柯爾百貨 (KSS) 2014 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to the Kohl's third-quarter 2014 earnings release conference call. 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, uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements.

Such risks and uncertainties include, but are not limited to, those that are described in Item 1A in Kohl's most recent Annual Report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference. Also, please note that replays of this recording will not be updated, so if you are listening after November 13, 2014, it is possible that the information discussed is no longer current. (Operator Instructions). As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Wes McDonald, Chief Financial Officer of Kohl's department stores. Please go ahead.

Thank you. With me today is Kevin Mansell, our Chairman, CEO and President. I will walk us through some of our results for the quarter and then Kevin will give you guys some more color on merchandising and marketing initiatives.

From a sales perspective, comp sales decreased 1.8% for the quarter. Transactions per store were down 2.6% while average transaction value was up 0.8%. Within the average transaction value, average unit retail was up 2.6% while units per transaction were down 1.8%. Total sales for the quarter were $4.4 billion, a decrease of 1.6% from the third quarter last year and year-to-date comp sales decreased 2.2% and total sales decreased 1.9% to $12.7 billion. Kevin will share some more details on our sales in a couple of minutes.

Our gross margin rate for the quarter was 37.2%, 28 basis points lower than the third quarter of last year. National brand sales penetration increased 230 basis points during the quarter. As expected, this reduced gross margin by approximately 12 basis points. The remaining decrease was due to lower margin rates across our brands. Year-to-date margin was consistent with last year. SG&A dollars increased 2% or $24 million over last year and deleveraged 90 basis points as a percent of sales compared to the third quarter of last year. Also, the increase in SG&A dollars versus last year was related to a change in our incentive compensation accrual. Last year, we lowered our expected payout during the third quarter resulting in favorability and bonus expense.

Our credit card business reported a $7 million increase in revenues this quarter. In our stores, both store payroll and store controllable costs decreased versus last year. Our retail distribution centers reported lower costs, but our E-Commerce Fulfillment Centers reported higher cost with the revenue growth. Advertising costs were also higher as we launched our loyalty program nationwide in the third quarter and we continue to invest in technology. Year-to-date, SG&A was relatively flat to last year and deleveraged 50 basis points as a percent of sales.

Depreciation and interest expenses were consistent with last year. Our income tax rate was 35.3% for the quarter. This is almost 200 basis points better than last year as we had favorable state tax audit settlements during the quarter. Diluted earnings per share decreased 14% to $0.70 for the quarter. Year-to-date, earnings per share decreased 3% to $2.43. Net income was $142 million for the quarter and $498 million year-to-date. We ended the quarter with 1,163 stores, gross square footage of 100,494,000 square feet and selling square footage of 83,000,833.

During the third quarter, we opened stores in three new locations and reopened one store, which had closed in the first quarter for a complete rebuild. We completed our final two remodels for the year early in this quarter. This is in addition to the 16 remodels completed in the second quarter and the 15 remodels that were completed in the first quarter. The total remodels for the year were 33 versus 30 last year.

Year-to-date capital expenditures were $561 million, which is $96 million higher than the first nine months of 2013. The increase reflects our continued investment in the Company and is attributable to higher spending in substantially all categories -- remodels IT, call center operations and our corporate campus. We ended the quarter was $631 million of cash and cash equivalents and generated almost $300 million of free cash flow year-to-date. Free cash flow was negatively impacted by the higher capital expenditures, as well as higher tax payments during the quarter. Despite the lower-than-expected sales, inventory per store is flat to last year. Units per store are 3% lower than 2013 levels. AP as a percent of inventory increased from 45.6% at quarter-end 2013 to 47.9% this year.

Weighted average diluted shares for the quarter and shares outstanding at the end of the quarter were both 203 million. During the quarter, we repurchased 2.7 million shares of our stock. Yesterday, our Board declared a quarterly cash dividend of $0.39 per share, which is payable December 24 to shareholders of record at the close of business on December 10.

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

Thanks, Wes. As Wes mentioned, our third-quarter comps decreased 1.8%. This is about 40 basis points lower than the guidance that we provided before last month's investor conference. Our guidance at that time assumed we would hit our internal plans for the final week of the month. Unfortunately, weak four store sales remained challenging and we did not achieve those plans.

