Kohl's (KSS) Earnings Report: Q2 2015 Conference Call...
Transcript of Kohl's (KSS) Earnings Report: Q2 2015 Conference Call...
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
Kohl's(KSS)EarningsReport:Q22015ConferenceCallTranscriptThefollowingKohl'sconferencecalltookplaceonAugust13,2015,08:30AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
WesMcDonald;Kohl'sCorporation;SeniorEVP&CFOKevinMansell;Kohl'sCorporation;Chairman,CEO&President
OtherPart icipants
CharlesGrom;SterneAgee;AnalystMattBoss;JPMorganChase;AnalystLorraineHutchinson;BankofAmericaMerrillLynch;AnalystPaulTrussell;DeutscheBank;AnalystDanBinder;JefferiesLLC;AnalystNeelyTamminga;PiperJaffray&Co.;AnalystBernardSosnick;GilfordSecurities;AnalystMichaelBinetti;UBS;AnalystMarkAltschwager;RobertW.Baird;AnalystStephenGrambling;GoldmanSachs;AnalystRichardJaffe;StifelNicolaus;AnalystMattMcGinley;EvercoreISI;AnalystBobDrbul;NomuraSecurities;AnalystOliverChen;CowenandCompany;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
Ladiesandgentlemen,thankyouforstandingby.WelcometotheKohl'sQ22015earningsreleaseconferencecall.
Certainstatementsmadeonthisgoalincludingprojectedfinancialresultsareforward-lookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.Kohl'sintendsforward-lookingterminologysuchasbelieves,expects,may,will,should,anticipates,plansorsimilarexpressionstoidentifyforward-lookingstatements.
SuchstatementsaresubjecttocertainrisksanduncertaintieswhichcouldcauseKohl'sactualresultstodiffermateriallyfromthoseprojectedinsuchforward-lookingstatements.Suchrisksanduncertaintiesincludebutarenotlimitedtothosethataredescribedinitem1AinKohl'smostrecentannualreportonForm10-KandasmaybesupplementedfromtimetotimeinKohl'sotherfilingswiththeSEC,allofwhichareexpresslyincorporatedhereinbyreference.
Alsopleasenotethatreplaysofthisrecordingwillnotbeupdated.Soifyou'relisteningafterAugust13,2015itispossiblethattheinformationdiscussedisnolongercurrent.
(OperatorInstructions)
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
Asareminder,today'sconferenceisbeingrecorded.IwouldnowliketoturntheconferenceovertoourhostMr.WesMcDonald,ChiefFinancialOfficerofKohl'sdepartmentstores.Pleasegoahead.
WesMcDonald (SeniorEVP&CFO):
Thankyou.Goodmorning,withmetodayisKevinMansell,ourChairman,CEOandPresident.
I'llstarttoday'scallbywalkingthroughouroperationalresults.KevinwillthenprovidemoredetailsonourGreatnessAgendainitiatives.Wewillthenopenupthecalltoyourquestions.
Compsalesincreasedslightlyinthequarterat0.1%.Althoughwearen'tsatisfiedwiththelevelofcompsalewearepleasedthatwearestartingtoshowsomeconsistencyinoursalesresults.Thisisthefirsttimesince2011thatwehaveachievedthreeconsecutivequartersofpositivecomps.
Themetricsofthecompsalesincreaseareasfollows;averageunitretailup2.3%,unitspertransactiondown1%resultinginanaveragetransactionvalueincreaseof1.3%,transactionsperstoreweredown1.2%partiallyduetotheshiftofthetax-freeeventsfromJulyintoAugust.FromalineofbusinessperspectiveforthequarterfootwearperformedbetterthantheCompanywithstrengthinathleticandmen'sdressandcasualshoes.
Women's,home,men'sandaccessorieswereinlinewiththeCompany.Inwomen'sourMissybusinesscontinueditsimprovementwitha2%compwithstrengthinupdated,contemporary,activeandclassicsportswear.Onthehomesidewehadstrengthinpremiumelectronics,luggageandoutdoorrecreationonline.
Inourmen'sbusinessstrengthremainsanactiveandinaccessorieswehadstrengthcontinuinginbeautyandfinejewelry.Children'sperformedbelowtheCompanywithtoysperformingwellandsomesoftnessinapparelalsopartiallyduetothetax-freeshare.Juniorsalthoughstillnegativedidimproveitsperformanceinthesecondquarter.
GeographicallywhichincludesonlineoriginatedordersthestrongestregionsweretheWestandMidwest.TheNortheast,SoutheastandMid-AtlanticperformedessentiallyinlinewiththeCompanywhiletheSouthCentraltrailedtheCompanyaverage.
Grossmargindecreasedslightlyforthequarter,down6basispointsandisup5basispointsforthespringseasonasweremainontracktoachieveourgrossmarginguidancefortheyearofflattoup20basispoints.SG&Aincreased2%anddelevered42%lastyearforthequarter.Thiswasslightlylessthanourexpectedrangeofexpensestobeup3%to4%.
Wewereabletoleverageinourlogisticsareasandcreditoperations.Marketingexpenseswereslightlydeleveragetoasweinvestedsomeofourfirst-quartersavingsintothesecond-quarterevents.Storeandcorporateexpensesarerelativelyfixedandwewereunabletoleveragethoseexpensesonthemodestcompincrease.
WeremainontracktoseeourSG&Aexpensesgrow1.5%to2.5%fortheyear.HigherITamortizationwastheprimaryreasonforthe$11millionincreaseindepreciationexpenseforthequarter.Interestexpensewas$84millionforthequarter,essentiallyflatlastyear.
Weincurredalossonextinguishmentofdebtwhichrepresentsthepremiumpaidtobondholdersrelatedtoa$767millioncashtenderoffercompletedthisquarter.Ourincometaxratewas37.9%forthequarter,higherthanlastby130basispoints.Lastyear'sresultsincludedsomefavorablestateaudittaxsettlementsduringthequarter.
Netincomeforthequarterwas$130millionwithearningsperdilutedsharebeing$0.66.Excludingthe
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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lossonextinguishmentofdebtearningspersharewere$1.07,a5%decreasetolastyear.Weendedthequarterwith1,164stores,grosssquarefootageof100.5millionandsellingsquarefootageof83.9millionsquarefeet.
Wedidnotopenanystoresduringthequarter.Capitalexpenditureswere$377millionforthespringseason,consistentwithlastyear.Storerefreshspendingwasconsistentyearoveryearbutshiftedfromnewstoresandremodelstocosmetics.
WecontinuetomakecapitalinvestmentsinITtosupportouromnichannelinitiatives.Weendedthequarterwith$934millionofcashandcashequivalents.
Inventoryperstoreincreased9%andunitsincreased8%.Theexcessinventoryistheresultofslightlylowerthanexpectedsalesandpre-positioningfreshfallreceiptstodrivesalesfortheback-to-schoolbusiness.Thisincludesanaggressivebuildinactive,ourbestperformingbusiness.
Inaddition,asportoperationshavereturnedtonormalontheWestCoastwehaveseenearlyreceiptoffallgoodsasourorderswerewrittenduringtheperiodofdisruption.Theneteffectofourreceiptpullforwardwasapproximately$120millionatcost.
Lookingahead,weexpectnewreceiptsfortheremainderofthefallseasonwillbeflattoayearago.Ourinvestmentinfallinventoryisinfourmajorareasthathavebeenperformingwell;active,premiumelectronics,entertainmentandlicensingandcosmetics.
