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Kohl First Quarter Earnings Call
Author: Maclintosh Kuhlengisa
Last Update: 12:20 PM EDT May 20 2008


The department store reported income of $153 million or 49 cents a share, down 26.8% from 2007, as sales marginally increased to $3.62 billion. Results reflect strong management of inventory levels and expenses in a difficult economic environment. The firm remains conservative in its sales expectations and will manage the business accordingly. It will continue to invest for the long-term as it adds new stores and remodel existing stores and in people and technology for market share gain.

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This summary is based on the first quarter fiscal 2008 earnings call conducted by Kohlís Corp. (KSS) on May 15, 2008.

- Chief Financial Officer: Wesley McDonald
- President: Kevin Mansell
- Chairman and Chief Executive Officer: Larry Montgomery

Key Investors Issues

- Sales marginally increased to $3.62 billion from $3.57 billion in the prior year.
- Net income was $153 million or 49 cents a share, down 26.8%
- The firm successfully opened 28 new stores.

First Quarter Highlights

Sales were $3.62 billion, up marginally from $3.57 billion last year, as comparable sales for the quarter decreased 6.7%.

- Comparable sales decreased 6.7% with all lines of business reporting a decrease in comparable sales.
- Accessories led the company with strength in fashion jewelry, watches and beauty which had strong positive comp store increases.
- Menís, womenís and childrenís apparel all performed relatively in line with the overall company sales with slightly more strength in menís.

Average transaction value decreased 2.1% reflecting a 1.5% decrease in average unit retail and a 0.6% decrease in units per transaction, while transactions per store decreased 4.6%.

- The gross margin rate was 36.8%, down six basis points from last year but better than the 20 to 30 basis point decrease expected due to the result strong inventory management as well as higher penetration of private and exclusive brand..
- SG&A increased 7.5%, while the remainder of the expenses did not leverage for the quarter due to lower than planned sales, continued desire to maintain a positive customer in-store experience and ongoing efforts to drive additional traffic.
- Depreciation expense was $130 million versus $105 million last year, an increase of 24%, due to an increase in new stores.

Pre-opening expenses were approximately $11 million this year versus $9 million last year, an increase of about 27%, consistent with the number of stores that were opened, 28 compared to 17 in 2007.

- Operating income declined from $346 million last year to $271 million this year as net interest expense increased to $27 million compared to $10 million in the prior year.
- The increase is primarily due to the $1 billion in debt that was issued in September of last year.
- Net income was $153 million or 49 cents a share, down 26.8% compared to $209 million or 64 cents a share in the prior year as a result of declining comparable store sales and higher operating expenses.
- The firm had $429 million in short and long-term investments at quarter end compared to $253 million last year.

During the quarter, the firm reclassified $425 million of auction rate securities from short-term investments to long-term investments.

- Capital expenditures were $273 million, down 9% from last year and the firm generated cash from operations of $355 million versus $83 million in 2007.
- AP as a percent of inventory was 33.6% versus 37.9% last year, with the decline due to management of the seasonal receipts during the quarter to sales patterns through the cycle-time reduction initiatives.
- Kohl repurchased 3.4 million shares of the stock for $150 million at an average price of $43.99 during the quarter.

Merchandise Initiatives:

- Jumping Beans is a new opening price point childrenís private brand targeted to provide the value mom is looking for in her childrenís apparel and has out-performed substantially.
- Gold Toe is a national brand in hosiery which holds the largest market share in department stores today.
- It is launched in menís, womenís and childrenís hosiery and that launch helped those areas out-perform the company.

The Elle brand was expanded to the remaining 500 stores and was launched in the Grand Opening Event in mid-March and was part of the reason Missy Updated business achieved a positive, double-digit comp

- The 2007 launches, Simply Vera Vera Wang, Elle and Food Network continue to perform extremely well with both with existing and new customers.
- The Chaps brand, in the face of the launch of a competitive brand, achieved a high double-digit comp growth as well.
- The exclusive and private brands were up over 400 basis points in penetration to 42% of sales primarily due to exclusive brands.

Inventory and Marketing:

- Inventories have been managed down in all areas but especially in seasonal and fashion categories.
- In addition to carrying a lower overall level of inventory, the firm continues to focus on flowing receipts in season, as needed through the cycle-time initiatives.
- Ongoing markdown and size optimization initiatives that the firm has focused on extensively in the recent past continue to develop and positively impact results.

As a result of the difficult retail environment, the firm is more focused than ever on making customersí life easy by continuing to differentiate offerings with lifestyle brands that make shopping at Kohlís unique.

- Direct mail vehicles, weekend events, web based advertising and broadcasts continue to be particularly important in producing more value.
- From an in-store perspective, focus continues to be around these new lifestyle brands and delivering a presentation in-store particularly in the area of strike points and visual that improves the customer perception of the Kohlís brand.
Ė The firm will also open a new distribution center in Ottawa, Illinois to support store growth as well as reduce future transportation and operating expenses.
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Sources: Data collected by and from company press releases, filings and corporate websites.
Market data: BATS Exchange. Inc.

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