Wes McDonald - CFO Kevin Mansell - President, CEO

Deborah Weinswig - Citigroup Chris Cuomo - Morgan Stanley Jeff Klinefelter - Piper Jaffray Bob Drbul - Barclays Capital Adrianne Shapira - Godman Sachs Lorraine Hutchinson - Bank of America Charles Grom - JPMorgan Dan Binder - Jefferies Richard Jaffe - Stifel Patrick McKeever - MKM Partners Michael Exstein - Credit Suisse Ken Stumphauzer - Sterne Agee Erika Maschmeyer - Robert W. Baird David Glick - Buckingham Research

Good morning. My name is [Christy] and I will be your conference operator today. At this time, I would like to welcome everyone to Kohl's second quarter 2010 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session. (Operator Instructions) Certain statements made on this call, including projected financial results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl's intends forward-looking terminology such as believe, expects, may, plans or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include but are not limited to those that are described in Item 1A in Kohl's most recent annual report on From 10-K and may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference. Also, please note that replays of this call will be available for 30 days but this recording will not be updated. So if you are listening after August 12 it is possible that the information discussed is no longer current. I would now like to turn the call over to Wes McDonald, Chief Financial Officer. Sir, you may begin.

Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I'll go over our financial performance and then Kevin will walk us through our four major focuses as a company: merchandizing, marketing, inventory management and store experience. We'll talk about our earnings guidance and then finally finish up with some more details about our new credit card agreement. Total sales for the second quarter were approximately $4.1 billion this year, up 7.7% from last year. Comparable store sales for the quarter increased 4.6%, driven by an 8.3% increase in transactions per store. Units per transaction decreased 2% and average unit retail decreased 1.7%. Year-to-date, sales increased 9.3% to approximately $8.1 billion and comparable stores sales increased 5.9% on an 8.5% increase in transactions per store. Partially offsetting the increase in traffic was a 1.7 decrease in average unit retail and a 0.9% decrease in units per transaction. Kevin will provide more color on our sales by region and line of business in a few minutes. Our credit share was 48.6% for the quarter and 48.2% for the year, an increase of approximately 160 basis points over the prior year quarter and approximately 210 basis points over the first half of 2009. Our gross margin rate for the quarter was 40.3%, up 31 basis points from last year and consistent with our expectations of a 20 to 40-basis point improvement. Year-to-date, our gross margin rate increased approximately 38 basis points to 39.2%. We would expect gross margin to increase 20 to 40 basis points in both the third and fourth quarters of this year. SG&A increased 8.4% for the quarter, better than our expectations of a 10% to 11% increase. Approximately $10 million of the favorability related to a shift in the timing of a change in terms notification to our credit card customers and training related to the opening of our second e-commerce fulfillment center from second quarter to third quarter. As expected, total SG&A did not leverage during the quarter mainly due to investments in both technology and infrastructure related to our e-commerce business, which caused both IT and distribution to deleverage. Store payroll and advertising leveraged for the quarter. Credit expenses also did not leverage primarily due to lower late fee revenue. We would expect SG&A expenses to increase 10% to 11% in the third quarter due to costs associated with a delay in implementation of a change in terms related to our credit card portfolio, increased investment in advertising based upon learnings in the spring season and continued investments in our e-commerce business. We would expect SG&A expenses in the fourth quarter to return to a more normalized run rate of an increase of 3% to 4% upon completion of the projects related to our e-commerce and credit card businesses. Depreciation expense increased approximately 6.5% in both the quarter and year-to-date period primarily due to new stores and remodels. Depreciation is expected to be approximately $165 million in both the third and fourth quarters. Preopening expenses were $2 million for the quarter, $9 million lower than the prior year quarter. The decrease reflects a decrease in a number of fall store openings, 21 this year versus 37 last year. Also, as a reminder, most of the 2009 fall openings were ground lease stores which had higher rental expenses during the preopening period. Preopening expenses are expected to be approximately $10 million for the third quarter and $2 million in the fourth quarter. Operating income increased 12% or $50 million for the quarter to $449 million. Operating income as a percent of sales was 10.9%, a 44 basis point improvement over the second quarter of 2009. Year-to-date, operating income increased 23% or $149 million to $800 million. Net interest expense was $31 million for the quarter and $62 million year-to-date, flat to both prior year periods. Interest expense is expected to be approximately $30 million in both the third and fourth quarters. Our income tax rate was 37.9% in both current year periods compared to 37.6% in both prior year periods. We expect our tax rate to be approximately 37.9% for both the third and fourth quarters of the year. Net income increased 13% to $260 million for the quarter and 25% to $459 million year-to-date. Diluted earnings per share increased 12% to $0.84 for the quarter and 23% to a $1.48 year-to-date. Moving on to the balance sheet for your models, we currently operate 1067 stores compared to 1022 at this time last year. Gross square footage was 94 million at quarter end 2010 compared to 91 million at quarter end 2009. Selling square footage increased from 76 million at the quarter end 2009 to 79 million at quarter end 2010. We ended the quarter with $2.5 billion worth of cash and cash equivalents, an increase of $1.2 billion over the prior year quarter end. The majority of the cash and the cash equivalents are in money market funds and commercial paper. Our inventory levels reflect continued strong inventory management. Total inventory was up 8% compared to the prior year and inventory per store is up approximately 3%. As expected, clearance inventory units per store, which represent less than 5% for the total units, increased more than total inventory units per store. Moving on to fixed assets, our capital expenditures for the spring season were $421 million, up $85 million versus last year due to increased remodels in the new San Bernardino e-commerce fulfillment centers. These increases were partially offset by a reduction in new stores. AP as a percent of inventory was 45.9% versus 42.3% last year. We are pleased with this continued improvement, although we expect this improvement to somewhat moderate as we anniversary a majority of our supply chain financing initiatives. Weighted average diluted shares were 308 million for the quarter and for the year and for your modeling purposes I would use 309 million shares for the year. This assumes no share repurchases. With that, I'll turn it over to Kevin.

