Wesley McDonald - Kevin Mansell - Chairman, Chief Executive Officer, President and Member of Executive Committee

Bernard Sosnick - Gilford Securities Inc. Michelle Clark - Morgan Stanley Richard Jaffe - Stifel, Nicolaus & Co., Inc. Robert Drbul - Barclays Capital Daniel Binder - Jefferies & Company, Inc. Adrianne Shapira - Goldman Sachs Group Inc. Jeffrey Klinefelter - Piper Jaffray Companies Deborah Weinswig - Citigroup Inc Erika Maschmeyer - Robert W. Baird & Co. Incorporated David Glick - Buckingham Research Group, Inc. Lorraine Hutchinson - BofA Merrill Lynch

Good morning. My name is Ashley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Kohl’s Quarter 2 2011 Earnings Conference Call. [Operator Instructions] Certain statements made on this call, including projected financial results and statements regarding the company's intent to restate its prior financial report, the nature of the estimated adjustment of the restated financial report and the expected timing of filing the restated financial reports are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. The company intends forward-looking terminologies such as believes, expects, may, will, should, anticipate, plans or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause the company's actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include, but are not limited to, the risk that additional information may arise during the course of the company's lease accounting review that would require the company to make additional adjustments to our financial reports, the time and effort required to complete the restatement of the financial reports, as well as other risks described more fully in Item 1A in the company's annual report on Form 10-K, which is expressly incorporated herein by reference and other factors as may periodically be described in the company's filings with the SEC. Also, please note that replays of this call will be available for 30 days, but this recording will not be updated. So if you are listening after August 11, it is possible that the information discussed is no longer current. Unless specifically noted, the historical results and the guidance that the company is about to discuss do not include any adjustments that may result from the lease accounting corrections that the company disclosed in its earnings release and related 8-K earlier today. Thank you. I would now turn the conference over to Wes McDonald, Senior Executive Vice President and Chief Financial Officer.

Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I'll take us through the financial performance, and then Kevin will make some remarks regarding our merchandising, marketing, inventory management initiatives, and then I'll close with our earnings guidance. Total sales for the second quarter were $4.2 billion this year, an increase of 3.6% over the second quarter of last year. Comparable store sales for the quarter increased 1.9%, driven by a 1.6% increase in average transaction value. The increase in average transaction value reflects the net impact of a 6.1% increase in average unit retail and a 4.5% decrease in units per transaction. The number of transactions per store is up slightly at 0.3%. Year-to-date, sales increased 3.4% to $8.4 billion, and comparable store sales increased 1.6%. Average unit retail increased 4.6% and was only partially offset by a 3.7% drop in units per transaction. The average transaction value rose 0.9%. We also achieved a 0.7% increase in number of transactions per store. Kevin will provide more color on our sales by region and line of business in a few minutes. Our credit share was approximately 55% for the quarter and 54% for the year, an increase of 645 basis points over the second quarter of 2010 and approximately 600 basis points over the first half of 2010. Moving on to gross margin. Our gross margin rate for the quarter was 40.7%, approximately 43 basis points higher than the second quarter of last year and significantly higher than the flat to 20 basis point improvement that we expected. Year-to-date, our gross margin increased -- rate increased 24 basis points to 39.4%. For the third quarter, we expect our gross margin rate to be down 10 basis points to up 10 basis points for the quarter. SG&A increased 0.7% for the quarter, significantly below our expectations of a 3% to 4.5% increase. The most significant leverage came from our credit and store organizations. Advertising and distribution also leveraged for the quarter. We would expect SG&A expenses to increase 1.5% to 3% for the third quarter. Depreciation expense increased approximately 6% for the quarter to $163 million, primarily due to new stores and remodels. Depreciation is expected to be approximately $171 million in the third quarter. Operating income increased 14% for the quarter to $510 million. Operating income as a percent of sales was 12%, 106 basis points higher than the second quarter of 2010. Year-to-date, operating income increased 9% or $72 million to $872 million. Net interest expense was $27 million this quarter and $31 million last year. Interest expense is expected to be $30 million in the third quarter. Our income tax rate was 37.3% for the quarter compared to 37.9% in the prior year quarter. The reduction was due to favorable state tax audit settlements. We expect our tax rate to be approximately 38% in the third quarter and 37.6% for the fiscal year. Our diluted earnings per share of $1.09 increased 30% over the second quarter of last year. Year-to-date, net income was $514 million or $1.81 per diluted share, a 22% increase over last year. Moving on to the balance sheet for your modeling purposes. We ended the quarter with gross square footage of 96 million, up 2 million from last year's 94 million. Selling square footage was 81 million at quarter end compared to 79 million last year. And we ended the quarter with a 1,097 stores, 30 more than the end of second quarter 2010. Moving on to cash. We ended the quarter with $1.2 billion of cash and cash equivalents, a decrease of $1.3 billion from the prior year quarter end. The reduction in cash is primarily due to retirement of $300 million in debt during the first quarter and share repurchases. We have repurchased approximately 2.2 billion of stocks since the second quarter of 2010, including 750 million repurchased during the second quarter of this year. Substantially, all of the cash and cash equivalents are in money market funds and commercial paper. We ended the quarter with $3.1 billion of inventory, a 5.6% increase over the prior year quarter. Inventory per store is up just under 3%, within our guidance of being up low single digits per store. Kevin will talk more about inventory management in a few minutes. Capital expenditures were $473 million for the first half of 2011, approximately $50 million higher than the prior year due to new stores, increased remodels, our third e-commerce fulfillment center and the exercise of a purchase option in our Texas call center lease. Accounts payable as a percent of inventory was 43.5% versus 45.9% last year. The decrease is primarily due to lower inventory turn. From a capital perspective, we repurchased approximately 14 million shares in the quarter and have repurchased approximately 40 million shares since reactivating the buyback program in the fourth quarter of last year. All of these purchases were made pursuant to 10b5-1 plans. Weighted average diluted shares were 278 million for the quarter. For your modeling purposes, I would use 266 million diluted shares for the third quarter. This assumes an additional 500 million in share repurchases in the third quarter at an average price of $52 a share with no additional share repurchases for the year. We'll update you on our plans for fourth quarter share repurchases when we report third quarter earnings. For those of you updating annual earnings per share numbers, I would use 274 million shares for the annual share count. Earlier this week, our board approved a quarterly dividend of $0.25 per share. The dividend is payable September 28 to shareholders of record at the close of business on September 7. And FYI, the shares outstanding as of quarter end were 269 million. And with that, I'll turn it over to Kevin.

