Kohl's Corporation (KSS) Q2 2016 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to Kohl's Q2 2016 Earnings Release Conference Call. 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 statement. Such risks and uncertainties include, but are not limited to, those that 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 expressed and incorporated herein by reference. Also, please note that replays of this recording will not be updated, so if you are listening after August 11, 2016, it is possible that the information discussed is no longer current. At this time, all participants are in a listen-only mode. Later, we'll conduct a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to turn the conference over to your host, Mr. Wes McDonald, Chief Financial Officer of Kohl's Department Stores. Please go ahead. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Thank you. Good morning. With me today is Kevin Mansell, our Chairman, CEO and President. I'll start today's call by walking through our operational results, and then Kevin will provide more details on our Greatness Agenda initiative and then we'll take some of your questions. Comp sales decreased 1.8% for the quarter, below our expectations, but significantly improved over first quarter results. Transactions per store were down 4.8% for the quarter. Average transaction value increased 300 basis points, comprised of a 310 basis points increase in units per transaction and a 10 basis point decrease in average unit retail. From a line of business perspective, Men's was the strongest category, while Home was the weakest. All other businesses were generally consistent with the company average. On a regional basis, the Southeast, Midwest and West were strongest. The Northeast, South Central and Mid-Atlantic were below the company. Kevin will provide additional details on sales in his prepared remarks. Gross margin increased 53 basis points for the quarter, a significant improvement over the 140 basis point decrease we saw in the first quarter. The increase was driven by savings in both promotional markdown and permanent clearance markdowns. Our SG&A decreased $19 million to $986 million for the quarter and deleveraged only three basis points on a 2% decline in sales. Our teams continue to aggressively and effectively manage store payroll as sales trends change versus our plan, but we were unable to leverage those expenses versus last year. IT and corporate expenses also deleveraged. Partially offsetting these increases were slightly higher credit income and lower variable store cost and marketing expenses. Depreciation expense was essentially flat to last year at $234 million. Our interest expense decreased $6 million to $78 million for the quarter as we saw the benefits of last summer's refinancing. Our income tax rate was 37.5%. The tax rate decreased approximately 40 basis points from last year as a result of Federal tax credits that were enacted in the fourth quarter of 2015. Net income on a reported GAAP basis for the quarter was $140 million, and diluted earnings per share were $0.77. During the quarter, we recorded $128 million of expenses related to the store closures and corporate restructuring that we announced in February, bringing the year-to-date total to $192 million. As you saw in our release, the second quarter charge includes: $119 million in future store lease obligations; $23 million in software licenses, which did not align with the strategic vision of our restructured IT leadership team; and $7 million in severance and other costs, which were partially offset by the write-off of $21 million in net lease obligations that were previously recorded on our books. Of the year-to-date charge, $57 million is non-cash write-offs of assets and liabilities that were previously recorded on our books. All the severance will be paid out within two years. The $119 million lease obligation charge represents the discounted value of rents and other lease liabilities under non-cancelable lease terms. Our real estate team was able to terminate leases at three of the locations during the quarter. They're actively working with landlords and potential subtenants at the 13 remaining lease locations. Assuming worst-case scenario that we are unable to terminate any additional leases before their maturity, the $119 million will be paid out over the next 13 years. The maximum expected payment in any given year is less than $10 million. Actual costs reported for the quarter were $18 million higher than the high end of our prior estimate. All of the overage is due to the write-off of the software licenses. We do not expect material charges in future periods. Excluding the store closure and restructuring charges, net income increased 5% to $221 million and diluted earnings per share increased 14% to $1.22 per share. We currently operate 1,150 Kohl's stores with gross square footage of 99.1 million square feet and selling square footage of 82.7 million square feet. We also operate 12 FILA outlets, which opened during the current quarter. We ended the quarter with $700 million in cash and cash equivalents, a decrease of $234 million from last year, due to the timing of last summer's debt refinancing. As you may recall, we had $317 million from the refinancing proceeds on balance sheet in July of last year that we used to pay off bonds tendered in August. Year-to-date, we generated almost $450 million in free cash flow, a $525 million improvement over the first half of last year. I'm very pleased with our inventory initiatives and our ability to decrease inventory dollars per store by 6% from the second quarter of last year, despite the challenging sales environment. Units per store were 7% lower than the second quarter of last year. Our accounts payable as a percent of inventory decreased 182 basis points to 35%. All of the decrease is due to lower receipts, especially in late June and in July, which have a larger impact on the A/P to inventory ratio than receipts from earlier in the quarter. As you may recall, in the second quarter of last year, we had an extraordinary amount of early arriving receipts due to improvement times in transit times after the West Coast port operations returned to normal. Capital expenditures were $340 million for the spring season, $37 million lower than last year, which included higher beauty spending as we finished the roll-out of our enhanced beauty environment, now in all stores, and some corporate campus spending as we consolidate space here in Wisconsin. Weighted average diluted shares were 181 million for the quarter. During the quarter, we repurchased 3.7 million shares of our stock. We ended the quarter with 181 million shares of stock outstanding. On Tuesday, our board declared a quarterly cash dividend of $0.50 per share. The dividend is payable on September 21 to shareholders of record on September 7. After reviewing our results for the spring season, we are updating our guidance to $3.12 to $3.32 per diluted share. Excluding the store closure and restructuring charges, the guidance would be $3.80 to $4.00 per diluted share. The guidance includes the following assumptions for the fall season: total sales decrease of 2.6%, up 0.6% to last year; a comp sales decrease of 2% to flat to last year; gross margin rate improvement of approximately 20 to 40 basis points over last year; and SG&A dollar growth of 0.5% to 2% over last year. I'll now turn it over to Kevin, who will provide some additional insights on our results. Kevin Mansell - Chairman, President & Chief Executive Officer: Thanks, Wes. The second quarter was below our expectations on the sales line. May was the weakest month of the quarter. June was aided by warm weather early in the month, along with favorable calendar shifts, with Memorial Day falling in fiscal June and Fourth of July moving to fiscal July. July finished very strong, as we moved our credit event a week closer to back-to-school, and those businesses, especially Juniors, Young Men's and Girls, performed extremely well. Our seasonal businesses in the