Kevin Mansell - Chairman, Chief Executive Officer, President Wes McDonald - Chief Financial Officer

Charles Grom - Sterne Agee CRT Matt Boss - JP Morgan Lorraine Hutchinson - Bank of America Merrill Lynch Paul Trussell - Deutsche Bank Dan Binder - Jefferies & Co. Neely Tamminga - Piper Jaffray Bernard Sosnick - Gilford Securities Michael Binetti - UBS Mark Altschwage - Robert W. Baird Stephen Grambling - Goldman Sachs Richard Jaffe - Stifel Matt McGinley - Evercore ISI Bob Drbul - Nomura Oliver Chen - Cowen & Company

Ladies and gentlemen, thank you for standing by. Welcome to the Kohl's Q2 2015 Earnings Release Conference Call. Certain statements made on this call, including projected financial results are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl's intends forward-looking terminology such as beliefs, expects, may, will, should, anticipates, plans or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those projected in such forward-looking statements. Such risks and uncertainties include, but are not limited to those that are described in item 1A in Kohl's most recent Annual Report on Form 10-K and as may be supplemented from time to time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference. Also, please note that the replays of this recording will not be updated, so if you are listening after August 13, 2015, it is possible that the information discussed is no longer current. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the conference over to our host, Mr. Wes McDonald, Chief Financial Officer of Kohl's Department Stores. Please go ahead.

Thank you. Good morning. With me today is Kevin Mansell, our Chairman, CEO, and President. I'll start today's call by walking through our operational results. Kevin will then provide more details on our Greatness Agenda initiatives. We'll then open up the call to your questions. Comp sales increased slightly in the quarter at 0.1%. Though we aren’t satisfied with the level of the comp sales, we are pleased that we are starting to show come consistency in our sales results. This is the first time since 2011 that we have achieved three consecutive quarters of positive comps. The metrics of the comp sales increase are as follows: Average unit retail up 2.3%, units per transaction down 1% resulting in an average transaction value increase of 1.3%; transactions per store were down 1.2%, partially due to the shift of the tax free events from July into August. From a line of business perspective for the quarter, footwear performed better than the company with strength in Athletic and Men’s Dress and Casual Shoes. Women’s, Home, Men’s, and Accessories were in line with the company. In Women’s, our Missy’s business continues its improvement with a 2% comp with strength in updated contemporary, active, and classic sports wear. On the home side, we had strength in premium electronics, luggage, and outdoor recreation online. In our Men’s business, strength remains an active; and in accessories we had strength continuing in beauty and fine jewelry. Children’s performed below the company with toys performing well and some softness in apparel, also partially due to the tax free shift. Junior’s although still negative did improve its performance in the second quarter. Geographically, which includes online originated orders, the strongest regions were the West and Mid-West. The Northeast, Southeast, and Mid-Atlantic performed essentially in line with the company, while the South Central trailed the company average. Gross margin decreased slightly for the quarter down 6 basis points, and is up 5 basis points for the spring season as we remain on track to achieve our gross margin guidance for the year of flat to up 20 basis points. SG&A increased 2% and deleveraged 42 basis points to last year for the quarter. This was slightly less than our expected range of expenses to be up 3% to 4%. We were able to leverage in our logistics areas and credit operations. Marketing expenses were slightly deleveraged as we invested in some of our first quarter savings into the second quarter events. Store and corporate expenses are relatively fixed, and we were unable to leverage those expenses on a modest comp increase. We remain on track to see our SG&A expenses grow 1.5% to 2.5% for the year. Higher IT amortization was the primary reason for the $11 million increase in depreciation expense for the quarter. Interest expense was $84 million for the quarter, essentially flat to last year. We incurred a loss and extinguishment of debt which represents the premium paid to bondholders related to a $767 million cash tender offer completed this quarter. Our income tax rate was 37.9% for the quarter, higher than last year by 130 basis points. Last year’s results included some favorable state audit tax settlements during the quarter. Net income for the quarter was $130 million with earnings per diluted share being $0.66. Excluding the loss in extinguishment of debt, earnings per share were $1.07, a 5% decrease to last year. We ended the quarter with 1,164 stores, gross square footage of 100.5 million, and selling square footage of 83.9 million square feet. We did not open any stores during the quarter. Capital expenditures were $377 million for the spring season, consistent with last year. Store refresh spending was consistent year-over-year, but shifted from new stores and remodels to cosmetics. We continue to make capital investments in IT to support our omni-channel initiatives. We ended the quarter with $934 million of cash and cash equivalents. Inventory per store increased 9% and units increased 8%. The excess inventory is a result of slightly lower than expected sales and pre-positioning fresh fall receipts to drive sales for the back-to-school business. This includes an aggressive build in Active, our best performing business. In addition, as port operations have returned to normal on the West Cost, we have seen early receipt of fall goods as our orders were written during the period of disruption. The net effect of our receipt pull forward was approximately $120 million at cost. Looking ahead, we expect new receipts for the remainder of the fall season will be flat to a year ago. Our investment in fall inventory is in four major areas that have been performing well: Active, Premium Electronics, Entertainment and Licensing, and Cosmetics. As a reminder, we now have 900 stores in our new beauty environments, with our new beauty environments and new brands. We are planning a modest increase on trend in the remainder of our businesses for the fall season. As a result, we expect a low-single-digit increase in inventory units per store at the end of the year, and in 2016 we are planning to see low to mid-single digit decreases in our inventory units per store. AP as a percent of inventory decreased from 37.9% last year to 36.8% this year. The decrease is primarily due to the early fall receipts arriving in June, which were already paid for by the end of the second quarter. Weighted average diluted shares were $197 million for the quarter. During the quarter, we repurchased 6 million shares of our stock. We ended the quarter with 196 million of shares of stock outstanding. On Tuesday, our board declared a quarterly cash dividend of $0.45 per share, which is payable September 23 to shareholders of record at the close of business on September 9. During the quarter, we completed several transactions which further strengthened our balance sheet. In July, we completed a cash tender offer for $767 million of our highest coupon debt. We also exercised our right to redeem 318 million of 2017 notes, which were not initially tendered. We used the proceeds from our $1.1 billion debt issuance to pay the principal of the tender debt. Tender debt premiums and accrued interest are being paid in cash. These transactions reduced our effective interest rate by 65 basis points and will reduce our annual interest expense by approximately $17 million. They also extended our average debt maturity by more than 3.5 years to a little over 13 years. We have no debt maturing until 2021 and our weighted average cost to debt is 4.88%. In conjunction with the refinancing, we incurred a loss of approximately $170 million. A $131 million was recognized in the second quarter. We expect another $39 million to be recognized in the third quarter when the reaming 2017 notes are settled. We also successfully amended and extended our revolver for an additional two years from 2018 to 2020. The amendment also reduced fees on undrawn balances. There were no changes to the financial covenants included in the agreement. Absent the effect of the loss in our extinguishment of debt, we now expect our earnings per diluted share to be at the low end of our previous guidance of $4.40 to $4.60. I’ll now turn it over to Kevin who will provide addition insights in our results.

