Executive Summary

Our net sales for the quarter and year-to-date periods reflect the impact of reduced discretionary consumer spending as a result of the slowdown in the U.S. economy. Partially offsetting the decrease in comparable store sales were the positive results of strong inventory and expense management. We believe that the slowdown in the U.S. economy will continue to have a negative impact on our net sales through the remainder of 2008. Though we have been conservative in our inventory management, an extended slowdown in the economy could negatively impact our future gross margin if we are forced to further reduce our selling prices to sell our merchandise.

For the quarter, net sales decreased 0.6% and comparable store sales decreased 6.7% compared to the prior year quarter. Year-to-date, net sales increased 1.5% and comparable store sales decreased 6.0% over the comparable prior year period. All regions and all lines of business reported negative comparable store sales for both the quarter and year-to-date periods.

Gross margin as a percent of net sales for the quarter was 37.4% a 33 basis point improvement over the prior year quarter. The year-to-date gross margin rate was 38.0%, a 34 basis point improvement over 2007. Aggressive inventory management, lower levels of clearance inventory, and increased penetration of private and exclusive brands contributed to the margin strength, despite the difficult economic environment. Inventory per store at quarter end decreased 14% compared to the comparable prior year quarter.

Selling, general and administrative expenses increased 5.1% compared to the prior year quarter. Year-to-date, selling, general and administrative expenses increased 7.8% compared to the prior year period. As expected, these expenses increased at a rate faster than sales, but at a slower rate than new store growth.

Net income decreased 17.4% from the prior year to $160.2 million for the quarter and 18.3% to $549.1 million for the nine months ended November 1, 2008. Diluted earnings per share for the quarter decreased 14.8% from the comparable prior year quarter to $0.52. Year-to-date diluted earnings per share decreased 14.4% to $1.79.

As of November 1, 2008, we operated 1,004 stores, with 75.0 million square feet of selling space, in 48 states compared to 914 stores, with 68.8 million square feet of selling space, in 47 states as of November 3, 2007. During the quarter ended November 1, 2008, we opened 47 stores, including our 1000th store and seven stores in the Miami-Ft. Lauderdale-West Palm Beach market. During the second quarter of 2008, we opened a new distribution center in Ottawa, Illinois to support our store growth. In 2009, we are planning to open approximately 50 new stores and remodel 60 stores, an increase from 36 remodels in 2008.

Results of Operations

Net Sales



                          November 1,    November 3,      Increase (Decrease)
                              2008           2007             $             %
                                         (Dollars in Thousands)
           Net sales:
           Quarter        $  3,803,649   $  3,825,162   $     (21,513 )    (0.6 )%
           Year-to-date     11,153,398     10,986,412         166,986       1.5

New stores, including 75 stores in the first nine months of 2008 and 95 stores in the third and fourth quarters of 2007, contributed $226.1 million to the change in net sales over the prior year quarter. Comparable store sales for the quarter, which are sales from stores (including E-Commerce sales and relocated or expanded stores) open throughout the full current and prior fiscal year periods, declined $247.6 million compared to the third quarter of last year. This 6.7% decrease in comparable store sales was the result of a 6.1% decrease in the number of transactions per store and a 0.6% decrease in average transaction value.

Year-to-date, new stores contributed $807.6 million to the $167.0 million increase in net sales over the comparable prior year period. Comparable store sales for the first nine months of 2008 declined $640.6 million compared to the same period last year. This 6.0% decrease in comparable store sales was the result of a 5.3% decrease in the number of transactions per store and a 0.7% decrease in average transaction value.

All lines of business reported negative comparable store sales for both the quarter and year-to-date periods. Accessories and Children's reported the strongest comparable store sales for both periods. In Accessories, handbags, sterling silver jewelry and beauty reported the strongest comparable store sales. The Children's business was driven by boys and infant/toddlers. Footwear and Men's also outperformed the company and were led by children's and athletic shoes and Men's outerwear, basics and dress shirts. Women's and Home underperformed the company for both the quarter and year-to-date periods. In Women's, misses' updated sportswear and intimate were the strongest categories. Home continues to be the most difficult line of business with soft home significantly underperforming the company.

We continue to be pleased with the performance of brands introduced in 2008 including Jumping Beans, an opening price point children's private brand; Gold Toe hosiery, which continues to help Men's, Women's and Children's basics outperform the company; and the Elle brand. We are also pleased with Back-to-School sales in our Abbey Dawn line, a new juniors' lifestyle brand inspired by Avril Lavigne. In addition, we launched FILA Sport, a collection of women's, men's and children's apparel, footwear and accessories, in September 2008 and are pleased with the initial results.

