UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended November 2, 2019August 1, 2020
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.
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: November 29, 2019August 28, 2020 Common Stock, Par Value $0.01 per Share, 156,567,901157,775,065 shares outstanding.
KOHL’S CORPORATION
INDEX
PART I |
| |
Item 1. |
| |
| 3 | |
| 4 | |
| 5 | |
| 6 | |
| 7 | |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
Item 3. |
| |
Item 4. |
| |
|
|
|
PART II |
| |
Item 1A. |
| |
Item 2. |
| |
Item 6. |
| |
|
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KOHL’S CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions) | November 2, 2019 | February 2, 2019 | November 3, 2018 | August 1, 2020 | February 1, 2020 | August 3, 2019 | ||||||||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents | $ | 490 |
| $ | 934 |
| $ | 1,047 |
| $ | 2,428 |
| $ | 723 |
| $ | 625 |
|
Merchandise inventories |
| 4,887 |
|
| 3,475 |
|
| 4,844 |
|
| 2,698 |
|
| 3,537 |
|
| 3,656 |
|
Income tax receivable |
| 205 |
|
| 15 |
|
| 16 |
| |||||||||
Other |
| 404 |
|
| 426 |
|
| 446 |
|
| 357 |
|
| 374 |
|
| 381 |
|
Total current assets |
| 5,781 |
|
| 4,835 |
|
| 6,337 |
|
| 5,688 |
|
| 4,649 |
|
| 4,678 |
|
Property and equipment, net |
| 7,364 |
|
| 7,428 |
|
| 7,538 |
|
| 6,970 |
|
| 7,352 |
|
| 7,276 |
|
Operating leases |
| 2,427 |
|
| - |
|
| - |
|
| 2,418 |
|
| 2,391 |
|
| 2,428 |
|
Other assets |
| 167 |
|
| 206 |
|
| 243 |
|
| 159 |
|
| 163 |
|
| 160 |
|
Total assets | $ | 15,739 |
| $ | 12,469 |
| $ | 14,118 |
| $ | 15,235 |
| $ | 14,555 |
| $ | 14,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable | $ | 2,454 |
| $ | 1,187 |
| $ | 2,583 |
| $ | 1,064 |
| $ | 1,206 |
| $ | 1,330 |
|
Accrued liabilities |
| 1,347 |
|
| 1,364 |
|
| 1,289 |
|
| 1,130 |
|
| 1,233 |
|
| 1,199 |
|
Income taxes payable |
| 2 |
|
| 64 |
|
| 14 |
|
| 86 |
|
| 48 |
|
| 34 |
|
Current portion of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease and financing obligations |
| 110 |
|
| 115 |
|
| 121 |
|
| 126 |
|
| 124 |
|
| 119 |
|
Operating leases |
| 162 |
|
| - |
|
| - |
|
| 160 |
|
| 158 |
|
| 158 |
|
Total current liabilities |
| 4,075 |
|
| 2,730 |
|
| 4,007 |
|
| 2,566 |
|
| 2,769 |
|
| 2,840 |
|
Long-term debt |
| 1,856 |
|
| 1,861 |
|
| 2,272 |
|
| 3,450 |
|
| 1,856 |
|
| 1,855 |
|
Finance lease and financing obligations |
| 1,332 |
|
| 1,523 |
|
| 1,528 |
|
| 1,356 |
|
| 1,367 |
|
| 1,270 |
|
Operating leases |
| 2,643 |
|
| - |
|
| - |
|
| 2,637 |
|
| 2,619 |
|
| 2,647 |
|
Deferred income taxes |
| 258 |
|
| 184 |
|
| 201 |
|
| 122 |
|
| 260 |
|
| 254 |
|
Other long-term liabilities |
| 220 |
|
| 644 |
|
| 657 |
|
| 267 |
|
| 234 |
|
| 221 |
|
Shareholders’ equity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
|
Paid-in capital |
| 3,256 |
|
| 3,204 |
|
| 3,185 |
|
| 3,290 |
|
| 3,272 |
|
| 3,236 |
|
Treasury stock, at cost |
| (11,490 | ) |
| (11,076 | ) |
| (10,952 | ) |
| (11,594 | ) |
| (11,571 | ) |
| (11,353 | ) |
Accumulated other comprehensive loss |
| - |
|
| - |
|
| (8 | ) | |||||||||
Retained earnings |
| 13,585 |
|
| 13,395 |
|
| 13,224 |
|
| 13,137 |
|
| 13,745 |
|
| 13,568 |
|
Total shareholders’ equity |
| 5,355 |
|
| 5,527 |
|
| 5,453 |
| $ | 4,837 |
| $ | 5,450 |
| $ | 5,455 |
|
Total liabilities and shareholders’ equity | $ | 15,739 |
| $ | 12,469 |
| $ | 14,118 |
| $ | 15,235 |
| $ | 14,555 |
| $ | 14,542 |
|
See accompanying Notes to Consolidated Financial Statements
3
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF INCOMEOPERATIONS
(Unaudited)
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | Six Months Ended | ||||||||||||||||||
(Dollars in Millions, Except per Share Data) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||||||||||
Net sales | $ | 4,358 |
| $ | 4,369 |
| $ | 12,348 |
| $ | 12,632 |
| $ | 3,213 |
| $ | 4,169 |
| $ | 5,373 |
| $ | 7,990 |
|
Other revenue |
| 267 |
|
| 259 |
|
| 794 |
|
| 774 |
|
| 194 |
|
| 261 |
|
| 462 |
|
| 527 |
|
Total revenue |
| 4,625 |
|
| 4,628 |
|
| 13,142 |
|
| 13,406 |
|
| 3,407 |
|
| 4,430 |
|
| 5,835 |
|
| 8,517 |
|
Cost of merchandise sold |
| 2,775 |
|
| 2,752 |
|
| 7,740 |
|
| 7,854 |
|
| 2,149 |
|
| 2,550 |
|
| 3,936 |
|
| 4,965 |
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| 1,419 |
|
| 1,375 |
|
| 3,962 |
|
| 3,907 |
| ||||||||||||
Selling, general, and administrative |
| 1,050 |
|
| 1,269 |
|
| 2,116 |
|
| 2,544 |
| ||||||||||||
Depreciation and amortization |
| 227 |
|
| 243 |
|
| 687 |
|
| 725 |
|
| 219 |
|
| 228 |
|
| 446 |
|
| 458 |
|
Impairments, store closing and other costs |
| - |
|
| - |
|
| 55 |
|
| - |
| ||||||||||||
Operating income |
| 204 |
|
| 258 |
|
| 698 |
|
| 920 |
| ||||||||||||
Impairments, store closing, and other costs |
| (2 | ) |
| 7 |
|
| 64 |
|
| 56 |
| ||||||||||||
(Gain) on sale of real estate |
| (127 | ) | — |
|
| (127 | ) | — |
| ||||||||||||||
Operating income (loss) |
| 118 |
|
| 376 |
|
| (600 | ) |
| 494 |
| ||||||||||||
Interest expense, net |
| 52 |
|
| 63 |
|
| 157 |
|
| 197 |
|
| 78 |
|
| 53 |
|
| 136 |
|
| 105 |
|
(Gain) loss on extinguishment of debt |
| (9 | ) |
| - |
|
| (9 | ) |
| 42 |
| ||||||||||||
Income before income taxes |
| 161 |
|
| 195 |
|
| 550 |
|
| 681 |
| ||||||||||||
Provision for income taxes |
| 38 |
|
| 34 |
|
| 124 |
|
| 152 |
| ||||||||||||
Net income | $ | 123 |
| $ | 161 |
| $ | 426 |
| $ | 529 |
| ||||||||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Income (loss) before income taxes |
| 40 |
|
| 323 |
|
| (736 | ) |
| 389 |
| ||||||||||||
(Benefit) provision for income taxes |
| (7 | ) |
| 82 |
|
| (242 | ) |
| 86 |
| ||||||||||||
Net income (loss) | $ | 47 |
| $ | 241 |
| $ | (494 | ) | $ | 303 |
| ||||||||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | $ | 0.79 |
| $ | 0.98 |
| $ | 2.69 |
| $ | 3.21 |
| $ | 0.31 |
| $ | 1.52 |
| $ | (3.21 | ) | $ | 1.90 |
|
Diluted | $ | 0.78 |
| $ | 0.98 |
| $ | 2.67 |
| $ | 3.19 |
| $ | 0.30 |
| $ | 1.51 |
| $ | (3.21 | ) | $ | 1.89 |
|
See accompanying Notes to Consolidated Financial Statements
4
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||
(Dollars in Millions, Except per Share Data) | November 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||||||||||
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
|
Stock options and awards |
| - |
|
| - |
|
| - |
|
| - |
| ||||||||||||
Stock-based awards |
| — |
|
| — |
|
| — |
|
| — |
| ||||||||||||
Balance, end of period | $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
| $ | 4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in capital |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 3,236 |
| $ | 3,163 |
| $ | 3,204 |
| $ | 3,078 |
| $ | 3,289 |
| $ | 3,223 |
| $ | 3,272 |
| $ | 3,204 |
|
Stock options and awards |
| 20 |
|
| 22 |
|
| 52 |
|
| 107 |
| ||||||||||||
Stock-based awards |
| 1 |
|
| 13 |
|
| 18 |
|
| 32 |
| ||||||||||||
Balance, end of period | $ | 3,256 |
| $ | 3,185 |
| $ | 3,256 |
| $ | 3,185 |
| $ | 3,290 |
| $ | 3,236 |
| $ | 3,290 |
| $ | 3,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Treasury stock, at cost |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance, beginning of period | $ | (11,353 | ) | $ | (10,835 | ) | $ | (11,076 | ) | $ | (10,651 | ) | $ | (11,593 | ) | $ | (11,221 | ) | $ | (11,571 | ) | $ | (11,076 | ) |
Treasury stock purchases |
| (133 | ) |
| (110 | ) |
| (387 | ) |
| (275 | ) |
| — |
|
| (133 | ) |
