柯爾百貨 (KSS) 2014 Q1 法說會逐字稿

Good morning.

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

At this time, I would like to welcome everyone to the Kohl's first-quarter 2014 earnings release conference.

(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 Items 1A in Kohl's most recent Annual Report on Form 10-K, as well 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So if you are listening after May 15, 2014, it is possible that the information discussed is no longer current.

I will now turn the call over to our host, Mr. Wes McDonald, Chief Financial Officer.

Sir, you may begin.

Thank you.

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

I will walk through our actual results and Kevin will talk a little bit in more detail about some of our merchandising and marketing initiatives and then we will wrap it up with a close and take your questions.

Comp sales decreased 3.4% for the quarter.

Our average unit retail increased 2.6% while units per transaction decreased 1.5%, which leads to a 1.1% increase in average transaction value.

Transactions per store decreased 4.5%.

Total sales for the quarter were $4.1 billion, a decrease of 3.1% from the first quarter a year ago.

Our comps were lower than our plans, but we continue to expect improvements in comps as we progress throughout the year.

Kevin will talk more about our actual sales results in a moment.

Our gross margin rate for the quarter was 36.8%, which was about 40 basis points higher than the first quarter of last year and slightly higher than the rate assumed in our annual guidance.

SG&A was $3 million higher than the first quarter of last year.

Marketing costs were lower than last year as we shifted some spending to the second quarter.

Our credit card business reported higher revenues.

Partially offsetting these improvements were higher remodel costs as our remodels are occurring earlier this year than they did last year and higher investments in our e-comm fulfillment centers and information technology.

Depreciation expense was $216 million for the quarter, essentially flat to last year.

We are decreasing our annual depreciation guidance from $950 million to $900 million.

Most of the changes related to remodels, which are lasting longer than the depreciable lives that we had originally given them for accounting purposes.

Our interest expense was $85 million for the quarter, up $2 million due to the $300 million of debt issued in September of 2013.

Our income tax rate was 36% for the quarter.

This is lower than expected as we had a favorable state audit tax settlement during the quarter.

Our diluted earnings per share were $0.60 for the quarter, down $0.06 from the first quarter of last year and net income was $125 million.

During the quarter, we opened four new store locations and relocated one existing store.

We permanently closed two stores.

One store is being temporarily closed and rebuilt and will reopen with three additional new stores this fall.

We ended the quarter with 1,160 stores, gross square footage of 100,340,000 square feet and selling square footage of 83,715,000.

Our plans are to remodel 33 stores this year.

This is generally consistent with last year.

Most of this year's remodels will be completed in the spring season.

Capital expenditures were $176 million for the first quarter of 2014, $41 million higher than the first quarter of 2013.

Most of the increases related to a call center that we purchased in Texas.

Remodels were also higher as our remodels are occurring earlier this year than they did last year and IT spending was also a little higher.

We ended the quarter with $717 million of cash and cash equivalents.

Higher capital spending and the timing of tax and non-inventory payments resulted in negative free cash flow for the quarter.

We ended the quarter with $4 billion of inventory, a 1% increase over last year.

Kevin will talk more about inventory in a few minutes.

AP as a percent of inventory decreased from 36.7% at the quarter-end 2013 to 34.7% this year.

Our first-quarter weighted average diluted shares were 208 million.

We repurchased 3 million shares of our stock during the quarter.

On May 14, our Board declared a quarterly cash dividend of $0.39 per diluted share, which is payable June 25 to shareholders of record at the close of business on June 11.

We continue to expect earnings per diluted share of $4.05 to $4.45 for fiscal 2014, consistent with our previous guidance.

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

Thanks, Wes.

As Wes mentioned, our first-quarter comps were down 3.4%.

Those sales were below our expectations for the quarter.

I am encouraged by the consistent improvement that we saw as the quarter progressed.

Looking at our results by line of business, children's and footwear outperformed the Company.

In children's, infant and toddler sales were strong and in footwear, strength continued in our athletic shoe business.

Men's and women's apparel performed with the Company.

Notable performers in men's included active apparel and young men's.

In women's, for the first time in many quarters, juniors was the strongest category, achieving a positive comp.

Intimates also outperformed the Company in women's.

Accessories and home underperformed the Company.

In accessories, the new beauty brands continued to contribute to strong sales.

And soft home was the best performing category in total home.

On a regional basis, the West was the strongest region.

The Southeast and South Central regions also outperformed the store average.

The Midwest was generally consistent with the store average and the Northeast and the Mid-Atlantic regions were the most challenging.

From a mix perspective, we are pleased with the results that we are seeing in our national brands since renewing our emphasis on them last fall.

For the third consecutive quarter, national brand penetration increased and national brands reported a higher comp result than our private and exclusive brands.

Our renewed emphasis around national brands does not mean we are abandoning our exclusive brands.

Our customer continues to recognize the value these brands provide and we expect to continue to innovate on the product side and deliver the incredible savings customers expect from us in these brands.

In April, we launched the first collection, which combines the magic of Disney and the quality and value of our Jumping Beans brand.

This was a tremendously successful initiative and we will be rolling out new elements around more of the Disney portfolio throughout the rest of the year.

This June, we are launching Fitbit as part of extending our active and wellness business.

And finally, this fall, we are on track to launch both the IZOD brand in men's and the Juicy Couture brand in women's.

A partnership with Elie Tahari will be introduced as the next phase of our DesigNation strategy this fall as well.

On the inventory front, on a per store basis, excluding e-commerce, inventory dollars were down 1% while units were down 4%.

