Operator: Good morning. My name is Brent and I will be your conference operator today. At this time, I'd like to welcome everyone to the Kohl's Fourth Quarter and Year-End 2012 Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.
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, will, should, anticipates, 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 Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are especially incorporated herein by reference. Also, please note that replays of this recording will not be updated. So, if you're listening after February 28, it is possible that the information discussed is no longer current.
Thank you. I would now like to turn the call over to Wes McDonald, Chief Financial Officer. Please go ahead, sir.
Wes McDonald - SEVP and CFO: Thank you. With me today is Kevin Mansell, our President, Chairman and CEO. I'll walk through the balance sheet and P&L and give you some forward-looking guidance and Kevin will take you through some of our merchandising and marketing strategies for 2013.
As a reminder, the 2012 fiscal year was a 53-week year for accounting purposes. All results reported today are 53-week results with the exception of comp sales metrics. Details on the impact of the 53rd week are available in the text of the earnings release. Comp sales increased 1.9% for the quarter and up 30 basis points for the year. The quarterly comp increase reflects a 4.2% increase in units per transaction offset by a 2.5% decrease in average unit retail. Transactions were essentially flat for the quarter. For the year, average unit retail increased 1.8% and transactions per store decreased 1.5%. Units per transaction were flat for the year.
Total sales increased 5.4% to $6.3 billion for the quarter and 2.5% to $19.3 billion for the year.
Kohl's charge sales penetration increased 80 basis points to 54% of total sales for the quarter. Our annual credit share was 56%, an increase of 130 basis points over fiscal 2011. Kevin will provide more color on our sales in a few minutes.
Our gross margin rate for the quarter was 33.3%, approximately 290 basis points lower than the fourth quarter of last year.
SG&A increased 3% for the quarter, better than our expectations of up 3.5% to 4.5%. SG&A as a percent of sales leveraged approximately 40 basis points for both the quarter and the year.
Depreciation increased 10% over the fourth quarter of 2011 to $214 million. For the year, depreciation increased 7% to $833 million. The increases are primarily due to IT investments.
Net interest expense was $85 million this quarter and $329 million for the year. The increases are primarily due to debt issuances in September 2012 and October 2011.
Our income tax rate was 37.1% for the quarter, 70 basis points below our expectation of 37.8%. The difference is due to tax credits that were extended when the fiscal cliff deal was finalized.
Diluted earnings per share decreased 8% to $1.66 for the quarter. Net income was $378 million for the current year quarter and $986 million for the year. For the year, diluted earnings per share were $4.17 this year versus $4.30 last year. The 53rd week increased our current year EPS by approximately $0.06.
Some information for your models. We currently have 1,146 stores with gross square footage of 99.57 million square feet and selling square footage of 83.09 million. Square footage is 1% higher than last year at this time.
Moving on to some balance sheet metrics, we ended the quarter with $537 million of cash and cash equivalents. Our CapEx expenditures were $785 million for 2012, $142 million lower than 2011. The change reflects changes in our capital expenditure mix, including fewer remodels and new stores, partially offset by higher IT spending. As a reminder, we opened 12 new stores this fall compared to 31 last fall. Our projected CapEx for 2013 is $700 million.
Our January inventory balance was $3.7 billion, a 16% increase over January 2011. On a per store basis, inventory dollars are up 12%, consistent with our previous guidance and compared February week one, which is a more apples-to-apples comparison, inventory is up 6% per store. Kevin will talk more about inventory management in a few minutes.
AP as a percent of inventory was 330 basis points lower than last year at 35.2%, primarily due to slower inventory turnover. Weighted average diluted shares were $228 million for the quarter and $237 million year-to-date. On February 27, 2013, our Board declared a quarterly cash dividend of $0.35 per share, a 9% increase over our previous dividend of $0.32 per share. The dividend is payable March 27, 2013 to shareholders of record at the close of business on March 13, 2013.
I'll now turn it over to Kevin, who will provide additional insights on our results.
Kevin Mansell - Chairman, President and CEO: Thanks Wes. Let me start by adding some color first to our sales results. From line of business perspective, children's reported the strongest comp for the quarter, primarily on strength in toys. Women's and men's apparel were both above the Company average for quarter. In women's, active apparel was the strongest category with an increase in the high-teens. Updated and contemporary sportswear and classic sportswear also outperformed the Company. As we expected, the junior business continued to be challenging. Notable performers in men's included both basics and active.
Footwear was slightly below the Company average. Athletic shoes were by far the strongest category. Home was also below the Company average. Notable strong categories included housewares, bedding, and small electrics. And finally, accessories was the only line of business that did not report a positive comp for the quarter. Sterling silver jewelry, watches, and bath and beauty were the strongest performers in the accessories category.
