柯爾百貨 (KSS) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to Kohl's Q4 year-end 2016 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So if you are listening after February 23, 2017 it is possible that the information discussed is no longer current.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.

Sir, please go ahead.

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 financial results and then Kevin will provide an operational update and our thoughts on 2017.

We will then open the call to your questions.

Comp sales decreased 2.2% for the quarter, consistent with the 2.1% holiday decline we reported in January.

For the year comp sales decreased 2.4%.

As we look at the comp metrics for the quarter average transaction value increased 3.8%.

Average unit retail increased 3.7% while units per transaction increased 0.1%.

Transactions per store declined 6.0% for the quarter.

For the year average transaction value increased 3.1%, average unit retail was up 1.5% and units per transaction were up 1.6%.

Transactions per store were down 5.5% for the year.

From a line of business perspective, men's was the strongest category for both the quarter and the year.

Accessories was the weakest category in both periods.

On a regional basis, the Southeast was the strongest of the quarter and the West was the strongest for the year.

The South Central region was the most challenging in both periods.

Our gross margin improved 33 basis points for the quarter as we improved in both permanent and promotional markdowns.

For the year gross margin decreased 6 basis points as increases in the final three quarters were not sufficient to offset the first-quarter decline.

SG&A increased $28 million to $1.36 billion for the quarter.

As a percentage of sales SG&A deleveraged 106 basis points.

Our credit area was the only area to leverage our expenses versus last year.

For the year as G&A expenses were $4.43 billion, a decrease of $17 million from 2015.

As a percentage of sales SG&A deleverage 55 basis points.

Our teams, again, did an admirable job of managing our expenses against their internal plans but most were unable to leverage on the lower sales.

Depreciation expense was $239 million for the quarter and $938 million for the year.

Both were consistent with last year and our expectations.

Interest expense decreased $4 million for the quarter and $19 million for the year.

Lower interest on capital leases at the portfolio matures and the store closures that we had earlier in the year contributed to the decreases for both the quarter and the year.

The annual decrease also reflects favorable interest rates achieved during our $1.1 billion debt refinancing in 2015.

Our income tax rate was 36.7% for the quarter and 36.6% for the year.

Our tax rate increased in both periods as the prior-year periods included some favorable state tax audit settlements that we didn't repeat in 2016.

For the quarter net income was $252 million and diluted earnings per share were $1.44.

There were no special items in the fourth quarter in either year.

For the year on a reported GAAP basis net income was $556 million and diluted earnings per share was $3.11.

Excluding store closure and restructuring costs in 2016 and debt extinguishment losses in 2015 net income was $673 million for the year and diluted earnings per share were $3.76.

We ended the year with 1,154 Kohl's stores with gross square footage of 99.1 million square feet and selling square footage of 82.8 million square feet.

During the year we opened nine Kohl's stores and closed 19 stores.

Eight of the nine new stores are in our new small 35K format.

We also operate 12 FILA outlets and three Off/Aisle centers.

We ended the year with $1.1 billion of cash and cash equivalents, an increase of $367 million over last year reflecting improving working capital, especially in inventory.

For the year we generated $1.3 billion in free cash flow, a $593 million improvement over last year and the highest free cash flow in our history.

We made additional progress on our inventory reduction initiatives during the quarter, reducing our inventory per store by about 5%.

All businesses and all brand types reported lower inventory levels.

We were also better able to flow in our spring transitional goods.

As a result our AP to inventory ratio increased 870 basis points to 39.7%.

Capital expenditures were $768 million, $78 million higher than last year.

Most of this increase is due to spending for our fifth E-Commerce Fulfillment Center which is scheduled to open next year.

Our actual capital expenditures were lower than our guidance of $825 million due to the timing of payments and the shifting of several IT projects into 2017.

We expect capital expenditures of approximately $700 million in 2017, of which approximately $350 million is for IT spending with the remainder split between store strategies and base capital, primarily in omnichannel investment.

Weighted average diluted shares were 175 million for the quarter and -- 175 million for the quarter and 179 million for the year.

We repurchased 2.7 million shares of our stock during the quarter, bringing our total for the year to 13.3 million.

We ended the quarter with 174 million shares of stock outstanding.

On Wednesday our Board approved a 10% increase in quarterly dividend.

The $0.55 dividend is payable March 22 to shareholders of record at the close of business on March 8.

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

Thanks, Wes.

While I would like to make a few comments regarding 2016, most of my thoughts will be focused on our plans for 2017 and beyond.

From a strength perspective we made great progress last year on the management of our inventory levels and expenses across the Company.

We also showed great improvement during the course of the year on merchandise margin.

