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EX-31.2 - EX-31.2 - KOHLS Corpkss-ex312_83.htm
EX-31.1 - EX-31.1 - KOHLS Corpkss-ex311_82.htm
EX-23.1 - EX-23.1 - KOHLS Corpkss-ex231_81.htm
EX-12.1 - EX-12.1 - KOHLS Corpkss-ex121_80.htm
EX-10.22 - EX-10.22 - KOHLS Corpkss-ex1022_455.htm

Table of Contents

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

 

X

Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the fiscal year ended February 3, 2018

 

or

 

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition period from ____________ to ___________

 

Commission file number 1-11084

KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-1630919

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin

 

53051

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code (262) 703-7000

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

Common Stock, $.01 Par Value

 

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

 

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes    X        No            .

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes                No    X    .

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    X        No            .

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    X        No            .

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   X   .

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer    X    Accelerated filer         Non-accelerated filer         (Do not check if a smaller reporting company)

Smaller reporting company         Emerging growth company         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.          

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes                No    X    .

At July 28, 2017, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was approximately $7.0 billion (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on such date). At March 14, 2018, the Registrant had outstanding an aggregate of 168,236,899 shares of its Common Stock.

Documents Incorporated by Reference:

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 16, 2018 are incorporated into Part III.

 

 


Table of Contents

KOHL’S CORPORATION

INDEX

 

PART I

 

Item 1.

Business

3

Item 1A.

Risk Factors

5

Item 1B.

Unresolved Staff Comments

10

Item 2.

Properties

10

Item 3.

Legal Proceedings

12

Item 4.

Mine Safety Disclosures

12

Item 4A.

Executive Officers

12

 

 

 

PART II

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

13

Item 6.

Selected Consolidated Financial Data

16

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

31

Item 8.

Financial Statements and Supplementary Data

31

Item 9.

Changes In and Disagreements with Accountants on Accounting and Financial Disclosures

31

Item 9A.

Controls and Procedures

31

Item 9B.

Other Information

33

 

 

PART III

 

Item 10.

Directors, Executive Officers and Corporate Governance

34

Item 11.

Executive Compensation

34

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

34

Item 13.

Certain Relationships and Related Transactions, and Director Independence

34

Item 14.

Principal Accountant Fees and Services

34

 

 

PART IV

 

Item 15.

Exhibits and Financial Statement Schedules

35

Item 16.

Form 10-K Summary

37

 

 

 

SIGNATURES

38

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

F-1

 

 

2

 


Table of Contents

PART I

Item 1. Business

Kohl’s Corporation (the “Company," “Kohl’s,” "we," "our" or "us") was organized in 1988 and is a Wisconsin corporation. As of February 3, 2018, we operated 1,158 Kohl's department stores, a website (www.Kohls.com), 12 FILA outlets, and four Off-Aisle clearance centers. Our Kohl's stores and website sell moderately-priced proprietary and national brand apparel, footwear, accessories, beauty and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise that is available in our stores, as well as merchandise that is available only online.  

Our merchandise mix includes both national brands and proprietary brands that are available only at Kohl's. Our proprietary portfolio includes well-known established private brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life and exclusive brands that are developed and marketed through agreements with nationally-recognized brands such as Food Network, Jennifer Lopez, Marc Anthony, Rock & Republic and Simply Vera Vera Wang. National brands generally have higher selling prices, but lower gross margins, than proprietary brands.

The following tables summarize our sales penetration by line of business and brand type over the last three years:

 

Our fiscal year ends on the Saturday closest to January 31st each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report.

 

 

Fiscal Year

Ended

Number of

Weeks

 

 

2017

February 3, 2018

 

53

 

 

2016

January 28, 2017

 

52

 

 

2015

January 30, 2016

 

52

 

For discussion of our financial results, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."

Distribution

We receive substantially all of our store merchandise at our nine retail distribution centers. A small amount of our merchandise is delivered directly to the stores by vendors or their distributors. The retail distribution centers, which are strategically located throughout the United States, ship merchandise to each store by contract carrier several times a week. Digital sales may be picked up in our stores or are shipped from a Kohl’s fulfillment center, retail distribution center or store; by a third-party fulfillment center; or directly by a third-party vendor.

See Item 2, “Properties,” for additional information about our distribution centers.

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Employees

During 2017, we employed an average of approximately 137,000 associates, including approximately 33,000 full-time and 104,000 part-time associates. The number of associates varies during the year, peaking during the back-to-school and holiday seasons. None of our associates are represented by a collective bargaining unit. We believe our relations with our associates are very good.

Competition

The retail industry is highly competitive. Management considers style, quality and price to be the most significant competitive factors in the industry. Merchandise mix, brands, service, loyalty programs, credit availability, and customer experience and convenience are also key competitive factors. Our primary competitors are traditional department stores, upscale mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses and other forms of retail commerce. Our specific competitors vary from market to market.

Merchandise Vendors

We purchase merchandise from numerous domestic and foreign suppliers. All business partners must meet certain requirements in order to do business with us.  Our Terms of Engagement include provisions regarding laws and regulations, employment practices, ethical standards, environmental and legal requirements, communication, monitoring/compliance, record keeping, subcontracting and corrective action. Our expectation is that all business partners will comply with these Terms of Engagement and quickly remediate any deficiencies, if noted, in order to maintain our business relationship.

Approximately 25% of the merchandise we sell is sourced through a third-party purchasing agent. No vendors individually accounted for more than 10% of our net purchases in 2017. We have no significant long-term purchase commitments or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier. We believe we have good working relationships with our suppliers.

Seasonality

Our business, like that of most retailers, is subject to seasonal influences. The majority of our sales and income are typically realized during the second half of each fiscal year. The back-to-school season extends from August through September and represents approximately 15% of our annual sales.  Approximately 30% of our annual sales occur during the holiday season in the months of November and December. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the fiscal year.

Trademarks and Service Marks

KOHL'S® is a registered trademark owned by one of our wholly-owned subsidiaries. We consider this mark and the accompanying goodwill to be valuable to our business. This subsidiary has over 200 additional registered trademarks, most of which are used in connection with our private brand products.

Available Information

Our corporate website is https://corporate.kohls.com. Through the “Investors” portion of this website, we make available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission (“SEC”).