Geographically, results were generally consistent across all regions for the quarter. The Midwest was the strongest region. A strong back-to-school season offset a very weak October. The South Central was the most difficult region for the second consecutive quarter. By line of business, children's continues to outperform other businesses and reported a low single-digit comp increase for the quarter. Online sales were especially strong. Accessories, footwear and men's were slightly negative, but outperformed the Company average. Accessories was again led by our beauty business and handbags were also positive.

In footwear, athletic shoes and men's dress and casual shoes were the strongest categories. And in men's, young men's and active sales increased. Home and women's underperformed the Company. National brand comps were higher than private and exclusive comps for the fifth consecutive quarter and were actually positive for the second consecutive quarter. As most of you know, on October 29, we held our first investor conference in seven years and during that conference, we introduced our leadership team and provided considerable detail about our three-year plan, what we call the Greatness Agenda. I'm not going to reiterate the comments made in that conference so I encourage you to review the presentations, the transcripts and the webcasts, which are available in the Investor Relations section of our corporate website if you haven't done so already.

This three-year plan, however, is focused on improving our top-line performance. And the initial impact of many of these initiatives resulting from this plan will be in our stores this holiday season. First, Buy Online Pick Up In Store is being tested in 100 of our stores with a full rollout expected during next spring. It's available in the Chicago, Milwaukee and San Diego markets. We haven't put our full marketing force behind it yet, but we are very pleased with the attachment sales, which are running in the mid-teens.

Second, going into holiday, we will be shipping from 800 of our stores. This allows us to ship from locations that are closer to our customers than our traditional fulfillment centers. More importantly, it provides much-needed distribution capacity as we enter the peak holiday season.

Third, our new beauty department was introduced into another 178 stores in August and September. This is in addition to the 47 stores that were completed in July. Stores with the new beauty department continue to outperform other stores, both in the beauty department itself and across the whole store. We continue to see total store lifts versus our control groups of approximately 2% in the higher volume stores.

Fourth, we are now scaling our personalization platform and over 90 million customer connections will be personalized this holiday season. We've seen significant lifts in our testing earlier this year and believe it will provide great benefits this holiday.

And last and definitely the most impactful is loyalty. Loyalty was launched in all stores on October 6. Prior to the nationwide launch, the program was tested in various formats in Texas, California, along with the Pittsburgh, Milwaukee and Seattle markets. During the year and a half that we tested the program, we enrolled approximately 10 million customers in the loyalty rewards program. Since the launch in October alone, we enrolled over 6 million additional customers and as of today, we now have 17.3 million customers enrolled in loyalty.

We continue to be extremely excited about the program. Our tests have shown that the program is working. Loyalty customers make two extra trips and spend an incremental $80 per year. Even more exciting is the fact that almost 60% of enrollees are non-Kohl's charge customers. Enrollment in the program provides us with customer-specific data that we will further enhance through personalization.

Looking forward, we believe we will run a positive comp between 2% and 3% in the fourth quarter. We arrived at that by taking our year-to-date underlying performance in our stores, adding our expected omnichannel performance in the fourth quarter and the impact of the extra shopping day between Thanksgiving and Christmas along with importantly the impact of the initiatives I just covered. With that, we will be happy to take your questions at this time.

(Operator Instructions). Oliver Chen, Cowen and Company.

Thank you, thanks for all the details regarding loyalty as well. I had a question regarding that. Are you most encouraged for the opportunity for traffic or check as that loyalty program plays out throughout the year? And then I also had a product question in terms of outerwear. How was it relative to your plan in terms of how you plan that category and the inventory composition now?

Oliver, it's Kevin. I can answer the first part and maybe Wes knows the answer to the second one specifically. I think loyalty is all about traffic. And in particular, it's all about really embracing and engaging new customers. So the thing that makes us very excited about loyalty is that in the tests customers are taking two extra trips to Kohl's and 60% approximately of the loyalty enrollees are non-Kohl's charge customers. So that's the really big positive for loyalty. On outerwear, Wes, do you know the (multiple speakers)?

Yes, women's outerwear is off to a pretty good start this quarter. It's a small percentage of the business, as well as -- men's is off to a little bit of a slow start. For the season, we plan outerwear down pretty significantly given last year's extremely cold winter.