Thanks, Wes. Let's start with sales. As Wes mentioned, comparable store sales increased 4.6% for the quarter and 5.9% year-to-date. E-commerce sales increased approximately 50% in both the quarter and year-to-date and contributed approximately 100 basis points to our total comp sales in both periods. We think this performance supports the decision we made to make major new capital and infrastructure investments in this business. From a line of business perspective, footwear reported the strongest comps for both the quarter and year-to-date periods with low-double digit comp store increases. Men's also outperformed the company average in both periods with strength in casual sportswear and basics. Home, women's and accessories all reported low to mid-single digit comp sales in both the quarter and year-to-date. The children's business underperformed the company, posting a negative low-single digit comp decrease for the quarter and low-single digit comp sales increase for the spring season. On a regional basis, the southeast region continued its first quarter trends and, again, reported strongest comps for the second quarter. The northeast also outperformed the company for the quarter. The midwest, south central, mid-Atlantic and west regions all posted positive comps for the quarter but underperformed the company average. Year-to-date, as I just mentioned, the southeast region was the strongest performer with high-single digit comp sales. All other regions posted mid-single digit comp sales. We expect an increase in comp sales for both the third and fourth quarter in the 2% to 4% range. For the third quarter we would expect August to be below the quarter, September approximately with the quarter and October to be above the quarter. On the merchandise front, in June we announced the signing of a multiyear service agreement and partnership with Aldo International, who will design and produce exclusive footwear products to be sold at Kohl's and on kohls.com under select private and exclusive brands. As part of the agreement, Aldo will be responsible for the design and production and will have a dedicated design team on the business. Kohl's will collaborate in the design process. The line will launch in spring 2011. Elle décor will launch in approximately 350 stores and on kohls.com beginning in September of this year. Elle décor will initially launch with contemporary home and home décor products including decorative pillows, frames, candles and accent items. As a reminder, LC Lauren Conrad, which was rolled out to all stores in March, and Helix, which launched in February, will be new to the back-to-school season. Both of these brands continue to perform well above our expectations and our original plans. Private and exclusive brands penetration increased more than 300 basis points to reach 49.1% of total sales for the quarter. Our three largest private brands, Apartment 9, Croft & Barrow and Sonoma, combined for a 20% increase in sales. Jumping Bean sales increased almost twice this amount. On the exclusive front, Elle, [Felix] Sport, Food Network and Simply Vera Vera Wang all reported total sales increases greater than 30%. On the inventory management side as we mentioned earlier, average inventory per store was approximately 3% higher than last year. Clearance inventory is slightly higher but is less than 5% of our total units on hand. Our merchants, product development and logistics team continue to work for their vendor partners to support our sales, putting us in a great position for the back-to-school season. Our size optimization initiatives continue to develop and we expect significant benefits this fall with the goal of having most of our size receipts on the program by the beginning of the fourth quarter. By leveraging this initiative and other inventory management disciplines we saw improvement in in-stock levels of over 4% in the second quarter leading to increased sales and higher customer satisfaction scores. We would expect our inventory per store at the end of the third quarter to be up low-single digits on a per store basis, similar to our expectations for the year. This run rate remains slightly below our comparable sales expectations. As Wes mentioned, we expect gross margin for the remainder of the year to be up 20 to 40 basis points over last year. We believe our increased penetration and private exclusive brands, as well as continued better inventory management will help ensure that result. Our marketing efforts are unchanged. We continue to utilize the highly effective The More You Know, The More You Kohl's platform. We remain focused on our total value increasing our regional relevance and differentiating and we think distancing ourselves from our competitors. Our customer has heard and is responding favorably to the value message. We continue to highlight the many ways that she can save while shopping at Kohl's to position us as the smartest choice for our cautious consumer. We continue to see the results of our relevancy by region efforts, especially in key hot and mild markets in the southeast and west where we have continued opportunity to connect more fully with consumers. Transactions per store in each of these markets have increased in the low-double digits for the spring season. When it comes to differentiation we want to emphasize what makes Kohl's the smartest choice, both in the store and in the community. We continued to highlight our in-store differences. Our no-exclusion sales events, our no-hassles, no-questions return policies and our world-class exclusive and private only at Kohl's brands are all everyday examples of our customer preferred shopping experience. As many retailers are reducing remodels, we were actually expanding our remodel efforts. Our stores, we think, are inviting and fun to shop and we've made significant investments in technology including our kiosks which will further improve the customer experience. Finally our customers also recognize our contribution to their communities. They have a choice when shopping and are consistently choosing Kohl's. On the store front we plan to open 21 new stores next month for a total of 30 stores this year. We will also reopen a store in Virginia which has been closed for a complete rebuild since January of this year. This in-store kiosk was effectively rolled out to all stores last week giving customers an additional way to find a size or color while conveniently shopping in store. Best of all, the kiosk delivers an engaging experience that makes it easy for our customer to find what she's looking for and is very easy to shop. We're excited to deliver industry-leading technology to our customers enhancing a best in class store experience. In closing, we achieved another strong financial quarter in which we made additional progress in our goals to build on our market share gains and to invest in our future by improving our business processes through technology, investing opportunistically in new stores and accelerating our remodel strategy. Our sales growth continues to come from all regions of the country and substantially all lines of business. Our increased penetration of private and exclusive brands along with a very strong inventory management continues to benefit us on our gross margin rate. We enter back-to-school season with new and fresh inventory. As we expected, inventory levels are up less than sales and clearance levels are very well managed. As Wes mentioned earlier, SG&A did not leverage this quarter as IT investments and remodel costs increased faster than sales. This was a planned decision and actual SG&A costs increased less than our expectations. Leverage in-store and advertising expenses continue to be driven by sustainable productivity improvements. Finally, I’m very pleased to have finalized our credit card negotiations and look forward to a productive and profitable partnership with Capital One. With that I'm going to turn it over to Wes, again, to provide our guidance and more detail on our new credit card agreement.