quarter followed a similar trajectory as the total company sales. A little more color on our sales. Men's was better than the company, with strength in active, Young Men's basic and dress clothing, and shorts and swimwear. Footwear ran with the company, with strength in Kids and Men's dress casual and weakness in Women's. Children's showed relative strength in Girls and Boys, while Infants and Toddlers was more difficult, as we continued to work on revitalizing our Jumping Beans brand. Women's showed strength in active, intimates and swim, while updated contemporary and classic sportswear continued to remain more difficult. Accessories continued to be driven by beauty and fine jewelry, with the remainder of the business being challenged. And finally, Home trailed the company, but showed significant improvement from the first quarter, as both bedding and luggage were strengths. We did a very good job of managing our inventory, gross margin and expenses during the quarter. Our gross margin rate increase of 53 basis points was better than our plan, due to both better initial markup and lower promotional markdowns. Our inventory per store is now down 6%, in line with our expectation. We continue to expect to make progress on this throughout the year, targeting end of third quarter levels of down mid-single digits on a per store basis. Our receipts will be down in the third quarter and slightly up in the fourth quarter, as we bring in more transitional receipts than we did last year for the holiday season. We're being very conservative in our cold-weather categories, as we expect the third quarter to be soft and the fourth quarter improving versus last year's mild winter. On the SG&A line, almost every area of the company was able to pull back on their planned expenses to allow us to spend less than last year in dollars and significantly less than our plans. I continue to be impressed by the team's agility to pull back on expenses in a difficult sales environment. Now I'd like to take a few minutes to update you on some of the initiatives within the Greatness Agenda. In our focus on product, on national brands, our first quarter launches of Stride Rite in children's shoes and the relaunched New Balance in the active area continue to pay dividends. The launch of Stride Rite helped kids' shoes to outperform, and New Balance achieved a 9% comp for the quarter. Our national brands in total were up low single digits, with active and wellness leading the way with a mid-single-digit comp. Nike continues to be very strong, achieving a low double-digit comp in the quarter. The active and wellness category itself is now 18% of our total business. Finally, national brand penetration increased approximately 200 basis points in the quarter. We're incredibly excited to add Under Armour to our active and wellness category in early 2017. We've already established a strong leadership position in the active and wellness area. And adding one of the most sought-after brands to our portfolio of offerings will allow us to project that leadership even more fully. As you know, this area has consistently been one of our fastest-growing categories in the store. And we would expect that adding Under Armour will extend that period of growth, accelerate the rate of growth and attract a new customer to our store at the same time. We relaunched SONOMA in the first quarter and have been happy with the results in both Men's and Women's as they've seen improvements versus their trend. One big initiative that we need to take across more of our private and exclusive brands is the need to improve our speed to market. We started to do this with our SO brand in Juniors, and we're achieving double-digit comps this spring on less inventory than last year. Michelle is working with our product development teams to reduce the end-to-end cycle on our private and exclusive brands by 25%, on average, and we have a goal of approximately a 40% reduction in Women's. This takes the success we have seen in SO for this initiative and we're rolling out this to Candie's in Juniors as well as Urban Pipeline in Young Men's. Missies' apparel will be the next area of focus. Our localization efforts are proving out and 2016 will be the year that all of our planning efforts for unique assortments by store will come to life in 90% of our assortments across all stores. As we exit the second quarter, approximately 70% of the assortment is already localized. We saw a modest lift in the spring season, achieving higher sales and lower inventory per store versus our control groups, but would expect the effect to improve as we gain more experience and enter key transitional periods by quarter two into quarter three, where localized assortments should have a much bigger impact. In our focus around omni-channel initiatives, we continue to see strong results in digital demand, with online generated demand achieving a mid-teens increase, as we expected. We continue to invest in technology and training in our stores to allow us to ship from store and provide buy online, pick up in store capabilities, providing faster shipping times and more convenience for the time-strapped customer. In the second quarter, the combination of ship from store and buy online, pick up in store sales reached 21% of total dollar online demand and 23% of total unit online demand, both increasing versus the first quarter. We do believe we have a big opportunity there, both short and long-term, which we think will only continue to amplify the role and relevancy of our brick-and-mortar stores. And finally, our Kohl's app was downloaded by more than 13.5 million customers, continues to grow in both downloads, but, more importantly, usage, particularly aspects like the digital wallet. On a store update basis, we opened 12 FILA stores in May and two additional Off/Aisle stores in March. In both cases, we're generally pleased with the results and implementing operational changes as we learn from the results. We'll be opening six smaller-format stores in the third quarter, adding to the two 35,000 square foot smaller stores we opened in the first quarter. Even more importantly than in our standard prototype stores, we've seen the importance of flexibility and localization in our offerings, as each trade area is unique, due to both the small trade area and small store size. In 2017, we'll be looking for a small number of these stores to open in more populated markets to ascertain the potential and the possible use as a tool to serve trade areas where our full-size stores have too much square footage. In conclusion, I'm very happy with the efforts the organization has made around rightsizing our inventory and the resulting improvement in merchandise margin and cash flow. We reached our objective, aggressive objective, of reducing inventories from last year by 6% per store at the end of the second quarter, and that will position us well to continue that rightsizing through fall and holiday. I'm also equally pleased with the team's ability to manage expenses down in a tougher sales environment. We continue to work to create more momentum in our sales trend. And this is our primary focus as we enter the fall and holiday. While the second quarter performance in sales certainly improved over the first quarter, we did have declines in foot traffic in our stores generally, and this needs to be reversed for the positive. The key areas of focus in continuing that improvement in sales are, of course, marketing and merchandising. On the marketing side, we're centered on projecting all of our loyalty components, rewards, Kohl's Cash and credit offers, more completely. And on the merchandising side, our focus is on improving our speed and agility across all of our businesses, but, most importantly, our largest one, Women's Apparel. As you heard in our assumptions for the remainder of the year, we're looking to continue to improve on each of our key metrics, but have stayed conservative in the level of improvement expected. Thank you. And with that, we'll be happy to take your questions.

