Ladies and gentlemen, thank you for standing by. Welcome to the Kohl’s Q2 2014 Earnings Release Conference Call. Certain statements made on this call, including projected financial results, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Kohl’s intends forward-looking terminology, such as believes, expects, may, will, should, anticipates, plans or similar expressions, to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl’s actual results to differ materially from those projected in such forward-looking 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, as well as maybe 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 recording will not be updated. So if you are listening after August 14, 2014, it is possible that the information discussed is no longer current.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 will now like to turn the conference to our host, Mr. Wes McDonald, Chief Financial Officer of Kohl’s Department Stores. Please go ahead.

Thank you. With me today is Kevin Mansell, Chairman, CEO and President. I’ll walk through our results for the quarter and Kevin will give us some more color in terms of merchandising and marketing, and then we will end the call and take your questions. Our comps sales decreased 1.3% for the quarter. Components of the comp were as follows, average unit retail up 3%, units per transaction down 1.1% for an average transaction value increase of 1.9%. Transactions per store decreased 3.2%. Total sales for the quarter were $4.2 billion, a decrease of 1.1% from the second quarter last year. Year-to-date comp sales decreased 2.3% and total sales decreased 2.1% to $8.3 billion. Kevin will share some more details on our sales in a couple of minutes. Our gross margin rate for the quarter was 39.0%, which were 6 basis points lower than the second quarter of last year. All of our decrease can be attributed to a higher mix of lower margin sales. For the spring season, our margin rate increased 16 basis points over last year. Our SG&A expenses decreased 2% and leveraged 20 basis points compared to the second quarter of last year. Our credit card business reported a $13 million increase in revenues this quarter. In our stores, both store payroll and controllable costs decreased as did our overall corporate expenses. Our retail distribution centers reported lower costs but our E-Commerce fulfillment centers reported higher costs. Advertising expenses were also higher as we continue our efforts to drive traffic to the stores and online, year-to-date SG&A decreased 1% and deleveraged 30 basis points. Depreciation expense decreased $3 million to $222 million for the quarter. Most of the decrease is due to the maturing of our store fleet. Net interest expense was $85 million for the…

Thanks, Wes. As Wes mentioned, our second quarter comps decreased 1.3%, which was consistent with the expectations included in our annual guidance. More importantly, we saw strong improvement throughout the quarter. Results were especially strong in July as we reported a positive comp for the first time in several months. I’m especially pleased but not surprised by the renewed momentum in our E-Commerce business. Last year, our E-Commerce sales were affected by the re-platform from July through October. July sales this year returned to rates that we have not seen since updating our platform last summer, they ran up over 30%. On a regional basis in our stores, the Mid-Atlantic and Northeast regions which have underperformed in recent quarters outperformed the store average. Warmer weather and pent-up demand contributed to the improvement. The Southeast and the West regions also outperformed the store average, both regions have consistently outperformed other regions over the last two years, and the Midwest and South Central underperformed the store average. On a line of business basis, home was the strongest business, with solid comps in both luggage and electrics. Children’s was also positive and was driven by the infant toddler business, including new non-apparel online offerings and the Jumping Beans Disney partnership. Footwear outperformed the company but was slightly negative, athletic shoes were again the strongest category. Men’s and accessories were consistent with the company. Men’s was led by young men’s and active, and accessories saw significant strength in beauty. Women’s was slightly below the company. We are extremely pleased with the progress we are seeing in our Juniors business. Juniors outperformed the company with the strongest women’s category for the second consecutive quarter and produced a strong positive comp. Active also produced a positive comp. As you know, national brands are a key component…

(Operator Instructions) And we will go to Charles Grom with Sterne Agee. Please go ahead.

Good morning, Kevin. Good morning, Wes.

Hey, Charles.

Just wondering if you could give a little flavor for the sequential trend in the quarter if you could quantify that for us and if you could give us any color on August sales and just amplify your commentary on back-to-school?

For the second quarter, I think the way we would characterize it is it was consistent improvement over the quarter and it ended with positive comps in July, up 2% and the strongest part of the July period was definitely the end of the month at the beginning of the back-to-school period. We don’t comment on in quarter sales results but I would just say that the start to back-to-school as indicated from our July performance was exceptionally strong.

Okay. That’s helpful. And then just to clarify, so going forward, we shouldn’t expect to get a guidance update from you guys at the end of the first or second quarter and the practice will be to, just give an update at the end of the third quarter, so should we take away that you are still comfortable with the 405 to 445 view?

I mean, that, first of all, the facts you have, that’s correct, that plan is we will give annual guidance at the beginning of the year. We think it’s probably appropriate at the end of the third quarter when 60% to 65% of our sales and earnings are in that we would update it. We just don’t think it serves any purpose to provide continual updates on an interim basis absent some extraordinary circumstances. Something that would cause shareholders to believe we were deviating from our plan for the year, we would definitely inform everybody.