Our opportunity, of course, continues to be on the top line and that has been driven by disappointing traffic metrics.

I still believe that the strategic framework of the Greatness Agenda is the path to changing that top-line trend over time and our associates feel the same way.

In our focus on product initiatives, we've successfully grown the depth and breadth of our national brand portfolio.

And we saw national brand penetration increase to 54% sales last year.

National brands were up low single digits for the year with particular strength in Nike, Carter's, Levi's, Columbia and Van Heusen and the launch of Apple Watches in the fourth quarter.

As we move into 2017 we expect the launch of Under Armour will drive the penetration even higher and project it to be a significant enough business in year one to add 75 to 100 basis points to our overall Company count.

We are also starting to see better results in our private brands as our speed initiatives take hold.

Our key private brands, which were involved in our speed initiative last year, achieved a low single-digit positive comp in total for the fourth quarter.

As the speed initiative expands this spring to other private and exclusive brands across apparel and soft home the percentage of our proprietary brand business impacted by the speed initiative will move from 25% at the end of last year to about 40% of our overall proprietary sales this year.

In addition, the relaunch of our Jumping Beans children's brand should turn that business from a drag on our sales to a major positive.

Finally, our localization efforts now impact about 85% of our assortment and are having a positive impact on sales as well as reducing inventory levels at the same time.

In our focus on omnichannel initiatives we are beginning to see the results of our multiyear, multibillion-dollar investment in digital technology as online demand and fulfillment metrics are improving.

Online demand was up in the low teens for both fourth quarter and for the year.

We also improved our shipping and fulfillment expenses as a percentage of digital sales while increasing the speed to customer by half a day overall.

Just as importantly, approximately one-third of our digital sales units were either shipped from store or picked up in our stores in the fourth quarter.

Our ship from store capability enhancements along with Buy Online, Pick Up In Store enhancements have improved the customer experience and leveraged the power of our store portfolio.

We will be aggressively marketing the BOPUS functionality option and ease this year and expect the penetration to climb significantly in 2017.

Mobile continues to drive digital engagement metrics and 30% of our digital sales came from mobile devices for the year.

Mobile devices account for over 50% of our digital traffic.

The investments and experiences involved in our Kohl's wallet, our Kohl's app and Kohl's pay are driving our 19 million wallet users engagement.

The same is true of our mobile centric Yes2You Rewards loyalty program.

Moving on to our focus on inventory and expense management, inventory levels and receipt flows were areas we made major progress on last year and we saw the benefits of that growing in importance throughout the year.

By year-end overall inventory was down about 5% in dollars and 7% in units.

More importantly, our fall seasonal inventory was down about 25% and our spring forward transitional inventory was up about 9% within that total.

This impacted several key metrics very positive week including merchandise margins for the fourth quarter, in-store and logistics expenses related to material handling and a dramatic improvement as Wes mentioned in cash flow for the year.

Our intent is to continue to lower inventory per store about 3% per year for the next three years at cost with larger reductions at retail and in units.

An improved supply chain focused on speed, localization initiatives and leveraging technology to increase the percentage of inventory shipped from stores to fulfill online demand or online demand picked up in-store will all play a factor in this.

This is one of the most important initiatives in the Company.

We are also pleased with our ability to manage our expenses lower when we did not achieve our expected sales results last year.

With the pressure of higher hourly wages in our stores and distribution network spending less overall on SG&A was a very meaningful accomplishment.

Having said that, we need to do better.

As a result, we've launched a profit improvement project that takes significant expense out of our Company.

I expect to share more about that effort as we go through this year and expect some impact coming later this year but the majority coming in 2018 and 2019.

Drivers of that effort will be improved speed and agility across the Company in the same way we've accomplished it in our product and inventory initiatives.

As I just indicated, on the product side this has resulted in lower inventory levels and better profitability and I believe the same approach in our expense structure will have a similar and permanent impact.

I would expect all areas of our expense lines to participate in the profit improvement project.

Moving on to a focus on store optimization.

As you know, we made a decision to close 18 stores last year with most closing in June.

Now that the fourth quarter is behind us we have been able to measure the impact of those closures in a number of ways: at customer level, at a store and market level and on the impact in online sales.

We believe that overall we have retained about a third of the sales from the closed stores in other nearby stores and about 90% of the online sales in those areas.

This is less than we estimated.

We want to continue to monitor the results throughout the spring season.

Those results will help inform future decision-making on store optimization.

Our overall perspective, though, on the importance of our store portfolio remains the same.

We believe stores are very important and critical component of our future success and we are committed to leverage them to their full extent.

There's great power in stores in an omnichannel world.

We also know, however, that the average sales per store have fallen as online sales have risen, and so an ongoing rigorous process for store performance review is critical to long-term success.