Introducing Matthew Boss from JPMorgan. Please go ahead.

Thanks and congrats on a nice quarter, guys. Kevin Mansell - Chairman, President & Chief Executive Officer: Thanks.

When we think about 2Q and the sequential comp improvement that you saw from three months ago, I guess my first is where did you see the largest performance gap in terms of improvement? And then just looking ahead, you have a lot of upcoming initiatives, some new brands, what's the best way think about the sustainable comp beyond all the noise that we're seeing this year? Kevin Mansell - Chairman, President & Chief Executive Officer: Wes? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Sure. I mean, I think all the areas improved, obviously, over the first quarter. I think the areas that probably improved the most were: Men's, which led the company with a positive comp; and Home, although negative, was very difficult in the first quarter. We made some marketing changes, adding some tab (20:54) distribution in both June and July, which we think disproportionately helps Home and we think that's going to be pointed in the right direction for the back half, which is a very important business in the fourth quarter. Kevin Mansell - Chairman, President & Chief Executive Officer: This is Kevin, Matt. On the more sustainability aspect of the comp looking forward, I think, as we sort of alluded to in the call, we're obviously very focused on the two most important elements, merchandising and marketing. On the merchandising side, I would say we're going to continue to drive our national brand strategy, in particular continue to amplify the importance of active and wellness because we think that's a trend that's taking hold very strongly. And while we have a good leadership position, I think expanding the portfolio with Under Armour is going to make a massive difference. We're actually going to invest in the stores across the whole active area to make that area stand out more as part of the launch of Under Armour. And then secondly, in merchandising, we touched on the fact that we know that we have to be faster in our product cycle from beginning to end on our private and exclusive brands. And so we've seen the success in the areas where we piloted. And I think Michelle and the team is focused on expanding that to Women's across the board, and then, of course, to the overall store as well. On the marketing side, I think we touched on probably the most important thing, which is continuing to wrap-up all of our loyalty efforts more successfully, so pulling together the credit offers, Kohl's Cash and Yes2You Rewards. And I think as we analyze the results of our business over time, we probably have had opportunity there. They've often stood alone and weren't well-connected in the communication with the customer. So I think Michelle feels pretty strongly that that's going to be a major opportunity going forward. So merchandise and marketing are our focus. Brands on the national side, continue to add them, but drive the ones we have. Most importantly, improve the speed around our private and exclusive brands, and then really focus on loyalty as a concept in our marketing.

Great. And then just a follow up, on the store base, could you just help talk about the evaluation of the fleet underway? How you're weighing the need for potential closings longer-term versus some of the cash flow that you're getting in some of these locations today; I guess any closings next year and then just thoughts longer-term? Kevin Mansell - Chairman, President & Chief Executive Officer: It's Kevin again. I can give you part of the thinking, and then Wes can get more specific to the financial aspect. I mean, overall, as you know, we've closed some stores this year, and I think our expectation is we're going to be able to probably understand more about the impact of that on markets and other trade areas inside of markets that might positively benefit from those store closures. I don't expect us to be able to do a thorough analysis to get a good understanding of that until next spring, because we really need to go through the fall and the holiday season to analyze that to a great degree. As a result, we honestly don't expect any store closures next year, as of right now. The second part of that answer, long-term, is we think that our stores are really important. And, as we noted in the call, more and more, we're seeing the role and relevancy of the store come to life through being able to use our stores as shipping points for customers as they go online to buy product, but also as pick-up points as customers choose the convenience of buying online but picking up in the store and, therefore, avoiding any shipping or time delay as well. And so that number continues to grow. I think Wes was pretty excited about the fact that it reached 21% of dollars, 23% of units. I expect at the end of the third quarter, it's going to be even higher. And I would really expect at the end of the fourth quarter, it's going to be massively higher, just because of the nature of the business. As it relates to specific financials around stores, Wes could give you a good handle on that. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Yeah, I mean, I think we mentioned in the past, we look at it on an incremental cash flow basis. As we look at our lease expirations for next year's, we don't have any stores that are underperforming that are going to expire next year on a lease. So we won't be closing any leased stores next year, for sure. There are some owned stores that are underperforming. We'll keep monitoring that. But to Kevin's point, until we get through holiday and understand how good we are at forecasting retained sales, it would be difficult for us to go ahead and say we're going to close more stores until we know how accurate we are on that.

