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Operator
Ladies and gentlemen, thank you for standing by.
Welcome to the Kohl's Q2 2015 earnings release conference call.
Certain statements made on this goal including projected financial results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Kohl's intends forward-looking terminology such as believes, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements.
Such statements are subject to certain risks and uncertainties which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements.
Such risks and uncertainties include but are not limited to those that are described in item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.
Also please note that replays of this recording will not be updated.
So if you're listening after August 13, 2015 it is possible that the information discussed is no longer current.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 our host Mr. Wes McDonald, Chief Financial Officer of Kohl's department stores.
Please go ahead.
Wes McDonald - Senior EVP & CFO
Thank you.
Good morning, with me today is Kevin Mansell, our Chairman, CEO and President.
I'll start today's call by walking through our operational results.
Kevin will then provide more details on our Greatness Agenda initiatives.
We will then open up the call to your questions.
Comp sales increased slightly in the quarter at 0.1%.
Although we aren't satisfied with the level of comp sale we are pleased that we are starting to show some consistency in our sales results.
This is the first time since 2011 that we have achieved three consecutive quarters of positive comps.
The metrics of the comp sales increase are as follows: average unit retail up 2.3%, units per transaction down 1% resulting in an average transaction value increase of 1.3%, transactions per store were down 1.2% partially due to the shift of the tax-free events from July into August.
From a line of business perspective for the quarter footwear performed better than the Company with strength in athletic and men's dress and casual shoes.
Women's, home, men's and accessories were in line with the Company.
In women's our Missy business continued its improvement with a 2% comp with strength in updated, contemporary, active and classic sportswear.
On the home side we had strength in premium electronics, luggage and outdoor recreation online.
In our men's business strength remains an active and in accessories we had strength continuing in beauty and fine jewelry.
Children's performed below the Company with toys performing well and some softness in apparel also partially due to the tax-free share.
Juniors although still negative did improve its performance in the second quarter.
Geographically which includes online originated orders the strongest regions were the West and Midwest.
The Northeast, Southeast and Mid-Atlantic performed essentially in line with the Company while the South Central trailed the Company average.
Gross margin decreased slightly for the quarter, down 6 basis points and is up 5 basis points for the spring season as we remain on track to achieve our gross margin guidance for the year of flat to up 20 basis points.
SG&A increased 2% and delevered 42% last year for the quarter.
This was slightly less than our expected range of expenses to be up 3% to 4%.
We were able to leverage in our logistics areas and credit operations.
Marketing expenses were slightly deleverage to as we invested some of our first-quarter savings into the second-quarter events.
Store and corporate expenses are relatively fixed and we were unable to leverage those expenses on the modest comp increase.
We remain on track to see our SG&A expenses grow 1.5% to 2.5% for the year.
Higher IT amortization was the primary reason for the $11 million increase in depreciation expense for the quarter.
Interest expense was $84 million for the quarter, essentially flat last year.
We incurred a loss on extinguishment of debt which represents the premium paid to bondholders related to a $767 million cash tender offer completed this quarter.
Our income tax rate was 37.9% for the quarter, higher than last by 130 basis points.
Last year's results included some favorable state audit tax settlements during the quarter.
Net income for the quarter was $130 million with earnings per diluted share being $0.66.
Excluding the loss on extinguishment of debt earnings per share were $1.07, a 5% decrease to last year.
We ended the quarter with 1,164 stores, gross square footage of 100.5 million and selling square footage of 83.9 million square feet.
We did not open any stores during the quarter.
Capital expenditures were $377 million for the spring season, consistent with last year.
Store refresh spending was consistent year over year but shifted from new stores and remodels to cosmetics.
We continue to make capital investments in IT to support our omnichannel initiatives.
We ended the quarter with $934 million of cash and cash equivalents.
Inventory per store increased 9% and units increased 8%.
The excess inventory is the result of slightly lower than expected sales and pre-positioning fresh fall receipts to drive sales for the back-to-school business.
This includes an aggressive build in active, our best performing business.
In addition, as port operations have returned to normal on the West Coast we have seen early receipt of fall goods as our orders were written during the period of disruption.
The net effect of our receipt pull forward was approximately $120 million at cost.
Looking ahead, we expect new receipts for the remainder of the fall season will be flat to a year ago.
Our investment in fall inventory is in four major areas that have been performing well: active, premium electronics, entertainment and licensing and cosmetics.
As a reminder we now have 900 stores in our new beauty environments with our new beauty environment and new brands.
We are planning a modest increase on trend on the remainder of our businesses for the fall season.
As a result we expect a low single-digit increase in inventory units per store at the end of the year.
And in 2016 we're planning to see low to mid single-digit decreases in our inventory units per store.
AP as a percent of inventory decreased from 37.9% last year to 36.8% this year.
The decrease is primarily due to the early fall receipts arriving in June which were already paid for by the end of the second quarter.
Weighted average diluted shares were 197 million for the quarter.
During the quarter we repurchased 6 million shares of stock.
We ended the quarter with 196 million shares of stock outstanding.
On Tuesday our Board declared a quarterly cash dividend of $0.45 per share which is payable September 23 to shareholders of record at the close of business on September 9. During the quarter we completed several transactions which further strengthened our balance sheet.
In July we completed a cash tender offer for $767 million of our highest coupon debt.
We also exercised our right to redeem $318 million of 2017 notes which were not initially tendered.
