'd like to share with us for how much that cost you guys?

No, I mean it's hard to -- there are so many elements to that because if you start to go down that road a little bit, you also get into a how much did it impact the sales.

So people were dissatisfied, did they not come back later in December and buy?

It is a significant number.

I mean we had incredible success in the two-week period of the week before Thanksgiving and the week after Thanksgiving and at the end of the day, we weren't able to deliver the traditional customer service that we would expect to those customers online in terms of shipping it and then we felt the aftereffect of that between then and the Christmas Day.

Yes, I would expect to be more productive in 2014 in the fulfillment centers.

So hopefully, we will do better on the SG&A line.

I couldn't tell you right now on the shipping cost part just because we are going to have to ship things more expensively to meet the peak demand.

That is one of the things we learned last year.

And I do think that the capacity that the FedExes and UPSes of the world that they won't -- they only have a fixed capacity, so it is going to move back, I think, in terms of what they are willing to promise all of us as shippers that they can deliver in time for Christmas.

Again, we are back to why Ship From Store is really important and Buy Online, Pickup in Store and why that is so important.

Exactly, right.

Okay.

On that AUR increase, is that mainly a function of the down 2.4% from a year ago or was it because of the increase in penetration in national brands?

Was it some cost inflation?

I would say it was more about the January clearance.

If I look at the AUR through November, December, it was up a little, but not to the -- it was significantly up double digits in January.

Yes, it is all -- it is just about the mix.

We had so much a lower level of clearance.

And then just on the comp for the full year, is there any shifts in between quarters, marketing events as we start to put the model out by quarter, if there is anything we should think about?

No, except for the Easter shift.

We are almost back to normal.

I mean the only thing, as Wes mentioned I think an earlier question or maybe in the call, the weight of our new initiatives, as you heard in the call, have a tendency to be getting more in the second quarter and accelerating into the third quarter.

So whatever implication that would have on our expectation, that would move it, I would say.

Okay.

And then just on the February comment you made earlier, have you guys taken a look at your good weather markets versus your bad weather markets?

Do you think that slowdown in the front half was mainly a weather issue or do you feel like the consumer is under a little bit more duress lately?

I think the consumer is definitely under duress, no question about that.

When we look at the business, both January and February, frankly, our West Coast business, which has had good weather, particularly for spring selling, has performed really well, I think, Wes, consistently very well.

Yes.

So that gives us a lot of optimism relative to the product offering and availability of selling spring once there is more reasonable weather in particularly the Midwest and Northeast.

Yes, it's minus 3 this morning, Chuck, out here, so Kevin and I are not updating our polos yet.

Bundle up.

All right, guys.

Thanks a lot.

Thank you.

Liz Dunn, Macquarie.

Hi, good morning.

Thanks for taking my question.

I wanted to circle back on the loyalty program and just sort of understand what kind of a penetration are you achieving and does it vary in markets like Texas or versus Pittsburgh where you might have a different penetration of the card.

And then are any of the things that you are learning about loyalty impacting some of the card benefits?

And then, finally, what is the -- what are you doing for marketing in terms of increase in dollars for 2014?

I would imagine that is an area you continue to kind of distort spending.

Thanks.

On the loyalty thing, the penetration frankly is pretty consistent across the whole country and to be totally honest with you, that is probably a little bit -- has been a bit of a surprise to us because we had some expectation that markets, which had really high credit penetration, might not be as successful on loyalty because there are just so many existing credit card customers that the opportunity to attract new customers that are non-Kohl's card customers might be less.

That has actually not proven out to be the fact and in fact, one of the highest credit card penetration markets we have is the Pittsburgh market in the whole country.

And we chose that market as one of the test markets just to see the impact of loyalty in that market and that has been an incredibly successful loyalty market.

It actually might be the most successful loyalty market that we have.

So we are -- that probably fuels a lot of optimism about the fact that loyalty is actually not in essentially any of our highly penetrated credit regions.

So it is not in the Northeast; it is essentially mostly not in the Mid-Atlantic or the Midwest to any significant amount.

So that is a big positive as we see it.

The amount of new customers, so that is outside of the current credit card customers who might also sign up for loyalty, I mean I think they are running pretty close to 50%, I think, right, Wes?

I mean about half of the -- if we have X number of loyalty customers in a test store, a little more than (multiple speakers) --

A little higher than non-credit.