Great. Best of luck. Kevin Mansell - Chairman, President & Chief Executive Officer: Thanks.

Thank you. Our next question will come from the line of Mark Altschwager from Robert W. Baird. Please go ahead. Mark R. Altschwager - Robert W. Baird & Co., Inc. (Broker): Good morning. Thanks for taking the question. Just first on the SG&A guidance for the back half, just as we model that out, do you expect much variability from Q3 to Q4? I think last year, it was flattish in Q3 and up quite a bit in the fourth quarter, so just any help on how we should be thinking about that. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: It really will depend on our results. I think we'll have more SG&A in the fourth quarter, if the sales are at the higher end, with incentive compensation and things like that, but I wouldn't expect any great variability. Certainly didn't expect the performance that we had there this quarter; everybody in the company, especially in store payroll, did a great job of pulling back on expenses, but nothing material. Mark R. Altschwager - Robert W. Baird & Co., Inc. (Broker): Okay. Thank you. And I wanted to dig into loyalty a little bit. First, can you just update us on your efforts on converting the Yes2You members to credit customers? And then, bigger picture, now that we're close to two years into the program, just talk about some of your learnings; how effective the program has been in driving incremental visits or increasing transaction sizes, and how the engagement among members has evolved over time and any changes planned for the program moving forward. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: I think from a loyalty perspective, we got a very nice lift last year. Our learnings from the second year is that we have to continue to create new ways for folks to get excited about loyalty. We started to do some events. We just did one the last week of July, where we combined our Friends and Family Event with the triple points for loyalty customers and that's some of the things that Kevin was talking about earlier about marketing. It's important to market the event, but the three biggest things we have driving our sales from a marketing perspective are credit card penetration, Kohl's Cash and our loyalty program. And we can't get those in front of the customers enough and get them to understand what the value of that is. As far as getting them to translate into credit card customers, I think we've seen some success there, but, honestly, we have a big data opportunity to marry the sources of data that we have within the company. There are people that register for our website on kohls.com that provide us that information. There are people that register on the loyalty profile. We need to marry that information together, along with trying to get some income information, so we can be able to prescreen those at the front register. We're going to be able to start to do that in more volume after we roll-out our new point-of-sale program in the third quarter, but I don't expect to see significant enrollments in that until the spring of next year. Kevin Mansell - Chairman, President & Chief Executive Officer: I mean, one thing that has proven out, Mark, and I think Wes would tell you is for sure the Yes2You customer who is also a credit card customer, is by far the most engaged, consistent shopper in terms of visits and dollars spent at Kohl's than any other customer we have. And they're also the most profitable customer for us. So I think from that perspective, we clearly are on the right path and, as Wes kind of alluded to, what we need to do is accelerate the engagement of Yes2You customers who aren't credit card customers to consider moving that way. Mark R. Altschwager - Robert W. Baird & Co., Inc. (Broker): That's very helpful. Thanks and best of luck.

Thank you. Our next question will come from the line of Lorraine Hutchinson from Bank of America Merrill Lynch. Please go ahead.

Thank you. Good morning. I wanted to follow up on the back half gross margin guidance of plus 20 to 40 [basis points]. Are you still planning for your inventory to be down as much as receipts were down coming into the third quarter? And, if so, are there further opportunities to reduce clearance and initial promotions? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Our inventories plan to be down mid-single digits, so kind of like where we ended the second quarter. We always have a level of conservatism. Fourth quarter is always very competitive. I think you guys know that the e-commerce business spikes significantly in the fourth quarter. That is a bigger headwind to gross margin from a shipping cost perspective, so we're still going to see more improvement in the fourth quarter last year, given our performance. We expect to see some improvement in the third quarter, but I think it's just a level of conservatism, not knowing what's ahead of us, but from an inventory management perspective, we're going to hit those numbers. The team is really focused on bringing those inventory levels down. And I think you've seen, by our results in the second quarter, what benefits that has.

Thanks. And I think you talked about bringing in more transitional product after holiday. Can you give us a little context on what that might look like coming into the first quarter? Kevin Mansell - Chairman, President & Chief Executive Officer: Well, I mean, first of all, it's baked into the inventory assumptions Wes gave you, which is continue to keep inventories down mid-single-digit. I think Wes and I and Michelle would say if we could do better than that, we'd be happy, but that's currently, certainly, our focus right now, but there's a pretty big shift because due to high inventories last year, as you know, we were unable to deliver in the mid-November to mid-December periods fresh receipts that will allow us to transition out of holiday into spring, and that's going to be a pretty big change. So I think our viewpoint is when you think about how we would then be positioned both for our late holiday selling, but, more importantly, into spring, we're just going to be in a much better place because the percentage of our total units on hand that'll be transitional will be much, much higher than it was last year.