We used the proceeds from a $1.1 billion debt issuance to pay the principal of the tendered debt.
Tendered debt premiums and accrued interest are being paid in cash.
These transactions reduced our effective interest rate by 65 basis points and will reduce our annual interest expense by approximately $17 million.
They also extended our average debt maturity by more than 3.5 years to a little over 13 years.
We have no debt maturing until 2021 and our weighted average cost of debt is 4.88%.
In conjunction with the refinancing we incurred a loss of approximately $170 million.
$130 million was recognized in the second quarter.
We expect another $39 million to be recognized in the third quarter when the remaining 2017 notes are settled.
We also successfully amended and extended our revolver for an additional two years from 2018 to 2020.
The amendment also reduced fees on undrawn balances.
There were no changes to the financial covenants included in the agreement.
Absent the effect of the loss on our extinguishment of debt we now expect our earnings per diluted share to be at the low end of our previous guidance of $4.40 to $4.60.
I'll now turn it over to Kevin to provide additional insights on our results.
Kevin Mansell - Chairman, CEO & President
Thanks, Wes.
As Wes indicated sales in the quarter fell short of our original expectations.
That was driven by a modestly lower level of seasonal demand over the quarter, a larger than expected tax-free shift and a later than expected back-to-school selling start.
While our bold moves around the Greatness Agenda continue to produce expected results the underlying business trend was softer as a result.
Looking at results under each of our pillars in the quarter and new initiatives coming this fall I'm excited to share the following.
Under amazing product, national brands continued to experience significant growth, up approximately 6% for the quarter and the season as penetration for both periods increased about 250 basis points.
This was driven significantly by strong growth in our active and wellness bold move with brands like Nike, New Balance and Puma.
We're also happy to announce that we will be launching the Stride Rite footwear brand in early 2016 to continue that momentum.
Under easy experience we continue to build a world-class digital experience.
Response to our new app has been very favorable with over 2 million downloads this year alone and we now have over 8 million total users.
Our wallet feature within our app has also been a big success with about 30% of our mobile traffic related to wallet use.
During the quarter we completed the rollout of Buy Online, Pick Up In Store to all stores across the country.
And we'll begin to market this feature across all of our platforms this fall.
Attachment rates are very encouraging in the pre-marketing phase and land at about 25%.
Based on these early results, we now expect Buy Online, Pick Up In Store to be a significant percentage of our digital sales and a driver of incremental store traffic this holiday season.
We are planning accordingly.
We also now have our new beauty environment and brands in 900 of our stores and we continue to see total store lifts on these implementations at the same plus 2% rate versus our control stores.
Personalization efforts continue to drive our marketing changes and already this year we have delivered over 130 million personalized mailers, over 120 million personalized emails along with millions of personalized digital and wallet impressions.
This fall we will also mark the first broad implementation of our localization strategy.
By the end of this fall 40% of our business will be unique, localized assortments with the expectation that all departments will have unique, localized assortments by the end of next year.
Finally, our Yes2You loyalty program continues to grow with 2 million more members added in the quarter allowing us to reach 32 million total members.
Over half of our transactions are now with loyalty members and almost three-quarters of Kohl's charge transactions are also loyalty member transactions.
We intend to launch a number of new enhancements and will celebrate the anniversary of last year's launch in October with a major event.
In closing, we remain committed to the Greatness Agenda and believe these initiatives will deliver our sales goal.
Although sales for the second quarter didn't meet our expectations, we're definitely pleased to see more consistent positive comp store sales results especially in a quarter that was negatively impacted by a later start to the back-to-school shopping season.
At this time I will turn the call back to our operator who will provide instructions on asking questions.
Operator
(Operator Instructions) Charles Grom, Sterne Agee.
Charles Grom - Analyst
Good morning, guys.
Just on the guidance the figure of $17 million benefit on interest expense it sounds like you're backing the gross margin and SG&A guidance that you gave last quarter.
So how should we think about comps in the back half of the year and then if you could just fill in the blanks on D&A and the tax rate and your buyback plans?
Wes McDonald - Senior EVP & CFO
Well, the $17 million is an annual number so you can think of it more like between $3 million and $4 million a quarter.
And we're not backing away from I mentioned in the script we still believe our guidance for gross margin will end up somewhere between flat and 20 basis points for the year.
And SG&A will be up somewhere probably closer to the higher end for the year between 1.5% to 2.5%.
So it will require a little bit of an increase in comp into the fall season.
To hit the 440 we probably have to run close to it 2 comp for the back half.
We talked about the tax-free shift, obviously hurt second quarter, obviously will help third, and so it doesn't require a large amount of improvement to get to where we need to be for the back half.
Charles Grom - Analyst
Okay.
And then Kevin you talked about the later back-to-school start and then also the shift.
Have you been able to quantify that for us, what would the comp been or maybe what was the comp trending through the first 12 weeks of the quarter?
Wes McDonald - Senior EVP & CFO
I will take it.
The comp would have been better for the quarter by probably about 50 basis points.
That was really just isolating the two days of the tax-free shift and with Labor Day shifting back a week that's hard to really ascertain but we have started to see some strength in our back-to-school business as we've entered August.
Kevin Mansell - Chairman, CEO & President
I think the other part of that is that's actually the math on the benefit that we get in August that we lost in July.
So Wes is 100% right on that.
The related piece which I think is more difficult to quantify but we think is relatively meaningful is that it also drove a later back-to-school selling season, those two factors both the shift to tax-free and the later Labor Day.
