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 NovemberAugust 3, 20182019
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 | Trading Symbol(s) | Name of each exchange on which registered |
Common Stock, $.01 par value | KSS | New York Stock Exchange |
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 every Interactive Data File required to be submitted 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 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 |
| ☐ |
| 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: December 1, 2018August 30, 2019 Common Stock, Par Value $0.01 per Share, 165,129,371159,126,736 shares outstanding.
PART I | FINANCIAL INFORMATION |
|
Item 1. |
| |
| 3 | |
| 4 | |
| 5 | |
|
| |
|
| |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 15 |
Item 3. |
| |
Item 4. |
| |
|
|
|
PART II | OTHER INFORMATION |
|
Item 1A. |
| |
Item 2. |
| |
Item 6. |
| |
23 | ||
24 |
KOHL’S CORPORATION
(Unaudited)
(Dollars in Millions) | November 3, 2018 | February 3, 2018 | October 28, 2017 | August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||||
Assets |
|
|
| As Adjusted (a) | As Adjusted (a) |
|
|
|
|
|
|
|
|
| ||||
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 1,047 |
| $ | 1,308 |
| $ | 736 |
| $ | 625 |
| $ | 934 |
| $ | 1,066 |
|
Merchandise inventories |
| 4,844 |
|
| 3,542 |
|
| 4,632 |
|
| 3,656 |
|
| 3,475 |
|
| 3,572 |
|
Other |
| 446 |
|
| 530 |
|
| 379 |
|
| 397 |
|
| 426 |
|
| 404 |
|
Total current assets |
| 6,337 |
|
| 5,380 |
|
| 5,747 |
|
| 4,678 |
|
| 4,835 |
|
| 5,042 |
|
Property and equipment, net |
| 7,538 |
|
| 7,773 |
|
| 7,974 |
|
| 7,276 |
|
| 7,428 |
|
| 7,635 |
|
Operating leases |
| 2,428 |
|
| - |
|
| - |
| |||||||||
Other assets |
| 243 |
|
| 236 |
|
| 226 |
|
| 160 |
|
| 206 |
|
| 238 |
|
Total assets | $ | 14,118 |
| $ | 13,389 |
| $ | 13,947 |
| $ | 14,542 |
| $ | 12,469 |
| $ | 12,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 2,583 |
| $ | 1,271 |
| $ | 2,113 |
| $ | 1,330 |
| $ | 1,187 |
| $ | 1,404 |
|
Accrued liabilities |
| 1,289 |
|
| 1,213 |
|
| 1,294 |
|
| 1,199 |
|
| 1,364 |
|
| 1,174 |
|
Income taxes payable |
| 14 |
|
| 99 |
|
| 24 |
|
| 34 |
|
| 64 |
|
| 70 |
|
Current portion of capital lease and financing obligations |
| 121 |
|
| 126 |
|
| 131 |
| |||||||||
Current portion of: |
|
|
|
|
|
|
|
|
| |||||||||
Finance leases and financing obligations |
| 119 |
|
| 115 |
|
| 122 |
| |||||||||
Operating leases |
| 158 |
|
| - |
|
| - |
| |||||||||
Total current liabilities |
| 4,007 |
|
| 2,709 |
|
| 3,562 |
|
| 2,840 |
|
| 2,730 |
|
| 2,770 |
|
Long-term debt |
| 2,272 |
|
| 2,797 |
|
| 2,796 |
|
| 1,855 |
|
| 1,861 |
|
| 2,273 |
|
Capital lease and financing obligations |
| 1,528 |
|
| 1,591 |
|
| 1,622 |
| |||||||||
Finance leases and financing obligations |
| 1,270 |
|
| 1,523 |
|
| 1,537 |
| |||||||||
Operating leases |
| 2,647 |
|
| - |
|
| - |
| |||||||||
Deferred income taxes |
| 201 |
|
| 211 |
|
| 272 |
|
| 254 |
|
| 184 |
|
| 188 |
|
Other long-term liabilities |
| 657 |
|
| 662 |
|
| 673 |
|
| 221 |
|
| 644 |
|
| 660 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
Paid-in capital |
| 3,185 |
|
| 3,078 |
|
| 3,039 |
|
| 3,236 |
|
| 3,204 |
|
| 3,163 |
|
Treasury stock, at cost |
| (10,952 | ) |
| (10,651 | ) |
| (10,633 | ) |
| (11,353 | ) |
| (11,076 | ) |
| (10,835 | ) |
Accumulated other comprehensive loss |
| (8 | ) |
| (11 | ) |
| (12 | ) |
| - |
|
| - |
|
| (8 | ) |
Retained earnings |
| 13,224 |
|
| 12,999 |
|
| 12,624 |
|
| 13,568 |
|
| 13,395 |
|
| 13,163 |
|
Total shareholders’ equity |
| 5,453 |
|
| 5,419 |
|
| 5,022 |
|
| 5,455 |
|
| 5,527 |
|
| 5,487 |
|
Total liabilities and shareholders’ equity | $ | 14,118 |
| $ | 13,389 |
| $ | 13,947 |
| $ | 14,542 |
| $ | 12,469 |
| $ | 12,915 |
|
|
|
See accompanying Notes to Consolidated Financial Statements
3
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||
(Dollars in Millions, Except per Share Data) | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||||||
|
|
|
| As Adjusted (a) |
|
|
| As Adjusted (a) | ||||||||||||||||
Net sales | $ | 4,369 |
| $ | 4,312 |
| $ | 12,632 |
| $ | 12,274 |
| $ | 4,169 |
| $ | 4,310 |
| $ | 7,990 |
| $ | 8,263 |
|
Other revenue |
| 259 |
|
| 255 |
|
| 774 |
|
| 753 |
|
| 261 |
|
| 260 |
|
| 527 |
|
| 515 |
|
Total revenue |
| 4,628 |
|
| 4,567 |
|
| 13,406 |
|
| 13,027 |
|
| 4,430 |
|
| 4,570 |
|
| 8,517 |
|
| 8,778 |
|
Cost of merchandise sold |
| 2,752 |
|
| 2,727 |
|
| 7,854 |
|
| 7,680 |
|
| 2,550 |
|
| 2,605 |
|
| 4,965 |
|
| 5,101 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general, and administrative |
| 1,375 |
|
| 1,340 |
|
| 3,907 |
|
| 3,774 |
|
| 1,269 |
|
| 1,272 |
|
| 2,544 |
|
| 2,532 |
|
Depreciation and amortization |
| 243 |
|
| 243 |
|
| 725 |
|
| 724 |
|
| 228 |
|
| 241 |
|
| 458 |
|
| 483 |
|
Impairments, store closing and other costs |
| 7 |
|
| — |
|
| 56 |
|
| — |
| ||||||||||||
Operating income |
| 258 |
|
| 257 |
|
| 920 |
|
| 849 |
|
| 376 |
|
| 452 |
|
| 494 |
|
| 662 |
|
Interest expense, net |
| 63 |
|
| 74 |
|
| 197 |
|
| 225 |
|
| 53 |
|
| 65 |
|
| 105 |
|
| 135 |
|
Loss on extinguishment of debt |
| — |
|
| — |
|
| 42 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 42 |
|
Income before income taxes |
| 195 |
|
| 183 |
|
| 681 |
|
| 624 |
|
| 323 |
|
| 387 |
|
| 389 |
|
| 485 |
|
Provision for income taxes |
| 34 |
|
| 66 |
|
| 152 |
|
| 233 |
|
| 82 |
|
| 95 |
|
| 86 |
|
| 117 |
|
Net income | $ | 161 |
| $ | 117 |
| $ | 529 |
| $ | 391 |
| $ | 241 |
| $ | 292 |
| $ | 303 |
| $ | 368 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.98 |
| $ | 0.70 |
| $ | 3.21 |
| $ | 2.33 |
| $ | 1.52 |
| $ | 1.77 |
| $ | 1.90 |
| $ | 2.23 |
|
Diluted | $ | 0.98 |
| $ | 0.70 |
| $ | 3.19 |
| $ | 2.32 |
| $ | 1.51 |
| $ | 1.76 |
| $ | 1.89 |
| $ | 2.21 |
|
|
|
See accompanying Notes to Consolidated Financial Statements
4
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Three Months Ended November 3, 2018 |
| ||||||||||||||||||||||
| Common Stock |
|
|
|
| Treasury Stock |
| Accumulated Other Comprehensive Loss |
|
|
|
|
|
| ||||||||||
(Dollars in Millions, Except per Share Data) | Shares |
| Amount |
| Paid-In Capital |
| Shares |
| Amount |
| Retained Earnings |
| Total |
| ||||||||||
Balance at August 4, 2018 |
| 374 |
| $ | 4 |
| $ | 3,163 |
|
| (207 | ) | $ | (10,835 | ) | $ | (8 | ) | $ | 13,163 |
| $ | 5,487 |
|
Comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 161 |
|
| 161 |
|
Stock options and awards, net of tax |
| — |
|
| — |
|
| 22 |
|
| — |
|
| (8 | ) |
| — |
|
| — |
|
| 14 |
|
Dividends paid ($0.61 per common share) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| (100 | ) |
| (99 | ) |
Treasury stock purchases |
| — |
|
| — |
|
| — |