Asareminderwenowhave900storesinournewbeautyenvironmentswithournewbeautyenvironmentandnewbrands.Weareplanningamodestincreaseontrendontheremainderofourbusinessesforthefallseason.Asaresultweexpectalowsingle-digitincreaseininventoryunitsperstoreattheendoftheyear.
Andin2016we'replanningtoseelowtomidsingle-digitdecreasesinourinventoryunitsperstore.APasapercentofinventorydecreasedfrom37.9%lastyearto36.8%thisyear.ThedecreaseisprimarilyduetotheearlyfallreceiptsarrivinginJunewhichwerealreadypaidforbytheendofthesecondquarter.
Weightedaveragedilutedshareswere197millionforthequarter.Duringthequarterwerepurchased6millionsharesofstock.Weendedthequarterwith196millionsharesofstockoutstanding.
OnTuesdayourBoarddeclaredaquarterlycashdividendof$0.45persharewhichispayableSeptember23toshareholdersofrecordatthecloseofbusinessonSeptember9.Duringthequarterwecompletedseveraltransactionswhichfurtherstrengthenedourbalancesheet.InJulywecompletedacashtenderofferfor$767millionofourhighestcoupondebt.
Wealsoexercisedourrighttoredeem$318millionof2017noteswhichwerenotinitiallytendered.Weusedtheproceedsfroma$1.1billiondebtissuancetopaytheprincipalofthetendereddebt.Tendereddebtpremiumsandaccruedinterestarebeingpaidincash.
Thesetransactionsreducedoureffectiveinterestrateby65basispointsandwillreduceourannualinterestexpensebyapproximately$17million.Theyalsoextendedouraveragedebtmaturitybymorethan3.5yearstoalittleover13years.Wehavenodebtmaturinguntil2021andourweightedaveragecostofdebtis4.88%.
Inconjunctionwiththerefinancingweincurredalossofapproximately$170million.$130millionwasrecognizedinthesecondquarter.Weexpectanother$39milliontoberecognizedinthethirdquarterwhentheremaining2017notesaresettled.
Wealsosuccessfullyamendedandextendedourrevolverforanadditionaltwoyearsfrom2018to2020.
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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Theamendmentalsoreducedfeesonundrawnbalances.
Therewerenochangestothefinancialcovenantsincludedintheagreement.Absenttheeffectofthelossonourextinguishmentofdebtwenowexpectourearningsperdilutedsharetobeatthelowendofourpreviousguidanceof$4.40to$4.60.
I'llnowturnitovertoKevintoprovideadditionalinsightsonourresults.
KevinMansell(Chairman,CEO&President):
Thanks,Wes.AsWesindicatedsalesinthequarterfellshortofouroriginalexpectations.Thatwasdrivenbyamodestlylowerlevelofseasonaldemandoverthequarter,alargerthanexpectedtax-freeshiftandalaterthanexpectedback-to-schoolsellingstart.
WhileourboldmovesaroundtheGreatnessAgendacontinuetoproduceexpectedresultstheunderlyingbusinesstrendwassofterasaresult.LookingatresultsundereachofourpillarsinthequarterandnewinitiativescomingthisfallI'mexcitedtosharethefollowing.
Underamazingproduct,nationalbrandscontinuedtoexperiencesignificantgrowth,upapproximately6%forthequarterandtheseasonaspenetrationforbothperiodsincreasedabout250basispoints.ThiswasdrivensignificantlybystronggrowthinouractiveandwellnessboldmovewithbrandslikeNike,NewBalanceandPuma.We'realsohappytoannouncethatwewillbelaunchingtheStrideRitefootwearbrandinearly2016tocontinuethatmomentum.
Undereasyexperiencewecontinuetobuildaworld-classdigitalexperience.Responsetoournewapphasbeenveryfavorablewithover2milliondownloadsthisyearaloneandwenowhaveover8milliontotalusers.Ourwalletfeaturewithinourapphasalsobeenabigsuccesswithabout30%ofourmobiletrafficrelatedtowalletuse.
DuringthequarterwecompletedtherolloutofBuyOnline,PickUpInStoretoallstoresacrossthecountry.Andwe'llbegintomarketthisfeatureacrossallofourplatformsthisfall.Attachmentratesareveryencouraginginthepre-marketingphaseandlandatabout25%.
Basedontheseearlyresults,wenowexpectBuyOnline,PickUpInStoretobeasignificantpercentageofourdigitalsalesandadriverofincrementalstoretrafficthisholidayseason.Weareplanningaccordingly.
Wealsonowhaveournewbeautyenvironmentandbrandsin900ofourstoresandwecontinuetoseetotalstoreliftsontheseimplementationsatthesameplus2%rateversusourcontrolstores.Personalizationeffortscontinuetodriveourmarketingchangesandalreadythisyearwehavedeliveredover130millionpersonalizedmailers,over120millionpersonalizede-mailsalongwithmillionsofpersonalizeddigitalandwalletimpressions.
Thisfallwewillalsomarkthefirstbroadimplementationofourlocalizationstrategy.Bytheendofthisfall40%ofourbusinesswillbeunique,localizedassortmentswiththeexpectationthatalldepartmentswillhaveunique,localizedassortmentsbytheendofnextyear.
Finally,ourYes2Youloyaltyprogramcontinuestogrowwith2millionmoremembersaddedinthequarterallowingustoreach32milliontotalmembers.Overhalfofourtransactionsarenowwithloyaltymembersandalmostthree-quartersofKohl'schargetransactionsarealsoloyaltymembertransactions.Weintendtolaunchanumberofnewenhancementsandwillcelebratetheanniversaryoflastyear'slaunchinOctoberwithamajorevent.
Inclosing,weremaincommittedtotheGreatnessAgendaandbelievetheseinitiativeswilldeliverour
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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salesgoal.Althoughsalesforthesecondquarterdidn'tmeetourexpectations,we'redefinitelypleasedtoseemoreconsistentpositivecompstoresalesresultsespeciallyinaquarterthatwasnegativelyimpactedbyalaterstarttotheback-to-schoolshoppingseason.
AtthistimeIwillturnthecallbacktoouroperatorwhowillprovideinstructionsonaskingquestions.
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)CharlesGrom,SterneAgee.
CharlesGrom(Analyst-SterneAgee):
Goodmorning,guys.Justontheguidancethefigureof$17millionbenefitoninterestexpenseitsoundslikeyou'rebackingthegrossmarginandSG&Aguidancethatyougavelastquarter.SohowshouldwethinkaboutcompsinthebackhalfoftheyearandthenifyoucouldjustfillintheblanksonD&Aandthetaxrateandyourbuybackplans?
WesMcDonald (SeniorEVP&CFO):
Well,the$17millionisanannualnumbersoyoucanthinkofitmorelikebetween$3millionand$4millionaquarter.Andwe'renotbackingawayfromImentionedinthescriptwestillbelieveourguidanceforgrossmarginwillendupsomewherebetweenflatand20basispointsfortheyear.AndSG&Awillbeupsomewhereprobablyclosertothehigherendfortheyearbetween1.5%to2.5%.
Soitwillrequirealittlebitofanincreaseincompintothefallseason.Tohitthe440weprobablyhavetorunclosetoit2compforthebackhalf.Wetalkedaboutthetax-freeshift,obviouslyhurtsecondquarter,obviouslywillhelpthird,andsoitdoesn'trequirealargeamountofimprovementtogettowhereweneedtobeforthebackhalf.
CharlesGrom(Analyst-SterneAgee):
Okay.AndthenKevinyoutalkedaboutthelaterback-to-schoolstartandthenalsotheshift.Haveyoubeenabletoquantifythatforus,whatwouldthecompbeenormaybewhatwasthecomptrendingthroughthefirst12weeksofthequarter?