And so I think he and I both feel that we probably would've been trending more like around a 1 comp for the quarter absent those things altogether.
Wes McDonald - Senior EVP & CFO
You also asked a couple of other questions.
For D&A I think the year will probably end up around 930.
And the tax rate is going to probably be around 37.5%, let's say.
Charles Grom - Analyst
And you expect to do $1 billion in buyback?
Wes McDonald - Senior EVP & CFO
Yes, as you can probably tell we were more aggressive on our buyback this quarter.
We tend to target $250 million a quarter.
We ended up doing more than that.
So I think we're pretty close to $550 million for the spring season and our target is still $1 billion.
But if we think the stock is cheap we certainly could do a little more than that but we're targeting $250 million a quarter.
Charles Grom - Analyst
The last question, you called out the South Central being weak.
Can you just dive into that a little bit more?
Is that the Texas market, Oklahoma?
Wes McDonald - Senior EVP & CFO
Texas and primarily the Houston market.
I'm sure that's not any different for most people with significant businesses down there.
I spoke with our regional manager down there and also obviously some of the weather issues they had with all the rain they had this summer hurt it a little bit.
But that's a market that's been tougher for us this year that's for sure.
Charles Grom - Analyst
Great, thanks for all the color.
Operator
Nancy Bush, JPMorgan.
Matt Boss - Analyst
It's Matt Boss, not Nancy.
On the top-line composition what are you guys embedding for traffic in that second-half plan?
And then more so to drive 2% comps or better the next two years how should we think about the timing for localization and personalization opportunities?
Wes McDonald - Senior EVP & CFO
Well, localization for sure is in its infancy.
We haven't got much benefit from that at all, we've really just been testing.
We will start to see more benefit from the fall.
On the bold moves that we talked about in the Analyst Day last fall the biggest benefit we've gotten thus far has obviously been from active.
We've been talking about it for a number of years now.
It continues to be very strong led by Nike.
Our digital business is very strong as well and we're seeing a lot of lift out of loyalty obviously.
The two things that probably haven't kicked in as much in the three-year plan yet, and we're not behind or anything it just takes a little longer to build, are personalization and localization.
Localization is not only going to provide sales benefit but should provide our ability to reduce our inventories pretty significantly because we won't be buying markdowns just to fill fixed or fill on the initial set.
So that's something as a CFO I'm very excited about is trying to get more sales with a lot less inventory.
Kevin Mansell - Chairman, CEO & President
The expectation on localization is that while localization will impact roughly 40% of the business by the end of this year the real lift from it is more modest in the third and fourth quarter and much more significant next spring.
Wes is 100% right on personalization.
The third piece which based on our early results we think is a big driver, particularly in the fourth quarter, will be the Buy Online, Pick Up In Store strategies.
So we essentially haven't done any marketing on Buy Online, Pick Up In Store because we are just in the process of launching it across all of the platforms.
And the sense we have is that once we launch the marketing based on the limited results we've seen so far the combination of the traffic it drives to the stores and the attachment sales it's been providing are pretty significant.
Wes McDonald - Senior EVP & CFO
And you asked about the traffic.
I think for us to run a 2 comp we pretty much have to get back to flat traffic.
We have seen, I'm sure you guys graph all this, we certainly do, but the last three quarters although not where we wanted to be have certainly improved over where we were running from a traffic perspective pre-Greatness Agenda.
Matt Boss - Analyst
Okay.
And then just one quick follow-up.
What are you guys seeing out there in terms of the competitive environment into the back-to-school season?
Kevin Mansell - Chairman, CEO & President
I don't think there's anything really new.
Many retailers have in place some versions of the strategies we have around particularly marketing and digital.
But we have, there hasn't been any significant shift in terms of let's say discounting if that's what you're after or anything in particular that would give us any pause for concern as we look at third- and fourth-quarter results.
Matt Boss - Analyst
Great, good luck, guys.
Operator
Lorraine Hutchinson, Bank of America Merrill Lynch.
Lorraine Hutchinson - Analyst
Thank you, good morning.
If we think about the third quarter as a 1 comp run rate can you just help us get comfortable with the back-half acceleration to a 2 to drive the low end of your guidance range?
What are the specific drivers that you expect to have an outsized impact on second-half comps?
Kevin Mansell - Chairman, CEO & President
Well, I think we discovered a few of them.
We're not precise enough to tell you that the third quarter is going to be 1 or 1.3 and the fourth quarter is going to be 1.5 or 1.8.
I think as we look at the year-to-date performance which we're looking at as about a 1 comp it does need to accelerate to about a 2 comp for us to achieve our objectives.
Wes McDonald - Senior EVP & CFO
If you lose 50 basis points in the second quarter you get it in the third, so you're at a 1.5 there.
So we've got to pick up another 50.
Kevin Mansell - Chairman, CEO & President
So I mean I think the big things remain to be the strategies that we discussed.
And we just touched on three big ones we think for the fall and holiday and those revolve around personalization, the impact of our marketing strategies in particular as they relate to our loyalty platform, our launch and development of Buy Online, Pick Up In Store as well as the effectiveness that ship from store across the entire platform will give us and the impact of things like localization.
That layered on top of the existing bold moves we think will accelerate the business.
We definitely recognize softer demand in the first half of the year.
I don't think there's any question about that.
As we look to the first six months results I think traffic was softer than expected and I don't necessarily see that as a Kohl's unique issue, it seems to be relatively broad that.
