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

Bob Drbul - Nomura Securities Matthew Boss - JPMorgan Renato Basanta - Sterne, Agee Paul Lejuez - Wells Fargo Dan Binder - Jefferies Oliver Chen - Cowen Michael Binetti - UBS Neely Tamminga - Piper Jaffray Paul Trussell - Deutsche Bank Paul Swinand - Morningstar.

Ladies and gentlemen, thank you for standing by. Welcome to the Kohl’s Quarter Four 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 certainties 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 maybe supplemented from time-to-time in Kohl’s other filings from 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So, if you are listening after February 26, 2015, it is possible that the information discussed is no longer current.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, sir..

Thank you. Good morning. With me today is Kevin Mansell, our Chairman, CEO and President. I will start today’s call by walking through our operational results. Kevin then will provide more details on our sales and greatness agenda initiatives.

I will conclude our remarks by providing our initial guidance for fiscal 2015 and then open up the call to your questions. We are pleased with our fourth quarter results. Comp sales increased 3.7% for the quarter, our highest quarterly comp since the fourth quarter of 2010. All lines of business were positive and all regions were positive.

Net income grew 10% and our earnings per share were $1.83, a 17% increase over last year. The comp reflects increases in both average transaction value and more importantly number of transactions. Average transaction value reflects a 2.8% increase in average unit retail, which was partially offset by a 1.1% decrease in units per transaction.

This resulted in an average transaction value increase of 1.7%. Number of transactions increased 2% reflecting increases in both online orders and in-store customers. Diving a little deeper by line of business for the quarter, children’s, footwear and men’s all reported mid to high single-digit increases.

Active and fitness categories were strong in all lines of business, women’s, men’s, footwear and children’s. Women’s home and accessories also generated positive comps for the quarter, but underperformed the company average.

As our omni-channel strategy continues to mature, it becomes increasingly difficult to distinguish between the store sale and an e-commerce sale. Because we no longer have a clear distinction between store sales and e-commerce sales, we are no longer separately reporting e-commerce sales.

For the quarter, comps were relatively consistent across all regions with results that range from positive 3% to 5%. Total sales increased 3.9% for the quarter and for the year were essentially flat at $19 billion. Comp sales decreased 30 basis points for the year.

Our gross margin rate decreased 13 basis points for the quarter and 8 basis points for the year. Merchandise margin increased over both prior year periods, but was more than offset by an increase in the impact of shipping cost. Our SG&A expenses were 2% higher than last year’s fourth quarter and leveraged 29 basis points.

Store expenses including payroll, fixed costs as rent and controllable costs such as utilities leveraged by 30 basis points. Lower corporate expenses were offset by higher marketing spend to support the loyalty launch and drive holiday sales, IT investments and slightly lower profitability in our credit card business.

For the year SG&A expenses increased 1% and deleveraged 21 basis points. Leverage in our credit card business and store distribution operations were more than offset by deleverage in our other operations. Depreciation expense decreased $3 million from both the prior year quarter and year.

The decrease reflects lower depreciations on our stores as they mature which is largely offset by higher IT amortization. Net interest expense was $84 million this quarter and $340 million for the year. Interest on capital lease – capitalized leases decreased in both periods as the leases matured.

For this year this favorability was more than offset by interest on the $300 million of debt that was issued in September 2013. Our income tax rate was 35.3% for the quarter and 35.7% for the year. Both periods reflect the benefits of favorable state tax audit settlements. Net income was $369 million for the quarter and $867 million for the year.

As I mentioned earlier diluted earnings per share increased 17% to $1.83 for the quarter, for the year diluted earnings per share were $4.24, consistent with the midpoint of the guidance that we provided at the beginning of the year.

From a store and square footage perspective, we currently have 1,162 stores one fewer than the end of the third quarter. We ended the quarter with selling square footage of 83,758,000 square feet and gross square footage of 100,394,000 square feet.

We generated $1.2 billion of free cash flow for the year and ended the year with $1.4 billion of cash and cash equivalents. Capital expenditures were $682 million for 2014, $39 million higher than last year.

The increase reflects higher corporate spending on IT and credit facilities, higher IT spending and lower remodel spending, 2014 spend was slightly lower than our original estimates due the timing of projects. Ending inventory and inventory per store decreased 2% from January 2014. Units per store were down slightly more, 3%.

Our accounts payable as a percentage of inventory was 440 basis points higher than last year at 35.2 it was 39.6 this year. The increase is due to higher receipt volume and timing of payments to some of our vendors. Weighted average diluted shares were 201 million for the quarter and 204 million for the year.

We repurchased 12.3 million shares of our stock during the year including 2.1 million shares during the fourth quarter. We ended the year with 201 million shares of outstanding stock. On February 25, 2015, our Board declared a quarterly cash dividend of $0.45 per share, an increase of 15% over last year.