-- half of them are noncredit.

So that is really exciting.

That was always the big objective is get these new customers engaged more effectively through loyalty.

And they really have no impact on the card benefits.

The card customers get everything they always got, they just get a little more.

And as I said, I think Michelle's excitement is focused around the delivery of loyalty, what does loyalty look like, how does it get engaged online, what are the benefits that are outside of just the transactional benefit of maybe getting an additional dollar back on a purchase.

And I think she is pretty excited about some of the ideas that are being generated.

There is a new level of loyalty marketing that is going to be launched this year, a completely new campaign.

It looks totally different.

The communication is totally different from what we have done, but it is built fundamentally on the learnings that we had during the course of the test.

So as you can hear, I am very optimistic about loyalty and I think every day that goes by, I get more confident about the possibility of loyalty.

On the marketing side, we are essentially pretty much holding our marketing for the year overall, but obviously loyalty is getting a pretty big increase.

So some of that money comes out of more traditional marketing that hasn't been as effective for us.

Great, thanks for all the great detail.

Dan Binder, Jefferies Company.

Hi, good morning.

Just following up on this discussion of loyalty, I am curious what percentage of the transactions in these test markets are -- what percentage of sales are with loyalty cards?

And then I think with the credit card, there is some sort of profit-sharing relationship with the bank.

And I am just curious when you get a credit card customer that signs up for the loyalty card, are they doing anything in terms of picking and choosing events and how to use the card that would cause the economics of the credit card to erode?

No, Wes can add some value on the credit card piece.

On the percent of business, I think we are just not at a point we want to share that because we would send you down a path that might turn out to not be true.

When we expanded, because we are essentially only in roughly 25% of those stores, so we don't have a big enough base to speak confidently about that.

And secondly, as I said, loyalty is going to look very different going forward in terms of the customer face of it.

And so that could very well change what we are experiencing.

We are not thinking it is going to be a negative.

We are thinking it is going to be an accelerant for sure.

Generally, our credit card partner, Capital One, has been our partner on loyalty.

They are engaged on this issue.

We have made them a partner every step of the way and we have actually accelerated that engagement so they understand that loyalty is not a threat at all to the card business that we have to them.

It has nothing to do with the profit-sharing arrangement, so that's --.

Yes, we haven't seen any change in behavior where people would be using their bank card more often.

It is a good question, Dan.

It is one of the things I was a little concerned about at the beginning, but we have it updated now that I am not real worried about that anymore.

What we have seen is they continue to use their credit card whether or not it is a credit event or not.

Okay, great.

My second question is on brands.

You obviously had a few that you've already announced and are planning to roll out this year.

I am just curious from a pipeline perspective, I am assuming you are not stopping there.

Is there any other potential brands you could announce this year even if you don't want to be specific today?

We are definitely pushing hard on this topic.

The way I would characterize it, I think over the course of the next few months, we are going to probably be sharing a little bit longer-term view of what we see as the sort of accelerants to our business and trying to provide more detail about the implications on that on our future next two, three years business.

Brands are an important element of that.

They are particularly important as we will share with you in certain segments of our business where we think we can take a really leadership position.

So I don't to get ahead of myself on that, but there are certain areas in the store and certain areas of customer interest that we are going to heavily focus on and that to some extent will drive the areas that we are most interested in accelerating our brand penetration.

An easy example would be active and wellness.

Active is an area that we are highly penetrated in, both in apparel and footwear and we know we have a huge opportunity to expand that platform into other categories and also to increase what we are doing in active in the existing world.

And those would be, for instance, one of the things we would probably be talking to you about and that would therefore imply that we are going to be really focused on new brand initiatives in that world.

And then just the final thing was on expenses.

You have done a remarkable job managing them the last few years and I think you had some consultants helping you get some cost out of the back non-customer-facing parts of the cost structure.

I am just kind of curious if you can give us an update on where you are in that process and what you are doing this year to still manage that pretty tightly.

Well, when we have uncovered them, we have obviously put them in the budgets and taken the work out where appropriate.

I would say that we've built it into our guidance, so if you do the math, we expect to leverage at a 2 comp.

That is what we guided to.

The remaining initiatives from that lie mostly in IT and credit and their related to some finishing some IT work on some projects that we have planned for this year.

So we have a lot built in for this year.

We have a little built in for 2015 and then we will have to relook at it because we have to continue to improve.