Thanks Wes. As Wes indicated, sales in the quarter fell short of our original expectations. That was driven by a modestly lower level of seasonal demand over the quarter, a larger than expected tax-free shift, and a later than expected back-to-school selling start. While our bold moves around the Greatness Agenda continued to produce expected results, the underlying business trend was softer as a result. Looking at results under each of our pillars in the quarter and new initiatives coming this fall, I’m excited to share the following: Under Amazing product, national brands continue to experience significant growth, up approximately 6% for the quarter and the season as penetration for both periods increased above 250 basis points. This was driven significantly by strong growth in our active and wellness bold move with brands line Nike, New Balance and PUMA. We are also happy to announce that we will be launching the Stride Rite footwear brand in early 2016 to continue that momentum. Under easy experience, we continue to build a world class digital experience. Response to our new app has been very favorable with over 2 million downloads this year alone and we now have over 8 million total users. Our wallet feature within our app has also been a big success with about 30% of our mobile traffic related to wallet use. During the quarter we completed the rollout of Buy Online, Pick Up in Store to all stores across the country and we’ll begin to market this feature across all of our platforms this fall. Attachment rates are very encouraging in the premarketing phase and land at about 25%. Based on these early results we now expect Buy Online, Pick Up in Store to be a significant percentage of our digital sales and a driver of incremental store traffic this holiday season. We are planning accordingly. We also now have our new beauty environment brands in 900 of our stores and we continue to see total store lifts on these implementations at the same plus 2% rate versus our control stores. Personalization efforts continue to driver our marketing changes and already this year we have delivered over 130 million personalized mailers, over 120 million personalized emails along with millions of personalized digital and wallet impressions. This fall will also mark the first broad implementation of our localization strategy. By the end of this fall 40% of our business will be unique, localized assortments with the expectation that all departments will have unique localized assortments by the end of next year. And finally, our Yes2You loyalty program continues to grow with 2 million more members added in the quarter, allowing us to reach 32 million total members. Over half of our transactions are now with loyalty members and almost three quarters of Kohl's charged transactions are also loyalty member transactions. We intend to launch a number of new enhancements and will celebrate the anniversary of last year’s launch in October with a major event. In closing, we remain committed to the Greatness Agenda and believe these initiatives will deliver our sales goal. Although sales for the second quarter didn’t meet our expectations, we are definitely pleased to see more consistent positive comp store sales results, especially in a quarter that was negatively impacted by our later start to the back-to-school shopping season. At this time I’ll turn the call back to our operator who will provide instructions on asking questions.

Thank you [Operator Instructions]. And our first question is from Charles Grom with Sterne Agee CRT. Please go ahead.

Hi, good morning guys.

Good morning.

Just on the guidance, I figure out the $17 million benefit on interest expense, it sounds like you are backing the gross margin and SG&A guidance that you gave last quarter. So how should we think about comps in the back half of the year and then if you could just fill in the blanks on D&A and the tax rate and your buyback plans.