Okay, and just a follow-up. On the details on the challenging week four, do you expect the volatility to continue as you look forward into the holiday season or how might that extrapolate given that you do have a fair degree of confidence on the looking for the 2% to 3%?

What we've tried to do is give you a lot of insight into how we arrive at our expected performance and fundamentally, we didn't want to make any assumptions on an improved underlying trend. So the underlying trend that we have utilized is basically the trend that we have had in our stores on a year-to-date basis. We're not assuming that's going to improve. It would be great if it did. If loyalty has the impact that we think it will, it may, but we didn't want to make that assumption.

There is definitely volatility in the business. I think the fourth week of October was by far the worst week of the month. It was definitely worse than we even expected and just as noticeably once the weather cooled going into this month, the first two weeks of this month have spiked dramatically. So I think volatility is just something that we come to expect.

Great, thank you. Best regards for the holidays.

Dan Binder, Jefferies.

Hi, good morning. I have two questions. One was related to the earnings guidance that you had provided previously. Is there upside to that guidance if you hit the 2% to 3% comp guidance that you provided today? I know you provided the guidance at different points in time, so I just wanted to be clear on that.

Well, I think we updated the guidance before our Analyst Day. No, the 2% to 3% would get us to the low end of the range. I would expect continued margin to be pressured somewhat. I would hope that we would get better than last year, but we've heard from some of our competitors already it seems like it's going to be a very promotional holiday season. So within those plans, I think margin is planned slightly down. SG&A is going to grow faster than it has throughout the first nine months partly because of some of the initiatives we've talked about. The incremental beauty stores and loyalty are incremental to the fourth quarter. They provide great sales opportunities, but they also have expenses associated with them.

I mean said another way, I think, Dan, what we're saying is we feel pretty confident about the sales side, but we also expect and have assumed that our merchandise margin is going to be pressured. I think on the expense side, Wes recapped it well, which is we have, we think, pretty good visibility and we've exhibited a pretty strong ability to manage expenses. So I think on that line we feel good.

And then do you expect inventory per store by the end of Q4 to be down low single or flat?

Yes, I think we will be down 3% to 4% assuming we hit the sales plan. So we've brought in a lot fewer receipts for the fall season. So that was planned and we will continue to plan that throughout next year as well.

Okay, thanks.

Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you, good morning. So you rolled out the loyalty program in early October and October obviously wasn't a great month. How do you expect the sales cadence to begin to come into the majority of your stores now that loyalty is rolled out?

Well, I would say that, particularly given the softness in traffic in October, the fact that we were able to get so many people engaged in the loyalty program anyway is a really positive sign for our ability to continue to enroll this month as traffic has improved a lot. The way the loyalty program works, as you know, Lorraine, it's all about earning rewards and then redeeming rewards. And so the impact of enrolling and engaging a whole bunch of new customers is always felt afterwards. So those 6 million customers we enrolled are activating and engaging now and the customers that we enroll this month are going to be activating and engaging next month. So it's definitely a forward look.

Great. And then what do you think caused the traffic to spike in early November?

Weather. I mean the weather was poor. In October, you heard a lot of our competitors, along with ourselves, talk about that. The weather has gotten much better in the first two weeks of November and that helps when you sell apparel.

Thank you.

Paul Trussell, Deutsche Bank.

Good morning. So as you continue to roll out the national brands, Puma, etc. coming next year, Wes, what's your expectation for the penetration? I know you mentioned 230 basis points this quarter. How do you imagine that over the next 12 months? And also could you just help us with an average of the spread between the AURs of your national brands and private label?

I think the penetration will continue to increase. I hope that private brand performance improves as well, so I don't expect it to increase 200 basis points each quarter. I think the private brands were somewhat hurt by the bad weather. A lot of the private brands that we have are more key item driven. So things that are more need-based versus collections. The collections usually fall in our exclusive brands. But I suspect next year national brands will continue to improve maybe a couple hundred basis points, but I would think a little bit less.

One of the things I pointed out in the script, hopefully guys caught it, was the effect on our margin rate has been pretty consistent to what we told you guys, the 4 to 7 basis points for every 100 basis points of deterioration, but I obviously hope the private brand gets a little bit better. Puma is starting out in the spring. It's in a small number of categories. I think it is more the accumulation of the national brands that we introduce over the next couple of years that will drive the incremental growth. Any one brand in itself is not going to drive that much.

