Bruce H. Besanko - Kohl's Corp. Kevin Mansell - Kohl's Corp. Michelle D. Gass - Kohl's Corp..

Matthew Robert Boss - JPMorgan Securities LLC Chuck Grom - Gordon Haskett Research Advisors Lorraine Corrine Hutchinson - Bank of America Merrll Lynch Oliver Chen - Cowen & Co. LLC Paul Lejuez - Citigroup Global Markets, Inc. Mark R. Altschwager - Robert W. Baird & Co. Inc.

Robert Drbul - Guggenheim Securities LLC Dana Lauren Telsey - Telsey Advisory Group LLC.

Ladies and gentlemen, thank you for standing by. Welcome to Kohl's Q4 2017 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 and as may be supplemented from time-to-time in Kohl's other filings with the SEC, all of which are expressly incorporated herein by reference.

Also, please note that replays of this recording will not be updated, so if you are listening after March 1, 2018, it is possible that the information discussed is no longer current.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. As a reminder, today's conference is being recorded.

I would now like to turn the conference over to our host, Mr. Bruce Besanko, Chief Financial Officer of Kohl's Department Stores. Please go ahead..

comp sales of flat to 2% higher, total sales of down 1% to up to 1%. As a reminder, this includes the impact of approximately $170 million of sales in the 53rd week in 2017. We expect our gross margin rate to increase 5 to 10 basis points for the year. SG&A dollars are expected to increase 1% to 2% for the year.

We estimate depreciation expense will be approximately $960 million and interest expense is expected to be approximately $280 million. We believe our effective tax rate will be approximately 24% to 25%, and our guidance assumes share repurchases of $300 million to $400 million for the year.

Now, given the atypical volatility caused by the 53rd week in 2017 and the timing of certain of our expenses, we're also providing additional details around our first quarter expectations. Please be advised that we're providing this detail only to set expectations for the first quarter and we'll only provide quarterly details as needed in the future.

So with that first, the calendar shift is expected to favorably impact our sales in the first half of the year and negatively impact sales in the second half of the year. As a result, we expect first quarter comp sales to exceed the high end of our annual guidance.

We expect first quarter gross margin to be at the low end of our annual guidance, as we anniversary an 80 basis point improvement in last year's first quarter margin rate.

SG&A is expected to increase mid single-digits percent due to costs associated with our cloud migration strategy, leadership changes we announced in the fall and investments in stores and omni-channel fulfillment. These assumptions result in earnings per share of $0.45 to $0.50 for the quarter.

This guidance doesn't include changes that will be required to make when we adopt the new revenue recognition accounting standard in the first quarter. The most significant change will be the presentation of credit card income. Historically, we reported the net profit of the credit portfolio as a reduction in SG&A.

Under the new standard, we'll report revenue from the credit card portfolio as a newly-created revenue line on the face of our income statement. Other changes required by the standard aren't expected to have a significant impact on our income statement. We'll update our guidance to reflect the standard during our first quarter call.

As we noted in our release, we're shifting our earnings reporting cadence this year and expect to report the first quarter 2018 results during the week of May 20. Since joining Kohl's, the team and I've reviewed a variety of our Investor Relations and other practices and determined that this is the preferred timing for us.

Our subsequent quarterly reporting going forward will follow a similar timeline. And now, I'll turn the call over to Kevin, who will provide additional details on our results and an update on our key initiatives..

Thanks, Bruce. Let me start with a few overall comments in the quarter and year results and then provide an update on the progress we're making on our two priorities, driving traffic and operational excellence through the lens of each of the key pillars of the Greatness Agenda.

Overall, sales for the fourth quarter were the highest level achieved in the history of the company and our increase in comp sales of 6.3% was the largest increase in sales since 2001. The consistent improvement in sales trend we had seen all year accelerated in the fourth quarter.

While our January results slowed in pace compared to our holiday results, we still achieved a positive, low single-digit comp sales increase for the month of January, which was well above our expectations. This was in spite of much lower-than-expected inventories coming out of the strong holiday.

While I'm obviously very happy with the sales results, I'm even more pleased in the breadth of the key drivers of the sales success. Most importantly, the fourth quarter sales results were driven by improvements in traffic, which, as you know, is our number one priority.