Great. Thank you.

Thank you. Our next question will come from the line of Neely Tamminga from Piper Jaffray. Please go ahead. Neely J. N. Tamminga - Piper Jaffray & Co. (Broker): Great. Thanks. Just a quick two-part question, on the localization efforts you guys been piloting that, at least with a group of stores, a little bit longer than the rollout for the company; just wondering if there's any data points around kind of longer tail insights you've had from that pilot store group that you can share about gaining confidence in the second half gross margin. And then, secondly, Kevin, maybe for you on the active wellness, really great to see Under Armour come into to the store; the overall category, sounds like it's up mid-singles. Nike is up low doubles. Just wondering how to reconcile those two just a little bit; are you transitioning out some brands as you prepare for space or are there underperforming brands within active wellness? Thank you. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: On the localization, we've sort of piloted versus control group, we're getting about a 70 basis point lift in comp in the areas that are localized versus the ones that aren't, with about a 40 basis point reduction in inventory. So that's a pretty good result from our perspective. I think as we learn more as we continue to get better at this, it really is a combination of art and science. So the absolute inventory levels are easier to control. Trying to figure out what the difference is in assortment is a little harder. I suspect we'll get better as we go throughout the year on that. And then Kevin can take the other question about... Kevin Mansell - Chairman, President & Chief Executive Officer: Yes, on the active wellness area, I think the way we're looking at that, Neely, is that the business is obviously growing faster than the overall apparel business. Certainly if you look at it industrywide, the rate of growth is slowing just because the denominator is getting bigger, the business is bigger and bigger and it's certainly a lot bigger for us, but it continues to grow a lot faster than the rest of the store. And so active and wellness is going to be getting more space. It's got more inventory dedicated to it in our stores. And we're going to be going through this holiday a pretty major transformation of the presentation and space allocation and fixtures in our active and wellness areas in the stores to prepare for the Under Armour arrival that will include updating and amplifying the rest of active and wellness in addition. There aren't any major brands that are going away at all. We just are seeing the continued move of consumers who are moving into that space. And I think it's a long-term sort of life change for American consumers, and we're just reflecting it in our inventory and space. Neely J. N. Tamminga - Piper Jaffray & Co. (Broker): Thank you so much, you guys. Best of luck out there. Kevin Mansell - Chairman, President & Chief Executive Officer: Thanks.

Thank you. Our next question will come from the line of Paul Trussell from Deutsche Bank. Please go ahead.

Good morning. Wanted to ask a question on the top line. I believe you mentioned that July ended well and there is momentum heading here into the third quarter. You also spoke positively about the Children's and Juniors business. And I also know, Wes, that I think Thanksgiving's a little bit earlier this year, which could be helpful to 4Q. I guess I'm just surprised you didn't guide to the possibility of positive comps; if you could just maybe rectify that for us. Kevin Mansell - Chairman, President & Chief Executive Officer: I think what we've done in terms of the forward look is consistent with the way we always look at guidance, Paul. At the end of the first quarter, we really didn't update our guidance. And the reason we didn't is we just felt like we didn't have a firm data point to be able to give you a true insight into the look through the year. Second quarter is now over. We see the improvement in the business. We see some of the inventory strategies taking hold, the resulting improvement in margin. Some of the SG&A initiatives that Wes and his team have implemented are taking hold as well. So we're just in a better position to use the current trend year-to-date to apply to the fall and holiday. Yeah, it goes without saying, Wes mentioned some of them, there is opportunity. We could do better on inventory. If you use second quarter as a data point, we could do better on margin. But I think it makes sense for us to just say, hey, year-to-date, this is where we're at and we're looking for continued improvement on each of the lines, but we don't want to get ahead of ourselves either.

Fair enough. That's helpful. And then, just to also better understand the comp composition, could you just tell us what drove the UPTs up, I believe, three points, and just if there's any opportunity for AUR to increase in the back half or should we continue to believe that is flattish? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: I mean, I think AUR will increase in the back half, due to increased penetration of national brands. We ended the quarter with less clearance than last year, but we were aggressive at pricing that through the second quarter to get rid of it. So I think that was part of the AUR drop, which hopefully will not be an issue in the back half, as clearance continues to be lower than last year as we – certainly in the fourth quarter, as we've moved throughout the fall season. But I think the units are up because the product is more salable. People like what we're – there's more positive parts of the business now than there were in the first quarter. So some of those Back-to-School businesses that we mentioned, like Young Men's and Juniors, were positive for the entire quarter, not just for July, so that gives us some hope going into back-to-school.

Thank you, and good luck.

Thank you. Our next question will come from the line of Dan Binder from Jefferies. Please go ahead.