Thanks, Kevin. Let me share with you some details behind our initial guidance for both the third and fourth quarter regarding expenses. As I mentioned earlier, second quarter benefitted from a $10 million shift in expenses into third quarter related to costs associated with a change in terms involving our credit card business and training costs associated with our second e-commerce fulfillment center. So that's just really a timing shift. We also added additional advertising into the fall season of $20 million, $15 million in the third quarter and $5 million in the fourth quarter, after evaluating the success of some of our spring advertising initiatives. As is our practice, we have not added any additional sales into our expectations as a result of this increased investment. The biggest impact affects our credit business. As you know, there has been significant legislation enacted this year regarding credit cards. As we reviewed our plans after receiving the Fed's final guidance related to the Card Act, we made a decision to implement our previously planned change in terms over a longer period of time than originally contemplated in order to monitor the impact on our customers and to provide great customer service in answering any questions that they might have about the changes. Given the uncertainty in the interpretation of the Card Act rules, we partnered with JPMorgan Chase in evaluating this guidance and took advantage of their experience in managing many credit card portfolios, both general purpose cards and private label and in the relationship with regulators in arriving at this joint decision. As a result, in the short term we expect a reduction in income of approximately $40 million with $25 million in Q3 and $15 million in Q4. Once the change is completed we expect no further impact. Our number one priority throughout this process is to continue to provide the best possible value to our Kohl's charge card holders. So in summary, for the third quarter, we would expect a total increase in sales of 4.5% to 6.5%, comp sales of 2% to 4% and gross margin up 20 to 40 basis points over last year. We expect SG&A to increase 10% to 11%. This would result in earnings per diluted share of $0.57 to $0.63 for the third quarter. For the fourth quarter we would expect a total sales increase of 4.5% to 6.5%, comp sales growth of 2% to 4% and gross margin up 20 to 40 basis points over last year. We would expect SG&A expenses to increase 3% to 4%. This would result in earnings per diluted share of $1.51 to $1.59 for the fourth quarter. Therefore, our updated guidance for the year is $3.57 to $3.70 per diluted share for fiscal 2010. This guidance does not reflect any additional share repurchases in fiscal 2010. Let me share some more details about our credit card agreement with Capital One. Under the new agreement we will continue to handle all customer service functions and will continue to be responsible for all advertising and marketing related to our credit card customers. The program will operate in a similar manner as it currently operates under Kohl's existing agreement with JPMorgan Chase. The effects of the transaction will be largely transparent to our customers. In return for our services under the program agreement, we will receive ongoing payments related to the profitability of the program. We do not expect this agreement to have any negative impact on our earnings. The initial term of the program agreement is seven years which becomes effective and commences upon Capital One's acquisition from Chase of all right, title and interest and Kohl's approximately 20 million proprietary credit card accounts and the outstanding balances associated with these accounts. With that, we'd be happy to take any questions you may have.

(Operator Instructions) Your first question comes from the line of Deborah Weinswig - Citigroup. Deborah Weinswig - Citigroup: Walk through the guidance for next quarter in terms of what are you thinking about gross margin versus SG&A. Can you help us walk through it in a bit more detail?

I can try to maybe talk about sales and margin and Wes can provide you some more color on SG&A. Our sales guidance of 2% to 4% has been pretty consistent and given our current run rates, which we had a very nice second quarter at a little over 4%, we feel like 4% is a good top end. In terms of how the quarter's coming, we're just looking at the year-over-year comparisons, looking at factors like the weather and seasonality, back-to-school and that's kind of what contemplates how we see the month-by-month performance. There isn't anything unique about that. On the margin standpoint, also I would say we've had very consistent guidance on that. I think year-to-date we're up about 38 basis points. For the quarter we were up about 31. Guidance we're giving you is 20 to 40. Pretty much our performance has been in the mid to high part of that range, so I think we feel good about that. More importantly, Deb, I'd say we feel very good about what underlies that because what drives that is the improving penetration in our private exclusive brands and a consistent improvement in our overall inventory management practices, which we've continued to see inventory increases lower than sales increases, which is what we're very highly focused on. Wes, you might want to talk about SG&A.

Yes, well, one thing on sales, the other thing to know about the back half in terms of sales is our e-commerce business is a bigger percentage of our business in the back half and obviously that has performed very well even above our expectations. So that's a bigger benefit to the comp. It was roughly 100 basis points in the spring. It'll be closer to 200 basis points in the fall season. Regarding SG&A, I just went through some pretty detailed explanations, but big picture, it's roughly $45 million of expenses in the third quarter, $25 million related to credit -- I guess it's $50 million -- $15 million related to advertising and then $10 million related to a timing shift. Then you have another $20 million in the fourth quarter, $15 million related to credit and $5 million related to advertising. I think that asperity between the third quarter and the fourth quarter shows everyone what we've tried to articulate all year long is that we have a one-time fairly major increase in our e-commerce investments that's concentrated in both the second and third quarters and then in the fourth quarter we're back to our normal practice of growing expenses slightly less than sales. Deborah Weinswig - Citigroup: From a category perspective can you discuss at the same time the [foot wear] but where in the weakness in children's?