Well the $17 million in an annual number. So you can think of more like between $3 million and $4 million a quarter, and we are not backing away from – I mentioned in the script. I mean we still believe our guidance for gross margin will end up somewhere between flat and 20 basis points for the year, and SG&A will be up somewhere probably closer to the higher end for the year between 1.5% to 2.5%. So, it will require a little bit of an increase in comp into the fall season. To hit the 440, we probably have to run close to a 2 comp from the back half. We talked about the tax free shift, obviously it hurt the second quarter, obviously it will help the third, and so it doesn’t require a large amount of improvement to get to where we need to be for the back half.

Okay and then just Kevin you talked about the later back-to-school start and then also the shift. Have you been able to kind of quantify that for us, what would have the comp been or maybe where was the comp trending through the first 12 weeks of the quarter?

The comp would have been better for the quarter by probably about 50 basis points. That was really just isolating the two days of the tax free shift and with Labor Day shifting back a week, that’s hard to really ascertain, but we have started see some strength in our back-to-school business as we have been through in August.

I mean I think the other part of that is Chuck is that’s actually the math on the benefit that we get in August that we lost in July. So Wes’ 100% right on that. The related piece which I think is more difficult to quantify, but we think is relatively meaningful is that it also drove a later back-to-school selling season. Those two factors, both the shift to back tax free and the later Labor Day, and so I think he and I both feel that we probably would have been trending more like around a 1 comp for the quarter absent those things all together.

Chuck you also asked a couple of other questions. For D&A, I think the year will probably end up around 930 and the tax rate is going to probably be around 37.5% let’s say.

And you still expect to do $1 billion in buyback.

Yes, as you can probably tell, we were more aggressive on our buyback this quarter, and we tend to target $250 million a quarter. We ended up doing more than that, so I think we’re pretty close to $550 million for the spring season, and our target’s still $1 billion, but we think the stock is cheap. We certainly could do a little more than that, but we’re targeting $250 million a quarter.

Okay, and then just the last question, just you called out the south central being weak. Can you just add into that a little bit more? Is that the Texas market, Oklahoma?

Yes, Texas and primarily the Houston market. I’m sure that’s not any different for most people with significant businesses down there. I spoke with our regional manager down there and I saw obviously some of the weather issues they have had with all the rain they had this summer. It hurt a little bit, but that’s a market that’s been tougher for us this year, that’s for sure.

Okay, great. Thanks for all the color.

Our next question is from Nancy Boss with JP Morgan. Please go ahead.

It’s Matt Boss, not Nancy.

Yes, I was just going to say.

On the top line composition, what are you guys embedding for traffic in that second half plan and then more so to drive 2% comps are better in the next two years, how should we think about the timing for localization and personalization opportunities?

Well, localization for sure is in its infancy. We really haven’t got much benefit from that at all. We really have just been testing. We’ll start to see more benefit from the fall. Of the bold moves that we talked about on the Analyst Day last fall, the biggest benefit we’ve gotten thus far has obviously been from Active. We’ve been talking about it for a number of years now. It continues to be very strong led by Nike. Our digital business is very strong as well, and we’re seeing a lot of lift out, out of loyalty obviously. The two things that probably haven’t kicked in as much in the three-year plan yet and we’re not behind or anything, it just takes a little longer to build our personalization and localization. So localization is not only going to provide sales benefit, but should provide our ability to reduce our inventories pretty significantly, because we won’t be buying mark downs just to fill fixture fill on the initial set. So that’s something you know as a CFO I’m very excited about, is trying to get more sales with a lot less inventory.

I mean the expectation on localization honestly Matt is that while localization will impact roughly 40% of the business by the end of this year, the real lift from it is more modest in the third and fourth quarter and much more significant next spring. Wes is 100% right on personalization. The third piece, which based on our early results we think is a big driver, particularly in the fourth quarter will be the Buy Online, Pick Up In Store strategies and so we essentially haven’t done any marketing on Buy Online, Pick Up In Store, because we are just in the process of launching it across all of the platforms and the sense we have is that once we launched the marketing based on the limited results we’ve seen so far, the combination of the traffic it drives to the stores and the attachment sales it’s been providing are pretty significant.

And in terms that you asked about the traffic demand, I think for us around the 2 comp, we pretty much have to get back to flat traffic. We have seen – I’m sure you guys graph all this, we certainly do, but the last three quarters, although not where we wanted to be; it’s certainly improved over where we were running from a traffic perspective pre-Greatness Agenda.

Right, and then just one quick follow-up. What are you guys seeing out there in terms of the competitive environments into the back-to-school season?

I mean I don’t think there is anything really new. I think many retailers have in place some versions of the strategies we have around particularly marketing and digital, but we have – I mean, there hasn’t been any significant shift in terms of let’s say discounting if that’s what your after or anything in particular that would give us any pause for concern as we look at third and fourth quarter results.

Great. Good luck guys.

Our next question is from Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

Thank you, good morning.

Good morning.

If we think about the third quarter as a one comp run rate, can you just help us get comfortable with the back half acceleration to drive the low end of your guidance range? What are the specific drivers that you expect to have an outsized impact on the second half comp?

Well, I think we just covered a few of them. I mean we’re not precise enough to tell you that the third quarter is going to be 1 or 1.3 and the fourth quarter is going to be 1.5 or 1.8. I think as we look at the year-to-date performance, which we’re kind of looking at as about a 1 comp, it does need to accelerate to about a 2 comp.

