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EX-32.2 - EX-32.2 - KOHLS Corpkss-ex322_41.htm
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EX-31.1 - EX-31.1 - KOHLS Corpkss-ex311_38.htm
EX-10.1 - EX-10.1 - KOHLS Corpkss-ex101_42.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 5, 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

 

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      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation 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      No  

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 the 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

 

 

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 pursuant to Section 13(a) of the Exchange Act.  

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: June 2, 2018 Common Stock, Par Value $0.01 per Share, 167,096,325 shares outstanding.

 

 


Table of Contents

 

KOHL’S CORPORATION

INDEX

 

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KOHL’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

  (Dollars in Millions)

May 5,

2018

February 3,

2018

April 29,

2017

Assets

 

 

 

As Adjusted (a)

As Adjusted (a)

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

  $

822

 

  $

1,308

 

  $

625

 

Merchandise inventories

 

3,726

 

 

3,542

 

 

3,991

 

Other

 

435

 

 

530

 

 

378

 

Total current assets

 

4,983

 

 

5,380

 

 

4,994

 

Property and equipment, net

 

7,694

 

 

7,773

 

 

8,069

 

Other assets

 

239

 

 

236

 

 

231

 

Total assets

  $

12,916

 

  $

13,389

 

  $

13,294

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

  $

1,454

 

  $

1,271

 

  $

1,480

 

Accrued liabilities

 

1,135

 

 

1,213

 

 

1,147

 

Income taxes payable

 

118

 

 

99

 

 

137

 

Current portion of capital lease and financing obligations

 

123

 

 

126

 

 

134

 

Total current liabilities

 

2,830

 

 

2,709

 

 

2,898

 

Long-term debt

 

2,301

 

 

2,797

 

 

2,795

 

Capital lease and financing obligations

 

1,563

 

 

1,591

 

 

1,657

 

Deferred income taxes

 

198

 

 

211

 

 

283

 

Other long-term liabilities

 

668

 

 

662

 

 

674

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

 

Common stock

 

4

 

 

4

 

 

4

 

Paid-in capital

 

3,125

 

 

3,078

 

 

3,013

 

Treasury stock, at cost

 

(10,737

)

 

(10,651

)

 

(10,503

)

Accumulated other comprehensive loss

 

(8

)

 

(11

)

 

(13

)

Retained earnings

 

12,972

 

 

12,999

 

 

12,486

 

Total shareholders’ equity

 

5,356

 

 

5,419

 

 

4,987

 

Total liabilities and shareholders’ equity

  $

12,916

 

  $

13,389

 

  $

13,294

 

 

(a)

Refer to Note 2 for details on the adoption of the new revenue recognition accounting standard and the impact on previously reported results.

 

See accompanying Notes to Consolidated Financial Statements

 

3


Table of Contents

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

 

Three Months Ended

 

(Dollars in Millions, Except per Share Data)

May 5,

2018

April 29,

2017

 

 

 

 

As Adjusted (a)

 

Net sales

$

3,953

 

$

3,815

 

Other revenue

 

255

 

 

250

 

Total revenue

 

4,208

 

 

4,065

 

Cost of merchandise sold

 

2,496

 

 

2,428

 

Operating expenses:

 

 

 

 

 

 

Selling, general and administrative

 

1,259

 

 

1,214

 

Depreciation and amortization

 

243

 

 

238

 

Operating income

 

210

 

 

185

 

Interest expense, net

 

71

 

 

76

 

Loss on extinguishment of debt

 

42

 

 

 

Income before income taxes

 

97

 

 

109

 

Provision for income taxes

 

22

 

 

43

 

Net income

$

75

 

$

66

 

Net income per share:

 

 

 

 

 

 

Basic

$

0.46

 

$

0.39

 

Diluted

$

0.45

 

$

0.39

 

 

(a)

Refer to Note 2 for details on the adoption of the new revenue recognition accounting standard and the impact on previously reported results.