Thanks, Wes. As Wes mentioned, comparable store sales increased 1.9% in the second quarter. Our monthly cadence was more volatile than normal as pent-up demand drove a very strong comparable sales performance in June when hot weather arrived, while July was negatively affected by a lack of clearance merchandise as our clearance inventory units ended down 25% on a per store basis. From a line of business perspective, Accessories and Home reported the strongest comps for both the quarter and on a year-to-date basis. Accessories was led by watches and handbags, Home was driven by strength in small electrics, food prep and bedding. Women's continue to be better than the company average for both the quarter and on a year-to-date basis. Strong performers in Women's included updated sportswear, active wear and special sizes. Men's and Children's were positive but slightly under the company average for the quarter. Men's was led by basics and active wear, while Children's had strength in infants and toddlers. Footwear, which has consistently outperformed the company in the last few years reported a mid-single digit comp sales decrease for the quarter. Athletic shoes drove the decrease, down mid-teens due to significant drops in the toning category. This was a category we had maximized last year, and it peaked in the second quarter last year. On the positive side, Women's shoes were the strongest category in the Footwear business, achieving a double-digit comp sales store increase. Our private and exclusive brands continue to increase in penetration. They were approximately 53% of our sales in the second quarter, up 335 basis points. Private brands such as SONOMA and Apt. 9 performed very well, while exclusive brands like FILA SPORT, Food Network, Lauren Conrad, Simply Vera Vera Wang and Mudd achieved very strong double-digit sales increases. From a regional perspective, the Northeast region reported the strongest comps. The Mid-Atlantic and Midwest regions reported low single-digit comp increases, and the Southeast, South Central and West regions were flat to modestly down. Our E-Commerce business continues to report significant sales increases and is on plan to reach our $1 billion business goal. For the quarter, E-commerce sales were $171 million, up 36% over last year. We expect an increase in comparable store sales for the third quarter in the 2% to 4% range. We expect all months to be consistent with the quarterly average with modest sequential improvement throughout the quarter. We're extremely excited about the upcoming Jennifer Lopez and Marc Anthony brand launches, and we see those 2 brand launches as catalysts in September and October. You will begin to see the merchandise in the stores in late August with the launch scheduled for mid-September in conjunction with our anniversary sale. We'd expect those brands to accelerate our already strong trend in exclusive brand penetration. Looking at inventory levels, merchandise content and receipt flows, we're very pleased in our inventory management results and are comfortable with our plan for the fall. Total inventory per store is down 5% in units and up less than 3% in dollars, while clearance units per store are down approximately 25% in units and down approximately 16% in dollars. As expected, we've incurred significant cost increases across all apparel categories this fall, approximately 10% to 15% overall. Our results in the second quarter, in addition to more specific testing by price point and lifestyle, indicate that our plans in fall for price elasticity on a 1:1 ratio are very sound. They won't be the same by area or price point, but overall, that's our plan for the fall season, and the plan appears to have been well-founded. We would expect our inventory dollars per store at the end of the third quarter to be up low single digits on a per store basis, similar to our expectation for the year. As Wes mentioned, we continue to expect gross margin for the third quarter to be down 10 basis points to up 10 basis points, higher than last year. This was our expectation heading into the year back in February. We've allowed ourselves the flexibility on pricing by planning units conservatively to meet customer demand. Our increased penetration in private and exclusive brands, as well as continued better inventory management will help us maintain margin if customers resist some of the planned price increases. Our #1 customer concern continues to be staying within her budget. As a result, we'll continue to drive home our value message using our highly effective The More You Know, The More You Kohl's platform. There are several new marketing investments we are making in the third quarter over last year. Included among them are, of course, the significant addition on investment in the new brand launches, increase in the amount of direct mail and increase in the amount of digital media and an expansion of our mild and hot market strategy to include the South Central region in addition to the Southeast. All of these investments are reflected in our guidance, which we will be sharing. History has proven that Kohl's Charge holders are our most loyal customers. We've seen that in the results thus far this year. They shop our stores more often and have a significantly higher annual spend than non-Kohl's Charge holders. As a result, we've also recently made changes in our incentives to open a Kohl's Charge account that will hopefully attract more occasional shoppers and help them turn into Kohl's brand lovers. We'll also continue to focus on adding to our mailable credit card base, especially in our mild and hot markets. As you may recall, we focused on the Southwest region in 2009, in the Southeast region in 2010 with excellent results in terms of increasing credit penetration and increasing sales productivity. We are now expanding those efforts this fall into the South Central region as part of our mild and hot market strategy. In addition, our partnership with Capital One has allowed us to increase our approval rates since April by approximately 300 basis points on average, giving more customers the chance to experience the value our charge card provides. Finally, we've also added new marketing this fall to all remodel stores to attract new customers and expect to see a benefit for the fall season. The final group of remodel stores will reopen in conjunction with our new brand launches in September and these final remodels will bring our total for the year to 100 stores. Finally, we're on schedule for our plan to open up another 31 new stores in the fall season at the end of September. In closing, we weren't happy with our sales performance in the second quarter. But we were very pleased to significantly exceed the high end of our earnings goals. We have strengthened our marketing for the third quarter and have the benefit of the biggest brand launches in our company's history, which we believe will allow us to achieve a better comp in the third quarter. We continue to be excited about our E-commerce performance as we remain on track to achieve $1 billion in E-commerce sales in 2011. And in order to achieve that goal, our third e-commerce fulfillment center in Maryland is online to support holiday 2011 peak season. Our biggest sales opportunity remains in our mild and hot markets. We're happy to add the South Central region to our marketing intensification initiatives. We have much more to do to achieve our goals in those markets, but we continue to move forward positively. Our increased penetration of private and exclusive brands, along with strong inventory management continues to benefit us on our gross margin rate, and we see no change in that going forward. Our inventory remains in great shape. As we expected, the inventory levels are on planned, and clearance levels are significantly below last year on a per store basis. In addition, our merchants and planners reacted to the sluggishness in seasonal sales. We have appropriate levels of inventory in those categories entering the third quarter. Perhaps most importantly by far, we continue to make significant progress on the SG&A line. After being a headwind in 2010, our credit business provided significant leverage in the spring season as our bad debt expense continues to drop towards prerecession levels. Leverage and store payroll expenses continues to be driven by sustainable productivity improvements such as the rollout of electronic sign. In other areas, such as distribution and advertising, contributed as well to our expense control. Finally, I think you can see that our capital structure provided flexibility in the quarter where the top line was less than planned. We believe that our stock is certainly undervalued at its current level, and we're more aggressive about share repurchases, buying approximately $750 million of stock during the quarter. Our peak working capital needs are in the third quarter with our holiday inventory build, but we would still expect to buy back at least $500 million worth of stock in the third quarter. We're committed to being good stewards of capital, and we'll continue to prioritize profitable growth and reinvestment in our stores while returning any excess cash to our shareholders. I think this is evident as you see our EPS increase of approximately 30% over last year and the $140 million of cash dividends that were paid so far this year. With that, let me turn it back to Wes to provide our earnings guidance.

