| Business and Summary of Accounting Policies | Business and Summary of Accounting Policies Business As of January 28, 2017 , we operated 1,154 department stores, a website (www.Kohls.com), 12 FILA outlets, and three Off-Aisle clearance centers. Our Kohl's stores and website sell moderately-priced private label, exclusive and national brand apparel, footwear, accessories, beauty and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise which is available in our stores, as well as merchandise which is available only on-line. Our authorized capital stock consists of 800 million shares of $0.01 par value common stock and 10 million shares of $0.01 par value preferred stock. Consolidation The consolidated financial statements include the accounts of Kohl’s Corporation and its subsidiaries including Kohl’s Department Stores, Inc., its primary operating company. All intercompany accounts and transactions have been eliminated. Accounting Period Our fiscal year ends on the Saturday closest to January 31 st each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report. Fiscal year Ended Number of Weeks 2016 January 28, 2017 52 2015 January 30, 2016 52 2014 January 31, 2015 52 Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Cash and Cash Equivalents In addition to money market investments, cash equivalents include commercial paper and certificates of deposit with original maturities of three months or less. We carry these investments at cost which approximates fair value. Also included in cash and cash equivalents are amounts due from credit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash were $81 million at January 28, 2017 and $92 million at January 30, 2016 . Merchandise Inventories Merchandise inventories are valued at the lower of cost or market with cost determined on the first-in, first-out (“FIFO”) basis 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 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 currently taken as a reduction of the retail value of inventory. We would record an additional reserve if the future estimated selling price is less than cost. 1. Business and Summary of Accounting Policies (continued) Property and Equipment Property and equipment consist of the following: (Dollars in Millions) Jan 28, Jan 30, Land $ 1,118 $ 1,110 Buildings and improvements: Owned 8,004 7,999 Leased 1,801 1,848 Store fixtures and equipment 1,711 1,804 Computer hardware and software 1,939 1,590 Construction in progress 318 167 Total property and equipment, at cost 14,891 14,518 Less accumulated depreciation and amortization (6,788 ) (6,210 ) Property and equipment, net $ 8,103 $ 8,308 Construction in progress includes buildings, building improvements, and computer hardware and software which is not ready for its intended use. Property and equipment is recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Leased property and improvements to leased property are amortized on a straight-line basis over the term of the lease or useful life of the asset, whichever is less. The annual provisions for depreciation and amortization generally use the following ranges of useful lives: Buildings and improvements 5-40 years Store fixtures and equipment 3-15 years Computer hardware and software 3-8 years Long-Lived Assets All property and equipment and other long-lived assets are reviewed for potential impairment 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. An impairment relating to store closures was recorded in 2016 . No material impairments were recorded in 2015 or 2014 as a result of the tests performed. 1. Business and Summary of Accounting Policies (continued) Accrued Liabilities Accrued liabilities consist of the following: (Dollars in Millions) Jan 28, Jan 30, Gift cards and merchandise return cards $ 329 $ 323 Sales, property and use taxes 183 184 Payroll and related fringe benefits 147 117 Accrued capital 102 64 Marketing 82 77 Credit card liabilities 67 88 Other 314 353 Accrued liabilities $ 1,224 $ 1,206 Self-Insurance We use a combination of insurance and self-insurance for a number of risks. We retain the initial risk of $500,000 per occurrence in workers’ compensation claims and $250,000 per occurrence in general liability claims. We record reserves for workers’ compensation and general liability claims which include the total amounts that we expect to pay for a fully developed loss and related expenses, such as fees paid to attorneys, experts and investigators. We are fully self-insured for employee-related health care benefits, a portion of which is paid by our associates. We use a third-party actuary to estimate the liabilities associated with workers’ compensation, general liability and employee-related health care risks. These liabilities include amounts for both reported claims and incurred, but not reported losses. Total liabilities for these risks were $65 million as of January 28, 2017 and $58 million as of January 30, 2016. Our self-insured retention for property losses differs based on the type of claim. For catastrophic claims such as earthquakes, floods and windstorms, the retained amount varies from 2 - 5% of the insurance claim. For other standard claims, such as fire and building damages, we are self-insured for the first $250,000 per occurrence of the property loss. Treasury Stock We account for repurchases of common stock and shares withheld in lieu of taxes when restricted stock vests using the cost method with common stock in treasury classified in the Consolidated Balance Sheets as a reduction of shareholders’ equity. 