 

See accompanying Notes to Consolidated Financial Statements

 

4


Table of Contents

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

Common Stock

 

 

 

Paid-In

Capital

Treasury Stock

Accumulated Other Comprehensive

Loss

 

 

 

 

 

 

(Dollars in Millions, Except per Share Data)

Shares

Amount

Shares

Amount

Retained

Earnings

Total

Balance at February 3, 2018

(previously reported)

 

373

 

$

4

 

$

3,078

 

 

(205

)

$

(10,651

)

$

(11

)

$

13,006

 

$

5,426

 

Change in accounting standard (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

(7

)

 

(7

)

Balance at February 3, 2018

(as adjusted)

 

373

 

 

4

 

 

3,078

 

 

(205

)

 

(10,651

)

 

(11

)

 

12,999

 

 

5,419

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

3

 

 

75

 

 

78

 

Stock options and awards, net of tax

 

1

 

 

 

 

47

 

 

 

 

(17

)

 

 

 

 

 

30

 

Dividends paid
($0.61 per common share)

 

 

 

 

 

 

 

 

 

1

 

 

 

 

(102

)

 

(101

)

Treasury stock purchases

 

 

 

 

 

 

 

(1

)

 

(70

)

 

 

 

 

 

(70

)

Balance at May 5, 2018

 

374

 

$

4

 

$

3,125

 

 

(206

)

$

(10,737

)

$

(8

)

$

12,972

 

$

5,356

 

 

(a)

Refer to Note 2 for details on the adoption of the new revenue recognition accounting standard and the impact on previously reported results.

See accompanying Notes to Consolidated Financial Statements

5


Table of Contents

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

Three Months Ended

 

(Dollars in Millions)

May 5,

2018

April 29,

2017

Operating activities

 

 

 

As Adjusted (a)

Net income

  $

75

 

  $

66

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

Depreciation and amortization

 

243

 

 

238

 

Share-based compensation

 

30

 

 

10

 

Deferred income taxes

 

(12

)

 

13

 

Loss on extinguishment of debt

 

42

 

 

 

Other non-cash revenues and expenses

 

2

 

 

(12

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

Merchandise inventories

 

(181

)

 

(193

)

Accrued and other long-term liabilities

 

(107

)

 

(117

)

Accounts payable

 

183

 

 

(27

)

Other current and long-term assets

 

68

 

 

42

 

Income taxes

 

44

 

 

26

 

Net cash provided by operating activities

 

387

 

 

46

 

Investing activities

 

 

 

 

 

 

Acquisition of property and equipment

 

(133

)

 

(216

)

Other

 

 

 

13

 

Net cash used in investing activities

 

(133

)

 

(203

)

Financing activities

 

 

 

 

 

 

Treasury stock purchases

 

(70

)

 

(156

)

Shares withheld for taxes on vested restricted shares

 

(17

)

 

(10

)

Dividends paid

 

(101

)

 

(94

)

Reduction of long-term borrowings

 

(500

)

 

 

Premium paid on redemption of debt

 

(35

)

 

 

Capital lease and financing obligation activity

 

(33

)

 

(32

)

Proceeds from stock option exercises

 

16

 

 

 

Net cash used in financing activities

 

(740

)

 

(292

)

Net decrease in cash and cash equivalents

 

(486

)

 

(449

)

Cash at beginning of period

 

1,308

 

 

1,074

 

Cash at end of period

  $

822

 

  $

625

 

Supplemental information

 

 

 

 

 

 

Interest paid, net of capitalized interest

  $

58

 

  $

46

 

Income taxes paid

 

15

 

 

5

 

Non-cash investing and financing activities

 

 

 

 

 

 

Property and equipment acquired through additional liabilities

  $

 

  $

13

 

 

(a)

Refer to Note 2 for details on the adoption of the new revenue recognition accounting standard and the impact on previously reported results.

 

See accompanying Notes to Consolidated Financial Statements

 

 

6


Table of Contents

 

KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for fiscal year end consolidated 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 consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2018 (Commission File No. 1-11084) as filed with the Securities and Exchange Commission.

Due to 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.

We operate as a single business unit.

The following table provides a brief description of issued, but not yet effective, accounting standards:

 

Standard

Description

Effect on our Financial Statements

Leases

(ASC Topic 842)

 

Issued February 2016

 

Effective Q1 2019

Among other things, the new standard requires us to recognize a right-of-use asset and a lease liability on our balance sheet for each lease.  It also changes the presentation and timing of lease-related expenses.

Approximately 5% of our store leases and all of our land leases are not currently recorded on our balance sheet.  Recording right-of-use assets and lease liabilities for these and other non-store leases is expected to have a material impact on our balance sheet.  We are also evaluating the impact that recording right-of-use assets and lease liabilities will have on our income statement and the financial statement impact that the standard will have on leases, which are currently recorded on our balance sheet.