WesMcDonald (SeniorEVP&CFO):
Iwilltakeit.Thecompwouldhavebeenbetterforthequarterbyprobablyabout50basispoints.Thatwasreallyjustisolatingthetwodaysofthetax-freeshiftandwithLaborDayshiftingbackaweekthat'shardtoreallyascertainbutwehavestartedtoseesomestrengthinourback-to-schoolbusinessaswe'veenteredAugust.
KevinMansell(Chairman,CEO&President):
Ithinktheotherpartofthatisthat'sactuallythemathonthebenefitthatwegetinAugustthatwelostinJuly.SoWesis100%rightonthat.
TherelatedpiecewhichIthinkismoredifficulttoquantifybutwethinkisrelativelymeaningfulisthatitalsodrovealaterback-to-schoolsellingseason,thosetwofactorsboththeshifttotax-freeandthelaterLaborDay.AndsoIthinkheandIbothfeelthatweprobablywould'vebeentrendingmorelikearounda1compforthequarterabsentthosethingsaltogether.
WesMcDonald (SeniorEVP&CFO):
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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Youalsoaskedacoupleofotherquestions.ForD&AIthinktheyearwillprobablyenduparound930.Andthetaxrateisgoingtoprobablybearound37.5%,let'ssay.
CharlesGrom(Analyst-SterneAgee):
Andyouexpecttodo$1billioninbuyback?
WesMcDonald (SeniorEVP&CFO):
Yes,asyoucanprobablytellweweremoreaggressiveonourbuybackthisquarter.Wetendtotarget$250millionaquarter.Weendedupdoingmorethanthat.
SoIthinkwe'reprettycloseto$550millionforthespringseasonandourtargetisstill$1billion.Butifwethinkthestockischeapwecertainlycoulddoalittlemorethanthatbutwe'retargeting$250millionaquarter.
CharlesGrom(Analyst-SterneAgee):
Thelastquestion,youcalledouttheSouthCentralbeingweak.Canyoujustdiveintothatalittlebitmore?IsthattheTexasmarket,Oklahoma?
WesMcDonald (SeniorEVP&CFO):
TexasandprimarilytheHoustonmarket.I'msurethat'snotanydifferentformostpeoplewithsignificantbusinessesdownthere.
Ispokewithourregionalmanagerdownthereandalsoobviouslysomeoftheweatherissuestheyhadwithalltheraintheyhadthissummerhurtitalittlebit.Butthat'samarketthat'sbeentougherforusthisyearthat'sforsure.
CharlesGrom(Analyst-SterneAgee):
Great,thanksforallthecolor.
Operator :
NancyBush,JPMorgan.
MattBoss (Analyst-JPMorganChase):
It'sMattBoss,notNancy.Onthetop-linecompositionwhatareyouguysembeddingfortrafficinthatsecond-halfplan?Andthenmoresotodrive2%compsorbetterthenexttwoyearshowshouldwethinkaboutthetimingforlocalizationandpersonalizationopportunities?
WesMcDonald (SeniorEVP&CFO):
Well,localizationforsureisinitsinfancy.Wehaven'tgotmuchbenefitfromthatatall,we'vereallyjustbeentesting.Wewillstarttoseemorebenefitfromthefall.
OntheboldmovesthatwetalkedaboutintheAnalystDaylastfallthebiggestbenefitwe'vegottenthusfarhasobviouslybeenfromactive.We'vebeentalkingaboutitforanumberofyearsnow.ItcontinuestobeverystrongledbyNike.
Ourdigitalbusinessisverystrongaswellandwe'reseeingalotofliftoutofloyaltyobviously.Thetwothingsthatprobablyhaven'tkickedinasmuchinthethree-yearplanyet,andwe'renotbehindoranythingitjusttakesalittlelongertobuild,arepersonalizationandlocalization.
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
Localizationisnotonlygoingtoprovidesalesbenefitbutshouldprovideourabilitytoreduceourinventoriesprettysignificantlybecausewewon'tbebuyingmarkdownsjusttofillfixedorfillontheinitialset.Sothat'ssomethingasaCFOI'mveryexcitedaboutistryingtogetmoresaleswithalotlessinventory.
KevinMansell(Chairman,CEO&President):
Theexpectationonlocalizationisthatwhilelocalizationwillimpactroughly40%ofthebusinessbytheendofthisyeartherealliftfromitismoremodestinthethirdandfourthquarterandmuchmoresignificantnextspring.Wesis100%rightonpersonalization.
Thethirdpiecewhichbasedonourearlyresultswethinkisabigdriver,particularlyinthefourthquarter,willbetheBuyOnline,PickUpInStorestrategies.Soweessentiallyhaven'tdoneanymarketingonBuyOnline,PickUpInStorebecausewearejustintheprocessoflaunchingitacrossalloftheplatforms.Andthesensewehaveisthatoncewelaunchthemarketingbasedonthelimitedresultswe'veseensofarthecombinationofthetrafficitdrivestothestoresandtheattachmentsalesit'sbeenprovidingareprettysignificant.
WesMcDonald (SeniorEVP&CFO):
Andyouaskedaboutthetraffic.Ithinkforustoruna2compweprettymuchhavetogetbacktoflattraffic.Wehaveseen,I'msureyouguysgraphallthis,wecertainlydo,butthelastthreequartersalthoughnotwherewewantedtobehavecertainlyimprovedoverwherewewererunningfromatrafficperspectivepre-GreatnessAgenda.
MattBoss (Analyst-JPMorganChase):
Okay.Andthenjustonequickfollow-up.Whatareyouguysseeingoutthereintermsofthecompetitiveenvironmentintotheback-to-schoolseason?
KevinMansell(Chairman,CEO&President):
Idon'tthinkthere'sanythingreallynew.Manyretailershaveinplacesomeversionsofthestrategieswehavearoundparticularlymarketinganddigital.Butwehave,therehasn'tbeenanysignificantshiftintermsoflet'ssaydiscountingifthat'swhatyou'reafteroranythinginparticularthatwouldgiveusanypauseforconcernaswelookatthird-andfourth-quarterresults.
MattBoss (Analyst-JPMorganChase):
Great,goodluck,guys.
Operator :
LorraineHutchinson,BankofAmericaMerrillLynch.
LorraineHutchinson (Analyst-BankofAmericaMerrillLynch):
Thankyou,goodmorning.Ifwethinkaboutthethirdquarterasa1comprunratecanyoujusthelpusgetcomfortablewiththeback-halfaccelerationtoa2todrivethelowendofyourguidancerange?Whatarethespecificdriversthatyouexpecttohaveanoutsizedimpactonsecond-halfcomps?
KevinMansell(Chairman,CEO&President):
Well,Ithinkwediscoveredafewofthem.We'renotpreciseenoughtotellyouthatthethirdquarterisgoingtobe1or1.3andthefourthquarterisgoingtobe1.5or1.8.Ithinkaswelookattheyear-to-date
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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performancewhichwe'relookingatasabouta1compitdoesneedtoacceleratetoabouta2compforustoachieveourobjectives.
WesMcDonald (SeniorEVP&CFO):
Ifyoulose50basispointsinthesecondquarteryougetitinthethird,soyou'reata1.5there.Sowe'vegottopickupanother50.
