Ladies and gentlemen, thank you for standing by. Welcome to Kohl’s Q4 2018 Earnings Release Conference Call. Certain statements made on this call, including projected financial results and the Company's future initiatives 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, and as maybe supplemented from time to time in Kohl’s other filings with the SEC, all of which are expressly incorporated herein by reference. Forward-looking statements relate to the date initially made and Kohl's undertakes no obligation to update them. Please note that this call will be recorded and available for replay. Replays of this call will not be updated, so if you’re listening to a replay of this call it is possible that the information discussed is no longer current, and Kohl’s undertakes no obligation to update such information. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. [Operator Instruction] As a reminder, today’s conference is being recorded. I would now like to turn the conference over to our host, Michelle Gass, Chief Executive Officer of Kohl’s Department Stores. Please go ahead.

Good morning and welcome to Kohl’s fourth quarter earnings conference call. With me today is Bruce Besanko, our Chief Financial Officer. We are very pleased to be reporting another quarter of strong financial results. Comp sales on a shifted basis increased % our sixth consecutive quarter of positive growth. The increase was generally consistent with the November, December holiday results that we announced in early January. We are excited to report the increasing comp sales given the exceptional holiday season that we had in 2017. On a 2-year basis, our fourth quarter comp sales increased over 7%. Our strong performance reflects the compelling product offering, great marketing strategy, and consistent execution in stores and online. We are encouraged by the transaction growth in 2018 as our customers continue to embrace the omni-channel investments we are making. The continued momentum this quarter punctuate the positive performance we've had every quarter in fiscal 2018, resulting in a 1.7% sales increase for the full-year. We are delivering growth, while also improving both profitability and margin, reporting our fifth consecutive quarter of margin expansion. Our long-term strategic initiatives and our commitment to our two top priorities of driving traffic and operational excellence are paying off. We are financially strong and our overall health in the business affords us the ability to drive the future we want to create. I will now turn the call over to Bruce, who will provide details on our financial results. After Bruce's remarks, I will return to add more color in the business and update you on our key initiatives.

Thanks, Michelle. As Michelle just mentioned, comp sales for the quarter increased 1.0% on a shifted basis, driven by the 1.2% increase for the combined November, December holiday period announced in January. Consistent with our reporting in prior quarters, this shifted comp adjusts for the 53rd week last year by comparing sales for the 13 week periods ended February 2, 2019 and February 3, 2018. So our shifted comp sales of 1.0% is a like-for-like comparison. And as a reminder, additional information on the calendar shift can be found in the appendix of the June 16, 2018 Analyst Meet and Greet presentation, which is available on the Investor Relations Pages of our Corporate website. The strong sales performance was driven by positive transactions and a double-digit increase in digital sales, which was on top of the 26% increase in the fourth quarter of last year. From a line of business perspective, children's and men's outperform the company. Our core women's business, which excludes juniors, was flat driven by strength in modern casual and active categories. Geographically, we saw strength across the country except for slight softness in the Northeast. The Midwest region was the strongest. We believe our strategic initiatives continue to drive the momentum in our performance. We also think our Q4 results were positively impacted by competitor store closures. The impact was especially strong in the Midwest, where we had a significant overlap with Bon-Ton stores and customer base. Competitor closures will remain a unique opportunity to capture market share. We will continue to invest incremental marketing dollars and position inventory to ensure we capture a disproportionate share of sales and customers from these competitor store closings. Michelle will provide additional comments on the sales results in her remarks. Moving on to margin and inventory. Gross margin in…

Thank you, Bruce. I'll now provide more color on our Q4 sales performance and discuss our outlook for 2019. We are excited that the positive momentum we've seen all year long carried through into the holiday season. The key strategic initiatives in our Greatness Agenda around product, experience and savings, continue to create new opportunities for growth. Our two key priorities on driving traffic and operational excellence keep us focused on the most important drivers to create a growing profitable business. These initiatives and priorities are even more important and beneficial to our business during the holiday season, when sales opportunities and competitive pressures are both at their highest. It is in Q4 that all pieces of the equation, from product to marketing to operations across the stores and digital channels, must be working at optimal level. Everything came together as expected in Q4, resulting in a 1% comp sales increase this year and more than 7% growth on a 2-year stacked basis. I will now give you a little more color on our Q4 merchandising, marketing and omni-channel results. First, I will discuss the merchandise strategy we had in place to drive our business across all categories and take advantage of real opportunities in the market. I will start with active, which continues to be a key growth driver for the company. We continue to gain market share as we saw mid single-digit growth in active in Q4, and high single-digit growth for the year. Our active business, which penetrates now nearly 20% of our total business has accelerated every year since we launched the greatness agenda in 2014 and we see even more potential ahead. In Q4, we had success across all apparel and footwear classifications in active. Our key active national brands Nike, Under Armour and Adidas…

[Operator Instructions] And our first question is from Bob Drbul with Guggenheim Securities. Please go ahead.