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The following have also been posted on our website, under the caption “Investors” and sub-caption "Corporate Governance":

 

Committee charters of our Board of Directors’ Audit Committee, Compensation Committee and Governance & Nominating Committee

 

Corporate Governance Guidelines

 

Code of Ethics

 

Corporate Social Responsibility Report

Information contained on our website is not part of this Annual Report on Form 10-K. Paper copies of any of the materials listed above will be provided without charge to any shareholder submitting a written request to our Investor Relations Department at N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051 or via e-mail to Investor.Relations@Kohls.com.

Item 1A. Risk Factors

This Form 10-K contains “forward-looking statements” made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "plans," "may," "intends," "will," "should," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements also include comments about our future sales or financial performance and our plans, performance and other objectives, expectations or intentions, such as statements regarding our liquidity, debt service requirements, planned capital expenditures, future business initiatives, and adequacy of capital resources and reserves. There are a number of important factors that could cause our results to differ materially from those indicated by the forward-looking statements including, among others, those risk factors described below. Forward-looking statements relate to the date made, and we undertake no obligation to update them.

Our sales, gross margin, expenses and operating results could be negatively impacted by a number of factors including, but not limited to those described below. Many of these risk factors are outside of our control. If we are not successful in managing these risks, they could have a negative impact on our sales, gross margin, expenses, and/or operating results.

Macroeconomic and Industry Risks

General economic conditions, consumer spending levels and/or other conditions could decline.

Consumer spending habits, including spending for the merchandise that we sell, are affected by many factors including prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy and fuel costs, income tax rates and policies, consumer confidence, consumer perception of economic conditions, and the consumer’s disposable income, credit availability and debt levels. The moderate income consumer, which is our core customer, is especially sensitive to these factors. A slowdown in the U.S. economy or an uncertain economic outlook could adversely affect consumer spending habits. As all of our stores are located in the United States, we are especially susceptible to deteriorations in the U.S. economy.

Consumer confidence is also affected by the domestic and international political situation. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers.

Our competitors could make changes to their pricing and other practices.

The retail industry is highly competitive. We compete for customers, associates, locations, merchandise, services and other important aspects of our business with many other local, regional and national retailers. Those competitors include traditional department stores, upscale mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses, and other forms of retail commerce.

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We consider style, quality and price to be the most significant competitive factors in our industry. The continuing migration and evolution of retailing to digital channels has increased our challenges in differentiating ourselves from other retailers especially as it relates to national brands. In particular, consumers are able to quickly and conveniently comparison shop with digital tools, which can lead to decisions based solely on price. Unanticipated changes in the pricing and other practices of our competitors may adversely affect our performance.

Tax and trade policies could adversely change.

Uncertainty with respect to tax and trade policies, tariffs and government regulations affecting trade between the United States and other countries has recently increased. We source the majority of our merchandise from manufacturers located outside of the United States, primarily in Asia. Major developments in tax policy or trade relations, such as the imposition of tariffs on imported products, could have a material adverse effect on our business, results of operations and liquidity.

Operational Risks

We may be unable to offer merchandise that resonates with existing customers and attracts new customers as well as successfully manage our inventory levels.

Our business is dependent on our ability to anticipate fluctuations in consumer demand for a wide variety of merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions could create inventory imbalances and adversely affect our performance and long-term relationships with our customers. Additionally, failure to accurately predict changing consumer tastes may result in excess inventory, which could result in additional markdowns and adversely affect our operating results.

We may be unable to source merchandise in a timely and cost-effective manner.

Approximately 25% of the merchandise we sell is sourced through a third-party purchasing agent. The remaining merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States, substantially all of which are shipped by ocean to ports in the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, work stoppages, port strikes, port congestion and delays and other factors relating to foreign trade are beyond our control and could adversely impact our performance.

Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of merchandise sold. The price and availability of raw materials may fluctuate substantially, depending on a variety of factors, including demand, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and policy, economic climates, market speculation and other unpredictable factors. An inability to mitigate these cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability. Any related pricing actions might cause a decline in our sales volume. Additionally, a decrease in the availability of raw materials could impair our ability to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.

If any of our significant vendors were to become subject to bankruptcy, receivership or similar proceedings, we may be unable to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as current terms, which could adversely affect our sales and operating results.

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Our vendors may not adhere to our Terms of Engagement or to applicable laws.

A substantial portion of our merchandise is received from vendors and factories outside of the United States. We require all of our suppliers to comply with all applicable local and national laws and regulations and our Terms of Engagement for Kohl's Business Partners. These Terms of Engagement include provisions regarding laws and regulations, employment practices, ethical standards, environmental and legal requirements, communication, monitoring/compliance, record keeping, subcontracting and corrective action. From time to time, suppliers may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more suppliers could have a negative impact on our reputation and our results of operations.

Our marketing may be ineffective.

We believe that differentiating Kohl's in the marketplace is critical to our success. We design our marketing and loyalty programs to increase awareness of our brands and to build personalized connections with new and existing customers. We believe these programs will strengthen customer loyalty, increase the number and frequency of customers that shop our stores and website and increase our sales. If our marketing and loyalty programs are not successful, our sales and operating results could be adversely affected.

The reputation of the Kohl's brand or our proprietary brands could be damaged.

We believe the Kohl's brand name and many of our proprietary brand names are powerful sales and marketing tools. We devote significant resources to promoting and protecting them. We develop and promote proprietary brands that have generated national recognition. In some cases, the brands or the marketing of such brands are tied to or affiliated with well-known individuals. Damage to the reputations (whether or not justified) of the Kohl’s brand, our proprietary brand names or any affiliated individuals, could arise from product failures; concerns about human rights, working conditions and other labor rights and conditions where merchandise is produced; perceptions of our pricing and return policies; litigation; vendor violations of our Terms of Engagement; or various other forms of adverse publicity, especially in social media outlets. Damage to our reputation may result in a reduction in sales, earnings, and shareholder value.

There may be concerns about the safety of products that we sell.

If our merchandise offerings do not meet applicable safety standards or our customers' expectations regarding safety, we could experience lost sales, experience increased costs, and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns, could have a negative impact on our sales and operating results.

We may be unable to adequately maintain and/or update our information systems.

The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage sales, distribution, and merchandise planning and allocation functions. We also generate sales though the operations of our Kohls.com website. We frequently make investments that will help maintain and update our existing information systems. The potential problems and interruptions associated with implementing technology initiatives or the failure of our information systems to perform as designed could disrupt our business and harm our sales and profitability.

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Our information technology projects may not yield their intended results.