| (8 | ) |
| (254 | ) |
Stock options and awards |
| (5 | ) |
| (8 | ) |
| (32 | ) |
| (29 | ) | ||||||||||||
Stock-based awards |
| (1 | ) |
| (2 | ) |
| (21 | ) |
| (27 | ) | ||||||||||||
Dividends paid |
| 1 |
|
| 1 |
|
| 5 |
|
| 3 |
|
| — |
|
| 3 |
|
| 6 |
|
| 4 |
|
Balance, end of period | $ | (11,490 | ) | $ | (10,952 | ) | $ | (11,490 | ) | $ | (10,952 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Accumulated other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Balance, beginning of period | $ | - |
| $ | (8 | ) | $ | - |
| $ | (11 | ) | ||||||||||||
Other comprehensive income |
| - |
|
| - |
|
| - |
|
| 3 |
| ||||||||||||
Balance, end of period | $ | - |
| $ | (8 | ) | $ | - |
| $ | (8 | ) | $ | (11,594 | ) | $ | (11,353 | ) | $ | (11,594 | ) | $ | (11,353 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, beginning of period | $ | 13,568 |
| $ | 13,163 |
| $ | 13,395 |
| $ | 13,006 |
| $ | 13,090 |
| $ | 13,436 |
| $ | 13,745 |
| $ | 13,395 |
|
Change in accounting standard (a) |
| - |
|
| - |
|
| 88 |
|
| (7 | ) |
| — |
|
| — |
|
| — |
|
| 88 |
|
Net earnings |
| 123 |
|
| 161 |
|
| 426 |
|
| 529 |
| ||||||||||||
Net income (loss) |
| 47 |
|
| 241 |
|
| (494 | ) |
| 303 |
| ||||||||||||
Dividends paid |
| (106 | ) |
| (100 | ) |
| (324 | ) |
| (304 | ) |
| — |
|
| (109 | ) |
| (114 | ) |
| (218 | ) |
Balance, end of period | $ | 13,585 |
| $ | 13,224 |
| $ | 13,585 |
| $ | 13,224 |
| $ | 13,137 |
| $ | 13,568 |
| $ | 13,137 |
| $ | 13,568 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders' equity, end of period | $ | 5,355 |
| $ | 5,453 |
| $ | 5,355 |
| $ | 5,453 |
| ||||||||||||
Total shareholders' equity, end of period | $ | 4,837 |
| $ | 5,455 |
| $ | 4,837 |
| $ | 5,455 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning of period |
| 375 |
|
| 374 |
|
| 374 |
|
| 373 |
|
| 377 |
|
| 375 |
|
| 375 |
|
| 374 |
|
Stock options and awards |
| - |
|
| - |
|
| 1 |
|
| 1 |
| ||||||||||||
Stock-based awards |
| — |
|
| — |
|
| 2 |
|
| 1 |
| ||||||||||||
Shares, end of period |
| 375 |
|
| 374 |
|
| 375 |
|
| 374 |
|
| 377 |
|
| 375 |
|
| 377 |
|
| 375 |
|
Treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares, beginning of period |
| (215 | ) |
| (207 | ) |
| (211 | ) |
| (205 | ) |
| (219 | ) |
| (213 | ) |
| (219 | ) |
| (211 | ) |
Treasury stock purchases |
| (3 | ) |
| (2 | ) |
| (7 | ) |
| (4 | ) |
| — |
|
| (2 | ) |
| — |
|
| (4 | ) |
Shares, end of period |
| (218 | ) |
| (209 | ) |
| (218 | ) |
| (209 | ) |
| (219 | ) |
| (215 | ) |
| (219 | ) |
| (215 | ) |
Total shares outstanding, end of period |
| 157 |
|
| 165 |
|
| 157 |
|
| 165 |
| ||||||||||||
Total shares outstanding, end of period |
| 158 |
|
| 160 |
|
| 158 |
|
| 160 |
| ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid per common share | $ | 0.67 |
| $ | 0.61 |
| $ | 2.01 |
| $ | 1.83 |
| $ | — |
| $ | 0.67 |
| $ | 0.704 |
| $ | 1.34 |
|
| (a) | Adoption of new lease accounting standard in |
See accompanying Notes to Consolidated Financial Statements
5
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
| Nine Months Ended | Six Months Ended | ||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | ||||||||
Operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income | $ | 426 |
| $ | 529 |
| ||||||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Net (loss) income | $ | (494 | ) | $ | 303 |
| ||||||
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
| ||||||
Depreciation and amortization |
| 687 |
|
| 725 |
|
| 446 |
|
| 458 |
|
Share-based compensation |
| 47 |
|
| 71 |
|
| 14 |
|
| 27 |
|
Deferred income taxes |
| 45 |
|
| (13 | ) |
| (132 | ) |
| 41 |
|
Impairments, store closing and other costs |
| 45 |
|
| - |
| ||||||
(Gain) loss on extinguishment of debt |
| (9 | ) |
| 42 |
| ||||||
Impairments, store closing, and other costs |
| 48 |
|
| 45 |
| ||||||
(Gain) on sale of real estate |
| (127 | ) |
| — |
| ||||||
Non-cash inventory costs |
| 187 |
|
| — |
| ||||||
Non-cash lease expense |
| 112 |
|
| - |
|
| 74 |
|
| 75 |
|
Other non-cash (income) expenses |
| (3 | ) |
| 15 |
| ||||||
Other non-cash expense |
| 10 |
|
| 3 |
| ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise inventories |
| (1,405 | ) |
| (1,293 | ) |
| 656 |
|
| (175 | ) |
Other current and long-term assets |
| 34 |
|
| 70 |
|
| 20 |
|
| 29 |
|
Accounts payable |
| 1,266 |
|
| 1,312 |
|
| (142 | ) |
| 143 |
|
Accrued and other long-term liabilities |
| (26 | ) |
| 38 |
|
| (23 | ) |
| (177 | ) |
Income taxes |
| (49 | ) |
| (73 | ) |
| (151 | ) |
| (8 | ) |
Operating lease liabilities |
| (125 | ) |
| - |
|
| (82 | ) |
| (88 | ) |
Net cash provided by operating activities |
| 1,045 |
|
| 1,423 |
|
| 304 |
|
| 676 |
|
Investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of property and equipment |
| (678 | ) |
| (458 | ) |
| (196 | ) |
| (439 | ) |
Other |
| 8 |
|
| 6 |
| ||||||
Proceeds from sale of real estate |
| 193 |
|
| — |
| ||||||
Net cash used in investing activities |
| (670 | ) |
| (452 | ) |
| (3 | ) |
| (439 | ) |
Financing activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of debt |
| 2,097 |
|
| — |
| ||||||
Deferred financing costs |
| (19 | ) |
| — |
| ||||||
Treasury stock purchases |
| (387 | ) |
| (275 | ) |
| (8 | ) |
| (254 | ) |
Shares withheld for taxes on vested restricted shares |
| (32 | ) |
| (29 | ) |
| (20 | ) |
| (27 | ) |
Dividends paid |
| (319 | ) |
| (301 | ) |
| (108 | ) |
| (214 | ) |
Reduction of long-term borrowings |
| (6 | ) |
| (530 | ) |
| (497 | ) |
| (6 | ) |
Premium paid on redemption of debt |
| - |
|
| (35 | ) | ||||||
Finance lease and financing obligation payments |
| (88 | ) |
| (95 | ) |
| (44 | ) |
| (60 | ) |
Proceeds from stock option exercises |
| — |
|
| 2 |
| ||||||
Proceeds from financing obligations |
| 11 |
|
| - |
|
| 3 |
|
| 13 |
|
Proceeds from stock option exercises |
| 2 |
|
| 33 |
| ||||||
Net cash used in financing activities |
| (819 | ) |
| (1,232 | ) | ||||||
Net decrease in cash and cash equivalents |
| (444 | ) |
| (261 | ) | ||||||
Cash at beginning of period |
| 934 |
|
| 1,308 |
| ||||||
Cash at end of period | $ | 490 |
| $ | 1,047 |
| ||||||
Net cash provided by (used in) financing activities |
| 1,404 |
|
| (546 | ) | ||||||
Net increase (decrease) in cash and cash equivalents |
| 1,705 |
|
| (309 | ) | ||||||
Cash and cash equivalents at beginning of period |
| 723 |
|
| 934 |
| ||||||
Cash and cash equivalents at end of period | $ | 2,428 |
| $ | 625 |
| ||||||
Supplemental information |
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid, net of capitalized interest | $ | 131 |
| $ | 192 |
| $ | 108 |
| $ | 105 |
|
Income taxes paid |
| 154 |
|
| 266 |
|
| 137 |
|
| 77 |
|
Property and equipment acquired through: |
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease liabilities |
| 163 |
|
| - |
|
| 56 |
|
| 73 |
|
Operating lease liabilities |
| 103 |
|
| - |
|
| 103 |
|
| 67 |
|
Financing obligations |
| - |
|
| 20 |
|
See accompanying Notes to Consolidated Financial Statements
6
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statementsConsolidated 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.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 statementsConsolidated Financial Statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended February 2, 20191, 2020 (Commission File No. 1-11084) as filed with the Securities and Exchange Commission.