We continue to review performance by store.

It's against a menu of options considered to improve that performance when less than desired.

Certainly our first focus continues to be to drive traffic in a positive direction in all stores, but included among actions after that are the following.

First, re-merchandising and re-fixturing full-size but lower volume stores to improve both profitability and customer experience.

This effort is called standard to small and is being expanded this year by 200 stores.

It has shown to date no result in an impact on sales, but an increase in gross margin due to rightsized inventories and lower four-wall SG&A due to lower inventory and more efficient use of space.

A second option is rightsizing or relocating existing stores into smaller footprints.

This allows us to maintain our presence in trade area and improve productivity and profitability in much the same way.

Our 55,000 square foot and our new 35,000 square foot prototypes now allow us to execute this profitably given that we've built the operating model through the testing of these stores.

Final option, of course, is removing from our store portfolio those stores that don't make a positive financial contribution and look to have no promise to do so.

This is only done where the first two options don't provide a better solution.

This was the case with the stores we closed last year.

Future decisions will now be informed more directly from that experience.

The result of all these efforts is that we will achieve a rationalization of square footage over time.

Not necessarily fewer stores but probably less square footage.

In summary, before I turn it back to Wes to provide 2017 guidance I want to reinforce that while we are committed to investing in the long-term health of our business we also intend to continue to be good stewards of capital.

As you saw in our press release, our Board has approved a 10% increase in our dividend for 2017.

In addition, we will continue to be opportunistic in our share repurchase program.

We would expect to purchase less than we did in 2016, targeting $300 million to $400 million in repurchases.

We do feel that the uncertainty in our sector will continue, and we want to maintain a strong balance sheet that would allow us to execute quickly as opportunities arise to garner share.

With that I will turn it back to Wes to provide some information on guidance.

Thanks, Kevin.

We expect earnings per diluted share of $3.50 to $3.80 for fiscal 2017 including the 53rd week.

The guidance based on the following assumptions.

Comp sales of flat to down 2%.

Total sales of down 1.3% to up 0.7% including the 53rd week.

Sales in the 53rd week are estimated to be approximately $160 million.

Gross margin rate performance to increase 10 to 15 basis points.

We would expect more significant improvement in the first quarter with the remainder of the year with very modest improvement.

Our SG&A dollars are going to increase 50 basis points to 2%.

Excluding the 53rd week in 2017, we would expect SG&A dollars to be flat to up 1.5%.

SG&A dollars in the 53rd week are expected to be approximately $25 million.

Depreciation expense of the year $960 million.

Interest expense of $300 million for the year.

Our tax rate for the year is going to be projected to be 37.5%.

Tax rates higher than our historical rate as new accounting rules will require us to recognize income tax benefits and tax deficiencies related to share-based payments as income tax expense rather than as equity on our balance sheet.

Given our current stock price we would expect the new rule to increase our effective tax rate.

The effect will not be equaled by quarter.

For the first quarter I would expect it to be approximately 39.5% for the quarter but still be 37.5% for the year.

The guidance assumes share repurchases of $350 million.

With that we will be happy to take the questions you have at this time.

(Operator Instructions) Lorraine Hutchinson, Bank of America Merrill Lynch.

Thank you, good morning.

I wanted to follow-up and on the comment that you made about reacting quickly as opportunities arise to garner share and how that relates to your balance sheet.

Is that speaking of an acquisition in particular, and would you be looking at stores or brands or maybe just a little bit more color on that and how it might impact your share buyback this year?

There isn't anything specific in mind, Lorraine.

I think it is informed by two things.

One, it's just an acknowledgment that we've been unable to date to drive the top line positive.

And so being more thoughtful about the balance sheet simply makes sense to us.

But, yes, secondarily I think that we do want to stay in a particularly strong capital and balance sheet endpoint in order to take advantage of things like new brands that might come where we could invest in them much in the same way as we did with Under Armour and drive increased top line in the future.

So I think things like new brands certainty come to mind.

Perhaps store opportunities where we have relocation or rightsizing availability.

So I wouldn't say there's anything in particular.

But it's sort of an acknowledging the environment that we are in and at the same time recognizing that we are in a phenomenally good capital shape.

And so we want to be poised if something appears to us to be an opportunity.

I think it's also, as Kevin mentioned in his comments, the uncertainty in the environment would cause I think most retailers to increase the amount of cash cushion just to provide some flexibility.

And I will echo Kevin's comment, the Under Armour fixtures were not cheap.

So it's awful to have those type of flexibility for investment should new brands come up on the horizon.

Thank you.

Oliver Chen, Cowen and Company.

