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Operator
Ladies and gentlemen, thank you for your patience in standing by.
Welcome to the Kohl's Q4 year-end 2015 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 and uncertainties which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements.
Such risks and uncertainties include but are not limited to those that are described in item 1A in Kohl's most recent annual report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.
Also please note that replays of this recording will not be updated.
So if you are listening after February 25, 2016 it is possible that the information discussed is no longer current.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.
Wes McDonald - Senior EVP & CFO
Thank you, good morning.
With me today is Kevin Mansell, our Chairman, CEO and President.
I will start today's call by walking through our operational results.
Kevin will then provide some more details on our Greatness Agenda initiatives and then we'll open up the call to your questions.
As we announced earlier this month, comp sales increased 40 basis points for the quarter.
Though we were pleased to report our fifth consecutive quarter of positive comps, sales were volatile during the quarter and were below our expectations.
Holiday sales which include the weeks between Thanksgiving and Christmas increased 4% and store traffic was 400 basis points better than industry average.
This strength, however, was substantially offset by softness in early November and in January when demand for cold weather goods was especially low.
For the year, comp sales increased 70 basis points.
Looking at the metrics of the comp the components of the comp for the 40 basis point increase in the fourth quarter were as follows.
Transactions per store increased 20 basis points for the quarter.
Average transaction value also increased 20 basis points comprised of an average unit retail increase of 30 basis points with a drop in units per transaction of 10 basis points.
The components of the 70 basis comp increase for fiscal 2015 were as follows.
Transactions per store decreased 20 basis points for the year.
Average transaction value increased 90 basis points, comprised of an average unit retail increase of 130 basis points with a drop in units per transaction of 40 basis points.
From a line of business perspective footwear and home were the strongest categories for both the quarter and the year.
Accessories was the weakest category in both pickles.
On a regional basis the West region was the strongest for both the quarter and the year while the Mid-Atlantic and South-Central were the most difficult regions.
Gross margin was challenging for the quarter, down approximately 80 basis points.
The decrease was driven by higher promotional markdowns during the holiday season as well as an increase in shipping costs versus last year, driven by our 30% increase in digital orders.
The effect of the increased penetration of the national brand was as expected as penetration grew to 58% for the quarter and 52% in the year.
The growth in penetration was similar for both the quarter and the year.
Gross margin was flat for the first three quarters of the year.
However, gross margin for the year decreased 27 basis points to 36.1% of sales due to the fourth-quarter performance which was lower than our guidance for the year of flat to up 20 basis points.
SG&A dollars increased $60 million to $1.3 billion for the quarter.
As a percentage of sales SG&A deleveraged 80 basis points.
As expected marketing expenses deleveraged as we invested heavily to drive sales.
Many of those expenditures will not be repeated in 2016.
Our payroll also deleveraged due to ongoing wage pressure and omnichannel support in Ship from Store and buy online, pick up in store.
During the fourth quarter almost 30% of our digital sales units readership from or picked up in our stores, more than two times last year's penetration rate.
EFCs and IT also deleveraged.
Store expenses, distribution centers for our brick-and-mortar stores, corporate and credit all leveraged.
For the year SG&A expenses were $4.5 billion, an increase of 2.3% over 2014 which was consistent with our guidance of a 1.5% to 2.5% increase.
As a percentage of sales SG&A deleveraged 30 basis points.
Store payroll, corporate, E-Commerce Fulfillment Centers and IT deleveraged for the year by marketing, credit and distribution centers for our brick-and-mortar stores all leveraged.
Depreciation expense was $239 million for the quarter.
For the year depreciation was $934 million, generally in line with our guidance of $940 million.
Depreciation increased in both periods, primarily due to higher IT amortization.
Interest expense decreased $5 million to $79 million for the quarter and decreased $13 million to $327 million for the year.
As a reminder, our original guidance was $335 million.
The decreases are due to favorable interest rates achieved during our $1.1 billion debt refinancing earlier in the year.
Our income tax rate was 35.9% for the quarter and 36.3% for the year.
The tax rate increased 60 basis points during both periods as the prior-year periods included some favorable tax audit settlements.
This was versus our guidance of 37% for the fiscal year.
For the quarter, net income was $296 million in diluted earnings per share what $1.58.
Excluding $169 million of debt extinguishment losses that were recorded earlier in the year, net income was $781 million for the year and diluted EPS was $4.01.
We recently closed two stores, one in Texas and the other in California.
We currently operate 1,164 stores.
Gross square footage is 100.4 million square feet and selling square footage is 83.8 million square feet.
Moving on to the balance sheet, we ended the quarter with $707 million in cash and cash equivalents, approximately half of last year's balance.
Higher inventories, lower payables and payment of debt premium in cash contributed to the decrease.
Inventory dollars per store were 5.7% higher than year-end 2014.
Units per store were up 5% higher than the end of last year.
The increases are primarily within national brands which are up more than 10% over last year.
We expect inventory to be down low single digits at the end of the first quarter and down mid single digits for the remainder of the year.
AP as a percent of inventory decreased 865 basis points to 31%.
Almost half of the increase, excuse me, half the decrease is due to the anniversary of last year's port strike.
Lower year-over-year January receipts and higher inventory levels also contributed to the decrease.
Our capital expenditures were $690 million for the year, approximately $100 million lower than our original expectations.
IT spending was approximately $300 million, which was $50 million lower than expectations as we are buying our registers closer to installing our new point-of-sale system.
