Kohl's (KSS)

Q4 2010 Earnings Call

February 24, 2011 8:30 am ET

Executives

Kevin Mansell - Chairman, Chief Executive Officer, President and Member of Executive Committee

Wesley McDonald - Chief Financial Officer, Principal Accounting Officer and Senior Executive Vice President

Analysts

Bernard Sosnick - Gilford Securities Inc.

Michelle Clark - Morgan Stanley

Richard Jaffe - Stifel, Nicolaus & Co., Inc.

Lizabeth Dunn - FBR Capital Markets & Co.

Robert Drbul - Barclays Capital

Daniel Binder - Jefferies & Company, Inc.

Adrianne Shapira - Goldman Sachs Group Inc.

Rob Wilson - Tiburon Research

Wayne Hood - BMO Capital Markets U.S.

Jeffrey Klinefelter - Piper Jaffray Companies

Deborah Weinswig - Citigroup Inc

Erika Maschmeyer - Robert W. Baird & Co. Incorporated

Charles Grom - JP Morgan Chase & Co

Lorraine Hutchinson - BofA Merrill Lynch

Presentation

Operator

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Good morning. My name is Christie, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl's Fourth Quarter and Year End 2010 Earnings Release Conference Call. [Operator Instructions] 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 terminologies such as believes, expects, may, plans or similar expressions to identify forward-looking statements. Such statements are subject to 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 call will be available for 30 days, but this recording will not be updated. So if you are listening after February 24, it is possible that the information discussed is no longer current.

Thank you. I would now like to turn the conference over to Mr. Wes McDonald, Senior Executive Vice President and Chief Financial Officer.

Wesley McDonald

Thank you. With me today is Kevin Mansell, our Chairman, CEO and President of Kohl's Corp. I'll start off with the financial review of our 2010 performance, talk about some balance sheet metrics, and I'll turn it over to Kevin to walk through some marketing merchandising initiatives. And then we'll close with our guidance and take some questions.

On the sales line, total sales for the fourth quarter were $6 billion this year, an increase of 6.3% over last year. Comparable store sales for the quarter increased 4.3%, driven by a 5.4% increase in transactions per store. Units per transaction decreased 1.1%, and average unit retail was flat.

For the year, sales increased 7.1% to $18.4 billion, and comparable store sales increased 4.4%. The number of transactions per store increased 7.4%. Average transaction value decreased 3% on equal declines in both average unit retail and 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 approximately 50% for both the quarter and the year, an increase of over 200 basis points over both prior-year periods.

Moving on to gross margin. Our gross margin rate for the quarter increased 38 basis points to 36.8%, at the high-end of the 20- to 40-basis point improvement that we expected. This is our 11th consecutive quarter of year-over-year margin improvement and our third consecutive year of fourth quarter margin improvement.

For the year, our gross margin rate increased 41 basis points to 38.2%. We would expect our gross margin rate to increase 10 to 30 basis points for the first quarter, and for the year to be flat to up 20 basis points over last year.

Moving on to SG&A. SG&A increased 4% for the quarter, consistent with our expectations of a 3% to 4% increase. For the year, SG&A increased 6%.

Store payroll, advertising and corporate expenses leveraged for both the fourth quarter and for the year. Distribution center costs, as a percentage of sales, were basically flat for both the quarter and the year. Profitability in our Credit business declined, as lower write-offs were more than offset by lower late fee revenues.

IT caused deleverage in both periods, more notably for a year due to investments in technology and infrastructure to support our growing E-Commerce business.

We would expect SG&A expenses to increase 5% to 6.5% for the first quarter. Included in this increase are additional remodel expenses associated with increase in our number of remodels from 85 stores to 100 stores. We expect SG&A to increase 3% to 4.5% for the full year. Pre-opening expenses our now included in our SG&A expenses, but for your modeling purposes, we expect them to be $28 million for the year and $4.5 million in the first quarter. The remaining quarters are $3 million in the second quarter, $16 million in the third quarter and $4.5 million in the fourth quarter.

Depreciation expense increased approximately 4% for the quarter and 11% for the year, primarily due to new stores and remodels. The increase for the year also includes $25 million of lease accounting-related adjustments recorded in the third quarter. Depreciation is expected to be $690 million in fiscal 2011 and $164 million in the first quarter. For your modeling purposes, depreciation in the second quarter will be $171 million, in the third quarter, $174 million, and in the fourth quarter, $181 million.

Operating income increased approximately 14% for the quarter to $820 million. Operating income as a percent of sales was 13.6%, an 87-basis point improvement over the fourth quarter of 2009. For the year, operating income increased 12%, or $202 million to $1.9 billion, and was 10.4% of sales, a 44-basis point increase over the prior year.

Net interest expense was $32 million for the quarter and $132 million for the year, compared to $31 million for the prior-year quarter at $124 million for 2009.

Interest expense is expected to be $115 million for the year and $30 million in the first quarter. For the remaining quarters, we expect interest expense to be $28 million in the second quarter, $27 million in the third quarter, and $30 million in the fourth quarter.

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