Nice job on the inventory execution.

We had a question related to accessories and women's.

What do you think needs to happen to that product and as that improves do your expect it to interplay with improved traffic?

And a second question was on the omnichannel CapEx this year.

What are the key projects that you are conducting and what you prioritizing in terms of the CapEx for omnichannel?

Thank you.

Thanks, Oliver.

It's Kevin.

I will answer on the product side and Wes can mention some of the specifics around the investments on capital and omnichannel.

Accessories has been a drag on the business both in the fourth quarter where it underperformed actually the most of all our six business categories and also for the year where it was similar in terms of underperformance.

And I think it's all product related.

And so you've heard Michelle talk about the need to improve product decisions, about the need to improve speed in our sourcing in order to flow receipts more quickly when we see product cycles developed to lower inventory so that we have more flexibility, and it's clearly a big focus.

Our women's business overall has modestly, more modestly underperformed, not to the extent that accessories did.

But they are connected, as you well know.

So I think it's a lot about product, and I think she feels like the inventory management initiatives, the product initiatives that we are focused on will improve it over time.

And it includes, of course, an underperformance in our fine jewelry business, as well.

On the initiatives and omnichannel investment I will let Wes tell you.

The one thing in accessories that we are pleased with is the continued strength of the beauty business, and we expect to continue to grow that in 2017, as well.

From an omnichannel perspective there's a couple of things going on.

We will continue the rollout of our new point-of-sale system which should help our associates in the store assist customers, easier to look at things in the store and online.

Kevin mentioned that 50% of the traffic is coming from mobile.

So a lot of the projects are continuing to improve the conversion rate on the mobile side of the business.

As most people, our conversion rate on a phone is a lot less than our conversion rate on the desktop, we want to make that it's frictionless as possible.

And then Kevin also mentioned we spent a lot of dollars and capital on our fifth E-Commerce Fulfillment Center.

We will spend some additional dollars and open that in the back-to-school time frame to be ready for holiday.

We would expect that distribution center to be three times as productive as our existing fulfillment centers given the level of automation that we are putting into that building.

Thanks.

Kevin, you gave a lot of great framework for the real estate and square footage.

The five-year story on square footage, do you have a yardstick about where that may end up whether it be 10% to 20% lower?

And as you think about the square footage, is there an interplay between resource allocation and also the ability for a rightsized optimized footprint to have stronger traffic, in-store traffic?

There is no vision in terms of the square footage in the future.

I think the thing that we are pretty aligned on is that with more business being initially driven online while we will continue to work hard to improve the percentage of that that we can fulfill from our stores, whether ship from store, Buy Online, Pick Up In Store, the overall impact is that the brick-and-mortar stores will continue to probably do a little bit less.

We are trying to modestly improve that, of course, from where it's been because we were down, as Wes said, traffic in the 5% to 6% range last year.

But it's really all focused on the strategies we just talked about.

We do think that having a big footprint is really important.

We suspected that as we closed the stores that we closed last June that it could have an impact on omnichannel and sales in those trade areas and it did.

So that just reinforces the need to have a great footprint, but they will be smaller.

That's really what it's going to be about.

As you know, we tested the 55,000 square foot stores for quite a long time, but last year we tested the 35,000 square foot stores and I think that now gives us a lot of confidence that we know how to operate those stores profitably.

In terms of resource allocation I'm not exactly sure what you are getting at.

Are you better able to prioritize where you should invest in the stores?

It sounds like there's a good, robust program for thinking about optimizing square footage, but one of the debates is as you do shrink square footage there could be some space that's not as brand appropriate and there could be opportunities to continue to think about where the dollars are best spent in fixtures, people, marketing.

So part of the paradigm is understanding the spectrum of ROIC in terms of closures.

I think retailers are looking across a whole framework of thinking about this.

Obviously, not every store gets the same level of fixtures.

So if you guys go out and look at different stores and Under Armour you'll see some stores that are high-volume that have a more robust presentation and then the stores that are lower volume we, obviously, need to showcase the brand, but they won't have as many bells and whistles as the high-volume stores.

I think what we've done, we have about 185 small stores that are actual footprint small.

We have another 115 or so that we've got on that standard to small program, so about 300 stores that are operating pretty efficiently.

We are going to add another 200.

So 500 of our 1,150 some stores are going to be run like a smaller store.

We think that will have better opportunity from a gross margin perspective and lower expenses to hopefully improve ROIC.

Kevin also mentioned, I think, we are looking for opportunities to bring in other retailers to take that square footage that we are able to carve out to drive some additional traffic to the developments that we are in.

Overall, Oliver, I think we are leaving you with hopefully the impression we think footprint in terms of number of stores is important and we don't necessarily see that going down.