Due to the seasonality of ourthe business of Kohl’s Corporation (the “Company,” “Kohl’s,” “we,” “our,” or “us”) and the uncertainty surrounding the financial impact of the novel coronavirus (“COVID-19”) pandemic, 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.
Accounting Policies
The accounting policies the Company follows are set forth in its most recently filed Annual Report on Form 10-K. There have been no material changes to these accounting policies except as discussed below.
Use of Estimates
The preparation of Consolidated Financial Statements in conformity with U.S GAAP requires management to make estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. We believe that our accounting estimates are appropriate and reflect the increased uncertainties surrounding the severity and duration of the COVID-19 pandemic. Actual results could differ from those estimates.
Leases
In the first quarter of 2020, we negotiated rent deferrals for a significant number of our stores, with repayment at later dates, primarily in the third and fourth quarter of 2020 and first and second quarter of 2021. These concessions provide a deferral of rent payments with no substantive changes to the original contract. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. We will continue to recognize expense during the deferral periods.
A sale leaseback was completed during the quarter ended August 1, 2020 for our San Bernardino E-commerce fulfillment and distribution center. The properties were sold for $195 million and generated net proceeds of $193 million after fees. A gain of $127 million was recognized during the second quarter of 2020 and is recorded in Gain on sale of real estate. An initial operating lease liability and a corresponding right of use asset of $84 million were recorded for these leased locations.
Merchandise Inventories
Merchandise inventories are valued at the lower of cost or market using the Retail Inventory Method ("RIM"). Under RIM, the valuation of inventory at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventory. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market since permanent markdowns are taken as a reduction of the retail value of inventories. A reserve would be recorded if the future estimated selling price is less than cost.
7
In the first quarter of 2020, as a result of the COVID-19 pandemic and store closures, we recorded a reserve of $163 million for excess seasonal inventory where the expected selling price was less than cost for the quarter ended May 2, 2020. NaN reserve was required for the quarter ended August 1, 2020 or August 3, 2019.
Property and Equipment and Long Lived Assets
All property and equipment and other long-lived assets are reviewed for potential impairment at least annually or when events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than the carrying value of the assets. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. Given the substantial reduction in our sales and the reduced cash flow projections as a result of the store closures due to the COVID-19 pandemic, we determined that a triggering event occurred in the first quarter of 2020 and an impairment assessment was warranted for certain stores and other long lived assets. Based on this assessment, we recorded impairment charges of $51 million in the first quarter of 2020 in Impairments, store closing, and other costs. In connection with the closure of 4 stores in the first quarter of 2019, we recorded impairment charges of $49 million in the first quarter of 2019 in Impairments, store closing, and other costs. We recorded impairment charges of $10 million in the second quarter of 2019 related to the closure of our 4 Off-Aisle clearance centers in Impairments, store closing, and other costs.
In the second quarter of 2020, we recorded an impairment charge of $2 million related to assets held for sale in Impairments, store closing and other costs. As of August 1, 2020, we had assets held for sale of $22 million.
Restructuring Reserve
The following table summarizes changes in the restructuring reserve during the six months ended August 1, 2020:
(Dollars In Millions) | Severance | ||
Balance - February 1, 2020 | $ | 27 |
|
Payments and reversals |
| (17 | ) |
Additions |
| 2 |
|
Balance - August 1, 2020 | $ | 12 |
|
Charges related to corporate restructuring efforts are recorded in Impairments, store closing, and other costs.
Recent Accounting Pronouncements
We adopted the new accounting standard on accounting for expected credit losses (ASU 2016-13), effective at the beginning of fiscal 2020. We applied the new principle using a modified retrospective approach. There was no material impact on our financial statements due to adoption of the new standard.
We adopted the new accounting standard on recognizing implementation costs related to a cloud computing arrangement (ASU 2018-15), effective at the beginning of fiscal 2020. We applied the new principle using a prospective approach. There was no material impact on our financial statements due to adoption of the new standard.
8
The following table provides a brief description of issued, but not yet effective, accounting standards:
Standard | Description | Effect on our Financial Statements |
(ASU
Issued
Effective Q1 |
The new standard | We are evaluating the impact of the new standard |
|
|
|
|
|
7
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Revenue Recognition
The following table summarizes net sales by line of business:
| Three Months Ended | Nine Months Ended | ||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 (1) | November 2, 2019 | November 3, 2018 (1) | ||||||||
Women's | $ | 1,264 |
| $ | 1,287 |
| $ | 3,857 |
| $ | 3,982 |
|
Men's |
| 938 |
|
| 925 |
|
| 2,656 |
|
| 2,668 |
|
Home |
| 715 |
|
| 719 |
|
| 1,994 |
|
| 2,090 |
|
Children's |
| 647 |
|
| 650 |
|
| 1,561 |
|
| 1,569 |
|
Footwear |
| 472 |
|
| 470 |
|
| 1,338 |
|
| 1,372 |
|
Accessories |
| 322 |
|
| 318 |
|
| 942 |
|
| 951 |
|
Net Sales | $ | 4,358 |
| $ | 4,369 |
| $ | 12,348 |
| $ | 12,632 |
|
|
|
| Three Months Ended | Six Months Ended | ||||||||||
(Dollars in Millions) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||
Women's | $ | 951 |
| $ | 1,377 |
| $ | 1,544 |
| $ | 2,601 |
|
Home |
| 657 |
|
| 575 |
|
| 1,140 |
|
| 1,147 |
|
Men’s |
| 598 |
|
| 890 |
|
| 961 |
|
| 1,639 |
|
Children's |
| 395 |
|
| 459 |
|
| 664 |
|
| 916 |
|
Footwear |
| 337 |
|
| 452 |
|
| 570 |
|
| 873 |
|
Accessories |
| 275 |
|
| 416 |
|
| 494 |
|
| 814 |
|
Net Sales | $ | 3,213 |
| $ | 4,169 |
| $ | 5,373 |
| $ | 7,990 |
|
Liabilities for performance obligations resulting from our rewards programs, return reserves and unredeemedUnredeemed gift cards and merchandise return cardscard liabilities totaled $354$283 million as of November 2, 2019, $413August 1, 2020, $334 million as of February 2, 20191, 2020, and $337$258 million as of NovemberAugust 3, 2018.