|
| (2 | ) |
| (110 | ) |
| — |
|
| — |
|
| (110 | ) |
Balance at November 3, 2018 |
| 374 |
| $ | 4 |
| $ | 3,185 |
|
| (209 | ) | $ | (10,952 | ) | $ | (8 | ) | $ | 13,224 |
| $ | 5,453 |
|
| Three Months Ended | Six Months Ended | ||||||||||
(Dollars in Millions, Except per Share Data) | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
|
Stock options and awards |
| - |
|
| - |
|
| - |
|
| - |
|
Balance, end of period | $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 3,223 |
| $ | 3,125 |
| $ | 3,204 |
| $ | 3,078 |
|
Stock options and awards |
| 13 |
|
| 38 |
|
| 32 |
|
| 85 |
|
Balance, end of period | $ | 3,236 |
| $ | 3,163 |
| $ | 3,236 |
| $ | 3,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | (11,221 | ) | $ | (10,737 | ) | $ | (11,076 | ) | $ | (10,651 | ) |
Treasury stock purchases |
| (133 | ) |
| (95 | ) |
| (254 | ) |
| (165 | ) |
Stock options and awards |
| (2 | ) |
| (4 | ) |
| (27 | ) |
| (21 | ) |
Dividends paid |
| 3 |
|
| 1 |
|
| 4 |
|
| 2 |
|
Balance, end of period | $ | (11,353 | ) | $ | (10,835 | ) | $ | (11,353 | ) | $ | (10,835 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | - |
| $ | (8 | ) | $ | - |
| $ | (11 | ) |
Other comprehensive income |
| - |
|
| - |
|
| - |
|
| 3 |
|
Balance, end of period | $ | - |
| $ | (8 | ) | $ | - |
| $ | (8 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 13,436 |
| $ | 12,972 |
| $ | 13,395 |
| $ | 13,006 |
|
Change in accounting standard (a) |
| - |
|
| - |
|
| 88 |
|
| (7 | ) |
Net earnings |
| 241 |
|
| 293 |
|
| 303 |
|
| 368 |
|
Dividends paid |
| (109 | ) |
| (102 | ) |
| (218 | ) |
| (204 | ) |
Balance, end of period | $ | 13,568 |
| $ | 13,163 |
| $ | 13,568 |
| $ | 13,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity, end of period | $ | 5,455 |
| $ | 5,487 |
| $ | 5,455 |
| $ | 5,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning of period |
| 375 |
|
| 374 |
|
| 374 |
|
| 373 |
|
Stock options and awards |
| - |
|
| - |
|
| 1 |
|
| 1 |
|
Shares, end of period |
| 375 |
|
| 374 |
|
| 375 |
|
| 374 |
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning of period |
| (213 | ) |
| (206 | ) |
| (211 | ) |
| (205 | ) |
Treasury stock purchases |
| (2 | ) |
| (1 | ) |
| (4 | ) |
| (2 | ) |
Shares, end of period |
| (215 | ) |
| (207 | ) |
| (215 | ) |
| (207 | ) |
Total shares outstanding, end of period |
| 160 |
|
| 167 |
|
| 160 |
|
| 167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share | $ | 0.67 |
| $ | 0.61 |
| $ | 1.34 |
| $ | 1.22 |
|
| Three Months Ended October 28, 2017 |
| ||||||||||||||||||||||
| Common Stock |
|
|
|
| Treasury Stock |
| Accumulated Other Comprehensive Loss |
|
|
|
|
|
| ||||||||||
(Dollars in Millions, Except per Share Data) | Shares |
| Amount |
| Paid-In Capital |
| Shares |
| Amount |
| Retained Earnings |
| Total |
| ||||||||||
Balance at July 29, 2017 (previously reported) |
| 372 |
| $ | 4 |
| $ | 3,026 |
|
| (203 | ) | $ | (10,596 | ) | $ | (12 | ) | $ | 12,606 |
| $ | 5,028 |
|
Change in accounting standard (a) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7 | ) |
| (7 | ) |
Balance at July 29, 2017 (as adjusted) |
| 372 |
| $ | 4 |
| $ | 3,026 |
|
| (203 | ) | $ | (10,596 | ) | $ | (12 | ) | $ | 12,599 |
| $ | 5,021 |
|
Comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 117 |
|
| 117 |
|
Stock options and awards, net of tax |
| 1 |
|
| — |
|
| 13 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 13 |
|
Dividends paid ($0.55 per common share) |
| — |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| (92 | ) |
| (91 | ) |
Treasury stock purchases |
| — |
|
| — |
|
| — |
|
| (2 | ) |
| (38 | ) |
| — |
|
| — |
|
| (38 | ) |
Balance at October 28, 2017 |
| 373 |
| $ | 4 |
| $ | 3,039 |
|
| (205 | ) | $ | (10,633 | ) | $ | (12 | ) | $ | 12,624 |
| $ | 5,022 |
|
| (a) | Refer to Note | standard. |
See accompanying Notes to Consolidated Financial Statements
5
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY - (Continued)CASH FLOWS
(Unaudited)
| Nine Months Ended November 3, 2018 |
| ||||||||||||||||||||||
| Common Stock |
|
|
|
| Treasury Stock |
| Accumulated Other Comprehensive Loss |
|
|
|
|
|
| ||||||||||
(Dollars in Millions, Except per Share Data) | Shares |
| Amount |
| Paid-In Capital |
| 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 |
|
| 529 |
|
| 532 |
|
Stock options and awards, net of tax |
| 1 |
|
| — |
|
| 107 |
|
| — |
|
| (29 | ) |
| — |
|
| — |
|
| 78 |
|
Dividends paid ($1.83 per common share) |
| — |
|
| — |
|
| — |
|
| — |
|
| 3 |
|
| — |
|
| (304 | ) |
| (301 | ) |
Treasury stock purchases |
| — |
|
| — |
|
| — |
|
| (4 | ) |
| (275 | ) |
| — |
|
| — |
|
| (275 | ) |
Balance at November 3, 2018 |
| 374 |
| $ | 4 |
| $ | 3,185 |
|
| (209 | ) | $ | (10,952 | ) | $ | (8 | ) | $ | 13,224 |
| $ | 5,453 |
|
| Six Months Ended | |||||
(Dollars in Millions) | August 3, 2019 | August 4, 2018 | ||||
Operating activities |
|
|
|
|
|
|
Net income | $ | 303 |
| $ | 368 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
| 458 |
|
| 483 |
|
Share-based compensation |
| 27 |
|
| 50 |
|
Deferred income taxes |
| 41 |
|
| (25 | ) |
Impairments, store closing and other costs |
| 45 |
|
| - |
|
Loss on extinguishment of debt |
| - |
|
| 42 |
|
Non-cash lease expense |
| 75 |
|
| - |
|
Other non-cash expenses |
| 3 |
|
| 13 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Merchandise inventories |
| (175 | ) |
| (24 | ) |
Accrued and other long-term liabilities |
| (177 | ) |
| (88 | ) |
Accounts payable |
| 143 |
|
| 133 |
|
Other current and long-term assets |
| 29 |
|
| 89 |
|
Income taxes |
| (8 | ) |
| 6 |
|
Operating lease liabilities |
| (88 | ) |
| - |
|
Net cash provided by operating activities |
| 676 |
|
| 1,047 |
|
Investing activities |
|
|
|
|
|
|
Acquisition of property and equipment |
| (439 | ) |
| (312 | ) |
Other |
| - |
|
| 6 |
|
Net cash used in investing activities |
| (439 | ) |
| (306 | ) |
Financing activities |
|
|
|
|
|
|
Treasury stock purchases |
| (254 | ) |
| (165 | ) |
Shares withheld for taxes on vested restricted shares |
| (27 | ) |
| (21 | ) |
Dividends paid |
| (214 | ) |
| (202 | ) |
Reduction of long-term borrowings |
| (6 | ) |
| (528 | ) |
Premium paid on redemption of debt |
| - |
|
| (35 | ) |
Finance lease and financing obligation payments |
| (60 | ) |
| (64 | ) |
Proceeds from financing obligations |
| 13 |
|
| - |
|
Proceeds from stock option exercises |
| 2 |
|
| 32 |
|
Net cash used in financing activities |
| (546 | ) |
| (983 | ) |
Net decrease in cash and cash equivalents |
| (309 | ) |
| (242 | ) |
Cash at beginning of period |
| 934 |
|
| 1,308 |
|
Cash at end of period | $ | 625 |
| $ | 1,066 |
|
Supplemental information |
|
|
|
|
|
|
Interest paid, net of capitalized interest | $ | 105 |
