See accompanying Notes to Condensed Consolidated Financial Statements

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In Thousands, Except per Share Data)

See accompanying Notes to Condensed Consolidated Financial Statements

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(In Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

See accompanying Notes to Condensed Consolidated Financial Statements

KOHL’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s Form 10-K (Commission File No. 1-11084) filed with the Securities and Exchange Commission.

Due to the seasonality of the Company’s 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.

Certain reclassifications have been made to prior year’s financial information to conform to the current year presentation.

2. New Accounting Pronouncements

In October 2005, the Financial Accounting Standards Board (FASB) issued FASB Staff Position FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period” (FSP 13-1). FSP 13-1 requires that rental costs associated with ground or building operating leases that are incurred during the construction period be recognized as rental expense. FSP 13-1 was adopted by the Company January 29, 2006 on a prospective basis. The Company has historically capitalized rental costs incurred during a construction period and the adoption of this guidance is expected to negatively impact net income per diluted share by approximately $0.03 in fiscal 2006.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (FIN 48). FIN 48 clarifies the accounting for income taxes by prescribing a minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. Under FIN 48, a tax position is not recognized until it is more likely than not to be sustained upon examination. Measurement of the tax position is based on the largest amount, determined on a cumulative probability basis, that is more likely than not to be realized upon ultimate settlement. FIN 48 applies to all tax positions related to income taxes subject to Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes.” FIN 48 is effective for

fiscal years beginning after December 15, 2006. The Company is in the process of determining whether this statement will have a material impact on the Company’s consolidated net earnings, cash flow or financial position.

3. Stock Based Compensation

As of OctoberJuly 29, 2005,2006, the Company has three long-term compensation plans pursuant to which stock-based compensation may be granted. The Company’s 1994 and 2003 long-term compensation plans provide for the granting of various forms of equity-based awards, including restrictednonvested stock and options to purchase shares of the Company’s common stock, to officers and key employees. The 1997 Stock Option Plan for Outside Directors provides for granting of equity-based awards to outside directors.

The following table presents the number of options and restricted stock initially authorized and available to grant under each of the plans:

The majority of stock options granted to employees vest in four equal annual installments. Remaining stock options granted vest in five to ten year increments.annual installments. Outside directors’ stock options vest inare typically granted upon a director’s election or re-election to the Company’s Board of Directors. The vesting periods for outside directors’ options are one to three equal annual installments. The restricted stock vests in three equal annual installments.years, depending on the length of the term to which the director is elected. Options that are surrendered or terminated without issuance of shares are available for future grants.

On January 30, 2005, the Company adopted Statement of Financial Accounting Standards (SFAS)SFAS No. 123(R), “Share-based Payments,Payment,” requiring the Company to recognize expense related to the fair value of its employee stock option awards. The Company adopted the “modified retrospective” method, which requiresrequired the prior period financial statements to be restated under the provisions of SFAS No. 123(R) to recognize

compensation cost in the amounts previously reported in the pro forma footnote disclosures. For additional information related to the Company’s adoption of SFAS No. 123(R), refer to the Company’s Quarterly Report on Form 10-Q for the period ended April 30, 2005.

As a result of adopting SFAS No. 123(R),The total compensation cost recognized related to stock-based compensationoptions for the quarterthree months ended OctoberJuly 29, 2006 and July 30, 2005 and October 30, 2004 are $11.4was $10.0 million and $10.2$10.6 million, respectively. Total compensation cost recognized related to stock-based compensationoptions for the ninesix months ended OctoberJuly 29, 2006 and July 30, 2005 and October 30, 2004 are $32.5was $18.9 million and $33.6$19.4 million, respectively. Stock compensation cost is recognized for new, modified and unvested stock option awards, measured at fair value and recognized as compensation expense over the vesting period. These amounts were expensed and included in selling, general and administrative (S,G & A) expenses in the accompanying Condensed Consolidated Statements of Income. The Black-Scholes option valuation model was used to estimate the fair value of each option award based on the following assumptions:

The following is a summary of the adjustments to the condensed consolidated financial statements as a result of these restatements.

		October 30, 2004
(In thousands)		As previously restated*			Share-based Compensation				As restated
Selected Balance Sheet Data:
Deferred income tax liabilities		$	286,736		$	(64,354	)		$	222,382
Paid-in capital			1,249,227			234,319				1,483,546
Retained earnings			3,380,032			(169,965	)			3,210,067
		January 29, 2005
(In thousands)		As previously reported			Share-based Compensation				As restated
Selected Balance Sheet Data:
Deferred income tax liabilities		$	296,551		$	(67,170	)		$	229,381
Paid-in capital			1,258,326			243,246				1,501,572
Retained earnings			3,704,969			(176,076	)			3,528,893
		Three Months Ended October 30, 2004
(In thousands, except per share data)		As previously restated*			Share-based Compensation				As restated
Selected Statement of Income Data:
Net income		$	140,933		$	(6,342	)		$	134,591
Basic net income per share			0.41			(0.02	)			0.39
Diluted net income per share			0.41			(0.02	)			0.39
		Nine Months Ended October 30, 2004
(In thousands, except per share data)		As previously restated*			Share-based Compensation				As restated
Selected Statement of Income Data:
Net income		$	405,443		$	(20,868	)		$	384,575
Basic net income per share			1.19			(0.06	)			1.13
Diluted net income per share			1.18			(0.06	)			1.12

The Company has awarded restrictednonvested shares of common stock to eligible key employees. All awards have restriction periods tied primarily to employment and/or service. The awards vest over three years. The awards are expensed on a straight-line basis over the vesting period.