Okay. And as we think about the apparel business, obviously you guys weren't the only ones to have a difficult time in 3Q, particularly given the weather. As you put together the forecast for the fourth quarter and the long-term plan that you provided us at the Analyst Day, what are you baking in from a market standpoint in terms of industry growth within women's apparel, within ready-to-wear, within children's? Just curious to the extent you expect your 2% to 3% comps to be more marketshare gains versus an overall expectation for pickup in these categories?

We're pretty much assuming that we have to drive marketshare and drive traffic. We are not assuming that there is any either inflation or increase in apparel overall sales that would drive our total sales up. So it has got to be about our own initiatives to take share, not about a rising tide lifting everybody. It's been a flat business and I think we're assuming it's going to continue that way.

And to your earlier point, national brands are going to carry a little bit higher AUR. So I'm fairly confident that our average transaction value will continue to rise. What we have to do and what we've talked about not only a few weeks ago, but consistently, we have to stabilize traffic and that's the key. For us to drive that 2% to 3% comp, we have to have traffic be flat to slightly negative. The basket should provide the lift to get us to the 2% to 3% comp.

Thanks for the color.

Neely Tamminga, Piper Jaffray.

Great, good morning. Wes, on that point, you've seen a 2.6% decline in the number of transactions in Q3. Could you break out for us what traffic versus conversion means and then I guess where we're going with this is for Q3 the big trends, are you actually comping positive traffic thus far quarter-to-date with the (multiple speakers)?

On the transactions per store, we don't really -- I mean we have traffic counters in about 150 of our stores, but not enough to give a true sample. So the transactions per store is really what we call traffic. So when you are coming to our store, we're not usually in a mall; it's usually a destination, so our conversion rates are probably higher than most mall-based retailers, but we're really looking at transactions per store. Other than just saying that the business has improved quite a bit in the first two weeks, I don't really want to get into the color of transactions per store. Cold weather obviously drives people to the store and when they come, they buy apparel.

Okay. And then just one other question then if I may. In terms of the Ship From Store versus Ship From DC, could you remind us again of the cost savings or just the overall cost differential of that and how much you factor that into your Q4 implied guidance in terms of maybe basis points of impact to the P&L? Thank you.

It's not really a cost savings to be honest. The labor is a little cheaper. The cost to ship is a little higher. It's really about speed and capacity. So it cuts off on average a day to get it from the store to the customer and then we just need the extra capacity because we have a tremendous spike that starts in a couple of weeks, the week of Black Friday and then really lasts for two to three weeks before it starts to come down a little bit. So we need those 800 stores for the excess capacity, first and foremost and then speed is certainly an added benefit to that.

So the effect on the P&L is more about, with all the plans that we've made for adding capacity and above that some productivity improvements, we feel like we won't have to expedite as near as many shipments as we had to last year. That's where the savings are going to be in gross margin.

Thank you. Best of luck out there.

Paul Swinand, Morningstar.

Good morning and thanks for taking the questions as usual. I wanted to drill down on the traffic drivers again a little bit. You've talked about beauty and some of the other initiatives. Are you finding that that's connecting with new customers that weren't Kohl's shoppers or is it merely the attachment rate and the higher spend per visit?

On beauty, it's really both. The basket for sure is getting bigger with the addition of beauty, but where we're getting the lift in the higher volume stores is on the repeat business. It's really about driving a replenishment purchase. We don't sell a lot of groceries or things that people run out of. Beauty is probably the closest thing to a commodity that we have. So the key where we've been getting the total store lift is bringing them back in more often.

Okay, got it. And then I know you've talked a little bit about you are trying to drive share and that's an important part and that you've been having more competition from the off-price channel. Have you done any analysis of where off-price is still opening stores and can you see the impact and do you see that finishing at some point since the network of off-price is maybe already built out?

Yes, the off-price stores when they open hit our stores if they are close to them by maybe a couple hundred thousand dollars a store on average. So it's not a significant hit in the first year and then we kind of go back to where we were comping prior to that. But it definitely is a hit and certainly given their outsized growth over the last few years has hurt our comps, especially as some of the competitors like Ross expand more into the Midwest areas where they haven't really concentrated before.