Thanks, Kevin. In conjunction with our July sales release, we reported that we had identified certain areas related to our accounting for leases. Earlier this week, our audit committee concluded that because of these errors, investors should not rely on our 2010 Form 10-K or our first quarter 10-Q. The most significant corrections relate to some very technical accounting literature related to our involvement in new store construction. It is important to note that all of the corrections are noncash. In reviewing our leases with our auditors, we have determined that many of our strategies in negotiating leases and in renovating and constructing stores have put us in a position of holding an ongoing financial interest on having control of the building. We have had several leasing strategies that have caused the accounting issues. First, situations where we construct the buildings for the landlord, but received a portion of the reimbursement through reduced rent over the term of the lease rather than upfront when we incurred the construction cost. Second, our leases generally have renewal options at fixed rates, which covers substantially all of the building's economic life. And finally, we often make improvements that are more significant than normal tenant improvements, replacing a roof or installing an HVAC system as examples. These strategies do not change the legal ownership of the store, but do require us to record the property and the corresponding liability on our books. The corrections will also re-categorize rent expense as depreciation and interest expense. We are working diligently to quantify the impact of these errors on both our historical and our perspective results and currently plan to file our restated 10-K and first quarter 10-Q, as well as our second quarter 10-Q by September 13, which is the normal due date plus a 5-day extension as allowed by the SEC. With that, let me share with you some details behind our initial guidance for the third quarter and for fiscal 2011. For the third quarter, we would expect the total sales increase of 4% to 6%, comp sales of 2% to 4%, gross margin down 10 basis points to up 10 basis points over last year. We expect SG&A to increase 1.5% to 3%. Including our expected $500 million share repurchase, this would result in earnings per share of $0.76 to $0.82 for the third quarter. As a result of our second quarter performance and our third quarter share repurchase estimate, we are raising our fiscal 2011 guidance from $4.25 to $4.40 per diluted share to $4.45 to $4.60 per diluted share. This guidance does not include any impact from the lease accounting corrections. And with that, we'd be happy to take a few of your questions.

[Operator Instructions] Our first question comes from the line of Deborah Weinswig with Citi. Deborah Weinswig - Citigroup Inc: Quick question on credit card. Your credit penetration is growing at impressive levels. I think you said 645 basis points year-over-year. Can you talk about what's driving that? And how is that impacting your business?

Well, I think from the second quarter it's a little unique situation as we tried to describe a little bit earlier June and July. One of the things we did from a marketing perspective in June is we added a second credit event to June, replacing our lowest prices as a season event. That obviously drove extraordinary increases in our credit penetration. Normally, the only month we have 2 credit events in are in March and September, which coincide with our grand opening of stores. So that's probably the biggest driver. Secondarily, I think as I mentioned in the call, partnership with Capital One has allowed us to increase our approval rates by about 300%. That certainly started to drive some increase in penetration and hopefully will help us through the balance of the year and into the future as we make those customers more loyal to Kohl's. Deborah Weinswig - Citigroup Inc: And can you give us some insight in terms of your early experience with back-to-school?