Some of the things we are learning now that we're three quarters sort of post the launch of the Greatness Agenda are informing some changes in I would call it sort of an evolution of the Greatness Agenda moves and those are underway already internally.
We'll probably share those with you sometime later in October but I think they are going to have a positive impact on both the third quarter but in particular the fourth quarter.
Lorraine Hutchinson - Analyst
Thanks.
Then if you look at the juniors business getting less negative in the second quarter as you've set the fall line and start to see some back-to-school have you seen a continued improvement in that business?
Kevin Mansell - Chairman, CEO & President
It's more positive than it was for sure.
Probably the most improved business in the store even though the total business as you well know was softer in the first half of the year.
The most improved business in the store is women's apparel and juniors is not as good as the rest of women's apparel but it improved significantly in the second quarter.
Lorraine Hutchinson - Analyst
Thank you.
Operator
Paul Trussell, Deutsche Bank.
Paul Trussell - Analyst
Good morning.
Wes, just a question going back to gross margins.
Like you said you've reiterated the goal to be up a little bit here in the second half and for the full year.
Can you just give us some of the puts and takes on gross margins?
In particular what is providing that uptick especially given you've even adjusting for the early receipt of inventory you're still up a bit kind of coming into Q3 coming off a quarter where you've had softer sales?
Any color would be helpful.
Wes McDonald - Senior EVP & CFO
Well if you do the math on the 120 million our units are up about 5%.
We're not going to not buy stuff that's selling, so investment into the things I indicated active, licensing, beauty are all going to -- we're not looking for an acceleration of what they're selling today.
We have pockets of stuff we're going to have to get through.
We've seen some great benefit.
Nike is not only providing great benefit on the sales line but with their stance on promotional environment we've made a significant amount of more gross margin on that so that's providing some tailwinds from that perspective.
Through the spring season we're up like I said 5 basis points.
I think will make end up between flat and 20.
We'll be up closer to 20 if we can hit the 2 comp that we mentioned.
If we can't we will be closer to the flat, that's normally how it works in retail.
Paul Trussell - Analyst
Got it.
That's helpful.
Then just in terms of the loyalty program I would think that one of the concerns going forward is lapping that in the fourth quarter.
Can you just remind us how many loyalty members you've had in 4Q heading into that holiday period?
Can you maybe discuss at all a little bit of your plans on how to get more spend out of those members?
I know you mentioned a big event planned for October.
Also just any color you can provide about the loyalty spend from those that have been in the program for over a year, perhaps some of those early states?
Wes McDonald - Senior EVP & CFO
Well, I think I can talk about the fact that we are going to have double the loyalty members when we go into the fourth quarter.
I think we ended last year around 16 million or 17 million at the end of the third quarter and we should have 35 million going into the fourth.
We're not going to talk about the plan for the loyalty event given that's more of a competitive thing and we continue to see strength in the loyalty members.
They shop more frequently which is really the driver of the lift that we're getting.
We're getting consistent lifts across both bank card, obviously have the biggest lift because their frequency is lower than somebody like an MBC but we're getting lifts across all three categories.
The bold moves are delivering pretty much what we thought they were going to be.
The reason our comps have been a little bit down is our businesses that haven't hit their plan that haven't had as much of an effect from the bold moves.
Everybody obviously gets the effect from loyalty across the store but we have a couple of businesses like juniors like we've talked about the last couple of quarters that are just weaker than we anticipated.
Paul Trussell - Analyst
I appreciate the color.
Good luck.
Operator
Dan Binder, Jefferies.
Dan Binder - Analyst
Thanks.
With regard to inventory can you just give us a little color around how clearance inventory looks year over year?
Kevin Mansell - Chairman, CEO & President
It's up year over year.
With the softer sales in the second quarter we were more aggressive in taking markdowns in the second quarter so we accelerated some of that into the quarter.
Sell-throughs, I think our expectation for sell-throughs in the third quarter is it will be about equal to last year.
We're not expecting a big acceleration.
And I'm thinking by the time we get into late August, early September year-over-year inventories and clearance are going to be relatively flat to last year.
Wes McDonald - Senior EVP & CFO
Yes, I mean if you use the same 120 million math on AP as a percent of inventory it's flat to last year.
So we have a lot more receipts that we've received in the last 30 days than we did last year.
Dan Binder - Analyst
Them with regard to the web business couple of questions there.
First, I forget, did you stop breaking out the gross from that?
And then the second part of the question is regarding BOPUS, as you have more business shift to either Buy Online, Pick Up In Store or ship from store what is the deleveraging effects of business not being shipped from the fulfillment centers?
And just curious with the ship from store initiative what are you seeing on a typical store in terms of orders per day or per week?
Wes McDonald - Senior EVP & CFO
Well I could tell you BOPUS is the best thing that ever happened to e-commerce.
We don't break out e-commerce sales anymore but implicit in our three-year plan back in October was an online generated order growth of about 20% a year.
We're doing better than that this year.
But Buy Online, Pick Up In Store from a profitability perspective is the best thing you can get because you're not shipping it so you save the $5 to $6 per package that it cost to ship it to the house.
And we're seeing attachment sales of about 20% to 25% depending on the time of the week.
Like Kevin said we haven't really publicized it a lot, it's about between 2% and 3% of our total online generated orders.
We think that can accelerate quite a bit when we start publicizing that as we get more into the fall season.