We continue to make investments in national brands, increasing their inventories, while reducing our private and exclusive brand inventories.

We ended the quarter with seasonal inventories down to last year and well in line with our plan.

In closing, I want to take a moment and give you some insight into our thinking and strategy for the longer term.

As you know, we have built a new leadership team across the Company over the last year and a half.

Frankly, that has been driven by the need to drive better results, particularly on the top line, and evolve our business more fully and with much greater speed.

The only remaining leadership role to be filled is our Chief Merchandising Officer position, which we will fill externally.

We built and grew a very successful business on brands, value and convenience, elements that remain core to our heritage and are important to today's families.

Change in our industry is happening faster than ever.

Competition has intensified.

Consumer behavior is shifting and expectations surrounding the speed and choice continue to be raised.

We need to evolve as a company and we are seizing this opportunity to refocus, re-energize and pave our path forward with a new and clear purpose.

We expect greatness and we have a plan to get there.

Over the last six months or so, the new leadership team has created a plan we are calling our greatness agenda.

Our greatness agenda is a multiyear vision built on five pillars, ideas that are fundamental to the way we do business.

They are amazing product, incredible savings, easy experience, personalized connections and winning teams.

To explain each a bit more.

First, amazing product.

We have always had amazing product, but our customers' wants and needs continue to evolve.

As a result, we have got a renewed focus on providing the right merchandise mix, being more locally relevant and tailoring products to every customer across every channel.

Our new beauty offerings are just one great example of the amazing new product that customers can find in many of our stores and online.

By year-end, almost half of our stores will feature a new and exciting beauty department.

Second, incredible savings.

Helping every customer get more from every dollar.

We provide ways to save that families won't find anywhere else like Kohl's Cash, our Kohl's charge savings and most recently our loyalty program pilot.

We continue to see very positive results in our loyalty tests in California, Texas and Pittsburgh, but continue to improve and evolve the program to make it even more compelling to our customers.

We are now more convinced than ever that the vision of loyalty that has come out of the testing will be a key element of driving our top line in the future.

We will be introducing that new vision to the Milwaukee market and relaunching it in the Seattle market later this quarter with a plan of rolling it chain-wide by the end of the third quarter.

Third, easy experience.

Consumers demand a seamless, easy, inspiring experience whenever they shop.

We continue to make significant investments to improve the shopping experience for our customers wherever or however they choose to engage with us.

Between last year and this year, we will have invested almost $600 million in capital spending on technology projects to make that experience better than ever.

Last year, we focused on moving e-commerce infrastructure to new providers to give us the capability to grow our digital sales and platform.

This year, we are building on this with significant investments as well around mobile and in-store technology.

Fourth, personalized connections.

It is all about building lasting relationships with our customers, both current and prospective.

Those relationships are based on the customers' experience in the store and online, as well as how they perceive us contributing in the communities in which they live every day.

We are focused on localizing and tailoring what we sell and how we communicate our amazing product so they see us as their store.

We know that our product and our offers have to be personally relevant to each and every customer.

At the same time, personalized connections is about contributing to causes like children's health and education or the environment so they see us as sensitive to the issues that are important to them.

And the last pillar, but certainly not the least, is winning teams.

We already have a winning team of 140,000 associates nationwide.

We are as committed as ever to building teams of engaged, talented, empowered and results-oriented associates and to attracting, developing and retaining the very best talent.

As a leadership team, we have had the opportunity to share our greatness agenda with every one of our associates, as well as begin conversations with our key business partners, including merchandise suppliers.

Across the board, the response has been incredibly positive.

I am inspired by the energy and the commitment we are seeing throughout the organization in the last few months.

Teams have been formed to support the very specific plans in place around these five pillars and new ideas continue to surface every day.

We have had some early exciting wins.

One of those has been the response to our Power of Yes campaign, which launched in April across a variety of media.

That campaign includes 30-second television commercials, which celebrates yes moments that most families can relate to in their own lives.

The campaign is authentic and it is grounded in our heritage that allows us to refresh who we are and connect with the customer in a new and different way.

On the brand side, our new partnership with Disney and our latest design partnership with Peter Som have been incredibly successful.

I am confident this is just the beginning.

I recognize that we need to accelerate the impact of these efforts on our results quickly, most importantly on the sales line.

We are evolving rapidly and are using the wins we see to build momentum.

We plan to share significantly more depth on our greatness agenda as the year progresses and we have planned an Analyst Day here in Milwaukee at the end of October.

At that time, I would expect you to be able to hear in great detail the moves being made to support our pillars of the greatness agenda, meet our new team in person and get a view of our three-year financial plan.

Finally, one piece of great news that we included in our release is about the extension of our credit card partnership agreement with Capital One.

As you know, the Kohl's credit card has been an important element of our engagement with our most loyal customers.

We partnered with Capital One three years ago on a seven-year agreement to help manage this very important relationship.

We chose them at the time because we felt they exemplified the type of partnership we value, one where both partners are focused on the same important themes, driving profitable sales and creating lasting strong relationships with our cardholders.

Our experience since then has reinforced we made a great choice.

As a result, we are announcing an extension of the original agreement for an additional five years, along substantially the same terms.

We have both identified a myriad of opportunities for the long term to build this business to an even greater height.

The agreement provides the certainty to allow us to do that with a long-term view and we look forward to working towards that goal with their team.

We will be happy to take your questions at this time.

(Operator Instructions).

Dan Binder.

Hi, it's Dan Binder.