Okay, but do you think that will abate as the store growth slows?

Well, if they don't open as many stores, we won't get hit as much, but I'm not privy to their store opening plan. So they tend to grow faster than the rest of us do in the industry. So I still expect it to be somewhat of a headwind, but if you're saying that they are going to open fewer stores, that certainly would help us.

Okay, great. Best of luck for the holidays.

Stephen Grambling, Goldman Sachs.

Hi, good morning, thanks for taking the questions. I just had a couple on e-commerce. Can you just talk about the acceleration you had seen at the beginning of the year and just how much of that is coming from new versus existing customers and are there any differences in the trends online by category or region that you can call out relative to the store?

In terms of traffic, I think over the last four months, we've talked about it. In the past, the increase in traffic was really a result of the decrease in traffic last year during our replatform. So we've kind of gone through that. In terms of categories, we still see home overpenetrating online. We continue to have opportunities in apparel. I think kids has been a category that we -- we mentioned that in the call. It's been a way for us to sell other categories associated with children's like baby gear and strollers and things like that that we don't carry in the store. But since the customer knows us for kids apparel and believe we provide good value, that's been a big growth area for us. Where we have to do better online is really in apparel and specifically in women's apparel. I think that's a big opportunity for us.

In terms of by region, you don't really see any big differences where we're more productive in terms of sales per store. Midwest, Northeast, Mid-Atlantic, they tend to have higher e-comm sales, as well share of store. There is a little bit of increase on the West Coast, but it's really driven by where we do well in the stores.

Thanks. And then just a quick follow-up. You did mention there was the re-platforming last year. Can you just remind us what the impact was and maybe even help quantify some of that in the fourth quarter? Thank you.

The fourth quarter I think our e-commerce business will be up 20% to 25% is kind of what we're planning.

But I guess in terms of the margin or SG&A hits from some of the re-platforming and the disruption that was seen even from a distribution standpoint, I was just hoping to get a better sense of what that impact was. Thank you.

Stephen, I think Wes sort of covered looking back why the third quarter was particularly strong, which was a comparative to last year and our replatform. As we look at the fourth quarter, you may remember that we had to navigate through a number of customer service issues online and many of the initiatives that we just spoke about relative to Ship From Store, Buy Online Pick Up In Store and preparedness for holiday on e-comm are focused on dealing with that. So I think our sense is that the third-quarter sales increase of roughly 30% will probably not be replicated in the fourth quarter, but the fourth quarter continues to be a pretty big opportunity for us online because we were not able to service the way we would've liked to last year.

Okay, best of luck.

Bob Drbul, Nomura Securities.

Good morning. Kevin, just following up on the last answer that you gave, within the logistical challenges that you had on the e-commerce business last year in the fourth quarter, how does that really play into the gross margin guidance for this year and what you're seeing in the fourth quarter?

Basically, Bob, overcoming and -- preparing for this holiday, overcoming last year's issues doesn't have much to do with how we're looking at merchandise margin for the fourth quarter. The impact of online in the fourth quarter really has to do with mix. Online we think is going to run up well over 20% and as you know, our merchandise margins online are lower primarily due to mix. So that's all implied in our expectations for our earnings.

Also, our strongest business is kids and that's a business that has a little bit lower margin. Our toy business is off to an extremely good start this year. Again, that's also a lower margin business. So we are trying to be cognizant of the fact that the mix might not go our way in the fourth quarter. So all things being equal, if we have the same mix as last year and you added in the fact that we had all those expedited costs, we certainly would have margin improvement, but it's not looking so far after a couple weeks that's the way it's playing out.

Got it, okay. And then, Kevin, just a couple of product questions for you. Can you talk a little bit about the Juicy business in terms of the Velvet Crush collection in terms of the jackets or the bottoms? Like what have you learned so far on that launch?

Bob, you ask some really detailed questions that I often struggle with answering. I can tell you this about Juicy. Juicy had a great launch. Juicy performed exceptionally well in certain parts of the country and as expected, not quite as well in other parts. From a classification perspective, it outperformed in some categories, for instance, footwear or handbags in particular, and the rest of the businesses we're learning and the path forward on that I think will play out, but we still feel really strong about the overall Juicy business. I can't comment on Crushed Velvet though.

