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Kohl's Corporation (NYSE:KSS)

Q3 2010 Earnings Call

November 10, 2010 8:30 am ET

Executives

Wes McDonald - CFO

Kevin Mansell - Chairman, CEO and President

Analysts

Charles Grom - JPMorgan

Chris Cuomo - Morgan Stanley

Mark Miller - William Blair

Bob Drbul - Barclays

Adrianne Shapira - Goldman Sachs

Debora Weinswig - Citi

Daniel Binder - Jefferies

Erika Maschmeyer - Robert Baird

Liz Dunn - FBR

Wayne Hood - BMO Capital

Lorraine Hutchinson - Bank of America

Sean Naughton - Piper Jaffray

Richard Jaffe - Stifel

Kenneth Stumphauzer - Sterne Agee

David Glick - Buckingham Research

Operator

At this time, I'd like to welcome everyone to Kohl's third quarter 2010 earnings release conference 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 terminology such as believes, 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 it 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 So if you are listening after August 12 it is possible that the information discussed is no longer current.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 conference over to Mr. Wes McDonald. Sir you may begin your conference.

Wes McDonald

Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I'll start off reviewing some of the financial numbers then Kevin will go through some of our merchandizing and marketing initiatives. I'll follow-up with some store operations data as well as earnings guidance and then Kevin will wrap it up.

Total sales for the third quarter were $4.2 billion this year, an increase of 4.1% over last year. Comparable store sales for the quarter increased 1.8%, driven by an 8.3% increase in transactions per store. Units per transaction decreased 3.4% and average unit retail decreased 3.1%, while average transaction value decrease of 6.5%.

Year-to-date, sales increased 7.4% to $12.4 billion and comparable stores sales increased 4.4%, again, on an 8.3% increase in transactions per store. Partially offsetting the increase in transactions was a 3.9% decrease in average transaction value, including a 2.2% decrease in average in retail and 1.7% 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 52.5% for the quarter and 49.7% for the year, an increase of almost 300 basis points over the prior year quarter and approximately 235 basis points for the over first nine months of 2009.

Our gross margin rate for the quarter increased 48 basis points to 38.5%, 8 basis points higher than the 20 to 40 basis point improvement that we expected. Year-to-date, our gross margin rate increased 42 basis points to 38.9%. We would expect fourth quarter gross margin to increase 20 to 40 basis points over last year.

Moving on to SG&A. SG&A $1.1 billion this year versus $1 billion last year, an increase of 8.4% for the quarter. Better than our expectations of a 10% to 11% increase. As we've discussed in prior periods, we've made significant investments in our e-commerce business during the third quarter. As expected these investments in technology and infrastructure had a negative impact on our ability to leverage in both IT and distribution expenses. Though they didn't leverage for the quarter both our advertising and credit businesses for the expenses notably lower than our expectations. The credit improvement is primarily related to improvement in charge offs.

Store payroll and corporate expenses were able to leverage for the quarter. We would expect SG&A expenses in the fourth quarter increase 3% to 4%. Depreciation of $165 million versus $150 million last year, an increase of approximately 10% for the quarter and 8% year-to-date, primarily due to new stores and remodels. Depreciation is expected to be approximately $165 million in the fourth quarter.

Preopening expenses were $9 million for the quarter, $14 million lower than the prior year quarter. This 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 $2 million in the fourth quarter.

Operating income of $335 decreased approximately 1% for the quarter versus last year. Operating income as a percent of sales was 7.9%, a 42 basis point decline over the third quarter of 2009. Year-to-date, operating income increased 15% or $145 million to $1.1 billion. Net interest expense was $31 million for the quarter and $93 million year-to-date, consistent with both prior year periods. Interest expense is expected to be $31 million in the fourth quarter.

Our income tax rate was 36.3% for the quarter compared to 37.5% in the prior year quarter. We favorable resolved some state tax audits during the quarter, which lowered the effective tax rate. We expect our tax rate to be approximately 37.7% for the fourth quarter and the blended rate of 37.6 for the year.

Net income for the quarter was $191 million, $1 million higher than the third quarter of 2009. Year-to-date net income increased 16% to $652 million year-to-date. Our diluted earnings per share were $0.63 for both this year and last year for the third quarter and year-to-date diluted EPS increased approximately 16% to a $2.12.

Moving on to some balance sheet metrics, first of all square footage for remodels, we currently operate 1,089 stores compared to 1,059 at this time last year. Gross square footage was 96 million at quarter end 2010 compared to 93 million at quarter end 2009. Selling square footage increased from 78 million at the quarter end 2009 to 80 million at quarter end 2010. We ended the quarter with $2.4 billion of cash and cash equivalents, an increase of $938 million over the prior year quarter end. Substantially all the cash and the cash equivalents are in money market funds and commercial paper.

Moving on to inventory, our inventory is approximately $4 billion versus $3.8 billion last year, an increase of approximately 6%, and inventory per store is up approximately 3%. Year-to-date capital expenditures were $645 million, approximately $100 million higher than 2009, due to increased remodels and the opinion of our new e-commerce distribution center as well as an additional call center to service our credit card and e-commerce. These increases were partially offset, by a reduction in new stores.

AP as a percent of inventory was a solid 52.7% versus 54.4% last year. As we've said in prior periods, we have anniversaried our supply chain financing initiatives, and we no longer expect to see the significant improvement in this metric that we have seen in the past.

Moving on, weighted average shares were 308 million for the quarter and for the year, and assuming no share repurchases, we would expect weighted average shares for the year of 309 million.

With that, I'll turn it over to Kevin.

Kevin Mansell

Thanks, Wes. As Wes mentioned, comparable store sales increased 1.8% for the quarter and 4.4% on a year-to-date basis. E-commerce sales increased approximately 41% for the quarter and 47% year-to-date, and contributed approximately 100 basis points to our comp sales for both the quarter and the year.