Wes, I was hoping maybe you could give us a little bit more color on two things -- one, the performance through the quarter and then two, just the puts and takes on the full-year guidance being maintained.

It sounds like you had missed relative to your expectations for Q1, but depreciation is coming down.

If there is any other color you can add to it?

Well, I mean other than just saying that it improved each month throughout the quarter, I don't want to really get into quantifying why -- that's kind of why we went to quarterly guidance, but it definitely did improve throughout.

And in terms of the guidance, obviously the depreciation number was included in our thinking of maintaining the guidance.

We have a lot of sales to go and we think it is going to improve for the reasons Kevin talked about on the call.

So I can't tell you if we are going to hit the flat to 2% for sales, but I mean we think we have a pretty good shot at it.

And the other lines of the P&L I think we have proven to manage pretty well.

Great, thanks.

Bob Drbul.

Hi, good morning.

When you guys look at I guess the traffic in the quarter and the down 4.5%, what do you think can turn that from your perspective and when do you think we can start to see some traction on the comps and how much of it do you think was really weather in the quarter?

This is Kevin, Bob.

I think it is hard for us to quantify the various drivers of the performance.

As we progressed through the quarter, each month got better, particularly as we ended the quarter.

Seasonal categories definitely underperformed the Company substantially.

On the positive side there, we ended the quarter with inventories in seasonal categories quite a bit less than last year, so we are really actually in a pretty good shape on that.

I mean fundamentally, Bob, one of the reasons we spent more extended time to provide some clarity into our thinking going forward is to make sure that you heard where our focus is and as you heard, it is built on these five pillars and those five pillars are really what is going to have to drive the change.

So product is a big part of that.

New savings initiatives is a big part of that and then new concepts like the beauty concept as an example is another big part of that.

Got it.

And Kevin, I just have a question on the fragrance piece of it.

When I was in the stores last week, there was a lot of -- in some of the fragrance areas like Nicki Minaj versus Jennifer Lopez type of fragrance in there.

Like which one of those are driving the business and sort of how are they performing versus the rest of the category?

Is that the Bob stumps Kevin question, which you definitely have me on?

Fragrance is, as you can imagine, not performing on a year-over-year basis to the same extent as overall beauty because overall beauty has a lot more new initiatives involved in it.

But the individual performance, Bob, you got me.

All right.

I will follow up with Wes.

I think he will figure it out for me.

Sure.

Oliver Chen.

Hi, thank you.

On the opportunity to broaden the appeal in the beauty, the brands in the loyalty side, where are the catalysts for the loyalty program in terms of where you see the next milestones there?

And then just on the brand side, I was just curious about, if we dissect that further, which classifications may have the most incremental opportunity for you as you engage in more improved product?

Thank you.

I think on the loyalty side, we continue to see comp outperformance versus the control group from approximately 150 basis points to 250 basis points.

That has been relatively consistent.

Texas has now been rolled out for a whole year now and they got about a 150 basis points lift versus the control group.

So we feel good about that.

We are going to roll out the two additional markets that Kevin mentioned in the second quarter, the balance of the chain in the third.

One of the things you will start to see more of in the store as we roll it out is additional pieces to the loyalty program, broader than just savings and we will let those play out as we roll that out.

On the beauty side of things, post-holiday, we've seen increases in the beauty business of 35% to 45% depending on the type of presentation and the sales volume store and our total store lift in some of the ones with more extensive renovation has gone from about 1% to almost 2% now.

So that is very encouraging.

One of the things we are thinking about is trying to accelerate next year as many of the higher volume stores that we can with the more extensive investment.

We had planned a lot of those for 2016.

We are trying to see how many of those we can move up into next year because we feel like those for sure will be successful.

We are still evaluating on the beauty side a brand new option that we rolled out, which was sort of in between our acrylic low investment and our higher investment.

We are opening those stores this year.

If they are proven to be successful, it is possible we could accelerate beauty on a more quicker timetable.

On the brand side, Oliver, I think as time wears on, we are more and more thinking about brands that relate to lifestyles that are important to our customers.

So as an example, for instance, active and wellness is an area that we have identified that we have strength in already on a share basis in our active apparel and active footwear categories.

But there are opportunities for us to extend that even further, so active and wellness is an opportunity category for us and that really impacts men's apparel, women's apparel, children's apparel, footwear and home to a great extent.

Home is another category I think that we have identified as a category that we could strengthen our national brand portfolio, particularly in classifications that are core to us like the housewares business.

And then I think the third thing is more what I would call unique ideas.

So they might not be the obvious ones.

The best example of that I would give you is the recent Disney partnership.

So we have a phenomenally successful children's business, but finding that combination of a great brand with a great value really hit a home run in there.

And then finally online.

I think the omnichannel team is working hard at extending the categories that we typically sell in our store outside of those and there has been a great deal of success in doing that and presenting new brands as a result of that.

Great, thank you.

Best of luck.

Liz Dunn, Macquarie.

Hi, thanks and thanks for all the detail on the new initiatives.

I guess just a couple of questions.

In terms of the lift you are seeing in Texas, is that versus all stores or is that versus some other hot market control group?

It's a control group.

Okay.

I guess in terms of the shift in marketing spending from the first quarter to the second quarter, is there any way you could quantify that or sorry, if I missed it?

It is a few million dollars.

I mean it is really a shift to support the loyalty rollout in the two markets we mentioned.

Okay.

And then just trying to understand the puts and takes on the depreciation versus the modest miss in earnings.