2019. Revenue of $100 million was recognized during the current year from the February 1, 2020 ending balance.
3. Debt
Long-term debt, which includes draws on the revolving credit facility, consists of the following unsecured and secured senior debt:
|
|
Coupon Rate | Outstanding | Effective Rate | Coupon Rate | Outstanding | ||||||||||||||||||||||
Maturity by fiscal year (Dollars in Millions) | Effective Rate | November 2, 2019 | February 2, 2019 | November 3, 2018 | ||||||||||||||||||||||||
2021 |
| 4.81 | % |
| 4.00 | % | $ | - |
| $ | - |
| $ | 413 |
| |||||||||||||
Maturity (Dollars in Millions) | Effective Rate | Coupon Rate | August 1, 2020 | February 1, 2020 | August 3, 2019 | |||||||||||||||||||||||
2023 |
| 3.25 | % |
| 3.25 | % |
| 350 |
|
| 350 |
|
| 350 |
| $ | 350 |
| $ | 350 |
| $ | 350 |
| ||||
2023 |
| 4.78 | % |
| 4.75 | % |
| 184 |
|
| 184 |
|
| 184 |
| 4.78 | % | 4.75 | % |
| 184 |
|
| 184 |
|
| 184 |
|
2025 | 9.50 | % | 9.50 | % |
| 600 |
|
| — |
|
| — |
| |||||||||||||||
2025 |
| 4.25 | % |
| 4.25 | % |
| 650 |
|
| 650 |
|
| 650 |
| 4.25 | % | 4.25 | % |
| 650 |
|
| 650 |
|
| 650 |
|
2029 |
| 7.36 | % |
| 7.25 | % |
| 42 |
|
| 42 |
|
| 42 |
| 7.36 | % | 7.25 | % |
| 42 |
|
| 42 |
|
| 42 |
|
2033 |
| 6.05 | % |
| 6.00 | % |
| 113 |
|
| 113 |
|
| 112 |
| 6.05 | % | 6.00 | % |
| 113 |
|
| 113 |
|
| 113 |
|
2037 |
| 6.89 | % |
| 6.88 | % |
| 101 |
|
| 101 |
|
| 101 |
| 6.89 | % | 6.88 | % |
| 101 |
|
| 101 |
|
| 101 |
|
2045 |
| 5.57 | % |
| 5.55 | % |
| 427 |
|
| 433 |
|
| 433 |
| 5.57 | % | 5.55 | % |
| 427 |
|
| 427 |
|
| 427 |
|
Outstanding long-term debt |
|
|
|
|
|
|
| 1,867 |
|
| 1,873 |
|
| 2,285 |
| |||||||||||||
Outstanding unsecured senior debt |
|
|
|
|
| 2,467 |
|
| 1,867 |
|
| 1,867 |
| |||||||||||||||
Unamortized debt discounts and deferred financing costs |
|
|
|
|
|
|
| (11 | ) |
| (12 | ) |
| (13 | ) |
|
|
|
|
| (17 | ) |
| (11 | ) |
| (12 | ) |
Long-term debt |
|
|
|
|
|
| $ | 1,856 |
| $ | 1,861 |
| $ | 2,272 |
| |||||||||||||
Unsecured senior debt |
|
|
|
|
| 2,450 |
|
| 1,856 |
|
| 1,855 |
| |||||||||||||||
Effective interest rate |
|
|
|
|
|
|
| 4.74 | % |
| 4.74 | % |
| 4.76 | % |
|
|
|
|
| 5.90 | % |
| 4.74 | % |
| 4.74 | % |
Secured senior debt |
|
|
|
|
| 1,000 |
|
| — |
|
| — |
| |||||||||||||||
Total long-term debt |
|
|
|
| $ | 3,450 |
| $ | 1,856 |
| $ | 1,855 |
|
9
Our unsecured senior 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-termunsecured senior debt was $2.5 billion at August 1, 2020, $2.0 billion at November 2, 2019, $1.8February 1, 2020, and $1.9 billion at February 2, 2019 and $2.3 billion at NovemberAugust 3, 2018.2019.
Year to date 2019,In March 2020, we have reducedfully drew down our outstanding debt by $6 millionthrough open market repurchases.
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-yearrevolver. In April 2020, we replaced and upsized the unsecured credit facility with a $1.5 billion senior secured, asset based revolving credit facility that will maturematuring in July 2024.The revolver is secured by substantially all of our assets other than real estate, and contains customary events of default and financial, affirmative, and negative covenants, including but not limited to, a springing financial covenant related to our fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions, and restricted payments, including a restriction on dividends in 2020 if our outstanding borrowings under the credit facility exceed $1.0 billion. At August 1, 2020, $1.0 billion was outstanding on the credit facility bearing an effective interest rate of 3.41%. Outstanding borrowings under the credit facility bear interest at a variable rate based on LIBOR plus the applicable margin. NaN amounts were outstanding on the credit facility at November 2, 2019,in place as of February 2, 20191, 2020 or NovemberAugust 3, 2018.
8
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 liability for lease obligations and a corresponding right of use asset on the balance 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.
|
|
|
|
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 lease 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 |
|
|
|
|
|
|
|
|
|
|
These adjustments represent non-cash activities for Statement of Cash Flow purposes.
9
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Adoption of the new standard is not expected to have a material impact on our net income prospectively. We expect 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 transition 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 percentage 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 the value of the lease liability and are adjusted for any lease payments made to the 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 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 the rate on the lease commencement date for finance leases.
For 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.
The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheet | November 2, 2019 | |||
(Dollars in Millions) | Classification | |||
Assets |
|
|
|
|
Operating leases | Operating leases | $ | 2,427 |
|
Finance leases | Property and equipment, net |
| 617 |
|
Total operating and finance leases |
|
| 3,044 |
|
Liabilities |
|
|
|
|
Current |
|
|
|
|
Operating leases | Current portion of operating leases |
| 162 |
|
Finance leases | Current portion of finance lease and financing obligations |
| 74 |
|
Noncurrent |
|
|
|
|
Operating leases | Operating leases |
| 2,643 |
|
Finance leases | Finance lease and financing obligations |
| 836 |
|
Total operating and finance leases |
| $ | 3,715 |
|
10
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Consolidated Statement of Income | Three Months Ended November 2, 2019 | Nine Months Ended November 2, 2019 | ||||||
(Dollars in Millions) | Classification | |||||||
Operating leases | Selling, general, and administrative | $ | 79 |
| $ | 236 |
| |
Finance leases |
|
|
|
|
|
|
| |
Amortization of leased assets | Depreciation and amortization |
| 18 |
|
| 53 |
| |
Interest on lease liabilities | Interest expense, net |
| 25 |
|
| 73 |
| |
Total operating and finance leases |
| $ | 122 |
| $ | 362 |
|
Consolidated Statement of Cash Flows | Nine Months Ended November 2, 2019 | |||
(Dollars in Millions) | Classification | |||
Cash paid for amounts included in the measurement of lease liabilities |
|
|
| |
Operating cash flows from operating leases | $ | 249 |
| |
Operating cash flows from finance leases |
| 73 |
| |
Financing cash flows from finance leases |
| 56 |
|
The following table summarizes future lease payments by fiscal year:
| November 2, 2019 | ||||||||
(Dollars in Millions) | Operating Leases | Finance Leases | Total | ||||||
2019 | $ | 66 |
| $ | 43 |
| $ | 109 |
|
2020 |
| 311 |
|
| 176 |
|
| 487 |
|
2021 |
| 303 |
|
| 156 |
|
| 459 |
|
2022 |
| 290 |
|
| 139 |
|
| 429 |
|
2023 |
| 275 |
|
| 117 |
|
| 392 |
|
After 2023 |
| 3,660 |
|
| 1,765 |
|
| 5,425 |
|
Total lease payments |
| 4,905 |
|
| 2,396 |
|
| 7,301 |
|
Amount representing interest |
| (2,100 | ) |
| (1,486 | ) |
| (3,586 | ) |
Lease liabilities | $ | 2,805 |
| $ | 910 |
| $ | 3,715 |
|
Total lease payments include $2.9 billion related to options to extend operating lease terms that are reasonably certain of being exercised and $1.5 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:
| |||
| |||
|
| ||
|
| ||
| |||
|
|
| |
|
|
|
11
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 | November 2, 2019 | |||
Assets |
|
|
|
| |
Financing obligations | Property and equipment, net | $ | 78 |
| |
Liabilities |
|
|
|
| |
Current | Current portion of finance lease and financing obligations |
| 36 |
| |
Noncurrent | Finance lease and financing obligations |
| 496 |
| |
Total financing obligations |
| $ | 532 |
|
Consolidated Statement of Income | Three Month Ended November 2, 2019 | Nine Months Ended November 2, 2019 | |||||
(Dollars in Millions) | Classification | ||||||
Amortization of financing obligation assets | Depreciation and amortization | $ | 3 |
| $ | 8 |
|
Interest on financing obligations | Interest expense, net |
| 9 |
|
| 28 |
|
Total financing obligations |
| $ | 12 |
| $ | 36 |
|
Consolidated Statement of Cash Flows | Nine Months Ended November 2, 2019 | |||
(Dollars in Millions) | Classification | |||
Cash paid for amounts included in the measurement of financing obligations |
|
|
| |
Operating cash flows from financing obligations | $ | 28 |
| |
Financing cash flows from financing obligations |
| 32 |
| |
Proceeds from financing obligations |
|
| 11 |
|
Gain on extinguishment of debt |
|
| (9 | ) |
2019.
In October 2019,April 2020, we purchased leased equipment that was accounted for asissued $600 million of 9.50% notes with semi-annual interest payments beginning in November 2020. The notes include coupon rate step ups if our long-term debt is downgraded to below a financing obligation and resultedBBB- credit rating by S&P Global Ratings or Baa3 by Moody’s Investors Service, Inc. The notes mature in recognition of a $9 million gain on extinguishment of debt.May 2025.
