For purposes of the following discussion, all references to “the quarter” are for the 13-week fiscal periods ended July 31, 2010 and August 1, 2009 and all references to “year to date” are for the 26-week fiscal periods ended July 31, 2010 and August 1, 2009.

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 2009 Annual Report on Form 10-K. The following discussion contains 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 2009 Annual Report on Form 10-K (particularly in “Risk Factors”).

Executive Summary

We believe that consumers were slightly more confident in their spending during the second quarter of 2010, but remain focused on value and ways to make their dollars go farther. We intend to continue to be flexible in our sales and inventory planning and in our expense management in order to react to changes in consumer demand.

Total sales increased 7.7% for the quarter and 9.3% for the six months ended July 31, 2010. Comparable store sales increased 4.6% for the quarter and 5.9% year to date. An increase in the number of transactions was the primary driver of the increase in comparable store sales in both periods. E-Commerce sales increased approximately 50% and contributed approximately 100 basis points to our comparable store sales in both the quarter and year-to-date period.

Gross margin as a percent of net sales increased 31 basis points in the quarter and 38 basis points year to date. Strong inventory management, as well as successful private and exclusive brand strategies, contributed to the margin strength.

Selling, general and administrative expenses increased eight percent compared to the prior year quarter and year-to-date period due in part to investments in technology and infrastructure in our E-Commerce business.

Net income increased 13% for the quarter to $260 million, or $0.84 per diluted share, compared to net income of $229 million and diluted earnings per share of $0.75 in the second quarter of last year. Year to date, net income increased 25% to $459 million or $1.48 per diluted share, compared to net income of $368 million and diluted earnings per share of $1.20 last year.

In June, we announced the signing of a multi-year service agreement and partnership with Aldo, International, who will design and produce exclusive footwear products to be sold at Kohl’s and Kohls.com under select private and exclusive brands. As part of the agreement, Aldo will be responsible for the design and production and will have a dedicated design team on the business. Kohl’s will collaborate on the design process. The line is expected to launch in spring 2011.

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Our strategic committees continue to focus on opportunities to drive our overall profitability. The mission of the Regional Assortment Committee is to accelerate sales growth by varying merchandise assortment, marketing and store presentation by region to reflect the lifestyle preferences and climate needs of our customers. Our focus on regional relevance resulted in year-to-date increases in both transactions per store and comparable store sales in our hot and mild markets in the Southeast and West, where we have the strongest opportunity to gain market share. The mission of the In-Store Experience Committee is to consistently deliver an improved store experience that generates loyalty and grows market share. Our overall internal customer service scores continue to increase year over year and were up 4% for the first six months of 2010.

As of July 31, 2010, we operated 1,067 stores in 49 states, compared to 1,022 stores as of August 1, 2009. Selling square footage totaled 79 million square feet at July 31, 2010 and 76 million square feet at August 1, 2009. We currently expect to open 21 additional stores in the second half of fiscal 2010. We also plan to re-open a store in Virginia which has been closed for a complete re-build since January 2010.

We completed 85 remodels this year; approximately two-thirds more than last year’s remodel total of 51. Remodels remain a critical part of our long-term strategy and we believe it is extremely important to maintain our existing store base, even in this difficult environment.

During 2010, we are making significant capital investments to support our growth:

Our current expectations for the third and fourth quarters of fiscal 2010 compared to the comparable prior year quarters are as follows:

Based on these assumptions, we expect diluted earnings per share of $3.57 to $3.70 for fiscal 2010. This guidance does not reflect any additional share repurchases in fiscal 2010.

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Results of Operations

Net Sales

New stores contributed $119 million in net sales over the prior year quarter and $255 million over the prior year-to-date period. 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, increased $175 million, or 4.6%, compared to the second quarter of last year and $435 million, or 5.9%, compared to the six months ended August 1, 2009.

Drivers of the changes in comparable stores sales were as follows:

From a line of business perspective, Footwear reported the strongest comparable store sales for both the quarter and year-to-date periods with low double-digit comparable store sales increases. Men’s also outperformed the company average in both periods with strength in casual sportswear and basics. Home, Women’s and Accessories all reported low to mid single-digit comparable store sales increases in both the quarter and year to date. The Children’s business underperformed the company, posting a negative low single-digit comparable store sales decrease for the quarter and a low single-digit comparable store sales increase year to date.

The Southeast region continued its first quarter trends and, again, reported the strongest comparable store sales for the second quarter. The Northeast also outperformed the company for the quarter. The Midwest, South Central, MidAtlantic and West regions posted positive comparable store sales for the quarter, but underperformed the company average. Year to date, the Southeast region was the strongest performer with high single-digit comparable store sales increases. All other regions posted mid single-digit comparable store sales increases.

Private and exclusive brands as a percentage of total sales increased approximately 300 basis points for the quarter to 49.1% of sales. Our three largest private brands - Apt. 9, Croft & Barrow and Sonoma - combined for a 20% increase in sales. Jumping Beans sales increased almost twice this amount. Strong exclusive brand performers for the quarter included ELLE, FILA Sport, Food Network, and Simply Vera Vera Wang, which all achieved sales increases of 30 percent or more.

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E-Commerce sales increased approximately 50% in both periods to $126 million for the quarter and $253 million year to date. The sales growth is primarily the result of increased customer traffic to the web site, increased style and size selections offered on-line compared with our in-store selection, and the expansion of product categories not available in our stores.