I mean the miss in the first quarter was fairly modest, but I guess $50 million in depreciation looks more like, I don't know, a $0.15 shift.

So is it that you've kind of adjusted your go-forward expectations or is it just that you are still looking at it in the range and you are not necessarily saying that you've taken $0.15 out of the operating performance to offset this $0.15 depreciation change?

No, I am just saying we still think we can make -- your calculation is pretty close.

It is really not a comment on anything other than it's a pretty wide range we gave.

Our biggest issue has been sales.

We believe sales are going to improve.

First-quarter sales, I don't think we had -- you are starting to hear reports -- I don't think anybody is going to knock the cover off the ball.

So we just wanted to make sure we could maintain our guidance and as sales improve, if we can get closer to the high end of the range, then that would be viewed more as incremental to the guidance.

If we start running 1% comp, which would be better than what we are running today, that will allow us to finish somewhere in the middle.

Okay, great.

Thank you.

Paul Trussell, Deutsche Bank.

Hi, good morning.

Just circling back to the breakdown of the comp, I believe you said AUR was up about 2.5% or 2.6% or so.

If you can just describe what is driving that lift.

Is that more the national brands in the mix or just what is providing that gain?

Thank you.

I think it is a combination.

It is less clearance that is contributing to part of it.

National brand mix is contributing a little bit to it, but it has actually been more on the private and exclusive side.

I think part of that is what we are selling right now since seasonal businesses are pretty tough.

Those tend to be like Ts and tanks are a little lower priced than some of the wovens and things we are selling in the women's and junior businesses.

So that is driving the comp or the AUR up a little higher than it would be normally if you were in seasonal weather.

And so, Wes, could you just remind us what is the expectation for AUR versus traffic for the full year?

I mean the goal is to get traffic to be at least flat and we think we will have a modest gain in terms of ticket.

What is going to be driven by AUR and UPT, if I had to tell you, my estimate now would be we would probably have a slightly higher AUR and slightly lower units, but still kind of average ticket to where we were for the quarter, up about 1%, but we need to get transactions per store back to flat.

That's helpful.

Thank you.

And my last question is just on the e-commerce initiatives.

I apologize if I missed it.

What was the e-commerce growth in 1Q?

And then if you can just update us on the test for order online, pick up in store, as well as your ship-from-store initiatives?

On the ship-from-store, we are still in a little over 200 stores.

We will be rolling that out to over 800 stores for the fall and that will happen sort of in the third-quarter timeframe.

The buy online, pick up in store test will be also in the third quarter in a couple of markets, Chicago, Milwaukee and San Diego.

That will allow us to advertise it a little bit since we can do versioning.

From an e-comm perspective, we were below our plan, but still up double digits.

Obviously, e-comm was also affected by some of the difficulty from a weather perspective in the quarter and it is getting difficult -- once we get more stores on ship from store and do buy online, pick up in store, it is going to become very blurred.

So it is going to be all just kind of in the total sales number.

Understood.

Thank you.

Michael Binetti, UBS.

Hey, guys, good morning.

I am not sure if I missed it, but could you tell us -- did you mention the growth of the e-commerce sales in the quarter?

That was the question that we just asked and we said it was below our plan, but still up double digits and it is getting more difficult because of ship from store and buy online, pick up from store.

Okay.

And many of our competitors sort of say it is blurred and we agree with them.

Okay, sorry if I missed that.

Does the Capital One renewal include a change in the economics or is that just a change in the duration of the contract right now?

No, we are just extending the contract and basically the new extended agreement are substantially the same terms as the old agreement.

Okay.

And then I know you've answered questions on AUR and traffic, but I was a little -- I was surprised to see the mid-single digit AUR increase again in the quarter.

It was actually low single digit.

It was 2.6%.

I'm sorry, low single digit, yes.

And I know that was similar to last quarter.

I know you said there was some reduced clearance in there, Wes, but do you think at this point as you look at pricing, you need to make some adjustments there to help stabilize the traffic number or are there any change in how you were thinking about this 90 days ago as far as where you want pricing to be for the year to help traffic get to that zero that you were talking about?

No, I mean I think, like I said, clearance was a part of it and then as you look at the brands, it came more from private and exclusive and if you looked at the line of business, it was primarily in women's.

Women's consists of juniors and missys.

Juniors ran a positive comp for like the first time in three years at least.

So I don't think it hurt their business.

And I think it was really just a mix within women's.

We weren't selling Ts and tanks, which have lower AURs.

We were selling more wovens and long bottoms and those have higher AURs.

So I think as we move through the spring, the AURs should come down a little bit.

It should be a little higher than last year just because of less clearance to be honest.

But I don't think it is going to be any higher than what it was this quarter.

Okay, thanks for the detail.

And then if I could ask just one last one.

Just on the gross margins as we think about our models here, it seems like, after the first quarter, if I just extend that out, you might be on track toward the higher end of that 10 to 30 guidance for the year.

Yes, it all depends on if spring ever comes and we are able to sell through the seasonal inventories that we do have.

We are lower than last year, but we have to sell them.

So if we get normal sellthrough in Q2, I would suspect us to be in pretty good shape.

It is very hard to anticipate in the first quarter what your full-year margin is going to be.

A lot of that is going to depend on how competitive the fourth quarter is.

Okay, thanks a lot, guys.

Matthew Boss, JPMorgan.

Hey, guys, good morning.

So on the expense side, if you ramp distribution and IT to drive online and clearly, you have a number of initiatives in place here, how should we think about investments and the SG&A leverage point going forward?