All regions also reported negative comparable store sales for both the quarter and year-to-date periods. The Northeast, Midwest and Mid-Atlantic regions led the company for both the quarter and year-to-date periods. We continue to experience weakness in the southern and southwestern regions of the country.

E-Commerce revenues were $81.7 million for the quarter, compared to $42.5 million for the third quarter of last year, an increase of 92.3%. Year-to-date, E-Commerce revenues were

$214.5 million, compared to $143.8 million last year, an increase of 49.1%. The growth reflects increases in the number of products available on-line. Additionally, prior year revenues were affected by business disruptions associated with the upgrades of our E-Commerce website and fulfillment center.

Gross Margin



                                          November 1,      November 3,         Increase
                                              2008             2007             $        %
                                                       (Dollars in Thousands)
Gross margin:
Quarter                                   $  1,422,797     $  1,418,031     $   4,766   0.3 %
Year-to-date                                 4,232,785        4,132,275       100,510   2.4

Gross margin as a percent of net sales:
Quarter                                           37.4 %           37.1 %          -     -
Year-to-date                                      38.0 %           37.6 %          -     -

The net increases in gross margin dollars for both the quarter and year-to-date periods reflect incremental sales at newly-opened stores, substantially offset by decreases at comparable stores.

Gross margin as a percent of net sales increased 33 basis points to 37.4% for the current year quarter, compared to 37.1% for the prior year quarter. For the year-to-date period, gross margin as a percent of net sales increased 34 basis points over the comparable prior year period to 38.0% in 2008.

Strong inventory management, lower levels of clearance inventories and increased penetration of private and exclusive brands contributed to the margin growth, despite the difficult economic environment.

Inventory per store as of November 1, 2008 decreased 14% compared to November 3, 2007, reflecting significant reductions in fall seasonal and clearance inventories. In addition to carrying a lower level of inventory per store, we continue to focus on receiving merchandise in season as needed through our cycle time reduction initiatives, which also reduce our seasonal merchandise clearance inventories. Additionally, our ongoing markdown and size optimization initiatives continue to develop and have favorable impacts on our gross margin percentage.

Sales of private and exclusive brands increased 154 basis points to 42.0% of net sales for the current year quarter, compared to 40.4% of net sales for the prior year quarter. Year-to-date, private and exclusive brands as a percent of net sales increased 336 basis points over the prior year period to 42.4% in 2008.

Operating Expenses



                                       November 1,      November 3,         Increase
                                           2008             2007             $        %
                                                    (Dollars in Thousands)
    S,G&A:
    Quarter                            $    981,455     $    933,706     $  47,749   5.1 %
    Year-to-date                          2,834,022        2,629,969       204,053   7.8

    S,G&A as a percent of net sales:
    Quarter                                    25.8 %           24.4 %          -     -
    Year-to-date                               25.4 %           23.9 %          -     -

The net increases in selling, general and administrative expenses ("SG&A") dollars for both the quarter and year-to-date periods reflect incremental costs at newly-opened stores, partially offset by decreases at comparable stores.

SG&A as a percent of net sales decreased, or "leveraged," in our credit operations for the quarter and year-to-date periods. Distribution centers leveraged for the quarter, but not year-to-date. Stores, advertising, and corporate did not leverage in either period due to lower sales. Our desire to maintain a positive customer in-store experience and on-going efforts to drive additional traffic into our stores also contributed to higher SG&A.

In conjunction with the sale of our Kohl's charge card accounts in 2006, we entered into a multi-year agreement under which we receive ongoing payments related to the profitability of the Kohl's credit card portfolio. Though bad debt expenses in this portfolio have risen in recent months, they have been more than offset by increases in finance charges and late fees.

We have increased our overall marketing budget for the fourth quarter of 2008 over last year by increasing the investment in our best performing mediums such as direct mail, internet advertising and e-mail, while at the same time focusing television and radio to align with the largest traffic opportunities. We will also continue to target our most loyal customer - the Kohl's charge card customer. For the current year quarter, Kohl's charge card sales represented 46.7% of our total sales, an increase of approximately 229 basis points over the prior year quarter. Year-to-date Kohl's charge card share increased approximately 195 basis points to 44.5%.

Distribution costs, which we include in SG&A, were $44.7 million for the current year quarter and $45.0 million for the prior year quarter. For the year-to-date period, distribution costs were $120.0 million in 2008 and $114.2 million in 2007.

                                              November 1,        November 3,           Increase
                                                 2008               2007              $         %
                                                             (Dollars in Thousands)
Depreciation and amortization:
Quarter                                      $     135,491      $     115,207      $ 20,284    17.6 %
Year-to-date                                       398,149            326,041        72,108    22.1

Depreciation and amortization as a
percent of net sales:
Quarter                                                3.6 %              3.0 %          -       -
Year-to-date                                           3.6 %              3.0 %          -       -

The increases in depreciation and amortization for both the quarter and year-to-date periods are primarily attributable to the addition of new stores.