We regularly have internal information technology projects in process. Although the technology is intended to increase productivity and operating efficiencies, these projects may not yield their intended results or may deliver an adverse user or customer experience. We may incur significant costs in connection with the implementation, ongoing use, or discontinuation of technology projects, or fail to successfully implement these technology initiatives or achieve the anticipated efficiencies from such projects, any of which could adversely affect our operations, liquidity and financial condition. 

Weather conditions could adversely affect consumer shopping patterns.

A significant portion of our business is apparel and is subject to weather conditions. As a result, our operating results may be adversely affected by severe or unexpected weather conditions. Frequent or unusually heavy snow, ice or rain storms; natural disasters such as earthquakes, tornadoes, floods, fires, and hurricanes; or extended periods of unseasonable temperatures could adversely affect our performance by affecting consumer shopping patterns, diminishing demand for seasonal merchandise and/or causing physical damage to our properties.

We may be unable to successfully execute an omnichannel strategy.

Customer expectations about the methods by which they purchase and receive products or services are evolving. Customers are increasingly using technology and mobile devices to rapidly compare products and prices and to purchase products. Once products are purchased, customers are seeking alternate options for delivery of those products. We must continually anticipate and adapt to these changes in the purchasing process. Our ability to compete with other retailers and to meet our customer expectations may suffer if we are unable to provide relevant customer-facing technology and omnichannel experiences. Our ability to compete may also suffer if Kohl’s, our suppliers, or our third-party shipping and delivery vendors are unable to effectively and efficiently fulfill and deliver orders, especially during the holiday season when sales volumes are especially high. Consequently, our results of operations could be adversely affected.

Our business is seasonal in nature, which could negatively affect our revenues, operating results and cash requirements.

Our business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the back-to-school and holiday seasons.

If we do not properly stock or restock popular products, particularly during the back-to-school and holiday seasons, we may fail to meet customer demand, which could affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profitability.

We may experience an increase in costs associated with shipping digital orders due to complimentary upgrades, split shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our website within a short period of time, we may experience system interruptions that make our website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. Also, third-party delivery and direct ship vendors may be unable to deliver merchandise on a timely basis.

This seasonality causes our operating results and cash needs to vary considerably from quarter to quarter. Additionally, any decrease in sales or profitability during the second half of the fiscal year could have a disproportionately adverse effect on our results of operations.

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Changes in credit card operations could adversely affect our sales and/or profitability.

Our credit card operations facilitate merchandise sales and generate additional revenue from fees related to extending credit. The proprietary Kohl's credit card accounts are owned by an unrelated third-party, but we share in the net risk-adjusted revenue of the portfolio, which is defined as the sum of finance charges, late fees and other revenue less write-offs of uncollectible accounts. Changes in funding costs related to interest rate fluctuations are shared similar to the revenue when interest rates exceed defined amounts. Though management currently believes that increases in funding costs will be largely offset by increases in finance charge revenue, increases in funding costs could adversely impact the profitability of this program.

Changes in credit card use, payment patterns and default rates may also result from a variety of economic, legal, social and other factors that we cannot control or predict with certainty. Changes that adversely impact our ability to extend credit and collect payments could negatively affect our results.

We may be unable to attract, develop and retain quality associates while controlling costs, which could adversely affect our operating results.

Our performance is dependent on attracting and retaining a large number of quality associates, including our senior management team and other key associates. Many associates are in entry level or part-time positions with historically high rates of turnover. Many of our strategic initiatives require that we hire and/or develop associates with appropriate experience. Our staffing needs are especially high during the holiday season. Competition for these associates is intense. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods.

Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, actions by our competitors in compensation levels, potential labor organizing efforts, and changing demographics. Competitive and regulatory pressures have already significantly increased our labor costs. Further changes that adversely impact our ability to attract and retain quality associates could adversely affect our performance and/or profitability. In addition, changes in federal and state laws relating to employee benefits, including, but not limited to, sick time, paid time off, leave of absence, wage-and-hour, overtime, meal-and-break time and joint/co-employment could cause us to incur additional costs, which could negatively impact our profitability.

Capital Risks

We may be unable to raise additional capital or maintain bank credit on favorable terms, which could adversely affect our business and financial condition.

We have historically relied on the public debt markets to raise capital to partially fund our operations and growth. We have also historically maintained lines of credit with financial institutions. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict our access to these potential sources of future liquidity. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating performance and maintaining strong debt ratings. If our credit ratings fall below desirable levels, our ability to access the debt markets and our cost of funds for new debt issuances could be adversely impacted. Additionally, if unfavorable capital market conditions exist if and when we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms and on a timely basis (if at all). If our access to capital was to become significantly constrained or our cost of capital was to increase significantly, our financial condition, results of operations and cash flows could be adversely affected.

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Our capital allocation could be inefficient or ineffective.

Our goal is to invest capital to maximize our overall long-term returns. This includes spending on inventory, capital projects and expenses, managing debt levels, and periodically returning value to our shareholders through share repurchases and dividends. To a large degree, capital efficiency reflects how well we manage our other key risks. The actions taken to address other specific risks may affect how well we manage the more general risk of capital efficiency. If we do not properly allocate our capital to maximize returns, we may fail to produce optimal financial results and we may experience a reduction in shareholder value.

Legal and Regulatory Risks

Regulatory and legal matters could adversely affect our business operations and change financial performance.

Various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. The costs and other effects of new or changed legal requirements cannot be determined with certainty. For example, new legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase prices of goods and services, reduce the availability of raw materials or further restrict our ability to extend credit to our customers.

We continually monitor the state and federal legal/regulatory environment for developments that may impact us. Failure to detect changes and comply with such laws and regulations may result in an erosion of our reputation, disruption of business and/or loss of associate morale. Additionally, we are regularly involved in various litigation matters that arise out of the conduct of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.

Sensitive or confidential customer, associate or company information could be improperly disclosed or lost, which could severely damage our reputation, expose us to risks of litigation and liability, disrupt our operations and harm our business.

As part of our normal course of business, we collect, process and retain sensitive and confidential customer, associate and company information. The protection of this data is extremely important to us, our associates and our customers. Despite the considerable security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, system failures, acts of vandalism, fraud, misappropriation, computer viruses, misplaced or lost data, programming and/or human errors or employee negligence, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, could disrupt our operations, damage our reputation and customers' willingness to shop in our stores or on our website, violate applicable laws, regulations, orders and agreements, and subject us to additional costs and liabilities which could be material.