I think it's probably too early generally from a perspective of the categories of the business. If you look backwards a little bit, Deb, we had a pretty consistent performance in Kids, which, of course, is an important area. We had a pretty good performance in July in the quarter in the nonathletic, non-toning Footwear business. So I think that gives us some confidence. And I think we're all looking hard at impact of price increases on the business, not just for back-to-school but for the third quarter. I'd say right now, we're seeing a pretty consistent pattern, and it's pretty much what we planned for, which is about 1:1. Beyond that, it's just way too early. Deborah Weinswig - Citigroup Inc: And last question what's happening in the mild and hot market? I think you've previously discussed these as being some of the biggest opportunity markets.

Well, I mean, generally, they're improving, right, if you look at performance over the course of the last 3 years. Consistently, the mild and hot markets have outperformed the company. They needed to because they were relatively underperforming as a percent of an average store. So we had room to improve our productivity levels in those stores. But they are catching up. And I think generally I would say, we're really pleased and kind of see that in the fact that we continue to expand our market intensification efforts to include other parts of the mild and hot markets. So it kind of went from a focus on the West Coast in '09 to a focus on the Southeast in 2010, and we've now made the decision that for this fall, new, we will be expanding that into the South Central, one of the key states, of course, which we have a lot of stores, Texas, and that's a stayed in a market, which could benefit from the expansion of the market intensification. So I think we're pleased with the progress, and we still have a little bit of a gap, so we've got a little room to improve as well.

Our next question comes from the line of Adrianne Shapira with Goldman Sachs. Adrianne Shapira - Goldman Sachs Group Inc.: Kevin, maybe just stepping back give us a sense of -- in light of the shift in the promotions, also the lack of clearance in June, July, the weather shift also. Just when you step back, what does it make you think about how aggressive you have to be in terms of getting the customers' attention in this environment? And how you think about the back half and perhaps the need to be more, to invest more in price? What you learned from sort of that experience June versus July?

The June, July swing, which was non-holiday related, that's about as big a swing as I can remember where we had almost an 8 comp in June positively and almost a 5 comp negatively in July. You hit on the 3 reasons as we look back in hindsight and sort of analyze, we understand it a little better. Weather was a factor. There was a lot of pent-up in the demand in June, and so the consumer was open to buy. We then had sort of pre-positioned the promotional change in our calendar to really accelerate sales into July both because of the weaker spring and also because strategically it was working. So I think we accelerated and pulled up demand into June. And then naturally, tight inventory management led to tight clearance levels and a really strong June further tightened that level. So you put all 3 of those things and we can kind of better understand the performance in the 2 months. Broadly though, there's no question that the consumer needs to be motivated more in order to buy today. And if you think about the period generally, most of the price increases that consumers are going to see, they're just kind of feeling for the first time. They might have seen some of them in June and July, but they're going to see much more broadly this fall as it hits in August, September, October. We try to go through on the call a whole series of marketing investments that we've made in the third quarter that are incremental to last year. And without getting into the gory detail of all of that, I think the signal we're giving you is that we know we have to be very aggressive on marketing to motivate the consumer, and that's everything from our incremental investment around the new brands to more direct mail to dramatically increase investment in digital media to this market intensification expansion into the South Central and even including increasing the incentive to attract customers to apply for and get a Kohl's credit charge. So I realize that was a long answer to your question, but it's really everything that we're thinking about. And as I said, I think that we're implying in the third quarter that we know we have to be very aggressive to motivate her. Adrianne Shapira - Goldman Sachs Group Inc.: Okay. And so that was on the heels of the learnings from the June, July, a lot of reinvestments was in response to that.

I think it was 2 things. I think we knew that we needed to be prepared to do that given the price increases and the weak economy, and then the June, July really accelerated our need to do so. So it definitely increased the importance of doing so. So we definitely made some changes due to June and July. Adrianne Shapira - Goldman Sachs Group Inc.: Okay. And in light of that, it's impressive that the gross margin held constant in light of some of these incremental changes. Maybe kind of help us think through how you're able to maintain that margin expectation? Is that a function of private label penetration continuing to ramp, to offset maybe some incremental pressure? And then following that, maybe the -- if you could be a little bit more specific in terms of the change of the incentives of the credit offering going forward.

Well, on the margin, I mean, it is primarily a function -- we would kind of generally qualify it as better inventory management results. It's got 2 big pieces to it. One is as you can see, we've had very strong inventory control, and we predicted where our inventories were going to be, sales fell short of what we thought they were going to be and yet we see still achieved our inventory levels, which sort of says to you that we have strong receipt flow control. So I think that's been a very big positive. It's particularly a positive when you go down into the store groupings, and we see improvement in the store groupings where we needed to see it. And then definitely the very large increase in the penetration of private and exclusive brands is a big positive for our merchandise margins and definitely was a tailwind for us. As we look at fall, I think we believe that if anything, that's going to accelerate because we have the 2 biggest brand launches in the company's history laying on top of strong demand. On the credit incentive, I mean, that's about new customers. So we have a focus that we're trying to get customers who shop Kohl's occasionally or infrequently to become shoppers more often. We would refer to them as more brand lovers. And the connection that we know we can make to get that to happen is to show them the reasons why they should consider carrying a Kohl's Charge. And so one of the ways to do that effectively is to increase the incentives to open one, and then that allows the ability to communicate all the incremental value opportunities they get during the course of the year, and that sort of moves them along the spectrum towards brand lovers. So it's been a positive. Adrianne Shapira - Goldman Sachs Group Inc.: Okay. Great. And then just lastly, one for you Wes, I mean an impressive job a second quarter in a row where you're able to deliver the high end of earnings despite the low end of sales performance. You've done a great job on the SG&A front. Just in light of these incremental marketing initiatives, we know that you're lapping some spend on credit from a year ago. Just give us a sense in the back half, does it get tougher to continue to be able to manage expenses as well as you had in the first half, if sales continue to be challenging?