Since paying our first dividend in 2011, we have increased the dividend at a compound annual growth rate of 16%. The dividend is payable March 25 to shareholders of record at the close of business on March 11. I will now turn it over to Kevin who will provide us an update on key greatness agenda initiatives..

Thanks Wes. As you know in early 2014, we introduced our new multiyear vision that we refer to as the greatness agenda. Over the last year our associates have fully embraced this new vision and it has become part of the Kohl’s culture.

In October we provided additional details regarding the greatness agenda and introduced our senior leadership team in our first investor conference in 7 years. We talked about measuring our progress in terms of sales, associate engagement and customer engagement. You have just heard our progress on sales.

In order to continue to increase our associate engagement, we just assembled nearly 3,000 of our leaders from across the country for a multi-day conference where we worked together to strengthen our leadership skills and explored ways to bring the greatness agenda to life and to deliver on our 3-year plan.

That conference was a significant investment in the development of our leaders, but one that we believe will pay off as we deliver on that 3-year plan. As a reminder, the five pillars of our greatness agenda are amazing product, easy experience, personalized connections, incredible savings and winning teams.

In amazing product, one of our strategies was to refocus on our national brands. That focus continues to pay dividends. The emphasis on national brands resulted in higher comps in our national brand portfolio than in our private and exclusive brands.

For the year, penetration was evenly split between national brands and only at Kohl’s brands, as national brands grew in penetration by 180 basis points. Among the strongest performers by brand during the quarter were Nike, Levi’s, Carter’s, Fila Sport and Jumping Beans. Nike, our largest national brand reported a 24% increase in fourth quarter sales.

The collaboration with Disney helped drive a 27% increase in Jumping Bean sales in the fourth quarter. Frozen was a big part of that growth and we look forward to more collaboration with Disney in 2015. Levi’s, Carter’s and our own Fila Sport all increased approximately 10%.

During 2014, we added over 15 new brands such as IZOD, Juicy, Fitbit, Nespresso and Gaiam to name just a few. And just yesterday, we announced the launch of Bliss, a prestige skincare collection. This launch further establishes Kohl’s as a go-to beauty destination.

The Bliss partnership will offer signature skincare and body products beginning in March on Kohls.com and at over 500 stores and expanding to all stores by the end of 2015. Under our easy experience pillar, beauty is the key part of driving sales.

The Bliss announcement is just another step in creating industry leading beauty departments in all of our stores. Approximately, 500 of our stores currently have the new beauty format, but by next fall, that number will increase to about 900.

In addition to adding new brands, we are creating a new environment that is both aspirational and approachable. We are also testing some different things in our 12 full store remodels this year as well as some ideas to drive sales in our in-aisle program, while presenting more cohesive seasonal themes and ideas.

In personalized connections, we have continued our investment in improving our platform, both in mobile and tablet and continue to develop our Kohl’s wallet allowing for easy storage of all of our promotions and our Yes2You Rewards as well as Kohl’s Cash.

Our investment in improving our mobile platforms has resulted in increased conversion rates across all channels. Our efforts in personalization from a marketing standpoint produced approximately what we expected in 2014. And most importantly, we have data and learnings in order to improve our effectiveness in 2015.

We have built 10 key behavioral segments and are focusing on our four largest customer opportunities in 2015. Our localization efforts are in the rollout phase and we expect them to have a lot more impact in 2015.

As part of the localization efforts, we are optimizing mass-media to better serve our markets from the tab perspective allowing us to invest savings in other forms of media. In incredible savings, for several quarters now you have heard us share our excitement and optimism about our Yes2You loyalty program.

The program launched nationwide in early October and has far exceeded our expectations. To-date, we have approximately 25 million customers enrolled in the program, 20% more than our original 2014 goal. More than half of these customers do not have a Kohl’s charge card.

And enrollment in the program provides us with customer specific data that will further our personalization initiatives. Additionally, enrollment in the program drives traffic and incremental sales. In closing, we have only just begun our journey in the greatness agenda.

In this first year alone, we have already delivered in several areas, including creating an industry disrupting loyalty program under our incredible savings pillar and increasing our penetration in active and wellness as well as building a new beauty business under our amazing product pillar.

We are also on target to reach our milestone goals in personalization and being world class in mobile under the personalized connections pillar. The fourth quarter results indicate the momentum created through these initiatives.

As we look ahead, the greatness agenda, its pillars and our values will be our consistent roadmap for the work we do everyday. We have made good early progress. We feel we can now move with greater speed as we continue to seek out more ways to innovate and to bring the greatness agenda to life.

Now, I want to turn it back to Wes to provide our initial guidance for fiscal 2015..

Thanks, Kevin. We expect earnings per diluted share of $4.40 to $4.60 for fiscal 2015. This guidance is based on total sales increases of 1.8% to 2.8% and comparable sales increases of 1.5% to 2.5%. We expect gross margin as a percent of sales to be flat to up 20 basis points for the year.

Continued rollout of our beauty initiatives will create some margin pressure in the first quarter as we liquidate the old product to make way for the new product. SG&A expenses are expected to increase 1.5% to 2.5% over 2014.