I'll dabble on the merchant side of it in terms of anything that's easily identifiable as Juicy has been selling very well. The stuff that's less logoed or less identifiable, that's where it has struggled a little bit.

Got it. And Kevin, can you talk a little bit about the JLo business, like the Gilded Glamour collection? There's a lot of like glitter going on there, as well as floral. I just wondered how has that been trending for you.

Bob, are you interested in a job in merchandising because it sounds like you might have the affinity for it. So product development and merchandising, next time I see you, I'm going to talk to you about future career opportunities. Jennifer Lopez also is doing very well. Again, your level of detail, you got me, Bob.

And speaking of merchandising, do you have any update for us?

No, no update on our search. We're still focused on it obviously. It's a key focus of mine, but no update since a couple weeks ago at the investor confidence.

Great, thanks, Kevin.

Michael Binetti, UBS.

Good morning. Wes, one thing, on the click and collect, you guys gave us good update on the attachment rate or the cross-shopping rate you're seeing in those test markets, but can you help us think about the actual magnitude of how big that program is as a percent of sales in the areas where you're testing it just so we can get some kind of an idea of the overall dollars of this program?

Not really yet, to be honest, because we just started in October. It's in three markets and we really haven't had a chance to market it. We're really focusing more on operational right now and trying to determine what the effective promise window is. Right now, we're at four hours. We'd like to bring that down to two and that's really what we're focused on. So we will definitely update you with more details on that once we roll it out next spring. The goal is to roll it out in the second quarter some time. We're shooting for May 1. That's sort of the internal goal. We will hopefully be able to hit that, but once we put the marketing behind it like some of our competitors have in terms of tab and even in broadcast, in some cases, I think we will be able to better understand the demand. Right now, the demand is pretty low given that we're really not marketing it.

Okay. And then just a couple of questions to help with the model here going forward. You said things have spiked with weather here, but you also commented that you're planning outerwear down after a long cold weather season last year. Can you talk about any flexibility you may have to chase or even just to pull forward deliveries to match demand?

Outerwear is one of the easier categories to chase because a lot of the product that we buy is from folks that have warehouses here in the US. So that's something that we can easily chase. I'm not too concerned about that.

Okay. And then if I just look at your guidance for the comps in the fourth quarter, it seems like you'd need the transaction count to go positive. It would be the first time we've seen that in a while to get to that number. You are lapping a pretty easy comparison on the transaction count you gave us in the fourth quarter, but maybe just a little bit of thinking along the three components that you give us every quarter on comps on how you get to your fourth-quarter number.

Yes, I think the traffic is going to have to be pretty much flat and the rest is going to come from ticket. The AUR, we've talked about it, it's been consistently up a couple percent. We hope to improve our clearance, which should help drive that AUR and hopefully people are feeling a little bit better economically and they will put another unit in the basket. But, yes, the traffic is definitely going to have to improve, no question about that.

Thanks, guys.

Paul Lejuez, Wells Fargo.

Hey, guys. I'm just curious what's driving AUR higher? If we look at national brands versus national brands last year and private versus private, are you seeing increases there? I'm just wondering how much of it is the mix one versus the other versus like for like?

Like for like is not up; that's pretty easy to answer. So it's all coming from mix and I'd say a majority of it is coming from national brands. There is some benefit from clearance, but most of it's coming from national brands.

Got you. And then just on IZOD and Juicy, obviously October seemed to have fallen short of your expectations. But just wondering if those two met your expectations in terms of the percentage of the box that they represented post-launch. And even bigger picture, when you guys have a brand launch such as those, how do you plan it in terms of what percent it should represent of the total box?

I think from what -- what I would say they both got off to a good start. I think IZOD probably did a little bit better in October than Juicy and how we really plan it is it should be incremental to what it replaced. Our rule of thumb is the cleanest thing that we use is what happened when we brought in Jennifer Lopez and Marc Anthony. We got a little less than 100 basis points lift from that, so that's how we plan the business. I'd say that's how we've done going forward and we don't really have enough data yet to make the call on whether we'll hit it, but that's what we are putting into the plans to hit.

So IZOD is a little bit different because we want to make sure that it doesn't cannibalize other brands in the store and we've built that into some of our thinking. So that might not provide as big an incremental lift as a Juicy which in some cases is replacing either some underperforming brands.