 

Item 1B. Unresolved Staff Comments

Not applicable.

Item 2. Properties

Stores

As of February 3, 2018, we operated 1,158 Kohl's department stores with 82.8 million selling square feet in 49 states. We also operate four Off-Aisle clearance centers and 12 FILA outlets.

Our typical store lease has an initial term of 20-25 years and four to eight renewal options for consecutive five-year extension terms. Substantially all of our leases provide for a minimum annual rent that is fixed or adjusts to set levels during the lease term, including renewals. Approximately one-fourth of the leases provide for additional rent based on a percentage of sales over designated levels.

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The following tables summarize key information about our Kohl's stores as of February 3, 2018:

 

Number of Stores by State

Mid-Atlantic Region:

 

Northeast Region:

 

South Central Region:

Delaware

5

 

Connecticut

22

 

Arkansas

8

Maryland

23

 

Maine

5

 

Kansas

12

Pennsylvania

50

 

Massachusetts

25

 

Louisiana

8

Virginia

31

 

New Hampshire

11

 

Missouri

27

West Virginia

7

 

New Jersey

38

 

Oklahoma

11

 

 

 

New York

51

 

Texas

84

 

 

 

Rhode Island

4

 

 

 

 

 

 

Vermont

2

 

 

 

Total Mid-Atlantic

116

 

Total Northeast

158

 

Total South Central

150

 

 

 

 

 

 

 

 

Midwest Region:

 

Southeast Region:

 

West Region:

Illinois

66

 

Alabama

14

 

Alaska

1

Indiana

40

 

Florida

51

 

Arizona

26

Iowa

18

 

Georgia

32

 

California

117

Michigan

46

 

Kentucky

17

 

Colorado

24

Minnesota

27

 

Mississippi

5

 

Idaho

5

Nebraska

7

 

North Carolina

30

 

Montana

3

North Dakota

4

 

South Carolina

16

 

Nevada

12

Ohio

59

 

Tennessee

20

 

New Mexico

5

South Dakota

4

 

 

 

 

Oregon

11

Wisconsin

41

 

 

 

 

Utah

12

 

 

 

 

 

 

Washington

19

 

 

 

 

 

 

Wyoming

2

Total Midwest

312

 

Total Southeast

185

 

Total West

237

 

 

Location

 

Ownership

Strip centers

779

 

Owned

412

Community & regional malls

83

 

Leased

509

Freestanding

296

 

Ground leased

237

 

Distribution Centers

The following table summarizes key information about each of our distribution centers.

 

 

 

 

Year

Opened

 

Square

Footage

 

 

Store distribution centers:

 

 

 

 

 

 

 

Findlay, Ohio

 

1994

 

 

780,000

 

 

Winchester, Virginia

 

1997

 

 

420,000

 

 

Blue Springs, Missouri

 

1999

 

 

540,000

 

 

Corsicana, Texas

 

2001

 

 

540,000

 

 

Mamakating, New York

 

2002

 

 

605,000

 

 

San Bernardino, California

 

2002

 

 

575,000

 

 

Macon, Georgia

 

2005

 

 

560,000

 

 

Patterson, California

 

2006

 

 

360,000

 

 

Ottawa, Illinois

 

2008

 

 

328,000

 

 

Online fulfillment centers:

 

 

 

 

 

 

 

Monroe, Ohio

 

2001

 

 

1,200,000

 

 

San Bernardino, California

 

2010

 

 

970,000

 

 

Edgewood, Maryland

 

2011

 

 

1,450,000

 

 

DeSoto, Texas

 

2012

 

 

1,200,000

 

 

Plainfield, Indiana

 

2017

 

 

936,000

 

 

We own all of the distribution centers except Corsicana, Texas, which is leased.

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Corporate Facilities

We own our corporate headquarters in Menomonee Falls, Wisconsin. We also own or lease additional buildings and office space, which are used by various corporate departments, including our credit operations.

Item 3. Legal Proceedings

We are not currently a party to any material legal proceedings, but are subject to certain legal proceedings and claims from time to time that arise out of the conduct of our business.

Item 4. Mine Safety Disclosures

Not applicable.

Item 4A. Executive Officers

Our executive officers as of February 3, 2018 were as follows:

 

Name

Age

Position

Kevin Mansell

65

Chairman, Chief Executive Officer and President

Michelle Gass

49

Chief Merchandising and Customer Officer and CEO-elect

Sona Chawla

50

Chief Operating Officer and President-elect

Bruce Besanko

59

Chief Financial Officer

Richard D. Schepp

56

Chief Administrative Officer

 

Mr. Mansell is responsible for Kohl’s strategic direction, long-term growth and profitability. He has served as Chairman since September 2009, Chief Executive Officer since August 2008 and President and Director since February 1999. We previously announced Mr. Mansell’s retirement as the Chairman of the Board, Chief Executive Officer and President and as a director of Kohl’s effective as of the close of the 2018 Annual Meeting of Shareholders or any adjournment thereof. Mr. Mansell began his retail career in 1975.

Ms. Gass joined Kohl's in June 2013 as Chief Customer Officer and was named Chief Merchandising and Customer Officer in June 2015 and CEO-elect in September 2017. She is responsible for all of Kohl's merchandising, planning and allocation, and product development functions as well as the company's overall customer engagement strategy, including marketing, public relations, social media and philanthropic efforts. Previously, she served in a variety of management positions with Starbucks Coffee Company since 1996, most recently as President, Starbucks Coffee EMEA (Europe, Middle East, Russia and Africa) from 2011 to May 2013. Ms. Gass began her retail career in 1991.

Ms. Chawla joined Kohl's in November 2015 as Chief Operating Officer and was named President-elect in September 2017.  She is responsible for Kohl's full omnichannel operations. She oversees all store operations, logistics and supply chain network, information and digital technology, and omnichannel strategy, planning and operations. Previously, she had served with Walgreens as President of Digital and Chief Marketing Officer from February 2014 to November 2015 and President, E-Commerce from January 2011 to February 2014. Ms. Chawla began her retail and digital career in 2000.