In 2017, we recorded provisional amounts for certain income tax effects of the Tax Cuts & Jobs Act (the “Act"), as addressed in Staff Accounting Bulletin No. 118 (“SAB 118”).  During the three months ended May 5, 2018, we made no adjustments to the previously recorded provisional amounts related to the Act.  Additional work is needed to finalize the income tax effects of the Act and we do not expect subsequent adjustments to be material.  Any such adjustments will be recorded as income tax expense in the period in which the adjustment is finalized.

 

2. Revenue Recognition

Effective February 4, 2018, we adopted Revenue from Contracts with Customers (ASC Topic 606) as required.  We adopted the new standard using the full retrospective method. The standard eliminates the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principles-based approach for revenue recognition and disclosures. Under the standard, revenue is recognized when a customer obtains control of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.

Net Sales

Net sales include revenue from the sale of merchandise and shipping revenues. Net sales are recognized when merchandise is received by the customer and we have fulfilled all performance obligations. We do not have any sales that are recorded as commissions.

7


Table of Contents

KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following table summarizes net sales by line of business for the quarters ended May 5, 2018 and April 29, 2017:

 

(Dollars in Millions)

May 5, 2018

April 29, 2017

Women's

  $

1,255

 

  $

1,224

 

Men's

 

790

 

 

754

 

Home

 

691

 

 

641

 

Children's

 

454

 

 

471

 

Footwear

 

426

 

 

399

 

Accessories

 

337

 

 

326

 

Net Sales

  $

3,953

 

  $

3,815

 

We maintain various rewards programs whereby customers earn rewards based on their spending and other promotional activities. The rewards are typically in the form of dollar off discounts which can be used on future purchases. These programs create performance obligations which require us to defer a portion of the original sale until the rewards are redeemed. Sales are recorded net of returns. At the end of each reporting period, we record a reserve based on historical return rates and patterns which reverses sales that we expect to be returned in the following period. Revenue from the sale of Kohl's gift cards is recognized when the gift card is redeemed.

Liabilities for performance obligations resulting from our rewards programs, return reserves, and unredeemed gift cards totaled $380 million as of May 5, 2018 and $368 million as of April 29, 2017.

Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes.

Other Revenue

Other revenue consists primarily of revenue from our credit card operations, unused gift cards (breakage), and other non-merchandise revenues.

Revenue from credit card operations includes our share of the finance charges and interest fees, less charge-offs of the Kohl’s credit card pursuant to the Private Label Credit Card Program Agreement. Expenses related to our credit card operations are reported in SG&A.

Income from unused gift cards (breakage) is recorded in proportion and over the time period gift cards are actually redeemed.

8


Table of Contents

KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

The following tables summarize the impact of adoption of the new standard by financial statement line item:

Three Months Ended April 29, 2017

(Dollars in Millions, Except per Share Data)

As Previously Reported

New Standard Adjustment

Adjusted

Net sales

  $

3,843

 

  $

(28)

 

  $

3,815

 

Other revenue

 

 

 

 

250

 

 

250

 

Total revenue

 

 

 

 

222

 

 

4,065

 

Cost of merchandise sold

 

2,445

 

 

(17)

 

 

2,428

 

Gross margin

 

1,398

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

975

 

 

239

 

 

1,214

 

Depreciation and amortization

 

238

 

 

-

 

 

238

 

Operating income

 

185

 

 

-

 

 

185

 

Interest expense, net

 

76

 

 

-

 

 

76

 

Income before income taxes

 

109

 

 

-

 

 

109

 

Provision for income taxes

 

43

 

 

-

 

 

43

 

Net income

  $

66

 

  $

-

 

  $

66

 

Net income per share:

 

 

 

 

 

 

 

 

 

Basic

  $

0.39

 

  $

-

 

  $

0.39

 

Diluted

  $

0.39

 

  $

-

 

  $

0.39

 

 

 

April 29, 2017

(Dollars in Millions)

As Previously Reported

 

New Standard Adjustment

Adjusted

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

  $

625

 

  $

-

 

  $

625

 

Merchandise inventories

 

3,991

 

 

-

 

 

3,991

 

Other

 

328

 

 

50

 

 

378

 

Total current assets

 

4,944

 

 

50

 

 

4,994

 

Property and equipment, net

 

8,069

 

 

-

 

 

8,069

 

Other assets

 

231

 

 

-

 

 

231

 

Total assets

  $

13,244

 

  $

50

 