Traffic was positive both in-store and online and in both cases well above the prior year-to-date trend. On a category basis, footwear, men's and home outperformed the total, but all categories were positive for the quarter, including the very important women's apparel category.

On a regional basis, all regions were positive, and the results were further aided by our successful efforts to capitalize on competitive store closures in our markets. I'm particularly happy that the improved sales results were combined with a very strong improvement in our gross margin results at the same time.

Our increase in gross margin was primarily a result of more effective inventory management through our speed, localization and stores standard to small initiatives.

The gross margin results were also helped by markdown optimization through the use of data and analytics, and these combined efforts more than offset the mix headwind of a much higher growth rate in our digital business. Similar to our sales results, our SG&A improvement came from a number of important expense areas.

These results have benefited from the efforts around our second priority of operational excellence. Our two largest expense centers, marketing and stores both leveraged for the quarter and were the primary drivers of our SG&A performance.

As you know, we've made significant investments in new technology solutions in both of these areas with a focus to improve productivity long-term. Looking then at progress on each of our key pillars. First, around our product initiatives.

Our active footwear and apparel business grew 25% comp stores for the quarter, accelerating over our full-year increase of 19% comp increase. The result was driven by a high single-digit increase in Nike sales, an extremely strong and above-planned performance with Under Armour and a double-digit increase in sales with adidas.

There are several strategies in place to continue this growth in active footwear and apparel throughout 2018, including increased investment in inventory, fixturization and space for the category.

There were a number of key national brands that also achieved strong results in the quarter including Levi's, Carter's, Columbia, Van Heusen, Haggar and Skechers. Each of these brands comped well ahead of the company total.

These results, combined with a strong home performance in the premium electronic and kitchen categories, drove our overall national brand performance much higher. We had an 11% increase in national brand sales and our national brand penetration grew to 62% of total sales for the fourth quarter.

Our proprietary brands had the most improved performance, however, over their prior year-to-date trend, and were essentially flat for the fourth quarter. This was an acceleration of over 600 basis points from their third quarter result.

Throughout 2017, we have edited out some of our proprietary brands in certain categories, which while a headwind on the overall sales performance in proprietary brands has benefited inventory and margin performance.

The impact of both our speed and localization initiatives are gaining traction on our overall results, which is reflected in the improved performance. In particular, this drove very strong results with our Lauren Conrad brand and our Simply Vera Vera Wang brand.

Our speed brands reached 40% of total receipts for the year, with a future target to achieve 60% of total receipts. Speed brands outperformed the total proprietary brand results by 250 basis points due in large part to our ability to chase receipts.

Second, in our efforts to provide a seamless and easy experience, online sales grew 26% for the fourth quarter driven primarily by traffic, but also improved conversion. And online penetration to our total business reached 25% for the fourth quarter.

Stores fulfilled 36% of digital demand units in the fourth quarter, and omni fulfillment key performance indicators were all better than last year. There were improvements in productivity, cost and most importantly, the customer experience.

We believe our stores are our biggest asset, and as you know, we're highly focused on creating a best-in-class omni-channel experience by leveraging our stores more fully. Investments we've made in new point-of-commerce, new associate mobile applications are having a positive impact on productivity in our stores.

Improved customer digital experience around things like endless aisle, price verifier, Kohl's Pay and Your Price are all improving the customer experience and improving conversion in the store. We also believe they're paying off in driving repeat traffic as customers engage more often with the new tools.

Third, in the area of personalization and savings, we continue to make significant progress in the use of data and analytics to drive improved results by personalizing much of our engagement and connection activities with consumers.

Technology investments have allowed us to effectively launch new strategies like personalized search, Smart Cart and Your Price. Your Price particularly has been a key driver of the acceleration in our digital growth rate by simplifying our value message.

The marketing team has also been very successful in improving our marketing effectiveness by optimizing our media spend across platforms, with a particular focus on our digital spend. This resulted in significant leverage in our marketing expense for the quarter.

The combination of the technology investments, personalization, optimization, and of course, product initiatives have improved our results on new customer acquisition. Our new customer acquisition growth was up in the mid-teens in the fourth quarter, which we believe will pay dividends as we move into 2018.

Finally, as we've indicated before, we believe we have an opportunity to bring our key loyalty assets of Kohl's Cash, Kohl's Charge and Yes2You Rewards into one simpler and easier-to-understand platform which will be called Kohl's Rewards. Beginning in late May of this year, we'll be piloting that new program in about 100 stores across eight markets.