Yes, I mean, I think to some extent there's been some consistency as well in that. I think our forward business has been leading the company for a while and the second quarter was kind of more evidence of that. We've got a lot of changes happening in there from a product perspective that are working. We actually think that this new agreement that we've come to with Aldo is going to be a platform to kind of continue that momentum into 2011 because we're going to be able to take a company whose expertise is designed in production and footwear and apply that expertise to brands that we have, our exclusive brands particularly that are really relevant to consumers. So we think we actually have a platform that could accelerate that growth opportunity in footwear. Children's has been weak and it's actually been pretty consistently weak. I think to some extent you're probably facing year-over-year comparative issues. Children's was an area that in the last couple years and really depth of the recession, Deb, actually did do and faired better. So to some extent I think that's got something to do with it. I think at the same time we know we have our own opportunities to improve as well. Younger businesses in general have been weaker in the last quarter. Deborah Weinswig - Citigroup: Then last question, you're one of the only retailers we follow that actually has been able to get stores opened. Everyone's talked about the difficulty in working with developers. So what's in your box of magic fairy dust that's allowing you to be able to work with developers or really getting -- what's allowing you to get stores opened?

Well, I think -- I mean, I'm sure West can add more color to is. I mean, high level, I think, first of all we feel that two years ago we kind of made a commitment to investors that we felt this recession probably offered us an opportunity to be aggressive in opening stores by taking advantage of an incredibly strong capital structure that we had. I think we've done that. To a great extent we've done that and continue to do that. The fact that we're able to do our own deals because we are in a very strong cash position, of course, has a lot to do with it. So we're not really dependent to a great degree on developers. Then secondarily, I think as other retailers have weakened, in some cases as in the Mervyns example this past year, failed. We were in a position to step in in a really fast way. That always works to your advantage. We're strong in a weak environment and I think that's a positive. Wes, I don't know if there's more.

Yes, I mean, I think, Deb, you're totally accurate. There's not a lot of brand new ground up, plow over a field kind of development. Many of our developments I can say we're getting success with some takeovers with very favorable terms. We're also getting some success where we go into an existing development that has a parcel available. But it's definitely true that there's very little brand new development going on. We've just been able to take advantage of the opportunities in existing developments or takeover opportunities.

Your next question comes from the line of Michelle Clark - Morgan Stanley. Chris Cuomo - Morgan Stanley: It's actually Chris Cuomo here filling in for Michelle. I just wanted to see if you could elaborate a little bit on timing of the expectation for -- a decision, I should say on a share repurchase or dividend now that the credit card deal is behind you, so if you could just elaborate on timing and your thoughts there.

Well, I think now that the agreement's behind us I think we're going to take the capital structure under consideration with the Board and we're going to consider resumption of share repurchases, the initiation of a dividend or both. But the timing I don't want to commit to. It sets expectations. We're going to try to do a methodical evaluation of it like we normally do of everything we undertake and we'll let you know when we come to a decision. Chris Cuomo - Morgan Stanley: Then just wanted to get your thoughts on apparel cost inflation has been a popular topic for the last few months, just your thoughts on what you're expecting in 2011 and then just your perspective on your ability to offset those inflationary headwinds and how do you think you compare versus some of your peers in terms of your ability to offset some of those headwinds?

I mean, from a cost perspective we definitely see cost increasing in the first half of next year. That's definitely a fact. I mean, I think we tried to characterize it as kind of low to mid-single digit kind of cost increases depending upon the category, their function of both product costs and of course transportation costs, which from an overseas perspective are up year-over-year significantly. In terms of how we mitigate those costs we've gone through that in the past but we do have a very disciplined approach in terms of how we look at mitigating the impact of costs to consumers. How will we fair on that? We've been successful mitigating the impact of deflation in the last few years more successfully than most of our competitors, so I'm optimistic that that kind of approach and discipline to dealing with it will be positive as far as going forward. I can't comment on our peers' ability to do that but I think history suggests that we're in a position to be able to do that well. Now we have to show you we actually can do it. Chris Cuomo - Morgan Stanley: Then just as maybe a quick follow-up, a broad follow-up. I mean, big picture do you think gross margins can go up in 2011? You obviously have a long track record of posting year-over-year gains. Is it your expectation that 2011 will be another notch up?

I mean, guidance for 2011 we're not prepared to discuss. What we always talk about on the gross margin side is really what's driving our margin increases. So things that are driving our margin increases are improved penetration of private exclusive brands and continual and continuous improvement in inventory management. Those are the things that we're focused on now. Those will be the things we'll focus on again next year.

But you point out a good point. Our track record is we've grown gross margin over the last seven years.

Your next question comes from the line of Jeff Klinefelter - Piper Jaffray. Jeff Klinefelter - Piper Jaffray: Just a couple quick questions, one of the marketing spend, Kevin. Given your "learnings from the spring season" I wondered if you could just get a little bit more specific on that, the mix of your marketing, what you're finding most effective and then stacking at $15 million Q3 and $5 million Q4 in terms of the incremental. How does that play into that strategy of leveraging your credit card file and other within the mix of media? Then the second question would be on e-commerce. Given the strength of e-commerce I'm just curious on how the categories are performing versus the stores, what differences or consistencies you're seeing. Then also what the credit card penetration is online versus stores.

On the marketing side from a dower investment, Wes called out and you repeated the two incremental investments that we have strategically decided to make, $15 million in marketing in the third quarter and the $5 million in the fourth now. What's driving that decision essentially is experience and the experience that we're having is -- I would characterize twofold. Our success in comp store sales and our success in driving overall sales and, therefore, market share gains is being driven by customer traffic increases and we've had significant traffic increases in each of the first two quarters. Year-to-date I think we're up over 80% in terms of transactions per store and that's being driven by strong, aggressive marketing tactics and we want to continue that because we do see a cautious consumer. We see one that's reluctant to spend. We see one that's focused on the long-term value of what she buys and we're going to drive that through this process. Secondly, I would say it's driven by regional investments. So we've highlighted the southeast. We highlighted the southeast for you at the beginning of the year that we expected the southeast to outperform. The first two quarters of the year they significantly outperformed and, again, that's because we took learnings from our west coast experience last year and applied them to the southeast. That's going to continue and accelerate in the third quarter. From a mix of media implication, I think there's probably not a lot of new news there for you. You know that from an investment perspective [TAB] as a percent of our total investment is down. Essentially direct mail and digital is up significantly and that's a function of a very strong credit card value focus and, of course, moving to where the customer's moving on the digital media platform. Comparing the $15 million to the third and the $5 million to the fourth, to some extent I think that's driven -- in the fourth quarter we have a significant investment in marketing already every year, so incrementally it's difficult to find investments in the fourth quarter that productivity wise you can prove out that they're smart. So third quarter there are opportunities and so we've made them. Wes, you might want to touch on the e-com.