It actually possibly could even go up.

Second, they are going to be smaller stores for sure.

And the way they are going to be smaller is to use technology to enable process inside the store more efficiently and fulfillment inside the store more efficiently and use our speed initiative and our sourcing strategies and our localization initiatives to be able to make better decisions on which brands and which categories are emphasized more in a smaller footprint.

Hopefully that gets your answer done.

Yes, that's very helpful (multiple speakers)

You've used your questions up for the year.

We will move on to the next one.

Thank you.

Mark Altschwager, Robert W. Baird.

Great, good morning.

I wanted to ask about some of the comp puts and takes near term.

Obviously, a much easier comparison in Q1 and presumably some benefits surrounding the UA as that builds throughout the year.

In the context of the flat to down 2% comps, how are you thinking about the cadence through 2017?

Is there a baseline traffic number that will be needed to achieve that level?

And then any color you can provide on February, which is the industry traffic is and pretty tough out there.

Thank you.

If you look at last year we were down a little over 2%, we are essentially implying that we would be down in the middle of our range at around 1%.

So that says we got to improve 100, 150 basis points.

I don't think there is any particular quarter that we are focused on.

Certainly there was weakness in the first quarter last year.

But at the same time, as you know, we've really dramatically reduced inventories this year.

So our clearance levels and fall transitional inventories are way down compared to last year, so that always has an impact early in a quarter.

I think we are looking at the Under Armour launch as an ongoing investment, so it's definitely not quarter focused.

We see that lifting sales over time.

So I really honestly we haven't targeted one quarter to be a little better than another.

If you look at the performance last year we had weak traffic all year really.

And so for us to get from, let's say, down 2% plus last year to down, let's say, 1% or even flat we need to improve store traffic from down 5% or 6% to be down more like 3%.

That's really what the math works out to be because our expectation is that omnichannel sales will continue to grow somewhere in the low double-digit range.

And if you are just looking for total sales guidance like Kevin said, I would just use down 2% to flat for comp across all the quarters.

There is a 60 basis point delta in the first and second quarter due to the closed stores from last year cycling through.

There is very minimal sales growth in the third and fourth quarter from new stores that are just going to be a few new stores opening in the 35K variety in the fall.

And then I would just add in the $160 million in the fourth quarter for the 53rd week.

That's great, thanks.

And any commentary on February?

No.

We try to avoid talking about periods when we are in the middle of them.

I think pretty much what we gave you, Mark, in terms of how we look at the periods is about the extent of what we can say.

Fair enough.

Congrats on the Under Armour rollout.

The floorsets are looking great.

Thank you.

Bob Drbul, Guggenheim.

Hey guys, good morning.

The first question that I have, Kevin, is when is Wes' pontoon launch going to take place here?

And do you have any update for us on how the search is going for the next CFO?

The actual pontoon launch I can't comment on.

I'm sure it's coming sometime this spring.

The process is ongoing, Bob, and there's nothing really to update you on.

I feel pretty good about it.

And Wes and I all along have been aligned that he would stay with this through this transition and then move up once we land on somebody.

But I would still expect it to be sort of early in the spring season sometime.

Got it.

Okay Kevin, with the Under Armour launch can you just talk a little bit more around how you are positioning the health and wellness and your Nike offering and what you are seeing around the entire pad?

Sure.

Active using, last year is a baseline active and wellness group basically double digits last year and it's on trajectory from a planning perspective in 2017 to continue at that kind of rate of growth.

Under Armour we look at as being fundamentally really incremental.

It's such a desired brand.

If you have seen the stores, Bob, I think you'll see that we've expanded the space in the active areas by 25% to 30% depending upon the store.

We think there's such massive opportunity with Under Armour in categories like women's apparel, our children's apparel and footwear that they really impact the overall business.

So we are not really looking at active other active brands being diminished by the introduction of Under Armour.

We are really looking at Under Armour as an incremental opportunity.

And that's why I think we guided to Under Armour could have an impact as much as 100 basis points in the overall Company comp for the year.

Okay.

Then Kevin, just on the women's business, the LC Lauren Conrad Dress Up Shops, are those going to help the women's business start to turn a little bit?

Do you think that that's you are onto something there?

If you are referring to Lauren Conrad and her Dress Up Shops I'm sure she is rolling over right now, Bob.

In all seriousness, Lauren Conrad is probably one of the shining stars of our proprietary brands.

You know we have talked about the fact that while our private brands, SONOMA, Apt.

9, Croft & Barrow, are really starting to see some traction as we get further and further into last year and we see a lot of opportunity going into 2017, the drag on our brand performance and our product performance has really been our exclusive brands.