We expect SG&A to increase more in the first quarter than in the balance of the year, roughly 4% to 5% in the first quarter versus roughly 0.75% to 1.75% for the balance of the year. There are a number of differences contributing to the higher first quarter expenses.

First, based on the success of beauty, we will be rolling the beauty initiatives to roughly 450 stores compared to less than 100 stores in early 2014. As a reminder, 2014 installations were mostly in the fall season.

We will also have higher store expenses associated with the acceleration of rolling out buy online, pickup in store to all stores and expanding ship from store to all stores due to the success we saw with these initiatives last year. We will continue to invest in technology and capacity to further accelerate our improving omni-channel experience.

Finally, we had several non-recurring items that helped last year and hurt this year in the first quarter. Our changes in how we market to our customer more efficiently start to take effect in the second quarter providing significant savings while increasing our reach for the balance of the year.

We expect depreciation expense to be $940 million and interest expense to be $335 million for the year. Our guidance also assumes an effective tax rate of 37% and $1 billion in share repurchases at an average price of $70 per share. We expect capital expenditures of $800 million in 2015, approximately $120 million more than 2014.

2015 CapEx is expected to include $350 million for IT spending, $250 million for store strategies, including new stores, remodel, beauty and other easy-experience initiatives, and $200 million for base capital projects. With that, we will be happy to take your questions at this time..

[Operator Instructions] Our first question today comes from the line of Bob Drbul with Nomura Securities. Please go ahead..

Hi, good morning..

Good morning..

Wes, I just have a question for you, on the guide when you think about sort of the omni-channel guide and shipping as ‘14 heads into ‘15, how do you have that factored into your gross margin guidance?.

Sure. Well, what we have tried to do, I think we talked a little bit about back in October, but over the next three years, we are trying to get back to where we were in the store gross margin, which is roughly a couple of hundred basis points around 38 and change.

The margin hit from e-commerce mix in terms of higher percentage of home and a little higher percentage of national brands is worth about 10 to 15 basis points and then shipping cost on total gross margins probably worth about 20 to 25 basis points each year over the next three years. So, that’s really how we built the guide.

That’s included in our flat to up 20 guidance for total company..

Okay. And then Kevin just had a couple questions for you.

The first one is can you share with us Kohl’s perspective on retailers voluntarily raising minimum wage throughout the U.S.?.

Sure Bob. First of all, we obviously don’t operate in a vacuum, but we never have. We have a pretty robust and very successful system in place to assess the competitive market across the whole country. And fundamentally we pay what’s necessary in each market to attract and retain the talent we need.

Frankly, cost of living are not the same everywhere and either our wages. As an aside and I realize wages are getting some focus. While wages are really important, there are a lot of other factors driving peoples’ decisions about where to work.

The work environment, the way associates are treated, future opportunities for growth and advancement are just a few of many. And as we shared with you back in October at the investor conference, our store associates engagement is in the top percent of retailers. So we definitely intend to keep it there..

Got it, alright.

And then Kevin, I just have – I have one more question for you, I think your first pillar is amazing product and I was in the stores recently checking out some of your footwear offerings and you seem to have a good offering on the wedge sandals and platform high heels and I just wondered if you think that the footwear business that you had success in the fourth quarter will continue into 2015?.

I had some anxiety when you were asking – getting ready to ask that question because I was thinking for sure I am going to get a question from Bob that I won’t be able to answer. I will do my best. I mean footwear has been strong.

Our casual footwear business has been strong, but frankly our active footwear business, athletic footwear has been much stronger and I would suspect that looking out into 2015 given the big focus we have as you know around active and wellness that athletic footwear is going to continue to outperform.

And we are just putting so much energy and so much behind that initiative..

Thanks Bob..

Great. Thank you..

Our next question today comes from the line of Matthew Boss with JPMorgan. Please go ahead..

Hey, good morning guys and a nice quarter. From a share perspective how do you guys view your pricing perception today where do you think your core customers indexing with some of your department store peers in the off-price.

And then really from a market share perspective just how you view the opportunities and particularly the pickup in traffic that you have seen any drivers that you think are really behind that?.

Sure, Matt, it’s Kevin. I mean from a pricing perspective we sort of lump that under our incredible savings pillar. And historically and consistently and still today, that’s a space in which we get really strong marks for consumers on that Kohl’s ability to deliver great value is at the very top of retailers.

Our opportunity I think is to broaden the reach. So much of our value equation has been driven through our proprietary credit card offering, and as you know Yes2You loyalty is really all about expanding that reach. And then really trying to deliver savings and therefore pricing perception strength at a very personalized level.

So it’s unique to each customer, so that each customer is kind of dealt with based on what’s important to them. On a market share basis, in the fourth quarter to be honest with you there were – there always are better businesses and businesses that are slower.