Hi. Good morning.

Good morning.

Good morning. I guess, the first question, Michelle, can you elaborate a little more on the Amazon, the relationship. Just curious in terms of the returns piece and the dedicated space and the -- there's a change going there, but just -- are there any metrics in terms of traffic or the benefits that you’ve seen from that relationship that you could share with us on the pilot and the test?

Sure. As I mentioned in my comments, Bob, we continue to be really pleased with the relationship of Amazon. We are working multiple things with them. I will start with the device side of things. It was an experiment and one of the things were really driving in the culture these days is trying lots of things, so we tried the shop in the shop idea and what we're seeing is we’re actually seeing great results through a wholesale relationship. We had a great Black Friday with Amazon devices. And so the learnings that we're taking in terms of how customers engage in the shop-in-shop, we’re actually going to bring it into a dedicated space in over 200 stores, as I mentioned, with a broader assortment of Amazon devices, but it will be more on a self-serve environment, which is how our customers are used to shopping us. This was determined by both us and Amazon, and again we believe the products will be fantastic and the experience will be great for our customers. And then as it relates to returns, we’ve been at this now for about a year. We extended the returns pilot into Wisconsin mid-to-late last year, so we’re now at a 100 stores. I think that the most important thing that we're seeing is how excited our customers and the Amazon customers are about this service. It's really unique. It takes a lot of the hassle out of returning items. It's free. They don’t have to package it. The big question of course at hand is, how we go forward and we continue to be in conversations with Amazon. It really needs to be a win-win for both. So I'd say stay tuned on that front.

Got it. And, Michelle, just a question on the women's business. In terms of what's in the stores, I guess, you talked about February. But jumpsuit seem to be pretty prevalent and I’m just wondering if you comment on that as a potential driver and whether it's strap jumpsuit that you see as a way to go this spring season?

Thanks, Bob. Very specific on the strapless versus strapped detail. Jumpsuits are in the trending now for the last year and we have a very broad assortment this spring. We think it's going to be a big hit this year. In terms of strap versus strapless, I don’t know. Let the customer be the judge and we've got plenty of both.

Great. Good luck. Thank you very much.

Thanks, Bob.

Next we go to Oliver Chen with Cowen and Company. Please go ahead.

Congrats. Congrats on the deal with Planet Fitness. It sounds really innovative. On the topic of women's classic and juniors, what are your thoughts as that integrate to millennial moms? And what percentage of mix is that business and what is -- what are the main point for strategy there just to reinvigorate traffic? And then a modeling question, just in terms of February, how did February help inform the guidance? You had such good momentum in Q4. I would love your thoughts on what's happening with February and also your thoughts on the year ahead? Thank you.

Thanks, Oliver. I will start with the women's business, and then I'll have -- Bruce talk a little more about February. In terms of women's, as you know, women's is a very important business for us. It's about 30% of our business and I’d say on the whole for the year, we're really pleased. The women's business in total for the year was positive. In Q4, basically we saw certain businesses as really strong and then we had a couple of opportunity areas. So, in terms of what was really strong and where we put a lot of focus and investment, our modern contemporary business of brands like LC Lauren Conrad, Simply Vera Vera Wang, the L Brand [ph], those are all doing really well. They’re on the speed platform, they're resonating. We got the right balance of basics and fashion. So we feel very pleased about that. Our active business continues and our intermittent sleep business had also a great quarter and a great year. And like I said, in total for the year, our totality of our women's business did well. The Q4 soft spots, if you will, really isolated to two areas, which is our women's classic and to juniors. Women's classic, I'd say Croft & Barrow is an opportunity for us. It's worth noting that in our private brands all of our top private brands for the year were positive outside of Croft & Barrow and we had opportunities. We had opportunities to bring more newness to that customer and the team is on it, and they are course correcting. And then with as juniors, we had some hits and misses on that business. I would say the good news about juniors is it's one of the fastest businesses we have. So again, the team is on it, course correcting and we anticipate improvement this coming year. You also mentioned a question around millennial, and like we're doing really across everything, the millennial opportunity will be a localized opportunity. We are starting in this 50 store test -- we today have great brands that resonate with millennials, our national brands that I mentioned like Levi's and our active brands, and then coupled with some great proprietary brands. The whole idea around carving out space for the millennial customer is to give them a destination where it's all in one place. And importantly to kind of mix up the brand, so we help them kind of solve their wardrobing challenges. So giving sort of outfitting solution. So it's a test. 1we'll see how this works, but our commitment to millennials is significant and we expect to make a lot of progress on that front.