Hi. It's Dan Binder. Thanks. Obviously, a tough industry backdrop; I was wondering if you could share a little bit of market share color, if you have any, and what you're seeing on industry promotion. And then, just lastly, kind of following on to the last question, the issue seems to be traffic. Obviously, if the product's more salable and UPT is up, what more do you think you can do to drive traffic? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Well, we don't really have the NPD data for the second quarter yet, but I'm assuming that it will tell us that Amazon continues to gain market share, as do off-price. We did a lot better in the second quarter than we did in the first, so I think that will probably help us out as well. From a traffic, Kevin talked about it, we're doing a good job with the credit card customer. They continued to shop us and shop us more than they did last year. We have to continue to make inroads with the non-credit card customer. That's part of the things we talked about. I think Mark asked a question earlier on loyalty, trying to engage them more, trying to round them up to a higher level of reward to get them to come in more frequently and raise the response rate, to hammer home the differentiation of us providing Kohl's Cash and the Yes2You Rewards versus our competition. All of that takes time. It's not going to turn on a dime, so we just have to continue to do that. If you start to notice our broadcast, I think you'll see a more consistent theme on highlighting those vehicles versus just saying what the current event is. And I think over time, that's going to resonate with the customer and get them to come into us more often. Kevin Mansell - Chairman, President & Chief Executive Officer: Yeah, I mean, I think Wes definitely covered the key points. And if you think about what we covered in the call, Dan, we're definitely trying to bring up the message that we know that we've got to improve our speed strategy in private brands. And we've been working on that and we're now starting to get confidence that we can scale that across the store. So that's a big one. And I think Michelle is now more confident than ever that wrapping loyalty platforms together allows us to move customers up through Yes2You and credit card combos that would lead to higher engagement and higher sales. The other part that I think is probably important for you to understand is that we do think that we have a big opportunity to amplify both the rollout, but, more importantly, the relevancy of our store base. So we made some store closures. As Wes said, we monitor stores all the time, but there are no stores that we would anticipate closing next year, right now. And the indicators through things like our ability to ship from store more effectively and less expensively, and buy online, pick up in store adoption rates, I think give us a sense that that's also a key element for us to see the value in having a broad network of brick-and-mortar stores. I think it's a big advantage.

That's a good segue to my next question. Wes, at one point, you'd given us sort of a rough idea of what the gross margin headwind was for each point of penetration in e-commerce. With the learnings on ship from store, take into consideration split shipments, the things you're doing around that, has that impact to gross margin changed versus what it was looking like a year ago, as we get an increase in e-commerce penetration? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: No, I still think it's going to be about 30 basis points in total for the year. Shipping cost is about 20 [basis points] and then mix is about 10 [basis points]. The BOPUS portion of that is obviously the biggest advantage in terms of profitability. That's moving up nicely, but not to the point where it can help us out significantly yet. I think the fourth quarter will be a big indicator of how good that can be. You alluded to split shipments. That's something we're working on very diligently. The ship from store option for us makes us competitive with Amazon Prime in terms of we can get the shipment to the person's house in less than two days about 90%-some of the time. So speed is a big initiative from that perspective, but if we have to ship it in two packages, that's a problem. So we're continuing to fine-tune our algorithms to allow more packages to go together and not split the shipments. And I suspect we'll have more improvement as we move into the back half of that. Kevin Mansell - Chairman, President & Chief Executive Officer: I mean, is it fair to say, Wes, that the opportunity on the online margin is more about improving the net merchandise margin the next few years? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Yeah, the shipping cost, given where we think online is going to go, is going to probably be around that 30 basis points, but if we can increase the apparel penetration through the combination of having both better product and smartly extending assortments in things like special sizes and big and tall, even in footwear with some of the wide shoe options, that'll allow us to do a lot better from a merchandise margin perspective. We made a lot of progress online from a clearance perspective and cleaning that up. And I think there's also opportunity with reducing SKUs, which will help as well.

And just a last item, anything more on brands for this year in terms of brand announcements or opportunities, any particular categories or anything you're ready to talk about? Kevin Mansell - Chairman, President & Chief Executive Officer: No. Nothing to share with you right now, but, as we said, that continues to be a key focus for Michelle, both adding new brands to our portfolio but also strengthening the ones in key areas. Active wellness is a great example with Nike. And then, secondly, the speed initiative in private brands has an equally important role as she sees the mix of national and private brands evolving.

Great. Thanks.

Thank you. Our next question will come from the line of Paul Lejuez from Citi. Please go ahead.

Hey. Thanks, guys. Macy's announced a store closing program today. I'm just curious if you've noticed any pick-up in your stores that are close to the last class of Macy's stores to close? And I think this was asked earlier, but just in the context of Macy's, does it make you think any differently about what the right number of stores is longer-term? I know you say you don't have anything lined up to close next year, but what's the right ultimate size of the fleet? Thanks, guys. Kevin Mansell - Chairman, President & Chief Executive Officer: Wes might be able to answer the first part. I can definitely reiterate... Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Yeah, we haven't really seen it. Because they're in malls, very similar to when Penney's was pursuing their different strategy, we didn't see a big pick up. We haven't seen a big pick up from the Macy's closures. I would think the mall-based retailers would see more of that. And then, from a store closure perspective, it's hard to predict the future. If we can start to drive top-line sales more consistently, that should make the stores better. We mentioned earlier, I don't see any stores that we're going to close next year. When we get a better idea of what the retained sales are going to be from the 18 that we just closed in June, that will tell us what our projections are going forward and make us feel better about either we'd be more aggressive on closing stores or more conservative, once we get that information. Kevin Mansell - Chairman, President & Chief Executive Officer: And just generally, though, Paul, again, I think we all feel that the role of brick-and-mortar stores in our future, we're actually more convicted about it than less convicted about it. Now, there can be individual stores, as we go through the next few years, that Wes might determine financially don't make sense to have, but if you think about all the things we're talking about, whether it's the rollout of these 35,000 square foot stores as a potential to replace larger stores over time, or it's all of the easy experience initiatives that we're implementing, or it's the adoption of buy online, pick up in store and our utilization of ship from store to make customer convenience on online orders easier and, as Wes just said, faster, they all, to a great extent, kind of point us toward saying that having a really strong base and portfolio of stores is an important element of why we're actually going to be successful in the future. Fewer stores, generally, are not going to be a ticket to success, in our mind. That doesn't mean if stores don't pass a financial hurdle, that we won't close them or downsize them. We will. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Yeah, we'll have smaller stores in the future. As leases come up, I think it'll be smarter for us to relocate into a smaller store the next five years. But I think Kevin's right. Distribution points, as digital becomes a bigger part of everybody's business, is important.