From a ship from store perspective the key is to try to keep the number of packages per shipment down as much as we can.
We've made some software changes to try to do that.
But both those things honestly would be a benefit to the profitability of online generated orders and gives us an opportunity to make the store inventory work a little harder and reduce the amount of inventory in the fulfillment centers.
Dan Binder - Analyst
And are you using existing labor in the stores to do the ship from store or have you had to add labor hours?
Kevin Mansell - Chairman, CEO & President
No, we add dedicated labor hours for these functions and it's part of our overall payroll plan.
I think one thing that we've tried to lay out clearly but I think is still not well understood, ship from store just finished rolling out to the entire Company this spring season.
So from a benefit perspective the big benefit we see in the fall and holiday is that it takes a tremendous amount of pressure off of our e-fulfillment centers, that's number one.
Number two, it definitely makes our inventory in our stores more effective than it was before and improves the efficiency that we get on store payroll as a result.
Buy Online, Pick Up In Store while it finished the completion of the launch to all stores this second quarter we have not marketed it at all.
And in fact it had not been available in any format other than desktop.
So both mobile and tablet will be new in the third quarter and with the launch of mobile and tablet comes a really aggressive marketing campaign.
So we've looked at the results in the small launch period with no marketing and looked at attachment rates as well as traffic rates and I think our sense is it's going to be a big driver of traffic to stores but most importantly as Wes said a driver of more efficient use of our inventory.
Dan Binder - Analyst
Great, thanks.
Operator
Neely Tamminga, Piper Jaffray.
Neely Tamminga - Analyst
I have one quick follow-up on that, Kevin, and then I have got a bigger question on pricing and promotions.
In terms of the mobile, I think originally we were thinking you were going to launch the mobile platform for Buy Online, Pick Up In Store in August.
Is it still slated for August or will it be on the other side of Labor Day?
That's the first question.
And secondly, in terms of looking at the pricing and promotional analyses that you guys have been very strategically making within the Company, I am thinking of like the lowest prices of the season sale that you did when you removed that 20% off coupon, has anything in the traffic pattern here thus far in back-to-school caused you to go back to the old ways of layering promotion on promotion or a you guys committed to providing more of a scalpel to your promotions?
Thanks.
Kevin Mansell - Chairman, CEO & President
Taking them one at a time, I mean the timing on our mobile and tablet implementation is the same as it has always been so we are right on target.
We're all set and as I said we've been sort of focused more on really accelerating it as we get into October and November because that's when we see the big opportunity being created.
So that's number one.
Number two, on the pricing there is absolutely nothing we're seeing happening that would change our longer-term perspective on how we go about marketing.
We definitely know that we have a big opportunity to really tailor our marketing efforts and therefore our pricing to a unique individual customer to get more effective response rates.
Without queuing you in too much to some of the things we're going to be talking about as part of the evolution of the Greatness Agenda, one of the areas that we do feel strongly about is that we have an opportunity through analytics to elevate our leadership on value through new strategies around pricing.
And so we'll talk more about that as we get into the later part of the fall season and you'll hear more about it as we go forward into 2016.
But I do think we see that space as a big opportunity for us.
Wes McDonald - Senior EVP & CFO
As far as LPS goes, it runs later this month, it's going to be the same as April and it's going to work well.
Neely Tamminga - Analyst
Excellent.
Thank you, guys.
Operator
Bernard Sosnick, Gilford Securities.
Bernard Sosnick - Analyst
Yes, thank you.
Pick up at store has its benefit of course as you outlined already, but shouldn't it also reduce shipping cost and have a benefit to gross margins?
Wes McDonald - Senior EVP & CFO
Yes, that was my favorite part.
That's the money we save on the $5 or $6 a box.
Bernard Sosnick - Analyst
Good.
I just wanted to clarify that.
Thank you very much.
Operator
Michael Binetti, UBS.
Michael Binetti - Analyst
Hey guys, good morning.
I apologize if I missed it but would you mind giving us for our models the percent of sales made on a Kohl's card in the quarter?
Wes McDonald - Senior EVP & CFO
It was down a little bit.
I don't have the exact number unfortunately in front of me but I think it was down about, I want to say it was down about 150 basis points.
But I will give you call after, I'm sorry about that.
Michael Binetti - Analyst
Okay.
Would you mind telling us about the overall, obviously you've got a number of initiatives going on with e-commerce but the overall trend that you saw in the quarter at a high level?
We saw some big retailers and some native e-tailers also throw pretty big promotions in the quarter and some of the other brands and retailers have seen the volatility around those events.
I'm wondering if you guys saw similar volatility?
Kevin Mansell - Chairman, CEO & President
No, if you're alluding to things like Prime Day by Amazon or that no.
I think what happens on those kinds of things is all retailers are sensitive and aware about promotions in the space.
And you inevitably, therefore, strategize and target your own elements to offset to ensure that you don't get hurt.
And so I think actually the facts, Wes would probably be able to give specifics, but I think actually the facts are we saw much larger lifts during that short period of both Prime Day implementation by Amazon and related --
Wes McDonald - Senior EVP & CFO
Yes, we beat our plan that day, for sure.
Kevin Mansell - Chairman, CEO & President
So I think it's just the way it works.
There's a lot of activity.
Wes McDonald - Senior EVP & CFO
Get more people to the web.
They might buy it on Amazon, they might buy it on Wal-Mart, looks like more of them than we thought bought it on ours.
I do have the credit numbers.