Okay. Great. And then, just if you could expand on the progress of the head merchant search and when we should expect to hear that announcement?

Sure. I mean, the search continues, we are making, what I would describe as excellent progress. I think I indicated earlier in the year, Chuck, that my objective was always to finish this search in sufficient time prior to our already scheduled end of October Analyst Day, so that the new leadership team would be in place and I don’t see anything that would preclude us from doing that at this point.

Okay. Great. See you in October. Thanks.

Thanks.

Thanks.

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

Hey. Good morning, guys. So you guys have a number of initiatives, which should be accretive to back half comps, we’ve talked about E-Commerce, loyalty, beauty? I guess what is the best way to think about the core underlying base? Now what are we building off of and any initiatives to the core?

Well, I mean, obviously, we are highly focused on the improvement in the core underlying trend. We’ve put a lot of focus in the third and fourth quarter just because as you indicated many of the drivers of the incremental traffic are all happening beginning this September, October, but we are highly focused on underlying trends. So as an example, that is why we are talking about the improvement in our Juniors business because that is clearly, as you know, Matt, been a drag on our business and that is no longer the case. I think home is probably another good indicator of how we are focused on the underlying trend. That has, in the recent past been a bit of a drag on our overall underlying trend and that looks like it is improving a lot. Wes, I don’t know if you have anything to add?

Yeah. I mean, I think, when Kevin talked about the July comp being positive too, that didn’t all come from E-Commerce. We got a lot better in the brick-and-mortar stores as well. I think the basis really is to get the stores to run in a flat comp and then with the E-Comm growth, we can get to the two and hopefully once we get some momentum from all these initiatives, we can do better than that. But the key is to get the brick-and-mortars from running negative to flat that’s what the rest of the businesses have to do over and above all the initiatives we’ve talked about.

Great. And then in terms of July and it sounds like early August in the back half, I mean is it traffic that you really saw as the difference here in same-store sales or I guess, anyway you can break down some of the components of that plus 2 that you saw in July to help us think about the opportunity looking forward?

Well, Wes, can give you that better…

Yeah. I mean, traffic definitely has to improve and did in July. So that’s good. The average transaction value should remain relatively constant for us to get back into consistently running a positive comp. We have to get traffic at least to flat.

And then in terms of drivers on a category basis, I think, pretty much across the board the back-to-school businesses were strong, some of them were exceptionally strong.

Great. Best of luck, guys.

Thanks.

And next we will go to Oliver Chen with Citi. Please go ahead.

Congratulations on really solid results and momentum. Regarding your inventory levels and the clearance being down year-over-year, does that bode well for the gross margins in the back half and if you could speak to, I mean, your comments about a higher mix of lower margin sales, will that trend continue, if you could just help us understand the puts and takes in that line item, that would be great?

I will touch, Oliver, on the inventory and maybe, Wes, can give you some more color on the mix opportunity. On the inventory level, I actually think we feel like we are in great position on inventory. We would have easily achieved our original goals of a low single digit decline in inventory per store but we made, I think, a really strong strategic decision to accelerate receipts on what we thought could be a slowdown coming in the dock strike possibility. And secondly, we just launched, I think, Wes referred to it, a new PO system and just to avoid any complications as we move through that process, we accelerated basic replenishment receipts. So, more broadly, I think your question is about inventory management and I think, Wes, would probably tell you, we feel better about our inventory management right now than we have in a long time and generally, that is certainly the driver of merchandise margin and if we manage inventories right, we will come out well on margin.

Yeah. I mean, the goal for the back half would be to be slightly down at the end of the third quarter and then down sort of 3% to 4% at the end of the year, is kind of what we are driving towards. In terms of low margin versus high margin businesses, it’s really just a reflection honestly that home and kids performed better than some of our other areas, kids is a business that is obviously very price-sensitive and carries a lower margin than the company and we had very strong business. And our home business mostly in the hard side of home and electrics, which is also a little bit lower, so I expect as we get through the back half that hopefully all six lines of businesses will improve and the mix won’t be an issue, but it was still just slightly down to last year.

Okay. And the comparisons you use in third quarter but then get a little harder in fourth quarter? Is there anything we should know as we look at our models on the GM line?

No, I mean, I think that the important things to note about the fall and holiday are that all of the key initiatives that we’ve talked about since the beginning of the year to drive our business. Our E-Commerce acceleration, our beauty rollout, our loyalty launch, our national brand focus are on target, on time and scheduled to happen. So I think it is a lot less about the comparisons and a lot more about the initiatives taking hold to drive the business.

Having said all that, I would expect more improvement in the fourth quarter than the third. That is just the way it normally happens. Most of your agreements with vendors in terms of margin occur on a seasonal basis, so you will settle up in the second and fourth quarter and that is where I would expect to see the most improvement.