| $ | 141 |
|
Income taxes paid |
| 77 |
|
| 164 |
|
Property and equipment acquired through: |
|
|
|
|
|
|
Finance lease liabilities |
| 73 |
|
| - |
|
Operating lease liabilities |
| 67 |
|
| - |
|
Financing obligations |
| - |
|
| 7 |
|
| Nine Months Ended October 28, 2017 |
| ||||||||||||||||||||||
| Common Stock |
|
|
|
| Treasury Stock |
| Accumulated Other Comprehensive Loss |
|
|
|
|
|
| ||||||||||
(Dollars in Millions, Except per Share Data) | Shares |
| Amount |
| Paid-In Capital |
| Shares |
| Amount |
| Retained Earnings |
| Total |
| ||||||||||
Balance at January 28, 2017 (previously reported) | 371 |
| $ | 4 |
| $ | 3,003 |
|
| (197 | ) | $ | (10,338 | ) | $ | (14 | ) | $ | 12,522 |
| $ | 5,177 |
| |
Change in accounting standard (a) |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (7 | ) |
| (7 | ) |
Balance at January 28, 2017 (as adjusted) | 371 |
| $ | 4 |
| $ | 3,003 |
|
| (197 | ) | $ | (10,338 | ) | $ | (14 | ) | $ | 12,515 |
| $ | 5,170 |
| |
Comprehensive income |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2 |
|
| 391 |
|
| 393 |
|
Stock options and awards, net of tax |
| 2 |
|
| — |
|
| 36 |
|
| — |
|
| (12 | ) |
| — |
|
| — |
|
| 24 |
|
Dividends paid ($1.65 per common share) |
| — |
|
| — |
|
| — |
|
| — |
|
| 5 |
|
| — |
|
| (282 | ) |
| (277 | ) |
Treasury stock purchases |
| — |
|
| — |
|
| — |
|
| (8 | ) |
| (288 | ) |
| — |
|
| — |
|
| (288 | ) |
Balance at October 28, 2017 |
| 373 |
| $ | 4 |
| $ | 3,039 |
|
| (205 | ) | $ | (10,633 | ) | $ | (12 | ) | $ | 12,624 |
| $ | 5,022 |
|
|
|
See accompanying Notes to Consolidated Financial Statements
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | |||||
(Dollars in Millions) | November 3, 2018 | October 28, 2017 | ||||
Operating activities |
|
|
| As Adjusted (a) | ||
Net income | $ | 529 |
| $ | 391 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
Depreciation and amortization |
| 725 |
|
| 724 |
|
Share-based compensation |
| 71 |
|
| 34 |
|
Deferred income taxes |
| (13 | ) |
| 2 |
|
Loss on extinguishment of debt |
| 42 |
|
| — |
|
Other non-cash revenues and expenses |
| 15 |
|
| (4 | ) |
Changes in operating assets and liabilities: |
|
|
|
|
|
|
Merchandise inventories |
| (1,293 | ) |
| (829 | ) |
Accrued and other long-term liabilities |
| 38 |
|
| (14 | ) |
Accounts payable |
| 1,312 |
|
| 606 |
|
Other current and long-term assets |
| 70 |
|
| 50 |
|
Income taxes |
| (73 | ) |
| (91 | ) |
Net cash provided by operating activities |
| 1,423 |
|
| 869 |
|
Investing activities |
|
|
|
|
|
|
Acquisition of property and equipment |
| (458 | ) |
| (547 | ) |
Other |
| 6 |
|
| 18 |
|
Net cash used in investing activities |
| (452 | ) |
| (529 | ) |
Financing activities |
|
|
|
|
|
|
Treasury stock purchases |
| (275 | ) |
| (288 | ) |
Shares withheld for taxes on vested restricted shares |
| (29 | ) |
| (12 | ) |
Dividends paid |
| (301 | ) |
| (277 | ) |
Reduction of long-term borrowings |
| (530 | ) |
| — |
|
Premium paid on redemption of debt |
| (35 | ) |
| — |
|
Capital lease and financing obligation activity |
| (95 | ) |
| (101 | ) |
Proceeds from stock option exercises |
| 33 |
|
| — |
|
Net cash used in financing activities |
| (1,232 | ) |
| (678 | ) |
Net decrease in cash and cash equivalents |
| (261 | ) |
| (338 | ) |
Cash at beginning of period |
| 1,308 |
|
| 1,074 |
|
Cash at end of period | $ | 1,047 |
| $ | 736 |
|
Supplemental information |
|
|
|
|
|
|
Interest paid, net of capitalized interest | $ | 192 |
| $ | 192 |
|
Income taxes paid |
| 266 |
|
| 322 |
|
Non-cash investing and financing activities |
|
|
|
|
|
|
Property and equipment acquired through additional liabilities | $ | 20 |
| $ | 42 |
|
|
|
See accompanying Notes to Consolidated Financial Statements
7
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, 20182, 2019 (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 |
|
|
|
Cloud Computing (ASU 2018-15)
Issued August 2018
Effective Q1 2020 | Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs.
The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense. | We are evaluating the impact of the new standard, but believe it is generally consistent with our current accounting for cloud computing arrangements and will not have a material impact on our financials.
|
|
|
|
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 nine months ended November 3, 2018, we made immaterial adjustments to the previously recorded provisional amounts related to the Act. Any additional adjustments related to the Act, while not expected to be material, will be recorded as income tax expense during the period in which the adjustment is finalized.
8
7
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 eliminated the transaction and industry specific revenue recognition guidance under prior U.S. GAAP and replaced 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 includes 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.
The following table summarizes net sales by line of business for the periods ended November 3, 2018 and October 28, 2017:business:
| Three Months Ended | Nine Months Ended | Three Months Ended |
| Six Months Ended |
| ||||||||||||||||||
(Dollars in Millions) | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | August 3, 2019 |
| August 4, 2018 (1) |
| August 3, 2019 |
| August 4, 2018 (1) |
| ||||||||||||
Women's | $ | 1,287 |
| $ | 1,276 |
| $ | 3,982 |
| $ | 3,883 |
| $ | 1,373 |
| $ | 1,439 |
| $ | 2,592 |
| $ | 2,694 |
|
Men's |
| 925 |
|
| 890 |
|
| 2,668 |
|
| 2,550 |
|
| 933 |
|
| 955 |
|
| 1,717 |
|
| 1,745 |
|
Home |
| 719 |
|
| 713 |
|
| 2,090 |
|
| 2,035 |
|
| 651 |
|
| 678 |
|
| 1,280 |
|
| 1,369 |
|
Children's |
| 650 |
|
| 640 |
|
| 1,569 |
|
| 1,534 |
|
| 458 |
|
| 464 |
|
| 914 |
|
| 919 |
|
Footwear |
| 465 |
|
| 473 |
|
| 1,334 |
|
| 1,288 |
|
| 447 |
|
| 465 |
|
| 867 |
|
| 902 |
|
Accessories |
| 323 |
|
| 320 |
|
| 989 |
|
| 984 |
|
| 307 |
|
| 309 |
|
| 620 |
|
| 634 |
|
Net Sales | $ | 4,369 |
| $ | 4,312 |
| $ | 12,632 |
| $ | 12,274 |
| $ | 4,169 |
| $ | 4,310 |
| $ | 7,990 |
| $ | 8,263 |
|
(1) | Certain businesses do not agree to previously reported amounts due to changes in category classification. |
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 and merchandise return cards totaled $337$354 million as of NovemberAugust 3, 2018, $4222019, $413 million as of February 3, 20182, 2019 and $335$358 million as of October 28, 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, unredeemed gift and merchandise return 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 unredeemed gift cards and merchandise return cards (breakage) is recorded in proportion and over the time period the cards are actually redeemed.