Yes, the one thing I will say about advertising, we are still leveraging significantly on our advertising expenses, both in the spring -- and our expectation would be even with these incremental investments for the fall and for the year. So e-commerce I think businesses -- the big news in e-commerce really is we're starting to gain a little traction in some of our under-penetrated businesses like apparel. If you remember, a couple years ago we only had about 25% of the SKUs online that were in our store. We're up to 100. That really occurred last year back-to-school. So we're starting to see some nice growth in apparel and footwear, which were under-represented versus their penetration store. But home continues to be the most highly penetrated business on the web. In terms of credit card penetration, it's something I like a lot. It's over 60% of our business on the web is done on the Kohl's card. So obviously we save a little bit in the interchange fee there and that's a loyal customer who's choosing to spend with us in multiple channels. Jeff Klinefelter - Piper Jaffray: Just one other thing: are you expecting your comps in the Q3 and the back half to be similar in terms of the metrics, the strong traffic offset by -- ?

It's going to be driven by traffic. I think we've been pretty consistently seeing the basket be down. AR's been pretty consistently down all year long. That's after an early sort of glimmer of hope where it was flat in the first quarter, came down in the second quarter. So we're planning on the basket being down a couple percent at least. So to drive the comps we're going to continue not to drive transactions.

Your next question comes from the line of Bob Drbul - Barclays Capital. Bob Drbul - Barclays Capital: Wes, I have a couple of questions on the credit card arrangement. Can you talk about the economics of the deal with Capital One compared to the economics of the deal with JPMorgan? Can you elaborate a little bit more on the $40 million hit in the back half of this year, exactly what that is?

Sure, about all I can say about the economics are that we don't expect the agreement to have any negative impact on earnings. That's really all I can say about the total. The split is very similar to how we have it today in terms of the mechanics. It's a split based upon risk-adjusted revenue where we take finance charges, late fees and other revenue less charge-offs, so pretty similar to what our current arrangement is. The $40 million hit really relates to the timing of rolling out our change in terms that allows us to be competitive and comply with terms in the Card Act. So when we originally contemplated this we thought we would notify all the card holders at once. After consulting with Chase and the regulators we thought it would be better to have a more even rollout. Bob Drbul - Barclays Capital: On the advertising, the incremental $20 million, when you look at the past -- earlier this year, when you look at the impact of the $20 million, if you're not planning a sales increase, Kevin, how do you think about sort of the returns on that in terms of justifying it?

Well, I think the way we look at it, Bob -- and we've tried to be consistent about this. In terms of our guidance always we try to be transparent in telling you whether we're incrementally adding to marketing, neutral to marketing or pulling back marketing. So we're telling you we're incrementally adding to marketing for the third and the fourth quarter. From the impact on sales we've also always been consistent in that we don't imply any impact on our guidance to our run rate based on that incremental advertising. Historic facts to year-to-date, it's working. As we've added we've leverage. As Wes said, marketing has actually been one of the best leverage areas in the entire company for the last 1.5 years and they continue to be so. So we're optimistic. We're very positive about it. We wouldn't be doing it unless we felt very strongly about it. But as far as guiding, we're not going to imply any impact in our sales because there are the things that I just touched on, a cautious consumer, one who's reluctant to spend, one who's focused on long-term value -- we just think that's a smart way to approach this. Bob Drbul - Barclays Capital: Kevin, just one final question; for back-to-school you seem to be making a pretty big push into [jeggings] and I was wondering if you could talk a little bit on that and the competitiveness for that to drive back-to-school traffic.

Second, yes, you're right. It's been a strong category year-to-date, probably longer than year-to-date. It's a category we invested in incrementally. I mean, denim, as you know, is a very important category overall for back-to-school for retailers but particularly for Kohl's where it's disproportionately of importance. It's working. Our sell-through rates in that category consistently -- it doesn't matter which size range you're talking about -- are better than the overall sell-through rates, so very, very positive.

Your next question comes from the line of Adrianne Shapira - Goldman Sachs. Adrianne Shapira - Goldman Sachs: Kevin, can you just clarify in terms of the comps of the Q3, the quarterly progression? If I look at August it looks as if you're up against the easiest compare and yet we're expecting August to be below the 2% to 4% for the quarter, so maybe you can kind of help us flush that out.

Yes, I mean, as you know, year-over-year comparisons are two year stacks are [some that are] analytic that says, hey, how we did last year impacts this year. It's sort of in the background to us. We recognize it. We understand it. But, frankly, the things that most impact how we forecast our business are due to the nature of the seasonality of what we sell, weather, the nature of holidays as they occur throughout the season, the nature of how we approach the consumer in terms of our marketing and, frankly, where we see opportunities. So I think we've proven in the past that we actually have sometimes really big months when we actually had the same really big month a year before. So I wouldn't dwell too much on the fact -- because you're right. Last year we were essentially flat in August. It was our softest month in the third quarter. I would focus on those other things that's listening to the category performance and listening to the weather performance. I mean, frankly, the northeast outperformed in the second quarter because it was very hot in the second quarter. It's still very hot. That's not necessarily a positive for August. So all those things are probably more important, Adrianne. Adrianne Shapira - Goldman Sachs: So that ramp, that $15 million in the advertising ramp in the third quarter, we should expect that to have an impact more in September and October rather than in August.