I mean if you lose 50 basis points in the second quarter, you get it in the third, so you’re at a 1.5 there. So we got to pick up another 50.

So I mean I think the big things Lorraine remain to be the strategies we’ve discussed and we just touched on three big ones we think for the fall and holiday and those revolve around the personalization impact of our marketing strategies, in particular as they relate to our loyalty platform, our launch and development of Buy Online, Pick Up In Store, as well as the effectiveness that ships from the store across the entire store platform or give us any impact of things like localization. That layered on top of the existing bold moves we think will accelerate the business. We definitely recognize softer demand in the first half of the year; I don’t think there is any question about that. As we looked at the first six months results, I think traffic was softer than expected and I don’t necessarily see that as a Kohl’s unique issue. It seems to be relatively broader than that. Some of the things we are learning now that we are three quarters, sort of post the launch of the Greatness Agenda are informing some changes in, I would call it sort of an evolution of the Greatness Agenda moves and those are underway already internally. We’ll probably share those with you sometime later in October, but I think they are going to have a positive impact on both the third quarter, but in particular the fourth quarter.

Thanks. And then if you look at the Juniors business getting less negative in the second quarter, as you’ve set the fall line and start to see some back-to-school, have you seen a continued improvement in that business?

It’s more positive than it was for sure. I mean probably the most improved business in the store, even though the total business as you all know was softer in the first half of the year. The most improved business in the store is Women’s Apparel and Juniors is not as good as the rest of women’s apparel, but it improved significantly in the second quarter.

Thank you.

Our next question is from Paul Trussell with Deutsche Bank. Please go ahead.

Good morning. Wes, just a question going back to gross margins. I mean like you said, you reiterated the goal to be up a little bit here in the second half and for the full year. Can you just kind of give us some of the puts and takes on gross margins, in particular what is providing that uptick, especially given that even adjusting for the early receipt of inventory, your still up a bit, kind of coming into 3Q, coming off of a quarter where you had softer sales. Any color would be helpful.

Paul, if you do the math on the $120 million, our units are up about 5%. We are not going to not buy stuff that’s selling. So investment and the things I indicated, Active, Licensing, Beauty are all going to – we are not looking for an acceleration on what they are selling today. We have pockets of stuff we are going to have to get through. We are starting this – we’ve seen some great benefit. Nike is not only providing great benefit on the sales line, but with their stance on promotional environment we’ve made a significant amount of more gross margin on that, so that’s providing some tail winds from that perspective. But through the spring season we’re up like I said, about 5 basis points. I think we’ll end up between flat and 20. We’ll be up closer to 20 if we can hit the two comps that we mentioned. If we can’t, we’ll be closer to the flat, that’s normally how it works in retail.

Got it, that’s helpful. And then just in terms of the loyalty program, I would think that one of the concerns going forward is lapping that in the fourth quarter. Can you just remind us how many loyalty members you had in 4Q heading into that holiday period? Can you maybe discuss it all, a little bit of your plans on how to get more spend out of those members I know you mentioned and a big event planned for October and also just any color you can provide about the loyalty spin from those that have been in the program for over a year, perhaps are some of those early stages.

Well, I think I can talk about the fact that we’re going to have double the loyalty members when we go into the fourth quarter. I think we ended last year around $16 million or $17 million at the end of the third quarter and we should have $35 million going into the fourth. We’re not going to talk about the plans for the loyalty event given that’s more of a competitive thing and we continue to see strength in the loyalty members. They shop more frequently, which is really the driver of the lift that we’re getting. We’re getting consistent lifts across both bank card, it obviously have the biggest lifts, because their frequency is lower than somebody like an MBC, but we’re getting lifts across all three categories. I mean the bold moves are delivering pretty much what we thought. They were going to be – the reason our comps have been a little bit down are in businesses that haven’t hit their plans and haven’t had as much of an effect from the bold moves. Everybody obviously gets the effect from loyalty across the store, but we have a couple of businesses like juniors, like we have talked about for the last couple of quarters that are just weaker than we anticipated.

I appreciate the color. Good luck.

And next we’re going to Dan Binder with Jefferies & Co. Please go ahead.

Thanks. With regard to inventory, can you just maybe give us a little color around how clearance inventory looks year-over-year?

Well, it’s up year-over-year with the softer sales in the second quarter. We were more aggressive in taking markdowns in the second quarter, so we accelerated some of that into the quarter. Sell-through, I think our expectation for sell-through in the third quarter is it will be about equal to last year. We are not expecting a big acceleration and I’m thinking by the time we get into late August, early September year-over-year inventories and clearance are going to be relatively flat to last year.

Yes, I mean if you use the same $120 million math on AP as a percent of inventory, its flat to last year. So we have a lot more receipts that we received in the last 30 days than we did last year.

And then with regard to the web business, a couple of questions here. First, I forget, did you stop breaking out the gross amount and then the second part of the question is regarding focus. As you had more business shift to either Buy Online, Pick Up In Store or Ship From Store, what is the sort of the deleveraging effects of business not being shipped from the fulfillment centers and just curious with the Ship From Store initiative, what are you seeing on a typical store in terms of orders per day or per week.

