For purposes of the following discussion, all references to "the first quarter of 2009" or "2009" are for the 13-week fiscal period ended May 2, 2009 and all references to "the first quarter of 2008" or "2008" are for the 13-week fiscal period ended May 3, 2008.

The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in our 2008 Annual Report on Form 10-K. The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed elsewhere in this report and in our 2008 Annual Report on Form 10-K (particularly in "Risk Factors").

Executive Summary

The recent economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of default and bankruptcy, and declining consumer and business confidence, which has led to decreased levels of consumer spending, particularly on discretionary items. Our sales reflect these reductions in consumer spending. Partially offsetting these sales declines, however, are the positive results of our inventory management and cost control initiatives.

For the quarter, net sales increased 0.4% and comparable store sales decreased 4.2% compared to the prior year quarter. All regions and all lines of business reported lower comparable store sales.

Gross margin as a percent of net sales for the quarter increased 77 basis points compared to the prior year quarter to 37.6%. Strong inventory management as well as increased penetration of private and exclusive brands contributed to the margin strength. Ending inventory per store decreased 6.8% compared to the prior year quarter.

Selling, general and administrative expenses increased 4.1% compared to the prior year quarter. As expected, these expenses increased at a rate faster than sales, but at a rate slower than store growth.

Net income for the quarter was $137 million, or $0.45 per diluted share, compared to net income of $153 million and diluted earnings per share of $0.49 in the first quarter of last year.

We opened 8 stores in March and 11 stores in April of 2009. As of May 2, 2009, we operated 1,022 stores in 49 states compared to 957 stores in 47 states as of May 3, 2008. Selling square footage totaled 76.3 million square feet at May 2, 2009 and 71.8 million square feet at May 3, 2008. We currently expect to open 37 additional stores in the second half of fiscal 2009. We closed one underperforming store in Michigan during the first quarter of 2009. We will continue to evaluate individual store performance in the future, but do not currently expect additional store closings in 2009.

We completed 20 remodels in March 2009. We plan to complete an additional 31 remodels during the remainder of the year, for a total of 51. This is an increase from 36 stores last year. We have been able to compress the remodel duration period from 16 weeks to nine weeks over the past two years in order to minimize costs and disruptions to our stores, benefiting our sales and customer experience. Remodels remain a critical part of our long-term strategy as we believe it is extremely important to maintain our existing store base, even in this difficult environment.

Results of Operations

Net Sales

New stores contributed $165 million 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 $151 million compared to the first quarter of last year. The 4.2% decrease in comparable store sales was the result of a 1.6% decrease in average transaction value and a 2.6% decrease in the number of transactions per store.

All regions and all lines of business reported lower comparable store sales for the quarter compared to the prior year quarter. The Southwest region reported the strongest comparable store sales, due partly to sales attributable to former Mervyn's customers. The Southeast region remains the most challenging.

Footwear reported the strongest comparable store sales for the quarter, with strong comparable store sales growth in children's and athletic shoes. In addition, Men's, Home, Accessories and Children's outperformed the company's average for the quarter. Men's was led by basics and casual sportswear. Children's was led by boys and infant/toddler. Home was led by bedding and small electrics and Accessories by sterling silver jewelry, handbags and fashion jewelry.

E-Commerce revenues were $89 million for the quarter, compared to $67 million for the first quarter of last year, an increase of 32.5%.

Gross Margin

Gross margin includes the total cost of products sold, including product development costs, net of vendor payments other than reimbursement of specific, incremental and identifiable costs; inventory shrink; markdowns; freight expenses associated with moving merchandise from our vendors to our distribution centers; shipping and handling expenses of e-commerce sales; and terms cash

discount. Our gross margin may not be comparable with that of other retailers because we include distribution center costs in selling, general and administrative expenses while other retailers may include these expenses in cost of merchandise sold.

Gross margin as a percent of net sales was 37.6% for 2009, an increase of approximately 80 basis points compared to 36.8% for 2008. Strong inventory management as well as increased penetration of private and exclusive brands contributed to the margin strength. 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. This strategy reduces our seasonal merchandise clearance inventories. Sales of private and exclusive brands reached 44% of net sales for the quarter, an increase of approximately 200 basis points over the comparable prior year period. Additionally, our ongoing markdown and size optimization initiatives continue to develop and have favorable impacts on our gross margin percentage.

Operating Expenses

Selling, general and administrative expenses ("SG&A") include compensation and benefit costs (including stores, headquarters, buying and merchandising and distribution centers); occupancy and operating costs of our retail, distribution and corporate facilities; freight expenses associated with moving merchandise from our distribution centers to our retail stores and among distribution and retail facilities; advertising expenses, offset by vendor payments for reimbursement of specific, incremental and identifiable costs; net revenues from our Kohl's credit card operations; and other administrative costs. Depreciation and amortization and preopening expenses are not included in SG&A. The classification of these expenses varies across the retail industry.

SG&A for 2009 increased $38 million, or 4.1%, over 2008. The net increase in SG&A dollars reflects incremental costs at newly-opened stores, partially offset by decreases at comparable stores, reflecting our ongoing efforts to control costs in the current economic environment. As expected, SG&A increased more than sales, but less than new store growth of 6.8%.