The $15 million investment, to be honest, I can't even tell you exactly where it is by month and we would normally not provide that anyway. But, yes, we think there's opportunity in September and October to drive our business and so we've tried to be intelligent about how we spend out money. Adrianne Shapira - Goldman Sachs: Just to follow on that, Wes, if we're thinking about it the right way, you lowered the high end of the annual guidance by about a nickel. It seems to us that the variance is related to the incremental $20 million in advertising. Is that the biggest change to where we were to where we are now?

I think the biggest change is really the credit agreement I mentioned and advertising. The sum of those two things equal the dime -- actually equals $0.12 and then the $0.02 is timing. So that would take you from the $3.84 to the $3.70. Assuming -- I mean, just to clarify on this -- you're right. Our high end was $0.06 higher than it is today, so we've only brought down the high end by $0.06. But we did beat -- we just did beat. So sometimes I know companies don't include beats in their future forecast. We've had a pattern of trying to recognize it and include it. So, Wes, is trying to -- .

Yes, I'm trying to reconcile the $3.84 which would then include the [inaudible] down to the $3.70. But Kevin's right. Sometimes people just roll the beats and don't change their guidance. Adrianne Shapira - Goldman Sachs: Help us think about the ramp in advertising. Is there a change in the events, any change in promotional cadence? When you're stepping up the $20 million what is the customer going to see? Are there going to be incremental new events or promotions here?

The way I would characterize it, Adrianne, is first and foremost we've have this focus on relevancy by region and using tactics that are successful in some regions and applying them to regions where we see the opportunity. So, certainly, a chunk of the incremental advertising is being devoted to doing that. The focus for that for us is the southeast because we see the biggest opportunity in the southeast. Media, we've made some adjustments in our media mix for certain and we've tried to additionally support things like direct mail where we're getting high productivity. Our, to some extent, digital campaigns -- we have a very successful campaign going on right now where we're trying to get people interest in supporting schools by contributing $10 million to schools nationwide and they can participate in their process by voting for their school on facebook, which connects us strongly to social media and is very successful, is very strong and that's certainly a user marketing as well. Adrianne Shapira - Goldman Sachs: So the promotional cadence you would expect it to be the same year-over-year despite the ramp in advertising?

Pretty much, yes.

Your next question comes from the line of Lorraine Hutchinson - Bank of America. Lorraine Hutchinson - Bank of America: Just following up on the product cost inflation discussion that you were having earlier, I guess it sounds like you have a lot of leverage to pull on your private label business. What are you hearing from your third party brands on their plans and how they'd like you to try to offset these cost increases? Do they expect you to be raising prices and how do you think your customer would react to this?

I mean, I think, generally obviously wholesalers are facing the same issues that, as a retailer and essentially half of our business coming direct, we're facing. So they're -- each one of them has their own strategy. Each one of them has a different way to approach this. We've been really successful, I know you know, Lorraine, in applying strong sourcing and supply chain strategies to our private and exclusive brands. So it does put us, our product development teams and our buying teams, in a really positive position in that we've been historically a little more successful at that than some of our wholesale partners. I would suspect that we're going to continue to devote more and more resources around our exclusive and private brands where the value is going to be probably increasingly a little better. Beyond that, it's the marketplace at work. Some of the wholesalers are better at this than others and I suspect those are going to benefit from it and others who can't figure out a way to mitigate the cost are probably going to feel the results of that because the product's not going to be as competitive to retail customers or a retail customer like us visa vie the value we have in our private and exclusive brands. Lorraine Hutchinson - Bank of America: Then just looking longer term, how are you thinking about your total store count going forward and what should we expect in terms of cadence over the next few years?

I mean, I think what we've tried to tell everybody for their longer-term models is to use whatever current run rate we have, which is 30 stores, so that's what I would use. If that changes we'll certainly let you know. We still think we have the ability to do 1400 stores here in the US. That hasn't changed. From a remodel perspective, our plans are basically to remodel 100 stores a year for the future.

Your next question comes from the line of Charles Grom - JPMorgan. Charles Grom - JPMorgan: I just wanted to follow up on Bob's question, not the [jeggings] but more on the credit. For $40 million, Wes, maybe if you can shed a little bit more light -- I know you tried to. Can you just give me a little bit more color on exactly what this cost is and just to be clear is it fully captured here in the third quarter? It's not expected to bleed into the fourth quarter?

Well, I think I gave you the split. It was $25 million and $15 million. We're notifying all of our customers over a 60-day period. There's 45 days when you notify them before changes can be made and effective. So it's really just aligning all of our terms to be competitive with the other guys out there and making sure that we're complying with all of the regulations that just came out in June. That finalized everything on the Card Act. I'm not trying to be evasive. That’s really what it is. It's a cost we expect to incur in this fall and it's a cost that we don't expect to incur going forward. Charles Grom - JPMorgan: So there won't be anything in the first half of 2011?

That's correct. Charles Grom - JPMorgan: Then I guess the second question I have is just on the new agreement on the credit card. You said the terms are identical, so is it safe to say that -- ?

I didn't say the terms were identical. I said there wasn't going to be a negative impact on our earnings. Charles Grom - JPMorgan: So next year when the deal converts over from Chase there will be no impact or the impact will be similar to the P&L?

Yes, when the deal transitions there shouldn't be any negative impact. That's correct. Charles Grom - JPMorgan: Then if you go back, if you look '04 to '08 you guys usually ended the year with say $100 million to $200 million in cash. Right now you've got $2.5 billion. I know you just completed a two-day board meeting this week. I'm just wondering kind of how the discussions went with your capital structure, what you're looking to see in the economy or in your business to reengage on the buyback front?

