Kohl's' CEO Discusses Q4 2011 Results - Earnings Call Transcript

Kohl's (KSS)

Q4 2011 Earnings Call

February 23, 2012 8:30 am ET

Executives

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

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

Analysts

Erika K. Maschmeyer - Robert W. Baird & Co. Incorporated, Research Division

Adrianne Shapira - Goldman Sachs Group Inc., Research Division

Jessica Lebo

Deborah L. Weinswig - Citigroup Inc, Research Division

Richard Ellis Jaffe - Stifel, Nicolaus & Co., Inc., Research Division

Jeffrey P. Klinefelter - Piper Jaffray Companies, Research Division

Charles X. Grom - Deutsche Bank AG, Research Division

Wayne L. Hood - BMO Capital Markets U.S.

Lizabeth Dunn - Macquarie Research

Dana Lauren Telsey - Telsey Advisory Group LLC

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Michael Exstein - Crédit Suisse AG, Research Division

Patrick McKeever - MKM Partners LLC, Research Division

Presentation

Operator

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 Fiscal 2011 Earnings 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 believe, expect, may, will, should, anticipate, 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/A, and as maybe 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 So if you are listening after February 23, it is possible that the information discussed is no longer current.

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

Wesley S. McDonald

Thank you. With me today is Kevin Mansell, our Chairman, CEO and President. I'll walk through the financial statements for the fourth quarter and the year, and then I'll turn it over to Kevin to talk about some merchandising and marketing initiatives. We'll give first quarter and 2012 guidance, and then Kevin will wrap it up with a summary of our outlook for the year.

For the quarter, total sales decreased 0.3% to $6 billion and comparable store sales decreased 2.1%. Average transaction value increased 0.4%, reflecting a 7.4% increase in average unit retail and a 7% decline in units per transaction. Number of transactions per store decreased 2.5%.

For the year, total sales increased 2.2% to $18.8 billion and comparable store sales increased 0.5%. Average unit retail increased 6.6%, and units per transaction decreased 4.9%, resulting in a 1.7% increase in average transaction value. Number of transactions per store decreased 1.2%. Kevin will provide more color on our sales in a few minutes. Our credit share was 53% for the quarter and 54% for the year, an increase of approximately 320 basis points over the fourth quarter of 2010 and 470 basis points over fiscal 2010.

Moving on to gross margin. For the quarter, gross margin decreased 64 basis points to 36.2% of sales for the quarter. The decrease is primarily a result of sales being below our expectations. For the year, our gross margin rate decreased 6 basis points to 38.2% of sales.

SG&A increased 0.3% for the quarter, well below our expectations of a 5% to 6% increase but deleveraged 12 basis points. Store payroll was able to leverage for the quarter. Our credit card operations, again, provided significant leverage. This business reduced SG&A by $347 million for the year versus last year's $180 million on growth and finance charge and late fee revenues, as well as a reduction in bad debt expense. Advertising did not leverage during the quarter nor the year as our increased spending during the holiday season did not produce expected sales.

Moving on to depreciation expense. It was $194 million in the fourth quarter this year, up $5 million from last year. Operating income was $805 million for the quarter, a 6.4% decrease from the fourth quarter of last year. For the year, operating income increased 10 basis points to 11.5% of sales.

Net interest expense was $76 million this quarter, up $5 million to the prior year quarter. Our fourth quarter income tax rate was 37.5% for both this year and last. Diluted earnings per share increased 9% to $1.81 over the fourth quarter of last year. Fourth quarter net income was $455 million, 8% lower than 2010. For the year, diluted earnings per share increased 17% to $4.30 per share, and net income increased 4% to $1.2 billion.

Moving on to the balance sheet. Some metrics for your models. From a square-footage basis, we ended the quarter with 1,127 stores, 38 more than at year end. Gross square footage at year end was 98 million square feet, 3 million higher than year-end 2010. Selling square footage increased 2 million to 82 million.

We ended the year with $1.2 billion of cash and cash equivalents, a decrease of $1.1 billion from the prior year end. The reduction in cash is primarily due to $2.3 billion of share repurchases in 2011. The cash equivalents are primarily in money markets and commercial paper.

On the inventory line, inventory per store is 2% higher than last year in dollars but 7% lower in units. Accounts payable as a percent of inventory was 38.5% versus 37.5% last year. The increase is primarily due to expiration of vendor-financing initiatives.

Moving on to capital expenditures. Capital expenditures were $927 million for fiscal 2011, $126 million higher than the prior year due to new stores, increased remodels, the opening of our third e-commerce fulfillment center and exercise of a purchase option in our Texas call center lease. Our capital spending was less than our guidance of $1 billion, and some of that spending will occur in 2012.

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