In general, all of the businesses performed pretty well, they were all positive first of all as Wes indicated. Some outperformed, like men’s or children’s. Some underperformed the store average. I would say the business that we are probably most highly focused on really gaining more traction in is our women’s apparel business.

It has trailed over some period of time the company performance. We are starting to make headway. The gap between women’s and the rest of the store is narrowing, but we are clearly not going to be happy to women’s runs with or ahead of the store.

So I would – if I picked one area, I would say it’s women’s apparel that we are focused on really try to gain more share..

Yes. I think one of the things, I forgot to mention in the scripted remarks is to Kevin’s point about broadening our reach. The comp this quarter was driven by both credit and non-credit card customers. So our credit card customers were up sort of mid single-digit, but our non-credit card customers were up low single-digit.

That’s the first time that’s probably happened, coincidentally – not coincidentally since the fourth quarter of 2010, back when we had the last really strong comp that we had. So we have to keep that going. It’s got to be – we got to get flat to positive comps in the non-credit card business to be as successful as we would like to be.

And the credit card guys should continue to outperform, but that was a good first step..

Great. And from a quarterly cadence, have you seen the top line and traffic momentum continue into February.

And more so, I mean do you think we are seeing any impact from lower gas ad what’s the best way to think about an earlier Easter this year?.

Well, I mean speaking about the quarter, obviously we don’t comment on individual months’ performance. But I think we have continued to get strength, particularly in the areas of the country that haven’t been so affected by weather. I mean there have been some areas as you know that have been really impacted by weather.

I don’t think Easter, the timing of Easter has really got a major effect on our quarterly results. You kind of know I think Matt that our quarterly results have a tendency to be driven really by the other more important factors for us, which are how quickly weather works in our favor on seasonal apparel, how effective our individual marketing events.

Particularly in this case, at this time of year our efforts around personalization, how are they working, how quickly these omni-channel efforts get traction. And then of course just product choices for sure, but beyond that there is probably not a lot to add.

Wes?.

No. I think you covered it..

Great. Best of luck, guys..

Thanks..

Our next question today comes from the line of Charles Grom representing Sterne, Agee. Please go ahead..

Good morning. This is actually Renato Basanta on the line for Chuck. Congrats on the nice quarter..

Thank you..

Thanks..

So I guess first, I was just hoping you could have drilled down a little bit more on the Yes2You program in terms of what you are seeing from a traffic and frequency perspective, particularly how the typically slower January period was presumably affected by the program.

And I guess related to that, maybe if you could just talk a little bit more about the progress in I guess improving engagement and fostering relationships with the 25 million members?.

Sure. I mean Wes and I can probably both add some color on that. I mean generally, Yes2You was – continued to be a positive in January. It was positive in December. It was a positive in January as well.

As you know that program is really all about in the future being able to deliver more unique and personalized offers to customers and really kind of connecting with them on an engagement perspective. So it’s being driven early on I would say and Wes can add color on the savings aspect of the program.

It’s a way for consumers to quickly, who are not Kohl’s charge customers gain more ways to save and they are using that. So it was a plus in January for sure. And we see it as a big plus in the first quarter as well..

Yes. I mean, in January was – I mean we were up above three for the first 2 months combined. And January obviously was much better than that. We were up high single-digits. So a lot of that was finally lapsing clearance, the clearance that we had last January and then obviously the rewards program was a big part of that as well.

I think one of the things that we are going to learn from both the combination of Yes2You rewards and personalization is to do a better job of onboarding new customers, probably not brand, brand new to Kohl’s, but people that we don’t know an awful lot about. We hadn’t done a very good job of that in the past.

We sort of pounded on the people who already liked us. But I think with personalization, our marketing folks have a really good strategy to get people who either sign up for rewards or sign up for a credit card or hopefully both onboard in the next 30 days to 60 days to get them back in for that second or hopefully third trip..

Okay, thanks.

And then you guys have a done a nice job of bringing some new brands onboard, you have the Bliss launching soon, can you just talk a little bit about expectations for additional brands perhaps later this year? And maybe talk about the types of brands that kind of fit in Kohl’s wheelhouse?.

I am working – I mean, we are obviously focused on continuing to expand the portfolio. There are certain parts of our business that are more important to do that than others probably beauty is clearly one of them as we expand the new beauty initiative. I don’t know that I would pick out any particular area.

We have done a great job in adding some newness into active. Active has been a really strength in the business. I doubt that we are unique in that, but it has particularly outperformed. But we have added some new brands, including Puma and including Gaiam, which in apparel launches in April I think of this year.

So, I wouldn’t call any particular area out. I think it’s just a focus on in particular our existing national brands. And that’s really where a lot of the lift is coming as we recommit to those in both our inventory and our stores and our marketing..

Yes. I mean, we have had Nike for an awful long time and they were up 24% in the fourth quarter. So, it’s really maximizing the value of the powerful brands we already have and then bringing in newer brands to fill in the holes we have..

Alright, guys. Thanks for the color..