Well, I mean, I think it was a real team effort the stores, the distribution guys, the advertising team did a great job. We continue to get benefits from credit much like some of our competition have already reported or in the first quarter. We're seeing the same benefits from bad debt expense coming down significantly, and that's passing through to the bottom line. I think the credit tailwind certainly continues through the balance of the year. I'm proud of the stores for leveraging on a little bit more than a flat comp, and I expect that they'll be able to do that in the fall season. Advertising, we're going to invest a little more. Kevin mentioned, the Jennifer Lopez, Marc Anthony launches. That's going to be a pretty significant investment very similar to what we did with Vera Wang back in 2007. So we're going to put some muscle behind that. So advertising will be very challenged to leverage in the back half off of last year. And corporate expenses will really be a function of what our comp is. But I'm comfortable that the team can flex to whatever the sales volume is.

I mean the incremental advertising though, it's important to note that, that is still built into the guidance that Wes gave you. So when he expects SG&A to increase 1.5% to 3% on a 4% to 6% sales increase, that includes the incremental advertising.

Our next question comes from the line of Bob Drbul with Barclays Capital. Robert Drbul - Barclays Capital: Kevin, from the standpoint of just on the sales perspective, can you comment a little bit about the performance of small format stores? Are they trending any differently than you expected? And can you also comment on the remodeled stores and sort of the results that you're seeing versus the entire store base most recently?

I don't have the specific small versus proto results for the quarter but -- for the quarter but generally, the small stores I think more because there's more new small stores are going to be trending better than the company. So I don't have the specific number in front of me, Bob. We'll get it for you later. But I'm pretty confident I can say that small stores trended at a better comp than the company did in the second quarter because that's been very consistent recently. On the remodels, we've been really pleased with the remodels. And I would say, we saw an acceleration in the year-over-year performance of our remodeled stores. And frankly, there's a number of investments that we're making as part of that incremental marketing spend that are targeted right at the remodeled stores. And we do expect if anything, that, that sales trend, which was better in the second quarter than it was last year on those remodels is going to accelerate because there are things that many of which we've tested and are working and there are new things, which we have a lot of confidence in because they worked for us in the past. So remodels is generally a really good story I would say, and I think better to come. Robert Drbul - Barclays Capital: And in the back half of the year now as we enter into it, can you just give us your updated thoughts around your ability to sort of maintain initial markup and keeping the pricing structure at the good, better, best? Have you really tweaked that at all, given the volatility of the sales trends over the last few months?

Not really. I mean, fundamentally, we went into this thinking that we wanted to maintain our initial markup. That, that was important, and that would give us the ability to respond to why the customer wanted to buy or didn't want to buy. So far, the results we've gotten have kind of been what we expected broadly, which is this kind of 1:1. For every increase in cost, there's a corresponding decrease in units, and that's kind of what we're experiencing. And there isn't anything we'd point to particularly about a price point or a business or a lifestyle that is different than that. It's generally mostly about the product itself. If the product is really on target, then the customer accepts the price increases. And if merchandise content is a little off target, she's much more apt to resist it, which would require us to be more aggressive from a price point perspective. Robert Drbul - Barclays Capital: Then my last question is you talked a little bit about some of the focus group work that you've done, and I think the #1 reason staying within her budget. How frequently do you perform those focus groups and sort of when is the most recent one sort of that you have done? And sort of how should we think about your frequency to sort of communicate with your consumer base like that?

It's a continual process, so it's all year, every month, and we're looking at what drives the customer to shop. And the #1 driver continues to be value. As we went into the second quarter, we still saw a pretty strong balance between a great price and an expectation that they would get really good quality and style for that price. I haven't seen any real change in that. It's something we look at every month. So this is not something we do every 6 months or a year. We do it on a continual basis. So we're tracking any changes in perception or intent to shop based on maybe more important to price and less important to quality or style, but we haven't seen that, Bob.

Our next question comes from the line of Daniel Binder with Jefferies. Daniel Binder - Jefferies & Company, Inc.: A couple of questions for you on the credit side. The credit penetration was up, as you pointed out, quite a bit year-over-year, given the relationship. And I was just curious, if you were to do a sensitivity analysis around how that contributed to comp store sales in the quarter, I would appreciate it and I was -- also, another question on credit. As you look at the relationship, and I realize you may not want to provide a lot of detail, but if you were to see a period where those credit tailwinds were to reverse and bad debt started going back up, what kind of a sensitivity would you have to your earnings given the profit-sharing relationship?