And our last question on a follow-up is the junior’s performance was very exceptional. What do you think is happening there in terms of your success and your back-to-school trends sound really encouraging. How do you attribute that, it feels like there is a bit of a mixed consumer picture, so you are likely gaining share?

Well, I think juniors has been improving. So it is not necessarily brand new. I think we probably ran a positive comp in the first quarter as well in juniors, so we saw some traction. While it might not have been positive in the fourth quarter last year, the trend was clearly moving in the right direction. So I think fundamentally there is a great leadership team in place in our juniors business. They are definitely delivering on our focus on narrower assortments but deeper assortments. They are definitely delivering on speed to market with exciting new product and styles. So I think it is the fundamental pieces of our business that are definitely driving it, but it’s not necessarily brand new, I think, Wes.

Juniors, I think has been improving for -- this is the fourth quarter in a row. It’s been on an upward trend.

Thank you. Best regards.

Thanks.

And next we’ll go to Paul Trussell with Deutsche Bank. Please go ahead.

Yes, good morning, Kevin and Wes. Just going back to your comments on the loyalty program, I know one-third of the stores have it today. Could you quantify or remind us what is the performance of those stores versus the rest of the chain? And then also if you could just clarify the comments you made about the beauty, the stores with the beauty concepts? I believe you said it -- those stores are outcomping the rest of the base by 2%. Is that correct?

Yeah, loyalty is 150 basis points basically. That’s been pretty consistent. That is what we have built into our expectations going forward. The Milwaukee launch that we just did had the same initial lift after a couple of months as Texas and California did. So we would expect it to achieve at least that, if not better. And so I feel pretty comfortable with that lift. The beauty stores, we are getting so far just a lift in the higher volume stores. So it’s the sort of more than $15 million, that’s what we are talking about on the 2% lift. The stores under $15 million tend to have a very significant lift in beauty, but we are not seeing an overall lift in the store quite yet. We have tested a new configuration in those lower volume stores that provides a little bit better environment for the product to really pop. And we haven’t gotten enough months behind us yet to read that. That is just getting installed right now in about 80 stores. So we will have more to talk about on the third quarter call perhaps, but certainly on the fourth quarter call on that. But we are very confident that we are going to get a lift in beauty in those higher volume stores. And we have actually accelerated the number of stores next year to do close to 400 stores to roll out beauty next year, which will give us at the end of ‘15 close to 900 stores.

I mean, a thing I would add to that, Paul, is I think Wes would agree that the evolution of these two initiatives, while perhaps seemingly painfully slow to you, to us, they have allowed us to learn along the way and then evolve the final product that gets delivered to the customer in a great way. And so the loyalty -- Wes is using a loyalty in this existing historical result of a lift of 1.5% and that’s definitely the right way to look at it. But the product that we will now deliver to customers in October, I believe, and Wes would echo is a better consumer product and that’s why we are so optimistic about the results on the other two-thirds of the store. Beauty, I think is identical to that. We are focused on higher volume stores first naturally because we have seen that work. And so we are going to move forward. The lower volume stores got the lift in beauty, but not the lift in the whole store. And so we made adjustments and those adjustments are now coming to fruition in the stores we are launching right now. I think our expectation is they are going to address that issue and we will see similar kinds of lifts in those stores.

That’s very helpful. Thank you. Moving to SG&A, it was a good performance in 2Q. But I believe the credit benefit helped by about 30 basis points or so in the quarter, how should we think about credit or what are you forecasting for the second half and are there any other factors that may swing growth rates in expense?

Yeah, credit did better than I anticipated. In fact, most of the lines versus our plan, you guys always focus on last year, but almost every one of our areas beat their SG&A expense plan in the quarter. The two that did not were for strategic reasons. We are spending more money in our ESCs to drive speed through the facility to get product to the customers faster and also do what we would call practice peak every day. So we are able to meet the big spike in demand, that’s going to occur in the fourth quarter. And then from an advertising perspective, we are doing a lot of testing in terms of things regarding personalization and different ways to drive traffic to both stores and online. And some of those have been successful and worked well, some of them didn’t work, but that is why you test. So going forward for the fall, we are not going to spend less money than last year, that’s for sure. And we also have to roll out beauty, which requires additional payroll that wasn’t in there last year as well as loyalty, which is also going to require SG&A. I would look at the SG&A guidance we gave for the year and bank our good performance for the spring, but kind of go back and look at what we guided for the year. I’d say for the year we should be closer to the low end of our guidance than the high end, but it is definitely going to be higher than what we experienced this spring.

Lastly and very quickly, the buyback guidance of about $1 billion for the year, is that still your target, Wes?