As of July 29, 2006, there was $6.3 million of unearned compensation cost related to the nonvested stock granted under the plans. That cost is expected to be recognized over a weighted-average period of 1.7 years. The total compensation expense recognized related to nonvested stock for the three months ended July 29, 2006 was $1.0 million and was $0.8 million for the three months ended July 30, 2005. Total compensation expense recognized related to nonvested stock during the six months ended July 29, 2006 and July 30, 2005 was $1.9 million and $1.6 million, respectively.

3.4. Merchandise Inventories

The Company changed its methodMerchandise inventories are valued at the lower of accounting for inventory from the last in, first out method (LIFO) tocost or market using the first in, first out method (FIFO) during.

5. Short-term Investments

Short-term investments consist primarily of auction rate securities and are stated at cost, which approximates market value. Short-term investments are classified as available-for-sale securities and are highly liquid. These securities generally have a put option feature that allows the quarter ended July 30, 2005. The Company believes that adoptingto liquidate the FIFO method provides more transparent financial reporting and is consistent with the Company’s changing business environment with respect to the sourcing of goods and the nature of its inventory. Because the accounting change was not material to the Company’s financial statements

for any of the periods presented, no retroactive restatement of prior years’ financial statements was made.

investments at par.

4.6. Contingencies

The Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the outcome of such proceedings and litigation will not have a material adverse impact on the Company’s consolidated financial position or results of operations.statements.

5.7. Net Income Per Share

The calculations of the numerator and denominator for basic and diluted net income per share are summarized as follows:

8. Common Stock Repurchases

During the first quarter of 2006, the Company’s Board of Directors authorized a $2 billion share repurchase program. During the three months ended July 29, 2006, the Company repurchased 18.4 million shares for a cost of approximately $1.0 billion. As of July 29, 2006, the Company has repurchased approximately 19.7 million shares for a total cost of approximately $1.1 billion. Share repurchases have been made in open-market transactions, subject to market conditions, legal requirements and other factors. The Company expects to complete the repurchase program in the next two to three years.

9. Sale of Proprietary Credit Card Business

On April 21, 2006, the Company completed the sale of its private label credit card accounts and the outstanding balances associated with the accounts to JP Morgan Chase (“Chase”) for a purchase price of approximately $1.6 billion. The purchase price is comprised of the face value of the receivables and was received in cash. Chase acquired all of the existing accounts as of April 21, 2006, and also owns the new accounts and the related balances generated during the term of the agreement.

Additionally, the companies have entered into a multi-year agreement that provides for Kohl’s to receive ongoing payments related to the profitability of the credit card portfolio. Kohl’s will continue to handle all customer service functions and will continue to be responsible for all advertising and marketing related to credit card customers.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

The spring season was a successful start to fiscal 2006 from both a sales and earnings perspective. The Company earned $399.6 million during the six months ended July 29, 2006, in net income, an increase of 28.1% over last year. The Company’s net sales increased 15.0% while comparable store sales increased 6.2%. The Company also improved the gross margin rate from 36.4% last year to 36.8% this year. The Company’s S,G&A expenses leveraged by approximately 40 basis points, decreasing from 23.9% last year to 23.5% this year.

The Company continues to target mid-single digitearned $232.4 million during the three months ended July 29, 2006, in net income, an increase of 24.1% over last year. The Company’s net sales increased 14.0% while comparable store sales increasesincreased 5.5%. The Company also improved the gross margin rate from 37.0% last year to 37.6% this year. The Company’s S,G&A expenses leveraged by approximately 24 basis points, decreasing from 23.3% last year to 23.0% this year.

The comparable store sales growth of 5.5% for the quarter and 6.2% year to date was achieved through consistent sales performance from all regions of the country and all six lines of business. This sales performance was driven by seasonal items such as it focuses on attractingtees, tanks, polos and capris as well as strong basics sales in mens, children’s and womens. The addition of more updated and contemporary offerings in our mix of national, exclusive and private brands has enabled the Company to broaden its customer base and add new customers.

In addition, the Company continues to introduce new brands and extend successful brands into additional areas of the store, which helps drive the sales growth. The Company launched Chaps into the misses, boys and footwear areas in February 2006 and will add girls in the fall. The Company also added West End, AB Studio and Stamp 10 to misses during the first quarter of 2006. Another exclusive brand, Tony Hawk, in partnership with Quicksilver, launched in March 2006 in both young men’s and boys. The Company expects Tony Hawk, along with Candies, which launched in July 2005 in juniors, to provide momentum as the Back to School season begins.

The Company’s fully integrated marketing approach also helped drive sales by drawing in new customers and encouraging existing customers to shop more frequently. The Company achieved a 3.5%increasing transactions by 4.1% in comparable store sales increase in the third quarter, which consisted of a 2.5% increase in transactions per store and a 1.0% increase in average transaction value.