Hourly store payroll costs as a percentage of net sales decreased, or "leveraged," as reduced inventory and clearance levels resulted in fewer hours spent on replenishment and inventory markdowns. We were able to shift some of these savings to provide additional customer assistance on the selling floor and at point-of-sale. This emphasis on customer service contributed to an 8.4% improvement in our customer service scores over 2008.

Distribution center costs, which are included in SG&A, totaled $35 million for 2009 and $38 million for 2008. The decrease reflects the benefits of investments in technology in our distribution centers that continue to generate operating efficiencies. Lower fuel costs also contributed to the decrease.

The revenue-sharing agreement related to our Kohl's credit card accounts generated higher revenues in the current year period than the prior year period. Even though we continue to see an increase in the number of accounts which carry balances and are ultimately charged-off, these increases were more than offset by increases in finance charges and late charge fees.

Net advertising costs and information services costs decreased slightly in 2009 compared to 2008.

Partially offsetting these expense reductions were higher fixed occupancy and variable store costs due primarily to an increase in the number of stores and higher incentive expenses as a result of improved performance expectations for 2009.

Increase 2009 2008 $ %
(Dollars in Millions)
Depreciation and amortization $ 141 $ 130 $ 11 8.5 % Depreciation and amortization as a percent of net sales 3.9 % 3.6 %

The increase in depreciation and amortization for the quarter is primarily attributable to the addition of new stores.

Increase 2009 2008 $ %
(Dollars in Millions)
Preopening expenses $ 15 $ 11 $ 4 36.4 % Number of stores opened 19 28

Preopening expenses increased despite a decrease in the number of stores opened primarily due to an increase in the number of ground leased stores which will open in 2009. Under Generally Accepted Accounting Principles ("GAAP"), we are required to recognize rent expense when we take possession of the property, so we must recognize rental expense for ground leased properties several months prior to the actual opening of the store and, in most cases, before rental payments are due.

Operating Income

As a result of the above factors, operating income as a percent of net sales was 6.9% for 2009 compared to 7.5% for 2008.

Interest Expense, Net

The increase in net interest expense reflects lower interest income due to lower interest rates on our investments and reductions in capitalized interest due to lower capital expenditures.

Provision for Income Taxes

Our effective tax rate was 37.5% for both 2009 and 2008.

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 rising 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.



                                                                 Increase (Decrease)
                                                                       in Cash
                                         2009       2008          $               %
                                                     (Dollars in Millions)
      Net cash provided by (used in):
      Operating activities              $  399     $  353     $      46            13.0 %

Operating Activities. Despite the decrease in net income, cash provided by operations in 2009 was $399 million, 13% higher than the prior year. The most significant source of operating cash flow for 2009 was a $122 million increase in accounts payable. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories.

Merchandise inventories per store were $2.7 million at May 2, 2009, $2.8 million at January 31, 2009 and $2.9 million at May 3, 2008. The decreases in inventories per store reflect continued inventory management, including conservative sales and receipts planning, and lower clearance levels. Normal business seasonality also contributed to the decrease from January 31, 2009 to May 2, 2009.

Accounts payable at May 2, 2009 increased $58 million from May 3, 2008 and increased $122 million from January 31, 2009. Accounts payable as a percent of inventory was 35.8% at May 2, 2009, compared to 33.6% at May 3, 2008, reflecting the positive results of inventory management, cycle time reduction and vendor finance initiatives.

Investing Activities. The increase in net cash used in investing activities is primarily attributable to net investment activity which used $139 million in 2009, compared to generating $20 million in 2008, reflecting increased short-term investment purchases in 2009.

As of May 2, 2009, we had investments in auction rate securities ("ARS") with a par value of $400 million and an estimated fair value of $326 million. To date, all ARS sales and calls have been at par and 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 underlying credit quality of the assets backing our ARS has been impacted by the reduced liquidity of these investments. While the auction failures, which began in February 2008, 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.

Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs. Capital expenditures totaled $186 million for 2009, an $87 million decrease from the comparable prior year period. This decrease is primarily due to a decrease in the number of new store openings from 28 in 2008 to 19 in 2009.

Financing Activities. Financing activities were not significant in 2009.

We have various facilities upon which we may draw funds, including a $900 million senior unsecured revolving facility 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 12 lenders have each committed between $30 and $130 million.

There were no draws on these facilities during 2009. In 2008, weighted-average borrowings under these facilities were $48 million.

We have no debt maturing until 2011. We expect to use funds from operations to repay both the $300 million of long-term debt which is due in March 2011 and the $100 million of long-term debt which is due in October 2011.

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

                                          May 2,       January 31,       May 3,
                                           2009           2009            2008
         Working capital (In Millions)   $  2,045     $       1,885     $  1,449
         Current ratio                     2.10:1            2.04:1       1.78:1
         Debt/capitalization                 23.1 %            23.5 %       26.3 %

The increase in working capital and the current ratio as of May 2, 2009 compared to May 3, 2008 was primarily due to higher short-term investments. The decrease in the debt/capitalization ratio reflects lower debt levels and higher capitalization, primarily due to earnings.

Debt Covenant Compliance. As of May 2, 2009, we were in compliance with all debt covenants and expect to remain in compliance during fiscal 2009.