                                November 1,     November 3,         Decrease
                                   2008            2007            $           %
                                             (Dollars in Thousands)

The decreases in preopening expenses for the quarter and year-to-date periods are the result of decreases in the number of new stores opened in 2008 compared to 2007. New store openings were as follows:

                                          2008   2007
                              March         14      7
                              April         14     10
                              September     46     80
                              November       1     15

                              Total         75    112

Operating Income



                                           November 1,        November 3,               Decrease
                                              2008                2007               $              %
                                                             (Dollars in Thousands)
Operating income:
Quarter                                   $     285,339       $    330,863       $  (45,524 )     (13.8 )%
Year-to-date                                    963,315          1,120,673         (157,358 )     (14.0 )

Operating income as a percent of net
sales:
Quarter                                             7.5 %              8.6 %             -           -
Year-to-date                                        8.6 %             10.2 %             -           -

The decreases in both operating income dollars and operating income as a percent of net sales reflect the net impact of the changes in gross margin and operating expenses discussed above.

Interest Expense, Net



                                  November 1,     November 3,        Increase
                                     2008            2007           $         %
                                              (Dollars in Thousands)

The increase in net interest expense for the quarter and year-to-date periods was primarily due to the $1 billion in new debt that was issued in September 2007.

Provision for Income Taxes



                                   November 1,     November 3,         Decrease
                                      2008            2007            $           %
                                                (Dollars in Thousands)

Our effective tax rate was 37.7% for both the three and nine months ended November 1, 2008. In 2007, the effective tax rate was 37.8% for both the three and nine months ended November 3, 2007.

Seasonality & Inflation

Our business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 15% of annual sales typically occur during the back-to-school season and 30% during the holiday season. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of sales and costs associated with the opening of new stores.

Although we expect that our operations will be influenced by general economic conditions, including fluctuations in food, fuel and energy prices, we do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be affected by such factors in the future.

Financial Condition and Liquidity

Our primary ongoing cash requirements are for capital expenditures in connection
with our expansion and remodeling programs and seasonal and new store inventory
purchases. Our primary source of funds for our business activities are cash flow
from operations, short-term trade credit and our lines of credit.



                                       November 1,        November 3,          Increase (Decrease) in Cash
                                          2008               2007                   $                   %
                                                              (Dollars in Thousands)
Net cash provided by (used in):
Operating activities                  $     828,004      $     300,288      $         527,716           175.7 %
Investing activities                       (802,795 )         (827,227 )               24,432             3.0
Financing activities                         37,218            632,755               (595,537 )         (94.1 )

The changes in our cash flows reflect reduced inventory levels, capital expenditures and treasury stock purchases in 2008 compared to 2007. Financing activities in 2007 also reflected $1 billion in proceeds from the issuance of new debt.

Operating Activities. Despite the decrease in net income, cash provided by operations for the year-to-date period was $828.0 million, which is 176% higher than the comparable prior year period. This increase in operating cash flow was primarily attributable to a $474.4 million reduction in cash used for inventory purchases.

At November 1, 2008, total merchandise inventories decreased $196.5 million, or 5.0%, from November 3, 2007. On an average per store basis, merchandise inventories at November 1, 2008 decreased 14% from November 3, 2007. Clearance inventory per store is down over twice this amount. These reductions are the result of our conservative sales and receipt planning.

Compared to February 2, 2008, merchandise inventories at November 1, 2008 increased $856.3 million, or 30.0%, as conservative sale and receipt planning were more than offset by normal business seasonality and the opening of 75 new stores.

Accounts payable at November 1, 2008 decreased $64.3 million from November 3, 2007 and increased $808.6 million from February 2, 2008. Accounts payable as a percent of inventory was 44.3% at November 1, 2008, compared to 43.7% at November 3, 2007, primarily due to a decrease in the percentage of imports, which have a shorter payment period than other receipts.

Investing Activities. Net cash used in investing activities was $802.8 million in the current year-to-date period, compared to $827.2 million in the comparable prior year period. Year-to-date decreases in capital expenditures were substantially offset by a comparable decrease in net investment activity.

Net purchases and sales of investments generated cash of $34.3 million in 2008 compared to $405.6 million in 2007. As of November 1, 2008, we had investments in auction rate securities ("ARS") with a par value of $407.1 million and an estimated fair value of $344.9 million. ARS are long-term debt instruments with interest rates reset through periodic short term auctions, which are typically held every 35 days. Beginning in February 2008, liquidity issues in

the global credit markets resulted in the failure of auctions for substantially all of our ARS. A "failed" auction occurs when the amount of securities submitted for sale in the auction exceeds the amount of purchase bids. As a result, holders are unable to liquidate their investment through the auction. A failed auction is not a default of the debt instrument, but does set a new interest rate in accordance with the terms of the debt instrument. A failed auction limits liquidity for holders until there is a successful auction or until such time as another market for ARS develops. ARS are generally callable by the issuer at any time. Scheduled auctions continue to be held until the ARS matures or is called. Since February 2008, two ARS were called at par. We sold $1.7 million of ARS in the second quarter of 2008 and $15.7 million of ARS in the third quarter of 2008.