Mr. Besanko joined Kohl’s in July 2017 as Chief Financial Officer and is responsible for financial planning and analysis, investor relations, financial reporting, accounting operations, tax, treasury, non-merchandise purchasing, credit and capital investment strategies. Previously, he served with Supervalu, Inc. as Executive Vice President, Chief Operating Officer and Chief Financial Officer from October 2015 to July 2017 and Executive Vice President and Chief Financial Officer from August 2013 to October 2015. Mr. Besanko also served as Executive Vice President, Chief Financial Officer and Chief Administrative Officer at OfficeMax, Inc. from 2008 to August 2013 and Executive Vice President, Chief Financial Officer at Circuit City from 2007 to 2008. On November 10, 2008, Circuit City and several of its subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia. Circuit City’s Chapter 11

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plan of liquidation was confirmed by the Bankruptcy Court on September 14, 2010. In addition to his business experience, he served 26 years in the U.S. Air Force where he rose to the rank of Lieutenant Colonel. Mr. Besanko began his retail career in 1996.

Mr. Schepp was promoted to the principal officer position of Chief Administrative Officer in June 2015 and is responsible for Kohl's human resources, legal, risk management and compliance, real estate, business development and store construction and design functions. He previously served as Senior Executive Vice President, Human Resources, General Counsel and Secretary from April 2013 to June 2015, Senior Executive Vice President General Counsel and Secretary from May 2011 to April 2013 and Executive Vice President, General Counsel and Secretary from August 2001 to May 2011. Mr. Schepp began his retail career in 1992.

 

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market information

Our Common Stock has been traded on the New York Stock Exchange ("NYSE") since May 19, 1992, under the symbol “KSS.” The prices in the table set forth below indicate the high and low sales prices of our Common Stock per the New York Stock Exchange Composite Price History and our quarterly cash dividends per common share for each quarter in 2017 and 2016.

 

 

 

 

2017

 

 

 

2016

 

 

 

 

High

 

 

Low

 

 

Dividend

 

 

 

High

 

 

Low

 

 

Dividend

 

 

Fourth quarter

 

$

69.14

 

 

$

37.97

 

 

$

0.55

 

 

 

$

59.43

 

 

$

39.00

 

 

$

0.50

 

 

Third quarter

 

 

47.44

 

 

 

36.50

 

 

 

0.55

 

 

 

 

46.15

 

 

 

37.70

 

 

 

0.50

 

 

Second quarter

 

 

42.13

 

 

 

35.16

 

 

 

0.55

 

 

 

 

45.07

 

 

 

34.49

 

 

 

0.50

 

 

First quarter

 

 

44.50

 

 

 

36.66

 

 

 

0.55

 

 

 

 

51.13

 

 

 

39.69

 

 

 

0.50

 

 

On February 28, 2018, our Board of Directors approved an 11% increase in our dividend to $0.61 per common share. The dividend will be paid on March 28, 2018 to shareholders of record as of March 14, 2018. In 2017, we paid aggregate cash dividends of $368 million.

Holders

As of March 14, 2018, there were approximately 4,000 record holders of our Common Stock.

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Performance Graph

The graph below compares our cumulative five-year shareholder return to that of the Standard & Poor’s (“S&P”) 500 Index and a Peer Group Index that is consistent with the retail peer group used in the Compensation Discussion & Analysis section of our Proxy Statement for our May 16, 2018 Annual Meeting of Shareholders.  The Peer Group Index was calculated by S&P Global, a Standard & Poor’s business and includes Bed, Bath & Beyond Inc.; The Gap, Inc.; J.C. Penney Company, Inc.; L Brands, Inc.; Macy’s, Inc.; Nordstrom, Inc.; Ross Stores, Inc.; Sears Holding Corporation; Target Corporation; and The TJX Companies, Inc.  The Peer Group Index is weighted by the market capitalization of each component company at the beginning of each period.  The graph assumes an investment of $100 on February 2, 2013 and reinvestment of dividends. The calculations exclude trading commissions and taxes.

 

 

 

Company / Index

 

Feb 2,

2013

 

 

Feb 1,

2014

 

 

Jan 31,

2015

 

 

Jan 30,

2016

 

 

Jan 28,

2017

 

 

Feb 3,

2018

 

 

Kohl’s Corporation

 

$

100.00

 

 

$

113.07

 

 

$

137.13

 

 

$

117.90

 

 

$

96.59

 

 

$

165.78

 

 

S&P 500 Index

 

 

100.00

 

 

 

120.30

 

 

 

137.42

 

 

 

136.50

 

 

 

164.99

 

 

 

202.66

 

 

Peer Group Index

 

 

100.00

 

 

 

110.41

 

 

 

140.97

 

 

 

132.93

 

 

 

123.18

 

 

 

134.02

 

Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities

We did not sell any equity securities from 2015 through 2017 that were not registered under the Securities Act.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

In 2016, our Board of Directors increased the remaining share repurchase authorization under our existing share repurchase program to $2.0 billion. Purchases under the repurchase program may be made in the open market, through block trades and other negotiated transactions. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued or accelerated at any time.

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Table of Contents

The following table contains information for shares repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the three fiscal months ended February 3, 2018:

 

 

Period

 

Total

Number

of Shares

Purchased

During

Period

 

 

Average

Price

Paid Per

Share

 

 

Total Number

of Shares

Purchased as

Part of

Publicly

Announced

Plans or

Programs

 

 

Approximate

Dollar Value of

Shares that May

Yet Be Purchased

Under the

Plans or

Programs

(Dollars in

Millions)

 

 

October 29 - November 25, 2017

 

 

320,380

 

 

$

41.98

 

 

 

318,312

 

 

$

1,606

 

 

November 26 – December 30, 2017

 

 

117,520

 

 

 

49.34

 

 

 

89,600

 

 

 

1,602

 

 

December 31, 2017 - February 3, 2018

 

 

12,787

 

 

 

62.85

 

 

 

1,400

 

 

 

1,602

 

 

Total

 

 

450,687

 

 

$

44.49

 

 

 

409,312

 

 

 

1,602

 

 

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Table of Contents

Item 6. Selected Consolidated Financial Data

The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document.