Sorry about that, a little too much paper here today.
Charge sales for Q2 were 57.6, down 171 basis points and then year to date is 57.8, down about 130 basis point.
So it kind of makes sense given the fact that we're doing better from a non-Kohl's charge because we've put more emphasis from a marketing perspective.
So the Kohl's charge was sort of negative for the quarter, down low single digits while the non-Kohl's charge was up mid single digits.
So we're continuing to figure out a way to better balance those.
The goal obviously would get them to be both positive.
But we need new customers and that's what's coming with the non-Kohl's charge comp.
They spend a little less obviously because they are newer and the Kohl's charge folks spend a little bit more.
But we will continue to work on better balancing them and hopefully by the time we get to the end of the year they will both be running positive.
Michael Binetti - Analyst
Okay and if I could just ask one last, Kevin you mentioned that you're planning accordingly for Buy Online, Pick Up In Store to be a bigger part of online this holiday.
I know you've commented on it a few times in the Q&A but would you mind giving us just a little bit more color on what you meant with that specific comment, please?
Thank.
Kevin Mansell - Chairman, CEO & President
Through the test period, the test period essentially was an operational test period.
It was to ensure that on the technology side everything worked the way we wanted it to work, that the customer service was delivered in the right way and that we were able to achieve the speed we needed to.
On the store side of course it was a start to better understand what stores have to do in order to quickly present the product to the customer and do it in an efficient way.
So that's the process we went through in the second quarter.
I think we did 2.5% or 3% of demand as we experimented with out on the operational side, so it's a meaningless number.
We're planning a much larger percent of digital sales to come as Buy Online, Pick Up In Store.
That's what's baked into our planning.
We're not planning that it necessarily lifts the total digital sales but we do believe based on the attachment rates we're seeing right now it's got the potential to add sales in-store and add some visits.
Which as you know our two biggest challenges are win new customers, Wes kind of just touched on that one, and secondly get more visits into our store.
And that's why we're super optimistic about Buy Online, Pick Up In Store.
Michael Binetti - Analyst
All right, thanks, guys.
Operator
Mark Altschwager, Robert W. Baird.
Mark Altschwager - Analyst
Good morning, thanks for taking the question.
Quick follow-up on SG&A.
Wes, I believe you said SG&A growth is expected to be at the high end of the 1.5% to 2.5% range.
Just what are the primary components to that and then if sales aren't able to hit that 2% expectation for the back half how much flexibility do have on the SG&A front?
Wes McDonald - Senior EVP & CFO
Well I didn't mean to alarm people on that.
It's probably going to be somewhere between 2% to 2.5% for the fall.
So it will be lower in the third quarter and higher in the fourth quarter.
Kevin mentioned Buy Online, Pick Up In Store, that's going to drive a little bit more store expense.
We're going to put a lot of the investments in we saved a lot of money in marketing this year and we're going to put a lot of investments in the fourth quarter on that.
We have a tendency to get outshouted especially on broadcast by some of the larger retailers that are bigger than we are, so that will give us a good opportunity to be more competitive from that perspective.
Obviously 80% of our cost roughly are fixed.
You can argue that advertising is variable but if you're not making your sales you're probably not going to cut your advertising.
So the easiest one of we don't make it would be related to incentive comp would come down.
Anything that's unit related we could save money in the stores from a processing perspective as well as the EFC's corporate expenses.
You can manage your hiring a little differently, leave positions open, but that's only about 20% of the expenses really what I would culturally variable.
Mark Altschwager - Analyst
That's helpful.
Thank you.
Then Kevin could you briefly address the off-aisle concept to the strategic rationale there, any early takeaways from test and how you're thinking about the potential longer-term opportunity?
Kevin Mansell - Chairman, CEO & President
Sure.
Off-aisle was originally conceived as a way for us to improve the valuation on our returns.
And as you know like any retailer we get a significant percentage of returns in our stores and a much more significant percentage of returns to our stores that originated with an online order.
So returns as a percent of sales for us had been rising consistently over time and it's just the math as more people bought online there is a higher return rate, those returns go to the stores so our total return rate keeps going up modestly.
When we looked at that the potential profit pool for managing what we get for those returns was pretty significant.
That coincided obviously with us trying to be more aggressive and experimenting more with new innovative concepts.
And so we created this off-aisle concept first and foremost to target an improved return on our returns from customers but secondly also to learn more about the off-price business in general.
So I would expect there are going to be more off-aisle stores coming.
Again not to queue too much into what we'll be talking about later in the third quarter as evolutions to the moves in the Greatness Agenda but definitely new formats including more off-aisle stores will be coming.
The results have been really good, they've been better than we expected.
Mark Altschwager - Analyst
Thank you.
And best of luck in the third quarter.
Operator
Stephen Grambling, Goldman Sachs.
Stephen Grambling - Analyst
Good morning, thanks for taking the question.
Just on the heels of Macy's announcement on examining ways to monetize real estate value, what's your latest philosophy on your own real estate?
And then maybe more broadly as a follow-up are traffic trends just dramatically different by stores just because you might at some point reconsider the number of stores that you're operating across the chain?
Thanks so much.
Kevin Mansell - Chairman, CEO & President
Well, Wes can probably, but the real estate answer is honestly pretty simple.
Real estate is one of the assets that we have; like all the other assets we have, we're always reviewing what the options are that would maximize shareholder value.
And that's under constant review.