Well, I mean, I think the first question, the credit card comp by far is a much better performing business, always has been. Even in my tenure here when we ran 6 comp back in '06, the non-credit comp was basically flat. So the credit comp for the quarter was in double-digit territory. The noncredit customer was a little more challenging. Part of that was the addition of the event in June, obviously, because that customer would have probably used a bank card and LPS or could use a bank card in LPS and used Kohl's credit card during our second credit event. As far as the bad debt goes the other way, I'm not going to quantify it. I can just tell you we went through it in '09 really is when the bad debt expense started to hit because we're not responsible for the reserves. So Chase has that. And there was a slight decrease in our profitability. But quite honestly, last year, there was a bigger decrease in our profitability given some of the changes that went through from a legislative perspective. If you recall, in the third quarter last year, we said we probably lost about $50 million worth of revenue. Our bad debt expense during its worst period was 6.6% of accounts receivable. We're starting to see it trend down to close to 5% this year would be where it would be, if we continue the trend we're on. So I don't think it presents a ton of risk going forward if it goes the other way. Daniel Binder - Jefferies & Company, Inc.: Okay. And then just 2 other quick questions. One, if you can comment not necessarily the specific numbers, but have you seen any choppiness in the business around the events of the last 2 to 3 weeks? Obviously, been a lot of turmoil and then some clarification on the guidance. Is it correct to say that the $0.10 of that increase was related to the buyback that you're assuming not just for Q3 but presumably for Q4 as well?

Well, I can't really comment on the choppiness of the current month because it's in the current month. As far as the buyback goes, yes, I mean, obviously, you guys can do the math. A big chunk of the guidance increase was due to the fact that we bought back more shares in the second quarter. That just gets carried through the third quarter, as well as the fiscal year. All your guys models already had share repurchase in it. So to be fair, I can't quantify a range from what your estimates are versus what our estimates are. But certainly, it affected it.

Our next question comes from the line of Erika Maschmeyer with Robert W. Baird. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Could you talk about the margin profile on your E-Commerce business? I know that's been pressured by all the investments that you've been making in it. And when you might expect to start to get some more leverage there?

Well, I mean, I think that's the right way to characterize it. We think about the E-Commerce business in the short term looks like this year and even into next year a little differently than we would think about the E-Commerce business after that, Erika. In the short term, it's a little bit of a drag on operating margins because we've made so many significant investments. And that will continue into early next year though it will improve from this year's level. In the longer term, as we look at it post this year and early next year, I think that our online business will begin to be a tailwind to our operating margin. We think long term, it can be a big, big positive I would say. But you're right in assessing it as right now, it's not exactly helping our operating margins because we've made so many investments not just on the capital side, but on the expense side as well.

Yes, I mean, from a gross margin perspective, I would expect it always to be slightly lower than brick and mortar. The business just tends to naturally be more driven by Home. Home is roughly 18% or 19% of our total business, but online right now, it's roughly 1/3. That's because it was one of the first categories we've put online back when we started the business. We're starting to increase the apparel offerings online as we widen areas that are available online like big and tall and special sizes group. That's going to help us do more Apparel business online, closing the gap to brick and mortar. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: And then in terms of your categories online comp-wise, do you see any different trends that you do in the stores?

Not generally, I mean, prior to -- beyond the obvious thing that Wes just touched on. The other thing that is a fact right now is that the penetration of our private and exclusive brands online is lower. And that's, of course, because we have had a strategy of beginning to expand the categories that we sell online to include things that we don't sell in the store and related categories. And as a result the percentage of business, this private and exclusive brand, naturally, it's going to be lower. We do have strategies in place as we move into next year to pretty aggressively change that trajectory. So we're going to be offering much larger assortments than we do in the stores in our private and exclusive brands. And I think that's something that will benefit us going forward. Erika Maschmeyer - Robert W. Baird & Co. Incorporated: Great. And then a quick follow-up. D&A was lower than we expected. What was the driver of that?

We're pretty conservative when we plan that in terms of when assets get put into service. So it's just more of a function of that than anything else where we might have planned the asset to be usually their IT assets get put into service at the beginning of the quarter. It might not make it to the end of the quarter or it might not make until third quarter.

Our next question comes from the line of Jeff Klinefelter with Piper Jaffray. Jeffrey Klinefelter - Piper Jaffray Companies: Just a couple of quick follow ups here. One would be on pricing. Kevin, appreciate the perspective you shared on elasticity, more specifically in key product categories like denim where we're seeing most of the significant price increases and pass-throughs. At the same time, for example, in the youth area, in the teens space, we're seeing a lot a very aggressive pricing in the malls to the downside. So I was just curious is there anything going on there in terms of how you see your performance in that category? Are you seeing more competition from malls than you would typically see? And then as another follow-up, it would just be on sourcing. In terms of your ability to chase in the second half could you share your thoughts on that? And would that actually end up coming in at a lower cost, given some changes on the sourcing environment?

On the elasticity, generally, I would say, particularly to the 2 categories that you called out, which is sort of the younger businesses and then separately denim more broadly. Younger business has generally had been pretty good. And to be honest, if there was any category we were a little concerned about as prices started to take hold, it was our younger businesses because they seem to be historically pretty price-sensitive. But those actually came through the second quarter, including July pretty well. I think, Wes, they ran pretty much with the company and the smaller sizes, which have a tendency to be the most sensitive actually outperformed the company. So on that one, I would say we're feeling good. On the denim, I think you're going to know a lot more about the impact of denim, Jeff, in September. And for us to be talking about the impact of this elasticity impact based on June and July, it's just not a period in which it's a good period to review. I think by the time we get to our August results and early September, we should have a pretty good understanding of what's happened in the denim category. On the sourcing side, we, as you know, have had a very aggressive approach to improving our sort of concept to customer, our supply chain effectiveness with our overseas suppliers. And that's benefiting us. You can see that. Most strikingly, I think, we had a subpar sales performance and yet we came in pretty much right on our inventory levels, I think actually a little bit below what we had projected. And so broadly, we feel pretty good about that. Having said that, when you get into the late fall and holiday, there's a very limited amount of chasing you can do. Those goods we do go back on, yes. I mean, raw material costs have moved the other way for sure. And so we actually -- it might actually benefit us since we have to chase later in the season. And it's one of the reasons why just from a total perspective, we feel really feel positive about the fact that we've really managed inventory tightly. So we're in a position to take advantage of it. Jeffrey Klinefelter - Piper Jaffray Companies: Okay. That's really helpful. Just one other clarification on your marketing spend, you are spending some incremental dollars here across different mediums. In total, your budget year-over-year has gone up from the thoughts at the beginning of the year. In terms of your leverage point, Wes, is that staying flat, is that dropping because more of your dollars are going into a digital and direct versus TV?