Got you. Thanks, guys. Good luck.

Mark Altschwager, Robert W. Baird.

Good morning, thanks for taking the question. I just wanted to follow up on guidance. The Company does have the various comp drivers of loyalty, beauty, marketing and the new products. I know at the Analyst Day, you laid out the potential contribution on a three-year basis. I was hoping you could just talk a little bit more about the order of magnitude each of these should present in Q4 and early 2015. Is the plan calling for 400 basis points plus of sequential improvement? Trying to get a better sense of the buildup to that number.

Well, I mean it's pretty simple. We're planning the basis down 4%, which is what we're running and then we're planning digital up between 20% and 25%, which is kind of what I mentioned. The additional day is worth about $90 million to $100 million. Personalization is worth about $50 million. Beauty is not worth a lot because it's only in a small number of incremental stores, so maybe $10 million. Loyalty is worth about $60 million. So if you do the math on that, you get to a 2.5 comp. 2015 we will talk about more lately, but if you're looking out now, I would use a 150 basis point lift for 71% -- roughly 70% of our stores and beauty, we will have to give you more granular guidance in February because I don't have the exact rollout plan for the 400 stores we expect to add next year.

That's really helpful. Thank you. And then looking at Q4, if the comp is trending below that 2% to 3% expectation, do you have any levers on the cost side that you can pull in order to still get close to the low end of the guidance range?

We try to manage it as best we can. That's kind of what we get paid to do. So we're not going to cut advertising; that's pretty much done. We'll have to flex store payroll if we can and there are other levers. If there's not unit demand out there, the miss is coming from e-comm, which I highly doubt, but we could pull levers on that. So we always try to do the best we can. We focus on trying to deliver the earnings number and we have a lot of different levers to pull. In the fourth quarter, your advertising is big; there is nothing you can do there. That is about the only thing I would say is fixed. Store payroll we can flex a little bit.

Great, good luck this holiday.

Kimberly Greenberger, Morgan Stanley.

Great, thanks so much. Good morning. I'm wondering in the fourth quarter with your guidance of 2% comp at the low end, would you be expecting SG&A to deleverage at that level? I know you said you expect it to grow faster in Q4, but are you planning SG&A dollars to deleverage at the low end of your comp range?

Yes. As I mentioned earlier in the questions, we have incremental things like more beauty stores and the loyalty program, which add incremental cost to last year. I still would expect to be at the low end of the 1.5% to 2.5% guidance that we gave for SG&A dollar growth at the beginning of the year for the year.

Okay, great. And then, Kevin, loyalty benefits, can you just help us understand the difference in the benefits in the loyalty program to consumers who are not Kohl's credit card shoppers? And I think you said at the Analyst Day that if you are a Kohl's credit card holder, you can also sign up for the loyalty program. I would assume those benefits will be a little bit different, but just help us understand those two different types of benefits if you could. And Wes, where do the costs associated with the loyalty program show up in your P&L? Thanks.

Well, the loyalty program is pretty easy to explain. It's tender-agnostic, so whether you are a credit card customer or a non-credit card customer, you get the same benefits. There is more aspects of the program in terms of sharing and surprise, but the basic premise of the program is for every 100 points you get, you get a $5 reward that we give to you each month and you have 30 days to spend it. So the benefits are the same. If you are a credit card customer, obviously there are credit events each month and other benefits you get for being a credit card customer, but they are not associated with the loyalty program. The benefits are exactly the same no matter who you are for loyalty. In terms of cost, the actual reward shows up as a markdown, so that would affect gross margin and the various costs associated with marketing the program, graphics in the stores, things like that would show up in SG&A.

Thanks, Wes.

Stacie Rabinowitz, Consumer Edge Research.

Thank you. I was just wondering what kind of synergies you're seeing among the different initiatives that you are counting on for growth right now? So are you seeing loyalty members buying more national brand versus private brand? Are you seeing loyalty members buying more beauty? Are you seeing any beauty national brand overlap?

Up until recently, we've kept loyalty and beauty relatively separate, so I don't have a good answer for you on that. I would tell you the non-credit card customers in general and newer credit card customers or newer customers tend to have more of an affinity towards national brands because that's what they know and like. Once they start shopping Kohl's more frequently, they understand the value of our private and exclusive brands. But to get them in the door, it's really with the national brands.