Store experience and refresh spending which includes beauty, remodels, new stores and general store upkeep was $250 million, about $50 million lower than our original plans as we reduce the number of stores we are remodeling and revised our in-store merchandising plans.
Base capital spending of approximately $150 million was generally consistent with our original plans.
We expect capital expenditures of $825 million in 2016, approximately $135 million higher than 2015.
About $60 million of the increase was related to a timing shift in IT, mainly due to our registered purchase for that new point-of-sale system this year.
In addition, we are accelerating construction of a fifth e-Commerce Fulfillment Center with construction beginning in 2015 with the goal to open in time for fall 2017.
CapEx is expected to include $375 million for IT spending, $250 million for store strategies including new stores, remodels, beauty and easy experience initiatives and new brand rollouts and $200 million in base capital including investment in the e-fulfillment center.
Weighted average diluted shares 187 million for the quarter and 195 million for the year.
During the quarter we repurchased 4.5 million shares of our stock, bringing our total for the year to 17.4 million shares repurchased.
We ended the year with 187 million shares of stock outstanding.
On Wednesday our Board approved an 11% increase in or quarterly dividend.
The $0.50 dividend is payable on March 23 to shareholders of record at the close of business on March 29.
I will now turn it over to Kevin who will provide additional insights on our results.
Kevin Mansell - Chairman, CEO & President
Thanks, Wes (technical difficulty) came on top of very strong holiday performance and were our fifth consecutive quarter of positive sales increases since the launch of the Greatness Agenda.
In the most competitive period between Thanksgiving and Christmas we achieved a 4% sales increase with customers definitely choosing Kohl's.
It's clear to us that these strategic framework of the Greatness Agenda is working and we're making progress towards our goal of being the most engaging retailer in America.
We've seen great success in many of the major initiatives engineered under our plan.
In our focus on product initiatives we've successfully grown the depth and breadth of our national brand portfolio and have seen double-digit increases in sales of most national brands.
We've put our stake in the ground to be the destination for active and wellness and have dramatically increased our share of this growing category, positioning us for success in the future.
We made five big investments for holiday: active and wellness, premium electronics, beauty, licensed entertainment, and team apparel.
And in total we achieved our plan for the fourth quarter for these investments and achieved a double-digit sales increase combined.
Finally, our localization efforts are proving out and 2016 will be the year that all of our planning efforts for unique assortments by store will come to life in 90% of our store portfolio.
This means we will be both improving the in-store experience for the customer and very importantly better managing our inventory across the Company.
In our focus around omnichannel initiatives we're seeing the results on our multiyear, multibillion-dollar investment in digital technology with online demand driving sales.
Online generated demand was up 25% for the year and 30% for the fourth quarter.
Just as importantly, much of that demand was fulfilled with best-in-class ship from store enablement and buy online, pick up in store capability.
Both of these capabilities will create more opportunity for future growth, provide a greater customer experience and leverage our store portfolio in a meaningful way.
Our Kohl's app was used by more than 11 million customers and growing and new mobile in-store capabilities including mobile pay were successful as well.
Our digital and mobile-centric Yes2You rewards program has quickly become an industry-leading loyalty program and we now have the opportunity to cultivate that mentorship base and increase our share of wallet from them by giving them more relevant and more personal experiences to draw them into the brand and back into the store.
Moving on to looking forward I want to provide an update on the Greatness Agenda, organizations and stores.
While I'm happy with the progress we've made on many of our key initiatives we were very clear on the expected outcomes of the Greatness Agenda.
By 2017 we had targeted three outcomes: 90th percentile on associate engagement, best-in-class customer engagement and $21 billion in sales.
I'm extremely proud of the progress that we've made on the first two outcomes and we are right where we need to be to achieving those two goals.
But for many reasons, including a difficult macroeconomic and retail environment, it's unlikely we will achieve our sales goal on the timeline we originally set.
But I do believe we will achieve that goal within a short time after.
It's clear, though, that we need to move at greater speed and agility, accelerate plan changes in our business model more quickly and focus our resources on the most productive assets and projects while moving away from those that are not delivering results.
We need to embrace the evolving behaviors of our customers and take actions to support the long-term health and success of our business.
We began those efforts recently by realigning our organization and leadership in buying and planning, store environment and design, and digital and infrastructure technology.
We changed the scope of some of our leaders and teams, reorganized some functions and brought key teams under shared leaders.
The purpose of those changes was to enable efficiency in decision-making, leverage our biggest asset, our inventory, more effectively and deploy capital resources more clearly around investments that drive both sales and profitability.
Most importantly they were targeted to increase our ability to respond with more speed to our customer.
As you likely read in our press releases morning we're announcing several updates to our store portfolio and omnichannel strategy.
We will be piloting seven new small format stores, approximately 35,000 square-foot in size, that will open this year which will help both inform future store size and rationalization and identify omnichannel opportunities as well.
We'll also continue our off-aisle pilot with two new stores and open 12 Fila stores to gauge the possibilities in the outlet space.
In addition, we will close 18 underperforming stores which represent less than 1% of our total sales.
We expect to announce the specific store locations by the end of March.
The closures are expected to generate annual SG&A savings of approximately $45 million and annual depreciation savings of approximately $10 million.
As a result of both the store closures and the organizational realignment we expect to incur approximately $150 million to $170 million in charges that will be recognized in the first and second quarter of 2016.
I am very happy to say that every affected Kohl's store associate will be offered the opportunity to work at a nearby Kohl's store location or if they prefer a competitive severance package.