Oliver, let me comment on the month of February and how that is informing on our guidance. So, first of all, we are very confident in the full-year guide of flat to up 2% from -- for a comp, on top of the 1.7% comp this year. February -- pardon me, February is off to a slow start. We believe it's primarily whether driven, but it is starting below our plan. The weather impact from our vantage point, we believe is a combination of both cold temperatures across large portions of the country and significant precipitation in the form of rain, but principally snow. And both of those things are keeping customers at home. So we are off to a slow start, which is why we guided the way we did in the first quarter, but we are confident in the full-year guide. And as it relates to margin, we think the margin impact -- again, first of all, we are confident in the guide for the full-year, but we also think that this weather impact is affecting gross margin and the way that it affects Kohl's gross margin is that we're selling more of our fall inventory levels, which is on clearance or being more promoted, and so that's the effect we see.

And I would just add …

Okay. Thanks.

I would just add one thing to Bruce's comment as well. This is -- well certainly not unique to us and we’ve seen this before in terms of the volatility with weather, particularly as it relates to the first quarter and the third quarter. And typically what we’ve seen in these situation is that where you may not be selling it when it's really cold or people are stuck at home with the snowstorm. Ones that weather returns, we do see pent-up demand. We had that experience last year as weather was a bit erratic as well. So I feel really good about the spring inventory, we are well positioned. We're extremely clean, our aged inventory is really down. So I'm excited. I think we’re all anxiously waiting for that business -- for the weather to turn. But that being said, I think the team is ready. We’ve marketing plans in place, and I think also our agile marketing efforts as I mentioned, allow us to once the weather turn, we will amplify and lean into the demand to even drive more. So as -- I reiterate with Bruce has said, while it's a slow start, we feel very confident in our annual guidance of flat up to 2%, so confident in our margin guidance of growing that again this year. So I think we’ve got a fantastic year ahead.

Okay. So lastly on Planet. That’s very helpful. Our survey indicates such broad appeal for this concept and it's a great comp and unit growth story with non-correlated traffic opportunities. Can you move this faster? What’s your thoughts on the pace and some background on the rationale. It seems like a really win-win, especially as you dive into active further?

Yes, you got that. We see the Planet Fitness partnership as a real win-win, and in fact the teams are working to take advantage of the co-location in these first 10 stores to figure how we can -- co-market to these customers. So very excited about it. I think like everything, we have to build a few. We will learn and we will take it from there, but all our indications is this is going to be a great fit for us and for our customers.

That’s great.

Okay.

Next question is from Matthew Boss with JPMorgan. Please go ahead.

Great and congrats on a nice quarter.

Thank you, Matt.

Thanks.

Michelle -- I guess, Michelle, first on comps in 2019, maybe versus performance this past year, how would you rank the incremental opportunities by category and maybe what's the largest swing factor between flat and positive two comps for the year?

