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Kohl's Corporation (KSS)

Q3 2010 Earnings Call

November 10, 2010 8:30 am ET


Wes McDonald - CFO

Kevin Mansell - Chairman, CEO and President


Charles Grom - JPMorgan

Chris Cuomo - Morgan Stanley

Mark Miller - William Blair

Bob Drbul - Barclays

Adrianne Shapira - Goldman Sachs

Debora Weinswig - Citi

Daniel Binder - Jefferies

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At this time, I'd like to welcome everyone to Kohl's third quarter 2010 earnings release conference call. (Operator Instructions)

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Previous Statements by KSS
» Kohl's Corporation Q2 2010 Earnings Call Transcript
» Kohl's Q1 2010 Earnings Call Transcript
» Kohl's Corp. Q4 2009 Earnings Call Transcript

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 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 From 10-K and it 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 call will be available for 30 days but this recording will not be updated. So if you are listening after August 12 it is possible that the information discussed is no longer current.

I would now like to turn the conference over to Mr. Wes McDonald. Sir you may begin your conference.

Wes McDonald

Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I'll start off reviewing some of the financial numbers then Kevin will go through some of our merchandizing and marketing initiatives. I'll follow-up with some store operations data as well as earnings guidance and then Kevin will wrap it up.

Total sales for the third quarter were $4.2 billion this year, an increase of 4.1% over last year. Comparable store sales for the quarter increased 1.8%, driven by an 8.3% increase in transactions per store. Units per transaction decreased 3.4% and average unit retail decreased 3.1%, while average transaction value decrease of 6.5%.

Year-to-date, sales increased 7.4% to $12.4 billion and comparable stores sales increased 4.4%, again, on an 8.3% increase in transactions per store. Partially offsetting the increase in transactions was a 3.9% decrease in average transaction value, including a 2.2% decrease in average in retail and 1.7% decrease in units per transaction.

Kevin will provide more color on our sales by region and line of business in a few minutes.

Our credit share was 52.5% for the quarter and 49.7% for the year, an increase of almost 300 basis points over the prior year quarter and approximately 235 basis points for the over first nine months of 2009.

Our gross margin rate for the quarter increased 48 basis points to 38.5%, 8 basis points higher than the 20 to 40 basis point improvement that we expected. Year-to-date, our gross margin rate increased 42 basis points to 38.9%. We would expect fourth quarter gross margin to increase 20 to 40 basis points over last year.

Moving on to SG&A. SG&A $1.1 billion this year versus $1 billion last year, an increase of 8.4% for the quarter. Better than our expectations of a 10% to 11% increase. As we've discussed in prior periods, we've made significant investments in our e-commerce business during the third quarter. As expected these investments in technology and infrastructure had a negative impact on our ability to leverage in both IT and distribution expenses. Though they didn't leverage for the quarter both our advertising and credit businesses for the expenses notably lower than our expectations. The credit improvement is primarily related to improvement in charge offs.

Store payroll and corporate expenses were able to leverage for the quarter. We would expect SG&A expenses in the fourth quarter increase 3% to 4%. Depreciation of $165 million versus $150 million last year, an increase of approximately 10% for the quarter and 8% year-to-date, primarily due to new stores and remodels. Depreciation is expected to be approximately $165 million in the fourth quarter.

Preopening expenses were $9 million for the quarter, $14 million lower than the prior year quarter. This decrease reflects a decrease in a number of fall store openings, 21 this year versus 37 last year. Also, as a reminder, most of the 2009 fall openings were ground lease stores which had higher rental expenses during the preopening period. Preopening expenses are expected to be approximately $2 million in the fourth quarter.

Operating income of $335 decreased approximately 1% for the quarter versus last year. Operating income as a percent of sales was 7.9%, a 42 basis point decline over the third quarter of 2009. Year-to-date, operating income increased 15% or $145 million to $1.1 billion. Net interest expense was $31 million for the quarter and $93 million year-to-date, consistent with both prior year periods. Interest expense is expected to be $31 million in the fourth quarter.

Our income tax rate was 36.3% for the quarter compared to 37.5% in the prior year quarter. We favorable resolved some state tax audits during the quarter, which lowered the effective tax rate. We expect our tax rate to be approximately 37.7% for the fourth quarter and the blended rate of 37.6 for the year.

Net income for the quarter was $191 million, $1 million higher than the third quarter of 2009. Year-to-date net income increased 16% to $652 million year-to-date. Our diluted earnings per share were $0.63 for both this year and last year for the third quarter and year-to-date diluted EPS increased approximately 16% to a $2.12.

Moving on to some balance sheet metrics, first of all square footage for remodels, we currently operate 1,089 stores compared to 1,059 at this time last year. Gross square footage was 96 million at quarter end 2010 compared to 93 million at quarter end 2009. Selling square footage increased from 78 million at the quarter end 2009 to 80 million at quarter end 2010. We ended the quarter with $2.4 billion of cash and cash equivalents, an increase of $938 million over the prior year quarter end. Substantially all the cash and the cash equivalents are in money market funds and commercial paper.

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