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Market Update : 
Kohls Q1 Earnings Call transcript
Author: Staff
Last Update: 3:39 AM ET May 22 2009

Kohls Corp. (KSS)
Q1 2009 Earnings Call Transcript
May 14, 2009 8:30 a.m. ET


Wesley S. McDonald - Chief Financial Officer
Kevin Mansell President and Chief Executive Officer
R. Lawrence Montgomery - Chairman of the Board


Jeffrey Klinefelter - Piper Jaffray
Robert Drbul Barclays Capital
Lorraine Hutchison Bank of America/Merrill Lynch
Adrianne Shapira Goldman Sachs
Michelle Clark - Morgan Stanley
Charles Grom JP Morgan
Lizabeth Dunn Thomas Weisel Partners
Deborah Weinswig Citigroup
Mark Miller - William Blair & Company



Good morning. My name is Lowry (ph) and I will be your conference operator. At this time I would like to welcome everyone to the Kohl''s Corporation first quarter 2009 earnings release conference call. (Operator Instructions) All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. If youd like to ask a question during this time simply press * then the number 1 on your telephone keypad. If you have already done so press the pound sign now, then press *1 again to ensure your question is registered. If youd like to withdraw your question then press the pound key.

Statements made on this call including projected financial results are forward-looking statements that are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include those that are described in the Item 1(a) in Kohls annual report on Form 10-K and as may be supplemented from time to time in Kohls 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recording will not be updated so if you are listening after June 14, it is possible that the information discussed is no longer current. Thank you. I would now like to turn the call over to Wes McDonald, Chief Financial Officer. Please go ahead sir.

Wesley S. McDonald Chief Financial Officer

Thank you. With me today are Larry Montgomery, Chairman, and Kevin Mansell, President and CEO. I will start off by reviewing our financial performance. Kevin will talk about our merchandising and marketing plans. Larry will discuss our store experience and expansion plans and Kevin will close and give guidance for second quarter and the year. Total sales for the first quarter were approximately $3.6 billion this year and last year, an increase of 0.4%. Comp sales for the quarter decreased 4.2%, driven by a 2.6% decrease in transactions per store. Average unit retail increased 5.8% but was offset by a 7.4% decrease in units per transaction resulting in a 1.6% decrease in average transaction value. The Southwest region generated the strongest comp sales for the quarter and from a line of business perspective, footwear led the company for the quarter. Our credit share was 45% for the quarter, an increase of approximately 160 basis points over the prior-year quarter.

Moving on to gross margin, our gross margin rate for the quarter was 37.6%, up almost 80 basis points from last year. The increase reflects continued inventory management, lower clearance levels, and higher penetration of exclusive brands. We would expect gross margin to increase 20 to 30 basis points over last year in the second quarter. SG&A for the quarter $961.0 million, versus $923.0 million last year, an increase of 4.1%, reflecting our ongoing efforts to control costs in the current economic environment. As expected, SG&A increased more than sales but less than new store growth of 6.8%. Credit expenses leveraged for the quarter. As you know, we have a revenue sharing agreement with Chase relative to our Kohl''s credit card accounts. Even though we continue to see an increase in the number of accounts which carry balances and ultimately charge off, these increases are more than offset by increases in finance charges and late fees, so this business continues to produce positive year-over-year results. Our advertising and distribution centers and IT organization expenses also leveraged for the quarter.

We would expect SG&A expenses to increase 3% to 4% in the second quarter, less than our store growth of 6.8%. Depreciation expense for the quarter was $141.0 million versus $130.0 million last year, an increase of approximately 8.5%. The increase is primarily due to new stores. For second quarter 2009, depreciation is expected to be $147.0 million. Pre-opening expenses were $15.0 million for the quarter, $4.0 million higher than the prior-year quarter. We opened 19 stores in the first quarter of 2009 compared to 28 stores in 2008. Even though we opened fewer stores in 2009, pre-opening expenses increased because a larger percentage of our fall 2009 new stores are treated as ground leases. Under GAAP we are required to recognize rent expense when we take possession of the property. As a result, we must recognize rental expense for ground lease properties several months prior to the actual opening of the store and in most cases, before rental payments are due. Pre-opening expenses are expected to be $14.0 million for the second quarter. Operating income for the quarter declined from $271.0 million last year to $251.0 million this year.