KevinMansell(Chairman,CEO&President):
SoImeanIthinkthebigthingsremaintobethestrategiesthatwediscussed.Andwejusttouchedonthreebigoneswethinkforthefallandholidayandthoserevolvearoundpersonalization,theimpactofourmarketingstrategiesinparticularastheyrelatetoourloyaltyplatform,ourlaunchanddevelopmentofBuyOnline,PickUpInStoreaswellastheeffectivenessthatshipfromstoreacrosstheentireplatformwillgiveusandtheimpactofthingslikelocalization.Thatlayeredontopoftheexistingboldmoveswethinkwillacceleratethebusiness.
Wedefinitelyrecognizesofterdemandinthefirsthalfoftheyear.Idon'tthinkthere'sanyquestionaboutthat.AswelooktothefirstsixmonthsresultsIthinktrafficwassofterthanexpectedandIdon'tnecessarilyseethatasaKohl'suniqueissue,itseemstoberelativelybroadthat.
Someofthethingswearelearningnowthatwe'rethreequarterssortofpostthelaunchoftheGreatnessAgendaareinformingsomechangesinIwouldcallitsortofanevolutionoftheGreatnessAgendamovesandthoseareunderwayalreadyinternally.We'llprobablysharethosewithyousometimelaterinOctoberbutIthinktheyaregoingtohaveapositiveimpactonboththethirdquarterbutinparticularthefourthquarter.
LorraineHutchinson (Analyst-BankofAmericaMerrillLynch):
Thanks.Thenifyoulookatthejuniorsbusinessgettinglessnegativeinthesecondquarterasyou'vesetthefalllineandstarttoseesomeback-to-schoolhaveyouseenacontinuedimprovementinthatbusiness?
KevinMansell(Chairman,CEO&President):
It'smorepositivethanitwasforsure.Probablythemostimprovedbusinessinthestoreeventhoughthetotalbusinessasyouwellknowwassofterinthefirsthalfoftheyear.Themostimprovedbusinessinthestoreiswomen'sapparelandjuniorsisnotasgoodastherestofwomen'sapparelbutitimprovedsignificantlyinthesecondquarter.
LorraineHutchinson (Analyst-BankofAmericaMerrillLynch):
Thankyou.
Operator :
PaulTrussell,DeutscheBank.
PaulT russell(Analyst-DeutscheBank):
Goodmorning.Wes,justaquestiongoingbacktogrossmargins.Likeyousaidyou'vereiteratedthegoaltobeupalittlebithereinthesecondhalfandforthefullyear.
Canyoujustgiveussomeoftheputsandtakesongrossmargins?Inparticularwhatisprovidingthatuptickespeciallygivenyou'veevenadjustingfortheearlyreceiptofinventoryyou'restillupabitkindof
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
comingintoQ3comingoffaquarterwhereyou'vehadsoftersales?Anycolorwouldbehelpful.
WesMcDonald (SeniorEVP&CFO):
Wellifyoudothemathonthe120millionourunitsareupabout5%.We'renotgoingtonotbuystuffthat'sselling,soinvestmentintothethingsIindicatedactive,licensing,beautyareallgoingto--we'renotlookingforanaccelerationofwhatthey'resellingtoday.Wehavepocketsofstuffwe'regoingtohavetogetthrough.
We'veseensomegreatbenefit.Nikeisnotonlyprovidinggreatbenefitonthesaleslinebutwiththeirstanceonpromotionalenvironmentwe'vemadeasignificantamountofmoregrossmarginonthatsothat'sprovidingsometailwindsfromthatperspective.Throughthespringseasonwe'reuplikeIsaid5basispoints.
Ithinkwillmakeendupbetweenflatand20.We'llbeupcloserto20ifwecanhitthe2compthatwementioned.Ifwecan'twewillbeclosertotheflat,that'snormallyhowitworksinretail.
PaulT russell(Analyst-DeutscheBank):
Gotit.That'shelpful.ThenjustintermsoftheloyaltyprogramIwouldthinkthatoneoftheconcernsgoingforwardislappingthatinthefourthquarter.
Canyoujustremindushowmanyloyaltymembersyou'vehadin4Qheadingintothatholidayperiod?Canyoumaybediscussatallalittlebitofyourplansonhowtogetmorespendoutofthosemembers?IknowyoumentionedabigeventplannedforOctober.Alsojustanycoloryoucanprovideabouttheloyaltyspendfromthosethathavebeenintheprogramforoverayear,perhapssomeofthoseearlystates?
WesMcDonald (SeniorEVP&CFO):
Well,IthinkIcantalkaboutthefactthatwearegoingtohavedoubletheloyaltymemberswhenwegointothefourthquarter.Ithinkweendedlastyeararound16millionor17millionattheendofthethirdquarterandweshouldhave35milliongoingintothefourth.We'renotgoingtotalkabouttheplanfortheloyaltyeventgiventhat'smoreofacompetitivethingandwecontinuetoseestrengthintheloyaltymembers.
Theyshopmorefrequentlywhichisreallythedriveroftheliftthatwe'regetting.We'regettingconsistentliftsacrossbothbankcard,obviouslyhavethebiggestliftbecausetheirfrequencyislowerthansomebodylikeanMBCbutwe'regettingliftsacrossallthreecategories.Theboldmovesaredeliveringprettymuchwhatwethoughttheyweregoingtobe.
Thereasonourcompshavebeenalittlebitdownisourbusinessesthathaven'thittheirplanthathaven'thadasmuchofaneffectfromtheboldmoves.Everybodyobviouslygetstheeffectfromloyaltyacrossthestorebutwehaveacoupleofbusinesseslikejuniorslikewe'vetalkedaboutthelastcoupleofquartersthatarejustweakerthanweanticipated.
PaulT russell(Analyst-DeutscheBank):
Iappreciatethecolor.Goodluck.
Operator :
DanBinder,Jefferies.
DanBinder (Analyst-JefferiesLLC):
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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Thanks.Withregardtoinventorycanyoujustgiveusalittlecoloraroundhowclearanceinventorylooksyearoveryear?
KevinMansell(Chairman,CEO&President):
It'supyearoveryear.Withthesoftersalesinthesecondquarterweweremoreaggressiveintakingmarkdownsinthesecondquartersoweacceleratedsomeofthatintothequarter.Sell-throughs,Ithinkourexpectationforsell-throughsinthethirdquarterisitwillbeaboutequaltolastyear.
We'renotexpectingabigacceleration.AndI'mthinkingbythetimewegetintolateAugust,earlySeptemberyear-over-yearinventoriesandclearancearegoingtoberelativelyflattolastyear.
WesMcDonald (SeniorEVP&CFO):
Yes,Imeanifyouusethesame120millionmathonAPasapercentofinventoryit'sflattolastyear.Sowehavealotmorereceiptsthatwe'vereceivedinthelast30daysthanwedidlastyear.
DanBinder (Analyst-JefferiesLLC):
ThemwithregardtotheWebbusinesscoupleofquestionsthere.First,Iforget,didyoustopbreakingoutthegrossfromthat?
AndthenthesecondpartofthequestionisregardingBOPUS,asyouhavemorebusinessshifttoeitherBuyOnline,PickUpInStoreorshipfromstorewhatisthedeleveragingeffectsofbusinessnotbeingshippedfromthefulfillmentcenters?Andjustcuriouswiththeshipfromstoreinitiativewhatareyouseeingonatypicalstoreintermsofordersperdayorperweek?
WesMcDonald (SeniorEVP&CFO):
WellIcouldtellyouBOPUSisthebestthingthateverhappenedtoe-commerce.Wedon'tbreakoute-commercesalesanymorebutimplicitinourthree-yearplanbackinOctoberwasanonlinegeneratedordergrowthofabout20%ayear.We'redoingbetterthanthatthisyear.