It's not necessarily focused on today's events or the last three month's events.
It's just a regular course of good governance and we'll continue to do that.
On the traffic side I think we're actually pretty optimistic I would say about traffic.
Wes McDonald - Senior EVP & CFO
Yes there's a little bit of variability by region but not a ton.
And in terms of the number of stores we have a list of stores that we always look at incremental, negative incremental cash flow stores.
We run it once a year.
There is a list of probably 10 or 15 stores on that list.
We've tried to look at market by market versus individual stores because obviously if you make a decision to close a store in one market you might pick up some sales in a couple of other stores that might make a negative one turn positive.
Most of the stores that are negative cash flow we're talking in the couple hundred thousand dollars range per store.
So we think it's prudent to be a little patient.
We believe in the Greatness Agenda.
We believe we're going to continue to make progress and hopefully the slightly negative cash flow stores will turn positive.
But we closed a couple of stores this year, we're going to close a couple stores next year but we're really looking at handfuls versus major closures.
Kevin Mansell - Chairman, CEO & President
And just so we're totally transparent about this, traffic variability in short-term windows a month, a quarter are highly volatile.
They can change a lot.
So in a particular market, in a particular region, in an individual territory the traffic trends year over year can be really pretty volatile and that's because weather is a big factor in our demand.
The economic conditions in a particular market can be very different depending upon the job environment.
And it can uniquely be affected as well by competition as new competition opens up in a trade area or in a market in a big way.
We kind of look at traffic when we're evaluating real estate more on let's say a three- to five-year trend.
We're looking at is there a consistent pattern of decelerating traffic?
And that would cause us to do the evaluation Wes is talking about which is to say hey, what's the future of this store.
Stephen Grambling - Analyst
That's all very helpful.
Thanks so much.
I will jump back in the queue.
Best of luck.
Operator
Richard Jaffe, Stifel.
Richard Jaffe - Analyst
Thanks very much.
Wes, if you could elaborate a little bit on the shift in ad spend from 1Q to 2Q and what bodes for the second half it?
Seems that there was some marketing powder kept dry last year and some indications that you'd be spending more this year and in differentiate ways.
Could you perhaps talk about second-half ad spend?
And also year-over-year promotional cadence, how you see that changing?
Wes McDonald - Senior EVP & CFO
There will be no powder left dry this year.
We're going to spend $1 billion.
That's going to be lower than last year but we've been taking what I would call non-production savings out and it's not by cutting the number of events or anything like that, it is just repositioning.
So for the fall season for the first time we're going to be spending more money in digital than we are in print.
That's where our customer is doing their research, whether or not they purchase online from whatever device they are using they're definitely using the research to make their purchasing decisions.
So that's important.
In the fall season from a marketing, or excuse me in the spring season from a marketing perspective we reduced the amount of credit marketing we have which we actually charged to the credit profitability and actually increased the amount of non-credit which is what has driven the non-credit card comps being positive.
So we continue to do that and shifted into more productive marketing.
But the fourth quarter will be up significantly to last year in terms of marketing spend.
Kevin Mansell - Chairman, CEO & President
At the end of the day, Richard, we spent less money on marketing in the first half than we originally had planned and then last year.
And we intend to spend more money in the second half.
Wes McDonald - Senior EVP & CFO
We're going to spend $1 billion.
We're certainly not going to spend $999 million.
Richard Jaffe - Analyst
And hopefully there's a tight correlation between ad spend and traffic?
Wes McDonald - Senior EVP & CFO
That's the hope.
Richard Jaffe - Analyst
Thanks very much.
Operator
Matt McGinley, Evercore.
Matt McGinley - Analyst
My first question is on the loyalty use and the credit card spend in the second quarter.
And it was a tough market for everyone in the second quarter and tax holiday certainly didn't help you.
But did the loyalty users and the credit card users still have positive traffic where I would interpret that as this is just an issue where you need to convert more non-loyalty people and get them on the bus?
Or did the loyalty users and credit users slowdown as well, which may indicate a broader issue with the market or perhaps that the program needs readjusted?
Kevin Mansell - Chairman, CEO & President
I think the way you've got to look at the loyalty users which is the way we have to look at, we have to look at them as unique loyalty users because you can't look at them as a pool.
Because we have twice as many loyalty members as we did last year, so it's kind of a meaningless, I think Wes, it's sort of a meaningless statistic.
Because naturally they transacted a lot more because there's two times as many of them.
So we try to look more at unique loyalty members, how our members who are in the program behaving.
And we are really focused on a different metric anyway which is the metric we're focused on essentially is to say that we've had a long period, five years or more, where the penetration of our credit business to our total credit business has risen consistently.
The problem is our total business hasn't risen.
So on a customer basis it's more customers transacting on credit but not more customers in total.
Loyalty's objective is to create and win new customers so that even if credit as a percent of total transactions is flat we win because total sales and total traffic is up.
So we look at it a little bit different.
And the answer to your question directly wouldn't get you to where you want to be because we'd tell you loyalty transactions are way up compared to last year.
Wes McDonald - Senior EVP & CFO
We do need to do a better job of using loyalty to feed the credit program.
We've been focused more on getting people onboarded into loyalty.
I think the next lever to pull after we've done that for a year is to show that now that they've all experienced the value of that loyalty, the value of being a credit card customer is much greater.
We also have to do a better job of soliciting applications in the stores for credit.
We've taken a step back as we focused a little too much on soliciting loyalty applications.