Net interest expense increased to $32.0 million for the quarter, compared to $26.0 million in the prior year, primarily due to lower interest rates on our long-term investments and reductions in capitalized interest due to lower capital expenditures. Interest expense is expected to be approximately $30.0 million for the second quarter. Our income tax rate was 37.5% for both the current and last year quarter. We expect our tax rate to be approximately 37.8% for the second quarter and the year.

Net income for the quarter was $137.0 million, compared to $153.0 million last year, a decrease of approximately 10% and EPS for the quarter was $0.45, compared to $0.49 last year. Moving on to the balance sheet, the square footage we grossed for 2009, 9554, a change of 6.6%, and selling of 76,273, a change of 6.3%. We currently operate 1,022 stores compared to 957 at this time last year, and we closed one store in Pontiac, Michigan, during the quarter.

On the investment line, we had $981.0 million in short and long-term investments at quarter end, compared to $429.0 million last year. The majority of our $655.0 million of short-term investments are in money market funds. We have also recorded temporary mark-to-market adjustments of $46.0 million, net of tax, through equity related to our long-term investments, but made no change to that valuation in the first quarter. Moving on to inventory, inventory levels, basically flat to last year, down about 0.5% at $2.8 billion, and inventory per stores are down approximately 7.0%. This reflects our continued commitment to conservative sales and receipt planning. Our clearance inventory per store is significantly lower than our total inventory per store.

Moving on to fixed assets, year-to-date capital expenditures were $186.0 million, down 32% from $273.0 million last year. We generated cash from operations of almost $400.0 million during the first quarter and free cash flow was $213.0 million, $133.0 million better than the first quarter of 2008, or 2.5x last year''s free cash flow. Moving on to accounts payable, AP as a percent of inventory was 35.8% versus 33.5% last year and weighted average number of shares, basic for Q1, 304.7 million and diluted 305.5 million. We have not repurchased any of our stock since July of 2008. We will continue to evaluate market conditions but do not currently expect to repurchase any shares in 2009. And for your modeling purposes, I would use 307.0 million shares for the year. And with that, Id like to turn it over to Kevin to talk about our merchandising and marketing initiatives.

Kevin Mansell Chief Executive Officer

Thanks Wes. As Wes mentioned, comparable sales decreased 4.2% for the quarter with all lines of business and regions reporting a decrease in comparable sales. By line of business, footwear reported the strongest performance, led by children''s and athletic shoes. Accessories was led during the quarter by sterling silver, handbags, and fashion jewelry. Men''s was led by basics and casual sportswear. In our home area bedding and small appliances performed best. Children''s was driven by infants and toddlers and boys and in women''s updated sportswear and intimate were the strongest categories. By region, the Southwest was the strongest region with the Southeast remaining the most difficult. The remainder of the regions performed closely to the overall company comp. We are planning comps down 5% to 8% in the second quarter, similar to our guidance for the year. By month, May should be toward the high end of the quarter, June should be toward the low end of the quarter, and July should be similar to the quarter. Those expectations are primarily driven by last year comparison levels.

From a merchandise standpoint, we are very excited about our recent merchandise initiatives. The Dana Buchman line was launched in February. This classic lifestyle brand spans several categories, including women''s apparel, intimate apparel, accessories, and footwear, and ultimately the brand may extend into home, beauty, and fragrance. Sales have significantly exceeded our plans and we have also seen lift in our Chaps line since the Dana Buchman launch. April saw the launch of Hang Ten in nearly 240 Kohl''s stores and on Hang Ten is a California lifestyle collection for young shoppers, which we hope to expand to all stores nationwide.

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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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