  $

13,294

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

  $

1,480

 

  $

-

 

  $

1,480

 

Accrued liabilities

 

1,088

 

 

59

 

 

1,147

 

Income taxes payable

 

137

 

 

-

 

 

137

 

Current portion of capital lease and financing obligations

 

134

 

 

-

 

 

134

 

Total current liabilities

 

2,839

 

 

59

 

 

2,898

 

Long-term debt

 

2,795

 

 

-

 

 

2,795

 

Capital lease and financing obligations

 

1,657

 

 

-

 

 

1,657

 

Deferred income taxes

 

285

 

 

(2

)

 

283

 

Other long-term liabilities

 

674

 

 

-

 

 

674

 

Total shareholders’ equity

 

4,994

 

 

(7

)

 

4,987

 

Total liabilities and shareholders’ equity

  $

13,244

 

  $

50

 

  $

13,294

 

 

9


Table of Contents

KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

 

February 3, 2018

(Dollars in Millions)

As Previously Reported

New Standard Adjustment

Adjusted

Assets

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

  $

1,308

 

  $

-

 

  $

1,308

 

Merchandise inventories

 

3,542

 

 

-

 

 

3,542

 

Other

 

481

 

 

49

 

 

530

 

Total current assets

 

5,331

 

 

49

 

 

5,380

 

Property and equipment, net

 

7,773

 

 

-

 

 

7,773

 

Other assets

 

236

 

 

-

 

 

236

 

Total assets

  $

13,340

 

  $

49

 

  $

13,389

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

  $

1,271

 

  $

-

 

  $

1,271

 

Accrued liabilities

 

1,155

 

 

58

 

 

1,213

 

Income taxes payable

 

99

 

 

-

 

 

99

 

Current portion of capital lease and financing obligations

 

126

 

 

-

 

 

126

 

Total current liabilities

 

2,651

 

 

58

 

 

2,709

 

Long-term debt

 

2,797

 

 

-

 

 

2,797

 

Capital lease and financing obligations

 

1,591

 

 

-

 

 

1,591

 

Deferred income taxes

 

213

 

 

(2

)

 

211

 

Other long-term liabilities

 

662

 

 

-

 

 

662

 

Total shareholders’ equity

 

5,426

 

 

(7

)

 

5,419

 

Total liabilities and shareholders’ equity

  $

13,340

 

  $

49

 

  $

13,389

 

The adoption of the new standard had no impact on our basic or diluted earnings per share or our net cash provided by (used in) operating, financing, or investing activities.

 

 

3. Store Closure and Restructure Reserve

 

The following table summarizes changes in the store closure and restructure reserve during the quarter ended May 5, 2018:

 

(Dollars in Millions)

 

 

 

Balance - February 3, 2018

$

87

 

Payments

 

(3

)

Balance - May 5, 2018

$

84

 

 

10


Table of Contents

KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

4. Debt

Long-term debt consists of the following unsecured senior debt:

 

 

 

 

Effective

Rate

 

 

Coupon

Rate

Outstanding

 

Maturity

(Dollars in Millions)

May 5,

2018

February 3,

2018 &          April 29,     2017

2021

 

4.81

%

 

4.00

%

$

426

 

$

650

 

2023

 

3.25

%

 

3.25

%

 

350

 

 

350

 

2023

 

4.78

%

 

4.75

%

 

184

 

 

300

 

2025

 

4.25

%

 

4.25

%

 

650

 

 

650

 

2029

 

7.36

%

 

7.25

%

 

42

 

 

99

 

2033

 

6.05

%

 

6.00

%

 

112

 

 

166

 

2037

 

6.89

%

 

6.88

%

 

101

 

 

150

 

2045

 

5.57

%

 

5.55

%

 

450

 

 

450

 

 

 

4.76

%

 

 

 

$

2,315

 

$

2,815

 

 

Long-term debt is net of unamortized debt discounts and deferred financing costs of $14 million at May 5, 2018, $18 million at February 3, 2018, and $20 million at April 29, 2017.

Our long-term debt is classified as Level 1, financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our long-term debt was $2.3 billion at May 5, 2018, $2.9 billion at February 3, 2018 and $2.8 billion at April 29, 2017.

In April 2018, we completed a cash tender offer for $500 million of senior unsecured debt.  We recognized a $42 million loss on extinguishment of debt in the first quarter of 2018 which includes $35 million of premiums paid to holders as a result of the tender offer, a $4 million non-cash write-off of an interest rate hedge on tendered debt, and a $3 million non-cash write-off of deferred financing costs and original issue discounts associated with the extinguished debt.  