Well, I could tell you BOPUS is the best thing that ever happened in e-commerce. So we don’t break out e-commerce sales anymore, but implicit in our three year plan back in October was a online generated order growth of about 20% a year. We’re doing better than that this year. But Buy Online, Pick Up In Store from a profitability is the best thing you can get, because you’re not shipping it, so you save the $5 to $6 per package that it costs to ship it to the house and we’re seeing attachment sales of about 20% to 25% depending on the time of the week. Like Kevin said, we haven’t really publicized it a lot. It’s about between 2% and 3% of our total online generated orders. We think that can accelerate quite a bit when we start publicizing that as we get more into the fall season. From a Ship From Store perspective, the key is to try to keep the number of packages per shipment down as much as we can. We have made some software changes to try to do that, but both those things honestly would be a benefit to the profitability of online generated orders and gives us an opportunity to make the store inventory work a little harder and reduce the amount of inventory in the fulfillment centers.

Are you using existing labor in the stores to do the Ship From Store or have you had to add labor hours.

No, I mean we add dedicated labor hours for these functions and as part of our overall payroll plan. I mean I think one thing that we’ve tried to lay out clearly, but I think is still not well understood, Ship From Store just finished rolling out to the entire company this spring season. So from a benefit perspective, the big benefit we see in the fall and holiday is that it takes a tremendous amount of pressure off of our e-fulfillment centers, that’s number one. Number two, it definitely makes our inventory in our stores more effective than it was before and improves the efficiency that we get on store payroll as a result. Buy Online, Pick Up In Store, while it finished the completion of the launch to all stores this second quarter, we have not marketed it at all and in fact it has not been available in any format other than desktop. So both mobile and tablet will be new in the third quarter and with the launch of mobile and tablet comes a really aggressive marketing campaign. So we’ve looked at the results in the small launch period with no marketing and looked at its attachment rates, as well as traffic rates and I think our sense is its going to be a big driver of traffic to stores, but most importantly as Wes said, a driver of more efficient use of our inventory.

All right, thanks.

Your next question is from Neely Tamminga with Piper Jaffray. Please go ahead.

Great, good morning. I have one quick follow-up on that Kevin and then I’ve got a bigger question on pricing and promotions. In terms of the mobile, I think originally we were thinking you were going to launch the mobile platform for Buy Online, Pick Up In Store in August. Is that still slated for August or will it be on the other side of Labor Day, that’s the first question. And then secondly, in terms of looking at the pricing and promotional analysis that you guys have been very strategically making I think within the company. I’m thinking of like the lowest prices of the season sale that you did and when you removed that 20% off coupon. Has anything in the traffic pattern here thus far in back-to-school caused you to want to go back to the old ways of kind of learning promotion on promotion or are you guys committed to kind of providing more of a scalpel to your promotions. Thanks.

Yes, taking them one at a time. I mean the timing on our mobile and tablet implementations is the same as it has always been, so we’re right on target, we’re all set and as I said, we’ve been sort of focused more on really accelerating that as we get into October, November, because that’s when we see the big opportunity being created, so that’s number one. Number two, on the pricing thing, there’s absolutely nothing that we’re seeing happening that would change our longer term perspective on how we go about marketing. We definitely know that we have a big opportunity to really tailor our marketing efforts and therefore our pricing to a unique individual customer to get more effective response rates. Without kind of queuing you in too much to some of the things we’re going to be talking about, just part of the evolution of the Greatness Agenda, one of the areas that we do feel strongly about is that we have an opportunity through analytics to elevate our leadership on value, new strategies around pricing. And so we’ll talk more about that as we get into the later part of the fall season and you’ll hear more about it as we go forward into 2016, but I do think we see that space as a big opportunity for us.

As far as LPS goes, it runs later this month. It’s going to be same as April and it’s going to work well.

Excellent! Thank you, guys.

Our next question is from Bernard Sosnick with Gilford Securities. Please go ahead.

Yes, thank you. Pick up on the store has its benefit of course as you’ve outlined already, but shouldn’t it also reduce shipping cost and have a benefit to gross margins?

Yes, I mean that was my favorite part Bernie. That’s the money we save on the $5 or $6 a box.

Okay, good. I just wanted to clarify that. Thank you very much.

Okay, bye.

And we’ll go to Michael Binetti with UBS. Please go ahead.

Hey guys, good morning. I apologize if I missed it, but would you mind giving us for our models the percent of sales made on a Kohl’s card in the quarter.

It was down a little bit. I don’t have the exact number unfortunately in front of me, but I think it was down about – I want to say it was down about 150 basis points, but I’ll give you a call after. I’m sorry about that.

Okay, all right. Would you mind telling us just about the overall – I mean obviously you’ve got a number of initiatives going on with e-commerce, but the overall trend that you saw in the quarter at a high level. You saw some big retailers and some native e-tailers also through pretty big promotions in the quarter and some of the other brands and retailers have seen some volatility around those events. I’m wondering if you guys saw similar volatility.