These organizational and store changes are a good example of how we intend to capture more expense savings, an effort which will be an important part of how we reach our sales goals and increase profitability at the same time.
While I believe most investors give us high marks for expense management we know we need to do better.
Traditionally our goal has been to leverage our expenses assuming we achieve a 2% sales increase.
And despite the fact that we're experiencing significant wage pressure in our stores and intend to continue to invest in our omnichannel initiatives we're moving to lower our leverage point to a 1.5% comparable sales increase.
The blueprint for that effort will be a plan to reimagine all of our decision-making processes and better utilize our previous investment in technology to do so.
I've challenged all of our teams to explore ways that will find more efficiency in our work and focus on speed in reaching our goals.
Although we've made progress in both our marketing spend and speed we believe there are opportunities in that area of our cost structure as part of this effort as well.
Our associates have wholeheartedly embraced the Greatness Agenda and we have seen an evolution in the way we work together.
By empowering our teams against the goal of greater speed and giving them the space they need to work in in a more streamlined way I believe we will continue to develop ways to do more with less, something Kohl's has always been known for.
The other area of opportunity I want to discuss is the work being done around lowering the level of our inventory.
This is especially critical in allowing our stores to be more efficient, lower our costs and deliver a better customer experience at the same time.
Since 2011 our average inventory per store has grown approximately 15%.
While some of this was funded to add inventory for the digital portion of our business and to aid in our national brand initiatives we're committed to manage it more intelligently.
Key areas of focus will be around effective implementation of our localization initiative, leveraging technology to increase the percentage of inventory shipped from stores to fulfill online demand or online demand picked up in-store and gaining efficiency in buying and planning through our recent reorganization.
I expect that we can reduce our inventory per store by 10% for 2017.
In the more near-term we expect to enter this fall season with inventory per store down mid single digits.
Finally, I also want to assure you that while we're committed to investing in the long-term health of our business we will also continue to be good stewards of our capital.
As you saw in our press release our Board has approved an 11% increase in our dividend and we intend to continue our share buyback plan.
I will now turn it back to Wes to give you our guidance for fiscal 2016.
Wes McDonald - Senior EVP & CFO
Thanks, Kevin.
We would expect earnings per diluted share of $4.05 to $4.25 for 2016.
The guidance is based upon the following assumptions.
Comp sales of flat to up 1%, total sales down 50 basis points to up 50 basis points.
This includes the effect of the lost sales from the closed stores in 2016.
However, we would expect retain some of these sales in nearby stores and through the digital channel.
Gross margin rate performance of flat to up 20 basis points.
We would expect to have significant pressure in the first quarter of approximately 150 basis points drop versus last year as we continue to aggressively clear excess merchandise.
We would expect to see improvement in each of the remaining quarters as our inventory levels drop below last year and become sequentially better throughout the year with the biggest improvement in the fourth quarter of 2016.
SG&A dollar increase of 1% to 2%.
Our expectations for first-quarter SG&A dollar growth would be 3% to 4% as we've shifted the timing of our advertising expenses and it's more weighted to the first quarter this year.
Depreciation expense of $940 million.
The SG&A and depreciation guidance includes the partial-year savings from the store closures in 2016.
Interest expense of $310 million, tax rate of 37%.
This guidance also assumes share repurchases of 600 million at an average price of $50 per share.
We would expect these costs and PP&E write-offs related to store closures and severance associated with the store closures and corporate reorganization to be approximately $150 million to $170 million with $55 million to $65 million of this charge included in Q1.
The earnings guidance I just gave excludes any of this impact as these are just estimates at this time.
And with that we will open the call to questions.
Operator
(Operator Instructions) Lorraine Hutchinson, Bank of America Merrill Lynch.
Lorraine Hutchinson - Analyst
Thank you, good morning.
I was hoping to get an update on some of the various facets of your sales growth program.
So cosmetics, any type of update on performance in the stores that that's in and also loyalty program metrics and how that impacted the fourth quarter.
Wes McDonald - Senior EVP & CFO
On the beauty it's still continuing to see about a 200 basis point lift total store in the stores that we're rolling out into.
We will complete that in the spring.
We will have all the stores done by the end of the second quarter, a little earlier than we did this year so we feel very good about that.
We're also saving money on a lot of the investment in the stores.
We've cut the investment about in half because we saw the same lift in the modified, little bit less expensive version as we did in the earlier version.
From a loyalty perspective we really anniversaried that in October.
We didn't expect to see any lift and we built the plan, the goal we shared with you guys last October, October of 2014.
We didn't really count on any lift from that.
They continued to spend a lot more money than non-loyalty members.
Obviously that's self-selecting but even in like-for-like we're still seeing a lift.
So we feel very good about the loyalty program.
The focus really in 2016 is to move them along the value chain, so try to get them to spend more money at Kohl's as loyalty members.
And then we're working behind the scenes as we roll out our new point-of-sale system in the fall to do a better job of being able to prescreen those folks behind the scenes to pre-approve them for a Kohl's credit card and explain the great additional value they get with that.
So that will be more of the focus as we move into 2016 and 2017.
Not so much trying to sign up more loyalty members, although that's certainly a goal but trying to move them into being more loyal customers either through spending more on loyalty or eventually moving them to a Kohl's credit card customer.
Lorraine Hutchinson - Analyst
Thank you.
Operator
Matthew Boss, JPMorgan.
Matthew Boss - Analyst
Hey, good morning guys.
So two questions.