All Yes2You Rewards will be converted to our iconic Kohl's Cash currency in the pilot markets.

In the same way as we've used technology to improve our overall store and marketing productivity, we intend to use data and analytics to provide richer rewards for both Kohl's Charge and non-Kohl's Charge customers enrolled in the program, while eliminating less effective marketing tactics at the same time.

We believe we can embrace far more customers with the new program and accelerate both our rate of customer acquisition and the retention to our brand; in short, a platform that will be simpler, richer and broader in reach. We would expect that post the pilot period, some version of the new platform will roll out to all of our stores in 2019.

And finally, in the area of store optimization, we're clearly seeing the benefits of amplifying the role and relevancy of our stores while focusing on improving their productivity in an omni-channel world. We believe in the power of our brick-and-mortar stores in that future world.

Our standard to small strategy has improved inventory productivity as these 300 stores have produced comp sales consistent with the company's sales results on inventory levels well below the average full-sized store. This has led to merchandise margin improvement well above the average store.

This strategy has been a key driver of our overall reduction in inventory, which as Bruce indicated, was down 7% per store at year-end. Based on the success of the standard to small program, we will be rolling out this strategy to an additional 200 stores in 2018 and we expect to achieve further inventory reduction and margin accretion as a result.

Our standard to small success has also enabled us to recognize we have an opportunity to right-size many of these stores as a next step. After completing two proofs-of-concept store right-sizing in fall 2017, we are now accelerating our plans in this area in 2018.

We will right-size approximately 12 additional stores, including a 5 to 10-store pilot effort with fast-growing supermarket chain, Aldi. We believe the opportunity to leverage our real estate through this effort has benefits on both the top line with increased traffic and the bottom line through expense offsets, both fixed and variable.

Our new 35,000 square foot stores, which have all been opened in the last two years in both small and large markets, had a very successful holiday. We benefited in some cases from competitor store closings, and I do expect that to continue.

These stores provide another blueprint for us to maximize our store presence in both smaller and larger markets and to continue to identify operational improvements we can transfer to our larger footprint stores. On the innovation side, we continued to evolve and expand our testing of our future store via an initiative we call Your Store.

Your Store is a learning lab environment to test and improve and prove concepts that we believe will help us develop best-in-class customer experiences and operate our stores more efficiently in the future. While we started the Your Store pilot in May last year with eight stores, we have now expanded it to 58 stores across the country.

Ideas that are successful in these pilot stores are expanded and then rolled out to all the company stores.

Some examples of the type of tests include next-generation checkout, reallocation of store payroll to elevate store service and store management empowerment via predictive analytics that allow individual stores to detect and act on unrealized store demand.

We believe that Your Store will give us an opportunity to improve our rate of return on store technology investment and improve our store productivity. Finally, I know there's continued interest in the results around our pilot with Amazon on returns and Amazon shops within Kohl's.

Given that the pilot has now been running for only four months and most of that time was in the holiday season, we need more time to draw conclusions that could be applied more broadly. In fact, package-less returns which is a key element of the overall return experience, has been in place only since late January.

I can reiterate that the customer experience and the customer feedback continues to be extremely positive. We've had initial discussion with Amazon about how and where we will expand the pilot and we'll share the details on that when they're finalized.

In summary, the fourth quarter and the annual 2017 results have continued to show significant progress in our performance. Our two priorities of driving traffic and operational excellence are clearly the right ones.

Actions taken under our driving traffic priority are resonating with our customers, and investments in actions around operational excellence are being embraced by our associates and improving our speed and agility as an organization.

On the number one priority of driving traffic, we've entered 2018 with a lot of momentum on the topline and in the effort to attract new customers to maintain that momentum going forward. We believe that our strategies around product, around personalization and around loyalty are the keys to continue our traffic and sales growth into this year.

As you just heard, we're innovating, testing and rolling out new concepts that will make the customer experience more seamless and easier than ever. The confidence in our ability to drive traffic more consistently has been reflected in our more positive guidance on the topline for 2018.

On a second priority of operational excellence, we've made better-than-expected progress on our efforts to remove more than $250 million from our ongoing expense base and now expect to comfortably exceed that goal.