9
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 October 28, 2017 (Dollars in Millions, Except per Share Data) | As Previously Reported | New Standard Adjustment | Adjusted | ||||||
Net sales | $ | 4,332 |
| $ | (20 | ) | $ | 4,312 |
|
Other revenue |
|
|
|
| 255 |
|
| 255 |
|
Total revenue |
|
|
|
| 235 |
|
| 4,567 |
|
Cost of merchandise sold |
| 2,737 |
|
| (10 | ) |
| 2,727 |
|
Gross margin |
| 1,595 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| 1,095 |
|
| 245 |
|
| 1,340 |
|
Depreciation and amortization |
| 243 |
|
| - |
|
| 243 |
|
Operating income |
| 257 |
|
| - |
|
| 257 |
|
Interest expense, net |
| 74 |
|
| - |
|
| 74 |
|
Income before income taxes |
| 183 |
|
| - |
|
| 183 |
|
Provision for income taxes |
| 66 |
|
| - |
|
| 66 |
|
Net income | $ | 117 |
| $ | - |
| $ | 117 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic | $ | 0.70 |
| $ | - |
| $ | 0.70 |
|
Diluted | $ | 0.70 |
| $ | - |
| $ | 0.70 |
|
Nine Months Ended October 28, 2017 (Dollars in Millions, Except per Share Data) | As Previously Reported | New Standard Adjustment | Adjusted | ||||||
Net sales | $ | 12,319 |
| $ | (45 | ) | $ | 12,274 |
|
Other revenue |
|
|
|
| 753 |
|
| 753 |
|
Total revenue |
|
|
|
| 708 |
|
| 13,027 |
|
Cost of merchandise sold |
| 7,693 |
|
| (13 | ) |
| 7,680 |
|
Gross margin |
| 4,626 |
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| 3,053 |
|
| 721 |
|
| 3,774 |
|
Depreciation and amortization |
| 724 |
|
| - |
|
| 724 |
|
Operating income |
| 849 |
|
| - |
|
| 849 |
|
Interest expense, net |
| 225 |
|
| - |
|
| 225 |
|
Income before income taxes |
| 624 |
|
| - |
|
| 624 |
|
Provision for income taxes |
| 233 |
|
| - |
|
| 233 |
|
Net income | $ | 391 |
| $ | - |
| $ | 391 |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
Basic | $ | 2.33 |
| $ | - |
| $ | 2.33 |
|
Diluted | $ | 2.32 |
| $ | - |
| $ | 2.32 |
|
10
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(Dollars in Millions) | As Previously Reported | New Standard Adjustment | Adjusted | ||||||
Assets |
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 736 |
| $ | - |
| $ | 736 |
|
Merchandise inventories |
| 4,632 |
|
| - |
|
| 4,632 |
|
Other |
| 332 |
|
| 47 |
|
| 379 |
|
Total current assets |
| 5,700 |
|
| 47 |
|
| 5,747 |
|
Property and equipment, net |
| 7,974 |
|
| - |
|
| 7,974 |
|
Other assets |
| 226 |
|
| - |
|
| 226 |
|
Total assets | $ | 13,900 |
| $ | 47 |
| $ | 13,947 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 2,113 |
| $ | - |
| $ | 2,113 |
|
Accrued liabilities |
| 1,237 |
|
| 57 |
|
| 1,294 |
|
Income taxes payable |
| 24 |
|
| - |
|
| 24 |
|
Current portion of capital lease and financing obligations |
| 131 |
|
| - |
|
| 131 |
|
Total current liabilities |
| 3,505 |
|
| 57 |
|
| 3,562 |
|
Long-term debt |
| 2,796 |
|
| - |
|
| 2,796 |
|
Capital lease and financing obligations |
| 1,622 |
|
| - |
|
| 1,622 |
|
Deferred income taxes |
| 275 |
|
| (3 | ) |
| 272 |
|
Other long-term liabilities |
| 673 |
|
| - |
|
| 673 |
|
Total shareholders’ equity |
| 5,029 |
|
| (7 | ) |
| 5,022 |
|
Total liabilities and shareholders’ equity | $ | 13,900 |
| $ | 47 |
| $ | 13,947 |
|
11
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
(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.
August 4, 2018.
3. Store Closure and Restructure ReserveDebt
The following table summarizes changes in the store closure and restructure reserve during the nine months ended November 3, 2018:
(Dollars in Millions) |
|
|
|
Balance - February 3, 2018 | $ | 87 |
|
Payments, reversals and additions |
| (13 | ) |
Balance - November 3, 2018 | $ | 74 |
|
12
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Long-term debt consists of the following unsecured senior debt:
|
|
|
|
|
|
| Outstanding |
|
|
|
|
|
| Outstanding | |||||||||||||
Maturity (Dollars in Millions) | Effective Rate | Coupon Rate | November 3, 2018 | February 3, 2018 & October 28, 2017 | |||||||||||||||||||||||
Maturity by fiscal year (Dollars in Millions) | Effective Rate | Coupon Rate | August 3, 2019 | February 2, 2019 | August 4, 2018 | ||||||||||||||||||||||
2021 |
| 4.81 | % |
| 4.00 | % | $ | 413 |
| $ | 650 |
|
| 4.81 | % |
| 4.00 | % | $ | - |
| $ | - |
| $ | 413 |
|
2023 |
| 3.25 | % |
| 3.25 | % |
| 350 |
|
| 350 |
|
| 3.25 | % |
| 3.25 | % |
| 350 |
|
| 350 |
|
| 350 |
|
2023 |
| 4.78 | % |
| 4.75 | % |
| 184 |
|
| 300 |
|
| 4.78 | % |
| 4.75 | % |
| 184 |
|
| 184 |
|
| 184 |
|
2025 |
| 4.25 | % |
| 4.25 | % |
| 650 |
|
| 650 |
|
| 4.25 | % |
| 4.25 | % |
| 650 |
|
| 650 |
|
| 650 |
|
2029 |
| 7.36 | % |
| 7.25 | % |
| 42 |
|
| 99 |
|
| 7.36 | % |
| 7.25 | % |
| 42 |
|
| 42 |
|
| 42 |
|
2033 |
| 6.05 | % |
| 6.00 | % |
| 112 |
|
| 166 |
|
| 6.05 | % |
| 6.00 | % |
| 113 |
|
| 113 |
|
| 112 |
|
2037 |
| 6.89 | % |
| 6.88 | % |
| 101 |
|
| 150 |
|
| 6.89 | % |
| 6.88 | % |
| 101 |
|
| 101 |
|
| 101 |
|
2045 |
| 5.57 | % |
| 5.55 | % |
| 433 |
|
| 450 |
|
| 5.57 | % |
| 5.55 | % |
| 427 |
|
| 433 |
|
| 435 |
|
|
| 4.76 | % |
|
|
| $ | 2,285 |
| $ | 2,815 |
| |||||||||||||||
Outstanding long-term debt |
|
|
|
|
|
|
| 1,867 |
|
| 1,873 |
|
| 2,287 |
| ||||||||||||
Unamortized debt discounts and deferred financing costs |
|
|
|
|
|
|
| (12 | ) |
| (12 | ) |
| (14 | ) | ||||||||||||
Long-term debt |
|
|
|
|
|
| $ | 1,855 |
| $ | 1,861 |
| $ | 2,273 |
| ||||||||||||
Effective interest rate |
|
|
|
|
|
|
| 4.74 | % |
| 4.74 | % |
| 4.76 | % |
Long-term debt is net of unamortized debt discounts and deferred financing costs of $13 million at November 3, 2018, $18 million at February 3, 2018, and $19 million at October 28, 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 $1.9 billion at August 3, 2019, $1.8 billion at February 2, 2019, and $2.3 billion at NovemberAugust 4, 2018.
On July 25, 2019, we amended and extended our existing credit facility with various lenders which provides for a $1.0 billion senior unsecured five-year revolving credit facility that will mature in July 2024. Among other things, the agreement includes a maximum leverage ratio financial covenant (which is generally consistent with the ratio under our prior agreement) and restrictions on liens and subsidiary indebtedness. NaN amounts were outstanding on the credit facility at August 3, 2018 and $2.9 billion at both2019, February 3, 2018 and October 28, 2017.2, 2019, or August 4, 2018.
8
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Year to date 2019, we have reduced our outstanding debt by $530$6 million including $500 million which was repurchased pursuantthrough open market repurchases.
4. Leases
Effective February 3, 2019 (the “adoption date”), we adopted ASC 842 Leases (the “new standard”). The new standard requires lessees to recognize a cash tender offerliability for lease obligations and $30 million which was repurchaseda corresponding right of use asset on the open market. In conjunctionbalance sheet. The guidance also requires disclosure of key information about leasing arrangements that is intended to give financial statement users the ability to assess the amount, timing, and potential uncertainty of cash flows related to leases. We adopted the new standard using a modified retrospective transition method and applied the transition provisions at the beginning of the period of adoption through a cumulative-effect adjustment to retained earnings. We did not restate prior period financial statements.
The new standard includes several transition practical expedients that were available to reduce the burden of implementing the standard.
• | We elected the package of practical expedients, which among other things, allowed us to carry forward our historical lease classifications. |
• | We did not elect the hindsight practical expedient which would have allowed us to revisit key assumptions, such as lease term, that were made when we originally entered into the lease. |
The following table summarizes changes in our Consolidated Balance Sheet upon adoption of the new standard:
(Dollars in Millions) |
| |||
Assets |
|
|
|
|
Property and equipment, net | $ | (174 | ) | (a) |
Operating leases |
| 2,446 |
| (b) |
Other assets |
| (32 | ) | (c) |
Total assets | $ | 2,240 |
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
Finance leases and financing obligations | $ | (237 | ) | (a) |
Operating leases |
| 2,771 |
| (b) |
Accrued and other liabilities |
| (413 | ) | (c) |
Deferred taxes |
| 31 |
| (d) |
Shareholders' equity |
| 88 |
| (d) |
Total liabilities and shareholders' equity | $ | 2,240 |
|
|
(a) | The reductions are primarily due to historical failed sale leaseback and build to suit arrangements where we were deemed owner for accounting purposes. In accordance with ASC 842 transition provisions, they became operating or finance leases. |
(b) | The increases include land and other operating leases which were not previously recorded on our balance sheet or were previously recorded as financing obligations. |
(c) | The reductions are primarily due to the reclassification of lease-related assets and liabilities such as straight-line rent and reserves for closed stores to operating lease assets and liabilities. |
(d) | The cumulative effect of lease adjustments, net of the deferred tax impact, was recorded as an adjustment to retained earnings. In addition, retained earnings include a $26 million lease impairment charge. |
9
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
These adjustments represent non-cash activities for Statement of Cash Flow purposes.