 

5. Stock-Based Compensation

The following table summarizes our stock-based compensation activity for the three months ended May 5, 2018:

 

 

Stock Options

Nonvested Stock Awards

Performance Share Units

(Shares and Units in Thousands)

Shares

Weighted

Average

Exercise

Price

Shares

Weighted

Average

Grant Date

Fair Value

Units

Weighted

Average

Grant Date

Fair Value

Balance - February 3, 2018

 

1,139

 

$

50.51

 

 

2,811

 

$

45.60

 

 

660

 

$

44.97

 

Granted

 

 

 

 

 

710

 

 

63.08

 

 

147

 

 

65.34

 

Exercised/vested

 

(582

)

 

51.30

 

 

(644

)

 

48.18

 

 

(38

)

 

78.35

 

Forfeited/expired

 

(2

)

 

53.14

 

 

(33

)

 

48.62

 

 

 

 

 

Balance - May 5, 2018

 

555

 

$

49.91

 

 

2,844

 

$

49.37

 

 

769

 

$

47.23

 

 

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KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

 

6. Contingencies

We are subject to certain legal proceedings and claims arising out of the conduct of our business.  In the opinion of management, the outcome of these proceedings and litigation will not have a material adverse impact on our consolidated financial statements.

7. Net Income Per Share

Basic net income per share is net income divided by the average number of common shares outstanding during the period. Diluted net income per share includes incremental shares assumed for share-based awards.

The information required to compute basic and diluted net income per share is as follows:

 

 

Three Months Ended

(Dollar and Shares in Millions, Except per Share Data)

May 5,

2018

April 29,

2017

Numerator—Net income

$

75

 

$

66

 

Denominator—Weighted average shares:

 

 

 

 

 

 

Basic

 

165

 

 

170

 

Impact of dilutive stock-based awards

 

2

 

 

1

 

Diluted

 

167

 

 

171

 

Antidilutive shares

 

 

 

3

 

Net income per share:

 

 

 

 

 

 

Basic

$

0.46

 

$

0.39

 

Diluted

$

0.45

 

$

0.39

 

 

 

 

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

For purposes of the following discussion, all references to "the quarter" and "the first quarter" are for the three fiscal months (13 weeks) ended May 5, 2018 and April 29, 2017. References to "2018" are for the quarter ended May 5, 2018.  References to “2017” are for the quarter ended April 29, 2017.  

The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in our 2017 Annual Report on Form 10-K (our "2017 Form 10-K"). The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could materially differ from those discussed in these forward-looking statements.  Factors that could cause or contribute to those differences include, but are not limited to, those discussed elsewhere in this report and in our 2017 Form 10-K (particularly in "Risk Factors").

 

Executive Summary

As of May 5, 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 private label, exclusive 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 on-line.

Key financial results for the quarter included:

 

Positive comparable sales results

 

50 basis point increase in gross margin as a percent of net sales

 

7% reduction in inventory per store

 

SG&A as a percent of total revenue deleveraged 6 basis points

 

$500 million reduction in outstanding debt

 

15% increase in GAAP diluted earnings per share ("EPS") and 65% increase in adjusted EPS

See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results.

 

Results of Operations

Net Sales

Net sales increased $138 million, or 3.6%, to $4.0 billion for the first quarter of 2018. Comparable sales increased 3.6% on a fiscal basis. The fiscal basis compares the 13 week periods ended May 5, 2018 and April 29, 2017. Comparable sales increased 0.4% on a shifted basis.  The shifted basis compares the 13 week periods ended May 5, 2018 and May 6, 2017, adjusting for the 53rd week in fiscal 2017. 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%.  

Average transaction value increased, driven by a strong increase in average unit retail.  Transactions were relatively flat on a fiscal basis and were lower on a shifted basis.      

From a line of business perspective, Home, Footwear, and Men’s were the strongest performers while the Children’s business was the most challenging.

From a regional perspective, the West, Midwest, and South Central outperformed the Company.  The Northeast and Mid-Atlantic, which were negatively impacted by weather, as well as the Southeast underperformed the Company.

Other Revenue

Other revenue increased $5 million, or 2%, to $255 million for the first quarter of 2018. The increase was primarily due to higher credit card revenue as a result of higher interest and late fees.