The first is I guess as we think about the delta between your holiday comps which you said were up 4% and then the reversal that we saw in January which I think you said was more weather related, I guess what comp are you embedding for the first quarter?
And have you seen any change post all of this January fray?
Kevin Mansell - Chairman, CEO & President
I think from a sales perspective I would expect that the first-quarter sales are pretty similar to the guidance we gave for the year.
I don't really see any big change there.
Probably the more noticeable difference that Wes touched on in the guidance review in the first quarter is we'll continue to have pretty significant merchandise margin pressure as we liquidate our heavier inventories coming out of the holiday season.
That's really the big difference.
Wes McDonald - Senior EVP & CFO
Yes, I wouldn't see a lot of volatility in sales across the quarters as we move throughout the year.
Let me be clear, the big issue in the fourth quarter was the first three weeks of November.
January was a very minor issue.
The drop in January was really related all to winter storm Jonas.
It was about a $20 million hit and that's basically what we finished down.
So the first three weeks of November as everybody probably mentioned either in their sales updates, on their earning call was very difficult to sell any cold weather apparel.
And that's where the big drop versus our plan was.
Matthew Boss - Analyst
Great.
And then just a data follow-up, so higher level in the first chunk of store closings announced today, how do you view the chain today?
Do you see additional closings over time and then is there anything structurally that you guys think you can execute differently or make change if you were a private versus a public Company?
Kevin Mansell - Chairman, CEO & President
On the store closures, as you know Matt this is probably the first experience we've had closing a more multiple number of stores and it does involve multiple markets as well.
And the process that we went through to determine that certainly involved looking at the total sales in the store and the momentum in the sales in the store because that's pretty critical as the store treading water headed down.
Second, most importantly probably, the market view.
So we took a really critical look at every single one of our markets and tried to make a determination of where we had significant store overlap in a trade area that we were not generating incremental sales in and stores that perhaps were being impacted more by our omnichannel initiatives.
And obviously also involved in it is cost review.
And so stores that we really didn't see the future potential to generate profitability and because of let's say a very high rent expense came under review as well.
I think that we're going to learn a lot.
I think fundamentally the answer to the question you had about additional store closures is we really don't know.
I think we will watch what happens with this process through the fall and holiday season and we'll make another assessment as we come out of this year and make a better determination of what the right portfolio really looks like.
Hopefully that answers everything on the store piece.
We're disclosing everything we can on that.
Wes McDonald - Senior EVP & CFO
Yes, we've closed like five or six stores in the time I've been here.
So we need to understand what happens to retain sales in the stores that surround those stores and if there's any effect on e-comm as well.
Kevin Mansell - Chairman, CEO & President
On the question on I think I guess essentially your question is really public versus private, I think that companies are successful in both ways for sure.
And we've been very successful as a public Company but we also as a public Company have an obligation to continually review all of the options we have to ensure we're maximizing shareholder to value.
That's not something new.
We've taken the obligation on for many, many years.
I've been on the Board for more than 15 years and it's a constant review with advisers to look at do we have the right store portfolio, are we making the right investments, is the capital allocation decision-making that we are employing sound and are there alternatives to that that we could consider.
So nothing new is happening there.
That's been that way for as long as I've been involved at Kohl's and I suspect will continue to be that way.
So I don't think there's a, hey, it would be better for us to be public, it would be better for us to be private.
It's really just a focus on shareholder value as we would make the same determination about share buyback or dividend yield or capital expenditures.
Matthew Boss - Analyst
Great.
Best of luck.
Operator
Bob Drbul, Nomura.
Bob Drbul - Analyst
Good morning.
Kevin, can you talk a little bit more around the marketing expenditures in terms of you said several things won't be repeated.
Like how much did you spend last year, what's the opportunity for savings versus reinvestments and what really did you guys learn as you went through the fourth quarter around the marketing plan?
Kevin Mansell - Chairman, CEO & President
For the year, Bob, we spent less in marketing than we did in the prior year.
So that's a good thing.
To be totally honest with you we had set a goal at the beginning of last year to have a larger reduction in ad expenditures than we ended up spending.
And fundamentally what happened there is as we got into the fourth quarter and we saw the real strength or lack of strength in our business and weakness across the board, we made the determination we need to be really aggressive in terms of ensuring that we were maximizing our traffic levels in the store.
So on the positive side marketing leverage and we actually reduced our marketing spend which is something long term we intend to continue to do.
On the negative side I think our expectations at the beginning of the year were more optimistic than we ended up.
Marketing is definitely a component part of the areas that we're looking to reduce expenses in over the course of the future years.
And frankly the key to unlock there we really believe is personalization.
That is going to be the driver, whether it's the application of our Yes2You reward loyalty program to improve as Wes covered both total sales with those customers but also a conversion over time to consider our credit card as a reasonable alternative as well or it is just making the spend that we have around personalization more effective regardless of whether that's print or direct mail or the utilization of our app.
So we've set goals for ourselves and we definitely think that it's an important part.
After store payroll marketing is our single biggest expense.
So we know if we're really going to reduce expenses over time we've got to do a better job of marketing.
Bob Drbul - Analyst
And as we look into 2016, on the e-commerce side where do you see opportunities to become more efficient and improve profitability there?
You mentioned shipping cost but can you just talk a little bit about how you are approaching that as it continues to grow in a somewhat pressured business?
Kevin Mansell - Chairman, CEO & President
Two things.
I think first and foremost one of the big changes that we made this year, we alluded to it in the call, was the decision to reorganize our buying and planning structure and essentially bring together our e-comm buying and planning teams with our brick-and-mortar buying and planning teams.