Adoption of the new standard is not expected to have a material impact on our net income prospectively. We expect immaterial increases in Selling, general and administrative expenses to be more than offset by decreases in Depreciation and amortization and Interest expense. Substantially all of the expected income statement changes are due to the reversal of accounting for build to suit arrangements where construction is complete which were accounted for as operating or finance leases in accordance with the debt reduction, we recordedtransition provisions of ASC 842.
Finance and Operating Leases
We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a one-time $42 million losspercentage of sales over contractual levels or which are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options.
Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on extinguishment of debt which includes $35 million of premium paid to holdersthe value of the debt, $4 million relatedlease liability and are adjusted for any lease payments made to anthe lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee.
Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate hedge,is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments. For leases that commenced prior to the adoption date, we used the February 3, 2019 rate for a term consistent with the original lease term for operating leases and $3 million of deferred financing fees and original issue discounts.the rate on the lease commencement date for finance leases.
5. Stock-Based CompensationFor leases with terms of 12 months or less, we elected the practical expedient to exclude them from the balance sheet and recognize expense on a straight-line basis over the lease term. For leases beginning, modified, or reassessed in 2019 and later, we elected the practical expedient to combine lease and non-lease components.
10
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheet | August 3, 2019 | |||
(Dollars in Millions) | Classification | |||
Assets |
|
|
|
|
Operating leases | Operating leases | $ | 2,428 |
|
Finance leases | Property and equipment, net |
| 544 |
|
Total operating and finance leases |
|
| 2,972 |
|
Liabilities |
|
|
|
|
Current |
|
|
|
|
Operating leases | Current portion of operating leases |
| 158 |
|
Finance leases | Current portion of finance leases and financing obligations |
| 72 |
|
Noncurrent |
|
|
|
|
Operating leases | Operating leases |
| 2,647 |
|
Finance leases | Finance leases and financing obligations |
| 764 |
|
Total operating and finance leases |
| $ | 3,641 |
|
Consolidated Statement of Income | Three Months Ended |
| Six Months Ended |
| |||
(Dollars in Millions) | Classification | August 3, 2019 |
| August 3, 2019 |
| ||
Operating leases | Selling, general, and administrative | $ | 79 |
| $ | 157 |
|
Finance leases |
|
|
|
|
|
|
|
Amortization of leased assets | Depreciation and amortization |
| 18 |
|
| 35 |
|
Interest on lease liabilities | Interest expense, net |
| 24 |
|
| 48 |
|
Total operating and finance leases |
| $ | 121 |
| $ | 240 |
|
Consolidated Statement of Cash Flows | Six Months Ended |
| ||
(Dollars in Millions) | Classification | August 3, 2019 |
| |
Cash paid for amounts included in the measurement of lease liabilities |
|
|
| |
Operating cash flows from operating leases | $ | 169 |
| |
Operating cash flows from finance leases |
| 48 |
| |
Financing cash flows from finance leases |
| 37 |
|
11
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes our stock-based compensation activity for the nine months ended November 3, 2018:future lease payments by fiscal year:
| 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 |
| — |
|
| — |
|
| 1,017 |
|
| 63.57 |
|
| 187 |
|
| 65.71 |
|
Exercised/vested |
| (992 | ) |
| 50.46 |
|
| (1,102 | ) |
| 47.56 |
|
| (38 | ) |
| 78.35 |
|
Forfeited/expired |
| (2 | ) |
| 53.38 |
|
| (78 | ) |
| 48.78 |
|
| (5 | ) |
| 46.91 |
|
Balance - November 3, 2018 |
| 145 |
| $ | 51.87 |
|
| 2,648 |
| $ | 51.62 |
|
| 804 |
| $ | 48.21 |
|
| August 3, 2019 |
| |||||||
(Dollars in Millions) | Operating Leases |
| Finance Leases |
| Total |
| |||
2019 | $ | 145 |
| $ | 82 |
| $ | 227 |
|
2020 |
| 309 |
|
| 168 |
|
| 477 |
|
2021 |
| 301 |
|
| 148 |
|
| 449 |
|
2022 |
| 287 |
|
| 131 |
|
| 418 |
|
2023 |
| 272 |
|
| 111 |
|
| 383 |
|
After 2023 |
| 3,603 |
|
| 1,686 |
|
| 5,289 |
|
Total lease payments |
| 4,917 |
|
| 2,326 |
|
| 7,243 |
|
Amount representing interest |
| (2,112 | ) |
| (1,490 | ) |
| (3,602 | ) |
Lease liabilities | $ | 2,805 |
| $ | 836 |
| $ | 3,641 |
|
Total lease payments include $2.9 billion related to options to extend operating lease terms that are reasonably certain of being exercised and $1.4 billion related to options to extend finance lease terms that are reasonably certain of being exercised.
The following table summarizes weighted-average remaining lease term and discount rates:
August 3, 2019 | |||
Weighted-average remaining term (years) | |||
Operating leases | 20 | ||
Finance leases | 17 | ||
Weighted-average discount rate | |||
Operating leases | 6 | % | |
Finance leases | 12 | % |
Financing Obligations
Historical failed sale leasebacks that did not qualify for sale leaseback accounting upon adoption of ASC 842 continue to be accounted for as financing obligations.
The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheet |
|
|
| |
(Dollars in Millions) | Classification | August 3, 2019 |
| |
Assets |
|
|
|
|
Financing obligations | Property and equipment, net | $ | 81 |
|
Liabilities |
|
|
|
|
Current | Current portion of finance leases and financing obligations |
| 47 |
|
Noncurrent | Finance leases and financing obligations |
| 506 |
|
Total financing obligations |
| $ | 553 |
|
12
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidated Statement of Income | Three Month Ended |
| Six Months Ended |
| |||
(Dollars in Millions) | Classification | August 3, 2019 |
| August 3, 2019 |
| ||
Amortization of financing obligation assets | Depreciation and amortization | $ | 3 |
| $ | 6 |
|
Interest on financing obligations | Interest expense, net |
| 9 |
|
| 19 |
|
Total financing obligations |
| $ | 12 |
| $ | 25 |
|
Consolidated Statement of Cash Flows | Six Months Ended August 3, 2019 | |||
(Dollars in Millions) | Classification | |||
Cash paid for amounts included in the measurement of financing obligations |
|
|
| |
Operating cash flows from financing obligations | $ | 19 |
| |
Financing cash flows from financing obligations |
| 23 |
| |
Proceeds from financing obligations |
| 13 |
|
The following table summarizes future financing obligation payments by fiscal year:
(Dollars in Millions) | August 3, 2019 | ||
2019 | $ | 29 |
|
2020 |
| 72 |
|
2021 |
| 72 |
|
2022 |
| 68 |
|
2023 |
| 66 |
|
After 2023 |
| 249 |
|
Total financing obligations payments |
| 556 |
|
Non-cash gain on future sale of property |
| 238 |
|
Amount representing interest |
| (241 | ) |
Financing obligation liability | $ | 553 |
|
Thefollowing table summarizes the weighted-average remaining term and discount rate for financing obligations:
August 3, 2019 | |||
Weighted-average remaining term (years) | 9 | ||
Weighted-average discount rate | 7 | % |
13
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes our stock-based awards activity for the six months ended August 3, 2019:
| Nonvested Stock Awards | Performance Share Units | Stock Options |
| Stock Warrants | |||||||||||||||||||
(Shares and Units in Thousands) | Shares |
| Weighted Average Grant Date Fair Value |
| Units | Weighted Average Grant Date Fair Value |
| Shares |
| Weighted Average Exercise Price |
| Shares |
| Weighted Average Exercise Price |
| |||||||||
Balance - February 2, 2019 |
| 2,601 |
| $ | 51.90 |
|
| 1,046 |
| $ | 52.08 |
|
| 136 |
| $ | 51.48 |
|
| - |
| $ | - |
|
Granted |
| 717 |
|
| 66.87 |
|
| 224 |
|
| 73.77 |
|
| - |
|
| - |
|
| 1,747 |
|
| 69.68 |
|
Exercised/vested |
| (753 | ) |
| 52.59 |
|
| (336 | ) |
| 46.87 |
|
| (39 | ) |
| 51.10 |
|
| - |
|
| - |
|
Forfeited/expired |
| (113 | ) |
| 57.49 |
|
| (57 | ) |
| 55.35 |
|
| - |
|
| - |
|
| - |
|
| - |
|
Balance - August 3, 2019 |
| 2,452 |
| $ | 55.79 |
|
| 877 |
| $ | 59.40 |
|
| 97 |
| $ | 51.64 |
|
| 1,747 |
| $ | 69.68 |
|
Effective April 18, 2019, in connection with our entry into a commercial agreement with Amazon.com Services, Inc. (“Amazon”), we issued warrants to an affiliate of Amazon, to purchase up to 1,747,441 shares of our common stock at an exercise price of $69.68, subject to customary anti-dilution provisions. The fair value was estimated to be $17.52 per warrant using a binomial lattice method. The warrants vest in 5 equal annual installments beginning on January 15, 2020 and expire on April 18, 2026. Unvested warrants will not vest if the commercial agreement is terminated, not renewed, or if no substitute written returns arrangement is entered into between the parties.