From a line of business perspective, footwear reported strongest comps for both the quarter and year-to-date periods, driven by strength in athletic and adult shoes. Men's also offer from the company average in both periods was strength in apparel basics, dress clothing and active wear. Home and women's apparel reported low single digit counts for the quarter and mid single digit counts for the year-to-date period.

The home business was driven by small electrics seasonal table topping luggage, women's strength was in Sonoma, active, intimate and updated sportswear. The children's and accessories business underperformed the company, posting slightly negative comps through the quarter and low single digit comp sale of increases on a year-to-date period.

Watches, sterling silver jewelry and fashion jewelry were best performers in accessories, but toys and infants and toddlers performed well in children. On a regional basis the Southeast region reported the strongest comps for the quarter and year-to-date. The mid-Atlantic and west regions boasted positive comps for the quarter, while the remaining regions had very slight negative comps. All regions in the company have positive comps for the year.

We expected increase in comparable storage sales for the fourth quarter in the 2% to 4% range. For the fourth quarter we would expect November to be towards the low end of the quarter, December to be at the high end of the quarter and partially due to the extra shopping day between Thanks Giving and Christmas and January to be with the quarter performance.

From a merchandise standpoint private and exclusive brands penetration increased by almost 300 basis points, to 48% of total sales for the quarter and is the same on a year-to-date basis. There is broad success on both the private and exclusive brand side on both the quarter and year-to-date basis.

In particular however, our efforts to extend our key brands more forcefully across the store have resulted in significant increases to some of our most important exclusive national brands Simply Vera Vera Wang, Elle, Mudd, Felix Sport and Food network all had sales increases of 15% or more in the quarter. In addition LC Lauren Conrad, which is new this year significantly over achieved our expectations.

From the inventory standpoint as we mentioned earlier on an overall basis average inventory per stores approximately 3% higher than last year. Clearance inventory is approximately 10% lower on a per store basis and is about 3% of our total units on hand. Our merchants, product development and logistics team continue to work for their vendor partners to support our sales, putting us in a great position for the holiday season. Our size optimization initiatives continue to develop and we will have almost all of our sized receipts on the program for fourth quarter deliveries.

By leveraging this initiative and other inventory management disciplines that are in place, we saw improvements in, in-stock levels of over 3% in the third quarter, leading the increased sales and customer satisfaction.

We would expect our inventory per store at the end of the fourth quarter to be up low-single digits on a per store basis, similar to our expectation for the year. As Wes mentioned, we expect gross margin for the remainder of the year to be up 20 to 40 basis points over last year. We believe our increased penetration in private and exclusive brands as well as the continued better inventory management performance will help drive that results.

On the marketing side our holiday campaign will continue to leverage are highly effective, The More You Know, The More You Kohl's platform which is proven to resonate with consumers in position Kohl's at the smartest choice for holiday gifts.

Key messages will be communicated across multiple mediums, including print advertising, direct mail, e-mail, digital and social media, kohl's.com, television, radio, in store and new for the holiday 2010 season mobile access to kohl's.com. Our marketing efforts are designed to make our customer feel confident over that revisits she makes to Kohl's, she will get what she wants and needs at the best total value.

She'll have an easy and guilt free shopping experience that we believe she won't get it in any other retailer. She'll see our amazing exclusive designer brands like Simply Vera Vera Wang, LC Lauren Conrad or Food Network. She can use our stackable savings tools like Kohl's cash and the Kohl's charge. And she'll be assured with our unbeatable policies, like hassle free returns and no exclusions.

We continue to believe and our year-to-date results prove that the more she knows about Kohl's, the more she chooses Kohl's. Now, I turn it back over to Wes to touch on our store experience initiatives in common on our share repurchase as well as provide earnings guidance.

Wes McDonald

We opened 21 new stores this quarter for a total of 30 stores this year. We also reopened a store in Virginia which closed in January 2010 for a complete rebuilt. We currently plan to open approximately 40 stores in 2011, with a split of 10 stores in the spring season and 30 stores in the fall season.

This is a slight increase over our original thinking as we were able to secure more attractive sides, the favorable realistic cost than we anticipated earlier in the year. All stores now have an in-store kiosk and they are over achieving our plans. The kiosks give the customers additional way to find a size or color while conveniently shopping in-store it also offer extended sizes in multiple programs and categories across the store. We are excited to deliver industry leading technology to the customers enhancing best in class store experience. We installed electronic signs in 50 stores at the end of October and plan to continue to pilot in another 50 stores by the end of January.

We expect to be able to make a decision on a full chain roll out, by the end of first quarter of 2011. Regarding our share repurchase announcement today, one strong cash position at the end of the third quarter and our cash flow generation is expectedly sufficient to meet our ongoing operating needs.

As such within in the next several weeks, we intend to enter an agreement to repurchase $1billion of our common stock on an accelerated basis. Commencement of this repurchase program will be continued on among other things, market conditions, and on Kohl's not possessing material non-public information on the commencement day.

The share will be repurchased under 2.5 billion share repurchase program announced in September of 2007, pursuant to which 1.9 billion of authorization remains. As of October 30, 2010, we've spent $600 million to acquire approximately 13.5 million shares of our common stock under the 2007 program, which has no specified expiration date.

Moving on to earnings guidance, as previously disclosed as a result of detailed review of our historical accounting lease properties, we expect to record non-cash adjustments, which are expected to increase depreciation, interest and rent expense for the third quarter. Although we have not completed our review based largely on the average adjustment required for leases that have been reviewed to date, we currently expect the correction, in the range of $25 million or $0.5 per diluted share, $75 million or $0.15 per diluted share.