That process has also allowed us to identify areas to gain efficiencies on the cost of shipping and product development side that will positively impact gross margin.

These savings, along with the positive impact of our lower tax rate, has then allowed us to make the necessary investments in customer experience, in our people and in technology, including our migration to the cloud. I hope you can see that we're investing in and innovating around all parts of our business.

Bruce shared the importance we place on keeping and improving on a strong balance sheet to allow us to continue to look long-term as we make those further investments.

In closing, I want to reinforce again how confident we are that the actions under our two priorities of driving traffic and achieving operational excellence are working, are providing clarity and mission to our customers and our associates and are driving our improved performance.

And with that, Bruce, Michelle and I will be happy to take your questions..

And we'll go to Matthew Boss with JPMorgan. Please go ahead..

Thanks, and congrats on a nice quarter..

Thanks, Matt..

So, on the top-line, store comps have improved four straight quarters now.

I guess, can you talk about some of the drivers to-date? And then, looking forward, what's the best way to think about ranking some of the drivers and initiatives, Smart Cart, traffic, and the convenience partnerships with Amazon and Aldi? And, I guess, lastly, any categories where you see additional national brand opportunities similar to the launch of Under Armour in athletic?.

Sure. This is Kevin. Maybe I'll try on the first couple things and then I'll ask Michelle to lean in on looking forward on brands. In terms of past drivers, I think to the extent that we can, Matt, we included most of them in the commentary in the script. There is definitely not one thing that is driving our business.

And typically when business is improved that's the case, and that's certainly what we want. What we want is that there are a whole bunch of initiatives all contributing.

So I mentioned at the end of the script that we think as we look back on 2017 and we saw this constant and consistent improvement that, we look perhaps more than anything else to the initiatives around product. We've made big improvements in product and Michelle on the private brand side has been able to head it down.

A lot of inventory pulled out of categories where they weren't productive, and certainly faced a headwind all year on that. But now we're in a great position as we go into 2018. New brands; definitely a part of the success, I think the efforts in technology around personalization, particularly on engagement, were a big driver.

As we look into 2018, those two things are going to continue to be big drivers. I think we have a lot of optimism about improved performance in proprietary brands continuing. It goes without question, Active was a massive importance.

I think the bet that Michelle and her team made on Active and Wellness three years ago, while it's been consistently good, has now turned into great, and there's just huge opportunity looking forward.

And then the final one that I mentioned and I think as a team, we feel really strongly about, while we're only piloting a new loyalty program, we're certain that making our loyalty program simpler and making it embrace more customers, that's going to work.

And what the component parts end up being after the pilot period, that can always evolve as we learn what works more effectively. But the improvement in our loyalty program we think long-term for the company is a really key aspect of growth. On the brands, I'll let Michelle talk about it..

Sure. I share the optimism with Kevin. I think, we enter the year with great momentum and all the things he said. There's continuing to be more upside in Active. We see tremendous opportunity in our proprietary brands, and especially in the Women's category, we began to see that turn in the fourth quarter. We expect that will continue.

And I think importantly, while we drive sales, the team is doing a great job managing the business well. The inventory reduction initiatives, the Speed agenda, choice count reduction, and really, a speed, agility and a chase mindset so we can get after those sales.

In terms of brands, we are always looking at what brands would enhance the portfolio across all of our categories, and certainly, you've seen us add a number of new brands not only in Active, but across the board, especially in categories like Home and Footwear. And that will continue.

We do have a pipeline of brands expected to rollout over the coming year. We just this quarter have started rolling out in the Footwear category Sam Edelman so that's another great addition to the line. And more to come on that..

Great. And then just one follow-up.

On the balance sheet, with debt leverage now at 2.5 times and annual free cash flow around $1 billion, I guess can you just outline the priorities for capital allocation from here?.

Yeah, there's been no change, Matt, in the priorities that we've had previously. So we're going to make sure that the business gets all the cash it needs to invest, including in our technology areas, so that we can continue the cloud migration, the investment in the omnichannel experience and so on.

So the business is going to get all the cash it needs to operate, and then we'll continue to provide an opportunity for dividends and dividend growth, share buybacks, and then in this commitment to win our investment grade.