 

 

(Dollars in Millions, Except per Share and per Square Foot Data)

2017 (e)

2016

2015

2014

2013

 

Net sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars

 

$

19,095

 

 

$

18,686

 

 

$

19,204

 

 

$

19,023

 

 

$

19,031

 

 

Net sales increase (decrease)

 

 

2.2

%

 

 

(2.7

)%

 

 

1.0

%

 

 

0.0

%

 

 

(1.3

)%

 

Comparable sales (a)

 

 

1.5

%

 

 

(2.4

)%

 

 

0.7

%

 

 

(0.3

)%

 

 

(1.2

)%

 

Per selling square foot (b)

 

$

229

 

 

$

224

 

 

$

228

 

 

$

226

 

 

$

227

 

 

Gross margin

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars

 

$

6,919

 

 

$

6,742

 

 

$

6,939

 

 

$

6,925

 

 

$

6,944

 

 

As a percent of sales

 

 

36.2

%

 

 

36.1

%

 

 

36.1

%

 

 

36.4

%

 

 

36.5

%

 

Selling, general and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars

 

$

4,512

 

 

$

4,435

 

 

$

4,452

 

 

$

4,350

 

 

$

4,313

 

 

As a percent of sales

 

 

23.6

%

 

 

23.7

%

 

 

23.2

%

 

 

22.9

%

 

 

22.7

%

 

Operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dollars

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported (GAAP)

 

$

1,416

 

 

$

1,183

 

 

$

1,553

 

 

$

1,689

 

 

$

1,742

 

 

Adjusted (non-GAAP) (c)

 

$

1,416

 

 

$

1,369

 

 

$

1,553

 

 

$

1,689

 

 

$

1,742

 

 

As a percent of sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported (GAAP)

 

 

7.4

%

 

 

6.3

%

 

 

8.1

%

 

 

8.9

%

 

 

9.2

%

 

Adjusted (non-GAAP) (c)

 

 

7.4

%

 

 

7.3

%

 

 

8.1

%

 

 

8.9

%

 

 

9.2

%

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported (GAAP)

 

$

859

 

 

$

556

 

 

$

673

 

 

$

867

 

 

$

889

 

 

Adjusted (non-GAAP) (c)

 

$

703

 

 

$

673

 

 

$

781

 

 

$

867

 

 

$

889

 

 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported (GAAP)

 

$

5.12

 

 

$

3.11

 

 

$

3.46

 

 

$

4.24

 

 

$

4.05

 

 

Adjusted (non-GAAP) (c)

 

$

4.19

 

 

$

3.76

 

 

$

4.01

 

 

$

4.24

 

 

$

4.05

 

 

Dividends per share

 

$

2.20

 

 

$

2.00

 

 

$

1.80

 

 

$

1.56

 

 

$

1.40

 

 

Balance sheet

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

13,340

 

 

$

13,574

 

 

$

13,606

 

 

$

14,333

 

 

$

14,228

 

 

Working capital

 

$

2,680

 

 

$

2,273

 

 

$

2,362

 

 

$

2,721

 

 

$

2,412

 

 

Long-term debt

 

$

2,797

 

 

$

2,795

 

 

$

2,792

 

 

$

2,780

 

 

$

2,777

 

 

Capital lease and financing obligations

 

$

1,717

 

 

$

1,816

 

 

$

1,916

 

 

$

1,968

 

 

$

2,069

 

 

Shareholders’ equity

 

$

5,426

 

 

$

5,177

 

 

$

5,491

 

 

$

5,991

 

 

$

5,978

 

 

Cash flow

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow from operations

 

$

1,691

 

 

$

2,153

 

 

$

1,484

 

 

$

2,027

 

 

$

1,187

 

 

Capital expenditures

 

$

672

 

 

$

768

 

 

$

690

 

 

$

682

 

 

$

643

 

 

Free cash flow (d)

 

$

881

 

 

$

1,269

 

 

$

681

 

 

$

1,237

 

 

$

1,130

 

 

Return on average shareholders’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Reported (GAAP)

 

 

16.7

%

 

 

10.6

%

 

 

11.8

%

 

 

14.7

%

 

 

14.8

%

 

  Adjusted (non-GAAP) (c)

 

 

13.7

%

 

 

12.5

%

 

 

13.5

%

 

 

14.7

%

 

 

14.8

%

 

Kohl's store information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores

 

 

1,158

 

 

 

1,154

 

 

 

1,164

 

 

 

1,162

 

 

 

1,158

 

 

Total square feet of selling space (in thousands)

 

 

82,804

 

 

 

82,757

 

 

 

83,810

 

 

 

83,750

 

 

 

83,671

 

 

(a)

Kohl's store sales are included in comparable sales after the store has been open for 12 full months. Digital sales and sales at remodeled and relocated Kohl's stores are included in comparable sales, unless square footage has changed by more than 10%.  Fiscal 2017 compares the 52 weeks ended January 27, 2018 and January 28, 2017.

(b)

Net sales per selling square foot includes comparable in-store and digital sales.  2017 excludes the impact of the 53rd week.

(c)

Adjustments include $156 million of state tax settlement and tax reform benefits in 2017, $186 million of impairments, store closing, and other costs in 2016, and $169 million of debt extinguishment losses in 2015. See GAAP to non-GAAP reconciliation in Results of Operations.

(d)

Free cash flow is a non-GAAP financial measure which we define as net cash provided by operating activities and proceeds from financing obligations less capital expenditures and capital lease and financing obligation payments.  See GAAP to non-GAAP reconciliation in Liquidity and Capital Resources.

(e)

Fiscal 2017 was a 53-week year. During the 53rd week, net sales were approximately $170 million; selling, general and administrative expenses were approximately $30 million; interest was approximately $3 million; net income was approximately $15 million and diluted earnings per share was approximately $0.10.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

As of February 3, 2018, we operated 1,158 Kohl's department stores, a website (www.Kohls.com), 12 FILA outlets, and four Off-Aisle clearance centers. Our Kohl's stores and website sell moderately priced proprietary and national brand apparel, footwear, accessories, beauty and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise which is available in our stores, as well as merchandise that is available only online.

Sales increased 2.2% to $19.1 billion for 2017. We saw consistent improvement during the year in sales trends which culminated in a 6.3% increase in our 4th quarter comparable sales and contributed to a 1.5% increase in our comparable sales for the year.

Gross margin as a percentage of sales increased 15 basis points as effective inventory management contributed to fewer permanent and promotional markdowns. These increases were partially offset by higher shipping costs caused by online sales growth.

Selling, general and administrative expenses ("SG&A") as a percentage of sales decreased 11 basis points as all areas effectively managed their expenses consistent with improving sales trends throughout the year.

For the year, net income on a GAAP basis was $859 million, or $5.12 per diluted share.

Tax reform and a favorable state tax settlement reduced our 2017 tax expense by $156 million and increased our diluted earnings per share by $0.93. The 53rd week in the 2017 retail calendar increased our diluted earnings per share by approximately $0.10.