Yes, it’s still our target. I mean, we have been pretty consistent in what we do. We put in a target for 250 every quarter. We put in a grid, we let it run. This year, it got -- this quarter, it got a lot closer to the 250. There is room to go above that within the plan that we filed. So it’s possible we could get to $1 billion, but it is also possible we could get under. We’ll continue to put that grid in and target 250. So if we were -- if we hit it, we would be at $900 million for the year. But if the stock moved in a direction that was lower, we’d buy more and get closer to the $1 billion. But I’d say right now I’d achieve $900 million and it could be higher than that.

Thanks. Good luck, guys.

My next question is from Lorraine Hutchinson with Bank of America. Please go ahead.

Thank you. Good morning. Could you talk about drivers behind the higher AUR this quarter?

A lot of that is national brand, right. We are focusing in on national brand. That carries a higher AUR and they have outperformed four quarters in a row and run positive comps. So it is not that like items are higher than last year. It’s really just a lot to do with the mix of business.

And then on the remodels, any analysis behind those that tells you what types of returns you are getting and what should we expect in the out years?

Sure. I mean, that is definitely a topic that we will be talking about pretty thoroughly at the end of October at the Analyst Day meeting. We’re trying to look at refreshing our stores in a new and different way, Lorraine. So the traditional way that we might have done it in the past, which would be to go into a store and completely remodel that store, that will still be in place for stores that definitely need that, stores that haven’t been touched in a while or stores that are more mature or stores that are very heavily shopped, high-volume stores? But we are also trying to take a different view and say what are we doing that would create a new experience in every store, not just in a subset of stores that we are going to spend capital on, on a remodel. And we are going to go into quite a bit of detail on that at the Analyst Day. And it’s going to be everything from technology improvements, new creative ways to give the customer a new shopping experience, new ideas that we are going to implement. And we’ll definitely -- it is a key topic for the Analyst Day meeting. But we don’t have any news to share with you on our remodel program far beyond this year.

Yes, I guess the best way to think about it is, in the last four years, we spent roughly $300 million to $350 million in what I would call store refresh initiatives. But remodels used to be $100 million this year on our net stores -- and this year, they are $33 million. There’s just a lot of initiatives that we have that are touching every store instead of just a subset.

Thank you.

Our next question id from Paul Swinand with Morningstar. Please go ahead.

Good morning. Just wanted to follow-up on both the national brands and the beauty initiative. Is that attracting a new customer or is that just selling a higher price product, a higher end product to the existing customer base?

If you take them one at a time, both of them are intended to do both. Both of them are intended to drive our transaction value in the store. The key proponent propelling, so for both of those initiatives, is really all about driving visits. And I think, Wes, on the beauty side of the business, we are definitely…

Definitely skewing younger on the younger side of that with more -- we get more customers in the 18 to 34-year old range than we had previously.

On the beauty initiative, I think we are also getting more visits.

Yes.

I’m sorry. So there’s actually more transactions happening in the stores in which we launch beauty. The national brand initiatives is probably a little tougher for us to analyze the visits versus the transaction value. But as Wes said, it has really been the driver of AUR increases because we are not really increasing individual AURs, but the mix is causing the AUR to go up.

Okay, got it. And then just think about -- I think you mentioned the unit per transaction and the transactions per store being down. Is there any way to analyze that further? Some people are talking about customers targeting stuff online and even if they don’t buy it, buying it in the store, but then not spending as much time shopping. Is there any analysis -- further analysis you can add or color you can add to that?

I mean traffic, transactions per store for the most part have been the issue with our comps for the last few years. So that’s why we are focusing on increasing and that is a function of better product and better marketing. So I don’t really have a better answer for you on that.

I mean, as you well know, traffic into brick-and-mortar stores is generally a focus of probably most brick-and-mortar retailers. Many of the initiatives we are talking about, Paul, are definitely designed to push people into our stores by giving them a new, a different and sometimes unexpected experience from the one they have had in the past. Those include things like buy online, pickup in store because we think that the convenience that that provides will really give customers another reason to make a visit that they otherwise might not have made. So it is all about traffic. I mean that’s what we are focused on. It is all about traffic.

Okay, great. Best regards and best of luck back-to-school and going into the holidays.

Thank you.

Thank you.

Then we’ll go to Bob Drbul with Nomura Securities. Please go ahead.

Hi, good morning, guys.

Hi Bob.

Kevin, couple questions. The first one, I think you said national brands. So this was the fourth consecutive quarter that comps in national brands were higher than private brands. Wes, can you give us an update on what you are seeing on the gross margin impact as that mix is shifting and like your updated thoughts around it from what they were previously?

Excellent question, Bob. It’s the same as I have been telling everybody. It’s been around 5 basis points of mix headwinds. So that really didn’t have anything to do with the margin deterioration that I spoke earlier. It was really a function of where the comps increased and just overall business, not really a mix issue with national versus private and exclusive.