The errors occurred over a number of years. Upon finalization of our review, we will quantify the impacts of the corrections on previously reported periods and we, expect to be complete by the filing of our 10-Q for the third quarter in December.

With that let me share some details behind our updated guidance for the fourth quarter.

Summary for the fourth quarter: We would expect the total increase in sales of 4.5% to 6.5%, comp sales of 2% to 4% and gross margin of 20 to 40 basis points over the last year. We expect SG&A to increase 3% to 4%. This would result in earnings per diluted share of $1.51 to $1.59 for the fourth quarter.

Importantly, this guidance does not reflect any additional share repurchases in fiscal 2010.

With that I will turn it back to Kevin to close it up.

Kevin Mansell

Thanks Wes we achieved another strong financial quarter in which we made additional progress on our goals to both build on our market share gains for last year. And at the same time to investment in our future by improving our business processes through technology, investing opportunistically to new stores and accelerating our remodel strategy.

Our sales growth continues to come from all regions of the country in all lines of our business. We continue to particularly make great progress in the Southeast region, using marketing tactics learned last year in the West region. Importantly, we have now anniversaried last year's major grand opening effort in California, while achieving a positive comp this quarter in the West region.

This was an issue to many investors who were concerned about accomplishing. Our increased penetration of private and exclusive brands along with strong inventory management, continue to benefit us on our gross margin rate and we see no change in that going forward. We enter the holiday season in great shape from an inventory perspective. As we expected, inventory levels are on plan and clearance levels are below last year on a per store basis.

I am particularly happy, that actual SG&A cost increased much less than our expectations. Every area the company participated and finding ways to save money to help keep our expenses low without affecting the customer experience. Leverage and store payroll expenses continue to be driven by sustainable productivity improvements.

And finally, as Wes just shared, we're pleased to announce the restart of our share repurchase program. We're reviewing our future capital structure plans and options, and expected to complete the review in the fourth quarter. We intended share details with you in our fourth quarter conference call in February, regarding our longer-term plans for both share repurchase as well as a potential initiation of dividend.

With that we'll be happy to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Charles Grom from JPMorgan.

Charles Grom - JPMorgan

Just wondered if you could just talk about why the cadence of the comp, Wes, would be lower in November and then better in December. On two year, it looks like your compare gets harder as the quarter progresses, but on a three and four year it gets easier. So I'm just kind of wondering if you'd give us a little detail why in a low end for November.

Kevin Mansell

It's Kevin, Chuck. First of all the estimates of our particular performance by month are what I would say is less than scientific. We do our best job, kind of looking at the overall period and making judgments about where we have more opportunities and less. Frankly, the major factor in the three months is the fact that there's an extra day in December, prior to Christmas.

And so by default we lean towards, saying that December will probably be a little better than the quarter. There isn't any other issue that would cause us to believe November was less or January would be less. It's just kind of saying to ourselves, it we expect to run in x-range, then December has an extra day before the holiday, and will probably run a little better in the December.

Charles Grom - JPMorgan

And then, Wes, on SG&A, it came in a couple 100 basis points lower than what you expected. Did you still incur the $25 million credit and then $15 million in advertising that you had anticipated in august.

Wes McDonald

We still incurred, the incremental spend in advertising was $15 million. We were able to save money in other areas of advertising, unrelated to the incremental promotion. From a credit perspective, we did incur the late fee revenue draft that we anticipated. We made up for a lot of it with better charge off experiences as well as the incident rate in incurring late fees was a little higher than we anticipated.

Charles Grom - JPMorgan

Just a follow-up on that, is your expectation for the fourth quarter still have $15 million in credit and then other $5 million in advertising?

Wes McDonald

That would be correct. Those, whether we can save money in other areas in credit, I expect to have better charge off rates. But that's kind of implied in our guidance. So can we do a little better than what we anticipated, may be. But I think the incremental $15 million and $5 million still stand.

Charles Grom - JPMorgan

And then just in terms of the ASR is it your expectation to get that complete in the fourth quarter. And I guess, my follow-up to that would be, how should we think about your strategy toward share repurchase once we get that complete in 2011?

Wes McDonald

I'm not sure at this time, because we haven't entered an agreement yet, as to what the duration of the ASR will be. What I could tell you for next year, I would feel comfortable using a reduction in approximately 17 million shares on share count for fiscal 2011. It's premature to kind of come up with an estimate of the fourth quarter, because we're not sure when we're going to enter the agreement and when we'll be delivered the initial shares and things like that.

So when we enter in the ASR agreement, we'll update our earnings guidance for the fourth quarter at that time. And then regarding next year, I think Kevin mentioned, we're in the process of reviewing. I think we'll lay out in our February call going in and while we give fiscal 2011 guidance. I think it will lay out a multi-year plan and distributing excess cash to shareholder, which would involve share repurchase and the possible initiation of the dividend. But I think we rather wait until February and lay it all out, and then we'll have a better idea of what we're going to do.

Operator

Your next question comes from Michelle Clark from Morgan Stanley.

Chris Cuomo - Morgan Stanley

It's actually Chris filling in for Michelle. I have a question on the dynamics of your comp. It's being largely driven by traffic as your AURs and fees have been trending down. So just a question on, how do you think about that playing out over the next twelve months? Is there any risk that we could see some stagnation in your comps, as the traffic compares get more and more difficult? How you're thinking about growing that by topline in 2011?

Kevin Mansell

Well, we haven't made any comments regarding 2011 guidance. I think the guidance that we gave for the fourth quarter sort of indicates and we believe we can continue to achieve the trend, more alike the trend we have in a year-to-date basis. The trends in terms of the mix that where the comps come from that is, it's primarily been driven by transactions, have been pretty consistent.