Well, I think our goal remains to leverage at a 2% comp.

We gave guidance for the year of 1.5% to 2.5%.

We did better than that in the first quarter.

I am trying to target towards the low end, but we are going to continue to drive IT and e-commerce investments.

You have to do that.

But there's a lot of things going the other way too.

Our stores are very, very productive, absent technology investments.

I don't see us being able to squeeze a ton of payroll out of that.

We have to be more efficient from a marketing perspective, not necessarily spend less money, but drive more sales.

But we will continue to do what we can to try to manage our expenses, but we still think over the long term we are going to need a 2% comp to leverage SG&A.

Great.

And then on the gross margin side, given what you have seen with traffic, and I know you are expecting some improvement in the back half, but what do you think on pricing?

Do you think you guys are appropriately priced with your private label with national brands or do you think you need to invest in price a little bit more going forward?

No, I mean generally, as we have looked at external data, our price points relative to the competition are in pretty good shape.

I mean primarily what is driving the slight increase in AUR are mix issues.

Specifically in women's is the biggest driver.

Exactly.

So it is really not -- as we go through it, Matt, when we look at each individual category by itself and look at the average unit retails that are being produced, they look basically really similar to last year, but the mix of what we are selling is driving that and as Wes mentioned, clearance, particularly in the first quarter, had an effect on that as well because we had much, much lower levels of clearance inventory.

Okay.

Good luck, guys.

Paul Swinand, Morningstar Incorporated.

Thanks for taking the questions.

I just wanted to drill down on the national brands a little more.

I guess a two-part question.

When do you think that, now that you are in this reinstitution of the national brands, is that a traffic driver and do you think as that builds, you will start to have an impact on traffic?

Yes, I mean fundamentally I think what we have seen in our results in the last couple years and also in the research we have done with customers is that we have lost some traction with our core customers as the place to get great brands that they recognize.

And so it is hard to see those changes on a month or quarter basis, but we are pretty certain, based on our own results and the research, that over time as we build that, we will kind of get back into the sweet spot that we need to be to be recognized as a place to go for great brands.

And fundamentally that is what the traffic driving is all about.

So that is more like an opinion of the store rather than a promoted or featured item?

Well, I mean it is a combination of both to be honest with you.

The customer has been pretty clear that they want more national brands and secondarily the results as we have built them have kind of reinforced that.

Right?

The brands are outperforming the store --

Three quarters in a row, yes.

-- right, substantially and consistently.

So yes, I mean is it a perception?

For sure.

That is the research part, but the results part are pretty clear.

That is statistical, both poor results prior to our change and better results after our change.

Will that obviously then drive down your clearance if people tend to buy national brands with less discount or just more frequently?

Well, I mean I think the advantage that probably comes with the strategy, but it is not the driver is that that business has a tendency to be more flow.

There is certainly a lot more strength in basic categories as a result of that.

So yes, there is an opportunity I think to improve the mix of clearance versus non-clearance.

I mean as you know, the national brands on a purely merchandise margin rate basis are always going to be a little bit lower than our proprietary brands, but they come with substantially less risk and at the end of the day, if they are driving more traffic, it doesn't really matter anyway.

So I feel like we are hitting our stride on this and we definitely are responding to what the customer wants.

Great, thank you very much and best of luck.

Thanks.

Neely Tamminga, Piper Jaffray.

Great, good morning.

Kevin, a strategic question for you and I have got some housekeeping as well.

So in listening to you talk about the greatness agenda, it seems to me that the third and fourth pillars around easy experience and personalized connections are really kind of wrapped up maybe in some of your mobile strategy as well.

So could you talk a little bit about what you have been seeing on some of your early initiatives around integrating Kohl's Cash on the mobile app?

Are you seeing people engage more and use that savings wallet to drive conversion through your e-commerce and digital channels?

And then related to that, Wes, on the transaction per store being down 4.5%, do you have a sense as to what the conversion versus traffic dynamic is there?

It is Kevin on the mobile question.

I think it would be hard for us to point at some change in our trend of customers redeeming or how they redeem due to strategies that we are implementing around mobile.

First of all, a lot of the mobile strategies are really more back-half-loaded, not front-half-loaded.

Kohl's Cash specifically has always been a very high usage online.

And particularly, as you can imagine, as you get near the end of the redemption period in an event, there is substantial utilization.

I don't know that I could tell you, Neely, that it has risen.

It is something we can definitely have Wes take a look at and probably give you some color on later.

Yes, I think you will see a lot of changes to both our smartphone app and our tablet, more importantly our tablet app over the course of the year.

If you guys recall when we did our replatform last year, we basically just replicated what we had on the previous platform to make it simpler and reduce the risk of having something go wrong.

This year, it was always planned to add more functionality to tablet and mobile.

Tablet is much more important because that is where the traffic is really going.

There's a lot of browsing on the phone, but not as much transactions.

So we are spending most of our time on the tablet app, but you will see changes to the mobile one as well.

And on the traffic versus conversion, Wes?

I'm sorry.

What was the question about?

So your transactions per store were down 4.5%, but what was the conversion versus traffic on there?

Transactions per store and traffic for us are one and the same.

We have traffic counters in about 100 stores, but it hasn't been a meaningful change year over year in terms of what people are converting at.

So we look at transactions per store.

And then, Kevin, if I may, one more.

On the timing of the chief merchandising position, it sounds like you obviously plan on having that person installed by the Analyst Day, but where are you right now in the process and what does the caliber of your candidates look like at this point?