And the two big exceptions there are Vera Wang, which has continued to perform well, but notably Lauren Conrad, that has performed well consistently through all of this.

So in all seriousness Michelle would tell you that is a business we are looking to grow a lot.

Thanks Bob.

Matthew Boss, JPMorgan.

Thanks.

On the inventory front, Wes, what inning do you see us today on the reduction effort and what categories do you see is the largest opportunity from here?

Well, I'm an Orioles fan so I'm a fan of the three-run homer.

So I think we made a pretty good first step this year.

But I think over the next three years Kevin mentioned we are going to be down on average about 3% with more on units and on the retail dollar side.

So our aspirational goal would be to try to get to at a cost basis of closer to 4% over the course of time.

I am not going to burden the new CFO with that expectation, but I think if you go back and look at some of our statistics we were at the 3.4%, 3.5% number back in 2010 and 2011.

I think that's a realistic number to get to over the next few years, which would require bigger reductions than what I just mentioned but we are signing up for 3% a year for now.

In all honesty, Matt, the inventory initiative I mentioned it in our prepared remarks is probably the most important initiative we had after driving top line positive.

And we just see this as an ongoing process.

And if you think about all the technology initiatives that we have, they are all focused on improving utilization of inventory in our stores because that is our biggest asset.

So whether ship from store or Buy Online, Pick Up In Store, all that technology is trying to use the inventory we already have to drive sales more effectively and efficiently.

And then you know that the biggest initiative we have on product really has to do with speed, and we know that that will have not just short-term but long-term impacts on our turnover.

So we just think we are really early here.

Last year was the beginning, but this is a permanent, long-term strategy for us to improve speed to market on our store scene and technology to enable better utilization of our inventory across the whole portfolio.

And we are seeing the benefit from localization in a big way because we are able to place inventory in our stores in the right way.

Yes, I mean oversimplified last year was taking a really blunt instrument and just cutting receipts we had so much room.

I think the next few years are really about flow and using the speed initiative and localization to our advantage.

Got it.

And then just on the mix strategy for national brands versus private label, with the Under Armour launch and Nike expansion are you guys fielding calls from any other new brands?

Anything to look forward to?

I wouldn't want to get into the specifics around focuses on brands.

But we've made it clear which areas of our business we think there is opportunity in and we do believe that given our commitment to our footprint, our physical footprint across the country that we become a more appealing choice for brands and I think as others shrink that only enhances the opportunity we have to take advantage of that.

So it's definitely a focus, there's no question about it, but I wouldn't want to get into the specifics, Matt.

Great.

Best of luck.

Bernard Sosnick, Madison Global Partners.

Good morning.

After the 2015 holiday season you pointed to weaknesses in marketing that were going to be corrected in 2016.

It doesn't seem to have helped very much.

I'm wondering what you would say in terms of your assessment of the marketing effort, personalization which was supposed to be a big step forward as well as the change in advertising dollars, newspapers, etc.?

Well, I think the point to be totally honest with you, Bernie, to point to marketing as either our issue or our opportunity would be not very thoughtful.

We have multiple things going on at the same time which is generally a weak apparel environment overall.

We have lots of challenges that we've talked about at length in our product assortments, some in certain categories like accessories, some in certain parts of our branding like the exclusive brands.

So these things all impact traffic and all impact sales.

You are right that we've consistently said that we think loyalty as an instrument and personalization as a vehicle are our long-term strategies to drive more efficiency in marketing.

And I can't point to the fourth quarter of last year as a massive improvement there because we spent more on marketing and we actually did fewer sales.

So you are 100% right on that, but we do see in the underlying metrics that personalization is the path we should be on and that loyalty is the key avenue for us to use personalization in.

I don't think there is any question about that.

Nothing is changing about that at all.

I don't know, Wes, if you want to add anything.

I think that the one thing that was different than our expectations was we expected a certain lift-out of loyalty in the second year and we just didn't get that.

As we dug more into it and talk to some experts from the outside that was probably a bad assumption on our part to assume a similar lift in year two as year one.

As you start to anniversary the program you have to make it more enticing to the customer that's been with you for a year.

Some of the customers actually were with us for two years as they were part of our pilot group.

So I think Michelle and the rest of the marketing team have done a good job of experimenting with more targeted promotions.

We did a lot of that in the fourth quarter.

I think what Kevin said is really true going forward is marketing has to be more personalized so there can't just be a blanket offer.

It just becomes a lot of noise.

You have to know your customer a little bit better, know what they are buying and target the offer to particular categories that they are interested or target.

If they are incented to get off the couch and go to the store if a 20% off versus a 15% off we have to take that into account.