Transactions have driven our comps the whole year and they continue to do so in the third quarter. So I would expect that when we get down with the fourth quarter and we talk about our performance in comp in the fourth quarter, then we'll be talking about transactions leading the way as well, so no change from that standpoint. As far as next year, though goes we'll talk about that in February.

Wes McDonald

I mean, our whole strategy, Chris, is to get back to the sales from square foot productivity that we were a few years ago. The best way to do that is increasing transactions per stores. We just did an eight, three on top of a three, six last year in the third quarter. So we've shown the ability to comp positively on traffic gains.

Chris Cuomo - Morgan Stanley

And then, one on the gross margins, specifically your guidance for the fourth quarter. You're looking for up 20 to 40 bps and that's consistent or with what you did in the third quarter, yet your compares are substantially more difficult. So could you talk about, how you get there? Presumably you're baking improvements from the size optimization efforts, probably exclusive brands. Could you just talk about some of the initiatives that I presume are moving the needle up year-over-year, despite the more difficult comparisons? And again, do you expect that, if you could touch on your expectations broadly if that would persist in 2011 as well?

Kevin Mansell

Again, 2011 is premature to talk about. And for the fourth quarter, the guidance we've given and margins, really been pretty consistent. I think we gave 20 to 40 basis points improvement earlier and we're staying with that. I would say frankly, that we work hard and trying to achieve and overachieve that, and we've had a consistent ability to do so.

And what's driving that has also been really, really consistent. It's primarily being driven by two things, one is continued success and growing our private and exclusive brand penetration, which for the quarter and for the year were both up about 300 basis points. That's definitely a plus for us and that's going to continue for sure.

And then secondly, a lot of technology investments around inventory management allow us to really deliver receipts closer to sales. And that benefited us from being able to allocate those receipts across our store portfolio and make them work harder for us. Things like size optimization or big piece of that. So the elements to drive margin improvement are in place and we believe it will work for us in the fourth quarter as well.

Operator

Your next question comes from Mark Miller from William Blair.

Mark Miller - William Blair

The credit penetration accelerated faster in the third quarter. And I was hoping you could comment on the drivers to that trend. And then how much of that was due to the additional marketing? Are you able to quantify the ROI and the additional marketing in this period?

Kevin Mansell

The first question is kind of easy, because we added a credit in October, where we didn't have one last year. So that's the major cause for the increase in credit share. That obviously is a much higher penetration during the credit event than our LPS event, which it replaced. As far as ROI and the incremental marketing, we think that the specific tactics that we did drove incremental business.

It wasn't reflected in the comp for October, primarily due to the fact that it was very warm in the first two weeks of the month, and it was very tough to do business. The incremental marketing events were really around the back half the month and we thought that worked fairly well.

Mark Miller - William Blair

And then could you address the outlook for additional exclusive lines going forward. You're obviously getting nice improvement on the existing product you have. But how much more expansion would we need to see in some of these exclusive opportunities for you to keep this penetration rate going next year?

Wes McDonald

We're obviously focused on continue to improve the penetration, given the success we've had and the impact that's had not only on our merchandise margins, which is certainly a nice benefit or more importantly the impact that's had on our sales. We're still planning major new brand introductions for fall of next year.

And I would expect that you would hear about them very shortly. We think they'll be significant as we've said along, we think they will impact the large number areas in the store. And we continue to be focused in our new brand introductions and improving our better and best price point offering for consumers, because that's what they're asking for, and particularly around our modern and contemporary style areas. So you'll be hearing something shortly, Mark.

Operator

Your next question comes from Bob Drbul from Barclays.

Bob Drbul - Barclays

First question that I have is on e-commerce, are you getting the returns on what you expected as you look at the contribution to the comp any sort of early reads from that perspective would be my first question.

Unidentified company representative

Yes, I mean the short answer is just, you know, Bob, that we made a very aggressive investment in our e-commerce business this year not only in capital investment, but expense investment and marketing investment as well. ECommerce is running well over 40% up for the year. You know, our course that e-commerce platform is a more important element of everybody's business in the fourth quarter. So, we really optimistic about the impact we could have on our business in the fourth quarter as well.

If you look at returns on investment on a short-term basis and naturally there are online operating model in this year. It is impacted by those big investments but that's just the natural cycle of the business and we were expecting to go right back to the kind of returns we had before so we really believe in this business so we wouldn't be making the kind of investments we're making in it.

Bob Drbul - Barclays

And then given on the inventory you seem pretty comfortable with where you are and despite the sale shortfall in the quarter. Are you comfortable with your outerwear inventories, one trend that I picked upon was you making a pretty big bet on motorcycle jackets in the women's outerwear. Wonder if you could comment on that a little bit?

Unidentified company representative

You're getting to be quite the merchant, by the way Bob and there is a future career for you in the merchant navy I think. Just in general I mean that the truth is that October was a weaker month for us, no question about it the facts say so that was driven frankly totally by the first 2 weeks of the month and those results were driven totally by exceptionally warm whether that dramatically impacted our seasonal categories.

As our outerwear was definitely one of those categories and I think we came out of the month of October with more outerwear inventory than we planned as a result of that but a more than comfortable levels going into the November, December selling period and I think you know that seasonal categories for us fluctuate wildly based on weather and has more normalized weather returned later in the month of October our business trends returned frankly to a much more normalized turn rate for the year.

So, from that perspective we're really optimistic about the fourth quarter.

Unidentified Analyst

And Kevin there's a lot of interest in the jegging trend I was just wondering if you can give us an update on that as well?

Kevin Mansell

Continues to be very strong. Overall, denim continues to be very strong. We've had great results in the third quarter, with some of our key suppliers, particularly Levi is a great example, success in denim. Jegging continues to be strong and Denim continues to be strong.