ButBuyOnline,PickUpInStorefromaprofitabilityperspectiveisthebestthingyoucangetbecauseyou'renotshippingitsoyousavethe$5to$6perpackagethatitcosttoshipittothehouse.Andwe'reseeingattachmentsalesofabout20%to25%dependingonthetimeoftheweek.
LikeKevinsaidwehaven'treallypublicizeditalot,it'saboutbetween2%and3%ofourtotalonlinegeneratedorders.Wethinkthatcanacceleratequiteabitwhenwestartpublicizingthataswegetmoreintothefallseason.
Fromashipfromstoreperspectivethekeyistotrytokeepthenumberofpackagespershipmentdownasmuchaswecan.We'vemadesomesoftwarechangestotrytodothat.Butboththosethingshonestlywouldbeabenefittotheprofitabilityofonlinegeneratedordersandgivesusanopportunitytomakethestoreinventoryworkalittleharderandreducetheamountofinventoryinthefulfillmentcenters.
DanBinder (Analyst-JefferiesLLC):
Andareyouusingexistinglaborinthestorestodotheshipfromstoreorhaveyouhadtoaddlaborhours?
KevinMansell(Chairman,CEO&President):
No,weadddedicatedlaborhoursforthesefunctionsandit'spartofouroverallpayrollplan.Ithinkonethingthatwe'vetriedtolayoutclearlybutIthinkisstillnotwellunderstood,shipfromstorejustfinished
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rollingouttotheentireCompanythisspringseason.
Sofromabenefitperspectivethebigbenefitweseeinthefallandholidayisthatittakesatremendousamountofpressureoffofoure-fulfillmentcenters,that'snumberone.Numbertwo,itdefinitelymakesourinventoryinourstoresmoreeffectivethanitwasbeforeandimprovestheefficiencythatwegetonstorepayrollasaresult.
BuyOnline,PickUpInStorewhileitfinishedthecompletionofthelaunchtoallstoresthissecondquarterwehavenotmarketeditatall.Andinfactithadnotbeenavailableinanyformatotherthandesktop.
Sobothmobileandtabletwillbenewinthethirdquarterandwiththelaunchofmobileandtabletcomesareallyaggressivemarketingcampaign.Sowe'velookedattheresultsinthesmalllaunchperiodwithnomarketingandlookedatattachmentratesaswellastrafficratesandIthinkoursenseisit'sgoingtobeabigdriveroftraffictostoresbutmostimportantlyasWessaidadriverofmoreefficientuseofourinventory.
DanBinder (Analyst-JefferiesLLC):
Great,thanks.
Operator :
NeelyTamminga,PiperJaffray.
NeelyT amminga(Analyst-PiperJaffray&Co.):
Ihaveonequickfollow-uponthat,Kevin,andthenIhavegotabiggerquestiononpricingandpromotions.Intermsofthemobile,IthinkoriginallywewerethinkingyouweregoingtolaunchthemobileplatformforBuyOnline,PickUpInStoreinAugust.
IsitstillslatedforAugustorwillitbeontheothersideofLaborDay?That'sthefirstquestion.
Andsecondly,intermsoflookingatthepricingandpromotionalanalysesthatyouguyshavebeenverystrategicallymakingwithintheCompany,Iamthinkingoflikethelowestpricesoftheseasonsalethatyoudidwhenyouremovedthat20%offcoupon,hasanythinginthetrafficpatternherethusfarinback-to-schoolcausedyoutogobacktotheoldwaysoflayeringpromotiononpromotionorayouguyscommittedtoprovidingmoreofascalpeltoyourpromotions?Thanks.
KevinMansell(Chairman,CEO&President):
Takingthemoneatatime,Imeanthetimingonourmobileandtabletimplementationisthesameasithasalwaysbeensowearerightontarget.We'reallsetandasIsaidwe'vebeensortoffocusedmoreonreallyacceleratingitaswegetintoOctoberandNovemberbecausethat'swhenweseethebigopportunitybeingcreated.Sothat'snumberone.
Numbertwo,onthepricingthereisabsolutelynothingwe'reseeinghappeningthatwouldchangeourlonger-termperspectiveonhowwegoaboutmarketing.Wedefinitelyknowthatwehaveabigopportunitytoreallytailorourmarketingeffortsandthereforeourpricingtoauniqueindividualcustomertogetmoreeffectiveresponserates.
Withoutqueuingyouintoomuchtosomeofthethingswe'regoingtobetalkingaboutaspartoftheevolutionoftheGreatnessAgenda,oneoftheareasthatwedofeelstronglyaboutisthatwehaveanopportunitythroughanalyticstoelevateourleadershiponvaluethroughnewstrategiesaroundpricing.Andsowe'lltalkmoreaboutthataswegetintothelaterpartofthefallseasonandyou'llhearmoreaboutitaswegoforwardinto2016.ButIdothinkweseethatspaceasabigopportunityforus.
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WesMcDonald (SeniorEVP&CFO):
AsfarasLPSgoes,itrunslaterthismonth,it'sgoingtobethesameasAprilandit'sgoingtoworkwell.
NeelyT amminga(Analyst-PiperJaffray&Co.):
Excellent.Thankyou,guys.
Operator :
BernardSosnick,GilfordSecurities.
BernardSosnick(Analyst-GilfordSecurities):
Yes,thankyou.Pickupatstorehasitsbenefitofcourseasyououtlinedalready,butshouldn'titalsoreduceshippingcostandhaveabenefittogrossmargins?
WesMcDonald (SeniorEVP&CFO):
Yes,thatwasmyfavoritepart.That'sthemoneywesaveonthe$5or$6abox.
BernardSosnick(Analyst-GilfordSecurities):
Good.Ijustwantedtoclarifythat.Thankyouverymuch.
Operator :
MichaelBinetti,UBS.
MichaelBinett i(Analyst-UBS):
Heyguys,goodmorning.IapologizeifImisseditbutwouldyoumindgivingusforourmodelsthepercentofsalesmadeonaKohl'scardinthequarter?
WesMcDonald (SeniorEVP&CFO):
Itwasdownalittlebit.Idon'thavetheexactnumberunfortunatelyinfrontofmebutIthinkitwasdownabout,Iwanttosayitwasdownabout150basispoints.ButIwillgiveyoucallafter,I'msorryaboutthat.
MichaelBinett i(Analyst-UBS):
Okay.Wouldyoumindtellingusabouttheoverall,obviouslyyou'vegotanumberofinitiativesgoingonwithe-commercebuttheoveralltrendthatyousawinthequarteratahighlevel?
Wesawsomebigretailersandsomenativee-tailersalsothrowprettybigpromotionsinthequarterandsomeoftheotherbrandsandretailershaveseenthevolatilityaroundthoseevents.I'mwonderingifyouguyssawsimilarvolatility?
KevinMansell(Chairman,CEO&President):
No,ifyou'realludingtothingslikePrimeDaybyAmazonorthatno.Ithinkwhathappensonthosekindsofthingsisallretailersaresensitiveandawareaboutpromotionsinthespace.
Andyouinevitably,therefore,strategizeandtargetyourownelementstooffsettoensurethatyoudon'tgethurt.AndsoIthinkactuallythefacts,Weswouldprobablybeabletogivespecifics,butIthinkactuallythefactsarewesawmuchlargerliftsduringthatshortperiodofbothPrimeDayimplementationbyAmazonandrelated--
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WesMcDonald (SeniorEVP&CFO):
Yes,webeatourplanthatday,forsure.
KevinMansell(Chairman,CEO&President):
SoIthinkit'sjustthewayitworks.There'salotofactivity.