So thanks for the question, Matt. As I said in remarks, I'm really excited as we enter the year. I think for us the theme of 2019 is innovation. We’ve innovation happening across all parts of our business. So if I start with product, there's innovation in every area. It's hard to single out a particular category. I will start with women's as we’ve got a huge brand launch ahead of us this summer fall in Nine West. But I also think EVRI, which were in process of launching today, is going to be great. It's been some time in the making, the team has been very thoughtful on how to approach the plus customer in terms of product and basics and fashion. So I think between EVRI and Nine West we're in great shape. Our proprietary brands continue to be as focused as you know that’s more than two thirds of our business with women's, so continuing to drive that speed agenda is really important. If I cut across all the categories, active is a priority. We’ve deep partnerships with our partners and frankly the product elevation in EVRI business whether it's women's, men's, kids, footwear, that that's coming and that will continue to be lift for us, especially now as we expand in the 160 stores where we will have that broader assortment. On in-home, excited about Scott Living and Property Brothers. They’ve got great broad reaches that relates to their television presence and I'm anticipating they’re going to be involved as we market the product. The product was fantastic. So I just think the innovation really cuts across. And then if I move over to our channel, digital and in-store, it's all about creating a great experience driving traffic, the marketing focus will enable that. But in terms of in-store, we have a lot going on as I mentioned, something that are rolling and then others that are incubating as I mentioned around the rightsizing opportunity, the expanded active or experimenting with the Weight Watchers partnership. So there really is a great, great spirit of innovation happening at the company to make sure that we can sustain the demand.

Great. And then, Bruce, maybe on the gross margin front. I guess, what inning are we in today with inventory management? And maybe what are you seeing from efficiency initiatives that you have to offset e-commerce pressure over time?

Good question. So on the inventory, Matt, I would say when I look at the levels of inventory turn in our past, we have still room to improve. We're certainly not in the early innings, but there's still a nice gap between what we once had from an inventory turn perspective and what we experienced even after these 12 consecutive quarters of reductions. So I think there's room. From an e-com -- as you know, e-com turns faster and it has a higher penetration particularly in the holiday. So I think there's opportunity there too.

The other thing I would add to Bruce's comment, inventory management has been a key enabler. We often talk about it in the context of margin, but it's also a sales driver. The speed initiative is part of that. I mean, one of the biggest benefits we have in speed is when we see things working, we can chase into units. And we’ve literally chased into millions of units. It had a major impact to our business. I think the team is doing a really nice job of how they are thoughtfully producing choices to going deeper into the things that matter. And then as we see those things resonating, we are getting the turn. Like I said, then we can chase into them. The last point I'd make is while the bar raises on inventory management we’re investing technology to increase our sophistication, predictive analytics to really know where and how to place that inventory. So that gives us, like I said, a further runway on this inventory management, inventory reduction and ultimately greater turns on our inventory.

Great. Congrats again.

Thank you, Matt.

Next we will go to Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi. Good morning, everyone, and congratulations on the nice progress.

Thanks, Dana.

Michelle, as you think of national brands and proprietary brands, what’s your outlook for performance of each? And you mentioned active, what are you most excited about there? And then just lastly on online costs, what changed this season and how you are executing fulfillment and managing SG&A? Thank you.

Right. So there are a few questions there. Why don’t I take the proprietary and brand question, also touch on active, and then I will let Bruce touch on the cost piece. So first of all, I'm a believer that ultimately that the customer decides what brands are resonating with them and we are constantly editing our portfolio. So we are not necessarily driving to a particular mix per se, we are looking at what’s relevant. And today as we sit here, national brands are penetrating in about 60% and our proprietary brands about 40%. I think as we look ahead, we’ve got a great pipeline of innovation and newness and excitement really across both. Women's you touched -- you mentioned women's, Dana, and we -- as I said earlier, that’s about two-thirds proprietary. So we’ve got to be really focused on making sure that we’ve got the inventory balance right, we’ve got basics, we’ve got relevant fashion, the speed initiative gives us more precision as it relates to getting that fashion, right, but I’m really excited about what's ahead in our key brands. LC Lauren Conrad has been really just on a phenomenal growth trajectory. We’ve more plans for that brand as we look out and I think we really have it right there. But I think even in our core private brands, Apartment 9 has been really positive in women's. Sonoma has been really positive. And in the areas where we’ve got some softness, be it classics or juniors, the teams know what those issues are and they’re actively course correcting. I think for active, I’m very excited about how our pilot went, the 30 store test proving out that we can further extend in this really important category. I think importantly as we do, customer surveys and the like, customers are giving us credit for being a real player in active. I mean, there really has been a shift since 2014 when we began this journey. So there is lots of good examples across -- really across all lines of business of levels and innovation. I would call out on the men's side, as an example, getting into the golf business with their active brands has been a huge hit. The jacket and layering side, which hasn't been a big part of our business has been providing a lot of incrementality. And I mentioned on women's, we are going to be expanding into plus with Nike, which will also be a big win. So there's lots there. We’ve got a great pipeline and looking forward to -- all we are going to bring to our customers this year. And then I'll hand it over to Bruce.