Our next question today comes from the line of Paul Lejuez with Wells Fargo. Please go ahead..

Thanks, guys..

Hey, buddy..

What can I do? Couple of quick ones. Credit card expectations, what do you expect in 2015 and how does that help or hurt you on the SG&A line? Loyalty customer, what percent are new to Kohl’s as far as you know? And just last, what’s your view on Target going free shipping at $25? Thanks..

Okay. Credit card profitability I think will be over last year. I am not sure we will leverage as a percent of sales. That really is going to depend on our top line sales, but we will have higher credit card income this year than we did last year. In terms of loyalty, I think it’s 52% of the loyalty members are non-credit card holders..

But are they new to Kohl’s, Wes, or were they shopping Kohl’s and just not a credit card customer?.

The actual percent that are “new” would be a guess on our part, first of all, Paul Lejuez. First of all, it would be a guess to be honest. Well, we can – I don’t have the number in my fingertips. I think Wes is actually looking through some papers right now to try to find it, but we will try to give you an assessment of what it is.

There is a certain percentage that we feel are definitely new to Kohl’s..

Yes..

So, we will definitely get back to you on that..

Yes, I can’t find – the font is too small. I will get back to you on that. And then free shipping at $25, that’s something that just I don’t think will work for us long-term from a profitability perspective. I can’t comment on Target’s ability to make it work, but we are comfortable where we are at.

We are trying to improve speed of delivery to customer. We are very excited about buy online, pickup in store and hope that can be a bigger share of our omni-channel business..

I mean, in all truth on that one, Paul, I think that we have learned that we are much better off putting all of our focus around really delivering great customer service and that’s why we are making some investments, as you heard Wes talk about earlier in the year that were probably not originally contemplated a year ago to accelerate, let’s say, for instance ship from store.

We never really planned to have it in every store, but it’s been so successful. It’s going to be in every store.

Buy online, pickup in store, the original plan was we pilot it in the fourth quarter and then we think about a pace of acceleration over the course of the year, but we are kind of so excited about it and the meaning of it on our inventory effectiveness in our stores and delivering great service that we are accelerating that.

So, I think there are just so many other areas that we are focused on in that seamless experience. And the reason is we have learned that’s what drives behavior. That’s what will drive traffic.

So, launching a new tablet experience, now launching a new mobile experience, giving a great customer experience on the site and in delivery, providing Yes2You value to customers who haven’t maybe considered Kohl’s, those are things to me that are much more important than what trigger level you provide free shipping at..

Yes. Yes, great. Thank you, guys. Good luck..

Thanks..

Our next question is from the line of Dan Binder with Jefferies. Please go ahead, sir..

Good morning..

Good morning..

My question was on the loyalty program. You have got some areas that are now in their second year.

I am just kind of curious after the first year of sign-ups what that growth in sign-ups looks like in the second year? Does it sort of flatten out or do you continue to get fairly robust growth there?.

Well, growth in – I mean, obviously growth in sign-ups once you have annualized slows down from a rate perspective, because you are up against a very significant launch and then annualizing a regular program. But we continue to sign up new customers in every store and market across the country.

And as you said, some of those were in a pilot, that are now more than two years old I think, Wes?.

Yes, I mean, I would expect us to get another 10 or 12 million people signed up this year. So, it would be at 35 to 37 at the end of the year. I know the marketing guys have a more stretched goal than that, but that seems like a reasonable assumption for us.

And we have – to be honest we are testing a lot of different things to get lift in the second year, which we haven’t rolled out very widely on..

I mean, the other thing, Dan, is the thing that I think is unique to us is that we have a very particular experience with is we have been driving essentially our old loyalty program, which is our credit card program for over 20 years.

And the problem with that program as you know is there gets to be a point where customers, while they love Kohl’s, don’t want to use private label credit card.

And so Yes2You loyalty provides access to those customers, but importantly, sort of the behavior that we see, including in the sign-up process and then the comping the launch of it is very similar to the experience we have had over many, many years with our credit card, which is we are definitely going to lose some customers over time, but we are gaining way more than we are losing in these markets in which we had pilots that are now as I said over 2 years old.

So, I feel like we have some experience here that is sort of unique and that we can draw – and we are drawing on it. I mean, Wes is drawing on it and our marketing team, in particular, Michelle’s team is really drawing on it..

And then just two other things, one, can you just breakdown in your comp assumptions the transaction and ticket growth? And then with regard to the tax rate, a lot of retailers have lower tax rates this fourth quarter because of the extension of the Work Opportunity Act.

I am just curious as we think about the tax rate next year it’s higher, I think rough math year-over-year it’s a hit of about $0.10.

Is there a possibility that tax rate comes back down again in the latter part of the year if that is extended?.

On the tax rate, yes, there is certainly a possibility. We never build that in if it’s not something that’s absolutely known. I think our tax rates gone down for the last five years. So, I would say it’s probably a conservative assumption, but it’s the best that we know at this time.