WesMcDonald (SeniorEVP&CFO):
GetmorepeopletotheWeb.TheymightbuyitonAmazon,theymightbuyitonWal-Mart,lookslikemoreofthemthanwethoughtboughtitonours.
Idohavethecreditnumbers.Sorryaboutthat,alittletoomuchpaperheretoday.
ChargesalesforQ2were57.6,down171basispointsandthenyeartodateis57.8,downabout130basispoint.Soitkindofmakessensegiventhefactthatwe'redoingbetterfromanon-Kohl'schargebecausewe'veputmoreemphasisfromamarketingperspective.
SotheKohl'schargewassortofnegativeforthequarter,downlowsingledigitswhilethenon-Kohl'schargewasupmidsingledigits.Sowe'recontinuingtofigureoutawaytobetterbalancethose.Thegoalobviouslywouldgetthemtobebothpositive.
Butweneednewcustomersandthat'swhat'scomingwiththenon-Kohl'schargecomp.TheyspendalittlelessobviouslybecausetheyarenewerandtheKohl'schargefolksspendalittlebitmore.Butwewillcontinuetoworkonbetterbalancingthemandhopefullybythetimewegettotheendoftheyeartheywillbothberunningpositive.
MichaelBinett i(Analyst-UBS):
OkayandifIcouldjustaskonelast,Kevinyoumentionedthatyou'replanningaccordinglyforBuyOnline,PickUpInStoretobeabiggerpartofonlinethisholiday.Iknowyou'vecommentedonitafewtimesintheQ&Abutwouldyoumindgivingusjustalittlebitmorecoloronwhatyoumeantwiththatspecificcomment,please?Thank.
KevinMansell(Chairman,CEO&President):
Throughthetestperiod,thetestperiodessentiallywasanoperationaltestperiod.Itwastoensurethatonthetechnologysideeverythingworkedthewaywewantedittowork,thatthecustomerservicewasdeliveredintherightwayandthatwewereabletoachievethespeedweneededto.
Onthestoresideofcourseitwasastarttobetterunderstandwhatstoreshavetodoinordertoquicklypresenttheproducttothecustomeranddoitinanefficientway.Sothat'stheprocesswewentthroughinthesecondquarter.Ithinkwedid2.5%or3%ofdemandasweexperimentedwithoutontheoperationalside,soit'sameaninglessnumber.
We'replanningamuchlargerpercentofdigitalsalestocomeasBuyOnline,PickUpInStore.That'swhat'sbakedintoourplanning.
We'renotplanningthatitnecessarilyliftsthetotaldigitalsalesbutwedobelievebasedontheattachmentrateswe'reseeingrightnowit'sgotthepotentialtoaddsalesin-storeandaddsomevisits.Whichasyouknowourtwobiggestchallengesarewinnewcustomers,Weskindofjusttouchedonthatone,andsecondlygetmorevisitsintoourstore.Andthat'swhywe'resuperoptimisticaboutBuyOnline,PickUpInStore.
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MichaelBinett i(Analyst-UBS):
Allright,thanks,guys.
Operator :
MarkAltschwager,RobertW.Baird.
MarkAltschwager (Analyst-RobertW.Baird):
Goodmorning,thanksfortakingthequestion.Quickfollow-uponSG&A.Wes,IbelieveyousaidSG&Agrowthisexpectedtobeatthehighendofthe1.5%to2.5%range.Justwhataretheprimarycomponentstothatandthenifsalesaren'tabletohitthat2%expectationforthebackhalfhowmuchflexibilitydohaveontheSG&Afront?
WesMcDonald (SeniorEVP&CFO):
WellIdidn'tmeantoalarmpeopleonthat.It'sprobablygoingtobesomewherebetween2%to2.5%forthefall.Soitwillbelowerinthethirdquarterandhigherinthefourthquarter.
KevinmentionedBuyOnline,PickUpInStore,that'sgoingtodrivealittlebitmorestoreexpense.We'regoingtoputalotoftheinvestmentsinwesavedalotofmoneyinmarketingthisyearandwe'regoingtoputalotofinvestmentsinthefourthquarteronthat.Wehaveatendencytogetoutshoutedespeciallyonbroadcastbysomeofthelargerretailersthatarebiggerthanweare,sothatwillgiveusagoodopportunitytobemorecompetitivefromthatperspective.
Obviously80%ofourcostroughlyarefixed.Youcanarguethatadvertisingisvariablebutifyou'renotmakingyoursalesyou'reprobablynotgoingtocutyouradvertising.
Sotheeasiestoneofwedon'tmakeitwouldberelatedtoincentivecompwouldcomedown.Anythingthat'sunitrelatedwecouldsavemoneyinthestoresfromaprocessingperspectiveaswellastheEFC'scorporateexpenses.Youcanmanageyourhiringalittledifferently,leavepositionsopen,butthat'sonlyabout20%oftheexpensesreallywhatIwouldculturallyvariable.
MarkAltschwager (Analyst-RobertW.Baird):
That'shelpful.Thankyou.ThenKevincouldyoubrieflyaddresstheoff-aisleconcepttothestrategicrationalethere,anyearlytakeawaysfromtestandhowyou'rethinkingaboutthepotentiallonger-termopportunity?
KevinMansell(Chairman,CEO&President):
Sure.Off-aislewasoriginallyconceivedasawayforustoimprovethevaluationonourreturns.Andasyouknowlikeanyretailerwegetasignificantpercentageofreturnsinourstoresandamuchmoresignificantpercentageofreturnstoourstoresthatoriginatedwithanonlineorder.Soreturnsasapercentofsalesforushadbeenrisingconsistentlyovertimeandit'sjustthemathasmorepeopleboughtonlinethereisahigherreturnrate,thosereturnsgotothestoressoourtotalreturnratekeepsgoingupmodestly.
Whenwelookedatthatthepotentialprofitpoolformanagingwhatwegetforthosereturnswasprettysignificant.Thatcoincidedobviouslywithustryingtobemoreaggressiveandexperimentingmorewithnewinnovativeconcepts.Andsowecreatedthisoff-aisleconceptfirstandforemosttotargetanimprovedreturnonourreturnsfromcustomersbutsecondlyalsotolearnmoreabouttheoff-pricebusinessingeneral.
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SoIwouldexpecttherearegoingtobemoreoff-aislestorescoming.Againnottoqueuetoomuchintowhatwe'llbetalkingaboutlaterinthethirdquarterasevolutionstothemovesintheGreatnessAgendabutdefinitelynewformatsincludingmoreoff-aislestoreswillbecoming.Theresultshavebeenreallygood,they'vebeenbetterthanweexpected.
MarkAltschwager (Analyst-RobertW.Baird):
Thankyou.Andbestofluckinthethirdquarter.
Operator :
StephenGrambling,GoldmanSachs.
StephenGrambling (Analyst-GoldmanSachs):
Goodmorning,thanksfortakingthequestion.JustontheheelsofMacy'sannouncementonexaminingwaystomonetizerealestatevalue,what'syourlatestphilosophyonyourownrealestate?
Andthenmaybemorebroadlyasafollow-uparetraffictrendsjustdramaticallydifferentbystoresjustbecauseyoumightatsomepointreconsiderthenumberofstoresthatyou'reoperatingacrossthechain?Thankssomuch.
KevinMansell(Chairman,CEO&President):
Well,Wescanprobably,buttherealestateanswerishonestlyprettysimple.Realestateisoneoftheassetsthatwehave;likealltheotherassetswehave,we'realwaysreviewingwhattheoptionsarethatwouldmaximizeshareholdervalue.Andthat'sunderconstantreview.