From a regional perspective, the West was the strongest region for the quarter. All other regions were slightly negative. E-Commerce sales increased 43% for the quarter. For the year, E-Commerce sales were $1.4 billion, 42% higher than the prior year. E-Commerce contributed 320 basis points to our quarterly comp and 230 basis points to the annual comp.
From a brand perspective, 48% of our fourth quarter sales were private and exclusive only at Kohl's brands, an increase of approximately 30 basis points over the fourth quarter of 2011. The increase was a result of our newer exclusive brands, Jennifer Lopez, Marc Anthony, Rock & Republic, DesigNation and Vera Wang, as well as strong sales in more mature brands such as Chaps, Lauren Conrad, Vera Wang and FILA SPORT.
On the gross margin side, as Wes mentioned, our gross margin rate for the quarter was approximately 290 basis points lower than the fourth quarter of 2011. While this was lower than planned, we were able to clear much of our seasonal merchandise in order to make way for our spring assortments. We believe that our value equation is now right and we expect gradual improvement in our gross margin throughout 2013 as a result of lower cost.
Moving on to expense management, on the SG&A line we performed slightly better than we expected. Our store organization continues to drive payroll efficiencies. Our fixed costs generally were flat as a percent of sales and we also reported significant leverage in our corporate operations primarily due to lower incentive costs. Marketing cost as a percentage of sales were flat for the year.
Our credit operations leveraged again this year. Our future performance will be driven by our ability to grow the portfolio and to manage the customer service and marketing functions more efficiently. We would expect more modest contributions from credit in 2013.
Finally distribution centers did not leverage as we continued to develop the infrastructure for our growing E-Commerce business. However, we were very pleased with our improvement in shipping costs and E-Commerce fulfillment expenses as a percentage of E-Commerce sales versus the prior year.
Moving on to store experience, we ended the year with 1,146 stores, 19 more than the year-end 2011. During 2012, we opened stores in 20 new locations, relocated one store in Michigan and closed one store in Ohio. Our current plans are to open 12 stores in 2013, nine in the spring and three in the fall. Consistent with 2012 new stores, we expect all but one of the 2013 stores to be small stores with less than 64,000 square feet.
We remodeled 50 stores in 2012 and we expect to remodel 30 stores in 2013. Most of these remodels are expected to occur in the fall season. As of year-end, approximately one-third of our stores now have customer service in the front of the store. This change has been received extremely well by our customers to appreciate the convenience of having this service at the front rather than at the back of the store. Additionally, all stores now have electronic signs. Relocating customer service and installing electronic signs are key contributors the payroll savings which allow our store organization to consistently deliver store payroll leverage.
Last year we tested several sales floor productivity ideas in selected markets across the country to drive sales. In general, the sales lift in those departments that were expanded primarily home did not the exceed the loss of sales in the department reduced. As a result, the test will not be rolled out. However, several ideas developed from the test around more emphasis on certain categories, again particularly in home that will be pursued companywide.
We believe strongly in the importance of testing new ideas and concepts and we'll continue to do so this year as well. Those tests whether product, display ideas, technology or marketing, all help us to ensure our ROI goals are met and reduce the probability of mistakes with the customer experience.
Moving on to our investments in E-Commerce and in IT, since its inception in 2001, our E-Commerce business has grown at a compounded annual growth rate of more than 50%. In 2011, we reached $1 billion in revenue and this past year, revenues exceeded $1.4 billion. Growing and improving profitability of this channel has required investments, and we are going to continue to make those investments.
On the human side, we are investing in E-Commerce merchants, planners and technology positions. We are also improving the foundation of the website and expect to be in a new more versatile platform this summer partnering with Oracle. We continue to stress the value of the Kohl's credit card to our online shoppers. Kohl's charged penetration is higher online than in our store, which has improved profitability. We've also made significant progress in reducing shipping costs and continued to identify ways to improve EFC processing cost.
We're also making the necessary investments to ensure our customer has the omnichannel shopping experience that she desires. All our stores are now equipped to Wi-Fi, so she can share our shopping experience real-time with her friends. We've replaced our gift registries with more modern kiosks and there are plans to further improve the kiosk and gift registry experience on it later this year. We will pilot mobile POS in the third quarter.
To our global inventory visibility project, we'll be able to better track our in-store inventory, the first of many steps necessary for us to offer in-store pick-up for online artists.
During holiday 2012 we tested fulfilling online artists from stores and expect to expand this test to 100 stores by holiday of this coming year. We have also expanded our RFID pilot to additional stores as well.
Finally, we're making investments in the infrastructure which supports our operations. We'll be implementing the new master data management system which facilitates seamless inventories across all channels and stage deliveries within the period. We're investing in price management, the second-generation of markdown optimization which focuses on promotional and permanent markdowns. And additionally, we're investing in new purchase order and new data warehouse systems.