Got you. And then, just one separate one, how can we think about the launch of Under Armour? How big can it be in year one and maybe long-term as well, how big can that business be for you guys? Kevin Mansell - Chairman, President & Chief Executive Officer: I mean, obviously, we don't scale things like that in terms of volume or that externally. Internally, we have a plan. I think the way Michelle spoke about it when she announced the launch of it is it will be the biggest launch that we've done. And it's going to be funded accordingly. And, more importantly, from my standpoint, Michelle is looking at the overall active area, because, as you just heard in the script, we have brands in that area that are performing at an extremely high level. So we're not looking for Under Armour to diminish the rate of growth in other brands. We're looking to expand our opportunity in active and wellness, and also expand for Under Armour, points of distribution to reach customers that they have not been as successful reaching. So we feel great about that.

Great. Thanks. Good luck, guys.

Thank you. Our next question will come from the line of Michael Binetti from UBS. Please go ahead.

Hey, guys. Good morning. Congrats on a nice quarter, tough environment. Could I just ask you really plainly for our models, what are you baking in as your assumption on traffic for the second half, inside the same-store sales guide? I know you gave us a couple pieces. I just want to make sure I'm clear. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Traffic is going to be down. You give us credit for being smarter than we really are. So I'm just thinking we're going to be down somewhere between down 2%, which was the run rate we had just recently, and flat. We think there are a lot of things moving in our direction to get to flat. If we get to flat, it's going to be because traffic is less negative. I don't think traffic has to be positive for us to be flat, because between a combination of either more units or slightly higher AUR, or hopefully both, we're going to have a higher transaction value.

Okay. And then, I guess the one thing that we talked about in the quarter, and you mentioned it a few times today, is the speed initiative on private label. Can you just help us think about what the overall opportunity is there? And I apologize if you mentioned this directly, but maybe the margin contribution you're seeing there? I know you've given us X% of private and exclusive label will get there over time, but maybe just how to think about how that impacts the margins? And then, I guess secondly to that, is that obviously, you're focusing on private and exclusive, but some of the other chatter around the industry has been some of the national brands trying to integrate more deeply with their retailers to see if they can speed up in that wholesale retailer relationship. Is there any opportunity to do that as you look beyond what you'll be able to do on the private label side? Thanks. Kevin Mansell - Chairman, President & Chief Executive Officer: Well, it's Kevin. I think there definitely is opportunity in the national brand portfolio to improve speed. And it's definitely a focus for many of our key suppliers. We are probably talking more about it with you on the private brand side because we completely control that. And we know the elements of the cycle, from design all the way through delivery, that we can take time out of on, and we've piloted and experimented and seen the results. I mean, I think, frankly, Michelle would tell you that she believes the metric that will improve if we effectively scale-up speed, beyond where it's been tested and piloted so far, will be sales. Yeah, there's a corresponding positive that comes with more effective inventory. And, therefore, if sales improve – as you know, margins on private brands are quite a bit higher. And so there's a possible margin implication that would be to the positive as well, but I think that the number she's looking to change the trend line on is implement speed in order to have relevant product, which will sell better, turn a little faster and, indirectly, I think, raise our merchandise margin because we'll just be doing better in private brands.

Thanks, guys.

Thank you. Our next question will come from the line of Richard Jaffe from Stifel. Please go ahead. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Thanks very much, guys, in a very comprehensive call. Just a question on the private brands and their evolution, clearly, there are some winners and losers in that portfolio. And wondering if there's an editing process that'll occur over the next year or so, where some of the private brands go away and are replaced by national brands or by expansion of the private label. So wondering how you're thinking about the private label brand portfolio and the opportunity now to edit it down a bit, to focus it. Thank you. Kevin Mansell - Chairman, President & Chief Executive Officer: It's Kevin. There's definitely editing opportunities in our private brand. And when I say private brand, I'm including our exclusive brand portfolio, so the entire portfolio represents almost 50% of our business. And I think the factors that will impact that will be how quickly we can scale up the speed initiative, will probably tell us pretty quickly which of the brands benefit the most from that, and, therefore, will point us in the right direction in terms of downsizing and then eliminating others. We definitely know that that's an opportunity for us. We have broadened the base of private and exclusive brands that we have to offer over the last five years quite substantially. And I think Michelle feels like there's a chance to tighten it up. Our big private brands, though, the $1 billion-plus brands of SONOMA and Croft & Barrow and Apt. 9, they're not going away. And those are the ones that probably will benefit the most. There's always good things and bad things in the private exclusive brand results, but, generally, the really good things have been the brands like SO that have had the speed initiative applied, and also things like SONOMA, where we've kind of relaunched it. And the things that have struggled more are those brands where we haven't had any adoption of the speed initiative. So that's kind of how we're thinking about it. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: Okay. Thank you.