Excluding the tax benefits, our net income was $703 million and our diluted earnings per share were $4.19, an increase of 11% over 2016, excluding $0.65 per diluted share of impairment, store closing and other costs in 2016.

See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results, how we define comparable sales, the impact of the 53rd week and tax reform and the state tax settlement in 2017, and the impairment, store closing and other costs in 2016.

2018 Outlook

Our current expectations for 2018 are as follows:

 

 

 

Net sales

Decrease (1) - Increase 1%

Comparable sales

Increase 0 - 2%

Gross margin as a percent of sales

Increase 5 - 10 bps

Selling, general and administrative expenses

Increase 1 - 2%

Depreciation and amortization

$960 million

Interest expense, net

$280 million

Effective tax rate

24 - 25%

Earnings per diluted share

$4.95 - $5.45

Capital expenditures

$700 million

Share repurchases

$300 - $400 million

 

This guidance excludes the impact of the new revenue recognition standard which we are required to adopt in 2018.  For additional details on the standard, see Note 1 to our Consolidated Financial Statements.

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Table of Contents

Results of Operations

53rd Week

The retail calendar for fiscal January 2018 included a fifth week, resulting in a 14-week fiscal fourth quarter and a 53-week year. During this 53rd week, net sales were approximately $170 million; selling, general and administrative expenses were approximately $30 million; and interest was approximately $3 million. The 53rd week increased our net income by approximately $15 million and our diluted earnings per share by approximately $0.10 for the year.  Our comparable sales in 2017 exclude the impact of the 53rd week and compare the 52 weeks ended January 27, 2018 to the 52 weeks ended January 28, 2017.

Net Sales

As an omnichannel retailer, it is often difficult to distinguish between a "store" sale and a "digital" sale. Below is a list of some omnichannel examples:

 

Digital customers can chose to have most online orders either shipped to their home or picked up in any of our stores.

 

Approximately 75% of our digital customers also shop in our stores.

 

Digital orders may be shipped from a dedicated E-Commerce fulfillment center, a store, a retail distribution center, direct ship vendors or any combination of the above.

 

Stores increase digital sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online.

 

Online purchases can easily be returned in our stores.

 

Kohl's Cash coupons and Yes2You rewards can be redeemed online or in store regardless of where they were earned.

 

In-store customers can order from online kiosks in our stores.

 

Customers who utilize our mobile app while in the store may receive mobile coupons to use when they check out.

Because we do not have a clear distinction between "store" sales and "digital" sales, we do not report them separately.

Kohl’s store sales are included in comparable sales after the store has been open for 12 full months.  Digital sales and sales at remodeled and relocated Kohl’s stores are included in comparable sales, unless square footage has changed by more than 10%.  

The following table summarizes net sales dollars and changes in comparable sales:

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Table of Contents

2017 compared to 2016

Net sales increased $409 million, or 2.2%, to $19.1 billion for 2017.  Approximately $170 million of the increase was due to the 53rd week in the fiscal 2017 calendar.  The remaining increase was primarily due to a 1.5% increase in comparable sales.  The increase in comparable sales reflects higher average transaction values as increases in selling prices were only partially offset by decreases in units per transaction.  During the year, number of transactions improved sequentially each quarter and increased in the fourth quarter, but were slightly negative for the full year.

By line of business, Home and Footwear were the strongest categories.  Men’s also outperformed the Company average.  Accessories and Kids also reported higher comparable sales.  Comparable sales trends in the Women’s business improved each quarter, but sales decreased for the year.

Geographically, all regions reported higher sales in 2017.  

2016 compared to 2015

Net sales decreased $518 million, or 2.7%, to $18.7 billion for 2016.  The decrease was primarily due to a 2.4% decrease in comparable sales.  The lower comparable sales were due to fewer transactions, partially offset by higher average transaction values due to increases in both selling prices and units per transaction.  

By line of business, Footwear and Men’s were the strongest categories.  All other categories underperformed the Company average.    

From a regional perspective, the West, Southeast, and Midwest outperformed the Company average and the South Central, Mid-Atlantic and Northeast underperformed.

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 digital sales; terms cash discount; and depreciation of product development facilities and equipment. Our gross margin may not be comparable with that of other retailers because we include distribution center and buying 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 sales increased 15 bps in 2017.  The increase was driven by inventory management and less promotional and permanent markdowns, slightly offset by higher shipping costs.  

Gross margin as a percentage of sales in 2016 was consistent with 2015 as higher merchandise margin was substantially offset by higher shipping costs.

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Table of Contents

Selling, General and Administrative 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; marketing 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 revenues and expenses. We do not include depreciation and amortization in SG&A. The classification of these expenses varies across the retail industry.

Many of our expenses, including store payroll and distribution costs, are variable in nature. These costs generally increase as sales increase and decrease as sales decrease. We measure both the change in these variable expenses and the expense as a percent of sales. If the expense as a percent of sales decreased from the prior year, the expense "leveraged" and indicates that the expense was well-managed or effectively generated additional sales. If the expense as a percent of sales increased over the prior year, the expense "deleveraged" and indicates that sales growth was less than expense growth.

The following graph summarizes the increases and (decreases) in SG&A by expense type from 2016 to 2017 (Dollars in Millions):

SG&A increased $77 million, or 2%, to $4.5 billion for 2017.  Approximately $30 million of the increase was due to the 53rd week in the fiscal 2017 calendar.  As a percentage of sales, SG&A decreased, or leveraged, by 11 basis points.  

The increase in corporate expenses reflects higher technology spend as we migrate to the cloud and higher incentive compensation as a result of our strong financial performance in 2017.

Distribution costs, which exclude payroll related to online originated orders that were shipped from our stores, were $303 million for 2017, $23 million higher than 2016.  The increase was due to growth in digital sales and the opening of our fifth E-Commerce facility.

In our stores, decreases in controllable expenses were substantially offset by higher store payroll due to on-going wage pressure and omnichannel support of ship-from-store and buy online, pick-up in store operations.

Earnings from our credit card operations, net of servicing and other credit-related expenses, were $496 million in 2017, $12 million higher than 2016.  The increase is due to lower marketing and operating costs.

Marketing costs, excluding credit card costs, reflect efficiencies in our non-customer facing spend and the benefit of not repeating a non-productive marketing event.  