Moving on to marketing, on the marketing front, our objective is to reenergize the Kohl's brand to drive more engagement and ultimately traffic. In 2013, our advertising will to continue to emphasize our value proposition, but will be especially targeted at mom, particularly in the 35 to 54-year-old age group. We'll also shift our marketing towards channels that we believe will maximize our marketing dollars. This includes significantly increased TV and digital exposure. In addition, we'll have a more balanced presentation between our private and exclusive national and our national brands in our both broadcast and circular efforts.
In fall of 2012, we piloted a loyalty program in 100 stores which provided additional flexible value to shoppers who either don't qualify for a Kohl's credit card or were simply preferring not to use credits in payment. As with our other pilots, this loyalty program pilot has provided us with significant insights into how our customer shops and how we're able better to influence her shopping behavior in the future. We still had more to learn. We are pleased with initial results of this pilot will be expanding the pilots in more markets this spring season.
Before Wes provides 2013 guidance, I'd like to make some overall comments regarding the year. From a strictly financial results perspective, 2012 was a disappointing year for our Company. While sales grew for the year in total, there were a number of categories where our growth was not at the rate we had planned and some where we actually lost market share. Just as importantly, our growth came in at higher cost to profitability than is acceptable. We didn't serve our customer at the standard we have set for ourselves.
It's also been a year of tremendous change and transition. From a business standpoint, we struggled to find the right delivery of value in our prices, the appropriate level of inventory in each of our key businesses and to evolve our marketing message to engage the customer more consistently. As a result of that, we had a mix of successes and failures and a series of fits and starts throughout the year. Some changes, we tested took hold quickly with the customer and we implemented them. Some needed to be revised and continued to be adjusted throughout the year.
On the organizational side, we've gone through a significant amount of change, as we put in place new structures and added new talent to leadership positions in many of our key areas. Frankly, there's probably as much change as we have ever had in my time at Kohl's. We enter 2013 as a smarter and more focused organization. Our strategies are clear and the more precise as is our plan to achieve them. We will own savings, we will focus on moms, our most important customer and will increase her confidence in Kohl's from all aspects.
On the savings strategy, we believe that strongly savings isn't just about the lowest price. It's about price, quality, style, and the experience the customer gets at Kohl's. Owning saving includes focusing our marketing message to consistently position Kohl's as the savings leader. It includes ensuring that our prices are completive first, and then even better with our value added offers.
It includes building increased style and quality into the products that she buys. Finally, owning savings includes leveraging our interactions with our customer in our stores every day. Our second strategy, increasing her confidence in Kohl's is about providing the assurance that Kohl's will always come through for her and that she knows we are the store for her, having what she wants and when she wants it, whether it's in our stores or online. And the third key strategy is focusing on mom. Though moms are our most loyal and highest spending customers, we believe we have significant opportunity to capture a larger share of her wallet. We know that the customer has a lot of choices. They'll only choose us if we provide the best value, the assurance we have that they need every time they shop and show we're their store through our message, our merchandise, and the experience we provide. We're committed to doing that this year.
With that, I'll turn it back to Wes to provide our first quarter and fiscal year guidance.
Wes McDonald - SEVP and CFO: Thanks Kevin. Our 2013 earnings guidance is as follows; total sales increase of flat to 2%. Comparable sales will also be flat to 2%. The reason is due to the 53rd week in fiscal 2012. Our gross margin rate increase will be 15 basis points to 30 basis points. SG&A expenses are expected to increase 1.5% to 3%; depreciation expense of approximately $910 million, interest expense of $330 million, and a tax rate of 38%. Our guidance assumes 216 million diluted shares for the year. This assumes $1 billion in share repurchases in 2013 at an average price of $50 per share. And including these estimated share repurchases, we expect earnings per diluted share of $4.15 to $4.45 for the year.
For the first quarter, our guidance is as follows; total sales increase of 0.5% to 2.5%, comparable sales increase of flat to 2%, gross margin increase of flat to 20 basis points, SG&A expenses increasing 2.5% to 3.5%, depreciation expense of $221 million, interest expense of $84 million and a tax rate of 38%. This should result in earnings per diluted share $0.55 $0.63 for the first quarter.
We will be happy to take your questions at this time.
Operator: Matthew Boss, JPMorgan.
Matthew Boss - JPMorgan: As we progress through the year, what should we be watching in stores from a merchandising standpoint? I thought the smaller Coach fragrances and (indiscernible) were moves in the right direction on the national brand side, but can you talk about any initiatives or categories that we should be focusing on?