Unidentified Analyst

And then Wes just one housekeeping question for you. On the fourth quarter, no buyback assumed. What's the share count that you are using on the guidance?

Wesley McDonald

It's three or nine, basically.

Operator

Your next question comes from Adrianne Shapira from Goldman Sachs.

Adrianne Shapira - Goldman Sachs

Bob asked my Jegging question. I appreciate the full review of the capital structure coming in February, but may be give us a sense of, how you are thinking about, may be a minimum cash level you are comfortable with in terms of operating the business?

Unidentified Company Representative

I think, articulate 750 to a billion that's going to occur roughly in the third quarter. So if you are trying to model on an annual basis, I think you probably need at least $1.5 billion. At the end of the year obviously we increase our cash in the fourth quarter versus the third quarter. We're doing it on an annual basis I would use the $1.5 billion as the minimum.

Adrianne Shapira - Goldman Sachs

And then Kevin a big topic these days is apparel inflation. Obviously we are seeing AUR down sharply here. Help us think about may be just how you're planning, how you're looking to contend with what seems like inevitable issue in the back half, how you're thinking about, how that impacts margins and then also how that impacts sort of AUR. What the plans are? Is that an opportunity? Are you looking to pass them on? How should we be thinking about inflation in the back half of next year?

Kevin Mansell

Well, I mean just set the facts first, cost are going to be up for fall of 2011 across all apparel categories there's no question about that. I would say that what we see right now is that the range of increases are fluctuating quite a bit and they're wide and they are naturally very dependent on the category you are talking about, the fabric content of course cottons get a lot of attention and the country of production.

We haven't made Adrianne enough firm commitments to comment specifically about our cost estimate beyond saying that, I would tell you as you know, every retailer and every wholesaler is going to impacted by this. So, like many other things I think the winners will be those that best navigate the situation, they figure out how to mitigate that environment most effectively and they execute better. And on that basis I like our chances being able to deal with this issue better than our competition.

Having said that, we've had plenty of time to prepare for this, so, this is not something that's unexpected, not something that's new and we were employing all the things that we know how to do to mitigate this ultimately for our customers. Because that's really what's its all about and you like we believe that we still have a consumer that's buying cautiously and so their apt to be less open to having to pay higher prices for goods that are really discretionary.

So, highlight our chances being able to deal with that and as I said we've got plenty of time to prepare for it and we were executing strongly against it. We're going to go out of our way to figure ways that the customer doesn't have to see the impact of those higher costs.

Unidentified Analyst

Kevin maybe give us the sense this year as you're seeing some perhaps cost pressures already this year, what you've done across categories, how you've been testing some pricing elasticity this year has been in terms of how able to pass it on? What the consumer's willing to accept?

Kevin Mansell

I would say two things, first of all if people are worried about the impact of higher costs and officially some cases higher retails on sales, I think its difficult to draw a straight line relation on that, I mean if you think about two categories that in the last 12 month I would say have universally been impacted by higher costs that's footwear and home and I think you probably are hearing that from all other companies you cover.

Both footwear and home are leading the company in terms of sales increases for the year and they are running slightly contrary to the company's trends and average unit retail because they are living with higher costs. But the team to a lot of different ways have been able to sort of mitigate that impact and prepare the customer part.

We're doing things obviously like reverse auction which we've been a leader in and I think on the early cycle on and we're expanding it. That's a really aggressive way to try to get cost to the lowest level. We are holding raw material shipments as long as we can while at the same time giving raw material commitments in categories which we expect to be in shorter supply.

You know continuing to consolidate our vendor structure overseas, we have a very concentrated supplier base as it is. That benefits us far more than ever because they are able to navigate this as well. The fact that we're growing is a really big weapon and they were one of the few companies that has seen consistent growth through the last two and a half years of a top economy.

And, so we've been there for our supplier partners and I think we'll be apt to be able to deal with that more effectively. Naturally, product reengineering is always something you look at what material do we use, how do we fabricate it, how do we construct it. You always are looking at your countries of production. Some countries are under more pressure than others because they not only have the raw material issue but they might also be dealing with either currency or labor issues. In that case, I really think our partnership with comes in a big way to positive because it gives us more flexibility than much of our competition has. So there are a whole series of steps that are real and we've used in the last twelve months in categories like footwear and home. And at the same time we've been we've been successful in footwear and home.

Unidentified Analyst

That's helpful and just last question it sounds like you saw an opportunity to accelerate the store openings. Maybe give us the sense of what change you open up those incremental price and then how we should be thinking about going forward are we seeing better opportunities and perhaps a ramp on a go forward basis in terms of square footage growth?

Unidentified Company Representative

I'd say it's a very fluctuating situation wouldn't start changing your models to 40 in the out years right now I think the reason we increased to 40 was quite honestly was mainly due to real estate cost favorability. So deals got a lot better than we've been working for a while and started profit in to the favorable NPV and so that's why we, kind of pulled the trigger on a lot of those, whether or not that continues is really going to be a function of the real estate costs remaining low. If they start to remain high and our sales estimates were still sort of sluggish and you know you might see us going back to 30 but for now 40 for next year and we'll see how 2012 goes.

Operator

Your next question comes from Deborah Weinswig from Citi.

Debora Weinswig - Citi

The opportunities that exists in the accessories business at this point?

Unidentified Company Representative

They continue the same. We've had great success in our bridge and fashion jewellary categories for a number of quarters now and that continued into third quarter we are highly focused on improving. My penetration of that business I think it works well with where the consumers mindset is today, in terms of what they are willing to spend and then beyond that in particular I would say our handbag business is a high area of focus, it's a category that we're looking to improve.