State settlements, you can’t really predict and you can’t really predict when legislation will take effect on that.

I am sorry, Dan, what was the other question?.

The breakdown of your comp assumption?.

Comp assumption. Yes. I mean, we are going to have at least flat traffic. I would suspect transaction value will be up a couple of percent. So, the ability for us to do better than a 2% comp will be probably predicated on what transactions per store are..

Is that ticket affected by lower cotton prices impacting AUR this spring?.

No. I think AUR is going to continue to be up just because of mix of business, national brands will continue to increase penetration in there, a little higher AUR than our private and exclusives. So, cotton benefits will come in the back half.

They are somewhat mitigated by pretty high wage rate increases overseas and some other more technical stuff that our product development guys are telling me is going to cost more money in terms of dye and things like that. But – so I think there will be a modest benefit in the back half from a cost perspective, but mix will outweigh that.

And hopefully we will continue to do better on inventory management. Kevin alluded to buy online, pick-up-in-store and ship-from-store. We are just trying to do a better job of inventory management overall. So if we can reduce the amount of clearance that should also help drive AUR too..

Great. Thanks..

Our next question today comes from the line of Oliver Chen from Cowen. Please go ahead, sir..

Thanks a lot. Congrats on a great finish to a solid year. Regarding your inventories, they look under really great control. Just an industry topic about the slowdown, is that impacting your receipts or how you are thinking about planning.

And also, Kevin, I just wanted to ask you and Wes a general question in terms of how you felt holiday went relative to your expectations, and if there – how would you prioritize any tweaks that you make to the greatness agenda as a result of the overall holiday performance?.

Sure. It’s Kevin, Oliver. On the inventory and in particular I guess you are alluding to the ports slowdown and stoppage that impacted flow through the port. We are definitely affected like everybody is affected, no question about it.

The way those things work, of course is we try to mitigate it through logistics strategies to push product to other access points, of course but certain categories or businesses typically get affected more. If I was looking at the ports slowdown in a list of things that can either be a headwind or tailwind, it’s definitely been a headwind, for sure.

It was a headwind in the fourth quarter. And it will be a headwind for a little while still, I would say.

But if I put it in a priority of other things that actually create business change, some of the things that we have talked about like our ability to deliver amazing product, our ability to have more effective marketing through more utilization of personalization or loyalty, weather as a factor at any point in time, those things all outweigh this.

Unfortunately, in certain categories they can be important and one I always allude to with Wes is sleepwear for instance in the fourth quarter is basically all imported and it was all relatively late. And as a result it impacted sales in sleepwear pretty dramatically..

Yes and will impact sleepwear margin in the first quarter..

Yes. So you get these individual things, I would say..

I do think we are in a little better shape than some people as we have been bringing in about 50% of our imports come in the East Coast as the normal course of business and we have been doing that for the last 8 years and have very well developed relationships.

So adding some additional volume, if necessary will be a lot easier than other retailers who might only have one or two DCs and bring everything through the West Coast. It will be very hard for those folks to switch to East Coast and develop new business relationships..

In terms of putting the holiday in context, I think in general what we would say is as we went into the holiday as you heard from us back at that investor conference at the end of October, we had expectations that the initiatives we were talking about to you would create growth in the fourth quarter in the range of 2.5% or so.

We delivered more than that. Why did we deliver more than that, essentially I think the initiatives delivered pretty much exactly on target, but the underlying business got better. And I think it got better to acknowledge of better macro environment. I think that was definitely part of it. We shared in that with other people.

But it also just got better because some of the everyday work that we are doing and the essential moves that we are making in the greatness agenda are paying off, so there is still plenty of opportunity. I alluded to our biggest area of opportunity which is our women’s business, positive comp in the fourth quarter that’s great news.

That’s a real change in trend, but it still trailed the store. And that’s been an ongoing issue that we are really attacking as we move into 2015 and I feel like we have some strategies to kind of create some momentum there..

Okay.

And just a quick follow-up, some retailers are calling out the idea of potentially customers trading up, is that a dynamic that you are seeing within your portfolio as you look across which products are working and the pricing trends?.

I mean, other than the big piece which Wes talked about which is the national brand focus, I mean if you want to call that trading up I guess you could because it does enhance average unit retail what you sell..

It’s a great thing about being in the middle. When things are good people trade up, when things are bad people trade down. So I think that’s happened over the course of my 12 years here.

But I think the biggest thing to Kevin’s point was the increased emphasis on national brand we are providing great value on those brands and people are reaching up a little bit..

Great. Thank you. Congrats, best regards..

Thanks..

Our next question today comes from the line of Michael Binetti representing UBS. Please go ahead, sir..

Hey, guys. Good morning, congrats on a good fourth quarter..

Good morning..

Just a few questions on the comp sales guidance, the comparisons are a bit lumpy here and then there is obviously you have got a lot of new initiatives going on, it sounds like they are hitting plan, but the underlying business is better.