Thank you. Our next question comes from the line of Brian Tunick from RBC Capital Markets. Please go ahead.

Thanks. Good morning, guys, and nice progress. We were just wondering, I guess two questions, one about the guidance cut. So it seemed like Q1, you may have missed your internal plan by $0.10. It seems like you've more than made up here in Q2. So with the business improving, we were wondering why you're taking down the full year guidance. What metrics are you seeing or you're being more cautious on? And then the second question is, with the lower SG&A levels, are you finding that you have a new lowered leverage point going forward? Is your D&A now maybe going to grow a little slower or come down? Can you maybe talk about go-forward what are some things that can continue? Thanks very much. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: All right. You're pretty new, Brian, so I'm going to help you with this. Well, first of all, we didn't take the guidance down from where the consensus was. You guys took it down for us, so we thank you for that. But the reason it's at $3.80 to $4, is if things don't improve from today, the quarter that we just reported, we'll make $3.80. Our internal expectations from a sales perspective are to improve. If we can hit those, we'll make $4. From a leverage perspective, we've lowered our internal goal from a 2% to a 1.5%. We did much better than that this spring. I mean, if you do the math on the numbers I gave you, we should leverage at a little bit above a flat comp for the year. I can't sign up for that forever, but we do have a lot of initiatives going forward where I hope to do better than the 1.5%, but that's what we're committing to at this point.

Super. And just a final question on the beauty side, any updates there on what you're seeing from the expanded assortments? Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Well, this was the last batch of roll-out. The new beauty environment in the stores we just rolled out in the spring averaged about a 34% comp in beauty, which was similar to the first two stages. So it is now complete and it should continue to comp in those 267 stores in the 30% range through the balance of the year and slightly into next. So that's been a big success, and we're very happy with it. Michelle is working on trying to get additional brands to strengthen that environment now that the physical environment's rolled out.

Super. Thanks very much, and good luck.

Thank you. Our final question will come from the line of Oliver Chen from Cowen and Company. Please go ahead.

Hi. Thanks. Good morning, guys. We had a question about weatherproofing and your ability to really navigate the environment when weather is more risky and when weather is an opportunity. How would you dissect what factors may lead to that happening over time, whether it be categories, and it looks like speed is a great opportunity as well? And then, if you could help us, just for our knowledge, dissect what's happening to your consumer as we kind of reconcile low unemployment and some wage growth against what's been tougher on traffic. And just our last question is on Amazon. With the competition evolving on Amazon, what are you focused on just to ensure you're un-Amazon-able? Like where do you think your customer overlap is and product overlap? Thanks, guys. Kevin Mansell - Chairman, President & Chief Executive Officer: A lot of questions, Oliver. On the how we think about navigating the weather changes that happen in regions and parts of the country over time, I think generally, there's two answers to that, Oliver. One is, and I think Wes may have mentioned it; if not, I'll make sure you know. As we look into the fall and holiday, we've planned down seasonal categories substantially more than the overall business. So we feel like we want to make sure that we're in front of that and not chasing it. And we'd much rather be in a position where we run low or do have to chase product in highly-seasonal categories, so the plan has an aspect to it. The longer-term answer is definitely the speed initiative, because many of our national brand businesses are less weather-sensitive, and most of our private and exclusive brand product is actually relatively highly weather-sensitive. So I think longer-term, we feel like the speed initiative is the solution. We've positioned private and exclusive brands I think, Wes, on an inventory basis really well going into the fall and holiday. We are down... Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Yeah, we're down like mid-teens. Kevin Mansell - Chairman, President & Chief Executive Officer: In total inventory. So I feel like we're in a really good place on that. In terms of consumer behavior, I think there isn't any new news there. We had modest improvement in our business and in traffic, but it's still negative. So until such time as we can implement these merchandising and marketing changes, we don't want to plan for traffic to turn positive. And so, as he said earlier in the call, we're planning traffic to be lower than sales in the near-term. In terms of competition, I think Wes also addressed that a little bit earlier, we continue to see and we expect that both Amazon and, generally, off-price space is gaining share. And so to the extent we can, we are really focused on making changes to our business model that would just allow us to compete more effectively. And one of the things that we're probably doing and have a stronger point of view about is the importance of our stores to do that. We're in a good position in that we have stores who pass our hurdles and are financially performing, but traffic is down. So if we don't get that turned around, at some point, we'll have to be looking at those stores more effectively. We're piloting these much smaller stores as perhaps replacements so we can continue to have points of distribution, but they're less square footage. And then we're trying to utilize them as points of distribution through BOPUS and ship from store strategies. So I think Wes and I, Michelle, Sona, Rick Schepp, we all feel like stores are a really important part of our future and we just have to make them work harder for us with customers. And having more presence in markets has an impact on brand awareness and share awareness beyond just distributing product and access points. It just makes you a more important competitor in any particular market across the country.

Thanks a lot. Solid results, and best regards. Kevin Mansell - Chairman, President & Chief Executive Officer: Thanks. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Thank you. Wesley S. McDonald - Senior Executive Vice President & Chief Financial Officer: Thanks, everybody.

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