The Company’s initiatives have been focused on appealing to customers’ different lifestyles with the introduction of new brands, differentiated marketing and a more exciting in-store experience.

The Company completed the rollout of its beauty initiative to all 732 stores in fiscal 2005. This consists of exclusive lines of makeup, skin care and skin treatment products that were developed in partnership with the Estee Lauder companies. In addition to the three initial brands, American Beauty, Flirt, and Good Skin!, a fourth brand, Grassroots, debuted in August 2005 and a fragrance, Wonderful, was launched in September 2005.

During the first nine months of fiscal 2005, Chaps and Candies were new brand introductions in all stores. In women’s sportswear, Nine & Company casual wear was launched in all stores in fall 2005 after being tested in 150 stores during the spring season. Also in fall 2005, apt. 9 was expanded into casual sportswear while Nine & Company was expanded into home.

In spring 2006, the Company will introduce Chaps for women and boys in partnership with Polo Ralph Lauren, and Tony Hawk, in partnership with Quiksilver, will be introduced in young men’s and boys. In addition, Stamp 10, an exclusive contemporary brand in partnership with Liz Claiborne, Inc., will be launched in men’s and women’s in approximately 300 stores.

The Company is focused on using the new brand launches and extension of successful, contemporary and updated brandscontinues to build awareness with its existing customers and drive more frequent trips as well as gain new customers. In order to achieve this goal, the Company has developed a fully integrated marketing approach usinguse circulars, direct mail, radio, magazines, internet and television to brand Kohl’s. introduce new brands and extend existing brands, as well as to build awareness with existing customers and gain new customers. In addition, the Company will start to leverage its partnership with JPMorgan Chase through the use of direct mail in order to drive more business into both existing and new stores beginning in the third quarter.

The Company invested aggressivelyis committed to growing the business profitably and returning excess capital to its shareholders. As part of this commitment, the Company’s Board of Directors authorized a $2 billion share repurchase program in marketing throughoutMarch 2006. The Company has repurchased 19.7 million shares to date at a cost of $1.1 billion. The Company anticipates completing this program over the next two to three years.

In looking ahead to the fall season, the Company expects to continue to build on a strong spring season. The Company’s size optimization strategy remains on track to be rolled out to all applicable departments by spring 2007 and will impact a substantial portion of receipts this fall. The strategy will focus on creating size profiles by store to improve in-stock inventory levels by size. In addition, markdown optimization software will be utilized by approximately 400 stores by the end of the third quarter. Adding stores to markdown optimization will accelerate the timing of some clearance markdowns from fourth quarter into third quarter. Both initiatives are expected to result in branding the store through various merchandise strategies. The Company believes that these investmentsbetter seasonal transitions and lower overall clearance levels which should result in increased traffic in the stores and should benefit sales in the upcoming holiday season.

improved gross margin.

The Company continues to be committedconcentrate on profitable expansion. The Company’s future growth plans are to maintaining appropriate inventory levelsincrease its presence in all of the regions it currently serves and to improving inventory management strategies. The Company’s average

inventory per store at October 29, 2005 decreased approximately 6% fromexpand into new markets. During the October 30, 2004 average due to improvements in merchandise flow. The Company remains committed to being in-stock on basics and key item programs. The reduction in inventory levels will allowfirst half of the year, the Company to flow new receipts inopened 17 stores, including its first entry into Oregon with five stores. In the fourth quarter and to maximize sales as the holiday season approaches. This should also result in a better transition out of the fourth quarter. The Company expects the inventory turn to improve in the fourth quarter and for average inventory per store to reflect an increase of a low single digit percentage at the end of the fourth quarter of fiscal 2005.

The fiscal 2005 year to date financial performance, with a total sales increase of 14.8% and a comparable store sales increase of 3.9%, resulting in net income growth of 21.4%, givesfall, the Company confidence that the strategies it is employing will provide continued success in the fourth quarter.

open 68 stores including making its initial entry into Seattle and will continue its expansion into Florida.

Results of Operations

Expansion Update

At OctoberJuly 29, 2005,2006, the Company operated 731749 stores in 43 states compared with 637670 stores in 40 states at the same time last year. Total square feet of selling space increased 14.8%11.6% from 49.251.8 million at OctoberJuly 30, 20042005 to 56.557.9 million at OctoberJuly 29, 2005. During2006.

The Company successfully opened 17 new stores during the third quarter,first half of the Company opened 61 stores,year, including entering Oregon with five stores. The Company will open approximately 68 additional stores in the Orlando, FLfall season of fiscal 2006 with 65 stores opening in October and three stores opening in November. The Company will make its initial entry into the State of Washington with four stores in the Seattle market with six stores and will continue its expansion into Florida, entering the Jacksonville, FLTampa market with three stores. In addition, the Company opened 15will add 16 stores in the Midwest region, 11 stores each in the South Central and Southwest regions, nine stores in the Southwest region, eight stores in the Southcentral region, eight stores in the Mid-AtlanticSoutheast region, seven stores in the Northeast region, and fivesix stores in the Southeast region. One planned October opening in Beaumont, TX occurred in November due to delays related to Hurricane Rita.