And then we have – I guess you, Kevin you referenced some weather in February, so maybe you can just help us think directionally through the model for the year, I know you guys don’t want to get back into the quarter-to-quarter, but with as much noise as we are seeing maybe just a little bit a help on how to think about the cadence through the year?.

Yes. We are definitely not going to get into quarterly guidance. But I don’t think we think about the year on the top line any differently over the course of the year. We think there is relatively equal opportunity across the whole year.

If there is a lumpy part to our year it’s as Wes alluded to, it’s the level of expense growth in the first quarter compared to the rest of the year. I look at that as really just a decision on our part to make investments earlier in the year because they are working.

These are all areas, as Wes mentioned, that we have been piloting and are testing and are succeeding beyond what we thought they would and so we have sort of accelerated it earlier investments that we would have probably paced out a little bit more over the course of the year.

And whether that’s ship-from-store, or [indiscernible] or mobile re-platform, or beauty rollout or any of the things that he touched on even the broader technology spend which we have accelerated the pace of in the first quarter. I just look at them as investments.

And we are – as you heard from us in October, we are focused on where we want to be in 3 years. And this year, is just a step on the path to get through whether it be 3 years from now. And I realized that you have to make judgments on how companies are performing over the course of the time. But we just don’t run our business that way.

We are not going to run our business that way. But in particular, on the top line....

There is not a lot of volatility it may be a little bit higher in the fall than in the spring. But I think that you guys sort of lapped at my extra day calculation, but it came in right on. So we get another day for that in the fourth quarter that will help a little bit.

But other than that it’s not really a ton of variability that’s going to cause anybody any consternation..

Okay.

Just checking if the West Coast and the weather were impacting anything?.

No, it’s a good question; I understand why you asked..

Okay.

And then regarding your comments that you pulled forward some of these initiatives that you thought were working, a big piece of the earnings algorithm coming on your Analyst Day was the progress of the operating margins online, I am seeing as you are changing up the pace of some of the investments, can you maybe talk us through how we ended the year in relation to where you guided the margins for that business headed over the next 3 years and then maybe are you pulling forward some of the opportunities to start expanding that margin this year? Thanks..

Let me – Wes will answer the question about how we ended the year because he can give you some color..

Yes. I mean I think I feel like we talked in the prepared remarks about how the lines are getting really blurry. So we are really thinking about the business in totality just because it’s so difficult to figure out what’s really an online sale versus a store sale, anymore.

But I mean in general, we performed much, much better on the merchandise margin side of the business there. We did a much better job of handling clearance at the end of the fourth quarter and for the year for that matter. We are still working on fine tuning the algorithm on shipping.

We invested a ton of money and speed in the spring in last year to offset some of the issues that we had in the fall of 2013. We had a great plan and a great team for fourth quarter and they performed excellently in terms of getting things to the customer and we really didn’t have very many hiccups at all.

What we have to figure out is ways to get more items in the box and to keep more orders together.

So, one of the things that I talked about with the technology initiatives, we are making some changes in the first quarter to allow us to do a better job of that in ship from store environment, so we can try to send it to a store that’s going to create the fewest packages possible to fulfill..

I mean, it’s an area that we definitely have invested a lot in talent in focusing on improving operating performance, but we have also put a lot of resources behind. So, as Wes said I think we understand what the issues are, but the things we have talked about we believe actually are going to help us in that regard, so….

Yes, I feel – I mean, like we are going to do much better over the course of the three years on UPH and the EFCs. We got a really good plan. We got a path. We know what to do there. You can’t force the customers to order what you would like them to order.

So, the shipping cost thing is a pretty complex thing, but we are going to get better at it each year, but as I mentioned earlier when somebody has to breakout, it’s going to be about a 20 basis point headwind for us on margin, but we should be able to overcome that through better inventory management..

Thanks a lot guys..

Our next question today comes from the line of Neely Tamminga with Piper Jaffray. Please go ahead..

Great. Good morning and congratulations to you guys. Hey, just a real quick question on inventory, how should we be thinking about the cadence of inventories we pass through this year? That would be helpful. You guys have done a really good job of pulling those levels back overall.

And then on the beauty rollout, Kevin, if you know and/or less, can you give us a sense of how big Bliss is going to be maybe in the size of either linear feet or are you guys going to take over a whole gondola dedicated to Bliss? Are you getting the full kind of complement of their products? It’s a great add..

Yes, thank you.

On the inventory?.

Yes. On the inventory, I think our target by the end of the year – and it might be different by quarter – is to be sort of down in the 3% to 5% on a unit basis just like we ended this quarter. On a dollar basis, it could be a little less down if national brands continue to increase in penetration. I hate to be repetitive, but it’s like a 3-year plan.

So, we are going to try to do that again next year and then into 2017. We have a lot of opportunity to make the store inventory work harder for us through ship from store and buy online, pickup in store. So, this will be a learning year for buy online, pickup in store, because we only had experience for about a quarter in 100 stores.