No, I mean Mike if you’re alluding to things like Prime Day by Amazon or that, no. I mean I think what happens on those kinds of things is all retailers are sensitive and aware about promotion in the space and you inevitably therefore strategize and target your own elements to offset, to ensure that you don’t get hurt and so I think actually the facts, Wes will probably be able to give you the specifics, but I think actually the facts are we saw a much larger list during that short period of both Prime Day implementation by Amazon and related.

Oh yes, we beat our plan, that’s for sure.

So I think it’s just the way it works. It’s just there’s a lot of activity.

You get more people to the web than you might find on Amazon and you might find on Wal-Mart. It looks like more of them than we thought bought it on ours. I do have the credit numbers. Sorry about that. I think I have a little too much paper here today. Charge sales for Q2 were 37.6% down 171 basis points and then year-to-date its 57.8% down about 130 basis points. So it kind of makes sense given the fact that we’re doing better from a non-Kohl’s charge because we put more emphasis from a marketing perspective. So the Kohl’s charge was sort of negative for the quarter, down low single digits, while the non-Kohl’s charge was up mid single digits. So we’re continuing to figure out a way to better balance those. The goal obviously would get them to be both positive, but we need new customers and that’s what’s coming with the non-Kohl’s charge comp. They spend a little less obviously, because they are newer and the Kohl’s charge folks spend a little bit more, but we’ll continue to work on better balancing them and hopefully by the time we get to the end of the year they’ll both be running positive.

Okay, if I could ask just one last one. Kevin you mentioned that your planning accordingly for Buy Online, Pick Up In Store to be a bigger part of online this holiday. I know you’ve comment on a few times to Q&A, but would you mind giving us just a little bit more color on what you meant with that specific comment please. Thank you.

Well, through the test period – I mean the test period essentially was really an operational test period. It was to ensure that on the technology side everything worked the way we wanted it to work. The customer service was delivered in the right way and that we were able to achieve the speed we needed to. On the storage side, of course it was the start to better understand what stores have to do in order to quickly present the product to the customer and do it in an efficient way. So that’s kind of the process we went through in the second quarter. I think we did 2.5% to 3% of demand as we sort of experimented with that on the operational side and so it’s sort of a meaningless number. We’re planning a much larger percent of digital sales to come as Buy Online, Pick Up In Store; that’s what’s baked into our planning. We are not planning that it necessary lifts the total digital sales, but we do believe based on the attachment rates we’re seeing right now, it’s got the potential to add sales in store and add some visits, which as you know our two biggest challenges are win new customer. Wes, kind of just touched on that one and secondly, get more visits into our store and that’s why we’re kind of super optimistic about Buy Online, Pick Up In Store.

All right, thanks guys.

And we’ll go to Mark Altschwage with Robert W. Baird. Please go ahead.

Hey, good morning. Thanks for taking the question. A quick follow-up on SG&A. Wes, I believe you said SG&A growth is expected to be at the high end of the 1.5% to 2.5% range. Just what are the primary components to that and then if sales aren't able to hit that 2% expectation for the back half, how much flexibility do you have on the SG&A front?

Well, I didn’t mean to alarm people on that. It’s probably going to be somewhere between 2% to 2.5% for the fall. So it will be lower in the third quarter and higher in the fourth quarter. Kevin mentioned Buy Online, Pick Up In Store, that’s going to drive a little bit more store expense. We’re going to put a lot of the investments and we saved a lot of money in marketing this year and we’re going to put a lot of investments in the fourth quarter. On that we have a tendency to get out shorted, especially on broadcast by some of the larger retailers that are bigger than we are. So that will give us a good opportunity to be more competitive from that perspective. Reflected down obviously the – 80% of our cost roughly are fixed. I mean you can argue that advertising is variable, but if you are not making your sales you probably are not going to cut your advertising. So the easiest one if we don’t make it would be related to incentive comp would come down. Anything that’s unit related we could save money in the stores from a processing perspective, as well as the EFCs corporate expenses. You can manage your hiring a little differently, leave positions opened, but that’s only about 20% of the expenses, really what I would call truly variable.

That’s helpful. Thank you. And then Kevin, could you briefly address the Off Aisle concept, to the strategic rational there. Any early takeaways from tests and just how are you are thinking about the potential longer term opportunity.

Sure. I mean Off Aisle was originally conceived as a way for us to improve the valuation on our returns, and as you know like any retailer we get a significant percentage of returns in our stores and a much more significant percentage of returns to our stores that originated with an online order. So returns as a percent of sales for us have been rising consistently over time and it’s just a math as more people bought online, there is a higher return rate, those returns go to the stores, so our total return rate keeps going up modestly. And when we looked at that, the potential profit pool for managing what we get for those returns was pretty significant. That coincided obviously with us trying to be more aggressive and experimenting more with new innovative concepts. And so we created this Off Aisle concept first and foremost to target an improved return on our returns from customers, but secondly also to learn more about the off price business in general. So I would expect there are going to be more Off Aisle stores coming again, not to queue too much into what we’ll be talking about later in the third quarter as evolutions to the moves and the Greatness Agenda, but definitely new formats, including more Off Aisle stores will be coming. Results have been really good. They’ve been better than we expected.