Got it. And then, Kevin, on the E-Commerce business, like the sort of revival that you are seeing. Can you talk a little bit about the opportunities in the back half of the year? I don’t know if this is Wes or Kevin, but like the profit opportunities that you see and sort of how you are planning differently than you experienced in the second half of the year last year?

Sure. I mean, I think the first focus, of course, we have, Bob, is on the top line. So we had, as you remember, a huge technology replatform of our E-Commerce interface that happened during the third quarter last year and it dramatically changed the pace of our sales growth for a period of time. That is now in front of us and we think that’s probably an unbelievable opportunity to drive top-line sales. We are probably more confident about that today because we just came out of the first month of that three or four month last year replatform and we ran well over a 30% increase in E-Commerce. So there’s a lot of confidence about what E-Commerce sales are going to look like in the third quarter due to the anniversary of the replatform. Beyond that, there is a whole bunch of merchandise initiatives that are in place that we think are going to drive the top lines in E-Commerce. On the bottom line, in terms of improving profitability, I would say our focus there is probably more on the fulfillment side. As you remember in the fourth quarter, while our topline sales on E-Commerce started to improve again, we really had some significant difficulties serving the customers through our infrastructure and we have had a year to plan and prepare for that. We’ve strengthened the organization. We have strengthened the process. We have strengthened facilities. We have gone from 200 stores to 800 stores in Ship from Stores. We are utilizing third-party providers on high velocity items. We have essentially changed almost the entire process of fulfilling in our EFCs. We’ve made management and leadership changes in that area as well. And so I think all of us feel like one thing we are going to do this year for sure is serve the customer a lot better. And I think fundamentally that will lead to a better result in the bottom line.

Got it. Again, and then just one last question for you, Kevin. In the juniors business, can you just talk about -- has the grunge revival trend been a positive factor in what you are seeing there at all?

You’ve stumped me again, Bob. And the fact that you can answer -- ask these questions without laughing are beyond my belief. I will have to get back to you, but we will make sure Wes gets back to you with a succinct answer on that. Thanks, Bob.

Thanks Kevin.

Our next question is from Paul Lejuez with Wells Fargo. Please go ahead.

Thanks, guys. I just want to go back to July for a second. Curious from a promotional perspective, was that part of the strength in July, was it more of a promotional month? Did that play a role in driving that positive comp that you saw? And then second, just looking out to IZOD and Juicy, can you just talk about what brands will be displaced by the introduction of those two? Thanks.

On the month of July, no, I mean the promotional calendar was essentially identical to last year. And we had pretty good strength throughout the month. But as I said, when back-to-school took hold in the third week and then particularly in the fourth week, that trend of business improved quite a bit. It also improved particularly in those back-to-school businesses in areas like juniors, areas like young man, areas like kids. So I would say no, promotional calendar, our timetable, our discounting really didn’t, as I see, play any role in the performance. Broadly, IZOD and Juicy have taken space from some of our proprietary brands and without getting into detail about how many fixtures this brand lost or this brand lost. I mean, just in general that’s kind of where the investment in inventory came from.

Thanks, guys. Good luck.

Thanks.

Thanks

And we’ll got to Dan Binder with Jefferies. Please go ahead.

Hi, good morning. Just a couple points of clarification, on the high-volume stores for beauty, I was just wondering if you could just give us a rough idea of how many or what percentage of the store base falls into that high-volume category?

60%.

60%. And then on the credit income of $13 million, I was just curious how much of that was actually above your expectation?

Wes is looking right now I think.

For the quarter, it was a couple million above our plan.

Okay. And then on the cash flow side, you obviously have great free cash flow characteristics, a little bit behind on the buyback versus the 250 per quarter, any thoughts about doing an ASR or perhaps taking the dividend payout ratio up?

But at this day, each of those decisions is something, of course, we regularly discuss at the Board level. We are committed to the current guidance we have given on dividend. It’s a discussion every year, so that could change at the beginning of next year and we might decide to do something different. I think Wes answered the share buyback

Yeah. We did an ASR. We didn’t feel like it was very beneficial to us at the time. I would be hard-pressed to see a situation where we would do that again. I think the more consistent way to do it is better. Like Kevin said, visiting the dividend payout ratio is something we will do at the end of the year with the Board. We obviously have a lot more people invested in the stock that are interested in value and dividend. So that would -- take that into account every year when we talk about what we want to do for next year. But we are committed to increasing it at least 10% annually and we will take a look at that at the end of the year.

And then on the back-to-school business, I think a lot of industry observers would say that that could be a precursor to a good holiday. Just kind of your thoughts broadly as you looked over the years what you think that tells you about your holiday, if it is telling or not telling?