To date, we have collected all interest payable on outstanding ARS when due and expect to continue to do so in the future. At this time, we have no reason to believe that any of the underlying issuers of our ARS or their insurers are presently at risk or that the reduced liquidity has had a significant impact on the underlying credit quality of the assets backing our ARS. While the recent auction failures limit our ability to liquidate these investments, we believe that the ARS failures will have no significant impact on our ability to fund ongoing operations and growth initiatives.

In August 2008, we finalized a new $150 million line of credit which will provide additional liquidity, if needed. This new line is backed by a portion of the ARS, bears interest at the Fed Funds rate plus a spread and expires in December 2008. We do not currently expect to draw against this line.

Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs. Capital expenditures totaled $843.0 million for the nine months ended November 1, 2008, a $415.1 million decrease from the comparable prior year period. This decrease is primarily due to a decrease in the number of new store openings in 2008 compared to 2007. We opened 75 stores in 2008 compared to 112 stores in 2007. Total capital expenditures for fiscal 2008 are expected to be approximately $1.0 billion. The actual amount of our future capital expenditures will depend primarily on the number of new stores opened, the mix of owned, leased or acquired stores, the number of stores remodeled and the timing of distribution center openings.

Financing Activities. Our financing activities provided cash of $37.2 million in the first nine months of 2008 and $632.8 million in the first nine months of 2007. The change reflects a $996.0 million reduction in the proceeds from issuance of debt in 2007, which was partially offset by lower treasury stock repurchases and higher borrowings on our credit facilities.

We have various facilities upon which we may draw funds, including a $900 million senior unsecured revolving facility, the $150 million line of credit which was finalized in August 2008 and two demand notes with aggregate availability of $50 million. The $900 million revolving facility expires in October 2011. The co-leads of this facility, The Bank of New York Mellon and Bank of America, have each committed $100 million. The remaining 13 lenders have each committed between $30 and $90 million.

Outstanding balances on our lines of credit totaled $302 million at November 1, 2008 and $170 million at November 3, 2007, which reflects additional borrowings due to lack of liquidity in our investment portfolio. We expect to repay all borrowings on our lines of credit during the

fourth quarter. Average borrowings under these facilities decreased from $74.7 million for the nine months ended November 3, 2007 to $29.2 million for the nine months ended November 1, 2008 reflecting decreased cash needs due to lower inventory levels, capital expenditures and stock repurchases.

We may from time to time seek to retire or purchase our outstanding debt through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved could be material.

We did not repurchase any shares of our stock during the current quarter. Year-to-date, we have repurchased 6.0 million shares for approximately $261 million at an average price per share of $43.19. We will continue to evaluate stock repurchases based on market conditions and our liquidity position.

Key Financial Ratios. Key financial ratios that provide certain measures of our liquidity are as follows:

                                      November 1,      February 2,      November 3,
                                          2008             2008             2007
     Working capital (In Thousands)   $  1,498,639     $  1,952,441     $  1,702,894
     Current ratio                          1.55:1           2.10:1           1.62:1
     Debt/capitalization                      27.1 %           25.3 %           27.7 %

The decreases in working capital and the current ratio as of November 1, 2008 compared to February 2, 2008 were primarily due to lower short-term investments due to the reclassification of our ARS from Current Assets at February 2, 2008 to Long-term Assets at November 1, 2008 and higher short-term debt due to the lack of liquidity in our investment portfolio as discussed above. Reduced income taxes payable due to lower taxable income and the timing of tax payments also contributed to the decrease.

The decreases in working capital and the current ratio as of November 1, 2008 compared to November 3, 2007 were primarily due to reductions in inventory greater than the corresponding reduction in accounts payable and higher short-term debt, partially offset by a reclassification of net FIN48 liabilities from current in 2007 to long-term in 2008.

The debt/capitalization ratios reflect higher short-term debt and higher capitalization as of November 1, 2008 compared to both February 2, 2008 and November 3, 2007. Compared to February 2, 2008, seasonality and peak inventory levels contributed to short-term debt increases which were more significant than the increases in equity. This resulted in an increase in the ratio. Compared to November 3, 2007, the increase in equity substantially offset the increase in short-term debt, which resulted in the slight decrease in the ratio.

. . .