Our performance on, and we're doing that in great way by intensifying the amount of our exclusive brands that we have in those categories. So that's been part of the strategy and not just footwear but also handbags to improve the penetration of some of the brands that are successful apparel areas. So I think those are probably the two biggest to one.

Unidentified Analyst

And then of the new stores that you are opening, how many of those are in newer small format?

Wes McDonald

It's hard to say we'll give you some more information on that now I would say, there is more small for next year that there has been in last years just given some of the strategies we're doing for real estate perspective. For example, we're we're testing a small store in New Jersey right across from Manhattan. That's a 64-K, where normally we put an 88-k, there's just no place to put an 88-k and so we're going to try to do a small store in a more urban area and see how it works.

Unidentified Analyst

And then with the same store sale in terms of same store sales to leverage at this point with some of your technology investments has that come down?

Wes McDonald

I'd say the goal would be to leverage on a one comp next year that would be versus our reported 2009 we'll give you a lot more clarity on that in February but I think there's still some inflationary pressures out there, that aren't really under control, control in terms of utility fuel anything, same kind of things recording comp prices to go up are going to cause other commodities to go up as well, we'll have a much better field for that in February.

Unidentified Analyst

We talked about expenses quite a bit but I just want to you would guidance for 10% to 11% expense but it came in at 8.4. What would you say kind of the biggest (inaudible) in terms of driving that better than expected expense growth?

Wes McDonald

It was really across the board if I had to pick one area probably be credit, just because the charge-offs. But we got favorability in advertising, in store payroll and corporate expenses. We didn't do anything with the bonus accrual or anything like that that would cause what I would call more one time favorability which is kind of consistency across the board from all the areas it was brilliant team effort.

Unidentified Analyst

And that's all for this holiday season.

Operator

Your next question comes from Daniel Binder from Jefferies.

Daniel Binder - Jefferies

Couple of questions, first on the brands that you are planning for the fall of next year I am just curious, does that include addressing some of the weakness in the juniors business that we saw this year? And then my second question was related to promotional cadent in marketing through the holiday season, how that compares, what you're expecting not just on your own but in the industry versus last year?

Kevin Mansell

Taking one at a time it will be premature for me to talk about the new brands for next year other than to continue to state here that we're probably most focused on our modern and contemporary dressing area and obviously our better and best price points (technical difficulty) where we see continued opportunity.

Beyond the promotional cadent are, our promotional cadent is basically similar to last year though we've intensified as you know our investment in certain types of media. Things like digital, certainly social, for the first time mobile and our efforts in those areas is up way, way over last year.

I think we've seen a promotional environment, I don't know that is uniquely different than last year Dan, I think it's to a great extent been like that for a while. To one think that we've continued to see a strong trend in terms of consumer behavior around is that, as we sort of exited the worst parts of consumer spending in these discretionary categories last year.

Consumers spend more and more time thinking about what they were getting for what they were paying. So, it moved from being lowest prices to really being what the overall value that I get. So, a lot of the incremental marketing we are doing in a lot of our intensification is around convincing and communicating to consumers why what we give them for the price is of better overall total value.

Daniel Binder - Jefferies

And then there's a follow up, Wes I think it's probably been about a $100 million or so expenses that we saw this year that maybe you weren't anticipating at the beginning of the year. Can you just give us the rough idea of how much of that actually reverses if you will, next year, stuff that's not sort of ongoing?

Wes McDonald

Some of it was in our original guidance but I think there are no one-time expenses in the spring. Much of it will be invested in the e-commerce in the second quarter and will be selected in additional e-commerce expenses going forward. The buckets will just change from outside services to equipment, rent, hardware and software maintenance. And the fall I'd say $50 million related to credit, $35 million in the third and $15 in the fourth.

Assuming that the fourth quarter incremental advertising spending of $5 million will be successful the $15 million and the $5 million that we spent in the fall for advertising will be repeated and then whatever the accounting adjustment, I would view it as unusual and not to be go-forward expense.

Operator

Your next question comes from Erika Maschmeyer from Robert Baird.

Erika Maschmeyer - Robert Baird

Could you talk some more about the sustainable productivity improvements at the short level that you've talked about, and you've been able to lower payroll and where you think you could see additional improvements going forward?

Kevin Mansell

There is a number of different initiatives in place, but to be honestly with you, the one we're probably most excited about is our electronic signing technology. And the impact that that might have on both saving payroll and improving productivity as a result, and also redeploying payroll into sales-getting efforts as opposed to simply changing signs around the store.

So we finished our first 50 store implementation and installation of our e-Sign technology in the third quarter. And we're rolling out the next 50 stores now. And our plan is to do a complete and fair analysis on the fourth quarter results of those 100 stores, as we turn the corner into next year. And if the results look like they're trending and look like they have an early going, we would aggressively move forward on expanding the technology to all stores.

And if we did that, that would be a substantial payroll saved productivity improvement. And as I said, we may make the decision to redeploy some of that payroll into things that will actually drive sales more effectively. I mean there are a lot of different initiatives, but that's one that really kind of stands out for me.

Erika Maschmeyer - Robert Baird

In terms of the e-commerce, could you just clarify the contribution of e-commerce for your Q3 comps and expectation for Q4? I know you had talked about closer to a 200 basis point benefit in the back half.

Kevin Mansell

I think it was 200 basis points in the fourth quarter. And in the third quarter it was about 110 basis points.

Operator

Your next question comes from Liz Dunn from FBR.

Liz Dunn - FBR

Just a few follow-up questions, I apologize if I missed it. But of the 40 stores for next year, are any takeovers? And if so or is not, what are you seeing in the environment relative to takeover opportunities?

Wes McDonald

Twelve of the 40 are takeovers, and a few more Mervyn's, a couple of Wal-Marts, a couple of Lowe's.