I think last year we had a really good back-to-school business and then business died mid-September. So I am not sure. When you do the math on the correlation, there is a little bit of a correlation there. But I think every year is different, every year is volatile. Weather for us is a big factor. I think we just got to continue to focus on our initiatives and getting better product. And hopefully we can continue the improving trend we had in the quarter.

And lastly, on brands, you started this sort of new flow of brands each quarter, every other quarter. Any thoughts as you look beyond Puma, areas that you want to add brands and if you’ve got stuff that’s work in progress?

Sure. I mean areas that we’ve talked about in the past around our key initiatives would be areas we are highly focused on. So the active and wellness initiative, which is one of the major moves we are making underneath the pillar of amazing product. Active and wellness is going to be a category that we are going to continue to add new classifications as well as new brands. I think a category like beauty, the results are creating an environment that we have a good story to tell. So we are going to be highly focused on trying to add more brands to our beauty portfolio. It is working and I think people are recognizing it is working. Unexpected product is also another bold move that we are focused on underneath amazing product. And so we are trying to find opportunities that might make customers who visit our stores view the experience in a different and unique way. So we will probably talk a little bit more about that at the end of October. But we do think that is an opportunity as well.

Great. Thank you.

Our next question is from Michael Binetti with UBS. Please go ahead.

Hey, good morning, guys. Congrats on a nice quarter in a tough market out there. Kevin, I know you said a couple times that E-Commerce accelerated 31st July, better than 31st. Would you mind giving us what it was for the full quarter just so we can have it in our models and track that trend?

We are trying to -- it is starting to get blurred when we start to do both of this. I would tell you it is something we are not going to really be giving out going forward. The only reason we called it out in July, there was a lot of notes out there that doubted our ability to achieve the bump in E-Commerce that we said we were going to achieve and that’s why we put it out there. But the only thing I would tell you is it was a better increase for the quarter than it was in the first quarter. And we would expect it to continue to be better in the third and fourth quarters as well.

Yes, I mean, in fact, the commentary on E-Comm in the second quarter is something that would fall under the extraordinary circumstances that we talked about because, last year, we were entering this period of the replatform and our sales dramatically slowed for a period of about four months almost total, 3.5 for sure. So we thought it was really important in this particular case to kind of give you transparency and visibility into the dramatic acceleration as we hit that period. But in total, you want to just stick with Wes’ earlier comment, which is we are planning I think E-Comm to contribute around 200 basis points. It is just going to get greater and greater and greater as we launch buy online, pickup in store.

Sure, okay. One thing with the different initiatives, I guess, of two of the big ones, beauty and loyalty. Are there any markets where those two intersect where you have got beauty and loyalty up and running in the stores at the same time and maybe you could talk a bit about those? I am trying to think about whether those stores are adding to the big goal that you guys keep talking about, which is traffic positive at brick-and-mortar?

There definitely are markets in which stores have an intersection of loyalty and beauty. We don’t really -- we haven’t really launched beauty in a market environment. Now we are getting ready to. We are launching beauty in all stores in some markets in order to then market around that. So Michelle’s team will have an opportunity to start communicating that and as we get results on that, I think we will be able to provide visibility into it. But right now, it is sort of a case where there are stores in let’s say, Milwaukee that have beauty and stores that don’t, but the whole market has loyalty.

We try to keep them as separate as possible to be honest to try to measure the individual contributions.

I mean, is your instinct that we could see traffic turn positive as we get an intersection of these?

Well, that is certainly the goal for sure.

Okay.

The assumptions that we are making, Wes covered pretty well. But whether or not, the goal all along has been to acknowledge that there is no single silver bullet to change our trend in traffic and it is going to require the intersection of a number of different initiatives all taking hold across the company. That’s how we’ll get positive traffic and that’s the goal, but we are not relying -- Wes, jump in here but we are not relying on any of these individually to make it happen.

Yeah. I mean, what we really need is to have every line of business do what juniors did and move in the right direction absent all these initiatives and the initiatives would kind of be the gravy on top.

And Wes, I guess one last question, as we talked earlier in the year, I think you guys obviously, had a number of execution issues on top of the replatforming last year online. And the margins for the online business were a big concern of yours earlier in the year. Obviously, you’ve got the replatform causing some accelerated E-Comm sales and it sounds like, Kevin, you said you have got some contingencies in place to make sure you guys can execute as we head into peak periods in the holiday. If we try to add all that up, is there -- what’s your thinking that’s baked into how you guys have guided us for the year as far as what the opportunity is on margins to improve the E-Commerce business in the back half? Thank you.

