Kohl's Corporation (KSS)
Q2 2010 Earnings Call
August 12, 2010, 8:30 AM ET
Wes McDonald - CFO
Kevin Mansell - President, CEO
Deborah Weinswig - Citigroup
Chris Cuomo - Morgan Stanley
Jeff Klinefelter - Piper Jaffray
Bob Drbul - Barclays Capital
Adrianne Shapira - Godman Sachs
Lorraine Hutchinson - Bank of America
Charles Grom - JPMorgan
Dan Binder - Jefferies
Richard Jaffe - Stifel
Patrick McKeever - MKM Partners
Michael Exstein - Credit Suisse
Ken Stumphauzer - Sterne Agee
Erika Maschmeyer - Robert W. Baird
David Glick - Buckingham Research
Good morning. My name is [Christy] and I will be your conference operator today. At this time, I would like to welcome everyone to Kohl's second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (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 terminology such as believe, 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 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 So if you are listening after August 12 it is possible that the information discussed is no longer current.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 call over to Wes McDonald, Chief Financial Officer. Sir, you may begin.
Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I'll go over our financial performance and then Kevin will walk us through our four major focuses as a company: merchandizing, marketing, inventory management and store experience. We'll talk about our earnings guidance and then finally finish up with some more details about our new credit card agreement.
Total sales for the second quarter were approximately $4.1 billion this year, up 7.7% from last year. Comparable store sales for the quarter increased 4.6%, driven by an 8.3% increase in transactions per store. Units per transaction decreased 2% and average unit retail decreased 1.7%.
Year-to-date, sales increased 9.3% to approximately $8.1 billion and comparable stores sales increased 5.9% on an 8.5% increase in transactions per store. Partially offsetting the increase in traffic was a 1.7 decrease in average unit retail and a 0.9% 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 48.6% for the quarter and 48.2% for the year, an increase of approximately 160 basis points over the prior year quarter and approximately 210 basis points over the first half of 2009.
Our gross margin rate for the quarter was 40.3%, up 31 basis points from last year and consistent with our expectations of a 20 to 40-basis point improvement. Year-to-date, our gross margin rate increased approximately 38 basis points to 39.2%. We would expect gross margin to increase 20 to 40 basis points in both the third and fourth quarters of this year.
SG&A increased 8.4% for the quarter, better than our expectations of a 10% to 11% increase. Approximately $10 million of the favorability related to a shift in the timing of a change in terms notification to our credit card customers and training related to the opening of our second e-commerce fulfillment center from second quarter to third quarter.
As expected, total SG&A did not leverage during the quarter mainly due to investments in both technology and infrastructure related to our e-commerce business, which caused both IT and distribution to deleverage.
Store payroll and advertising leveraged for the quarter. Credit expenses also did not leverage primarily due to lower late fee revenue. We would expect SG&A expenses to increase 10% to 11% in the third quarter due to costs associated with a delay in implementation of a change in terms related to our credit card portfolio, increased investment in advertising based upon learnings in the spring season and continued investments in our e-commerce business.
We would expect SG&A expenses in the fourth quarter to return to a more normalized run rate of an increase of 3% to 4% upon completion of the projects related to our e-commerce and credit card businesses.
Depreciation expense increased approximately 6.5% in both the quarter and year-to-date period primarily due to new stores and remodels. Depreciation is expected to be approximately $165 million in both the third and fourth quarters.
Preopening expenses were $2 million for the quarter, $9 million lower than the prior year quarter. The 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 $10 million for the third quarter and $2 million in the fourth quarter.
Operating income increased 12% or $50 million for the quarter to $449 million. Operating income as a percent of sales was 10.9%, a 44 basis point improvement over the second quarter of 2009. Year-to-date, operating income increased 23% or $149 million to $800 million.
Net interest expense was $31 million for the quarter and $62 million year-to-date, flat to both prior year periods. Interest expense is expected to be approximately $30 million in both the third and fourth quarters.
Our income tax rate was 37.9% in both current year periods compared to 37.6% in both prior year periods. We expect our tax rate to be approximately 37.9% for both the third and fourth quarters of the year.
Net income increased 13% to $260 million for the quarter and 25% to $459 million year-to-date. Diluted earnings per share increased 12% to $0.84 for the quarter and 23% to a $1.48 year-to-date.