In total, the Company opened 95 stores in fiscal 2005Mid-Atlantic region and will end the year with 732 stores in 41 states, compared to 637 stores in 40 states at the end of 2004.

The Company plans to add approximately 500 stores by the end of fiscal 2010 and is targeting opening 200 storesone store in the next two years. The actual number of new store openings in any given year will depend, in part, upon the availability, timing and terms of potential acquisitions of existing store locations from other retailers. The Company plans to open approximately 70-80 stores in fiscal 2006 with approximately 17 stores opening during the first quarter including its entry into the Pacific Northwest in the Portland, OR market.region.

Net Sales

Net sales include merchandise sales, net of returns, from the Company’s stores and on-line business. Net sales do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes.

Net sales increased $375.5$403.3 million or 13.7%,14.0% to $3,119.4$3,291.4 million for the three months ended OctoberJuly 29, 2005,2006, from $2,743.9$2,888.1 million for the three months ended OctoberJuly 30, 2004.

2005. Net sales increased $283.5$245.2 million due to the opening of 9417 new stores in the first nine monthshalf of 2005fiscal 2006 and to the inclusion of 4863 new stores opened after the start of the second quarter in fall 2004.fiscal 2005. The remaining $92.0$158.1 million increase is attributable to an increase in comparable store sales of 3.5%5.5%. Comparable store sales growth for eachthe period is based on the sales fromof stores (including e-commerce sales and relocated or expanded stores) open throughout the full period and throughout the full prior fiscal year. Accessories, men’s, home and shoes exceeded the total company comparable sales increase for the quarter. All regions delivered aThe 5.5% comparable store sales increase was a result of a 3.3% increase in number of transactions per store and an increase in average transaction value of 2.2%. All lines of business posted strong results for the quarter with Home and Accessories leading the Company. All regions had comparable store sales increases, with the Southwest region having the strongest performance.

Net sales increased $1,128.4$845.3 million or 14.8%,15.0% to $8,750.3$6,476.2 million for the ninesix months ended OctoberJuly 29, 2005,2006, from $7,621.9$5,630.9 million for the ninesix months ended OctoberJuly 30, 2004.2005. Net sales increased $852.3$510.1 million due to the opening of 9417 new stores in 2005the first half of fiscal 2006 and to the inclusion of 95 new stores opened in fiscal 2004.2005. The remaining $276.1$335.2 million increase is attributable to an increase in comparable store sales of 3.9%6.2%. The accessories6.2% comparable store sales increase was a result of a 4.1% increase in transactions per store while average transaction value increased 2.1%. All lines of business led the Companyposted strong results for the first nine months, whilehalf of the children’s business was the most difficult. All regions delivered ayear with all lines achieving at least mid-single digit comparable store sales increase,growth. All regions had comparable store sales increases, with the Southwest region having the strongest performance.

Gross Margin

Gross margin increased $147.0$169.4 million to $1,132.6$1,238.0 million for the three months ended OctoberJuly 29, 2005,2006, from $985.6$1,068.6 million for the three months ended OctoberJuly 30, 2004.2005. Gross margin increased $96.3$86.1 million due to the opening of 9417 new stores induring the first half of fiscal 20052006 and to the inclusion of 4863 new stores opened after the start of the second quarter in the third quarter of fiscal 2004.2005. Comparable store gross margin increased $50.7$83.3 million. The Company’s gross margin as a percent of net sales was 36.3%37.6% for the three months ended OctoberJuly 29, 2005,2006 compared to 35.9%37.0% for the three months ended OctoberJuly 30, 2004, an increase of 39 basis points.

2005.

Gross margin increased $441.4$334.4 million to $3,184.4$2,386.2 million for the ninesix months ended OctoberJuly 29, 2005,2006 from $2,743.0 million$2,051.8 for the ninesix months ended OctoberJuly 30, 2004.2005. Gross margin increased $291.5$165.6 million due to the opening of 9417 new stores induring the first half of fiscal 20052006 and to the inclusion of 95 new stores opened in fiscal 2004.2005. Comparable store gross margin increased $149.9$168.8 million. The Company’s gross margin as a percent of net sales was 36.8% for the six months ended July 29, 2006 compared to 36.4% for the ninesix months ended October 29, 2005, and 36.0% for the nine months ended OctoberJuly 30, 2004, an increase of 40 basis points.2005. The improvement in gross margin for the three and ninesix months ended OctoberJuly 29, 2005,2006, was thea result of having betterthe Company’s inventory management initiatives, including more frequent flow of merchandise content and improved inventory flow.store allocation.

Operating Expenses

Selling, general and administrative (S,S,G&A)&A expenses include all direct store expenses such as payroll, occupancy and store supplies and all costs associated with the Company’s distribution centers, advertising and corporate functions, but exclude depreciation and amortization and preopening expenses.