We want to make sure that the company has adequate financial flexibility, which is why we're committing to this investment grade, and that'll give us great financial flexibility to continue to do things like share buybacks and dividend growth..

Great. Best of luck..

Thanks..

Our next question is from Chuck Grom with Gordon Haskett. Please go ahead..

Hey. Thanks. Good morning. Kevin, just on the new customers up mid-teens here in the fourth quarter, just can you give us a little bit of perspective on how that relates to the rest of the year? And then if you could, just dissect what type of customer that's demographically, and what you're going to do to cultivate that relationship in 2018..

The way I would think about the progression over the course of last year is similar to if you looked at the way our sales moved during the course of the year where we frankly had a very weak first quarter and then we improved substantively in the second, improved to the positive in the third, and then accelerated a lot in the fourth, that's kind of the story on customer acquisition.

There was poor results early in the year which were more similar to the year before, so we knew this was an area of focus. Michelle's new Chief Marketing Officer, Greg Revelle, has made this a really important priority and his team is making a difference.

And so sequentially, just if you looked at the comp results over the year, sort of customer acquisition moved the same way, just faster, and so that's – you hear a certain tone of confidence as we look into 2018 because, as you know well, Chuck, customer acquisition is the key.

Clearly for long-term success, retention becomes the key, but you got to start with more customers to begin with. So I think that's how I'd think about the rate. In terms of the type, it's more of what we currently have, so from that perspective, I think we feel great.

We have a lot of strategies in place, not the least one is the product strategy around Active and Wellness that we do think over time will cultivate a younger customer for us, and we're seeing that in our business.

But I would say generally to be honest with you the new customer we're getting looks a lot like the core customer that created the business that we have today, and the important element is we're finally on a path where we're getting more of them..

Okay. Helpful. And then, as you discussed earlier, that January was a little bit of a slowdown. Just wondering if you could just talk about that all. It doesn't sound like you're concerned, and then just anything so far in February..

Yeah, I mean, to be totally honest with you and not to refute what you just said, but certainly in comparison to a 6.9% increase November to December, a low 2% plus increase in January is a deceleration, but it's positive sales increase coming out of a holiday period where we did exceptionally well.

And, as you can imagine, therefore, had substantively less inventory and, in particular, a lot less clearance inventory, which is an important component of January sales. So I don't actually look at it as a slowdown. I think, Michelle and I both were extremely pleased with January.

We would not have expected that, and as I said, as you know, clearance is such a big aspect of January sales and we had so much less to be able to still get a positive sales comp tells me that we're operating on chasing receipts pretty well..

Okay.

Anything on February?.

February – we include February in our guidance. I think, the way Bruce described it is that it's positive, and it's helped. Our outlook is helped in the first quarter by the shift in the calendar..

Okay. Great. Thanks very much..

Yes..

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

Thank you. Good morning..

Good morning..

Your fourth quarter success sets up an interesting challenge for forecasting comps in 2018.

How are you thinking about the progression of comps and inventory receipts through the year? And what are some strategies that you're using to try to lap that plus-6% in the fourth quarter 2018?.

I can give you a little bit on how we're thinking on the progression, and I'll let Michelle answer the question on the holidays, though. As you can imagine, her team is well ahead of the curve on that one. So they have a lot of big plans to do exactly that, which is comp, that big comp.

On the progression, you heard from Bruce sort of broadly how the sales will probably come, which will be overall stronger than the guidance in the first half of the year and probably slightly less than the overall guidance in the second half of the year. That's sort of around the edges is how I would think about that.

The first quarter is more notably different, for sure, because it's more positively impacted by the shift.

Prior-year comps, in general, we haven't found to be good indicators of future performance and if future performance is typically driven more by the key initiatives that the company has and so, as I said, there's a certain note of optimism I'm sure you're hearing about those sales because customer acquisition has improved, our product initiatives are working, our inventory is in phenomenal shape, which allows us to flow fresh and new receipts into our stores, and the combination of these other investments in technology and personalization we think are going to drive new business.

Particularly to the holiday, I'll let Michelle take that..

Sure. I think, the success this past holiday is a testament to the core strategies that we've been operating against, frankly all year, and in my mind, that continues. It's things we've already mentioned. We will lean into Active all year and, as we saw this past quarter, Active will be a big piece of our growth plans for holiday next year.