Thanks.

I mean obviously one of the reasons that we set the Analyst Day in the fall, there were really two drivers.

One, we were pretty confident that we'd have a full team in place and two, as I sort of described in the call, we have a pretty strong outline of a path forward.

And by the time we get to the early fall, we will be in a position to talk to you in great detail.

We are shooting high on leadership in merchandising.

That is what we do.

Our product is a huge driver of our success.

And much as we did when we filled and created the Chief Customer Officer role and we were able to recruit Michelle Gass in for that role, we want to make sure we shoot high, we want to make sure that we get a capable executive who is able to make an impact on the business first, but also that they are an executive who can grow in the future as well.

So improving the overall team is a pretty big factor as well, Neely.

Thank you.

Paul Lejuez, Wells Fargo.

Hey, guys, thanks.

You had some pressure with e-comm in the fourth quarter.

Just wondering how the profitability of that channel looked in the first quarter and what actions have you taken that will make sure that you don't run into some of those same issues in 4Q again this year?

Well, we made money, not as much money as I would've liked to make.

Some of the actions that we are taking, our guys in the EFC are really treating every day as a peak day and we are trying to simulate the pace of what we are going to see in the fourth quarter.

I think our average, it was 1.3 days from order to ship, which is pretty good, much better than we did last year and sort of the pace we have to maintain to be successful in peak.

Some of the things we have done from a planning perspective, we went from 200 and some stores to 800 from ship from store.

That should increase our throughput quite a bit.

We have increased the number of SKUs that we use from a bulk position in our brick-and-mortar DCs.

Since their peak is a little earlier than the e-comm peak, we are able to use that labor force in that space to do that and we have been successful in doing that the last few years.

And then I guess finally the third thing is really to engage a third-party logistics company to evaluate our operations and we made some changes because of that, as well as we are using a third-party logistics to help at the peak season with some of the additional bulk products.

So I think we have a pretty good plan.

We also made some management changes in some of the EFCs, which we think strengthen the team.

And one of the DCs performed very well last year.

We just have to get all four of them to perform as well as that DC last year and we should be in good shape.

Got you.

And then just one more.

On the five pillars, just wondering what does that imply from a CapEx perspective?

Do you need any additional infrastructure to receive those five pillars as you think about the next couple years?

And also just wondering which of the five do you think is the most low-hanging fruit.

Thanks.

First of all, for this year, the answer is no, we are not --

Yes, this year --.

-- making changes in our capital spend.

I think what it probably implies is that you will continue to see a significant part of our overt capital moving against technology because many of the pillars are fundamentally focused around improving the experience and making it more seamless.

There is certainly nothing, as we think through the next few years, that we are not able to do from a liquidity or cash perspective, but it really doesn't appear to us to any of the pillar strategies going to dramatically change what our CapEx spend thoughts were since the beginning of the year.

Yes, we will give more guidance from a three-year plan in the future, but if you modeled somewhere between $750 million or $800 million a year on average, that is probably -- we are a little lower now, but as we ramp up beauty and ramp up remodels perhaps in the out years, that $750 million to $775 million is probably a good average.

Got you.

And any low-hanging fruit on the five pillars in your view?

Well, I think each one of them is individually unique.

The two that obviously we are looking at in the near term, one is around incredible savings, in particular the loyalty program.

I think that is clearly an obvious one.

Price second.

I don't want to say it is second in priority, but is another obvious one, our product changes.

So as Wes described the acceleration of the beauty rollout and the launch of what we think are going to be two really powerful brands, IZOD and Juicy Couture in the fall, I think are going to be a driver for sure.

When we look at it a little bit longer term, so more third, fourth quarter, building into next year, I think it is an awful lot about personalized connections and making that seamless experience better and we have got opportunity on both of those fronts.

But it is harder for us to pinpoint that as let's say a driver of third-quarter sales.

I think that is more of an ongoing driver.

Got you.

Thanks and good luck, guys.

Charles Grom, Sterne Agee.

Good morning, Kevin.

Good morning, Wes.

The improvement in gross was impressive despite the comp shortfall.

Just wondering if you could flesh out the drivers on that front.

And then on inventory, if you could speak to the units across the three categories, national, exclusive and private brands?

What do they look like relative to last year?

Well, from an inventory perspective, I think we actually get this weather forecast in advance and we bought seasonal down about 10% coming into the year, so I think that was a pretty smart move we thought we could chase if it turned out to be wrong and it turned out to be right.

So I think we are in pretty good shape.

From a unit perspective, we are up a little bit in national brands, kind of like low single digits and down mid-single digits in private and exclusive.

On the margin side, I think we had pretty good consistent performance across the store.

It was planned to improve and it did improve.

It probably actually improved a little bit more than we expected it to and I think a little bit more than, if I'm right, Wes, a little bit more than the guidance we gave for the year.

Yes, all the lines of business except for kids beat LY from a margin perspective.

Okay, fair enough.

And then on the comp, the down 3%, 3.4%, just wondering if you guys have looked at how big a delta existed between some of the markets.

You called out the West and parts of the South being strong and parts of the Northeast and Mid-Atlantic being weak.

I am just wondering how big a comp gap there was between the good and the bad markets.

It was relatively substantial.

I think the way we try to deal with this issue of lines of business or regional performance, Chuck, is if a region or a business is within 100 or 150 basis points of the average, we are not even going to call it out as a strength or a weakness.

It needs to be more substantial than that for us to call it out and we definitely wanted to call out the West as clearly outperforming.