Kevin Mansell - Chairman, President and CEO: This is Kevin, Matt. Generally, our focus is pretty broad. As we mentioned in the script itself, we have essentially a new merchandise team across the entire Company. They've been charged with really kind of delivering on and ensuring that we have in stock for the customer what she wants. So, there is a high degree of focus around basics and in-stock. So our service levels on those areas need to improve and remain consistent. I think that's one thing you should look for. I think the second thing, Wes sort of mentioned it. We've been focused on improving our performance with our key national brands. We made some progress on that, particularly in the fourth quarter. I think the fourth quarter was the first quarter to be honest in several years where national brands actually grew on a comp store basis. I think that's another thing to look for. Our key national brands improving in the presentation in the store, in the breadth of assortment and in how much space and attention they get in our advertising as well. I'd say the last thing is about clarity and assortment. We're working hard to remove duplication. That's probably particularly so in our private and exclusive brands. As you know, we've expanded the number of private and exclusive brands a lot over the last three years. What's happened as a result that of course, is that there's been some redundancy and things that are carried in one of our private exclusive brands, sometimes show up as well in another and we want to definitely eliminate that. That was part of our effort in our reorganization, adding new talent and new leadership in the private and exclusive brand, product development organization is going to help us do that. So, I'd say those are probably the big four things. Generally, those things apply to the whole store. So, it's less about one particular area.
Matthew Boss - JPMorgan: Then on the gross margin side, I mean do you believe the pricing and the depth of promotion today is where you wanted and aside from easier comparisons, how should we think about the primary drivers of expansion this year?
Wes McDonald - SEVP and CFO: Yeah. I mean I think we're, as you know, we're a very promotional store. That's what drives our traffic and drives our business. I don't see us really changing that certainly not in a downward way, but I also don't see us increasing either the level or depth of promotion. I think again, much like our merchandised assortments providing more clarity, paying more attention to the product and to the brands in our advertising and most importantly probably as I mentioned in the call putting more emphasis around media that will reach a broader audience for us and of course television is a key one, and with our growing online presence, our digital efforts is a secondary key one. Those areas are going to get significantly higher spend. That's going to come at the expense of areas that have traditionally gotten more of our weight, particularly newspaper, advertising and direct mail, outside of our credit card business.
Operator: Bob Drbul, Barclays Capital.
Robert Drbul - Barclays Capital: Kev, can you talk a little bit just on your confidence level around the fact that you have the pricing right in the stores now after a lot of changes last year, sort of coming out of the fourth quarter? What gives you that confidence right now?
Kevin Mansell - Chairman, President and CEO: I think the metrics that we watch on that are the underlying metrics to make up our comp sales. So, obviously average unit retail is a key one of those. We report to you average unit retail for the Company. So, that can sometimes be affected by mix as one business grows and another one shrinks, but generally for the year, average unit retail was up. It was up quite a bit in the first half of the year. In the fourth quarter, average unit retail was down, and when we look at it on a trend basis, there was a real consistency to it, as we brought our prices down; we started to reach levels that were more similar to 2011 on an AUR basis. So, I think our sense is that, you're never going to be perfect on prices. We always have opportunities to improve, but the combination of the AUR metrics looking this year versus last year and this year versus historical gives us a lot of confidence and secondarily of course we're pretty aggressive in understanding how our prices look compared to competition. We try to look at that on the basis of what our sales prices are compared to competitive sales prices, not including our value-added triggers. So, we have, as you know, really big value-added triggers that we think put us in a premier position. So, that's probably a long-winded answer to say to you, yeah, my confidence now is pretty high that our value equation is pretty well set. I mean, I don't know…
Wes McDonald - SEVP and CFO: Yeah, I mean, I think, in November/December – obviously, we had a lot of clearance in January that drove the ARU down. But if you look at November-December combined, our AUR is down about 1% and our units remained up 4%. So that means the customer, in my opinion, felt like they were getting some value.
Robert Drbul - Barclays Capital: On the new zero to 2 comp assumption for the quarter and for the year essentially, what do you expect the growth of credit card sales on a comp basis versus non-credit card? Like, how does that sort of flow through as the year progresses given the penetration level of your credit business right now?
Wes McDonald - SEVP and CFO: From my perspective, I think, the non-credit card business has to be sort of flattish and the credit card business will kind of up low to mid-singles. 4 and flat will get you to 2 roughly and we've seen that in the fourth quarter. Our non-credit card business actually in the fall season was basically flat versus being down 6 in the spring. So, that, in my opinion, gives you some additional ammunition to support Kevin's confidence in that fact that we're priced right.
Operator: Deborah Weinswig, Citigroup.
Deborah Weinswig - Citigroup: Kevin, you discussed some of the changes to your marketing plan, a move towards more digital and TV, can you expand on that as well?