It'snotnecessarilyfocusedontoday'seventsorthelastthreemonth'sevents.It'sjustaregularcourseofgoodgovernanceandwe'llcontinuetodothat.OnthetrafficsideIthinkwe'reactuallyprettyoptimisticIwouldsayabouttraffic.
WesMcDonald (SeniorEVP&CFO):
Yesthere'salittlebitofvariabilitybyregionbutnotaton.Andintermsofthenumberofstoreswehavealistofstoresthatwealwayslookatincremental,negativeincrementalcashflowstores.
Werunitonceayear.Thereisalistofprobably10or15storesonthatlist.We'vetriedtolookatmarketbymarketversusindividualstoresbecauseobviouslyifyoumakeadecisiontocloseastoreinonemarketyoumightpickupsomesalesinacoupleofotherstoresthatmightmakeanegativeoneturnpositive.
Mostofthestoresthatarenegativecashflowwe'retalkinginthecouplehundredthousanddollarsrangeperstore.Sowethinkit'sprudenttobealittlepatient.
WebelieveintheGreatnessAgenda.Webelievewe'regoingtocontinuetomakeprogressandhopefullytheslightlynegativecashflowstoreswillturnpositive.Butweclosedacoupleofstoresthisyear,we'regoingtocloseacouplestoresnextyearbutwe'rereallylookingathandfulsversusmajorclosures.
KevinMansell(Chairman,CEO&President):
Andjustsowe'retotallytransparentaboutthis,trafficvariabilityinshort-termwindowsamonth,aquarterarehighlyvolatile.Theycanchangealot.Soinaparticularmarket,inaparticularregion,inanindividualterritorythetraffictrendsyearoveryearcanbereallyprettyvolatileandthat'sbecauseweatherisabigfactorinourdemand.
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Theeconomicconditionsinaparticularmarketcanbeverydifferentdependinguponthejobenvironment.Anditcanuniquelybeaffectedaswellbycompetitionasnewcompetitionopensupinatradeareaorinamarketinabigway.
Wekindoflookattrafficwhenwe'reevaluatingrealestatemoreonlet'ssayathree-tofive-yeartrend.We'relookingatisthereaconsistentpatternofdeceleratingtraffic?AndthatwouldcauseustodotheevaluationWesistalkingaboutwhichistosayhey,what'sthefutureofthisstore.
StephenGrambling (Analyst-GoldmanSachs):
That'sallveryhelpful.Thankssomuch.
Iwilljumpbackinthequeue.Bestofluck.
Operator :
RichardJaffe,Stifel.
RichardJaf f e (Analyst-StifelNicolaus):
Thanksverymuch.Wes,ifyoucouldelaboratealittlebitontheshiftinadspendfrom1Qto2Qandwhatbodesforthesecondhalfit?Seemsthattherewassomemarketingpowderkeptdrylastyearandsomeindicationsthatyou'dbespendingmorethisyearandindifferentiateways.
Couldyouperhapstalkaboutsecond-halfadspend?Andalsoyear-over-yearpromotionalcadence,howyouseethatchanging?
WesMcDonald (SeniorEVP&CFO):
Therewillbenopowderleftdrythisyear.We'regoingtospend$1billion.That'sgoingtobelowerthanlastyearbutwe'vebeentakingwhatIwouldcallnon-productionsavingsoutandit'snotbycuttingthenumberofeventsoranythinglikethat,itisjustrepositioning.
Soforthefallseasonforthefirsttimewe'regoingtobespendingmoremoneyindigitalthanweareinprint.That'swhereourcustomerisdoingtheirresearch,whetherornottheypurchaseonlinefromwhateverdevicetheyareusingthey'redefinitelyusingtheresearchtomaketheirpurchasingdecisions.Sothat'simportant.
Inthefallseasonfromamarketing,orexcusemeinthespringseasonfromamarketingperspectivewereducedtheamountofcreditmarketingwehavewhichweactuallychargedtothecreditprofitabilityandactuallyincreasedtheamountofnon-creditwhichiswhathasdriventhenon-creditcardcompsbeingpositive.Sowecontinuetodothatandshiftedintomoreproductivemarketing.Butthefourthquarterwillbeupsignificantlytolastyearintermsofmarketingspend.
KevinMansell(Chairman,CEO&President):
Attheendoftheday,Richard,wespentlessmoneyonmarketinginthefirsthalfthanweoriginallyhadplannedandthenlastyear.Andweintendtospendmoremoneyinthesecondhalf.
WesMcDonald (SeniorEVP&CFO):
We'regoingtospend$1billion.We'recertainlynotgoingtospend$999million.
RichardJaf f e (Analyst-StifelNicolaus):
Andhopefullythere'satightcorrelationbetweenadspendandtraffic?
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WesMcDonald (SeniorEVP&CFO):
That'sthehope.
RichardJaf f e (Analyst-StifelNicolaus):
Thanksverymuch.
Operator :
MattMcGinley,Evercore.
MattMcGinley(Analyst-EvercoreISI):
Myfirstquestionisontheloyaltyuseandthecreditcardspendinthesecondquarter.Anditwasatoughmarketforeveryoneinthesecondquarterandtaxholidaycertainlydidn'thelpyou.
ButdidtheloyaltyusersandthecreditcardusersstillhavepositivetrafficwhereIwouldinterpretthatasthisisjustanissuewhereyouneedtoconvertmorenon-loyaltypeopleandgetthemonthebus?Ordidtheloyaltyusersandcreditusersslowdownaswell,whichmayindicateabroaderissuewiththemarketorperhapsthattheprogramneedsreadjusted?
KevinMansell(Chairman,CEO&President):
Ithinkthewayyou'vegottolookattheloyaltyuserswhichisthewaywehavetolookat,wehavetolookatthemasuniqueloyaltyusersbecauseyoucan'tlookatthemasapool.Becausewehavetwiceasmanyloyaltymembersaswedidlastyear,soit'skindofameaningless,IthinkWes,it'ssortofameaninglessstatistic.Becausenaturallytheytransactedalotmorebecausethere'stwotimesasmanyofthem.
Sowetrytolookmoreatuniqueloyaltymembers,howourmemberswhoareintheprogrambehaving.Andwearereallyfocusedonadifferentmetricanywaywhichisthemetricwe'refocusedonessentiallyistosaythatwe'vehadalongperiod,fiveyearsormore,wherethepenetrationofourcreditbusinesstoourtotalcreditbusinesshasrisenconsistently.
Theproblemisourtotalbusinesshasn'trisen.So,onacustomerbasisit'smorecustomerstransactingoncreditbutnotmorecustomersintotal.Loyalty'sobjectiveistocreateandwinnewcustomerssothatevenifcreditasapercentoftotaltransactionsisflatwewinbecausetotalsalesandtotaltrafficisup.
Sowelookatitalittlebitdifferent.Andtheanswertoyourquestiondirectlywouldn'tgetyoutowhereyouwanttobebecausewe'dtellyouloyaltytransactionsarewayupcomparedtolastyear.
WesMcDonald (SeniorEVP&CFO):
Wedoneedtodoabetterjobofusingloyaltytofeedthecreditprogram.We'vebeenfocusedmoreongettingpeopleonboardedintoloyalty.Ithinkthenextlevertopullafterwe'vedonethatforayearistoshowthatnowthatthey'veallexperiencedthevalueofthatloyalty,thevalueofbeingacreditcardcustomerismuchgreater.