So, I suspect we will make some improvement next year. I expect to make dramatic improvement in 2016, but I feel like we are going to continue to make progress throughout the year..

On Bliss specifically, I mean, first of all, it’s definitely a significant add. It’s in an area in which we are on a relative basis weaker than in our overall beauty offering. We are weaker I would say in skincare and body products. And this really enhances that a lot.

Space allocation, Neely, is very different, because as you know we piloted different presentation and space allocations and we landed with essentially two levels. So, in a level 1 or larger presentation, they have essentially more of the gondola presentation that you alluded to in the smaller presentation is not as big obviously.

And then there are actually some stores, where there will be Bliss products in, but it won’t be the full offering. The online offering of course will be more substantial, but we are definitely very excited about the partnership, because I think they are actually a really innovative resource and they have a lot of great ideas..

We agree. Congratulations you guys. Good luck..

Thanks..

Our next question is from the line of Paul Trussell with Deutsche Bank. Please go ahead, sir..

Hey, Paul..

Hey, guys. Good morning. Just a question on CapEx, Wes, I believe you mentioned $800 million for this year, had about $350 million that was related to IT.

Are there kind of any one-time or any items specific to this year or is $800 million kind of the run-rate?.

No, that’s going to be kind of the run-rate, I think, we talked about in October $750 million to $800 million. I think IT it’s just the cost of playing poker. We were a little lighter. We came in, I think we budgeted $300 million last year and only spent about $280 million, so some of that is a flip forward from last year into this year.

But IT is going to be somewhere between $300 million and $350 million every year. The store 250 that I talked about is probably going to be the same for next year as we finish rolling out beauty. And then as we cycle into 2017, we will start to ramp up the pace of remodels again.

We will go from I think we are doing 12 this year to 50 next year to 75 in 2017. And then base capital will remain about 200.

That’s really investments in some of our easy experience initiatives as well as some investment in DCs and EFCs for new sorters and new technology and just normal repair and maintenance of replacing HVACs and roofs in the stores as our store base gets a little older..

Got it.

And just going back to Neely’s question on beauty for the 500 stores that already have the new beauty concept, is there any notable difference in sales that you can point out and how we should think about the impact of you guys adding in these beauty concepts into additional stores this year and the lift you may see?.

Yes. I guess there is good news on that front. We have built-in and I think we talked about it in October, but the stores that had more than $15 million in sales that had what we would call a level 2 experience. So, that’s sort of the most fancy for layman’s terms, beauty environment, they got about a 2% lift.

We didn’t build this in, but we came up with sort of a hybrid option that was between really a retrofit option that we tried initially last year and the high-end shop, that’s about half the cost of the high-end shop. Those stores, there were about 80 of them, also got around a 2% lift for holiday.

Holiday is a little strange, because you got a big fragrance business that’s in there that drives a lot of business. So, we want to see how it performs post holiday. But if that happens, that would be something that would be incremental to sort of the guidance that we provided for the 3-year plan in October.

So, we are encouraged by it, but fourth quarter is not something you can make a decision on whether that’s really going to work or not..

Got it. Appreciate the color. Good quarter, guys..

Thanks, Paul..

Our next question comes from the line of Paul Swinand with Morningstar. Please go ahead..

Good morning. Paul Swinand from Morningstar. I wanted to drill down on the national brands a little bit more. I noticed on your prepared remarks you said that this was the first time in a while that you got a lift both from existing customers and I think non-credit card customers.

Any analysis that says the national brands is part of that? And then obviously you are marketing the national brands are you promoting them at the same level as your private brands?.

Well, I mean, in terms of the analysis, essentially I think your question is about what the market – what the basket look like in the various categories of customers. I think our experience has been that new customers definitely lean into national brands, because they already have the experience and the credibility with those to begin with.

So, as we have enhanced our efforts around national brands, I think that’s been a positive for new customers. I don’t have the specific basket info, Paul, but Wes, can definitely get back to you for sure with that.

What was the second part of your question?.

Well, so it sounds like the customers that aren’t existing Kohl’s customers are coming in and discovering that you may have better brands than they thought.

So maybe as you market them more and reach new customers with the market, you will get additional traffic as kind a lagging indicator?.

Right. I mean, I think what you were asking I guess was investment. And we definitely are investing more in national brands both in marketing, I would say, Wes, for sure, but also in-store presentation. So, you can probably see that when you go into the store. There is several brands that have enhanced presentations..

Yes. We spent a lot of money with Carter’s and Nike and....

Levi..

Levi, and there’s a whole litany of brands where we improved the in-store presentation. Some of these guys have gone to sort of minimum advertised pricing.

So, the one advantage that we have over some of the other guys is the exclusions don’t – any exclusions that are involved don’t include Kohl’s Cash or loyalty redemption, so that provides a little extra value for some of those national brands that are really priced the same across the stores that carry them..

Interesting. Thanks a lot. Best of luck..

Alright, thank you..

Thanks, everyone..

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