12
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following table summarizes future financing obligation payments by fiscal year:
(Dollars in Millions) | November 2, 2019 | ||
2019 | $ | 12 |
|
2020 |
| 71 |
|
2021 |
| 71 |
|
2022 |
| 68 |
|
2023 |
| 66 |
|
After 2023 |
| 249 |
|
Total financing obligations payments |
| 537 |
|
Non-cash gain on future sale of property |
| 228 |
|
Amount representing interest |
| (233 | ) |
Financing obligation liability | $ | 532 |
|
Thefollowing table summarizes the weighted-average remaining term and discount rate for financing obligations:
| |||
|
| ||
|
|
|
5.4. Stock-Based Awards
The following table summarizes our stock-based awards activity for the ninesix months ended November 2, 2019:August 1, 2020:
| Nonvested Stock Awards | Performance Share Units | Stock Options |
| Stock Warrants |
| Stock Options | Nonvested Stock Awards | Performance Share Units | |||||||||||||||||||||||||||||||||
(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 | Shares | Weighted Average Exercise Price | Shares | Weighted Average Grant Date Fair Value | Units | Weighted Average Grant Date Fair Value | ||||||||||||||||||||||||||||
Balance - February 2, 2019 |
| 2,601 |
| $ | 51.90 |
|
| 1,046 |
| $ | 52.08 |
|
| 136 |
| $ | 51.48 |
|
| - |
| $ | - |
| ||||||||||||||||||
Balance - February 1, 2020 |
| 87 |
| $ | 51.78 |
|
| 2,312 |
| $ | 56.24 |
|
| 1,274 |
| $ | 61.55 |
| ||||||||||||||||||||||||
Granted |
| 823 |
|
| 64.95 |
|
| 242 |
|
| 72.53 |
|
| - |
|
| - |
|
| 1,747 |
|
| 69.68 |
|
| — |
|
| — |
|
| 2,467 |
|
| 20.09 |
|
| 735 |
|
| 21.12 |
|
Exercised/vested |
| (961 | ) |
| 49.76 |
|
| (336 | ) |
| 46.87 |
|
| (41 | ) |
| 50.89 |
|
| - |
|
| - |
|
| — |
|
| — |
|
| (868 | ) |
| 54.29 |
|
| (826 | ) |
| 42.72 |
|
Forfeited/expired |
| (191 | ) |
| 57.62 |
|
| (71 | ) |
| 59.11 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| (33 | ) |
| 51.07 |
|
| (202 | ) |
| 48.40 |
|
| (25 | ) |
| 73.55 |
|
Balance - November 2, 2019 |
| 2,272 |
| $ | 56.45 |
|
| 881 |
| $ | 59.13 |
|
| 95 |
| $ | 51.74 |
|
| 1,747 |
| $ | 69.68 |
| ||||||||||||||||||
Balance - August 1, 2020 |
| 54 |
| $ | 52.22 |
|
| 3,709 |
| $ | 33.06 |
|
| 1,158 |
| $ | 49.03 |
|
Effective April 18,In 2019, in connection with our entry into a commercial agreement with Amazon.com Services, Inc. (“Amazon”), we issuedgranted 1,747,441 of stock warrants to an affiliate. The total vested and unvested warrants as 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,August 1, 2020 were 349,489 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.1,397,952, respectively.
6.5. 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.
13
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
7.6. Net Income (Loss) Per Share
Basic netNet income (loss) per share is netNet income (loss) divided by the average number of common shares outstanding during the period. Diluted netNet income (loss) per share includes incremental shares assumed for share-based awards and stock warrants. Potentially dilutive shares include stock options, unvested restricted stock units and awards, and warrants outstanding during the period, using the treasury stock method. Potentially dilutive shares are excluded from the computations of diluted earnings per share (“EPS”) if their effect would be anti-dilutive.
10
The information required to compute basic and diluted netNet income (loss) 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 2, 2019 | November 3, 2018 | November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||||||||||
Numerator—Net income | $ | 123 |
| $ | 161 |
| $ | 426 |
| $ | 529 |
| ||||||||||||
Numerator—Net income (loss) | $ | 47 |
| $ | 241 |
| $ | (494 | ) | $ | 303 |
| ||||||||||||
Denominator—Weighted-average shares: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 156 |
|
| 164 |
|
| 158 |
|
| 165 |
|
| 154 |
|
| 159 |
|
| 154 |
|
| 160 |
|
Dilutive impact |
| 1 |
|
| 1 |
|
| 1 |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
Diluted |
| 157 |
|
| 165 |
|
| 159 |
|
| 166 |
|
| 155 |
|
| 159 |
|
| 154 |
|
| 161 |
|
Antidilutive shares |
| 2 |
|
| — |
|
| 1 |
|
| — |
| ||||||||||||
Net income per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Basic | $ | 0.79 |
| $ | 0.98 |
| $ | 2.69 |
| $ | 3.21 |
| $ | 0.31 |
| $ | 1.52 |
| $ | (3.21 | ) | $ | 1.90 |
|
Diluted | $ | 0.78 |
| $ | 0.98 |
| $ | 2.67 |
| $ | 3.19 |
| $ | 0.30 |
| $ | 1.51 |
| $ | (3.21 | ) | $ | 1.89 |
|
The following potential shares of common stock were excluded from the diluted Net income (loss) per share calculation because their effect would have been anti-dilutive:
14
| Three Months Ended | Six Months Ended | ||||||||||
(Shares in Millions) | August 1, 2020 | August 3, 2019 | August 1, 2020 | August 3, 2019 | ||||||||
Anti-dilutive shares |
| 5 |
|
| 4 |
|
| 7 |
|
| 3 |
|
11
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purposes of the following discussion, unless noted, all references to "the third quarter"quarter” and “the second quarter” are for the threefiscal months (13 weeks) ended November 2, 2019August 1, 2020 or NovemberAugust 3, 2018. 2019. References to “year to date” and “first half” are for thenine six fiscal months (39(26 weeks)ended NovemberAugust 1, 2020 or August 3, 2019. References to “the first quarter” are for the three fiscal months (13 weeks) ended May 2, 20192020 or November 3, 2018.May 4, 2019.
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”“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.reserves and the competitive environment, including statements relating to the ongoing implications of COVID-19. Forward-looking statements are based on our management’s then currentthen-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 20182019 Form 10-K, Part II Item 1A of our first quarter 2020 Form 10-Q, 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.
Executive Summary
As of November 2, 2019,August 1, 2020, we operated 1,1591,163 Kohl's stores, a website (www.Kohls.com), and 12 FILA 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 online.
In the third quarter of 2019, we delivered positive comparable sales growth driven by an acceleration in our Active business, continued strength in Digital and improved performance in our stores and across all of our lines of business versus the first half. During the quarter, we invested in pricing and enhanced our marketing offers to respond to a heightened competitive environment and to drive sales following modest disruption in stores related to a record number of brand launches.
Key financial results for the third quarter of 2019 include:included:
| • |
|
• | Disciplined management of expenses and inventory resulted in positive operating cash flow |
• | 22.9% decrease in net sales |
| • |
|
| • |
|
| • |
|
| • |
|
We adoptedRecent Developments
As discussed in our 2019 Form 10-K, the new lease accounting standardWorld Health Organization declared the outbreak of COVID-19 as a pandemic in March 2020. Subsequently, COVID-19 has continued to spread throughout the United States. As a result, the President of the United States declared a national emergency. Federal, state, and local governing bodies mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to the virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption in the financial and retail markets, including a decrease in consumer demand for our merchandise.
12
The COVID-19 pandemic has had, and will likely continue to have, significant adverse effects on our business including, but not limited to the following:
• | On March 20, 2020, the Company furloughed 85,000 store and distribution center associates, as well as some corporate office associates, as a result of temporarily closing all of our stores which limited our business to the digital channel. As of August 1, 2020, the majority of the associates who were furloughed have returned to work. |
• | Starting on May 4, 2020, we began reopening stores in locations where permitted. As of August 1, 2020, we have reopened all of our stores. |
• | The Company experienced a significant decline in sales demand, and expects to continue to experience volatility in demand for its merchandise. We also experienced pressure in gross margin, and continue to expect pressures on gross margin as we expect digital penetration to remain elevated and the potential for a heightened promotional environment. |
• | Additionally, social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact store traffic which could result in a loss of sales and profit. As our stores reopened, we have implemented numerous social distancing and safety measures. These include providing personal protective equipment to our associates, implementing a more rigorous cleaning process, including enhanced cleaning of high touch surfaces throughout the day, installing protective barriers at all registers, and requiring associates and customers to wear face coverings while inside our stores. To encourage social distancing, we installed social distancing signage and markers throughout the store, closed our fitting rooms, widened aisles by removing in-aisle fixtures, relocated Amazon returns to a separate area of the store, and are limiting occupancy in stores as appropriate. We have implemented a new process for handling merchandise returns, reduced store operating hours, and are providing dedicated shopping hours for at-risk individuals. |
The chart below details costs that we believe are directly attributable to COVID-19:
(Dollars In Millions) |
| Three Months Ended | Six Months Ended | ||||
Decription | Classification | August 1, 2020 | August 1, 2020 | ||||
Inventory write-downs | Cost of merchandise sold | $ | — |
| $ | 187 |
|
Net compensation and benefits | Selling, general, and administrative |
| 6 |
|
| 40 |
|
Other costs | Selling, general, and administrative |
| 21 |
|
| 27 |
|
Asset write-offs | Impairments, store closing, and other costs |
| — |
|
| 53 |
|
Total |
| $ | 27 |
| $ | 307 |
|
In response to COVID-19 we have taken the following actions to preserve financial liquidity and flexibility during the first quarterhalf of 20192020:
• | Managed inventory receipts meaningfully lower, |
• | Significantly reduced expenses across all areas of the business including marketing, technology, operations, and payroll, |
• | Decreased capital expenditures 55% year to date 2020, |
• | Suspended share repurchase program, |
• | Suspended regular quarterly cash dividend beginning in the second quarter of 2020, |
• | Replaced and upsized the unsecured $1.0 billion revolver with a $1.5 billion secured facility, of which $1.0 billion was drawn as of quarter-end, |
• | Issued $600 million of 9.5% notes due 2025, and |
• | Completed a sale leaseback for our San Bernardino E-commerce fulfillment and distribution center which generated net proceeds of $193 million after fees and also resulted in a $127 million gain. |
13
We cannot estimate with certainty the length or severity of this pandemic, or the extent to which the disruption may materially impact our Consolidated Financial Statements. However, we do expect the impact to continue to have a material adverse effect on our business, financial condition, and prior periods were not restated. results of operations for the full year 2020.