So we need to do a better balance of that and I've been working along with the marketing guys and the store team to do that.
We've seen some dramatic improvement in July on that.
We've made some changes from an incentive perspective for both the applicant and the associate who is soliciting credit.
So I suspect that will do much better on soliciting credit in the fall season.
Matt McGinley - Analyst
Thank you.
And then on the second question I just want to make sure you said this a few times, I just want to make sure I got it right on the SG&A growth, it was around 2% in the first half.
Do you still think it will be 1.5 to 2.5 points in the back half at probably the higher end of that range, I think you said between 2% and 2.5%?
And the primary driver of that which you had previously I think was around 0.75% to 1.75% is Buy Online, Pick Up In Store in ad dollars or was there something else that you were adding else to that that was driving that?
Wes McDonald - Senior EVP & CFO
For two quarters in a row we've beat our guidance on SG&A so the year hasn't changed.
So it just got pushed further.
If we save money in marketing we're not going to spend less than $1 billion.
We're $20 million let's say below our plan for the spring, we're just going to reinvest that in the fall.
Matt McGinley - Analyst
Okay, so you're conservative and you rolled it?
Wes McDonald - Senior EVP & CFO
Yes, I would say the SG&A spend I think you guys assume it's somewhere between 2% in 2.5% for the fall season.
Matt McGinley - Analyst
Okay, perfect.
Thank you.
Operator
Bob Drbul, Nomura.
Bob Drbul - Analyst
Yes, good morning.
I guess the first question I have is can you share with us the Nike comp?
Usually you gave it to us recently, I just wondered is it remaining a big number?
Wes McDonald - Senior EVP & CFO
It's up, well, not high double digits because that would be like 99% but it's up mid to high teens.
Bob Drbul - Analyst
Okay.
And I just had two merchandising questions for you Kevin.
The first one on the Missy category what's changed there?
Is it the crinkle Ts, is it the hoodies that are having a big impact, can you just talk a little bit about that?
And a question on the denim category, you haven't really talked about the denim category but are the destructed jeans really driving the business at all there?
Kevin Mansell - Chairman, CEO & President
Glad to see you are back on your course on the marketing questions, Bob.
I don't even know how to answer you.
I will try to answer them seriously for you, though, Bob.
Missy is probably I would say our most improved business trend and that's after a long period of not being able to say that.
Again as part of our evolution of the Greatness Agenda we expect to share with you later Missy apparel, women's apparel in total is going to be a real focal point of some changes we're making.
I think many of them are taking place internally now and we're getting a little bit of the benefit of that.
I think denim is definitely improved.
Wes McDonald - Senior EVP & CFO
Yes, Levi's had a really good quarter in the second quarter.
Kevin Mansell - Chairman, CEO & President
So that's a really positive thing because as we talked about back-to-school definitely started later.
And that's typically not good for denim sales but denim sales have declined significantly over the course of the last probably 12 to 24 months and there's been a big change in trend in there for sure.
I think that actually is a really positive one as we look at August, September.
Bob Drbul - Analyst
Thank you very much.
Operator
Oliver Chen, Cowen and Company.
Oliver Chen - Analyst
Hi, thanks a lot.
On the inventory side you did mention that you were just a little bit overinventoried with respect to where you wanted to be.
Which categories was that an issue in?
And that would be great, thanks.
Wes McDonald - Senior EVP & CFO
I think the pockets where we're still working through some of the junior stuff probably have a little too much inventory in kids and jewelry.
Those are the areas that have been soft versus their plan obviously.
When you miss the sales plan you've got to work through the inventory and that's what we'll do.
Kevin Mansell - Chairman, CEO & President
The other factor and Wes talked about it I think in our earlier scripted comments is we did make a decision that we were a long time ago, six months or more, that we were going to accelerate our overseas imports flow because we were concerned about ensuring that we had them in plenty of time for back-to-school.
As you know as it turned out the port strike was settled, flow dramatically improved and so overseas import items I would say generally private brand kind of merchandise --
Wes McDonald - Senior EVP & CFO
Came in early.
Kevin Mansell - Chairman, CEO & President
Came in early and it wasn't really category related, it was across categories because it's all the same.
Wes McDonald - Senior EVP & CFO
The biggest investment we have in inventory remains our national brands.
They are up, units are up double digits.
So that's where the investment I alluded to active, obviously that's a lot of national brand merchandise as well.
Oliver Chen - Analyst
Great, that's helpful.
And Wes and Kevin, regarding the outlook for the category planning in light of the weather I was just curious if there's distinctions you're making on a year-over-year basis how you're thinking about outerwear?
The picture for weather could be mixed.
Wes McDonald - Senior EVP & CFO
Outerwear we're really conservative.
We all get the same forecast that you guys seem to get, so it doesn't seem like it's going to be an extremely strong outerwear season from a weather perspective.
So we plan that down accordingly.
Oliver Chen - Analyst
Okay great.
How are you guys feeling about skinny jeans and crinkle Ts?
I'm not sure if I got that.
Kevin Mansell - Chairman, CEO & President
I will get back to you on that, Oliver.
Oliver Chen - Analyst
Okay, thanks.
Best regards.
Operator
That will conclude the Q&A session for today's call.
I will turn it back to our presenters for any closing comments.
Kevin Mansell - Chairman, CEO & President
Thank you very much.
Wes McDonald - Senior EVP & CFO
Thanks very much.
Take care, bye.
Operator
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