Honestly, we are focused on sales. And we are making assumptions on profitability in E-Commerce based on our past historical experience. That is what is really kind of driving it. Our focus is on the sales line and our focus is on the customer service line, as I covered earlier. It’s all about how do we drive sales with our new platform and our new customer engagement in E-Comm. And secondly how do we give the customer an incredible experience like the one she gets in our stores every day. And where that leads to on the P&L basis strictly in E-Comm, we are working on, but we are not making any assumptions I would say that there is going to be some dramatic turnaround in profitability in E-Comm short-term.

I would say it is not going to be a headwind, but I don’t expect a big tailwind either.

All right. Thanks a lot, guys.

Our next question is from Stephen Grambling with Goldman Sachs. Please go ahead.

Hey, good morning and thanks for taking the questions. This is somewhat of a follow-up to other questions on the call, but with E-Commerce now growing 30% plus. Can you just discuss some of the differences in trends in that channel versus the stores to help us evaluate how much is incremental versus how much is coming at the expense of the stores, for example, details on the customer overlap category performance?

I mean, generally the answer is no. Because, as I said earlier, we are really just not in a position to be able to kind of break down the differences to the degree that we used to when they were very separate, so overlapping today. I’d say, though having said that, merchandise categories and items that are exclusively offered on the web are driving sales on the web to a larger degree than merchandise categories and classifications that are also offered in our store. I think that is true, right, Wes?

Yeah.

And that has been somewhat consistent over time, but if anything it perhaps accelerated as we’ve made a big focus on driving sales and the merchandising teams in E-Commerce are looking for categories and brands that are unique that give a different experience.

And then I guess just as a follow-up to that, are there geographies where there is a big delta between E-Comm and the stores. And how would you even start evaluating potentially closing stores or is there just not that big of a delta at this point? Thanks.

The most productive stores in the company are also where we have the highest penetration of E-Comm sales. So that would be mostly Midwest, Northeast and Mid-Atlantic, but the most improvement is coming in places like the West and the South Central.

That’s super helpful. Thank you so much and good luck.

Thanks.

And next we go to Neely Tamminga with Piper Jaffray. Please go ahead.

Great, thanks. Hey, Kevin, just a question here on the E-Commerce business. Two things, one, would love to hear your thoughts on how mobile has been layering into your better performance. I know that mobile has been like a primary portion of your overall planned CapEx for technology, so how does that fit in with this acceleration in E-Comm? And then secondly, related as well, if you think about your SKU expansion opportunities you just mentioned, the exclusives that are on the web. To what extent can you work with your vendors to really expand that online assortment and maybe just facilitate some drop shipping for consumers as a means to drive this? Thanks.

Sure. I will take them one at a time on mobile and Wes can add whatever he wants to. But I mean, mobile is driving the E-Comm business. And essentially a large portion of the increase in mobile in E-Comm traffic has been accounted for on-mobile devices and the shift from desktop to mobile, both phone and tablet, is dramatic, accelerating and doesn’t appear to have any slowdown insight. The technology teams and the E-Comm teams have really done a great job in preparation for that trend and have built the infrastructure that we’ve been launching and all of the new initiatives we are launching, things like Yes to You Rewards, the loyalty business, with the mobile platform in mind, in fact, at the forefront of their thinking. So, I do believe that while we have got lots of opportunity to improve on all of the interface with our customers. This is an area that the team has really been ahead of the curve on and I think when we launch loyalty nation-wide, you are going to see the application on mobile devices is pretty spectacular frankly and its…

Was it, Kevin, can I just pause on that point real quick and clarify? Are you seeing an-- I think everyone is seeing an increase in mobile traffic, are you also seeing an increase in mobile traffic and mobile conversion?

Mobile conversion itself, Wes.

It’s getting better. The whole issue that we are all struggling with is conversion on a smartphone is a lot less than conversion on a tablet or a desktop. So one of our focuses for this year and into next year is in, as Kevin mentioned, is improving the mobile app to where it is easier and you can check out in fewer steps because on a phone, they are buying fewer units as well. So we have got to make it a lot easier for them to do. And you talked about drop shipping or direct shipping, we already do that. It’s about between 20% and 25% of our business is direct ship. So it is something that merchants are really focused on trying to expand categories in areas like big and tall, and special sizes where we are somewhat constrained by the floor pad there, but we can definitely broaden the assortment online in those types of businesses.

Thank you so much, guys. Best of luck out there.

Our next question is from Liz Dunn with Macquarie. Please go ahead.

Hi. Thanks for taking my question. Just a lot of little follow-up questions. So, on the 30% plus E-Commerce comp in July, you are saying that part of that is obviously anniversarying this period of disruption? Are you able to break out how much was that versus a lift that might be sustainable?

I mean, the honest answer on that, Liz, is it is difficult. We definitely -- there are things that are happening in the business like the growth of our WebEx or our Web-exclusive product categories that would indicate, those are probably sustainable and those are unique and separate from the anniversary of the disruption. But we also definitely want to acknowledge that last year there was a tremendous slowdown and therefore this year by default becomes an opportunity to anniversary that. So it’s definitely both, but it’s really, really hard. If we had a good answer on that, we would definitely give it to you. It is just really difficult for us to separate those things.