Kevin Mansell - Chairman, President and CEO: Let me back up on a little bit. As we went to last year, I think one of the efforts that we did talk to you about is Wes's effort around improving SG&A efficiency and improving cost. As part of that, we partnered with outside help to really try to dive into a lot of our key expense areas. Naturally, one of the biggest expense areas, we have is marketing. We spend almost $1 billion a year in marketing, and as we did that and really more finally looked at efficiency, one of the things that became very clear is that our share of voice and our impact with the broader swath of customers reaching a larger audience was not where it needed to be and when we don't further into that, it became really apparent that broadcast was an area that we needed to really make a more significant investment into, to carry more weight with the customer, and make us more appealing to a wider audience. Mainly, that is going to be event broadcast and it's going to be more timed around our big events, so it's trying to support other efforts that we have in media as well, but I would say that's the biggest single learning was, we need to raise our share of voice in broadcast because we need to reach more customers outside of our core customer, particularly our credit card customer and that's a way in which we're going to be able to compete more effectively. Obviously, this is a zero-sum game. So, there were other areas that provided lower productivity and we're also sort of overreaching the same customer over and over and over again and those areas have been scaled back as a result of that. Hopefully that gives you the answer you're looking for?
Deborah Weinswig - Citigroup: Yeah, that's helpful. And then, as we think about the zero percent to 2% comp for the quarter and also for 2013, I mean there is lot of – it sounds like very positive changes taking place? Are those more back-end-loaded or how should we just think about all the different initiatives in place in the comps you're guiding to?
Kevin Mansell - Chairman, President and CEO: I mean we haven't given any specific quarter comp on the first on. The first quarter, I think Wes just said that he's forecasting zero to 2 as well. I don't know – unlike last year, I would say last year at the beginning of the year we really kind of felt that the year was more back-end-loaded because we were just recognizing that there were just so many changes that needed to be made that we were going to get traction to late in the year and that turned out to be true. I mean our best comp – it wasn't what we'd like it to be, but our best comp was in fact the fourth quarter for the year. I think this is more even. We do have, Deb, as you know, essentially an entirely new merchandising team and they've joined our organization at various times during the course of the year. So, I recognize that in some cases it takes time to get traction there, but I don't know that I see that particularly affecting the individual quarter comps.
Operator: Erica Maschmeyer, Robert W. Baird.
Erica Maschmeyer - Robert W. Baird & Co.: Could you talk a bit into your gross margin plans for Q1? What proportion of the hit from clearance inventory did you take in Q4 and what you think is remaining into Q1 and how does that play into your gross margin guidance?
Wes McDonald - SEVP and CFO: Well, we obviously took what we thought was appropriate and in Q4, we didn't need to raise our markdown reserve at the end of the quarter. We continue to sell out, we're in the first quarter; that will have additional markdowns. All the markdowns we need to clear the remaining fall inventory are in the flat to 20% gross margin. A lot of them factored in our inventories are up, because we have more transition merchandise in there than we did last year. I think I spoke to some of you guys about that, when we did our January comp call. So, we feel much better about where we are positioned for spring selling.
Erica Maschmeyer - Robert W. Baird & Co.: Just a follow-up on that point. Could you talk a little bit more about the areas where you have increases in inventory for the first half of this year and how that really is different from your merchandising strategy in Q4?
Kevin Mansell - Chairman, President and CEO: Well the areas that have come into this year – I think Wes described our inventory position in two different ways, one was just the absolute number that we recorded fiscally and the other was to try to provide a more apples to apples consideration. So, that number I think was more in the mid-single digits up to last year. So, using that as a context, the Company was running mid-single-digit inventories higher than last year. It was pretty broad across the store. There were a couple of exceptions in the high side due to business trends and a couple of exceptions on the low side, due to business trend. So, an example I would give you is juniors I think actually on that apples to apples comparison had less inventory than last year and that was a result of the fact that we've had very difficult business in juniors, so they need to run with less inventory. An area like athletic footwear, our athletic apparel across the whole store, which has been very, very strong has been running with much higher than average inventories than last year. So, I think we actually feel pretty good that the balance of our inventory is sort of directed to the places that are either driving our business, or if they're not driving our business, they're not being funded with inventory.
Wes McDonald - SEVP and CFO: I mean I think and comparing that to fourth quarter, I think that was another part of your question. We obviously went very deep in gift strategy. As Kevin mentioned in his comments, we had some successes and some failures, big successes with toys. We were up, 25 comp, in toys for the quarter, small electrics was another big success, up mid-teens. Some things that didn't work out as well were our investments in seasonal apparel and some of our jewelry and accessories categories. Those obviously being fourth quarter and very seasonal related have very short shelf lives. Our inventory in the spring has a very long shelf life. It's obviously not very warm out here in Milwaukee. We just had seven inches of snow yesterday. So, we're not selling a heck of a lot of shorts right now, but we have a long time to get through all the short inventory and it will eventually get warm in the Midwest and the stuff we are carrying now doesn't have a lot of markdown risk in the first quarter.