S,G&A expenses increased $94.3$86.0 million or 14.3%,12.8% to $753.8$758.5 million for the three months ended OctoberJuly 29, 2005,2006, from $659.5$672.5 million for the three months ended OctoberJuly 30, 2004.2005. The S,G&A expenses as a percent of net sales increased 13 basis points from last year and were 24.2%decreased to 23.0% of net sales for the three months ended OctoberJuly 29, 2005. Store operating expenses increased 14.7% which is consistent with the Company’s square footage growth. Credit expenses as a percent2006, from 23.3% of net sales increased primarily due to bad debt expense of approximately $7.5 million related to the revised bankruptcy legislation effective October 17, 2005. SG&A expenses for the third quarter included a credit of approximately $5.0 million related to the favorable resolution of the Visa Check/MasterMoney antitrust litigation settlement. Expenses as a percent of sales related to advertising and corporate were slightly higher for the three months ended October 29, 2005. AsJuly 30, 2005, a percentdecrease of sales, the Company leveraged24 basis points. The decrease was primarily due to leverage achieved in distribution center costs, credit costs and corporate expenses. This was partially offset by a 14.4% increase in store operating expenses during the third quarter.

resulting from an 11.8% growth in number of stores and additional payroll costs incurred to execute various merchandise initiatives.

S,G&A expenses increased $276.2$174.8 million or 15.2%,13.0% to $2,099.2$1,520.2 million for the ninesix months ended OctoberJuly 29, 2005,2006 from $1,823.0$1,345.4 million for the ninesix months ended OctoberJuly 30, 2004.2005. The S,G&A expenses as a percent of net sales increased 7 basis points from last year and were 24.0%decreased to 23.5% of net sales for the ninesix months ended OctoberJuly 29, 2005. The Company leveraged distribution, credit and corporate expenses2006, from 23.9% of net sales for the ninesix months ended October 29, 2005. Store operating expenses increased 16.8% for the nine months ended October 29,July 30, 2005, a decrease of 42 basis points. The decrease was primarily due to the Company’s square footage growthleverage achieved in distribution center costs and credit costs partially to the rollout of the beauty initiative to all remaining stores.

offset by a 13.6% increase in store operating expenses.

Depreciation and amortization for the three months ended OctoberJuly 29, 2005,2006 was $85.1$96.1 million compared to $72.1$82.6 million for the three months ended OctoberJuly 30, 2004.2005. Depreciation and amortization for the ninesix months ended OctoberJuly 29, 2005,2006 was $247.7$189.4 million compared to $210.2$162.6 million for the ninesix months ended OctoberJuly 30, 2004.2005. The increase is primarily attributable to the addition of new stores and the remodeling of existing stores.

Preopening expenses are expensed as incurred and relate to the costs associated with new store openings including advertising, hiring and training costs for new employees, and processing and transporting initial merchandise.merchandise and rent expenses. Preopening expense for the three months ended OctoberJuly 29, 2005,2006, was $26.3$8.1 million compared to $22.5$4.1 million for the three months ended OctoberJuly 30, 2004.2005. The increase for the three months ended July 29, 2006, is primarily due to a $4.6 million increase in rent expense due to the expense relatedadoption of FSP 13-1 as of January 29, 2006. FSP 13-1 requires that rental costs associated with ground or building operating leases incurred during the construction period be recognized as rental expense. Prior to opening 61 stores in the three months ended October 29, 2005, compared to 48 stores inadoption of FSP 13-1, the three months ended October 30, 2004.Company capitalized rental costs incurred during the construction period. Preopening expense for the ninesix months ended OctoberJuly 29, 2005,2006 was $42.9$19.1 million compared to $46.6$16.7 million for the ninesix months ended OctoberJuly 30, 2004.2005. This increase is also due to the adoption of FSP 13-1 as of January 29, 2006, which resulted in $8.2 million of incremental rent expense. This increase was partially offset by the opening of 17 new stores for the six months ended July 29, 2006 compared to opening 33 stores for the six months ended July 30, 2005.

Operating Income

As a result of the above factors, operating income for the three months ended OctoberJuly 29, 2005,2006, was $267.4$375.4 million or 8.6%,11.4% of net sales compared to $231.5$309.4 million or 8.4%,10.7% of net sales for the three months ended OctoberJuly 30, 2004,2005, an increase of 15.5%21.3% from last year. Operating income for the ninesix months ended OctoberJuly 29, 2005,2006 was $794.5$657.6 million or 9.1%,10.2% of net sales compared to $663.4$527.1 million or 8.7%,9.4% of net sales for the ninesix months ended OctoberJuly 30, 2004,2005, an increase of 19.8%24.8% from last year.

Net Interest Expense

Net interest expense for the three months ended OctoberJuly 29, 2005,2006 was $18.0$6.0 million compared to $15.1$16.3 million for the three months ended OctoberJuly 30, 2004. 2005. The decrease in net interest expense was primarily due to interest income of $9.5 million earned on the investment of the proceeds received from the sale of the Company’s private label credit card portfolio and higher interest rates on investments than last year.

Net interest expense for the ninesix months ended OctoberJuly 29, 2005,2006 was $51.5$20.2 million compared to $45.1$33.5 million for the ninesix months ended OctoberJuly 30, 2004.

2005. The decrease in net interest expense was primarily due to interest income of $10.9 million earned on the investment of the proceeds received from the sale of the Company’s private label credit card portfolio and higher interest rates on investments than last year.