We definitely wanted to call out the Northeast and Mid-Atlantic as clearly underperforming.

So it is relatively substantial.

And is it safe to say that some of those underperforming markets in the quarter have improved in April and I guess sometime here in the first two weeks of May?

Yes, I think, and Wes is shaking his head in the background.

I think the performance in April started to kind of come together more is the way I would say it and so the Northeast and the Mid-Atlantic, which were the most underperforming early in the quarter, began to look a lot more like the Company at the end of the quarter.

Is that right, Wes?

Yes, I mean it is still worse, but it improved certainly from where they were in the beginning of the quarter.

Okay.

And then just bigger picture, Kevin, I was wondering what's the expectation for future national brands, how the conversation is going with potential vendors and is it your expectation that beyond IZOD and Juicy that we will have some new brands in the store this time next year or into the summer of next year?

Yes, I mean the short answer is yes.

It is a high priority.

When we talked about the pillars, the first pillar we talked about is product and within product, it is an awful lot about the brands we sell.

So it is probably our number one priority in terms of creating new traffic, driving ideas and I am really optimistic that we will have some new things to talk about before the end of this year that would impact next year's business.

Okay, cool.

Thanks a lot.

Mark Altschwager, Robert Baird.

Great, good morning and thanks for taking the question.

There are various comp drivers in the second half with the loyalty, beauty, marketing and national brands.

I am just curious, now that you have more test data, can you talk more about the order of magnitude from each of these initiatives?

Well, I think the biggest short term is national brands.

They�ve outperformed the last three quarters.

We would expect that.

We certainly would think that would ramp up in the third quarter with the launch of IZOD.

Secondly, I would probably say beauty, it is going to be in 512 stores before holiday.

Last is loyalty just because it is not in as many stores as beauty and we will roll it out in October probably, but you only have a quarter worth of business.

But we are up to 8 million loyalty members now in the 300 stores we have, so it is definitely gaining some traction and we have seen some pretty consistent lift versus the control group, but we are not going to get 8 million people to sign up in the fourth quarter; it is going to take time.

Okay.

And then any sense for how much these initiatives are impacting new customer acquisition versus better traffic from your core customer base and any goals on that front as each of these things roll out?

Well, we want to do both, that is for sure, but the early reads are that we are making some headway with customers who are new to us or at the very least not highly loyal.

Meaning they are our non-Kohl's charge customers.

So our sense is that what our hope was, which is to focus on customer acquisition and be a little more relevant to more customers, that these specific initiatives are actually starting to drive some of that behavior.

Great, thank you.

Lorraine Hutchinson, Bank of America.

Thank you, good morning.

Can you give a little more detail around the strength in juniors this quarter?

Was that driven by particular product categories, by national brands, sort of how you are looking at the business for the rest of the year?

It was pretty broad.

If there was one sort of underperforming classification in juniors, it was a common denominator to the rest of the store and that was denim.

Denim underperformed, but I suspect that Kohl's is not unique in that, at least in listening to sales results of others.

I think denim has been an underperforming category, but other than that, there is really great strength across the juniors world.

We had some early initiatives around color, the Wink of Pink promotion.

We had some initiatives mid-quarter as we moved into Easter around dresses, but there is pretty broad strength across the whole area.

If there is one thing we could point to as a business that made a lot of changes in terms of how they managed the flow, the inventory level and the content, that is a business that was focused on and they got some great results.

And as Wes said, I don't know exactly how long it has been since we had a positive comp in juniors, but I think he is probably right.

It has been several years.

Thank you.

Stephen Grambling, Goldman Sachs.

Hi, good morning.

It's Stephen and thanks for taking the questions.

I guess first following up on personalization and the customer connections online.

As you look beyond the ship from store and click and collect, can you talk about some of the capabilities you currently have to tailor the online experience and maybe what initiatives you have planned to improve these digital connections?

Sure.

I mean things that we are working on -- obviously loyalty is a big part of this because basically all of our loyalty engagement is going to be online and so whether we are communicating to them and through them, as Wes described, on a tablet device or we are communicating to them and through them on a desktop device, a lot of that engagement is going to be very personal because the loyalty customer is a customer we are going to learn a lot more about and therefore, we are going to be able to appropriately personalize the offers we might make to them.

Other than that, there are things going on in terms of reaching customers when they come into the store.

We are planning to expand that quite a bit as we move into the fall and holiday season.

I am trying to think, Wes, anything else you would want to call out?

We can do the geocoding when they are in the store.

We can shoot them an offer if they come in from your -- buy online, pick up in store, if they come into the store and we know they are there and they opt into the WiFi, we can shoot them an email or an offer via their smartphone.

So we are really just starting on this.

We have been working with a consultant to try to help us jumpstart this and we have started to do some segmenting of emails and retargeting of customers based on their browsing behavior online.

So I would say we are in our infancy on this and certainly going to see more of this throughout this year and into next.

And one quick clarification on just e-commerce versus in store, can you talk about the differences you see in the mix of national brands online versus in store versus the exclusive and private label?

I think national brands have always penetrated a little higher.

Yes, because home is bigger online.

That is going to drive a bigger national brand penetration.

So I would say it is a little bit higher nationally just because home is about 30% of the business online versus less than 20% overall.

If you are talking about the acceleration of the penetration online versus brick-and-mortar, I don't know that we have that number in front of us, but it is definitely something we can give you some color on later.

Great.

I will follow up.

Thanks so much.

David Glick, Buckingham Research Group.

Thank you.

Good morning.

