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Earnings Flat, Kohl's Sees Tougher 2008

While sales of core basics left much to be desired, it was the name branded goods, like Food Network, Simply Vera Vera Wang and Chaps, that proved "exceptionally strong" in the home department in 2007 at Kohl's stores, the company said in its fourth-quarter and yearend earnings call.

But even a trendy brand portfolio was not enough for the 929-unit mid-tier department store to lift the home department or to surpass total 2006 earnings in 2007.

For the fiscal year ended Feb. 2, 2008, net income was $1.1 billion, or $3.39 per diluted share, compared with $1.1 billion or $3.31 per diluted share, a year ago. Margins were cramped, as net sales of $16.5 billion were up 5.6% over $15.6 billion a year ago. On a comparable 52-week basis, comp sales fell 0.8%.

Home, along with women's apparel, "trailed the company in both periods," said Kohl's president Kevin Mansell of the quarterly and annual results.

Looking closer at home furnishings, he said, "There was no particular category that did much worse than any other, and from a brand perspective, almost the exact same thing is true."

Mansell said that in home, much of the "core basics had a tough falling out," while recently introduced Food Network-branded products were "exceptionally strong" and the Simply Vera Vera Wang and Chaps lines showed "positive" results.

"The customer continues to respond well to all our new brand launches and their penetration continues to increase with substantial room to grow," he continued.

In Kohl's initial guidance for fiscal 2008, the company assumes a total sales increase of 5% to 8% and a comp sales change of 0% to negative 3%, and projects earnings per diluted share of $3.15 to $3.50 for the year. For the first fiscal quarter, Kohl's expects earnings per diluted share of $0.50 to $0.54.

The home-related brand launches for 2008 include Jumping Beans, an opening price point assortment in children's goods, which debuted in February; and a mostly hardlines program of Bobby Flay-branded kitchen products, crafted with the celebrity chef as part of Kohl's Food Network platform, to roll out in May.

On the marketing and advertising front, Kohl's this year intends to "dramatically expand" its "versioning" of materials to what Mansell said would "reflect the differences by individual market across the country, be it lifestyle or climate."

The new store count for 2008 calls for 70 to 75 units. Of these, 28 will open this spring and the balance — including Kohl's 1,000th store — will open in the fall, when Kohl's plans to enter the Miami/Ft. Lauderdale metro markets for the first time, with eight units.

In 2007, by comparison, the retailer opened 112 stores.

During the question-and-answer portion of the call, an analyst asked Kohl's top executives to comment on competition between its (Ralph Lauren) Chaps program and JCPenney's new American Living line, created by Polo Ralph Lauren.

"Chaps had a very good year at Kohl's, a very solid fourth quarter, particularly in men's, and we expect to get off to good start this year," said Larry Montgomery, ceo. Mansell added that Chaps "is a brand that has been around for a lot of years; the customer knows it well … and we are giving spectacular value for high-quality from a great sourcing customer."

Kohl's Corporation

Qtr. 2/2 ($millions) 2007 2006 % change
a. 13-week fourth quarter in fiscal 2007 compared to 14-week fourth quarter in fiscal 2006.
b. 52-week fiscal 2007 compared to 53-week fiscal 2006.
Sales $5,487.3a $5,448.6a (0.7)%a
Oper. Income (EBIT) 683.8 787.8 (13.2)
Net income 411.7 484.6 (15.0)
Per share (diluted) 1.31 1.48 (11.5)
Average gross margin 34.3% 35.4%
SG&A expenses 19.4 19.0
Full year
Sales $16,473.7b $15,596.9b 5.6%b
Oper. Income (EBIT) 1,804.5 1,814.8 (0.6)
Net income 1,083.9 1,108.7 (2.2)
Per share (diluted) 3.39 3.31 2.4
Average gross margin 36.5% 36.4%
SG&A expenses 22.4 21.9


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