Provision for Income Taxes

The Company’s effective income tax rate was 37.1% and 37.3% for the three and six months ended OctoberJuly 29, 2005 was 37.8%.2006. The effective tax rate for the nine months ended October 29, 2005 was 37.1%, which is less than the Company’s underlying estimated annual effective tax rate. The change in the effective tax rate was due to a tax adjustmentfavorably impacted by the tax-free interest earned on the investment of $4.9 million in the second quarterproceeds received from the sale of fiscal 2005 due to the favorable resolution of certain state tax matters. The effective tax rate is expected to be 37.8% for the fourth quarter. The Company’s effective tax rate in fiscal 2004 was 37.8%.

private label credit card portfolio.

Net Income

Net income for the three months ended OctoberJuly 29, 2005,2006, was $155.1$232.4 million compared to $134.6$187.2 million for the three months ended OctoberJuly 30, 2004,2005, an increase of 15.3%24.1% from last year. Earnings were $0.45Net income per diluted share was $0.69 for the three months ended July 29, 2006, compared to $0.54 per diluted share for the three months ended OctoberJuly 30, 2005, an increase of 27.8% over last year.

Net income for the six months ended July 29, 2005,2006, was $399.6 million compared to $0.39$311.9 million for the six months ended July 30, 2005, an increase of 28.1% from last year. Earnings were $1.17 per diluted share for the threesix months ended October 30, 2004. Net income for the nine months ended OctoberJuly 29, 2005, was $467.0 million2006, compared to $384.6 million for the nine months ended October 30, 2004, an increase of 21.4% from last year. Earnings were $1.35$0.90 per diluted share for the ninesix months ended October 29,July 30, 2005, compared to $1.12 per diluted share for the nine months ended October 30, 2004.an increase of 30.0% over last year.

Seasonality & Inflation

The Company’s business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the lastsecond half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 15% and 30% of sales typically occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company’s 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 revenuessales and costs associated with the opening of new stores.

The Company does not believe that inflation has had a material effect on its results during the periods presented. However, there can be no assurance that the Company’s business will not be affected by such factors in the future.

Financial Condition and Liquidity

The Company’s primary ongoing cash requirements are for capital expenditures in connection with the store expansion and remodeling programs and seasonal and new store inventory purchases, and the growth in proprietary credit card accounts receivable.purchases. The Company’s primary sources of funds for its business activities are cash flow from operations, short-term trade credit and its lines of credit.

Operating Activities. Cash flow provided by operations was $263.4$2.3 billion for the six months ended July 29, 2006, compared to $440.0 million for the ninesix months ended October 29, 2005 compared to $248.6 million for the nine months ended OctoberJuly 30, 2004.2005. The primary sourcessource of cash flow for the ninesix months ended OctoberJuly 29, 2005, were net income2006, was the $1.6 billion cash proceeds received in connection with the sale of $467.0 million and a $625.7 million increase inthe Company’s proprietary credit card accounts payable.to Chase on April 21, 2006. The primary use of cash flow for the six months ended July 29, 2006, was an increase inof merchandise inventory of $907.3 million.$170.6 million which was more than offset by an increase of $182.2 million 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. Seasonal cash needs are met by financing secured by proprietary accounts receivable and lines of credit available under the Company’s revolving credit facilities.

Key financial ratios that provide certain measures of the Company’s liquidity are as follows:

The reduction in the debt/capitalization ratio as of July 29, 2006, compared to July 30, 2005, was due to the retirement of $100.0 million of current debt during the first quarter of 2006. The decrease in working capital and the current ratio as of July 29, 2006, compared to July 30, 2005, was due to the sale of the Company’s private label credit card portfolio on April 21, 2006, and the $1.1 billion of share repurchases made during the six months ended July 29, 2006.

The Company’s net accounts receivable balance at October 29, 2005merchandise inventories increased $102.5$210.8 million, or 9.6% from the January 29,July 30, 2005 balance primarily due to the seasonality of the Company’s business. The accounts receivable balance typically peaks during the holiday season. The October 29, 2005 net accounts receivable balance increased $207.4 million over the October 30, 2004 balance. The increase is primarily due to a 19.5% year to date increase in proprietary credit card sales offset by increased payment rates. Write-offs increased to 1.2%the number of Kohl’s charge sales for the nine months ended October 29, 2005, compared to 1.1% last year. The Company’s estimate of incremental bad debt expense relating to the revised bankruptcy legislation, effective October 17, 2005, was $7.5 million. The Company believes write-offs of delinquent accounts were accelerated due to the revised bankruptcy legislation. As a result, the allowance for doubtful accounts was reduced to 1.6% of gross accounts receivable at October 29, 2005 from 1.8% at October 30, 2004. The following table summarizes information related to the Company’s proprietary credit card receivables:

The Company’s merchandise inventories increased $214.0 million, or 8.1% from the October 30, 2004 balance, primarily due to the opening of 94 additional stores during the first nine months of 2005. Merchandise inventory increased $907.3 million, or

46.6%, from the January 29, 2005 balance due to normal business seasonality and to the opening of 94 additional stores during the first nine months of 2005.stores. On an average per store basis, the inventory at OctoberJuly 29, 2006 decreased 2.0% from the July 30, 2005 decreased approximately 6% compared tobalance. The Company’s merchandise inventories increased $170.6 million, or 7.6% from the same time last year,January 28, 2006 balance due to improvements in merchandise flow.normal business seasonality and the opening of 17 new stores. Accounts payable decreased $16.1at July 29, 2006, increased $45.6 million from OctoberJuly 30, 2004,2005, and increased $625.7$182.2 million from January 29, 2005.28, 2006. Accounts payable as a percent of inventory at OctoberJuly 29, 20052006, was 46.6%42.0%, compared to 51.0%44.0% at OctoberJuly 30, 2004. The reduction versus last year is a result of the improvement in inventory strategies and flowing receipts closer to need.