Proprietary brands, the continued acceleration there; we have lots of plans around newness innovation.

And then of course, at holiday times, value is a key driver and what we saw this past quarter was just how much our Kohl's Cash program and promotion resonated with customers, so we had our learning this year and we'll certainly apply that again going forward.

But I'm really confident, even though, certainly, it's a big comp to comp, I think already we have great plans in order to address that and have a positive result..

Thank you..

Our next question is from Oliver Chen with Cowen & Company. Please go ahead..

Hi. Nice quarter, and great initiatives ahead.

On the Amazon relationship, what factors are you monitoring in terms of what you're looking at which will be important for you to analyze? And also, does that interplay with product assortments you make for yourself just to maximize what you're doing in your own innovation? And our second question was just on online margins.

You've done a really good job with fulfillment and using your stores. So what are some guidelines around the long-term prospects for there and minimizing split shipments? Thank you..

On the Amazon pilot, I'd characterize it consistent with the way I've characterized it before.

We really only have one objective here, which is the key priority we have as a company is to drive traffic and ways in which we can innovate and ideate to help improve the trend of traffic we're open to consider, and this is one of those ideas, and we think it has a lot of merit, as you can tell.

We're more focused on it being a great customer experience and making sure that that customer is happy when they do arrive in a Kohl's store because that gives us the best opportunity to convert them into a sale. I mean, that's fundamentally what we're focused on. The implications on our product assortment really don't play a role there.

It's about driving traffic. So I'd say that's the answer on the Amazon. On the online margin, I think, you know Oliver, the background and the whys as to why online merchandise margin and gross margin online is lower than our brick-and-mortar, so we probably don't need to go into that.

But clearly, the two key components there are product and product placement because we know that if we can improve the way we place product so that it's more prepared to fulfill demand at a lower cost, we win. I think, Sona and her team have a lot of initiatives in place coming into 2018 that they believe will help in that.

And then secondly, really technology and technology driving the decision-making about how we really maximize the productivity on the cost of shipping.

And to be totally honest with you, I think Michelle and I would both say we're really proud of the job that team has done because you know that costs on shipping generally have been moving up and yet they've been able to leverage cost in shipping on online as a percent of digital demand, which, in my eyes, is a pretty darn good performance on their part.

So I think on both that aspects of the margin piece of our online business, we're feeling pretty good that we have a lot of things in place to continue to improve..

Okay. And, Kevin, that's really helpful. And our last question is on customer acquisition cost. You have a really robust ability to look at existing versus new in customer base evaluation.

What are you seeing with customer acquisition costs? And how do you expect this to trend in terms of the interplay between your programs and using bricks and clicks here?.

I'll let Michelle take that..

Yes, I'll take that one. Great question, and I'm really encouraged and excited about all the work that Greg and his team are doing to drive greater analytics on the business, as Kevin mentioned earlier. He mentioned in his commentary earlier that we are making a significant shift into digital.

That is all based on the sophisticated modeling that Greg and his team are doing around ROI, and so we anticipate that, over time, our new customer acquisition will, that cost will come down. And in fact, we're already seeing that. We're seeing the impact grow and we're seeing the cost decrease.

So we believe that's a fantastic formula going forward, and that translates into both stores and into our online business..

Thank you. Best regards..

Thanks..

Next question is from Paul Lejuez with Citi. Please go ahead..

Hey, guys. Kevin, you talked about the goal of driving traffic and Amazon being one of the partnerships that you're hoping might help in that respect. I'm curious what you saw.

Did you actually see better traffic results in those stores, where you were accepting returns? Maybe even more specifically in the 10 stores, where you have shop-in-shops, if you could maybe speak to that.

And then, separately, I'm just curious about the drivers behind your comp assumptions this year from a traffic and ticket perspective, and do you assume positive store traffic, maybe talk about your store versus e-com expectations that are built within your comp assumptions. Thanks..

Sure. I mean, while I appreciate your interest in probing more deeply on Amazon, Paul, to be totally frank with you and direct, there's really nothing more to add than what I gave during the scripted comments.

It's just literally too early, and I think, you've been in this business long enough to appreciate the fact to try to draw conclusions out of a holiday period when we had so many other massive initiatives in place would end up coming to potentially a different – an incorrect answer.