Great, thanks.

Mark Altschwager, Robert W. Baird.

Hey, good morning and thanks for taking the question.

Congrats on a nice quarter.

I just want to follow up again on the marketing side.

Can you just talk a bit more about the response to some of the changes on that front with the higher profile ad buys and focus on broadcast and social media?

And then it sounds like the budget is staying relatively consistent.

So maybe where are you pulling back with the greater emphasis on loyalty in these higher cost avenues?

Well, we definitely have had some successes.

Michelle likes to talk about those as green shoots, so things that she has been able to focus on in a very short period of time with her team and create change.

And we have seen some really exciting results around that.

Probably the one that is the easiest to understand that I'm sure you saw was our effort prior to the Thanksgiving event around the MAs and an effort with Jennifer Lopez and that had tremendous -- a tremendous amount of impressions and a tremendous amount of excitement generated.

And it translated into traffic and it translated into sales.

Obviously, she knows full well that those small steps have to now translate into bigger steps.

We have an initiative underway right now.

One of the color trends of the season is for sure pink and there is an initiative that launched just at Presidents' Day and has been ongoing around that.

I think those kind of things you are going to see a lot more of, an awful lot about loyalty.

Obviously, it is a zero sum game.

So we are not planning on spending essentially any more in marketing and if we are going to fund loyalty and we are going to fund some of these big ideas, then there are other areas of funding that have occurred in the past that we have identified that have haven't produced results and Michelle is focused on those and those are the areas that are going to be pulled back.

Print is clearly one of those areas for sure.

Great, thank you.

And then following up on the beauty side, any data you can share on how the tests are impacting frequency of visits in those stores?

And then any data you have on the costs associated with the further rollout?

Thank you.

Well, we've seen -- it's very early, so I don't want anybody to read a whole lot into this.

We've seen low single digit overall lifts in the stores, which is critical to the success of the program.

So from that perspective, I think we are very pleased with what has been going on.

In terms of the investment, it really varies.

I don't want to really get into specifics.

At the low end, it's tens of thousands of dollars in investment.

At the higher end, it's hundreds of thousands of dollars and like I mentioned earlier, we are just try trying to find the right mix in terms of looking at the sales volume because that is important.

Obviously a 1% lift in a store that does $12 million is a lot different than a 1% lift in a $24 million store.

So that is something that we are going to work on and finalize this year and we will have a really good plan to roll out the balance of the chain in 2015 and beyond.

Great.

Good luck.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone and congratulations on moving through the season.

As you think about remodels, we have heard a lot about marketing in the loyalty program, connecting it with the stores and the remodel program.

How do you see the stores matching the marketing program and sending the message?

What should we be looking for in the remodels this year that may have been different than last year?

Thank you.

Thanks, Dana.

I think one of the things we are looking at in remodels, we are going to continue to do a significant amount of total store remodels going forward, but more and more we are highly focused on identifying new initiatives that would require capital that could make the store look different and also generate very specific returns both in the business and in the overall store traffic.

A good example of that is beauty.

So as we looked at spending a fair amount of money on the beauty initiative, because it is a significant capital expense both last year and this year, we are looking at the results of that and saying that it would be better for us to roll out beauty to the whole Company quickly in various formats, depending upon what gives us the best return, than it might be to remodel completely 20 other stores because we are looking at the lifts and the lifts are good.

Loyalty, the implications of loyalty in the in-store environment would be another thing.

Moving customer service to the front of our stores from where it was in the back in some cases, that might be another thing.

New brand initiatives require capital and we are saying that we are serious about new brand initiatives, particularly national brands like Disney, like IZOD, like the DesigNation, definitely like Juicy Couture.

Those require capital, significant capital investments and we are seeing better results by accelerating those kind of initiatives again than we are necessarily seeing from remodeling a whole store somewhere.

So we are going to spend just as much money on investing in our existing infrastructure.

Wes talked about some of the operational pieces like Buy Online, Pickup in Store and what that requires, or Ship From Store and what that requires or mobile enhancement in-store and what that requires.

We just believe it will be spent a little differently than maybe historically we have looked at investing in our store base.

Yes, most things will touch every store instead of just a few.

Thank you.

Thanks, Dana

Thanks, everybody.

Ladies and gentlemen, this does conclude today's conference call.

Thank you for participating.

At this time, you may now disconnect.