2005.

Investing Activities. Net cash used in investing activities was $1.1 billion for the six months ended July 29, 2006 compared to $471.8 million for the six months ended July 30, 2005. Investing activities in 2006 included the net purchases of $359.2 million of short-term investments and $706.5 million of capital expenditures. The purchase of short-term investments represents the investment of the proceeds received from the private label credit card transaction on April 21, 2006 in excess of the cash used to repurchase common stock. Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs. The Company’sInvesting activities for 2005 included capital expenditures including favorable lease rights, for the nine months ended October 29, 2005, were $668.4 million compared to the $669.3 million for the same period a year ago.of $416.8 million.

Total capital expenditures for fiscal 20052006 are expected to be approximately $875 million.$1.2 billion. This estimate includes new store spending, new distribution center spending, as well as remodeling and base capital needs. The actual amount of the Company’s future annual 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 opening distribution centers.

Financing Activities. The Company periodically accesses the capital markets, as needed,expects to financefund growth with available cash and short-term investments, proceeds from cash flows from operations, short-term trade credit, seasonal borrowings under its growth.revolving credit facilities and other sources of financing. The Company believes it has sufficient lines of credit, cash and short-term investments and expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company has twoan unsecured revolving bank credit facilitiesfacility (“revolvers”revolver”) totaling $552$532.0 million. No amounts were outstanding under the revolver at July 29, 2006 and July 30, 2005. The Company also hashad a $225.0 million Receivable Purchase Agreement (RPA) under(“RPA”) which was terminated in the Company periodically sells an undivided interestfirst quarter of 2006 in its private label credit cardconjunction with the sale of the receivables. For financial reporting purposes, receivables sold are treated as secured borrowings. At October 29, 2005, there was $225.0 millionNo amounts were outstanding under the RPA and $106.5 millionat July 30, 2005. In addition, the Company has two demand notes with availability totaling $50.0 million. No amounts were outstanding under the Company’s revolvers. At Octoberthese notes at July 29, 2006 and July 30, 2004, accounts receivable of $225.0 million were sold and $129.0 million was outstanding under the revolvers.2005.

Contractual Obligations

The Company has aggregate contractual obligations at July 29, 2006, of $11,013.0 million$14.8 billion related to debt repayments, capital leases, operating leases, royalties and royaltiespurchase obligations as follows:

The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $30.8$103.1 million at OctoberJuly 29, 2005.2006. If certain conditions were met under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, the Company does not expect to make any significant payments. Therefore, they have been excluded from the preceding table.

The various debt agreements contain certain covenants that limit, among other things, additional indebtedness, as well as requiringrequire the Company to meet certain financial tests. As of OctoberJuly 29, 2005,2006, the Company was in compliance with all financial covenants of the debt agreements.

agreements and expects to remain in compliance for the upcoming year.

Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of OctoberJuly 29, 2005. All purchase obligations are cancelable and therefore are not included in the above table.

2006.

The Company has not created, and is not party to, any special-purpose or off-balanceoff- balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

Critical Accounting Policies and Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.

Allowance for Doubtful Accounts

The Company records an allowance for doubtful accounts as an estimate of the accounts receivable balance that may not be collected. The Company evaluates the collectibility of accounts receivable based on the aging of accounts, historical write-off experience and specific review for potential bad debts. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.

Factors that would cause this allowance to increase primarily relate to increased customer bankruptcies or other difficulties that make further collection unlikely. Conversely, improved write-off experience and aging of receivables would result in a decrease in the provision.

Retail Inventory Method and Inventory Valuation

The Company values its inventory at the lower of cost or market with cost determined on the first-in, first-out (FIFO) basis using the retail inventory method (RIM). Under RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of the retail inventory methodRIM will result in inventories being valued at the lower of cost or market as markdowns are currently taken as a reduction of the retail value of inventories.

Based on a review of historical clearance markdowns, current business trends, expected vendor funding and discontinued merchandise categories, an adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce inventories to the lower of cost or market. Management believes that the Company’s inventory valuation approximates the net realizable value of clearance inventory and results in carrying inventory at the lower of cost or market.

Vendor Allowances

The Company records vendor allowances and discounts in the income statement when the purpose for which those monies were designated is fulfilled. Allowances provided by vendors generally relate to profitability of inventory recently sold and, accordingly, are reflected as reductions to cost of merchandise sold as negotiated. Vendor allowances received for print advertising or fixture programs reduce the Company’s expense or expenditure for the related advertising or fixture program.program when appropriate. Vendor allowances will fluctuate based on the amount of promotional and clearance markdowns necessary to liquidate the inventory.