I mean, we did spend some time obviously talking about capital structure. But, frankly, our new credit card agreement literally was financed yesterday. So it was preliminary discussion and, of course, we still have to have the two parties transition the portfolio. So we had only a preliminary discussion. I think Wes probably characterized it properly, which is the discussion is revolving around resumption of share repurchase, the potential for implanting a dividend or both and that's where we'll probably resume the discussion with the board.

Your next question comes from the line of Dan Binder - Jefferies. Dan Binder - Jefferies: A couple questions, first on the expense growth this year; it's obviously been pretty aggressive. As we look out to next year, in terms of the stuff that's likely to repeat, it seems like the advertising investment, all else being equal, might be something that would repeat. But is it fair to say that the technology investments and stuff that's been affecting you near term is sort of coming to a head? Secondly, is the drag on the credit income -- does that actually reverse next year so that it's a benefit of the same amount in those same quarters?

I think on the e-com there are some one-time expenses that won't reoccur. But along with the incremental investment in terms of hardware and software there's ongoing, obviously, maintenance expenses that will be incurring. I don't expect to see the type of lumpiness that we've seen in the second and third quarters. Again, our goal would be to try to leverage at a one comp next year. That has been our goal historically. We'll tell you when we give you guidance if we're set up to do that. From the credit card perspective, I think I tried to answer Chuck's question. The expense incurred in this fall we don't expect to incur again. Charles Grom - JPMorgan: But does it actually reverse in the Q3 and Q4?

It doesn't -- I'm not going to get -- no, it doesn't reverse. We're just not going to incur it. Charles Grom - JPMorgan: Then the second question was related to the lower late fee income that you're seeing on the portfolio now that's an offset to SG&A. In your back half assumptions do you assume that those lower late fees ultimately result in lower right offs and lower reserves?

Yes, it's not a one-to-one match, unfortunately, because of the lag of roughly 180 days between -- I guess a better way to characterize it is we're seeing fewer people pay late, which is a good thing long term. So I expect to see more benefit from reductions and write offs in the back half than we saw in the spring just because of the mechanism of when you write things off. Charles Grom - JPMorgan: Is that in the guidance today?

It is. We've actually incurred some benefit versus our projections in the spring regarding write offs. It's just that the late fee income coming down more than offset that. I'm hoping there's a better match in the back half. Charles Grom - JPMorgan: Finally, on the competitive outlook, is your expectation for the back half that the environment will be equally more or less aggressive than last year?

I mean, I think our best assessment, Dan, is that it's more the same, notwithstanding any individual company's inventory issue or some unique situation they might be in but notwithstanding that, broadly more the same.

Your next question comes from the line of Richard Jaffe - Stifel. Richard Jaffe - Stifel: Just I guess a follow-up question on the cash; is there a magic number, a cash balance that you'd always like to keep on hand as a safety net?

I don't think there's -- this is Kevin, Richard. No, the straight answer is no. So we are a conservative company.

Yes, I mean, basically what we do when we run different scenarios is if we run scenarios where we never get into our revolver at our peak use of cash, which usually is October, so that translates roughly depending on what year you're looking at, somewhere between having $750 million and $1 billion in cash on the balance sheet. Richard Jaffe - Stifel: Just a general question about the regionalization of both merchandizing and mark downs; I'm wondering -- obviously you've talked about it being a good thing. How far along is it? Is there still more fruit to be harvested from those initiatives? Is it fully implemented? Give us a sense of what's left both on the mark down and on the distribution side.

I mean, the short answer is, yes, there is a lot of opportunity. We still -- while we've had very nice increases in places like the west and the southeast, those increases, while they've been very nice and have definitely helped overall sales increase, have not brought the portfolio of stores in those regions to the average performance of the company. We have a long way to go. We're making improvements. They're positive. But our efforts around regional relevance tailor in our assortments and getting the productivity of our store portfolio in those regions to reach the optimized level of an average store are a long way from being fulfilled. So I do expect that you will be hearing from us about the mild and hot markets focus and I’m hopeful that they'll continue to outperform as a result [and effect of] our focus.

Your next question comes from the line of Patrick McKeever - MKM Partners. Patrick McKeever - MKM Partners: Just on the new credit card alliance or partnership, I'm just wondering if you could talk about why you didn't renew your partnership with Chase. Does that have something to do with the time period, being able to negotiate longer, a seven-year deal versus a five-year deal? Is there anything at all that you can talk about in that area?

This is Kevin and Wes can add more color if he wants. I mean, the short answer is certainly the -- .

It didn't have anything to do with the length of the agreement.

That was not a factor at all. I think like any decision, important decision like this have many, many parts to them and we felt the combination of the financial bid, which was attractive, the overall cultural fit and alignment of the two companies, both their strategies and their management teams, their analytical approach to the business and the commitment on their part to helping us drive the business both now an dint he future in aggregate, in total kind of guided our decision to them. That is not to say that Chase has not been a good partner. They have been an excellent partner and they have done a wonderful job helping us manage our portfolio and grow it. But when it comes to assessing something like this, as you can imagine, it doesn't always revolve around just the dollars and cents. The dollars and cents are part of it but these other things are very, very important.

Yes, I can't really add anything to Kevin. He summarized it perfectly. But Chase has been a great partner in terms of helping us, especially through this recession, which was difficult for a lot of credit card companies and we came through very well with that, which was really evidenced by the amount of companies interested in our portfolio when we went out to gauge the interest. Patrick McKeever - MKM Partners: Just a second quick one on back-to-school; any comments on the National Retail Federation forecast that is out there for back-to-school saying -- I think it says that total spend will be up at least for back-to-school, not back-to-dorm, but just strictly back-to-school will be up 10% plus. I think last year they were pretty cautious and things turned out better than they expected, so they might have a little bit of a history as being conservative. I mean, how do you feel about the overall back-to-school outlook this year versus last year?