And while at the time that we built a separate e-comm team it made sense for us because it was a small but growing business, today it's a very big business but most importantly from a customer's perspective she sees this through one lens.
So we know that we need one view of the customer and the way to achieve that is through one organization long term.
What that means we think is that we'll do a better job of inventory management as a result.
So I think one way we're looking at this is inventory management more effectively and that will include using the inventories we have in our stores to fulfill online orders.
That was very successful all year last year and it peaked dramatically in the fourth quarter and we suspect that will continue to be a big tool of both improved inventory leverage but also to make us more efficient.
The other piece that we know we have to find a better long-term solution to is around fulfillment and cost fulfillment cost and that's critical for us.
And so we are investing, Wes called out some of the big things, everything from the beginning of the building of a new e-fulfillment center to the implementation of tools inside our stores to make order fulfillment more efficient and less expensive and improve speed.
So those are the two lines that we're focused on.
Michelle is kind of overseeing the buying and planning review and Sona is very much involved in ensuring that we're leveraging on the fulfillment side.
I don't know, Wes, if you want to --
Wes McDonald - Senior EVP & CFO
We learned a lot with the increased volume.
I think either Kevin or imagined it was 30% of our digital volume in the fourth quarter.
We're getting our logistics team involved in working with the stores and spending additional capital to better configure the back room to make it more efficient to ship.
So we're looking for a 50% improvement in UPH in the ship from store shipping channel next year.
And we're also spending a lot more time and money -- the key for us with our low AURs and our relatively low average order value online is to keep the package together.
So we're spending a lot of time and technology in making our systems better to do that.
So those will be key for us to be more efficient.
From a rate perspective, our rates with UPS and FedEx and the Postal Service are as competitive out there.
We're going to do probably $3 billion of digitally generated business in 2016.
So I don't think we're at a disadvantage from a rate perspective.
We do have to do a better job of keeping the order together.
Bob Drbul - Analyst
Thank you very much.
Operator
Paul Trussell, Deutsche Bank.
Paul Trussell - Analyst
Hey, good morning.
Wes, I believe you said the national brands in 4Q were about 58% of sales, up from 52%.
Could you maybe just touch on some of the initiatives you have on both the private label and the national brand side in 2016 and maybe how you might expect that to impact the mix going forward?
Then just as a follow-up to that, could you touch on maybe some of the category color, a little bit more detail on how you are feeling about the juniors category, women's apparel, athletic and small electrics?
Thanks.
Wes McDonald - Senior EVP & CFO
Okay, I can take the category real quick.
You mentioned all of our good categories, so thank you for that.
Juniors had a positive comp for both to the quarter and for the season.
So that business has really turned it around.
And they've done it the way I'd like to see all of our merchants do it.
They cut their inventory and grow their comp, so it is possible to do both.
Active continues to do very, very well led by Nike but there's other guys participating in that success as well.
I would say premium electronics did much better than kitchen electrics.
Kitchen electrics was a little tough in the fourth quarter.
But we're growing that premium electronics area.
And I would include things like active and wellness initiative, so things like FitBit would be included in that category as well.
And then I will let Kev talk about some of the -- we have a lot of new initiatives from private brand perspective that we're very excited about.
Kevin Mansell - Chairman, CEO & President
I think generally I would expect that both our national and private brand portfolios have the opportunity to perform more relatively equally beginning this year.
Last year was definitely a year in which we dramatically made investments in some of our national brands.
As you know one that you called out was our active and wellness category which was extremely successful and I continue to see growth there and we are still expecting to grow the business.
But we also know that we need to have a good balance.
So what we've been working on, Paul, is to really reimagine change the way we go about delivering our private and exclusive brands with an eye towards increased speed and shortened delivery times.
Because we know that that's the only way we're going to get really long-term improvement there.
We're also targeting each of our particularly large private brands for relaunches.
And we're starting naturally with the biggest single private brand we have which is Sonoma.
And Sonoma will be relaunched as a brand this year and we do expect that that's going to rejuvenate that business in a meaningful way.
So I think we're happy with the balance.
We're not backing away at all on our intensity around national brands.
We still believe that's really critical for us to continue to both support the ones we have, whether they are big brands like Levi in denim or Nike in active but also had new brands.
So we're definitely focused on both omnichannel and stores considerations of where we could improve our brand portfolio.
Wes McDonald - Senior EVP & CFO
I think there's a big opportunity from a digital channel perspective to better emphasize private and exclusive brands.
We may have gotten a little ahead of our skis on emphasizing national brands because it's a good way for us to try out new national brands.
It's low risk for both parties and that's a much bigger share of the business online than it is in store.
So I think there's opportunity and one of the advantage I think that Kevin mentioned of putting the merchants together, there can be a better balance of looking at the total picture versus just driving one particular channel.
Paul Trussell - Analyst
That's very helpful color.
Thank you.
A very quick follow-up on store closures.
I believe you said that you will announce the actual locations by the end of March.
Can you just clarify and I apologize if I missed it when the actual store closings are likely to occur?
Kevin Mansell - Chairman, CEO & President
Probably in June, sometime in June.
Paul Trussell - Analyst
Got it.
All right helpful.
Thank you, guys.
Operator
Mark Altschwager, Robert W. Baird.
Mark Altschwager - Analyst
Good morning and thanks for taking the question.
I was hoping you could talk a bit more about how the various revenue components of your growth agenda been evolving.