Or if they only buy kids clothes versus men's clothes we have got to take that into account, as well.

I have an add-on question, if I may.

In this era of pricing transparency, have you looked at your pricing methodology high, low?

I know there is a movement toward differentiated product which is not vulnerable to price transparency and pricing action.

But overall Kohl's seems to have lost something in terms of its value message.

Otherwise traffic wouldn't be down as much, and despite the Greatness Agenda Kohl's hasn't shown that in this era of stress for retailers an ability to outperform other retailers.

So is it perhaps an issue of pricing methodology?

I think there's no question, Bernie, I think you had a question in there somewhere, but I think which you are asking is what are we doing to make our value more clear to customers.

And so without taking a lot of time on the call, and I am sure Wes would be happy to take you through this separately in more detail, simplification of our value is a key priority in marketing and we see doing that by tailoring our messages through our loyalty platforms which are fundamentally Kohl's Cash, Yes2You rewards and Kohl's charge on a personal basis to consumers so it's more understandable and then on a very personal basis providing offers to them that are unique to them in real time so that they activate and engage more often.

Because that's fundamentally our problem is that people aren't responding to the more traditional media that we have at the same rate they used to.

So summarizing it, that's kind of the plan in the strategy and the results we are seeing gives us some confidence as we scale this up that there's real value there.

But we have to show it.

I would definitely acknowledge that the only way you show that is to improve the traffic levels in the store from last year's level to a better level this year, and then I can tell you it's working.

I think some of the omnichannel initiatives we're working on for both desktop and the phone is to give the customer what the out-the-door price is, and that takes into account all the types of discounts that we have available.

I think the pricing strategy will remain focused on our credit customer and the program and extra value that provides, Yes2You loyalty and Kohl's Cash.

And those are things that all of our research has shown people like that.

And they have a high use of that and a high redemption rate.

But we just have to simplify so they understand that they can get better value when applying those discounts than they can whether it's searching online or at another store.

Thanks, Bernie.

Paul Lejuez, Citigroup.

Hey, thanks, it's Tracy filling in for Paul.

I was hoping you guys could talk a little more about your speed initiative and what currently is the difference in the leadtimes and which businesses are currently on the initiatives and which do you expect to move to the initiative this year?

I'm just wondering also some of these businesses just lend themselves more to these type of initiatives than others.

Thanks.

Well, the speed initiative really began to roll out early last year.

Wes will correct me if I am wrong on any of this, but I think we focused first and foremost logically on areas where speed is a more important factor which was a category, for instance in women's like juniors where brands like SO, our young private brand for juniors, we could have a meaningful impact by delivering more often and more quickly.

Those results, which were phenomenal but, of course, in a relatively small part of the overall store, then began to roll out into other parts of our business.

Women's apparel is definitely a focus in this effort.

And so speed is starting to take hold in other key proprietary brands in women's apparel like SONOMA and like Apt 9 and now like Croft & Barrow were the next avenue.

And then finally, of course, we also know speed needed to impact everything, so it also has begun to roll out into home as well.

So I think we gave you some statistics which are very generalized but basically said, hey, of our proprietary brand portfolio at the end of the year about 25% of our proprietary brands were being impacted by the speed initiative.

And as we go into 2017 we see that moving up to 40%-plus in terms of its impact.

Kevin is exactly right.

Mostly in the juniors area.

SO was the first one.

It also includes MUDD and Candie's and then it would also include more the contemporary brand, so SONOMA, Simply Vera Vera Wang, Lauren Conrad and then we added Apt.

9 in the back half of last year.

So more to come on the remaining exclusive brands like Jennifer Lopez and then as Kevin mentioned getting into other apparel, non-apparel areas on the home side.

The other thing I would say, Tracy, on speed to reinforce something we talked about on the call, but the experience we've had on the speed initiative and product we believe that is actually the blueprint for working with more speed and working with more agility as a result across the whole Company.

So we are going to use that blueprint in trying to reimagine everything from our organizational structures in various areas including our stores to the way we approach our business overall, and we think that what that will do is allow us to also begin to bring down expenses more effectively and more permanently.

So speed and agility overall is probably the number one strategy we have at Kohl's.

And if you are looking for I think you mentioned leadtime, the 40% this year, you are talking 40% of it would be between three and four months.

Compared to --

From concept to -- we have a fancy word for it, but concept to customer.

Versus the rest of the assortment that's not on the initiative is --

Probably on average closer to six months.

Erinn Murphy, Piper Jaffray.

Great, thanks for taking my question.

A couple of questions, first on the gross margin guidance calling for up 10 to 15 basis points.

So it's just a slight acceleration from 2016.