Liz Dunn - FBR

And do those continue to have better return characteristics then other new stores?

Wes McDonald

I mean they're cheaper to open, because the building already exists. We have to remodel to our specs. But I'd say, it really depends on the area, we can ground-up stores. They'll just as get us a return and takeovers are in general a better return than a ground-up store. They're just cheaper originally to open.

Liz Dunn - FBR

And can you discuss sort of your thinking around dividend. I know, Kevin referenced it in at the tail end of his prepared remarks. But I think some more expecting in announcements, rather than later. Can you talk through your thinking, regarding a dividend, and why we are not hearing that announcement now?

Wes McDonald

I think first of all we've never had a dividend. Our thought process is that when we implement and institute a dividend, it's for good, it's permanent. And we would certainly like to grow it over a period of time. So from my perspective and I think Wes agrees, this is a long-term strategic implementation. And it's not something that we do lightly and we just think it's more appropriated at our year end, when we're able to better kind of also describe our future view of capital repurchase.

Because while we're making this onetime very large repurchase, as you know, you probably have models that show cost creating quite a bit of cash over the next few years. And I think both of us feel investors, while they might want to hear more details quicker. And they really would rather ultimately here the long-term strategies.

So they really understand what we are going to be doing with our cash, each and every year over the next few years, as we produced a lot of cash. So it's a little bit of a long answer for you Liz. But honestly, we just think it's more appropriate at a year end kind of a call, when we can really give you a lot of details about the future.

Liz Dunn - FBR

And then I guess a final question and sort of related to that. Do you envision having an Analyst Day next year to sort of unveil sort of a new long-term plan?

Wes McDonald

Haven't really had the discussion, it's probably something we will have a discussion about, but not prepared to giving the answer right now.

Operator

Your next question comes from Wayne Hood of BMO Capital.

Wayne Hood - BMO Capital

Wes, I guess in your prepared remarks or during the Q&A, you've mentioned that, you felt like you needed $700 million to as much as $1.5 billion in cash on the balance sheet to run the company.

Wesley S. McDonalda

$1.5 billion at the year end. The third quarter would be $1 billion, that's our peak use of cash. And I don't want to go into the revolver.

Wayne Hood - BMO Capital

So why would you say, the business need such a large cash balance to run it and save in year end, when you have an opportunity to take your churns back up to where they were. And drive your payable ratio higher, which seems to me that that number would be closer to $500 million to $600 million on a normalized basis rather than even $1 billion.

Kevin Mansell

Let me interject one thing, because Wes is looking at me, I think that one factor in there is, we're going to be conservative and what our estimates are. So I think that's a big factor to be honest with you, Wayne. And of course, Wes, is acutely aware of what we need and the numbers that we need, he's giving you his best estimate, but he's going to make it a conservative estimate.

Wes McDonald

Now, I would say, if you do the math on the $1.5 billion, you'll still see the opportunity to do significant share repurchase going forward. That's what my number show. I don't how many billion, you're looking for from a share repurchase program over a multi-year period.

Wayne Hood - BMO Capital

That affects how you look at that, because it depends on how much you want to carry without becoming Kohl's National Bank.

Wes McDonald

It's $1.5 billion. And I just think you guys should be really happy with the share repurchase program based upon the excess cash flow. And that we'll talk about in February. We can't argue about what's the comfortable cash level. The way we look at it is on a downside scenario, where we're not running the comp that we expect, what do we need in our peak cash usage period, which is the third quarter, without having to ever dip in the revolver. Now, we've got more conservative in the past, we've dipped in for this revolver halfway in those calculations. But after living through 2008, when bank's wouldn't lend to banks. I don't want to be held a hostage to having to go into the revolver at all.

Wayne Hood - BMO Capital

And one other question related to capital structure would be, I think in the past you had mentioned, that the credit rating agencies may get nervous, if you're debt-to-EBITDAR, it was 2.5. So as we think about guardrails, would the kind of a low end of that ratio be 2 and maybe 2.3 is kind of a way to think about where those numbers should fall out without putting your credit ratings at risk.

Wes McDonald

We're going to manage two times that EBITDAR. And that's what we've kind of talked about with the rating agencies and the board. And that's where we feel comfortable, because if you manage that you have a bad year. It can go up like, to your point, it can go up two to three, and you still won't be in danger of getting downgraded. At that 2.5, they get nervous.

Wayne Hood - BMO Capital

And my last question, I guess is for Kevin. You mentioned in your prepared remarks, the kids business was down and below the company average. So could you just speak to how you plan to restore growth there, particularly in the spring of next year, and how to you're derisking any kind of markdown risk in that business?

Wes McDonald

First of all on the margin risk, I don't think we believe there is any. We've managed inventories effectively there just as we have in the rest of the companies. So I'm not concerned about that at all. From performance basis our focus is around improving our boys and girls performance. Our infants and toddlers performance in new born, and small sizes have consistently done well. And it hasn't really been in any trail down in sales over a period of time. That's not true in boys and girls, we've had weaker performance particularly on the girl side of that equation.

So we've got a very intensified effort weighing to try to improve that naturally. It always comes back to product and the marketing of that product and that's what we're going to try to correct both. Not just fourth quarter, but certainly for next year.

Operator

Your next question comes from Lorraine Hutchinson from Bank of America.

Lorraine Hutchinson - Bank of America

Was just hoping to hear a little bit more detail about your long-term CapEx plans. As you get your store count up, should we expect some increases there or how are you thinking about 2011 and 2012?

Wes McDonald

To Kevin's point I will talk more about 2011 in February. I guess if you're looking for a number to use in the interim, I think the $900 million we talked about this year and add $100 million to it for the ten extra stores.

Operator

Your next question comes from Sean Naughton from Piper Jaffray.