See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results.
15
Results of Operations
Total Revenue
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change | November 2, 2019 | November 3, 2018 | Change | August 1, 2020 | August 3, 2019 | Change | August 1, 2020 | August 3, 2019 | Change | ||||||||||||||||||||||||
Net sales | $ | 4,358 |
| $ | 4,369 |
| $ | (11 | ) | $ | 12,348 |
| $ | 12,632 |
| $ | (284 | ) | $ | 3,213 |
| $ | 4,169 |
| $ | (956 | ) | $ | 5,373 |
| $ | 7,990 |
| $ | (2,617 | ) |
Other revenue |
| 267 |
|
| 259 |
|
| 8 |
|
| 794 |
|
| 774 |
|
| 20 |
|
| 194 |
|
| 261 |
|
| (67 | ) |
| 462 |
|
| 527 |
|
| (65 | ) |
Total revenue | $ | 4,625 |
| $ | 4,628 |
| $ | (3 | ) | $ | 13,142 |
| $ | 13,406 |
| $ | (264 | ) | $ | 3,407 |
| $ | 4,430 |
| $ | (1,023 | ) | $ | 5,835 |
| $ | 8,517 |
| $ | (2,682 | ) |
Comparable
Net sales increased 0.4%declined 22.9% for the thirdsecond quarter of 2020 and decreased 1.9%32.8% for year to date 2019. 2020.
| • | The |
• | Digital sales increased 58% for the second quarter of 2020 and 41% for year to date |
| • | All |
| • | Active continues to be a key strategic initiative |
|
|
|
|
Comparable sales is a measure that highlights the performance of our stores and digital channel by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales includes all store and digital sales, except sales from stores open less than 12 months, stores that have been closed, and stores where square footage has changed by more than 10%. We measure the change in digital sales by including all sales initiated online or through mobile applications, including omnichannel transactions which are fulfilled through our stores.
As our stores were closed for a period during the second quarter of 2020, we have not included a discussion of comparable sales as we do not believe it is a meaningful metric over this period of time.
We measure digital penetration as digital sales over net sales. These amounts do not take into consideration fulfillment node, digital returns processed in stores, and coupon behaviors.
Comparable sales and digital penetration measures vary across the retail industry. As a result, our comparable sales calculation and digital penetration are non-GAAP measures that may not be consistent with the similarly titled measures reported by other companies.
IncreasesThe decreases in Other revenue of $8$67 million for the thirdsecond quarter of 2020 and $20$65 million for year to date 20192020 were driven by higherlower credit revenue.revenue due to lower accounts receivable balances associated with lower sales.
14
Cost of Merchandise Sold and Gross Margin
| Three Months Ended | Nine Months Ended | ||||||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change | November 2, 2019 | November 3, 2018 | Change | ||||||||||||||
Net sales | $ | 4,358 |
| $ | 4,369 |
| $ | (11 | ) |
| $ | 12,348 |
| $ | 12,632 |
| $ | (284 | ) |
|
Cost of merchandise sold |
| 2,775 |
|
| 2,752 |
|
| 23 |
|
|
| 7,740 |
|
| 7,854 |
|
| (114 | ) |
|
Gross margin | $ | 1,583 |
| $ | 1,617 |
| $ | (34 | ) |
| $ | 4,608 |
| $ | 4,778 |
| $ | (170 | ) |
|
Gross margin as a percent of net sales |
| 36.3 | % |
| 37.0 | % |
| (67 | ) | bp |
| 37.3 | % |
| 37.8 | % |
| (51 | ) | bp |
16
| Three Months Ended | Six Months Ended | ||||||||||||||||||
(Dollars in Millions) | August 1, 2020 | August 3, 2019 | Change | August 1, 2020 | August 3, 2019 | Change | ||||||||||||||
Net sales | $ | 3,213 |
| $ | 4,169 |
| $ | (956 | ) |
| $ | 5,373 |
| $ | 7,990 |
| $ | (2,617 | ) |
|
Cost of merchandise sold |
| 2,149 |
|
| 2,550 |
|
| (401 | ) |
|
| 3,936 |
|
| 4,965 |
|
| (1,029 | ) |
|
Gross margin | $ | 1,064 |
| $ | 1,619 |
| $ | (555 | ) |
| $ | 1,437 |
| $ | 3,025 |
| $ | (1,588 | ) |
|
Gross margin as a percent of net sales |
| 33.1 | % |
| 38.8 | % |
| (569 | ) | bps |
| 26.8 | % |
| 37.9 | % |
| (1,109 | ) | bps |
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 digital 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.
The decreasesIn the second quarter, the decrease in gross margin as a percent of net sales werewas driven by higher promotional markdownsapproximately 295 bps due to a heightened competitive environment, product mix of business and increased promotional activity as well as approximately 275 bps due to higher shipping costs due to increases inincreased digital penetration for both the third quarter and yearsales penetration. Year to date, 2019.the decrease was driven by approximately 275 bps due to the mix of business and increased promotional activity, approximately 265 bps due to higher shipping costs, as well as approximately 550 bps due to the inventory actions taken in the first quarter of 2020.
Selling, General, and Administrative Expenses ("SG&A")
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change | November 2, 2019 | November 3, 2018 | Change | August 1, 2020 | August 3, 2019 | Change | August 1, 2020 | August 3, 2019 | Change | ||||||||||||||||||||||||||||
SG&A | $ | 1,419 |
| $ | 1,375 |
| $ | 44 |
| $ | 3,962 |
| $ | 3,907 |
| $ | 55 |
| $ | 1,050 |
| $ | 1,269 |
| $ | (219 | ) |
| $ | 2,116 |
| $ | 2,544 |
| $ | (428 | ) |
| ||
As a percent of total revenue |
| 30.7 | % |
| 29.7 | % |
| 96 | bp |
| 30.1 | % |
| 29.1 | % |
| 101 | bp |
| 30.8 | % |
| 28.6 | % |
| 217 |
| bps |
| 36.3 | % |
| 29.9 | % |
| 639 |
| bps |
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".
The following table summarizes the increases and (decreases)decreases in SG&A by expense type:
| Three Months Ended November 2, 2019 | Nine Months Ended November 2, 2019 | Three Months Ended | Six Months Ended | ||||||||
(Dollars In Millions) | August 1, 2020 | |||||||||||
Store expenses | $ | 43 |
| $ | 60 |
| ||||||
Marketing |
| 6 |
|
| 26 |
| ||||||
Technology |
| 6 |
|
| 7 |
| ||||||
Credit expenses |
| (1 | ) |
| (6 | ) | $ | (17 | ) | $ | (38 | ) |
Corporate and other |
| (10 | ) |
| (32 | ) |
| (23 | ) |
| (83 | ) |
Total increase | $ | 44 |
| $ | 55 |
| ||||||
Marketing |
| (72 | ) |
| (123 | ) | ||||||
Store expenses |
| (107 | ) |
| (184 | ) | ||||||
Total decrease | $ | (219 | ) | $ | (428 | ) |
15
SG&A expenses increased 3.2% deleveraging 96 basis pointsdecreased $219 million, or 17.3%, to $1.0 billion in the thirdsecond quarter and increased 1.4% deleveraging 101 basis points yearof 2020. As a percentage of revenue, SG&A deleveraged by 217 bps. Year to date 2019, compared to the same periodsSG&A expenses decreased $428 million, or 16.8%. As a percentage of revenue, SG&A deleveraged by 639 bps. The decrease in 2018. The changes wereSG&A was primarily driven by an increasea reduction in store expenses which reflect higher rent expense, primarily due to the new lease accounting standard, costs relatedtemporary store closures nationwide, lower marketing expense due to brand launches, the Amazon return initiativereductions in most working media channels, and wage pressurelower credit expenses due to lower sales and payroll in the thirdsecond quarter and year to date 2019. Marketing expense increases2020. Partially offsetting the decrease in SG&A expenses in the second quarter and year to date 2020 were driven by continued investmentsexpenses related to target market share gains over the long-term. CorporateCOVID-19 pandemic which primarily consisted of incremental employee compensation and otherbenefits as well as cleaning and protective supplies. Included in these expenses decreasedwas the retention credit benefit we were eligible for under The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act, enacted on March 27, 2020, provides eligible employers with an employee retention credit equal to 50% of qualified wages paid to employees who were not providing services to the Company due to lower general corporate costs in 2019 and expenses associated with leadership changes in 2018.the impact of COVID-19.