Well, in the first half, I think marketing leverage.

Yes, we leverage in the second quarter mark. In the back half, it will be worth of the leverages. Our expectation would be, obviously, in the back half, for the incremental investment we're going to get the sales for it. So I think we were at 4.7% of sales last year. My goal would be to get to flat this year. That's going to be dependent on -- as a percent of sales, that's going to be totally dependent on the back half. Jeffrey Klinefelter - Piper Jaffray Companies: Okay. If you hit your sales plan on the back half with this incremental spending that would be a push in the rate?

That will be the goal, yes.

Our next question comes from the line of Lorraine Hutchinson with Bank of America. Lorraine Hutchinson - BofA Merrill Lynch: Your first test comp came in a little late versus your expectations, and I know you're adding some marketing in the back half, but it seems like the environment remains quite challenging. What gives you the confidence in that 2% to 4% comp in the back half?

Well, I think you're right on target on the environment, no question about that. And there's obviously no question disputing the fact that our comps were less than we projected them to be. We think we understand some of the reasons that is, and we do have some specific strategies in place to try to correct that. We talked about those in the call. There are a lot about frankly, brand launches, which have accelerated our trends in the past, and we have the biggest ones in the company's history coming. And then secondarily, smart and intelligent incremental investments in marketing. And we've exhibited a pretty good ability to make good decisions about spending additional marketing. As Wes said, we have to get sales to show that, that continues to be true in the fall and holiday, but we believe we're putting the extra marketing in the places that will drive extra sales. So there's not much more to say beyond that to be honest, Lorraine. It's really those 2 things.

It would also almost be impossible to sell less outerwear in October this year than we did last year given the weather.

Our next question comes from the line of David Glick with Buckingham Research. David Glick - Buckingham Research Group, Inc.: Most of my questions have been answered. I'm just curious on the merchandising front. Obviously, you noted not having a big brand launch, was one of the issues you identified for sales below your expectations. Just as a little bit of a preview, how should we think about your floors flowing just in a general sense? What gets displaced? Is this going in strike points? Where is J. Lo and Marc Anthony going to go in the floor? And is it a major reflow of your selling floors that's going to give a fresh look to the customer when they shop in mid-September?

Yes, David. I mean, the short answer it is a major reflow. Both of those brands will fit on the front of our floor pads one in Women's, of course, one in Men's. Both will anchor the floor in the zone that sits to the front of the store in both those respected areas. In the Women's area because they actually go from the aisle all the way through to the wall and then Men's, they do have a similar but, of course, slightly smaller floor pad. The primary elimination has been the Axcess brand, which we had in both Men's and Women's, which was a brand we purchased through Liz Claiborne, and that's been eliminated. To be honest, that's been a drag in the first half of the year on our exclusive brand penetration because we decelerated, of course, our investment in brand in both areas a lot going into the first half, but we've been kind of fighting that. It's one of the reasons why I mentioned at the beginning that we actually would expect to have private, particularly our exclusive brand penetration increase is going to accelerate a lot in the third quarter. It's going to be a dramatic change because the first half reflected no newness in the elimination of pretty big anchor brand in exclusive brands and the second half reflects the 2 biggest brand launches we've ever had in all newness. So we feel good about that. David Glick - Buckingham Research Group, Inc.: So does that mean that Simply Vera kind of moves to the side and J. Lo gets that strike point?

No, Simply Vera still anchors, Simply Vera is the premier brand we have in the Women's world. That brand ran double-digit increases in the first half of the year and actually is accelerating. So no, she did not -- we did not relocate that brand. Jennifer Lopez will basically be in the middle of that pad. David Glick - Buckingham Research Group, Inc.: Okay. And then last question on the athletic Footwear obviously, huge drag in the first half. When do you see -- how much do you see that trend improving in Q3? And is it possible to see that category flatten out by the end of the year?

On a percentage to last year basis, I would not expect -- I don't have the specific numbers on toning, but I would not expect the toning drop percentage-wise to last year in the third quarter. It will be much different than the second quarter, but the dollars are much, much smaller. And as a result of that, the impact on the total Footwear sales and the total company sales are dramatically less. And of course, as you would expect, as we move through from August to September to October they get less and less. July was the peak dollar amount of toning business we did in the whole year. And of course, it came in what is the price second lowest sales month of the whole year. So the impact on the company was pretty dramatic. David Glick - Buckingham Research Group, Inc.: And last follow-up on the credit events clearly, those will become a bigger and bigger percentage of your business and your performance seems strongest in those events. This multipronged marketing strategy, do you think that makes you less dependent on that event and can sort of drive better performance outside of what's clearly been your most successful marketing promotion?

Yes, I mean, that's certainly the objective. I mean, generally, that's what we're trying to do, which is recognize that while we love the fact that our customers love having their credit card, and we want to get more of them into it, the reality is that we need to increase our share of voice in our noncredit event, and we're going to do that through the brand launches, through the direct mail, to noncredit customers, and in a pretty dramatic way, in an increase in digital media. And so that's definitely how we're thinking about it.