Patrick McKeever, MKM Partners.

Hi, thanks. You didn't mention the West Coast port slowdown, whatever issues that are going on out there. Did that have any impact or has that had any impact on the business just from a product flow standpoint? Is that something to think about?

I think looking backwards, yes, there are categories and classifications within the business that were negatively impacted by slowdowns in deliveries. Obviously, to a great degree, we anticipated what happened and so we did pull up a lot of receipts into the third quarter to accommodate it, but there were still further delays that impacted it. I would say overall I don't think it made a difference in traffic for the third quarter and that's really what drove the slowdown in sales in October is fewer customers coming into the stores. As we look at the fourth quarter, it's really more about an item issue. So there are going to be probably items that we will have planned to have had on hand and they will not be delivered at the time we thought. But on a broad basis, I don't believe it's going to have any big impact.

Also, just the way that our distribution centers are located across the country, we basically have a 50-50 split between East and West Coast predicated by where our distribution centers are and that hasn't changed. That's something that we just do as a matter of course of business. So some of the stuff we bring in isn't really affected.

Okay. And then just on the comp variance in the third quarter versus the guidance that you gave right before the investor event, the 40 basis point slip, so to speak. You said much of that was in the final week, which didn't go as you were planning it. How about just the EPS number of $0.70? How did that compare to your internal plan if you care to talk about that?

Well, we don't give quarterly guidance anymore, so I'm not really interested in talking about that because that was -- we're sticking with annual guidance. And the miss was really just as you mentioned. In the fourth week, we obviously had a number that we went with when we had the Analyst Day and we missed our plan the rest of the week.

I guess does it have an impact on the guidance, the EPS guidance that you gave at the time for the low end of that 4.05 to 4.45 range?

No. I mean we -- no.

Okay, okay, thanks.

Dana Telsey, Telsey Advisory Group.

Good morning, everyone. As we get towards post-holiday and the importance of post-holiday with gift cards, how are you planning post-holiday? Is there anything different we should be watching for this year as compared to last year? Thank you.

We haven't really planned this, but I think there is an opportunity for us that will be created in post-holiday around loyalty in particular because those customers who have enrolled will have earned significant amounts of benefits that they are going to be able to use post the holiday. So we haven't really made any assumptions of the impact on traffic or sales for January as a result of that, Dana. But I think I'm pretty optimistic that that could be a positive force. I think that's right, Wes.

Yes, I agree.

Thank you. Best of luck for the season.

David Glick, Buckingham Research.

Thank you. Kevin, just wondering how your experience with your most recent brand launches, Juicy and IZOD, how those impact your point of view going forward in terms of the types of brands that you're going to pursue next and how they fit into the lifestyle continuum of contemporary versus more traditional brands?

I think it's going to be a mix for sure. I would say for certain we're happy with both. Not surprisingly, we spend more time looking at brands that are closer to what we already have to assess the impact on existing businesses. So I would say IZOD is a good example of that type of brand where it's a new space for us, it's a new brand for us. We had high expectations and we pretty much exceeded those, but we're very focused on the incremental piece because we do know it's going to probably impact the existing business more.

I think Wes rightfully called out Juicy as a brand that, since it's in a new space, we didn't expect it to have the type of impact elsewhere and I don't think it did. Not surprisingly, during September when business was better, those two brands both performed better and in October when traffic slowed relatively, those two brands didn't perform as well as they did during September. So generally, David, I would say we think about the brands and their impact as we think about the open space. So if the space is wide open, probably a bigger positive overall impact than if the space is going to affect some other things around it, probably a little bit less positive impact.

Do you think there is some whitespace in the men's contemporary area? You had Chaps, you added IZOD. It seems like you have traditional pretty well-covered. Is that an area of opportunity that you're focused on?

Yes, for sure.

Okay, great. Thanks. Good luck in the holiday season.

To the presenters, we have no further questions in the queue.

All right, thanks, everybody.

Ladies and gentlemen, this conference is available for replay. It starts today at 11 AM Eastern time and will last until December 13 at midnight. You may access the replay at any time by dialing 800-475-6701 and entering the access code 338567. That number again 1-800-475-6701 with the access code 338567. That does conclude your conference for today. Thank you for your participation. You may now disconnect.