How are you thinking about the underlying merchandise margin within that assumption versus fulfillment cost?

And then in terms of the shape of the year for gross margin your biggest opportunity is in Q1.

Should we be thinking about that is capturing most of your gross margin improvement or should we see maybe more of a measured improvement?

Yes, that's what I tried to say on the call.

So I would say the majority of the improvement would be in the first quarter and the remainder of the year would be flat to up slightly.

And then from a merchandise margin perspective the rule of thumb that we've had and given is shipping cost plus mix of business and digital is about a 30 basis point headwind to overall gross margin.

So the way it will feel to the merchants they will have to deliver a 40 to 45 basis point improvement on what they can control.

Okay, that's helpful.

And then just on e-commerce and the split shipments there, are the declines in split shipments being offset by or fully offset by increased fulfillment cost?

Or how should we be thinking about the magnitude of these two factors and the net impact going forward?

Well, our shipping and fulfillment expenses as a percent of digital sales are improving.

That's what you want to happen.

I expect that will continue to happen, especially on the fulfillment side, as we have the [50 SE] coming up that's going to be much more productive.

The shipping cost are really like you mentioned a function of reducing the amount of split shipment.

So we continue to tweak the technology that we have available.

It's a pretty complicated algorithm, but it basically prioritizes above all keeping the shipment together because shipping across a certain number of zones costs a little bit of incremental money but if my average cost to ship a package is $5 or $6 if I have to ship to because I split it that's much more of a cost than it is to pay an extra couple of quarters for crossing zones.

I think, Wes, in the fourth quarter we finally got some improvement in packages per order.

Which is that is a signal I think to us that the investments we have made in the technology side to help do the logic in terms of how orders get fulfilled are starting to pay off.

And that's why we pointed to that, because I think the fourth quarter was actually the first time that we saw an improvement there moving in the right direction.

And then just last question, I think it's following up on Bob Drbul's question earlier on the athletic space, did you say with the Nike growth rate was in Q4?

I think you talked about it in quarters past.

I think for the year was mid-teens.

I don't remember what was in the fourth quarter.

I think pretty close to it.

It was pretty consistent all year.

Okay, thanks.

I will let someone else jump in.

Paul Trussell, Deutsche Bank.

Hi, this is Tiffany on for Paul.

Thanks for taking our questions.

Would you dig into your traffic-driving initiatives a little more and in particular whether you expect Under Armour to bring in new shoppers and additional trips or be more of an increase to UPT?

And would you also please discuss how you expect Under Armour to impact your broader assortment and if we should expect any changes outside the brand?

On Under Armour's impact overall I actually I think the way we are looking at that is it should drive positive momentum both on traffic because, frankly, they do have a younger customer and I think it's a customer who has been going elsewhere to get that brand and now can come to Kohl's.

But it will positively impact UPT because overall national brand transaction value and everything retail are, in fact, higher.

So as I said at the beginning, it's not all necessarily a one-for-one positive impact on sales but for the most part we are looking at Under Armour as an incremental business.

It is not cannibalizing some other business.

So we think it will be a plus overall and it will be definitely a plus in the active space for sure.

Moving on from Under Armour, I think we've just got to keep it more generalized that national brands we think are really important to our future.

And so we are going to continue to focus on being the place with a physical footprint large enough to give distribution avenues and opportunities to brands that they either don't have today or they have but they are shrinking.

And so we just think that that's a place for us to win big.

Thanks.

Dan Binder, Jefferies.

Hi, this is Dolph on for Dan.

You mentioned earlier that the store sales transfer rate on (inaudible) this year was a little below your expectations.

Did you happen to measure the transfer rate on the few stores you closed last year and does that help set your expectations?

Yes, we had very few data points.

So we expected to get about 38% overall on we got 34%.

So it was a little bit less than what we thought.

We will to continue to monitor it.

We would expect it maybe that the holiday period was perhaps the high point.

But we don't know because we haven't closed a lot of stores up until last year in our history.

We give you these numbers, they are very generalized numbers because by default they are averages.

So the percentage of sales that retain from a closed store in a particular trade area can range greatly.

They could be as low as 20% depending upon the market to it as high as 50% depending upon the market.

So Wes is right, on average we estimated 38% retention and we got 34%.

We didn't know what would happen on omnichannel sales but we suspected we might lose a little momentum and we did.

And those two facts really help inform how we look going forward at stores.

Thank you.

My follow-up, just on the wage pressure that you might see this year, what is built into your expectations?

It is built into the overall guidance but it is a big number.

It is $50 million or $60 million we will have to overcome.

Great, thank you.

That will conclude our Q&A session.

Gentlemen, any closing comments?

No, thanks very much.

Thank you.

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