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 40.3% for the second quarter of 2010, an increase of 31 basis points compared to 40.0% for the second quarter of 2009. For the year-to-date period, gross margin as a percent of sales was 39.2% in 2010 compared to 38.8% in 2009. Strong inventory management as well as increased penetration of private and exclusive brands contributed to the margin strength. Total inventory increased eight percent compared to the prior year, but inventory per store increased three percent, less than our comparable store sales increase. At the end of the second quarter, clearance inventory was slightly higher than last year, but constitutes less than five percent of our total units on hand. Sales of private and exclusive brands reached 49.1% of net sales for the quarter, an increase of more than 300 basis points over the prior year quarter. Year to date, private and exclusive brand sales were 48.2% of net sales, an increase of 284 basis points over last year. Additionally, our ongoing markdown and size optimization initiatives continue to develop and have favorable impacts on our gross margin percentage.

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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. We do not include depreciation and amortization and preopening expenses in SG&A. The classification of these expenses varies across the retail industry.

SG&A increased eight percent in both the quarter and year-to-date periods. SG&A as a percentage of net sales increased, or “deleveraged” for the quarter, primarily due to investments in technology and infrastructure related to our E-Commerce business, but decreased, or “leveraged,” year to date. Store payroll and advertising expenses leveraged in both the quarter and year to date. Credit expenses did not leverage in either period due to reductions in late fee revenue. Costs associated with legislative changes effective in the first quarter of 2010 also had a negative impact on credit expenses for the year-to-date period.

The increases in depreciation and amortization are primarily attributable to the addition of new stores and remodels.

Preopening expenses decreased due to fewer new store openings during the six months ended July 31, 2010 as compared to August 1, 2009. We plan to open 30 new stores in fiscal 2010, compared to 56 in fiscal 2009. Additionally, most of the stores opened in September 2009 were ground leased stores which had higher rental expenses.

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As a result of the above factors, operating income as a percent of net sales increased 44 basis points to 10.9% of net sales for the three months ended July 31, 2010, compared to 10.5% of net sales for the three months ended August 1, 2009. For the year-to-date period, operating income as a percent of net sales increased 116 basis points to 9.8% of net sales for 2010 compared to 8.7% of net sales for 2009.

Interest Expense, Net

Net interest expense in both the quarter and year-to-date periods was comparable to the prior year periods as interest income from higher average investments was more than offset by lower interest rates.

Provision for Income Taxes

Our effective tax rate was 37.9% for both the three and six months ended July 31, 2010 compared to 37.6% for both the three and six months ended August 1, 2009.

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 second 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.

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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.

We are, however, beginning to experience inflation in our merchandise and transportation costs. We do not expect such costs to be significant in the third and fourth quarters of 2010, but we do expect to see low to mid single-digit increases in the first six months of 2011. In our private and exclusive brands, where we have more control over the production and manufacture of the merchandise, we have historically been able to minimize inflationary pressures through measures such as committing earlier for fabric and shifting production to lower cost markets. Our third-party brand vendors are also facing the same inflationary pressures. We will continue to work with these vendors, as possible, to minimize the impact of inflation on our merchandise costs and our selling prices.

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.

As of July 31, 2010, we had cash and cash equivalents of $2.5 billion. As discussed in Footnote 7, “Subsequent Events,” on August 11, 2010, we entered into a strategic alliance with Capital One, National Association (“Capital One”) related to our proprietary credit card accounts. Once the receivables from our credit card accounts are transitioned to Capital One, we will consider various capital planning options, which could include the resumption of share repurchases, the initiation of a dividend, or both.

Operating Activities. Despite the increase in net income, cash provided by operations in 2010 was $628 million, 37% lower than the prior year. The decrease is primarily a result of higher incentive compensation payments in the first quarter of 2010, inventory reductions in 2009 and slower accounts payable growth in 2010.

Merchandise inventories per store were $2.75 million at July 31, 2010 and $2.67 million at August 1, 2009. This three percent increase in inventories per store reflects continued inventory management, including conservative sales and receipts planning.

Accounts payable as a percent of inventory was 45.9% at July 31, 2010, compared to 42.3% at August 1, 2009. The increase is primarily due to vendor finance initiatives. We have rolled out a receivable financing program whereby a financial institution provides our vendors with financing, at a rate which is below what the vendors could normally obtain on their own. We offer this program to vendors in exchange for extended payment terms. We do not incur any costs or expenses or forfeit any portion of our receivables in connection with this program.

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Investing Activities. Net cash used in investing activities increased $70 million, primarily due to higher capital spending as a result of increased remodels and the opening of a second fulfillment center to support our E-Commerce business. These increases were partially offset by reductions in capital spending for new stores.

As of July 31, 2010, we had investments in auction rate securities (“ARS”) with a par value of $359 million and an estimated fair value of $297 million. To date, substantially 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 do not believe that these failures will have any significant impact on our ability to fund ongoing operations and growth initiatives.

Financing Activities. Financing activities generated cash of $22 million in 2010 and used cash of $5 million 2009. The increase is primarily due to increased stock option exercises in 2010.

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 2010 or 2009.

We have no debt maturing until 2011. We expect to use cash and cash equivalents on hand and 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. Alternatively, if economic conditions and financing terms are favorable, we may choose to refinance the $400 million in 2011.

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

The increase in working capital and the current ratio as of July 31, 2010 compared to August 1, 2009 was primarily due to higher cash and cash equivalents, partially offset by the reclassification of $300 million of long-term debt due in March 2011 to current liabilities. The decrease in the debt/capitalization ratio reflects higher capitalization, primarily due to earnings.

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Debt Covenant Compliance. As of July 31, 2010, we were in compliance with all debt covenants and expect to remain in compliance during fiscal 2010.