Operator: Richard Jaffe, Stifel.
Richard Jaffe - Stifel Nicolaus: I guess a question about marketing and the mix and the margins Wes, you touched on some of the successes, such as toys and small electrics, but a more modest margin business and trying to understand how some of the marketing initiatives for fall or for 2013 become clearer and more compelling to the consumer and also perhaps more focused on higher margin categories and could you also talk about mix through the online channel and an opportunity to shift that to higher margin product?
Kevin Mansell - Chairman, President and CEO: We'll try to take that one piece at a time. I think part of your question had to do with how marketing will target the categories of businesses that we think are opportunities and may even be higher margins. The way we're thinking about our marketing efforts this year is that we're really adjusting the balance of our investments by media type pretty significantly. And that adjustment beyond obviously spending a lot more dollars on broadcast and digital; there are two elements to that effort. One is just our media weight more – a lot more to increase share of voice and presence, and second is message, and the message is going to be broader, so not so targeted to individual items or categories, but a broader message of savings and value across the store and it's targeted to brands because we think our key national brands should be part of that and our very key, most important exclusive national brands should also be part of that. So the message is definitely very different than it was last year. When it comes to the category investment and that gets into a lot of detail that is probably not good for the call, but I think just stepping back you'd say, okay, they definitely are spending – going to spend a lot more in television and a lot more in the digital platform and that that investment is going to be a broad message across the whole store about savings for mom and getting her confident again that we have great prizes that she can actually believe in and that we give them to her all the time.
Wes McDonald - SEVP and CFO: And from an E-Com perspective, I think you're in against a headwind there because home is a very highly penetrated area there for us for a couple of a couple of reasons; one, it's really where we started the website with a majority of homes for a number of years and two, just the giftable nature of a lot of those things for weddings and things like that makes it easy to ship it online. Having said that, one of the things our E-Com folks are focusing on is more direct ship categories and to broaden the assortment which is going to be in higher margin categories and also carry much higher AURs. One of the issues with our E-Com profitability is our AUR is a lot lower than our competition and to ship a T-shirt for $10 is the same cost as to ship a T-shirt for $30. So, from that perspective, we needed to average ticket to reduce the drag on our margins from shipping costs.
Richard Jaffe - Stifel Nicolaus: Will then initiative you reflected on the E-Commerce appetizing that would be integrated into that?
Wes McDonald - SEVP and CFO: Well, I mean, it's going to be on the website, obviously, with broader assortment and we'll be able offer more categories. I mean, we are going to try to sell what sells. We're not going to just ping the higher AUR things. We have to have a good mix just like we did in the past.
Operator: Liz Dunn, Macquarie Capital.
Liz Dunn - Macquarie Capital: I guess, as a follow-up to the last question, do some of these efforts around shipping costs change your viewpoint on E-Commerce profitability over the long-term because I think in the past we've talked about it being sort of a mid-single-digit operating margin in that business. Do you think you can get it higher?
Wes McDonald - SEVP and CFO: Yeah, I mean, we've made about 100 basis points improvement this year and we're not fully automated in the four EFCs that we have. The key to – you have to look at operating margin and return on investment. I think those guys down in Washington don't have a real high operating margin, but they have a really good ROI from a – I'm talking about Amazon. So, one of the things we got to do and continue to grow and we tested it last year was the shift from store initiative. That allows us to service the customer during the four to six-week peak, which is really where you needed. The rest of the year, we can comfortably accommodate growth for a number of years in our four existing EFCs to crack the code and raising it from mid-single-digit profitability to high-single-digit profitably is really going to be able come down to how do we service that customer in that peak period without a lot of capital investment and that's what we are going to try to do with the shift from store initiative.
Liz Dunn - Macquarie Capital: Do you current have a position on price matching? I think somebody shows you had lower price online?
Kevin Mansell - Chairman, President and CEO: Sure. Not a specific position on price matching online. It's different than our stores. We have a service promise, which we are very good at I think in our stores and online, which is yes, we can and we are going to take care of the customers. So, not to the extent, you're talking about. Obviously, a very large percentage of our business comes from our own private and exclusive brands. I mean, it's definitely one of the strategies that we thought that was really important for us to drive over the last five years because we just anticipated that transparency in pricing was just going to grow and more and more we needed to be unique in our offering. So, I think to some extent, this is a smaller issue for us and secondarily, I think it's a smaller issue for us because, as you know, over 80% of our business is apparel and accessories.
Liz Dunn - Macquarie Capital: Then just finally, I'm sorry if I missed it, but what's the reason that the SG&A growth rate is higher in the first quarter versus the full year?
Kevin Mansell - Chairman, President and CEO: A lot of it is in terms of shift of remodel expense, so we have more remodel expense in terms of writing off things and preparing for the remodels in first quarter, where last year we would have done more remodels in spring and taken the SG&A hit in the fall.