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.awards and stock warrants.
The information required to compute basic and diluted net income per share is as follows:
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||
(Dollar and Shares in Millions, Except per Share Data) | November 3, 2018 | October 28, 2017 | November 3, 2018 | October 28, 2017 | August 3, 2019 | August 4, 2018 | August 3, 2019 | August 4, 2018 | ||||||||||||||||
Numerator—Net income | $ | 161 |
| $ | 117 |
| $ | 529 |
| $ | 391 |
| $ | 241 |
| $ | 292 |
| $ | 303 |
| $ | 368 |
|
Denominator—Weighted average shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Denominator—Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic |
| 164 |
|
| 166 |
|
| 165 |
|
| 168 |
|
| 159 |
|
| 165 |
|
| 160 |
|
| 165 |
|
Impact of dilutive stock-based awards |
| 1 |
|
| — |
|
| 1 |
|
| — |
| ||||||||||||
Dilutive impact |
| — |
|
| 1 |
|
| 1 |
|
| 1 |
| ||||||||||||
Diluted |
| 165 |
|
| 166 |
|
| 166 |
|
| 168 |
|
| 159 |
|
| 166 |
|
| 161 |
|
| 166 |
|
Antidilutive shares |
| — |
|
| 2 |
|
| — |
|
| 3 |
|
| 3 |
|
| — |
|
| 1 |
|
| — |
|
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.98 |
| $ | 0.70 |
| $ | 3.21 |
| $ | 2.33 |
| $ | 1.52 |
| $ | 1.77 |
| $ | 1.90 |
| $ | 2.23 |
|
Diluted | $ | 0.98 |
| $ | 0.70 |
| $ | 3.19 |
| $ | 2.32 |
| $ | 1.51 |
| $ | 1.76 |
| $ | 1.89 |
| $ | 2.21 |
|
14
Item 2. Management’s Discussion and Analysis ofof Financial Condition and Results of Operations
For purposes of the following discussion, unless noted, all references to "the quarter" and "the thirdsecond quarter" are for the three fiscal months (13 weeks) ended NovemberAugust 3, 2018 and October 28, 2017.2019 or August 4, 2018. References to "year“year to date"date” and “first half” are for the ninesix fiscal months (39(26 weeks) ended NovemberAugust 3, 20182019 or August 4, 2018. References to “the first quarter” are for the following three fiscal months (13 weeks) ended May 4, 2019 or May 5, 2018.
This Form 10-Q 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 October 28, 2017.
The following discussion should be read in conjunction withsimilar expressions are intended to identify forward-looking statements. Forward-looking statements may include comments about our Consolidated Financial Statementsfuture sales or financial performance and the related notes included elsewhere in this report, as well as the financialour plans, performance, and other information included inobjectives, expectations or intentions, such as statements regarding our 2017 Annual Reportliquidity, debt service requirements, planned capital expenditures, future store initiatives, and adequacy of capital resources and reserves. Forward-looking statements are based on Form 10-K (our "2017 Form 10-K"). The following discussion may contain forward-looking statements that reflect our plans, estimatesmanagement’s then current views and beliefs. Our actual results could materially differ from those discussed in these forward-looking statements. Factorsassumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors described in Part I, Item 1A of our 2018 Form 10-K or contributedisclosed from time to those differences include, but are not limited to, those discussed elsewhere in this report andtime in our 2017 Form 10-K (particularly in "Risk Factors").filings with the SEC, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.
Executive Summary
As of NovemberAugust 3, 2018,2019, we operated 1,159 1,155 Kohl's department stores, a website (www.Kohls.com), and 12 FILA outlets, and four Off-Aisle clearance centers.outlets. 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 on-line.online.
Key financial results for the second quarter included:of 2019 include:
• | 2.9% decrease in comparable sales |
• | 72 basis point decrease in gross margin as a percent of net sales |
• | 0.2% decrease in SG&A |
• | 14% decrease in diluted earnings per share |
• | 12% decrease in diluted earnings per share excluding non-recurring charges |
2.5% increaseWe adopted the new lease accounting standard in comparable sales on a shifted basis
25 basis point increase in gross margin as a percentthe first quarter of net sales2019 and prior periods were not restated.
SG&A as a percentage of total revenue deleveraged 37 basis points
40% increase in diluted earnings per share
See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results.
Results of Operations
Net SalesTotal Revenue
Net
| Three Months Ended |
| Six Months Ended |
| ||||||||||||||
(Dollars in Millions) | August 3, 2019 |
| August 4, 2018 |
| Change | August 3, 2019 |
| August 4, 2018 |
| Change | ||||||||
Net sales | $ | 4,169 |
| $ | 4,310 |
| $ | (141 | ) | $ | 7,990 |
| $ | 8,263 |
| $ | (273 | ) |
Other revenue |
| 261 |
|
| 260 |
|
| 1 |
|
| 527 |
|
| 515 |
|
| 12 |
|
Total revenue | $ | 4,430 |
| $ | 4,570 |
| $ | (140 | ) | $ | 8,517 |
| $ | 8,778 |
| $ | (261 | ) |
15
Comparable sales increased $57 million, or 1.3%, to $4.4 billiondecreased 2.9% for the third quarter of 2018. Year to date, net sales increased $358 million, or 2.9%. Results reported on a “shifted basis” are adjusted for the 53rd week in fiscal 2017 by comparing the periods ended November 3, 2018 and November 4, 2017. On a shifted basis comparable sales increased 2.5% for thesecond quarter and 2.1%3.2% year to date. On
• | The decreases in comparable sales in the second quarter and year to date 2019 reflect decreases in transactions and average transaction value. |
• | From a line of business perspective, Accessories, Children’s, and Men’s outperformed the Company average for the second quarter and year to date 2019, and Footwear, Home, and Women’s performed below the Company average in both the second quarter and year to date 2019. |
• | Geographically, the strongest regions were the Midwest and Northeast for the second quarter and Midwest and Mid-Atlantic year to date 2019. |
• | Digital sales increased in the mid-teens for the second quarter and low double digits year to date 2019. |
Comparable sales is a fiscal basis, which comparesmeasure that highlights the fiscal periods ended November 3, 2018performance of our stores and October 28, 2017,digital channel by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales increased 1.0% for the quarterinclude all store and 2.9% year to date. Kohl’s storedigital sales, are included in comparableexcept sales after the store hasfrom stores open less than 12 months, stores that have been open for 12 full months. Digital salesclosed, and sales at remodeled and relocated Kohl’s stores are included in comparable sales, unlesswhere square footage has changed by more than 10%.
The following resultsWe measure the change in digital sales by including all sales initiated online or through mobile applications, including omnichannel transactions which are onfulfilled through our stores. Comparable sales measures vary across the retail industry. As a shiftedresult, our comparable sales basis:
The increases in comparable sales reflect higher average transaction value for both the quarter and year-to-date periods. For the quarter, we also saw a positive trend in transactions.
By line of business, all businesses except Accessoriescalculation may not be consistent with similarly titled measures reported increases in comparable sales for both the quarter and year-to-date periods. Women’s was positive for the second consecutive quarter. Men’s and Children’s led the Company for the quarter. Year to date, Men’s and Footwear led the Company.
Geographically, all regions reported increases in comparable sales for both the quarter and year-to-date periods. The Midwest region outperformed the Company average in both periods, while the Southeast underperformed the Company average.
15
Other Revenueby other companies.
Other revenue increased $4$1 million or 2%, to $259$261 million for the thirdsecond quarter of 20182019 and $21$12 million or 3%, to $774$527 million year to date. Higher revenue earned from third-party advertisers on our website contributed tofor the 6 months ended August 3, 2019 compared with the same periods in 2018. The increases in both periods. Year to date, the increase also includeswere driven by higher credit revenue and unredeemed gift card and merchandise return card revenue (breakage).revenue.