Thank you and best of luck in the third quarter.

Thanks.

And we will go to Stephen Grambling with Goldman Sachs. Please go ahead.

Hey, good morning thanks for taking the question. Just on the fields of Macy's announcement, on examining ways to monetize real-estate value, what’s your latest philosophy on your own real-estate and then maybe more broadly as a follow-up, has our traffic trends just dramatically different by stores just because you might at some point reconsider the number of stores you are operating across the chain. Thanks so much.

Wes can probable – I mean the real-estate answer is honestly pretty simple. I mean real-estate is one of the assets that we have like all of the other assets we have. We are always reviewing what the options are that would maximize shareholder value, and that’s under constant revenue, it’s not necessarily focused on today’s events or the last three months events, it’s just a regular course of good governance and we’ll continue to do that. On the traffic side, I think we are actually pretty optimistic I would say about traffic Wes.

Yes, I mean there is a little bit of variability by region, but not a ton and in terms of the number of stores, we have a list of stores that we always look at negative incremental cash flow stores, we run it once a year. There is a list of probably 10% or 15% stores on that list. We’ve tried to look at market by market versus individual stores, because obviously if you make a decision to close the store, in one market you might pick up some sales and a couple of other stores that might make a negative one term positive. Most of the stores that are negative cash flow, we are talking in a couple of $100,000 range per store. So we think that it’s prudent to be a little patient. We believe in the Greatness Agenda, we believe we are going to continue to make progress and hopefully those slightly negative cash flow stores will turn positive. But we closed a couple of stores this year. We are going to close a couple of stores next year. But we are really looking at handfuls versus major closures.

And just so we are totally transparent about this, traffic variability on sharp turn windows a month, a quarter are highly volatile, they can change a lot. So in a particular market, in a particular region, in an individual territory the traffic trends year-over-year can be really pretty volatile and that’s because weather is a big factor in our demand. The economic conditions in a particular market can be very different depending upon the job environment and it can uniquely be affected as well by completion, as new competition opens up in a trade area or in a market in a big way. We kind of look at traffic when we are evaluating real-estate more or less let’s say on a 3 to 5 year trend and we are looking at is there a consent pattern of decelerating traffic and that would cause us to do the evaluating Wes is talking about, which is a what’s the future of this store.

That’s all very helpful. Thanks so much. I’ll just back in the queue. Best of luck.

Thanks.

And we’ll go to Richard Jaffe with Stifel. Please go ahead.

Thanks very much. Wes, if you could elaborate a little bit on the shift in ad spend from 1Q to 2Q and what bodes for the second half? It seems that there was some marketing powder kept dry last year and some indications that you'd be spending more this year and in differentiated ways. Can you perhaps talk about second-half ad spend and also year-over-year promotional cadence, how you see that changing?

Well there will be no powder left dry this year. We are going to spend a $1 billion, that’s going to be lower than last year, but we’ve been talking not what I would call non-product saving. It’s not by cutting the number of events or anything like that, just repositioning. So for the fall season, for the first time we are going to be spending more money in digital than we are in print. That’s were our customers are doing their research, whether or not they purchase online from whatever device they are using, they are definitely using the research to make their purchasing decision. So that’s important. In the spring season from a marketing perspective we reduced the amount of credit marketing we have, which we actually charge to their credit profitability and actually increased the amount of non-credit, which is what’s driven the non-credit card comps being positive. So we continue to do that and shift it into more productive marketing. But the fourth quarter will be up significantly to last year in terms of marketing spend.

I mean at the end of the day Richard we spend less money in marketing in the first half than we originally had planned than last year and we intend to spend more money in the second half that’s high level.

We are going to spend $1 billion. We are certainly not going to spend $999 million.

And hopefully there's a tight correlation between ad spend and traffic?

That’s the hope.

Okay. Thanks very much.

Our next question is from Matt McGinley with Evercore ISI. Please go ahead.

Good morning. My first question is on the loyalty use and the credit card spend in the second quarter. I know it was a tough market for everyone in the second quarter and the tax holiday certainly didn't help you. But did the loyalty users and the credit card users still have positive traffic where I would interpret that as this is just an issue where you need to convert more non-loyalty people and get them on the bus or did the loyalty users and credit users slowdown as well, which may indicate a broader issue with the market or perhaps that the program needs to be readjusted?

I think the way you got to look at the loyalty users, which is the way we having to look at it. We have to look at them as unique loyalties users, because you can’t look at them as pool right, because we have twice as many loyalties members as we did last year. So it’s kind of a meaningless – I think Wes its sort of meaningless statistic, because naturally they transacted a lot more because there is two times as many of them. So we try to look more at unique loyalty members, how our members who are in the program behaving. And we are really focused on a different metric anyway, which is you know – the metric we are focused on essentially is to say that we’ve had a long period right, 5 years and more where the penetration of our credit business to our total credit business has risen consistently. The problem is our total business hasn’t risen. So it’s on a customer basis. Its more customers transacting on credit, but not more customers in total. Loyalties objective is to create and win new customers, so that even if credit as a percent of total transactions is flat, we win because total sales and total traffic is up, and so we look at it a little bit different and the answer to your question directly wouldn’t get you to where you want to be, because we’d tell you all loyalty transactions are way up compared to last year.