Insurance Reserve Estimates

The Company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. The Company determines the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims frequency and severity of claims from historical experience as well as changes in state statutes and the mix of states in which the Company operates could result

in a change into the required reserve levels. Under its workers’ compensation and general liability insurance policies, the Company retains the initial risk of $500,000 and $250,000, respectively, per occurrence. The Company also has a lifetime medical payment limit of $1.5 million.

Impairment of Assets and Closed Store Reserves

The Company has a significant investment in property and equipment and favorable lease rights. The related depreciation and amortization is computed using estimated useful lives of up to 50 years. The Company reviews whether indicators of impairment of long-lived assets held for use (including favorable lease rights) for impairmentare present annually or whenever an event, such as decisions to close a store, indicate the carrying value of the asset may not be recoverable. The Company has historically not experienced any significant impairment of long-lived assets or closed store reserves. Decisions to close a store can also result in accelerated depreciation over the revised useful life. If the store is leased, a reserve is set up for the discounted difference between the rent and the expected sublease rental income when the location is no longer in use. A significant change in cash flows, market valuation, demand for real estate or other factors, could result in an increase or decrease in the reserve requirement or impairment charge.

Income Taxes

The Company pays income taxes based on tax statutes, regulations and case law of the various jurisdictions in which it operates. At any one time, multiple tax years are subject to audit by the various taxing authorities. The Company’s effective income tax rate was 37.3% for the six months ended July 29, 2006, and 36.8% for the six months ended July 30, 2005. The effective rate is impacted by changes in law, location of new stores, level of earnings and the result of tax audits.

Operating Leases

The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation of the related leasehold improvements. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the building for the initial setup of fixtures and merchandise.depreciation.

Item 3.Quantitative3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary exposure to market risk consists of changes in interest rates or borrowings. At OctoberJuly 29, 2005,2006, the Company’s fixed rate long-term debt, excluding capital leases, was $996.7$895.8 million.

Fixed rate long-term debt is utilized as a primary source of capital. When these debt instruments mature, the Company may refinance such debt at then existing market interest rates, which may be more or less than interest rates on the maturing debt. If interest rates on the existing fixed rate debt outstanding at OctoberJuly 29, 2005,2006, changed by 100 basis points, the Company’s annual interest expense would change by $10.0$9.0 million.

During the first ninesix months of 2005,2006, average borrowings under the Company’s variable rate credit facilities, the revolversrevolver and the RPA, were $61.1$23.4 million. If interest rates on the average fiscal 20052006 variable rate debt changed by 100 basis points, the Company’s interest expense would change by $611,000$234,000 assuming comparable borrowing levels.

Item 4.Controls4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no material changes in the Company’s risk factors from those disclosed in our 2005 Annual Report on Form 10-K.

Forward Looking Statements

Items 2 and 3This report contains statements that may constitute forward-looking statements within the meaning of this Form 10-Q contain “forwardthe safe harbor provisions for forward looking statements” subject contained in the Private Securities Litigation Reform Act of 1995. Those statements relate to protections under federal law.developments, results, conditions or other events the Company expects or anticipates will occur in the future. The Company intends words such as “believes,” “anticipates,” “plans,” “may,” “will,” “should,” “expects,”“expects” and similar expressions to identify forward-looking statements. In addition,Without limiting the foregoing, these statements covering the Company’smay relate to future sales or financial performance and the Company’s plans, objectives, expectations or intentions are forward-looking statements, such as statements regarding the Company’s liquidity,outlook, revenues, earnings, store openings, planned capital expenditures, future store openingsmarket conditions, new strategies and adequacy of capital resourcesthe competitive environment. Forward-looking statements are based on management’s then current views and reserves. Such statementsassumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipatedprojected. Any such forward-looking statements are qualified by the forward looking statements. These risks and uncertainties include but are not limited to thoseimportant risk factors, described in Exhibit 99.1 topart 1A of the Company’s annual reportAnnual Report on Form 10-K filed with

the SEC on March 18, 2005,17, 2006, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and the Company undertakes no obligation to update them. An investment in the Company’s common stock or other securities carries certain risks. Investors should carefully consider the risks as stated in the Company’s Form 10-K and other risks which is expressly incorporated herein by reference, and such other factors as may periodically be describeddisclosed from time to time in the Company’s filings with the SEC.SEC before investing in the Company’s securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended July 29, 2006, the Company did not sell any equity securities which were not registered under the Securities Act.

c. Issuer Purchases of Securities

On March 6, 2006, the Company announced that its Board of Directors authorized a $2.0 billion share repurchase program. Purchases under the repurchase program may be made in the open market, through block trades and other negotiated transactions. The Company expects to execute the share repurchase program primarily in open market transactions, subject to market conditions. The Company expects to complete the program in approximately two to three years. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued or accelerated at any time.

The following table contains information for shares repurchased during the three months ended July 29, 2006:

PART II.OTHER INFORMATIONItem 6. Exhibits

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

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