Our next question comes from the line of Michelle Clark with Morgan Stanley. Michelle Clark - Morgan Stanley: Just a point of clarification on an earlier question. Your fiscal year EPS outlook does not include any share buyback assumptions in the fourth quarter, is that correct?

That's correct. Michelle Clark - Morgan Stanley: Okay. And then SG&A guidance in the third quarter, obviously credit has been a big tailwind for you guys. Can you just tell us what is embedded in your third quarter SG&A outlook that credit continues at the pace we saw in the second quarter or is it an outlook that you had at the beginning of the year in terms of credit?

Well, I think it's really a function of how it's done. So far this spring, obviously, we've done better in the spring than we thought. So we embedded that in the guidance. Overall, SG&A you have to remember we're adding that marketing investment with Jennifer Lopez and Marc Anthony. So I always hope to do better than what we guide, but I built in some of that credit upside. We'll see if it's more than I thought. Michelle Clark - Morgan Stanley: Okay. Great. And then lastly, on J. Lo, Marc Anthony, can you give us any color on what this SKU breakout is between the 2 brands? Is one more heavily weighted versus the other?

Yes, Jennifer Lopez is by far the bigger brand. And as you know -- I mean, as you know, the Women's business is roughly 50% bigger in dollars than the Men's business at Kohl's. So you would expect that the Women's brand is a bigger impact, and you'll see that on the floor. While Marc Anthony, the Marc Anthony brand has a significant floor presence and great presentation, Jennifer Lopez brand is significantly larger. Michelle Clark - Morgan Stanley: Is the magnitude 3:1, 4:1?

We really don't get into specific. From a presentation perspective, in 3 weeks, you'll be able to look at it and judge for yourself. But it doesn't really matter I guess right, Michelle, because it's all in the way the customer receives it. So from an impact on sales standpoint, but it's dramatically different, and you'll see it.

Our next question comes from the line of Richard Jaffe with Stifel, Nicolaus. Richard Jaffe - Stifel, Nicolaus & Co., Inc.: I guess a couple of quick follow-up questions. With the E-Commerce business so strong, how do you think about that internally? I mean, how cannibalistic do you think it is? And how accretive or found sales is the E-Commerce business? And then if you could just spend a minute on price increases. You talked about 1:1, and I assume that's as dollar costs increased, units decreased. I'm wondering if there's an opportunity as you chase businesses to benefit from this product cost inflation environment, let's say, to see retail price inflation leveraging your cost.

Richard, on the E-Com thing, I think it's a mix. We recognize and we know for sure that there's certain amount of cannibalization going on, no differently than when we open up new stores and markets which have existing Kohl's stores, and some of those new stores cannibalized and some of them take sales from other retailers. So we know that our online growth, a certain portion of it is coming out of our comp store sales growth. But with amount of increase we have and from many objective numbers I've seen, our Online business is growing much faster than the overall industry online business. We're taking some incremental share as well. That's particularly true I would say, Richard, in the categories in which we offer online that we don't offer in-store. So there's a whole bunch of related categories to our core business that aren't available in our store but are available online. Those we know, of course, we're taking share. On the movement of raw material costs the other way, I think we always try to not anticipate that we're going to be the smartest people when it comes to buying and time-to-market just right. Generally though, we're really focused more on keeping our inventories lean and manage our inventories to our plan or below because that will give us the greatest flexibility. So if our inventories are well maintained and well managed and prices to us start to move the other way, we're going to be in a great position to take advantage of that.

And the last question comes from the line of Bernard Sosnick [Gilford Securities]. Bernard Sosnick - Gilford Securities Inc.: Could you give us some amplification guidance as to the role of Kohl's Cash in stimulating sales, the linkage with your card and your assessment of that plan versus those of competitors?

Yes, Bernie. I mean, generally, we think about Kohl's Cash as one of the ways in which consumers who understand the value of Kohl's, it's part of the platform of The More You Know, The More You Kohl's can get the best value. So we talk a lot about ways to stack the savings, ways in which you can get great sale prices. If you have a proprietary card, we reward you with incremental savings. Sometimes, we also allow you to earn cash, as you said, Kohl's Cash during those purchases to then come back in the store later when it's convenient for you because we give you a period of time to do so and use that Kohl's Cash. So I wouldn't -- we run Kohl's Cash events during credit offers and not during credit offers. And they're redeemed during credit offers and not during credit offers. So there's not a particularly direct linkage between it and the credit card, but it is linked in that it's part of the ways which we say to customers, you can really understand the value you can get at Kohl's by using Kohl's Cash in addition to our credit card, in addition to taking advantage of our no exclusion policy, in addition to getting hassle-free returns. It's just one of the value it issues. Bernard Sosnick - Gilford Securities Inc.: Well, could you also then compare what Kohl's is doing Kohl's Cash and other things to the programs employed by other retailers, Target, Macy's, for example?

Sure. I mean, broadly without talking about any specific retailer, I would say we think that this is not what we think. I guess it's what our customers tell us. The biggest differentiator on Kohl's Cash compared to other retailers that might offer other similar programs is that you can earn it on anything you buy in the store, and you can redeem it on anything you buy in the store. And I think that's very unique. I do not believe that, that is generally true.

I'll be available, if anybody has any questions after the call. Thanks again.

And there are no further questions. Thank you, ladies and gentlemen. This does conclude today's conference call. You may now disconnect.