Other Expenses
17
| Three Months Ended | Six Months Ended | ||||||||||||||||
(Dollars in Millions) | August 1, 2020 | August 3, 2019 | Change | August 1, 2020 | August 3, 2019 | Change | ||||||||||||
Depreciation and amortization | $ | 219 |
| $ | 228 |
| $ | (9 | ) | $ | 446 |
| $ | 458 |
| $ | (12 | ) |
Interest expense, net |
| 78 |
|
| 53 |
|
| 25 |
|
| 136 |
|
| 105 |
|
| 31 |
|
Impairments, store closing, and other costs |
| (2 | ) |
| 7 |
|
| (9 | ) |
| 64 |
|
| 56 |
|
| 8 |
|
(Gain) on Sale of Real Estate |
| (127 | ) |
| — |
|
| (127 | ) |
| (127 | ) |
| — |
|
| (127 | ) |
Other Expenses
| Three Months Ended | Nine Months Ended | ||||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change | November 2, 2019 | November 3, 2018 | Change | ||||||||||||
Depreciation and amortization | $ | 227 |
| $ | 243 |
| $ | (16 | ) | $ | 687 |
| $ | 725 |
| $ | (38 | ) |
Impairments, store closing and other costs |
| — |
|
| — |
|
| — |
|
| 55 |
|
| — |
|
| 55 |
|
Interest expense, net |
| 52 |
|
| 63 |
|
| (11 | ) |
| 157 |
|
| 197 |
|
| (40 | ) |
(Gain) loss on extinguishment of debt |
| (9 | ) |
| — |
|
| (9 | ) |
| (9 | ) |
| 42 |
|
| (51 | ) |
Depreciation and amortization decreases were driven by the maturity of our store portfolio, as well as the adoption of the new lease accounting standard.capital reductions.
Interest expense, net decreased in the third quarter and year to date 2019 due primarily to the benefits of debt reductions in 2018 and adoption of the new lease accounting standard in the first quarter of 2019.
In the thirdsecond quarter 2019, of 2020 we purchased leased equipment that was accounted for asrecognized a financing obligation and resultedgain of $2 million in the recognition of a $9 million gain on extinguishment of debt.
Year to date 2019, we incurred $55 million of Impairments, store closing, and other costs;costs which was the result of a gain due to a lease amendment partially offset by an asset impairment on assets held for sale. Additionally, we recognized a gain of $127 million from the sale leaseback transaction of our San Bernardino E-commerce fulfillment and distribution centers. In the first quarter of 2020, we incurred $49$51 million in lease asset impairment chargeswrite-offs, $2 million related to capital reductions and strategy changes due to COVID-19, and $13 million in brand exit costs. In the closuresecond quarter of four Kohl’s stores and $62019, we incurred $7 million in costs related to the closure of our four Off-Aisle clearance centers, and the execution of a voluntary role reduction program.
program, and a gain on lease termination. In the first quarter 2018,of 2019, we recognized a $42incurred $49 million loss on extinguishment of debtin lease impairment charges related to our $500the closure of four stores.
Net interest expense increased in the second quarter and year to date 2020 as a result of higher interest expense due to the outstanding balance on the revolving credit facility and the $600 million cash tender offer.of notes issued in April 2020.
Income Taxes
| Three Months Ended | Nine Months Ended | Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change | November 2, 2019 | November 3, 2018 | Change | August 1, 2020 | August 3, 2019 | Change | August 1, 2020 | August 3, 2019 | Change | |||||||||||||||||||||||||
Provision for income taxes | $ | 38 |
| $ | 34 |
| $ | 4 |
|
| $ | 124 |
| $ | 152 |
| $ | (28 | ) | ||||||||||||||||||
(Benefit) provision for income taxes | $ | (7 | ) | $ | 82 |
| $ | (89 | ) | $ | (242 | ) | $ | 86 |
| $ | (328 | ) | |||||||||||||||||||
Effective tax rate |
| 23.6 | % |
| 17.6 | % |
|
|
|
|
| 22.5 | % |
| 22.3 | % |
|
|
|
| (17.9 | %) |
| 25.3 | % |
|
|
|
| 32.9 | % |
| 22.1 | % |
|
|
|
The increaseThe second quarter and year to date 2020 resulted in the Provisiona benefit for income taxes in the third quarter was driven by a higheryear to date 2020 net loss due to lower sales that resulted from the temporary closure of our stores. The second quarter change in our effective tax rate was primarily due to the benefit from the net loss carryback which offset income from taxable years where the federal statutory tax rate was 35% versus the current federal statutory tax rate of 21%. In addition, the Company recognized favorable items in the third quarter 2018 not repeatingfirst half of 2020 that are more beneficial to the rate than those recognized in the thirdfirst half of 2019, resulting in a negative rate for the second quarter 2019, including positive audit results, tax accounting method changes and a higher stock price for share-based compensation. The decreasean increase in the Provision for income taxesrate for year to date 2019 was driven by lower taxable income.2020.
18
16
Income before(Loss) Before Income Taxes, Net Income (Loss), and Earnings (Loss) Per Diluted Share
| November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | |||||||||||||||||||||||||||||||||||
(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 (Loss) before Income Taxes | Net Income (Loss) | Earnings (Loss) Per Diluted Share | Income before Income Taxes | Net Income | Earnings Per Diluted Share | |||||||||||||||||||||||||||
Three Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP | $ | 161 |
| $ | 123 |
| $ | 0.78 |
| $ | 195 |
|
| $ | 161 |
|
| $ | 0.98 |
|
| $ | 40 |
| $ | 47 |
| $ | 0.30 |
| $ | 323 |
| $ | 241 |
| $ | 1.51 |
|
Impairments, store closing and other costs |
| — |
|
| — |
|
| — |
|
| — |
|
|
| — |
|
|
| — |
|
| ||||||||||||||||||
(Gain) loss on extinguishment of debt |
| (9 | ) |
| (7 | ) |
| (0.04 | ) |
| — |
|
|
| — |
|
|
| — |
|
| ||||||||||||||||||
Impairments, store closing, and other costs |
| (2 | ) |
| (2 | ) |
| (0.01 | ) |
| 7 |
|
| 7 |
|
| 0.05 |
| |||||||||||||||||||||
(Gain) on Sale of Real Estate |
| (127 | ) |
| (127 | ) |
| (0.82 | ) |
| — |
|
| — |
|
| — |
| |||||||||||||||||||||
Income tax impact of items noted above |
| — |
|
| 43 |
|
| 0.28 |
|
| — |
|
| (1 | ) |
| (0.01 | ) | |||||||||||||||||||||
Adjusted (non-GAAP)(2) | $ | (89 | ) | $ | (39 | ) | $ | (0.25 | ) | $ | 330 |
| $ | 247 |
| $ | 1.55 |
| |||||||||||||||||||||
Six Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
GAAP | $ | (736 | ) | $ | (494 | ) | $ | (3.21 | ) | $ | 389 |
| $ | 303 |
| $ | 1.89 |
| |||||||||||||||||||||
Impairments, store closing, and other costs |
| 64 |
|
| 64 |
|
| 0.41 |
|
| 56 |
|
| 56 |
|
| 0.35 |
| |||||||||||||||||||||
(Gain) on Sale of Real Estate |
| (127 | ) |
| (127 | ) |
| (0.82 | ) |
| — |
|
| — |
|
| — |
| |||||||||||||||||||||
Income tax impact of items noted above |
| — |
|
| 23 |
|
| 0.15 |
|
| — |
|
| (14 | ) |
| (0.09 | ) | |||||||||||||||||||||
Adjusted (non-GAAP) | $ | 152 |
| $ | 116 |
| $ | 0.74 |
| $ | 195 |
|
| $ | 161 |
|
| $ | 0.98 |
|
| $ | (799 | ) | $ | (534 | ) | $ | (3.47 | ) | $ | 445 |
| $ | 345 |
| $ | 2.15 |
|
Nine Months Ended: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||
GAAP | $ | 550 |
| $ | 426 |
| $ | 2.67 |
| $ | 681 |
|
| $ | 529 |
|
| $ | 3.19 |
|
| ||||||||||||||||||
Impairments, store closing and other costs |
| 55 |
|
| 41 |
|
| 0.26 |
|
| — |
|
|
| — |
|
|
| — |
|
| ||||||||||||||||||
Loss on extinguishment of debt |
| (9 | ) |
| (7 | ) |
| (0.04 | ) |
| 42 |
|
|
| 32 |
|
|
| 0.19 |
|
| ||||||||||||||||||
Adjusted (non-GAAP) | $ | 596 |
| $ | 460 |
| $ | 2.89 |
| $ | 723 |
|
| $ | 561 |
|
| $ | 3.38 |
|
|
(1) | Weighted average diluted shares outstanding for purpose of calculating diluted earnings per share for the three months ended August 1, 2020 was 155 million, which includes the dilutive effect of share-based awards as determined under the treasury stock method. |
(2) | Weighted average diluted shares outstanding for purposes of calculating diluted adjusted (loss) per share for the three months ended August 1, 2020 was 154 million as the effect of including dilutive shares would be antidilutive. |
We believe the adjusted results in the table above are useful because they provide enhanced visibility into our results on a non-GAAP basis.for the periods excluding the impact of certain items such as those included in the table above. However, these non-GAAP financial measures are not intended to replace the comparable GAAP measures.