Operator: Alex Fuhrman, Piper Jaffray.
Alex Fuhrman - Piper Jaffray: Just want to talk a little bit about shipping and handling revenues and costs as that becomes a bigger part of the business. If I'm interpreting your prepared remarks correctly, it sounds like shipping and handling cost as a percentage of sales or (this) E-Commerce sales was down year-over-year. I'll be curious to know kind of how the net shipping margin if that would also improve year-over-year or if that might have been offset by lower shipping and handling revenue collected from customers as a percentage of sales. And then, if you can just talk about kind of – what are the longer term – as this channel grows to a double-digit penetration, what are the opportunities to contain that net shipping margin over the next couple of years? And clearly with the growth, are there other certain scale levers that you'll hit over the next few years that will enable you to bring shipping cost down or perhaps be a little bit more dynamic in how you fulfill those orders, or is there anything we should be thinking about as the E-Commerce business scales, that might mitigate the gross margin impact?
Wes McDonald - SEVP and CFO: Yeah, I think I partially answered that question with my remarks to Liz, but I mean our shipping cost in the fourth quarter improved about 270 basis points. That's on a net basis. And for the year, it improved about 100 basis points. So, we're definitely making progress. It's on the cost side; it' not really on the revenue side. We don't make a whole lot of money from shipping revenue perspective. We have free shipping pretty much at $75 most days. Sometimes we do $0.99 an item, but primarily it's $75 and then in the fourth quarter we take it down to $50 to be competitive with rest of the folks. So, our focus on net shipping is going to be really on the cost side and it's going to be augmented and then help to improve when we automate the fourth EFC, balance the inventories a little bit better and then obviously in the fourth quarter, it's going to be real important to be able to ship from store to help offset the peak.
Operator: Michael Binetti, UBS.
Michael Binetti - UBS: So, last night we heard JCPenny talk about switching back to becoming more promotional. I'm wondering how you think about that as you think about the guidance for the year. Anything that you've kind of withheld in guidance to say if we need to switch back to be more promotional to defend share, anything like that that you could talk about with maybe some changes ahead on the competitive landscape?
Kevin Mansell - Chairman, President and CEO: No, I mean, I think as we sort of covered in the call, last year was not the kind of year we would like to see. We didn't – while we grew, we didn't get the growth rate that we were looking for. But more importantly, profitability really suffered as a result, in some cases, I think, a poor execution on our part and in some cases, us being very aggressive in going after share that essentially didn't come. Our promotional positioning is plenty aggressive. We have great voice with the customer and we kind of touched on the fact that we're reallocating that voice to areas that we don't feel a strong hand, but overall we have very aggressive marketing. So, we definitely drive traffic to our stores. People know what Kohl's stands for. We know from our own research, independent survey price data that our prices are more than competitive that Kohl's stands for savings, but also stands for great values. I don't think there really need to be any tweaks on that. That's really not where our focus is. We need to hone our position more effectively by improving all these other things, which to a great degree is about presenting better products in better ways to the customer and reaching more customers. So, what's happening in other competitors, first of all, is obviously outside of our control, but it's not really what our focus is. Our focus is internal.
Michael Binetti - UBS: Can you just help us think about the composition of how you are thinking about the same-store sales guidance for the year between transactions in AUR? I think historically you've done better in an environment where you've been able to drive sales through transactions. I only see when you are looking back when your total comps went the opposite direction of transactions. So, is this a positive trend (continuing)?
Wes McDonald - SEVP and CFO: I think every year for us sets out to be a transaction year. We are not usually baking a comp assumption based upon an increase in ticket. So, a lot of what we talked about today is to driving the customer into the store and broadening our media mix to reach more non-credit card customers. That's going to be the key. So, I think if we have a good comp this year, it's going to be mostly driven by transactions.
Michael Binetti - UBS: Just for models, is there any reason why there is such a big jump in D&A this year? Looks like it's up 9%, was there anything in there Wes?
Wes McDonald - SEVP and CFO: We are spending a hell of a lot of money on IT, which has life of three to five years and also more money on remodels and new stores are coming down, remodels are depreciated over about eight-year period and obviously, new stores much longer than that. So, as becomes a smaller part of our mix new stores, you are going to see D&A is going to grow faster than sales.
Operator: (Paul Trussell), Deutsche Bank.
Paul Trussell - Deutsche Bank: The E-Commerce business drove the entirety of the comp growth last year with in-store sales down, what's a kind of a modest remodel program? Can you provide a little bit more detail on how you expect to actually drive traffic in the doors? I mean you mentioned a different advertising strategy, maybe you could elaborate a little bit more on that and also, I noticed you are opening fewer stores this year, have we kind of potentially reached the point where you think your store count will be kind of in the future?