Our outlook is 2% to 4%.

Yes, and I can't comment on NRF's forecast at all. I think as you know we predominantly position our guidance around the trend line of our business combined with the proprietary research that we do with consumers as to intent to spend, confidence around spending and how they expect to behave in the future and that's really about our business.

Your next question comes from the line of Michael Exstein - Credit Suisse. Michael Exstein - Credit Suisse: Quick question; can you just talk about the clearance levels and why they've ticked up? I know you planned that way. But we have pretty unseasonable weather and you would have thought that wear in-house stuff would have sold through.

13,000 units, Michael. I wouldn't get too stressed about it.

The way I would characterize it -- I mean, Wes is always going to look at just the number.

That's what I do.

It's a very tiny number as a percent. It's less than 5% of our total units. It's really well managed. It's in a great place. The content of it, frankly, is not very seasonal because seasonal actually has sold through as you pointed out. Most importantly, I think you know, Michael, we try to be aggressive in terms of how we approach transitioning. So as we've had good sales and we've had good seasonal sell-throughs we're going to be more aggressive in terms of how we move through that product so that we position our inventory really in a forward-looking way as we come to August and September. So I would just reassure you that we are very, very comfortable with both the level and the content of our clearance inventory.

Yes, from a -- I mean, just from a timing perspective we've moved up markdowns in both missies and kids. Last year we took them to the third quarter and this year we took them in the second quarter. That was planned but from a comparison LY it would show an increase.

Your next question comes from the line of Ken Stumphauzer - Sterne Agee. Ken Stumphauzer - Sterne Agee: A couple of quick questions; first, can you talk about the drivers in footwear year-to-date and what you're expecting for the back half?

Sure, I mean, the drivers are kind of twofold or were on the athletic side of the business, which has been very good. One of the key drivers, broadly, is the Tony category and there are multiple suppliers involved in that. Sketchers is probably the lead supplier but it's been a very positive propeller for our sales in athletic footwear and has kind of driven that business. On the casual side of the business, we've had a really high focus with a new merchandise team in foot wear around driving fashion and style potion and leveraging the exclusive brand successes around our key exclusive brands in apparel, in women's particularly into footwear and that's working. Customer is being accepting of it and has been very favorable towards it. So I'm hoping that that's a long-term trend. I think we talked to you at the beginning of the year, Ken, about the fact that we were going to try to leverage our success in women's apparel exclusive brands into categories like footwear and accessories and it's working. Ken Stumphauzer - Sterne Agee: Then as far as the decline in the children's business in the quarter, that combined with the jumping beans business I think being up 40%, is it reasonable to infer that the reason you're seeing decline is because there's price compression in the category as you're moving towards more private label?

I mean, broadly, yes, the answer to that is yes. Probably if you think about it generally, probably not a shock or surprise because the customer's really focused on value and she's getting great value and she's moving dollars from other brands and other price points into that. Ken Stumphauzer - Sterne Agee: Then just one more question for you, Wes, actually; the depreciation actually came in a little bit lighter than what you got it for. I'm sorry if I missed it. What was the cause for that?

The biggest cause is just timing of some of the installation of our e-commerce projects. We had planned it earlier in the year to be second quarter to be conservative. It's actually going to be in stalled in August.

Your next question comes from Erika Maschmeyer - Robert W. Baird. Erika Maschmeyer - Robert W. Baird: Could you talk about the early results that you've been seeing from your remodeled stores this year?

Yes, I think we - nothing's really changed from what we've seen over previous years. There's a slight decline during the remodel period of eight weeks, between 1% and 2%. We get a big lift upon the grand reopening that basically wipes that out. Then ongoing we're seeing a lift of somewhere around 1% or 2%. We hope to see better but that's an improvement from when we really started to do remodels n earnest back in 2007. So we continue to try to shorten the period. Our goal next year is to try to be a seven week timeframe. We're doing more marketing during the remodels to try to mitigate the drop. We're adding more marketing on the back end post re-grand opening both for back-to-school and holiday because a lot of people unfortunately only shop our stores a couple times a year. So we're trying to get them in during those key peak seasons to give us a shot again with the new remodeled store. Erika Maschmeyer - Robert W. Baird: Then just a follow-up on store growth; I know you've talked about 30 stores. Could you talk about your real estate pipeline for next year and do you see kind of any room for opportunistic acquisitions? I know you've kind of said in the past that you don't really see anything sort of big on the horizon but if you could just update us on that.

Yes, sure. We'll tell you in October how many stores we think we're going to open in 2011. That's kind of our normal practice. To be honest, any stores that will be coming available would probably not come available until after January as people look to prune their fleets. That will be a very tight timeframe for 2011. It would be more likely 2012 spring opening.

We have reached the allotted time for questions and answers. Your final question comes from the line of David Glick - Buckingham Research. David Glick - Buckingham Research: Fortunately most of my questions have been answered. Just a question on private and exclusive with the penetration approaching 50%, is there room for any major new brands? It seems like recently it's been more category and door rollouts of brands introduced over the last couple of years. Is there room for any major new brands? There really hasn't been a major one like a Vera or a [Chaps] for a year or so; just wondering your thoughts on that.

I mean, the short answer is, yes, there is room and we're highly focused on it. Frankly, I would expect us to have something to talk to you about at front to the very, very near future that we think would be major. We are still focused this year around doing exactly what you described which is leveraging the exclusive brands we have had into more areas in the store. You've witnessed from our performance in categories like footwear accessories and home. That's working. Thank you. Thanks, everybody.

Thank you for participating in this morning's conference call. You may now disconnect.