Cost of Merchandise Sold and Gross Margin
| Quarter | Year to Date | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
(Dollars in Millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||||||||||
Net sales | $ | 4,369 |
| $ | 4,312 |
| $ | 57 |
| $ | 12,632 |
| $ | 12,274 |
| $ | 358 |
| $ | 4,169 |
| $ | 4,310 |
| $ | (141 | ) |
| $ | 7,990 |
| $ | 8,263 |
| $ | (273 | ) |
|
Cost of merchandise sold |
| 2,752 |
|
| 2,727 |
|
| 25 |
|
| 7,854 |
|
| 7,680 |
| 174 |
|
| 2,550 |
|
| 2,605 |
|
| (55 | ) |
|
| 4,965 |
|
| 5,101 |
|
| (136 | ) |
| |
Gross margin | $ | 1,617 |
| $ | 1,585 |
| $ | 32 |
| $ | 4,778 |
| $ | 4,594 |
| $ | 184 |
| $ | 1,619 |
| $ | 1,705 |
| $ | (86 | ) |
| $ | 3,025 |
| $ | 3,162 |
| $ | (137 | ) |
|
Gross margin as a percent of net sales |
| 37.0 | % |
| 36.8 | % | 25 bp |
|
| 37.8 | % |
| 37.4 | % | 39 bp |
|
| 38.8 | % |
| 39.5 | % |
| (72 | ) | bp |
| 37.9 | % |
| 38.3 | % |
| (41 | ) | 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-linedigital sales; and terms cash discount. Our costCost of merchandise sold may not be comparable with that of other retailers because we include distribution center and buying costs in selling,Selling, general and administrative expenses while other retailers may include these expenses in costCost of merchandise sold.
The increasedecreases in gross margin as a percent of net sales reflects the benefit of less permanent and promotional markdownswere driven by higher shipping costs due to our ongoing inventory management initiatives. increases in digital sales penetration in the second quarter and year to date 2019 and due to pricing and promotions implemented in the second quarter of 2019. The year-to-date period also reflects an unfavorable mix shift between regular and clearance sales.
16
Selling, General and Administrative Expenses ("SG&A")
| Quarter | Year to Date | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
(Dollars in Millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||||||||||
SG&A | $ | 1,375 |
| $ | 1,340 |
| $ | 35 |
| $ | 3,907 |
| $ | 3,774 |
| $ | 133 |
| $ | 1,269 |
| $ | 1,272 |
| $ | (3 | ) |
| $ | 2,544 |
| $ | 2,532 |
| $ | 12 |
|
|
As a percent of total revenue |
| 29.7 | % |
| 29.3 | % | 37 bp |
|
| 29.1 | % |
| 29.0 | % | 17 bp |
|
| 28.6 | % |
| 27.8 | % |
| (81 | ) | bp |
| 29.9 | % |
| 28.8 | % |
| (102 | ) | 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.
The following table summarizes the increases and decreases in SG&A by expense type:
(Dollars in Millions) | Quarter | Year to Date | ||||
Corporate costs | $ | 25 |
| $ | 60 |
|
Technology |
| 15 |
|
| 51 |
|
Distribution costs |
| 6 |
|
| 11 |
|
Store expenses |
| — |
|
| 14 |
|
Marketing |
| (11 | ) |
| (3 | ) |
Total increase | $ | 35 |
| $ | 133 |
|
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".
16The following table summarizes the increases and (decreases) in SG&A by expense type:
| Three Months Ended | Six Months Ended | ||||
(Dollars In Millions) | August 3, 2019 |
| August 3, 2019 |
| ||
Store expenses | $ | 12 |
| $ | 17 |
|
Marketing |
| 5 |
|
| 20 |
|
Credit expenses |
| (1 | ) |
| (5 | ) |
Technology |
| (3 | ) |
| 1 |
|
Corporate and other |
| (16 | ) |
| (21 | ) |
Total (decrease) increase | $ | (3 | ) | $ | 12 |
|
SG&A expenses decreased 0.2% in the second quarter of 2019, however, deleveraged 81 basis points compared to the second quarter of 2018. Year to date, SG&A increased 0.5% and deleveraged 102 basis points. The changes were driven by an increase in store expenses which reflect higher rent expense in the second quarter and year to date 2019, primarily due to the new lease accounting standard. In addition, marketing expense increases were driven by continued investments to target market share gains over the long-term. Corporate and other expenses decreased due to lower general corporate costs in 2019 and expenses associated with leadership changes in 2018.
Other Expenses
| Three Months Ended | Six Months Ended | ||||||||||||||||
(Dollars in Millions) | August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||
Depreciation and amortization | $ | 228 |
| $ | 241 |
| $ | (13 | ) | $ | 458 |
| $ | 483 |
| $ | (25 | ) |
Interest expense, net |
| 53 |
|
| 65 |
|
| (12 | ) |
| 105 |
|
| 135 |
|
| (30 | ) |
Impairments, store closing and other costs |
| 7 |
|
| — |
|
| 7 |
|
| 56 |
|
| — |
|
| 56 |
|
Loss on extinguishment of debt |
| — |
|
| — |
|
| — |
|
| — |
|
| 42 |
|
| (42 | ) |
17
For both periods, stores and marketing expenses leveraged. As planned, technology expenses did not leverage as we made deliberate investments in the cloud and other technology initiatives to drive future efficiencies and growth. Corporate expenses also deleveraged due to higher incentives for the quarter and leadership changes for the year-to-date period.
Other Expenses
| Quarter | Year to Date | ||||||||||||||||
(Dollars in Millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | ||||||||||||
Depreciation and amortization | $ | 243 |
| $ | 243 |
| $ | - |
| $ | 725 |
| $ | 724 |
| $ | 1 |
|
Interest expense, net |
| 63 |
|
| 74 |
|
| (11 | ) |
| 197 |
|
| 225 |
|
| (28 | ) |
Loss on extinguishment of debt |
| — |
|
| — |
|
| — |
|
| 42 |
|
| — |
|
| 42 |
|
Depreciation and amortization was consistent with last year for both periods.decreases were driven by the maturity of our store portfolio, as well as the adoption of the new lease accounting standard.
Interest expense, net decreased in the second quarter and year to date 2019 due primarily to the benefits of debt reductions in 2018 and adoption of the $500new lease accounting standard.
In the second quarter of 2019, we incurred $7 million debt tender transaction executed in Marchcosts related to the closure of our four Off-Aisle clearance centers and a voluntary role reduction program conducted during the period. In the first quarter of 2019, we incurred $49 million in lease asset impairment charges related to the closure of four Kohl’s stores.
In the first quarter of 2018, as well as increased interest income due to higher yield and investment balances.
Wewe recognized a one-time $42 million loss on extinguishment of debt in the first quarter of 2018 related to our $500 million cash tender offer.
Income Taxes
| Quarter | Year to Date |
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
(Dollars in Millions) | 2018 | 2017 | Change | 2018 | 2017 | Change | August 3, 2019 | August 4, 2018 | Change | August 3, 2019 | August 4, 2018 | Change | ||||||||||||||||||||||||
Provision for income taxes | $ | 34 |
| $ | 66 |
| $ | (32 | ) | $ | 152 |
| $ | 233 |
| $ | (81 | ) | $ | 82 |
| $ | 95 |
| $ | (13 | ) | $ | 86 |
| $ | 117 |
| $ | (31 | ) |
Effective tax rate |
| 17.6 | % |
| 36.1 | % |
|
|
|
| 22.3 | % |
| 37.3 | % |
|
|
|
| 25.3 | % |
| 24.5 | % |
|
|
|
| 22.1 | % |
| 24.2 | % |
|
|
|
The decreases in the provision for income taxes were driven by lower taxable income in the second quarter and year to date 2019. Year to date 2019, the effectiveprovision also reflects a lower tax rate were primarily due to a favorable state audit settlement in the benefitfirst quarter of tax reform as well as favorable audit results.2019.
Income before Income Taxes, Net Income and Earnings Per Diluted Share
| Year to Date |
| ||||||||||||||||||||||||||||||||||
| 2018 |
| 2017 |
| 2019 |
| 2018 |
| ||||||||||||||||||||||||||||
(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 |
| Income before Income Taxes |
| Net Income |
| Earnings Per Diluted Share |
| Income before Income Taxes |
| Net Income |
| Earnings Per Diluted Share |
| ||||||||||||
Three Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
GAAP | $ | 681 |
| $ | 529 |
| $ | 3.19 |
| $ | 624 |
| $ | 391 |
| $ | 2.32 |
| $ | 323 |
| $ | 241 |
| $ | 1.51 |
| $ | 387 |
| $ | 292 |
| $ | 1.76 |
|
Impairments, store closings and other costs |
| 7 |
|
| 6 |
|
| 0.04 |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||
Loss on extinguishment of debt |
| 42 |
|
| 32 |
|
| 0.19 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
Adjusted (Non-GAAP) | $ | 723 |
| $ | 561 |
| $ | 3.38 |
| $ | 624 |
| $ | 391 |
| $ | 2.32 |
| $ | 330 |
| $ | 247 |
| $ | 1.55 |
| $ | 387 |
| $ | 292 |
| $ | 1.76 |
|
Six Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
GAAP | $ | 389 |
| $ | 303 |
| $ | 1.89 |
| $ | 485 |
| $ | 368 |
| $ | 2.21 |
| ||||||||||||||||||
Impairments, store closings and other costs |
| 56 |
|
| 42 |
|
| 0.26 |
|
| — |
|
| — |
|
| — |
| ||||||||||||||||||
Loss on extinguishment of debt |
| — |
|
| — |
|
| — |
|
| 42 |
|
| 31 |
|
| 0.19 |
| ||||||||||||||||||
Adjusted (Non-GAAP) | $ | 445 |
| $ | 345 |
| $ | 2.15 |
| $ | 527 |
| $ | 399 |
| $ | 2.40 |
|
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.non-recurring expenses. 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 portionmajority 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
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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.