Seasonality and Inflation
Our business, like that of mostother retailers, is subject to seasonal influences, with the majority of salesinfluences. Sales and income are typically realizedhigher 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.Due to the impact of COVID-19, typical sales patterns may not occur this year.
WeIn addition to COVID-19, we expect that our operations will continue to be influenced by general economic conditions, including food, fuel, and energy prices, higher wagesunemployment, and by costs to source our merchandise, including tariffs. There can be no assurances that such factors will not impact our business in the future.
Liquidity and Capital Resources
Financial liquidity and flexibility are a key focus of our response to COVID-19. As previously mentioned, we took various actions during the first half of 2020 to preserve our financial liquidity and flexibility.
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 •Debt reduction |
| •Cash flow from operations •Short-term trade credit, in the form of extended payment terms •Line of credit under our revolving credit facility •Issuance of debt
|
1917
Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season. Due to COVID-19, typical working capital and inventory patterns may not recur this fiscal year.
| Nine Months Ended |
| Six Months Ended | |||||||||||||||
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | Change |
| August 1, 2020 | August 3, 2019 | Change | |||||||||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities | $ | 1,045 |
| $ | 1,423 |
| $ | (378 | ) | $ | 304 |
| $ | 676 |
| $ | (372 | ) |
Investing activities |
| (670 | ) |
| (452 | ) |
| (218 | ) |
| (3 | ) |
| (439 | ) |
| 436 |
|
Financing activities |
| (819 | ) |
| (1,232 | ) |
| 413 |
|
| 1,404 |
|
| (546 | ) |
| 1,950 |
|
Operating Activities
Operating activities generated $1,045$304 million year to date 2019of cash in the first half of 2020 compared to $1,423$676 million year to date 2018. in the first half of 2019.The decrease was primarily due to increased inventory purchases, lower net income and changes in operating liabilities.decreased sales resulting from temporary nationwide store closures due to COVID-19.
Investing Activities
Investing activities used cash of $670$3 million year to date 2019in the first half of 2020 and $452$439 million year to date 2018. in the first half of 2019.The increasedecrease was primarily due to investmentsreductions in capital expenditures as a part of our E-commerce fulfillment centers and increased investment in our stores, including rightsizes, new stores and refreshes.response to COVID-19 as well as the proceeds from the sale of real estate.
Financing Activities
Financing activities usedgenerated cash of $819 million year to date 2019$1.4 billion in the first half of 2020 compared to $1,232$546 million yearcash used for financing activities in the first half of 2019.
In March 2020, we fully drew down our $1.0 billion senior unsecured revolver. In April 2020, we replaced and upsized the unsecured credit facility with a $1.5 billion senior secured, asset based revolving credit facility maturing in July 2024. At August 1, 2020, $1.0 billion was outstanding on the credit facility bearing an effective interest rate of 3.41%.
In April 2020, we issued $600 million of 9.50% notes with semi-annual interest payments beginning in November 2020. The notes mature in May 2025. We used part of the net proceeds from this offering to date 2018.repay $500 million of the borrowings under our senior secured, asset based revolving credit facility with the remainder for general corporate purposes.
We paid cash forAs a result of the suspension of our share repurchase program in response to COVID-19, treasury stock purchases in the first half of $3872020 were $8 million yearcompared to date 2019 and $275$254 million year to date 2018.in the first half of 2019. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors.
We paid cash dividends of $319Cash dividend payments were $108 million ($2.010.704 per share) year to date 2019in the first half of 2020 and $301$214 million ($1.831.34 per share) yearin the first half of 2019. In response to date 2018. On November 13, 2019, our BoardCOVID-19, the dividend program was suspended in April 2020, effective the beginning of Directors declaredthe second quarter of 2020. The Company remains committed to paying a quarterly cash dividend on our common stock of $0.67 per share. The dividend is payable December 24, 2019 to shareholders of record atonce the close of business on December 11, 2019.
We used cash to repurchase $6 million of debt on the open market year to date 2019uncertain and to repurchase $530 million of debt pursuant to a tender offer and on the open market year to date 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 marketvolatile conditions our liquidity requirements, contractual restrictions and other factors.
caused by COVID-19 have stabilized.
As of November 2, 2019,August 1, 2020, our credit ratings were as follows:
| Moody’s | Standard & Poor’s | Fitch |
Long-term debt | Baa2 |
|
|
2018
Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity are as follows:
(Dollars in Millions) | November 2, 2019 | November 3, 2018 | August 1, 2020 | August 3, 2019 | ||||||||
Working capital | $ | 1,706 |
| $ | 2,330 |
| $ | 3,122 |
| $ | 1,838 |
|
Current ratio |
| 1.42 |
|
| 1.58 |
|
| 2.22 |
|
| 1.65 |
|
The decreasesincrease in our working capital and current ratio are primarily due to lowerhigher cash balances as a result of debt reductions, share repurchases and dividends, as well as the addition of operating leases to current liabilities due to adoption of the new lease accounting standard. issuances.
Debt Covenant Compliance
Our senior secured, asset based revolving credit facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to, a springing financial covenant relating to our fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions, and restricted payments, including a restriction on dividends in 2020 if our outstanding borrowings under the credit facility exceed $1.0 billion. These covenants vary from those presented in our Annual Report on Form 10-K. As of November 2, 2019,August 1, 2020, we were in compliance with all debt covenants and expect to remain in compliance during the remainder of fiscal 2019. 2020.
Contractual Obligations
Other than operating leasesDuring the first half of 2020, we issued $600 million in aggregate principal amount of 9.50% notes due 2025. We also replaced our outstanding unsecured credit facility, of which are now Recorded, rather than Unrecorded contractual obligations, there$1 billion was outstanding at the end of the quarter. See "Liquidity and Capital Resources" for additional details about these financing activities. See Note 3 of the Consolidated Financial Statements for additional details about outstanding debt. There have been no other significant changes in the contractual obligations disclosed in our 20182019 Form 10-K.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of November 2, 2019.August 1, 2020.
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 U.S. GAAP 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. ThereOther than the items discussed in Footnote 1, there have been no significant changes in the critical accounting policies and estimates discussed in our 20182019 Form 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our operating results are subject to interest rate risk as our secured revolving credit facility carries variable interest rates, and the $600 million of notes issued in April 2020 include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating by S&P Global Ratings or Baa3 by Moody’s Investors Service, Inc. There have been no other significant changes in the market risksQuantitative and Qualitative Disclosures About Market Risk described in our 20182019 Form 10-K.
19
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.
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
21
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
On August 4, 2019, we implemented a new enterprise resource planning (“ERP”) system resulting in certain changes in our internal control over financial reporting. This implementation becomes a significant component of our internal control over financial reporting. With the exception of the new ERP implementation, thereThere were no other changes in our internal control over financial reporting during the most recent fiscal quarter ended August 1, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no significant changes in the risk factorsRisk Factors described in our 20182019 Form 10-K.10-K, other than as set out in our Quarterly Report on Form 10-Q for the quarter ended May 2, 2020, in Item 1A of Part II.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 November 2, 2019:August 1, 2020:
(Dollars in Millions, Except per Share Data) | 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 4 - 31, 2019 |
| 916,227 |
| $ | 47.20 |
|
| 888,253 |
| $ | 908 |
|
September 1 - October 5, 2019 |
| 1,127,544 |
|
| 49.36 |
|
| 1,067,009 |
|
| 855 |
|
October 6 - November 2, 2019 |
| 766,508 |
|
| 51.49 |
|
| 761,510 |
|
| 816 |
|
Total |
| 2,810,279 |
| $ | 49.27 |
|
| 2,716,772 |
| $ | 816 |
|
(Dollars in Millions, Except per Share Data) | 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 3 - 30, 2020 |
| 20,670 |
| $ | 16.73 |
|
| — |
| $ | 726 |
|
May 31 - July 4, 2020 |
| 16,098 |
|
| 22.26 |
|
| — |
|
| 726 |
|
July 5 - August 1, 2020 |
| 2,202 |
|
| 20.39 |
|
| — |
|
| 726 |
|
Total |
| 38,970 |
| $ | 19.22 |
|
| — |
| $ | 726 |
|
2221
Item 6. Exhibits
Exhibit | Description | |
| ||
| ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | Inline XBRL Instance Document | |
101.SCH | Inline XBRL Taxonomy Extension Schema | |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase | |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase | |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase | |
104 | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101) | |
2322
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Kohl’s Corporation (Registrant) |
|
|
Date: | /s/ Jill Timm |
| Jill Timm On behalf of the Registrant and as Chief Financial Officer (Principal Financial Officer) |
2423