So you'll hear when we are more confident about being able to isolate that impact in these stores, how we feel about each of the little individual pieces. So there's really nothing more to say on Amazon. I want to make sure you know we're very optimistic. We feel very positive.

There's nothing we're seeing that doesn't make us believe that it's just another idea for us to drive traffic. In terms of other drivers, looking forward, I think, your question is more about kind of looking forward. For the most part we kind of covered the key ones.

We don't share assumptions looking forward on the mix of brick-and-mortar versus online, or the mix of hey, how much of this is ticket, transaction, units, traffic. I would just leave it that we're focused on traffic being the driver and we've made that clear.

I don't think we can make it any more clear and that doesn't matter whether it's in-store or online. We're looking to drive our topline performance by driving our traffic metrics and then we hope that like what happened in the fourth quarter, all these investments we've made in technology improve conversion.

And that's a formula for great success, so there's really not much else to add to that one. Thanks, Paul..

Thanks. Good luck, guys..

Next question is from Mark Altschwager with Baird. Please go ahead..

Great. Good morning, and congrats on a great quarter. I wanted to follow-up on Under Armour.

Just as you hindsight the year, are you able to tell us how much that contributed to the comp in fiscal 2017? And how are you thinking about the opportunity to begin to lap that rollout this spring?.

Hey, Mark. It's Michelle, and I'll take that one. Well, we are very, very pleased with our results with Amazon over the last year. It did exceed our internal objectives. Of course, I can't share the specifics around that, but let's say it is in the top amongst our top active national brands. As we look forward, we see that growth continuing.

I mean, we're at the beginning of a long great journey with Under Armour, not unlike what we've had with Nike and also with adidas. They're giving us new product. We're just in the midst of launching, as an example, Under Armour Golf, and more on that to come so I couldn't feel better about the brand and the partnership..

And I know you know this, but just to clarify. Michelle said Amazon, but she meant Under Armour..

Oh, did I say Amazon? A little slip there..

No problem. And then, just a quick follow-up on the private label Speed initiatives. You saw a nice comp improvement across all the categories in the fall season. Maybe just remind us what percent of the private label assortment will be on Speed for the spring season and how does that compare to spring of last year? Thanks..

Mark, we're still working through that. We're roughly at about 40% of the assortment right now in our proprietary brands being on Speed. I fully anticipate by the end of 2018 we'll be at 50%, and that number over time will go to 60% plus.

I mean, Speed is the core strategy of our proprietary brands, and it's giving us lots of benefit on both the top line and the bottom line..

Great. Thanks for the color. Best of luck..

Thanks..

Our next question is from Bob Drbul with Guggenheim Securities. Please go ahead..

Hi, guys. Good morning..

Good morning, Bob..

Kevin, on the announcement of the pilot with Aldi, how many stores do you think that has the potential to be in your fleet? And is Aldi – is there an exclusivity around the convenience partnership with them, or can it be other retail partners as well?.

Let me just start by saying, okay, what's the landscape, the scale, or size of the opportunity? Frankly, the size of the opportunity in our eyes is the 500 stores by the end of this year would have moved from a standard footprint to a small footprint.

All of those stores can be candidates to be right-sized, and we obviously, as you can kind of tell, we think this is a big idea. We're already getting all the operational improvements of making them small stores. So you heard us talk about it on the inventory, working capital side, you heard us talk about it on the improved margin side.

I didn't allude to this, Bob, but standard-to-small stores have a phenomenal improvement in customer engagement scores, which is driven by improved findability, ease of shopping, standards in housekeeping, so those are all sort of on the side, but they're really good.

But we think store optimization is a big idea because, as you know, and I realize we keep repeating this, but we believe in our stores. We have an amazing platform of stores. We're uniquely positioned I think to execute this idea of right-sizing because our stores are new.

Most are strip center or freestanding in areas that are highly wanted from a real estate perspective, and so, companies who are looking to grow are looking to grow in the trade areas in the markets in which we already operate. So I think we start in a phenomenal spot.

The real estate team has done a magnificent job of creating these proof-of-concepts so that we know what we're getting into from both the cost and execution perspective. In terms of where we see this going, I think we're focused on traffic driving retailers with good strong balance sheets and outlooks.

So certainly, the one that we're doing the pilots with falls into that category. Generally, I think we would all say that the filters start at places like groceries, supermarket chains, just because they drive a lot of traffic, but it's certainly not limited to that. There are other sectors that I think are good pairings with us.