Kevin, just following up on the CMO search, it sounds like, listening to your strategic objectives, it sounds like you are trying to evolve the culture of the organization to move faster and take more calculated fashion risks and I guess you are seeing that come to fruition in juniors and it sounds like you are trying obviously to spread it to the rest of the organization.

But with that as a backdrop, what kind of specific background and skill set are you looking for in a prospective Chief Merchandising Officer?

Is it more specialty retail, department store?

Obviously you said you are shooting high.

You are looking for someone who can continue to grow in the organization from a leadership perspective, but how are you thinking about that position and the impact on your strategic objectives specifically in terms of taking more calculated fashion risks?

Well, just real broadly without getting into the detail, I mean generally we would be looking for an executive who has exhibited speed to act, so decisiveness and speed are really critical factors.

Second, obviously, it goes without saying we want somebody who has been highly successful and has demonstrated an ability to get results over a period of time.

Third, we think we have a great leader in Michelle on the customer engagement side and it would be great to balance that with more deep knowledge on the product side for sure and then most importantly probably of course of all is find somebody who will fit from a leadership perspective, somebody who can inspire and lead because we have a very talented team underneath and they are very capable when it comes to understanding the product in their various businesses, but we need somebody who definitely can lead them from an inspirational perspective and style perspective that will fit in the culture of the Company.

So there definitely is some very specific filters that we are sifting through.

This is a really phenomenal opportunity.

It really is.

It is very unique.

I don't think there are many cases where somebody gets an opportunity to come into a business that is almost $20 billion in scale and make an immediate contribution and at the same time have a chance to develop their career even further over time.

So I feel good that we are going to be able to get a great leader.

Thank you very much for that color and perspective.

Good luck.

Dana Telsey, Telsey Advisors.

Good morning, everyone.

As you look at the store remodels, how are they doing, what are you seeing in their performance and any adjustments that you are making to any of the new remodels as you go forward?

And then lastly with the new product introductions set for the second half with Juicy and IZOD, marketing plans, budgets, what should we be looking at as that gets introduced?

Thank you.

Hello?

(Operator Instructions).

Dana Telsey, Telsey Advisors.

Hi, I hope everything is okay.

Just wondering on the performance of the store remodels, any further color on how those are doing and any changes you are making to future remodels.

And lastly, with the big introductions of IZOD and Juicy in the fall, marketing, budgets for marketing, how are you thinking of those product introductions?

Thank you.

There are specific things that we have done that are definitely big winners.

Three that we have called out, one is operational and it might not be that exciting, but from a customer perspective it has got great impact and that is moving our customer service space to the front of the store at the door adjacent to our POS.

It gives us incredible leverage on the payroll side, but most importantly, it has given us a much better experience and as we think about the importance that buy online pick up in store will have, which will all happen at customer service, we think it is going to just growth in importance.

Second is beauty.

You can tell we're pretty excited about the beauty results.

We are accelerating the rollout of beauty.

We are looking at ways to accelerate it even faster because we are getting actual dramatic lifts in beauty and lifts in total store as well in the beauty test stores.

And then third, probably the area that has some of the biggest facelifts on the product side are the juniors accessory worlds and again, we have had great response.

And you can see for the first time, it is certainly not about necessarily the environment, but we have had pretty dramatic improvement in our juniors business.

On the product side, we are going to support the IZOD and Juicy launch significantly, so it will have a full weight of our marketing efforts both online and in store and it will be across our platforms of print, direct mail, digital and broadcast.

And we know the importance of those two brands to our fall business and they are going to be supported as a result of that.

Overall, that was always built into our original plan for marketing, so there is really no change in that.

Thank you.

Patrick McKeever, MKM Partners.

Okay, good morning.

I know you are not giving quarterly guidance anymore, but just wondering if you might have some thoughts on just the second quarter going up against the only positive comp from last year.

Any thoughts there?

No, I mean overall, I think on the positive -- so if you think about puts and takes in the second quarter, stack comps I think are probably not a reliable predictor of performance for anybody.

So whether we were positive or negative last year I think has little to do with whether we will be positive or negative this year.

I think the driver is going to be some of the things we have talked about in the call.

On the positive side, I would say I don't know that you can ever hope to make up sales in categories like seasonal-related businesses when they don't happen early in the year.

It doesn't translate into incremental sales in the second quarter, but I also would expect fully to be honest that we would have more normalized sales in those seasonal categories.

So I think that just in the background is generally kind of a positive thing for the second quarter.

I don't know if there is anything else, Wes, you would call out.

No, I think when you expect improvement, how much remains to be seen, a lot of it is going to depend on what you talked about in terms of weather demand.

The second piece is obviously we called out clearance as a headwind in the first quarter.

Year over year, clearance inventories were down substantially and naturally that translated into lower sales.

We pretty much anniversaried that, and so as we go into the second quarter, we wouldn't expect that to be a headwind the way it was in the first either.

Okay.

And then just a question on beauty care.

How big a business is that for you as a percent of total sales and how big do you think it can be as you roll out the expanded footprints?

It's less than 2% of total sales and our goal would be to double it in five years and we are well on our way to that.

I think all in since we launched it probably somewhere between 30% and 40% all in.

Great.

Okay, thanks, guys.

Stephen Grambling, Goldman Sachs.

I think you guys already got me, but maybe I will sneak one other in there.

He doesn't get two questions.

All right.

Thanks, Stephen.

Thanks, Stephen.

Thank you.

Thanks, everybody.

This concludes today's conference call.

You may now disconnect.