We expect that our operations will continue to be influenced by general economic conditions, including food, fuel and energy prices, higher wages and by costs to source our merchandise.merchandise, including tariffs. There can be no assuranceassurances that our businesssuch factors will not be impacted by such factorsimpact our business in the future.
17
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 •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.
|
|
|
|
|
|
| Increase/(Decrease) in Cash | Six Months Ended |
| ||||||||||||
(Dollars in Millions) | 2018 | 2017 | $ |
| % |
| August 3, 2019 |
| August 4, 2018 |
| Change |
| |||||||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities | $ | 1,423 |
| $ | 869 |
| $ | 554 |
|
| 64 | % | $ | 676 |
| $ | 1,047 |
| $ | (371 | ) |
Investing activities |
| (452 | ) |
| (529 | ) |
| 77 |
|
| 15 | % |
| (439 | ) |
| (306 | ) |
| (133 | ) |
Financing activities |
| (1,232 | ) |
| (678 | ) |
| (554 | ) |
| (82 | )% |
| (546 | ) |
| (983 | ) |
| 437 |
|
Operating Activities
Operating activities generated $1.4 billion$676 million of cash in the first three quartershalf of 2018, an increase of $5542019 compared to $1,047 million overin the first three quartershalf of 2017.2018. The increasedecrease was primarily due to increased inventory purchases and changes in accounts payable and merchandise inventory due to our inventory management initiatives and to timing shifts caused by the 53rd week in 2017.operating liabilities.
Investing Activities
Investing activities used cash of $452$439 million in the first three quartershalf of 20182019 and $529$306 million in the first three quartershalf of 2017.2018. The decreaseincrease was primarily due to lower spending oninvestments in our E-commerce fulfillment centers and timing of technology spending.centers.
Financing Activities
Financing activities used cash of $1.2 billion$546 million in the first three quartershalf of 2018, an increase of $5542019 and $983 million overin the first three quartershalf of 2017.2018.
InWe paid cash for treasury stock purchases of $254 million in the first nine monthshalf of 2018, we reduced2019 and $165 million in the first half of 2018. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our outstandingstock price and other factors.
We paid cash dividends of $214 million ($1.34 per share) in the first half of 2019 and $202 million ($1.22 per share) in the first half of 2018. On August 13, 2019, our Board of Directors declared a quarterly cash dividend on
19
our common stock of $0.67 per share. The dividend is payable September 25, 2019 to shareholders of record at the close of business on September 11, 2019.
We used cash to repurchase $6 million of debt by $530on the open market in the first half of 2019 and to repurchase $528 million including $500 million which was repurchasedof debt pursuant to a cash tender offer and on the open market in the first quarter and $30 million which was repurchased on the open market.half of 2018. We may again seek to retire or purchase our outstanding debt through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors.
We paid cash for treasury stock purchases of $275 million in the first three quarters of 2018 and $288 million in the first three quarters of 2017. Share repurchases are discretionary in nature. The timing and amount of repurchases is based upon available cash balances, our stock price and other factors.
We paid cash dividends of $301 million ($1.83 per share) in the first three quarters of 2018 and $277 million ($1.65 per share) in the first three quarters of 2017. On November 14, 2018, our Board of Directors declared a quarterly cash dividend on our common stock of $0.61 per share. The dividend is payable on December 26, 2018 to shareholders of record at the close of business on December 12, 2018.
18
On July 25, 2019, we amended and extended our existing credit facility with various lenders which provides for a $1.0 billion senior unsecured five-year revolving credit facility that will mature in July 2024. Among other things, the agreement includes a maximum leverage ratio financial covenant (which is generally consistent with the ratio under our prior agreement) and restrictions on liens and subsidiary indebtedness. No amounts were outstanding on the credit facility at August 3, 2019, February 2, 2019, or August 4, 2018.
As of NovemberAugust 3, 2018,2019, our credit ratings were as follows:
| Moody’s | Standard & Poor’s | Fitch |
Long-term debt | Baa2 |
| BBB |
Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity are as follows:
(Dollars in Millions) | November 3, 2018 | October 28, 2017 | August 3, 2019 |
| August 4, 2018 |
| ||||||
Working capital | $ | 2,330 |
| $ | 2,185 |
| $ | 1,838 |
| $ | 2,272 |
|
Current ratio |
| 1.58 |
|
| 1.61 |
|
| 1.65 |
|
| 1.82 |
|
Debt/capitalization |
| 41.8 | % |
| 47.5 | % |
The increasesdecreases in our working capital and current ratio includeare primarily due to lower cash balances as a $311 million increase in cash despite $530 million inresult of debt reductions, duringshare repurchases and dividends, as well as the first nine monthsaddition of 2018. The debt/capitalization ratio reflectsoperating leases to current liabilities due to adoption of the benefit of lower debt outstanding.new lease accounting standard.
Debt Covenant Compliance
As of NovemberAugust 3, 2018,2019, we were in compliance with all debt covenants and expect to remain in compliance during the remainder of fiscal 2018.2019.
Contractual Obligations
Aside from the $530 million reduction in outstanding debt and the resulting decline in our interest expense,Other than operating leases which are now Recorded, rather than Unrecorded contractual obligations, there have been no significant changes in the contractual obligations disclosed in our 20172018 Form 10-K.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of NovemberAugust 3, 2018.2019.
20
We have not created, and are not a party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our financial condition, liquidity, results of operations or capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts. Management has discussed the development, selection and disclosure of its estimates and assumptions with the Audit Committee of our Board of Directors. There have been no significant changes in the critical accounting policies and estimates discussed in our 20172018 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 20172018 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (the “Evaluation”) at a reasonable assurance level as of the last day of the period covered by this report.
19
Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are defined by Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") as controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the second quarter ended November 3, 2018of 2019 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
On August 4, 2019, we implemented a new enterprise resource planning (“ERP”) system which affects many of our financial processes. This project is expected to improve the efficiency and effectiveness of certain financial and business transaction processes, as well as the underlying systems environment. The new ERP system will be a significant component of our internal control over financial reporting.
21
PART II. OTHER INFORMATION
There have been no significant changes in the risk factors described in our 20172018 Form 10-K.
This Form 10-Q 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 may 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 store initiatives, and adequacy of capital resources and reserves. Forward-looking statements are based on our management’s then current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors described in Part I, Item 1A of our 2017 Form 10-K or disclosed from time to time in our filings with the SEC, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
We did not sell any securities during the quarter ended November 3, 2018, which were not registered under the Securities Act of 1933, as amended.
20
The following table contains information for shares of common stock repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ stock-based compensation during the three fiscal months ended NovemberAugust 3, 2018:2019:
(Dollars in Millions) | Total Number of Shares Purchased | 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 | ||||||||
August 5 - September 1, 2018 |
| 409,837 |
| $ | 77.04 |
|
| 382,828 |
| $ | 1,408 |
|
September 2 - October 6, 2018 |
| 636,828 |
|
| 77.04 |
|
| 559,120 |
|
| 1,364 |
|
October 7 - November 3, 2018 |
| 523,364 |
|
| 73.15 |
|
| 518,400 |
|
| 1,327 |
|
Total |
| 1,570,029 |
| $ | 75.72 |
|
| 1,460,348 |
| $ | 1,327 |
|
(Dollars in Millions) | Total Number of Shares Purchased | 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 | ||||||||
May 5 - June 1, 2019 |
| 652,849 |
| $ | 58.82 |
|
| 625,302 |
| $ | 1,046 |
|
June 2 - July 6, 2019 |
| 1,144,386 |
|
| 47.84 |
|
| 1,132,119 |
|
| 992 |
|
July 7 - August 3, 2019 |
| 844,211 |
|
| 49.89 |
|
| 841,986 |
|
| 950 |
|
Total |
| 2,641,446 |
| $ | 51.08 |
|
| 2,599,407 |
| $ | 950 |
|
2122
2223
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Kohl’s Corporation (Registrant) |
|
|
Date: | /s/ Bruce Besanko |
| Bruce Besanko On behalf of the Registrant and as Chief Financial Officer (Principal Financial Officer) |
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