Yes, so with respect to SG&A and the cost of ship, so first, Dana, we remain committed to leveraging expenses at a 1.5% to 2%. I think the company has done a great deal of effort, particularly with our operational effectiveness and excellence initiatives. And in fact, as I mentioned in my prepared remarks, fiscal '18 was our second year and we are delighted to report that we are already at the $250 million mark in both SG&A and gross margin savings. So this third year here, which is fiscal '19, we have even more to go get. So that’s all good. And then with respect to cost of shipping. Cost of shipping is an important element of the efforts here around operational excellence. We need to mitigate the rising cost of shipping by increasing store pickup penetration. We are doing that with BOPUS and our recent BOSS launch. We need to minimize split shipments and manage our cost per package, which is part of the operational excellence work that is under -- that we are undertaking. We need to help with speed to customer and driving the overall costs down. EFC 5 is one of the ways that we do that. There's more productive -- the EFC 5 is far more productive than the first generation of distribution centers. We announced we would be opening a sixth or begin investment in the sixth EFC here shortly. And so for all those reasons, we think that we can get the cost of shipping down and that’s an element of the technology investments that we’ve been making that we expect to deliver benefits over time.

Thank you.

Our next question is from Mark Altschwager with Baird. Please go ahead.

Hey, good morning and congrats on a strong 2018. Just to start out, Bruce, following up on some of those gross margin comments. How should we be thinking about that gross margin algorithm overall? Is it still 20 basis point headwind from e-commerce, offset by a positive merchandise margin?

Yes, the headwind from cost of shipping remains in our view, 20 to 30 basis points. Now as I said with Dana's question, we intend to look at ways that we can mitigate some of that through operational excellence and through technology investments, but the 20 to 30 basis point headwind exists and to the extent that we move more sales into the digital channel that cost to ship may go up.

Got it. And then separately, last year management spoke to some customer count metrics. I’m wondering if you have any updates on that front. Was net customer acquisition up year-over-year in 2018? Are you bringing in younger customers? How do the Bon-Ton markets maybe compare to a control group? Just any color there would be great.

Yes, great. Thanks, Mark. We are very encouraged by our continued efforts around customer acquisition. And again in Q4, our new customer acquisition rate was up in the low double digits. So we are continuing to get those new customers in. We do see that the competitive store closures are helping that, but it's not just that. We are getting new customers really across the board. And as I spoke earlier about personalized marketing, that’s a real asset now for us as we can retain and grow them into loyal customers.

Thank you and best of luck.

Thanks, Mark.

Our final question will be from the line of Lorraine Hutchinson with Bank of America Merrill Lynch. Please go ahead.

Thanks. Good morning. I wanted to focus on credit for a minute. Are you seeing any change in payment trends in your portfolio? And then also, what’s your outlook for credit for 2019?

Hey, Lorraine, let me take a stab at that. So let me just take a step back. Our credit operation is an important element of our loyalty program. In fact, as we talk about millennials, millennials are an effort that we are focusing on in credit as well. About a third of our new applications are coming from millennials, about a quarter of the new accounts are from millennial. So we think that that’s a great opportunity as we focus on millennials. In the -- in fiscal '18, ex the 53rd week, we grew revenue and we grew profitability. The team has done a fantastic job in terms of managing costs. We consolidated the Dallas call center, is an example of that. Our fraud expense has been going down significantly. And so the team has done just a tremendous job in terms of ensuring that the credit operation, both on the top line and the bottom line remain solid. In terms of 2019, we haven't provided any guidance on the credit card profitability or the revenue, but we are hopeful that we can continue to convert some of the new customers that Michelle just mentioned that, particularly in the fourth quarter, where we had new customer acquisition that we can convert them through our loyalty ladder into credit cardholders.

Thank you.

Ms. Gass, any closing comments?

No, I just want to say thank you to everyone listening on the call today and we are looking forward to a great 2019. Thank you so much.

Ladies and gentlemen, this conference will be available for replay after 11:00 AM Eastern Time today, through April 5, 2019 at midnight Eastern Time. You may access the AT&T teleconference replay system at any time by dialing 1800-475-6701 and entering the access code 445967. International participants, please dial 320-365-3844. Those numbers again are 1800-475-6701 and 320-365-3844, access code 445967. Replays are also available at the Investor Section of Kohl's corporate website. That does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.