Sean Naughton - Piper Jaffray

On the AUR front, Wes, I think you talked about there was a 3.1% decrease. That's obviously the biggest decline we've seen in the last few years. Can you talk about the decline a little bit, and was this a change from your initial expectations in the quarter, due to competitors' promotions or was it more mix shift related? And how we should think about that really moving into the fourth quarter?

Wes McDonald

I think it's probably a little bit promotional, but more importantly we didn't sell a whole lot of outerwear and sweaters which are much higher ticket items for us.

Sean Naughton - Piper Jaffray

So not too much on the competitor front then?

Wes McDonald

Nothing really incremental from the spring season.

Sean Naughton - Piper Jaffray

And then just secondly, I'm not sure if you mentioned this, but is there any update on the credit receivable transfer that you recently signed?

Wes McDonald

No, I mean the negotiations are ongoing on the purchase and sales agreement and we have a contract with Chase until April next year, and when we have something finalized we'll announce it.

Sean Naughton - Piper Jaffray

So it sounds like end of the first quarter would be the last possible deadline there?

Wes McDonald

It's not for me to say, it's up to those guys from a purchase and sale agreement and one that can start.

Sean Naughton - Piper Jaffray

And then just lastly on the e-commerce growing nicely, is there any change you've obviously seen rapid growth in this channel. Is there any change in your long-term real estate plan, as this becomes a bigger and bigger portion of the absolute total of Kohl's?

Wes McDonald

Not specifically, I mean I think it's a very good question as online…

17-20

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…not specifically, I mean I think it is a very good question as online sales become a larger portion of our business. And in-store kiosk sales are running well ahead of the plan that we had. What does that imply for not only store count but also more for store sides and so some of things we're experimenting with to try to find out a little bit more about that, but as we said during the remarks we have an incredibly strong trend online and we really believe in a business and we are investing a lot to keep that trend going.

Operator

Your next question comes from Richard Jaffe from Stifel.

Richard Jaffe - Stifel

Thanks very much, guys. Just a quick follow-up on the kiosk business which is an exciting development in terms of fueling that the e-commerce, it is a question how you account or credit those sales are those retail store sales, computer sales, or they formed the e-commerce socket?

Wes McDonanld

There e-commerce sales which fall into the comp stores bucket, like they have been since like they have been sometime I think we did that starting in '05 or '06.

Richard Jaffe - Stifel

I guess a followup question regarding that the smaller stores and the opportunity there, 40 new stores next year. How many of those will be traditional format? How many will be the smaller store?

Wes McDonanld

It really depends we bunch of them in the hopper. I don't want to give a number now because it's going to move around. We have more than 40 stores in place. So, I'd say the only thing I would tell you, there's more smalls than there have been in the past we have a little over a hundred smalls right now. We'll you give an exact breakdown in February.

Richard Jaffe - Stifel

Okay that I should return for that is the small store experiment much more than experiment and there is some positive feedback here.

Wes McDonanld

Yes, I'd say we're pleased with the return. We are able to do similar volume for the most case. It's not something that you are going to do all in a high density population area except for the example I mentioned but we think we can run and we brought $70 million in that size building and done it really effectively so I think its something that's certainly worked for us and it will be a big part of what we do going forward.

Richard Jaffe - Stifel

And the cost to do that simply is less as well.

Wes McDonanld

Oh yes, it's about 20% less.

Operator

Your next question comes from the line of Kenneth Stumphauzer from Sterne Agee

Kenneth Stumphauzer - Sterne Agee

Good morning guys. Thanks for taking my questions. First, can you give us a break out between private label versus exclusive?

Kevin Mansell

Now, we don't break down the distribution I mean private label continues to be the larger percentage of the total. No exclusive is the faster growing percent of the total.

Kenneth Stumphauzer - Sterne Ageef

Okay, and then obviously the changes you guys made first in southwest and then secondly in the southeast had pretty remarkable success? And I was just wondering if that something that you're looking to replicate again in 2011 and in different region?

Kevin Mansell

Yes, I mean that's only in our thinking to continue to take the tactic that work, apply them more broadly across the country, and also particularly in any regions where we think there is you know market share opportunity. You know having said that to be honest with you the mid and half markets including the east and the west continue to under perform the average store and so we have a lot of opportunity in those markets. So, I would expect us to be talking more about continuing to fuel the southeast and the west next year with new enhanced marketing.

Kenneth Stumphauzer - Sterne Ageef

And then, just one last question I guess. Strategic or be it may be a little bit early you know there is obviously a fair amount of speculation that the run up in cotton may be transient in nature. And that would most directly impact second half deliveries for apparel. I am just wondering, how you would think about the second half should cotton persist in that buck 40 to buck 50 range if you'd be willing to some percent to gain market share in the back half or would you work to correct enterprising action?

Kevin Mansell

Our concept is a store can is all about market share. So we are always going to lean towards market share as you know our primary weapon. Having said that we'll be able to have both so far and so you know would like to think, we can configure way to continue to get both for we will always lean for first to get in more sales that's really what drives our equation.

Operator

Your next question comes from David Glick from Buckingham Research.

David Glick - Buckingham Research

Just a clarification of your comment on the reduction of 17 million shares for fiscal 2011? Is that on top of the ASR which you know based on today's price would reduce by around $19 millions is that in addition too or is that reflecting just the ASR?

Wes McDonald

That is what I am willing to, on the ASR because you don't know when the ASR is going to be diminished.

David Glick - Buckingham Research

Got it, okay. So that doesn't assume any incremental repurchases next year which will give us more details.

Wes McDonald

We'll give you more color on future share repurchase outside the ASR at the end at the end of February.

Operator

That concludes our Q&A session. This does conclude today's conference call. You may now disconnect.

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