Wes McDonald - SEVP and CFO: I mean from a marketing perspective, I think we spent a big part of the call talking about it. We're not really willing to get into any more detail than we already have. Our new store slowing down is really a function of our performance of our new stores over the last few years. As we've grown our E-Commerce business, that's somewhat come out of the stores by our best estimates about a third of the E-Commerce growth has come out of the stores and we're not getting the same kind of returns on our new stores that we used to. That's why we're bringing it down and we're focusing more on IT investments to help make the existing stores more productive and focusing more on remodels to try to add some different things to them from a category perspective to make those more profitable. We talked about the sales for productivity test. We've learned a lot there. Some of the stuff we'll grow out to all the stores, going forward. There's some different nuances in the remodels that we're doing this year, which should help us grow sales per square foot, but again they're just testing. So, that's what we have to do.
Paul Trussell - Deutsche Bank: Then maybe I missed this, but does your buyback plans for $1 billion this year – does that include adding debt similar to what we saw this past third quarter?
Wes McDonald - SEVP and CFO: No, our target is a BBB+ rating. We've communicated to the rating agencies that we will manage a range of 2 to 2.25. If you do the math on this year's results, it gets pretty close to that 2.25. If our results are better than what we said, it is possible we add a little debt, but at this point if we're within the zero to 2 range, we will not be adding any debt this year.
Paul Trussell - Deutsche Bank: And then just last, you spoke, West, earlier about the snow and certainly weather has been unfavorable this month. Could you just speak to where trends are quarter-to-date and are they at the low end of the range or a little bit below with the expectation of just seeing some improvement as the quarter progresses?
Kevin Mansell - Chairman, President and CEO: This is Kevin. I mean, obviously, we can't talk in any detail about what the performance is for the month of February specifically. The trend of our business is incorporated in the guidance that we give you. I will say that I think like many other retailers that I have listened to, trends of business late in January continued to be weak into February. So, I think that's definitely accurate in our case as well. I'm sure that that – it looks to be a combination of factors from economic factors like the payroll tax change to probably gas prices…
Wes McDonald - SEVP and CFO: Late tax refunds.
Kevin Mansell - Chairman, President and CEO: Late tax refunds to, unfortunately, weather not favorable for selling forward merchandise. So, it's probably a combination of things. But I think our experience late in the month of January and continuing into this month in February has probably been like many other retailers which is the business has gotten a lot weaker.
Wes McDonald - SEVP and CFO: But, the beautiful thing about moving the quarterly comps is we can actually look more than 30 days ahead of time.
Operator: Kimberly Greenberger, Morgan Stanley.
Heather Balsky - Morgan Stanley: This is Heather Balsky filling in for Kimberly. Just returning to merchandising strategy I was wondering if you could talk about some of the progress you've made in the juniors in terms of improving merchandising and then any earnings that you may have had from the Narciso Rodriguez launch in November?
Kevin Mansell - Chairman, President and CEO: Sure, I think generally as you know, juniors trailed the store by a lot last year. It's part of our women's overall line of business, so we don't break out juniors specifically, but it trailed the rest of women's apparels significantly. I think we're starting to feel a lot better about it as we look at the trend of business in the last four to six weeks in juniors. It's changed pretty dramatically. It looks a lot I think Wes, more like the store right now, which would be a huge change in trend from what it was in 2012. I think that impact is being driven by better merchandising decisions, new merchandising teams, new leadership team in place and a real focus on more clarity in our assortments being faster, but more edited and deeper around the things we believe in. So, we don't want to get ahead of ourselves at all, but it certainly feels better. So, I think, some of the things that we talked on the call that apply to the whole store eliminating duplication, eliminating redundancy, getting more focused around brands that matter are working in June here is I would say and we're starting to feel better about the results.
Wes McDonald - SEVP and CFO: I think in January the regular price business in June, as I believe, was flat, which is a big improvement of trend for last year. So, we're looking forward to better things out of those guys this year.
Heather Balsky - Morgan Stanley: The Narciso Rodriguez, is there any learning from that?
Kevin Mansell - Chairman, President and CEO: The Narciso Rodriguez launch was our first launch in our DesigNation effort which continues this year. I think there were some significant learnings, not surprisingly probably the impact of that business online was out of proportion to our typical apparel penetrations. I think by multiple times, if I remember right, Wes, so the amount of goods we sold online as a percentage of picking more business was way more than we would typically have in the overall (indiscernible) business. I think we learned a lot about breadth of what we offer and depth of what we offer. And we learned a lot about making sure have clarity in that in our store from a presentation perspective. I think generally our in-store experience on the brand was pretty good, right at the launch and we need to do better job of maintaining that then through the period as well. I think those were probably the two big learnings I would say.
Operator: Thank you. This concludes today's conference call. You may now disconnect.