And obviously the revenue is running below your targeted rate and new store concepts have become a bigger part of the conversation.
So just trying to get a better sense of where you see the greatest opportunity for product and marketing initiative to move the needle in 2016?
Kevin Mansell - Chairman, CEO & President
I think generally, honestly, Mark our focus is around our existing store portfolio.
That's where the improvement has to come from.
And as we both alluded to utilizing the growth in online demand, the embracing that customers have done around our digital platform more effectively by leveraging our store base and our store inventory is really the critical component that we need to improve on.
And that has a lot of elements to it that we're focused on, everything from leveraging the inventory to improving the effectiveness in which we fulfill the orders and as Wes pointed out making technology drive better decisions in terms of where orders are fulfilled across the platform.
So our focus is definitely on our existing store platform.
Having said that we don't want to back down from looking at new ideas that might enhance the future for Kohl's.
So I still believe that the 35,000 square foot pilot stores that we're launching could be long term really important for us.
Because they are a nod to the fact that more and more of our business is being online and while it's fulfilled in store either through ship from store or pick up in store that customer is starting out online.
And if we can find a way to have smaller stores that are effective and still provide that platform it just gives us a great opportunity as we look down the road in a few years.
Wes McDonald - Senior EVP & CFO
If you are just talking about comp metrics our ability to outperform the flat to 1 is going to be predicated on our ability to improve traffic from the roughly flat that it was this year.
So I continue to believe our average unit retail will be up.
It was up for the year.
It was somewhat muted in the fourth quarter just due to the extreme promotional nature of the business, especially in our cold weather merchandise as we had to liquidate merchandise.
But for us to exceed the guidance that we gave we're going to have to get traffic moving into a slightly positive direction.
Mark Altschwager - Analyst
That's very hopeful.
Thank you.
Operator
Oliver Chen, Cowen and Company.
Oliver Chen - Analyst
Hi, thank you.
Kevin, on the reorganization regarding speed, what is the low-hanging fruit there?
And can you brief us on lead times now versus where you may want to go and how this may impact the merch margins?
It sounds like integrated inventory is a nice opportunity.
And Wes, on the 30% regarding utilizing your store network and the integration of bricks and clicks, do you think that number will continue to rise and was there a breakout between the mix of ship from store versus picked up?
And I think if you could highlight the frontier in terms of mobile and mobile traffic because we think that will continue to be a huge important piece of interactivity from the customers.
Thank you.
Kevin Mansell - Chairman, CEO & President
I will take the first --
Wes McDonald - Senior EVP & CFO
You got way more than one question.
Good thing you didn't breathe a lot.
Kevin Mansell - Chairman, CEO & President
Nice job, Oliver.
On the reorganization there's component parts to it.
First the most important part is we recognize that while the structure we had was right for the time we had it we need a different view looking forward that reflects the way the customer looks at our business and the customer looks at our business through one lens.
It's seamless, it's omnichannel and therefore that's how we have to make our decisions.
So the buying and planning decision that we'll make will be predicated on one view and that's the customer's view.
So that's got opportunity for us because I think it will make us more sensitive to assortment sizes.
It will make us more sensitive to leveraging the inventory that we have in our existing brick-and-mortar organization.
The second, though, really important component which you hit on is really speed.
And we probably would say that the biggest opportunity we have on speed is naturally inside our private and exclusive brand organization.
Half of our business we work on longer lead times generally and we've had success in some areas.
Juniors is a great example of really driving down that cycle time and getting better top-line results and more effective inventory turnover.
So we're employing some of those ideas into our other business is what we're focused on now.
I wouldn't want to go through with each and every brand and what the leadtime is today and what our goals are and to be frank with you in each and every brand we probably don't have a completely clear vision on that.
But we definitely want to bring it way, way down.
So I think on the speed initiative it's probably more about the private and exclusive brands.
Wes McDonald - Senior EVP & CFO
And then your questions on digital, I think the breakout was more like 25% ship from store, 5% buy online, pick up in store.
I would expect over the next few years the buy online, pick up in store to at least double to 10%.
It's possible it could get to 15%.
That's sort of been a relatively common target for other retailers in our business.
We've learned that you can't market it all the time.
It was critical we got good adoption obviously the last few days before Christmas Eve.
It's a good thing to do around Valentine's Day, Mother's Day, Father's Day for last-minute kind of things as people pick up gifts for that.
So I think we will learn more throughout the year now that the capability is well understood and well launched for us.
And then all the traffic really came from mobile, the increases this year.
You're right to think that's where it's going to come from.
I think I'm most proud of the fact that our overall conversion rate for the year approached 4% for all devices but our conversion rate on the phone, which is a lot lower the desktop and tablet, improved 59%.
So our investments in improving the app especially was definitely well received by the customer.
I think Kevin mentioned there was 11 million downloads of our app and growing.
So that's a big portion of our IT investments going forward as well.
Oliver Chen - Analyst
Okay, thank you.
That's super helpful.
And Kevin, just lastly, personalization.
I feel like this has been a topic that's come up in different ways in the past but now it seems like the right time for this being material.
Can you articulate why you have conviction that personalization will really be a frontier which can drive results now?
Kevin Mansell - Chairman, CEO & President
While I think the reason we're more and more convicted on this is that we've now had enough time under our belt in testing the impact of personalization across a wide variety of media platforms, everything from utilization and conversion, opening and conversion of our emails to the delivery of our direct mail vehicles to the utilization that customers have around our app which is of course highly personalized.