We do need to do a better job of using loyalty to feed the credit program. We have been focused more getting people on-boarded into loyalty. I think the next lever to pull after we have done that for a year is to show them that they’ve all experienced the value of loyalty, the value of being a credit card customer is much greater. We also have to do a better job of soliciting applications in the stores for credit, we have a taken a step back as we’ve focused a little bit too much on soliciting loyalty applications. So we need to do a better balance of that and I’d been working along with the marketing guys and the store team to do that. We’ve seen some dramatic improvement in July on that. We’ve made some changes from an incentive perspective for both the applicant and the associate who is soliciting credit. So I suspected that we’ll do much better on soliciting credit in the fall season.

Thank you. And then on the second question I just want to make sure – you said this a few times. I just want to make sure I got it right on the SG&A growth, it was around 2% in the first half. Do you still think it will be 1.5 to 2.5 points in the back half at probably the higher end of that range? I think you said between 2% and 2.5%? And the primary driver of that which you had previously I think was around 0.75% to 1.75% is Buy Online, Pick Up In Store and ad dollars or was there something else that you were adding else to that that was driving that?

No, I mean for two quarters in a row, we’ve beat our guidance on SG&A, so the year hasn’t changed. So it’s just got pushed further. If we save money in marketing, we are not going to spend less than $1 billion. We are $20 million let’s say below our plan for the spring. We are just going to reinvest that in the fall.

Okay, so you're conservative when you rolled it?

I would say the SG&A spend, I think you guys assume its somewhere between 2 and 2.5 for the fall season.

Okay, perfect. Thank you.

The next question is from Bob Drbul with Nomura. Please go ahead.

Hi, good morning.

Good morning Bob.

Hi Wes. I guess the first question I have is, I mean Wes can you share with us the Nike comp? Usually you gave it to us I think recently. I just wondered is it remaining a big number for you on that.

It’s up – we are not at high double digits, it’s got to be like 99%, but it’s up mid to high teens.

Okay and I just had two merchandising questions for you Kevin. The first one, on the Missy category what's changed there? Is it the crinkle Ts, is it the hoodies that are having a big impact, can you just talk a little bit about that? And a question on the denim category, you haven't really talked about the denim category, but are the destructed jeans really driving the business at all there?

Glad to see your back on your horse on the marketing questions Bob. I don’t even know how to answer you to one of those. I’ll try to answer them seriously for you though Bob. Missy is probably I would say our most improved business trend and that’s after a long period of not being able to say that. And again, as part of sort of our evolution of the greatness agenda which we expect to share with you later, Missy apparel, women’s apparel in total is going to be a real focal point of some changes we are making. I think many of them are taking place internally now and we are getting a little bit of the benefit for that. I think Denim is definitely improved.

Yes, Levis had a really good quarter in the second quarter.

So that’s a really positive thing, because as we talked about Back-to-School definitely started later and that’s typically not good for denim sales, but denim sales have declined significantly over the course of the last by 12 to 24 months. And there’s been a big change in trend in there for sure. So I think that actually is a really positive one as we look at August, September. Thanks Bob.

Thank you very much.

And we will go to Oliver Chen with Cowen & Company. Please go ahead.

Hi, thanks a lot. On the inventory side, you did mention that you were just a little bit over inventoried with respect to where you wanted to be. Which categories was that an issue in and that would be great, thanks. A - Wes McDonald: I think the pockets where we are still working through some of the junior stuff, probably have a little too much inventory in kids and in Jeweler. Those are the areas that have been soft versus their plan. Obviously you miss a sales plan you got to work through the inventory and that’s what we’ll do.

I mean the other factor, and Wes talked about it I think in our earlier scripted comments is, we did make a decision a long time ago, six months or more that were going to accelerate our overseas imports flow, because we were concerned about ensuring that we had them and plenty of time for back-to-school. As you know as it turned out, port strike was settled, flow dramatically improved and so overseas import items I would say, generally private brand kind of merchandise.

Yes, came in early.

Came in early, and it wasn’t really category related. It was across categories, because it’s sort of all the same.

The biggest investment we have in inventory remains our national brands. They are up, units are up double digits. So that’s where the investment alluded to act. Obviously that’s a lot of natural brand merchandise as well.

All right, that’s helpful. And Wes and Kevin, regarding the outlook for the category planning in light of the weather, I was just curious if there is distinctions you're making on a year-over-year basis. How are you thinking about outerwear? The picture for weather could be mixed.

Yes, outerwear we were really conservative. We all get the same forecast that you guys seem to get. So it doesn’t seem like it’s going to be an extremely strong outwear season from a weather perspective. So we’ve planned that down accordingly.

Okay, great. And how are you guys feeling about skinny denim and crinkle Ts? I'm not sure if I got that?

I’ll get back to you on that Oliver.

Okay, thanks. Best regards.

Thanks.

And that will conclude the Q&A session for today’s call. I’ll turn it back to our presenters for any closing comments.

No, thank you very much.

Thanks very much. All right, take care. Bye.

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