People in the fitness category, for instance, I think are great combination with Kohl's, and there's many others. But it's traffic drivers, strong brands, strong balance sheets where we know that we can coexist together for a long time.

So, honestly, I realize that I'm sounding probably pretty optimistic about this, but that's because we think we've got a big idea here. And most importantly, I think we're very uniquely positioned to execute on it..

Got it. And, Kevin, on February 5, 2006, the Steelers won Super Bowl XL, and I was actually there to witness that game. Shortly after that, one of my favorite running backs, Jerome Bettis, retired on top.

With these exceptional Q4 results led by that 6.3% comp, do you feel like Jerome Bettis this morning?.

driving traffic, operational excellence, but more importantly the initiatives and the actions under each one, they are on target and they are working, and I think Michelle is going to fuel them as we look forward..

Thanks, Bob..

Congratulations, Kevin. Good luck, Michelle..

Thank you..

Our final question will be from Dana Telsey with the Telsey Advisory Group. Please go ahead..

Good morning, everyone, and congratulations..

Thank you..

Two things.

As you think about the women's apparel business, it's something we've been watching for a long time, what's driving the improvement there and what should we be looking forward to in 2018? And then if you think about the buckets of expenses, any update on wages and how you're planning and thinking about wages for the upcoming year? Thank you..

Okay. Hi, Dana. It's Michelle..

Hi..

I'll take the first one on women's. As I said earlier, I'm really encouraged with the momentum that we're seeing accelerate on the women's business. And I'd answer it in a couple ways. Number one, it's highly related to what we're seeing on proprietary brands, which is correlated to our speed agenda.

Our proprietary brands make up 70% of our women's business. And again, it's important to remind everybody, women's represents 30% of Kohl's. So it is critically important for us to see long-term sustained health on that business. So the improvement in proprietary brands is driven by speed, number one. Number two, I would say clarity in the assortment.

We're doing a lot around this. Chris Candee, our GMM of women's with his team in editing out underperformers, driving choice count down, and improving depth, so that's a key strategy. And then I'd also say clarity of pricing in our value offers and making sure that we continue to lead in both the quality and value space.

So I'm really optimistic as we head into 2018 that we'll see that momentum continue..

On the wages thing, I can kind of give you a high level and then I'm looking at Bruce because I think he can probably give you....

Yeah..

...a couple more specifics. But wages and primarily, as you know, Dana, the primary part of our overall payroll is store and fulfillment-related. So when I say wages, that's sort of what I'm talking about.

Wages have been in the past and are assumed and planned to be up in the future, and that is just the dynamic in the world in which we operate, and we're planning for that and it's included in the guidance that we give you. And that is, as I said, really driven by store and fulfillment wages.

We have a really comprehensive process for studying wage rates and, more importantly, work availability on a market-by-market basis, and so we manage it that way.

When we're not competitive in a market or if we don't believe we're going to attract and retain the best talent, then we adjust our wages in the market like we do anything else, and that has worked for us.

That analytical approach I think has worked for us for a long time, and we continue to apply it going forward because we think it's the right strategy; manage wages the way we manage everything else, which is at the local level where we have to compete. In terms of specifics, Bruce might have a couple..

I'll add a couple of points quickly, Dana. So store wages are going to continue to be a headwind. We've got that baked into our 2018 budget, and so consequently, it's embedded in the outlook.

Over the past two years, we've invested, call it, upwards of $100 million in incremental store wages to remain competitive, and we expect that to continue for the foreseeable future. As Kevin said, leading to the second point, our compensation plans are designed to be market competitive.

This comprehensive process that we have in place has worked well for the company over the years, and we're going to continue to do this sort of market-by-market analysis and make changes as necessary..

And the one other thing which I didn't mention that I'd add to what Bruce just said is this is why you hear us talk so much about investments in technology to improve associate productivity because that to me is the way we have to compete at that store level.

Because we're going to pay the wages that are necessary to get the best talent; now we've got to give them better tools so they can be more productive..

Thank you..

Thanks, Dana..

Thank you..

I'll turn it back to the company if you have any closing comments..

No. Thank you all very much for joining us on the call, and we look forward to talking to you soon. Thank you..

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