Wealsohavetodoabetterjobofsolicitingapplicationsinthestoresforcredit.We'vetakenastepbackaswefocusedalittletoomuchonsolicitingloyaltyapplications.SoweneedtodoabetterbalanceofthatandI'vebeenworkingalongwiththemarketingguysandthestoreteamtodothat.
We'veseensomedramaticimprovementinJulyonthat.We'vemadesomechangesfromanincentiveperspectiveforboththeapplicantandtheassociatewhoissolicitingcredit.SoIsuspectthatwilldo
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muchbetteronsolicitingcreditinthefallseason.
MattMcGinley(Analyst-EvercoreISI):
Thankyou.AndthenonthesecondquestionIjustwanttomakesureyousaidthisafewtimes,IjustwanttomakesureIgotitrightontheSG&Agrowth,itwasaround2%inthefirsthalf.
Doyoustillthinkitwillbe1.5to2.5pointsinthebackhalfatprobablythehigherendofthatrange,Ithinkyousaidbetween2%and2.5%?AndtheprimarydriverofthatwhichyouhadpreviouslyIthinkwasaround0.75%to1.75%isBuyOnline,PickUpInStoreinaddollarsorwastheresomethingelsethatyouwereaddingelsetothatthatwasdrivingthat?
WesMcDonald (SeniorEVP&CFO):
Fortwoquartersinarowwe'vebeatourguidanceonSG&Asotheyearhasn'tchanged.Soitjustgotpushedfurther.
Ifwesavemoneyinmarketingwe'renotgoingtospendlessthan$1billion.We're$20millionlet'ssaybelowourplanforthespring,we'rejustgoingtoreinvestthatinthefall.
MattMcGinley(Analyst-EvercoreISI):
Okay,soyou'reconservativeandyourolledit?
WesMcDonald (SeniorEVP&CFO):
Yes,IwouldsaytheSG&AspendIthinkyouguysassumeit'ssomewherebetween2%in2.5%forthefallseason.
MattMcGinley(Analyst-EvercoreISI):
Okay,perfect.Thankyou.
Operator :
BobDrbul,Nomura.
BobDrbul(Analyst-NomuraSecurities):
Yes,goodmorning.IguessthefirstquestionIhaveiscanyousharewithustheNikecomp?Usuallyyougaveittousrecently,Ijustwonderedisitremainingabignumber?
WesMcDonald (SeniorEVP&CFO):
It'sup,well,nothighdoubledigitsbecausethatwouldbelike99%butit'supmidtohighteens.
BobDrbul(Analyst-NomuraSecurities):
Okay.AndIjusthadtwomerchandisingquestionsforyouKevin.ThefirstoneontheMissycategorywhat'schangedthere?
IsitthecrinkleTs,isitthehoodiesthatarehavingabigimpact,canyoujusttalkalittlebitaboutthat?Andaquestiononthedenimcategory,youhaven'treallytalkedaboutthedenimcategorybutarethedestructedjeansreallydrivingthebusinessatallthere?
KevinMansell(Chairman,CEO&President):
CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
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Gladtoseeyouarebackonyourcourseonthemarketingquestions,Bob.Idon'tevenknowhowtoansweryou.Iwilltrytoanswerthemseriouslyforyou,though,Bob.
MissyisprobablyIwouldsayourmostimprovedbusinesstrendandthat'safteralongperiodofnotbeingabletosaythat.AgainaspartofourevolutionoftheGreatnessAgendaweexpecttosharewithyoulaterMissyapparel,women'sapparelintotalisgoingtobearealfocalpointofsomechangeswe'remaking.Ithinkmanyofthemaretakingplaceinternallynowandwe'regettingalittlebitofthebenefitofthat.Ithinkdenimisdefinitelyimproved.
WesMcDonald (SeniorEVP&CFO):
Yes,Levi'shadareallygoodquarterinthesecondquarter.
KevinMansell(Chairman,CEO&President):
Sothat'sareallypositivethingbecauseaswetalkedaboutback-to-schooldefinitelystartedlater.Andthat'stypicallynotgoodfordenimsalesbutdenimsaleshavedeclinedsignificantlyoverthecourseofthelastprobably12to24monthsandthere'sbeenabigchangeintrendinthereforsure.IthinkthatactuallyisareallypositiveoneaswelookatAugust,September.
BobDrbul(Analyst-NomuraSecurities):
Thankyouverymuch.
Operator :
O liverChen,CowenandCompany.
OliverChen (Analyst-CowenandCompany):
Hi,thanksalot.Ontheinventorysideyoudidmentionthatyouwerejustalittlebitoverinventoriedwithrespecttowhereyouwantedtobe.
Whichcategorieswasthatanissuein?Andthatwouldbegreat,thanks.
WesMcDonald (SeniorEVP&CFO):
Ithinkthepocketswherewe'restillworkingthroughsomeofthejuniorstuffprobablyhavealittletoomuchinventoryinkidsandjewelry.Thosearetheareasthathavebeensoftversustheirplanobviously.Whenyoumissthesalesplanyou'vegottoworkthroughtheinventoryandthat'swhatwe'lldo.
KevinMansell(Chairman,CEO&President):
TheotherfactorandWestalkedaboutitIthinkinourearlierscriptedcommentsiswedidmakeadecisionthatwewerealongtimeago,sixmonthsormore,thatweweregoingtoaccelerateouroverseasimportsflowbecausewewereconcernedaboutensuringthatwehadtheminplentyoftimeforback-to-school.Asyouknowasitturnedouttheportstrikewassettled,flowdramaticallyimprovedandsooverseasimportitemsIwouldsaygenerallyprivatebrandkindofmerchandise--
WesMcDonald (SeniorEVP&CFO):
Cameinearly.
KevinMansell(Chairman,CEO&President):
Cameinearlyanditwasn'treallycategoryrelated,itwasacrosscategoriesbecauseit'ssortofallthe
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same.
WesMcDonald (SeniorEVP&CFO):
Thebiggestinvestmentwehaveininventoryremainsournationalbrands.Theyareup,unitsareupdoubledigits.Sothat'swheretheinvestmentIalludedtoactive,obviouslythat'salotofnationalbrandmerchandiseaswell.
OliverChen (Analyst-CowenandCompany):
Great,that'shelpful.AndWesandKevin,regardingtheoutlookforthecategoryplanninginlightoftheweatherIwasjustcuriousifthere'sdistinctionsyou'remakingonayear-over-yearbasishowyou'rethinkingaboutouterwear?Thepictureforweathercouldbemixed.
WesMcDonald (SeniorEVP&CFO):
Outerwearwe'rereallyconservative.Weallgetthesameforecastthatyouguysseemtoget,soitdoesn'tseemlikeit'sgoingtobeanextremelystrongouterwearseasonfromaweatherperspective.Soweplanthatdownaccordingly.
OliverChen (Analyst-CowenandCompany):
Okaygreat.HowareyouguysfeelingaboutskinnydenimandcrinkleTs?I'mnotsureifIgotthat.
KevinMansell(Chairman,CEO&President):
Iwillgetbacktoyouonthat,O liver.
OliverChen (Analyst-CowenandCompany):
Okay,thanks.Bestregards.
KevinMansell(Chairman,CEO&President):
Thanks.
Operator :
AndthatwillconcludetheQ&Asessionfortoday'scall.Iwillturnitbacktoourpresentersforanyclosingcomments.
KevinMansell(Chairman,CEO&President):
Thankyouverymuch.
WesMcDonald (SeniorEVP&CFO):
Thanksverymuch.Takecare,bye.
Operator :
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CompanyName:Kohl'sCorpCompanyTicker:KSSSector:ServicesIndustry:Retail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:12.15BPriceasofEventDate:56.11
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