Yeah. I’d focus -- we plan to grow E-Commerce 20% a year. So we underachieved that for a variety of reasons in the first quarter. We are going to overachieve that in July, August, September for sure, and then it should go back to a normalized 20% going forward.

Okay. The lift you have seen in beauty, so do I understand you correctly that that is really without marketing that beauty has changed because you haven’t been able to market because it is not in any one market in total, is that correct, so it has just been the customer sort of discovering it?

Yeah. We have done some small marketing, like there is a couple markets that we have, real small but nothing like Milwaukee or New York that we’ve seen. We’ve seen a little bit bigger lift in advertised markets versus unadvertised, but I wouldn’t tell you that we are going to get some additional lift after that because I just don’t have enough data to say that with a lot of confidence.

But fundamentally the results to date on beauty do not include any marketing component.

Okay. And then, finally, on the loyalty, I was interested in your comments that, I’m paraphrasing, that you want to build a deeper connection with the customer and that you think that it could be more powerful than your card. So two questions there, that sounds like it is more than just discounts, that there’s more substance to it a then do those, whatever those benefits are that you have identified that you can offer to the customer, does that translate to the card as well, could it be a benefit to the card over time? Thanks.

I mean, first of all, definitely loyalty is not fundamentally focused on the saving aspect. So that’s sort of a price of entry. We know that to have a great loyalty relationship with the customer that has to be some incredible savings aspect to it and that’s fundamentally kind of underpinning our loyalty strategy. But we also look at, given the number of loyalty programs across retail, hospitality and other consumer categories. It is very clear that some are extremely successful, some are very mediocre and some just really don’t work well. We are focused on trying to understand the components of the ones that are super successful and our program that we are launching in October combines the savings aspect, which is important, with a sharing element and a surprise element and a connection element that we think will make ours unique because that is really what this is about. Just having another loyalty program, that is not going to do anything fundamentally, but if we combine all these aspects, we’re trying to use best in class, they are not necessarily in our sectors, they are probably in many cases outside of our sector to design the overall overreaching aspect. So far, the credit overlap has probably been the most exciting thing. I think as we went into loyalty, one of the concerns we had is we didn’t want to do anything that would be positive on the loyalty side with a broad array of customers but somehow perceived negatively by our current loyal customer in our credit business and that has definitely not been the case. And as we have looked at loyalty members by store, the percentage of members who are credit and noncredit is pretty exciting, we have more noncredit members that’s the objective, for sure, but we also have a substantial amount of credit members.

Yeah. We also think it could, over time, act as sort of a feeder program into credit. We will be able to analyze our activity and if they give us information, we can actually even prescreen them when they come to the register and if they qualify, offer them an opportunity to apply for a Kohl’s charge. So I think it is something that could actually augment the credit program at this point versus hurting it.

Okay. Great. Thanks. Good luck.

Thank you.

And the next question if from Richard Jaffe with Stifel. Please go ahead.

Thanks very much, guys and exciting to hear about July. I’m wondering -- I am looking at the specific success stories within the July positive comp? Can you guys sort of drill in and answer on a high level or as much detail as you can? If you have got the product to back up the successes of July, if you weren’t cherry picked and now have to chase successes but just the opposite, there is the inventory and replenishment possibly in the successful categories and key items?

Well, we have tried to be, on the inventory front we’ve tried to be particularly aggressive around our basic replenishment categories, you heard Wes talk about that, that we funded those businesses proactively. I don’t think we see anything in our inventory plans that would cause us to be worried that we are going to run out of key items or categories. We have so much room to improve in inventory management, Richard, that...

Yeah.

And I’m pretty confident, we can run with less inventory, which I think we are looking for the end of the third quarter to be down probably 3% or so and inventory…

End of the year.

End of the year.

… more 3% or 4% to last year…

Right.

… that still get the sales results we’re looking for.

And could you comment just on categories that have performed well, say, within Juniors or more specifically than you provided on men’s as well?

Active is one that I would highlight. Active has been great everywhere but it has been great in Juniors as well. Their results have been pretty broad. There are categories like dresses that have been spectacular as well on a brand basis. Our Candie’s business, I think, Wes, has been dramatically outperforming, as we’ve made some changes to the strategies behind that brand.

Young men’s has also been very good and starting in the back, sorry, in back-to-school, so that is encouraging as well.

That’s helpful. Thank you.

Thanks.

That will conclude this conference’s Q&A session. I will turn it back to the presenters for any closing comments.

Well, I’ll thanks, everybody, for joining us on the call.

Thank you.