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Cost of Merchandise Sold and Gross Margin

 

 

Quarter

 

(Dollars in Millions)

2018

2017

Change

Net sales

$

3,953

 

$

3,815

 

$

138

 

Cost of merchandise sold

 

2,496

 

 

2,428

 

 

68

 

Gross margin

$

1,457

 

$

1,387

 

$

70

 

Gross margin as a percent of net sales

 

36.9

%

 

36.4

%

50 bp

 

Cost of merchandise sold 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 expenses for on-line sales; and terms cash discount. Our cost of merchandise sold 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.  Cost of merchandise sold increased $68 million, or 3%, in the first quarter of 2018.  

We calculate gross margin as net sales less cost of merchandise sold.  Our gross margin rate increased 50 basis points to 36.9% of net sales for the quarter.  The increase was driven by our clean inventory position at the start of the quarter.  As a result, we drove an improvement in full-price and clearance sell-throughs resulting in fewer markdowns.

Selling, General and Administrative Expenses ("SG&A")

 

 

Quarter

 

(Dollars in Millions)

2018

2017

Change

SG&A

$

1,259

 

$

1,214

 

$

45

 

As a percent of total revenue

 

29.9

%

 

29.9

%

6 bp

 

SG&A expenses include compensation and benefit costs (including stores, headquarters, buying, 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; expenses related to our 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". If the expense as a percent of sales increased over the prior year, the expense "deleveraged".

SG&A increased $45 million, or 3.7%, to $1.3 billion in the first quarter of 2018.  As a percentage of total revenue, SG&A deleveraged 6 basis points.  Substantially all of the increase was driven by higher technology spending as we make investments in programs like cloud migration and omni channel growth and by corporate costs related to our recent executive leadership changes. Store expenses were flat for the quarter; despite the increase in sales as savings from our operational excellence initiatives offset wage pressures.

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Other Expenses

 

 

Quarter

 

(Dollars in Millions)

2018

2017

Change

Depreciation and amortization

$

243

 

$

238

 

$

5

 

Interest expense, net

 

71

 

 

76

 

 

(5

)

Loss on extinguishment of debt

 

42

 

 

 

 

42

 

 

Depreciation and amortization increased as a result of the opening of our fifth E-commerce fulfillment center in 2017 and technology investments.  

Interest expense decreased due to lower interest on capital leases as the store portfolio matures, as well as increased interest income due to higher yield and investment balances.

In April 2018, we completed a cash tender offer for $500 million of senior unsecured debt.  We recognized a $42 million loss on extinguishment of debt in the first quarter of 2018 which includes $35 million of premiums paid to holders as a result of the tender offer, a $4 million non-cash write-off of an interest rate hedge on tendered debt, and a $3 million non-cash write-off of deferred financing costs and original issue discounts associated with the extinguished debt.

Income Taxes

 

 

Quarter

   (Dollars in Millions)

2018

2017

Change

Provision for income taxes

$

22

 

$

43

 

$

(21

)

Effective tax rate

 

22.8

%

 

39.2

%

(1640) bps

 

The decreases in the provision for income taxes and the effective tax rate were primarily due to tax reform. Favorable audit settlements in 2018 and stock-based compensation also contributed to the decrease.      

Income before Income Taxes, Net Income and Earnings Per Diluted Share

 

 

Quarter

 

2018

2017

(Dollars in Millions, Except per Share Data)

Income

before

Income Taxes

Net

Income

Earnings

Per Diluted

Share

Income

before

Income Taxes

Net

Income

Earnings

Per Diluted

Share

GAAP

$

97

 

$

75

 

$

0.45

 

$

109

 

$

66

 

$

0.39

 

Loss on extinguishment of debt

 

42

 

 

32

 

 

0.19

 

 

 

 

 

 

 

Adjusted (Non-GAAP)

$

139

 

$

107

 

$

0.64

 

$

109

 

$

66

 

$

0.39

 

 

We believe the adjusted results in the table above are useful because they provide enhanced visibility into our results excluding the loss on extinguishment of debt.  However, these non-GAAP financial measures are not intended to replace the comparable GAAP measures.

Seasonality and 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.

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.

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Table of Contents

 

 

Liquidity and Capital Resources

The following table presents our primary uses and sources of cash.

Cash Uses

 

Cash Sources

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

Capital expenditures

Inventory

Dividend payments

Share repurchases

Debt reduction