So I think what's driving the probably the stronger language about the critical nature of personalization to improving sales productivity on our advertising expense is we now have a pretty long track record of the testing and the piloting.
We have to convert that now.
We have to scale it and we have to apply it to every single platform we have because that to us is going to be the long-term success.
It's not that unlike the localization initiatives important to our inventory management.
While we know we've got to drive down inventory per store and utilize our store inventory to help fulfill this growing online demand we also know the most important thing we have to do is provide more localized assortments that are more attractive to the customers in the trade areas in which the store sits.
So personalization is the most important thing that we have as a tool to drive advertising expense down over time.
And given it's our second-biggest expense center that's a pretty important initiative.
Oliver Chen - Analyst
Okay, that's perfect.
Thanks for that and great job on online innovation.
Thanks.
Operator
Paul Lejuez, Citigroup.
Tracy Kogan - Analyst
Hey, thanks guys.
It's Tracy filling in for Paul.
I had a question about credit.
I was wondering if you've seen any change in the quality of your portfolio or like a rise in delinquencies and what are you expecting for credit income in 2016?
And then just a quick follow-up on that small store format.
I'm just wondering what the key areas are that you expect you'll be reducing in size in that store?
Thanks.
Wes McDonald - Senior EVP & CFO
We haven't seen any deterioration and our loss rate for the year was exactly the same as last year at 3.7%.
I would expect our credit income to rise modestly, predicated on how successful you are at adding people to the credit file.
This past year we focused a lot on loyalty and not as much on credit and our applications were a little bit down to last year.
But I would expect as we've anniversaried loyalty and we saw this in the fourth quarter our application, our approved applications were actually up.
So that gives me confidence that we will grow our credit file in 2016.
And then the small store question?
Kevin Mansell - Chairman, CEO & President
Categories that will be downsized or maintained.
We haven't disclosed, Tracy, the specifics around the small stores either in terms of their locations or the category assortments that will be inside the store.
I would say generally, though, the way you should think about it the broad-based categories that are contained inside of a Kohl's store will be represented in the new stores as well.
But categories that have exhibited a very high level of digital demand will probably have further reductions in their space and assortment than other categories because our sense is that we can fulfill much of that in a digital way inside the store.
Tracy Kogan - Analyst
Got it.
Thanks a lot, guys.
Operator
Neely Tamminga, Piper Jaffray.
Kayla Wesser - Analyst
Good morning, this is Kayla Wesser on for nearly this morning.
Just two quick questions.
One about loyalty.
I know you mentioned that they spent a lot more in the quarter.
I'm just curious of you could give any more color on the bounceback, maybe post-holiday especially if you saw the visits, return visits or the spend that you were expecting maybe outside of the winter-impacted areas?
And then also just buy online, pick up in store, where are the attachment rates trending and they kind of where you guys expected them?
Wes McDonald - Senior EVP & CFO
On the buy online, pick up in store that's an easy one.
It's on average it's been about 25%.
It was actually more during holiday.
On loyalty we obviously had a lot more dollars since we had a lot more customers bounce back in January.
We did see a slight deterioration in the response rate.
One thing I probably made a mistake on is when you double the size of your file not everybody loves Kohl's equally.
As you add the later adopters to loyalty they are not going to respond as quickly.
So that's some learning we will do a better job of planning in 2016 because of that.
Kayla Wesser - Analyst
Thanks.
Operator
Michael Binetti, UBS.
Michael Binetti - Analyst
Hey guys, good morning.
I just wanted to ask a couple of questions for the CFO officer maybe.
I want to make sure I understand the D&A was the step change higher in CapEx and then I know some of the investments have been in IT which I would have thought would have had a faster amortization cycle to them.
I think you guys talked about that.
I know you mentioned maybe some of the store closures have a D&A component.
But maybe you could help me think about the push and pull on the D&A going down next year a little bit closer.
Wes McDonald - Senior EVP & CFO
Most of it's because $7 million comes out because of the store closures.
Michael Binetti - Analyst
And the others aren't enough to override that I guess?
Wes McDonald - Senior EVP & CFO
Well we spent, last year we spent $934 million, what I'd I say $940 million for this year.
So it's a little bit of a rise.
We've been spending a boatload of money on IT for a number of years so we're starting to cycle through that.
The average life of an IT project ranges from three to five years but I would say more and more we're using three years just because the innovation cycle is so short.
Michael Binetti - Analyst
Okay.
And then I understand the comments, thanks for the comments on looking at the leverage point for the future, Kevin I wanted to make sure I understand the components of the SG&A guidance for 2016.
I know you just said you're planning credit up as an offset but in the past you've said 2% SG&A growth and this year a touch below that.
If I had to think about the buckets you'll have healthcare and wages going up in the stores.
Can you just help us understand the remainder of where the remainder of the cost control to come in below that 2% target you had before is, if it is between corporate overhead, ad spend and the credit you mentioned versus the store level cost?
Wes McDonald - Senior EVP & CFO
Well from my perspective again the store closures help them.
We said it was $44 million, $45 million, so you can take a portion of that for the year depending on when we close the store in June, that's embedded in the guidance.
Store payroll is going to grow.
We're seeing the wage pressure.
We're not immune to it.
Other people who have reported said it's a pressure.
In this quarter it is going to be a pressure this year.
It's more than a third of our overall SG&A so that's going up.
I think we can be more efficient as I mentioned in ship from store and BOPUS.
That will help mitigate that.
We actually experienced healthcare deflation this year.
We had a tremendous year in terms of that.