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The following graph summarizes the increases and (decreases) in SG&A by expense type from 2015 to 2016 (Dollars in Millions):

SG&A decreased $17 million to $4.4 billion for 2016.  As a percentage of sales, SG&A increased, or deleveraged, by 55 basis points in 2016.

Marketing costs, excluding credit card costs, reflect higher digital media spending.

Distribution costs, which exclude payroll related to online originated orders that were shipped from our stores, were $280 million for 2016, $2 million higher than 2015. Increases due to higher fulfillment costs resulting from our growing digital business were partially offset by lower store distribution costs.

The decrease in corporate expenses reflects higher technology spending which was more than offset by expense management in other corporate areas.

The decrease in store expenses includes reductions in store controllable expense, partially offset by higher store payroll due to on-going wage pressure and omnichannel support of ship-from-store and buy online, pick-up in store operations.

Earnings from our credit card operations, net of servicing and other credit-related expenses, were $484 million in 2016, $28 million higher than 2015.  The increase is due to higher finance charges and late fees due to growth in the portfolio. Additionally, lower marketing costs were partially offset by higher servicing costs.

Other Expenses

 

(Dollars in Millions)

 

2017

 

 

2016

 

 

2015

 

Depreciation and amortization

 

$

991

 

 

$

938

 

 

$

934

 

Interest expense, net

 

 

299

 

 

 

308

 

 

 

327

 

Impairments, store closing and other costs

 

 

 

 

 

186

 

 

 

 

Loss on extinguishment of debt

 

 

 

 

 

 

 

 

169

 

The increase in depreciation and amortization from 2016 to 2017 includes a $22 million write-off of information technology (“IT”) projects that no longer fit into our strategic and cloud migration plans.  The increase was also driven by the opening of our fifth E-commerce fulfillment center and other IT investments. The increase from 2015 to 2016 reflected higher IT amortization which was partially offset by lower store depreciation due to maturing of our stores and store closures.

The decreases in net interest expense in both periods were due to lower interest on capital leases as the portfolio matures. Also contributing to the decreases were higher interest income due to higher yields and investment balances in 2017 and favorable interest rates achieved during our $1.1 billion debt refinancing in 2015.

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Impairments, store closing and other costs includes the following costs related to closing 18 stores in 2016 and the organizational realignment at our corporate office:

 

(Dollars in Millions)

 

 

 

Store leases:

 

 

 

Record future obligations

  $

114

 

Write-off net obligations

 

(21

)

Impairments:

 

 

 

Software licenses

 

23

 

Buildings and other store assets

 

53

 

Severance and other

 

17

 

Total

  $

186

 

During 2015, we completed a cash tender offer and redemption for $1,085 million of senior unsecured debt. We recognized a $169 million loss on extinguishment of debt which included a $163 million bond tender premium paid to holders of the debt and a $6 million non-cash write-off of deferred financing costs and original issue discounts associated with the extinguished debt.

Income Taxes

 

(Dollars in Millions)

 

   2017

 

 

2016

 

 

   2015

 

Provision for income taxes

 

$

258

 

 

$

319

 

 

$

384

 

Effective tax rate

 

 

23.1

%

 

 

36.5

%

 

 

36.3

%

On December 22, 2017 the Tax Cuts & Jobs Act (“the Act”) was signed into law.  The Act contains several key tax provisions including the reduction of the corporate income tax rate from 35% to 21% effective January 1, 2018, and a variety of other changes including the acceleration of certain business asset expenses and reductions in the amount of executive pay that could qualify as a tax deduction.    

Accounting standards require us to recognize the effect of the tax law changes in the period of enactment.  However, the SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which allows us to record provisional amounts during a measurement period.  

We have calculated our best estimate of the impact of the Act on our 2017 income tax provision in accordance with our understanding of the Act and guidance available as of the date of this filing.  For 2017, the reduction in the tax rate is prorated, resulting in a current year statutory federal tax rate of 33.7%.  In 2017, we recorded a total tax benefit of $136 million related to the current year federal tax rate reduction and the re-measurement of our deferred tax assets and liabilities as well as a $20 million benefit from the settlement of a significant state tax dispute.

Net Income and Earnings per Diluted Share

 

(Dollars in Millions, Except per Share Data)

Income before Taxes

 

Net Income

 

Earnings per Diluted Share

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

GAAP

 

$

1,117

 

 

$

859

 

 

$

5.12

 

Federal tax reform benefits

 

 

 

 

 

(136

)

 

 

(0.81

)

State tax settlement

 

 

 

 

 

(20

)

 

 

(0.12

)

Adjusted (non-GAAP)

 

$

1,117

 

 

$

703

 

 

$

4.19

 

2016

 

 

 

 

 

 

 

 

 

 

 

 

GAAP

 

$

875

 

 

$

556

 

 

$

3.11

 

Impairments, store closing and other costs

 

 

186

 

 

 

117

 

 

 

0.65

 

Adjusted (non-GAAP)

 

$

1,061

 

 

$

673

 

 

$

3.76

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

GAAP

 

$

1,057

 

 

$

673

 

 

$

3.46

 

Loss on extinguishment of debt

 

 

169

 

 

 

108

 

 

 

0.55

 

Adjusted (non-GAAP)

 

$

1,226

 

 

$

781

 

 

$

4.01

 

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We believe adjusted results are useful because they provide enhanced visibility into our results for the periods excluding the impact of infrequent items such as the tax settlement and federal reform in 2017, impairments, store closing and other costs in 2016, and the loss on extinguishment of debt in 2015.  However, these non-GAAP financial measures are not intended to replace GAAP measures.

Inflation

Although we expect that our operations will be influenced by general economic conditions, including food, fuel and energy prices, and by costs to source our merchandise, 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 impacted by such factors in the future.

Liquidity and Capital Resources

The following table presents our primary cash requirements and sources of funds.

Cash Requirements

Sources of Funds

•   Operational needs, including salaries, rent, taxes and other costs of running our business

•   Capital expenditures

•   Inventory (seasonal and new store)

•   Share repurchases

•   Dividend payments

•   Cash flow from operations

•   Short-term trade credit, in the form of extended payment terms

•   Line of credit under our revolving credit facility

Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.

The following table includes cash balances and changes.

 

 

(Dollars in Millions)

 

2017

 

 

2016

 

 

2015

 

 

Cash and cash equivalents

 

$

1,308

 

 

$

1,074

 

 

$

707

 

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

    Operating activities

 

$

1,691

 

 

$

2,153