Knock on wood we were lucky we didn't have a ton of large claims which can really from swing it one way or the other.
But we've made a lot plan changes in wellness initiative.
We have a relatively young population, that helps as well.
But we're going to cut advertising.
I think Bob asked we spent $1.011 billion this year.
We wanted to spend $1 billion.
The goal is to spend $1 billion this year, so maybe we will spend even a little bit less than that.
We can get more efficient in the E-Commerce Fulfillment Centers.
And we're going to get more efficient in corporate with the reorganization that we had.
And we have to be smarter about when positions open up not filling them and just increasing speed across the organization.
I think that will be a big help but those are kind of the buckets we're going to try to do to offset.
IT expenses also going to go up.
I mean we're spending a bunch on IT.
So IT and stores are going up.
Everything else pretty much has to go down somehow.
Kevin Mansell - Chairman, CEO & President
The 35% to 40% of our expense that is essentially store payroll, that's going up.
So we're planning it to go up, that's just a fact.
Things like the reorganization, things across the Company in the other 65% we've been working on.
This is not something we're starting last week.
We've been working on reducing those forward-looking expenses.
And one of the things that's going to big component part of that that you sort of alluded to but I think honestly has a big impact is lower inventory level.
Lower inventory level is less material handling, it's less distribution expense, it's significantly less workload in the store and that has a big impact in a positive way on store payroll.
So our average hourly wage is going up but if we're putting a lot less inventory in the store there's a lot less work to do on the store's part to handle it.
Michael Binetti - Analyst
Just because it's critical, sorry, because the fourth quarter is so important, and I know you guys were rethinking advertising as you went through fourth quarter last year, is advertising planned up in the fourth quarter this year?
Kevin Mansell - Chairman, CEO & President
We haven't gotten there --
Wes McDonald - Senior EVP & CFO
We planned the fall season.
But I mean there's not a Star Wars movie to my knowledge so we won't have to spend money on that.
Kevin Mansell - Chairman, CEO & President
Honestly I wouldn't think I think Wes just said we spent $1.011 billion or $1.012 billion in marketing this past year.
I wouldn't think about, I wouldn't take away from this discussion hey, they are going to dramatically lower the amount of marketing they spend.
We're talking about on the ledges.
We're talking about reducing it by $10 million on a $1 billion base.
The more important thing for us that we just touched on with the caller or two ago is we've got to make that $1 billion work harder through personalization.
That's really the win and then the other things become savings.
Michael Binetti - Analyst
Thanks a lot, guys.
Operator
Stephen Grambling, Goldman Sachs.
Stephen Grambling - Analyst
Hey, good morning, thanks for speaking me in.
As you think about your ongoing clearance in what seems to be something that's going on across the space can you provide any color on how much of these margin pressures are driven by cyclical or seasonal issues versus something structural such as increasing price transparency, particularly with the growth in mobile?
Wes McDonald - Senior EVP & CFO
All about cold weather merchandise.
Kevin Mansell - Chairman, CEO & President
Yes, this is all about liquidating and getting out of our holiday cold weather inventories through the early part of the first quarter and repositioning our inventories at a lower level going forward.
Stephen Grambling - Analyst
Great.
And then as a follow-up I believe to Matt's question earlier on store closings, how does the performance of the remaining base of stores look?
And specifically is there a wide range or is it fairly tight?
Kevin Mansell - Chairman, CEO & President
I mean it's always been relatively fairly tight.
What happens is regionally each quarter, I hate to use the word weather, but the facts are weather can positively influence a quarter's results in a region and negatively influence another quarter's results.
So the West Coast got better results because they had better weather and the Midwest or Mid-Atlantic got lower results.
But the spectrum across from a store comp perspective, I mean it's not like there's a dramatic difference.
Wes McDonald - Senior EVP & CFO
The sales, the comp sales really aren't driving the closure decisions.
It's really about the fixed cost and our ability to manage the other lines of expenses to make them more positive.
And then the biggest thing that changed honestly in the first quarter is our digital orders grew 30% on a very large base -- in the fourth quarter, sorry.
And that was something that was unexpected.
We far exceeded our plan on digital for the fourth quarter.
So that was really sort of the aha moment if you want to say that about how to take a look at the store base with a more critical eye.
Stephen Grambling - Analyst
That's helpful.
And one last one if I may, just on the smaller format stores.
Are some of these, I know you're not answering explicitly where they are going to be, but are some of these going to be in the markets where you are closing and is that part of the thought process that you could potentially downsize the existing base?
Kevin Mansell - Chairman, CEO & President
They are not in the markets in which we are closing.
Wes McDonald - Senior EVP & CFO
But that's a good thought.
Kevin Mansell - Chairman, CEO & President
And frankly we did that intentionally because we didn't want to make the results of these stores driven by anything else that was happening in that market.
But having said that I still think the biggest opportunity for the small store pilot will be as we review our overall store portfolio, as leases become up over time, if we're able to prove successful in this much smaller store and leverage the digital growth in our business I think that could be a major change for us in terms of our expense structure and our fixed cost as Wes just alluded to.
Wes McDonald - Senior EVP & CFO
And it doesn't have to be a 35,000, we have plenty of 64,000 and 55,000.
So it's more about having the toolbox to better rightsize the store base as we move forward.
Stephen Grambling - Analyst
Thanks again.
Best of luck this year.
Kevin Mansell - Chairman, CEO & President
All right, thank you.
Wes McDonald - Senior EVP & CFO
Thanks everybody.
Operator
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