1. Business and Summary of Accounting Policies (continued) Other Comprehensive Income The tax effects of each component of other comprehensive income are as follows: (Dollars in Millions) 2016 2015 2014 Interest rate derivatives: Before-tax amounts $ 5 $ 5 $ 5 Tax expense (2 ) (2 ) (2 ) After-tax amounts 3 3 3 Unrealized gains on investments: Before-tax amounts — — 18 Tax expense — — (7 ) After-tax amounts — — 11 Other comprehensive income $ 3 $ 3 $ 14 Revenue Recognition Revenue from the sale of merchandise at our stores is recognized at the time of sale, net of any returns. Sales of merchandise shipped to our customers are recorded based on estimated receipt of merchandise by the customer. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes. Revenue from Kohl's gift card sales is recognized when the gift card is redeemed. Gift card breakage revenue is recognized based on historical redemption patterns and represents the balance of gift cards for which we believe the likelihood of redemption by a customer is remote. Cost of Merchandise Sold and Selling, General and Administrative Expenses The following table illustrates the primary costs classified in Cost of Merchandise Sold and Selling, General and Administrative Expenses: Cost of Merchandise Sold Selling, General and Administrative Expenses • Total cost of products sold including product development costs, net of vendor payments other than reimbursement of specific, incremental and identifiable costs • Inventory shrink • Markdowns • Freight expenses associated with moving merchandise from our vendors to our distribution centers • Shipping and handling expenses of on-line sales • Terms cash discount • Compensation and benefit costs including: • Stores • Corporate headquarters, including buying and merchandising • Distribution centers • Occupancy and operating costs of our retail, distribution and corporate facilities • Net revenues from the Kohl’s credit card program • Freight expenses associated with moving merchandise from our distribution centers to our retail stores and between distribution and retail facilities • Marketing expenses, offset by vendor payments for reimbursement of specific, incremental and identifiable costs • Other administrative revenues and expenses The classification of these expenses varies across the retail industry. 1. Business and Summary of Accounting Policies (continued) Vendor Allowances We receive consideration for a variety of vendor-sponsored programs, such as markdown allowances, volume rebates and promotion and marketing support. The vendor consideration is recorded as earned either as a reduction of inventory costs or Selling, General and Administrative Expenses. Promotional and marketing allowances are intended to offset our marketing costs to promote vendors’ merchandise. Markdown allowances and volume rebates are recorded as a reduction of inventory costs. Loyalty Program We maintain a customer loyalty program in which customers earn points based on their spending and other promotional activities. Upon accumulating certain point levels, customers receive rewards to apply to future purchases. We accrue the cost of anticipated redemptions related to the program when the points are earned at the initial purchase. The costs of the program are recorded in Cost of Merchandise Sold. Fair Value Fair value measurements are required to be classified and disclosed in one of the following pricing categories: Level 1: Financial instruments with unadjusted, quoted prices listed on active market exchanges. Level 2: Financial instruments lacking unadjusted, quoted prices from active market exchanges, including over-the-counter traded financial instruments. The prices for the financial instruments are determined using prices for recently traded financial instruments with similar underlying terms as well as directly or indirectly observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3: Financial instruments that are not actively traded on a market exchange. This category includes situations where there is little, if any, market activity for the financial instrument. The prices are determined using significant unobservable inputs or valuation techniques. Current assets and liabilities are reported at cost, which approximate fair value. Leases We lease certain property and equipment used in our operations. We are often involved extensively in the construction of leased stores. In many cases, we are responsible for construction cost over runs or non-standard tenant improvements (e.g. roof or HVAC systems). As a result of this involvement, we are deemed the “owner” for accounting purposes during the construction period, so are required to capitalize the construction costs on our Balance Sheet. Upon completion of the project, we perform a sale-leaseback analysis to determine if we can remove the assets from our Balance Sheet. In many of our leases, we are reimbursed a portion of the construction costs via adjusted rental payments and/or cash payments or have terms which fix the rental payments for a significant percentage of the leased asset’s economic life. These items generally are considered “continuing involvement” which precludes us from derecognizing the assets from our Balance Sheet when construction is complete. In conjunction with these leases, we also record financing obligations equal to the cash proceeds or fair market value of the assets received from the landlord. At the end of the lease term, including exercise of any renewal options, the net remaining financing obligation over the net carrying value of the fixed asset will be recognized as a non-cash gain on sale of the property. We do not report rent expense for the properties which are owned for accounting purposes. Rather, rental payments under the lease are recognized as a reduction of the financing obligation and interest expense. Some of our property and equipment is held under capital leases. These assets are included in property and equipment and depreciated over the term of the lease. We do not report rent expense for capital leases. Rather, rental payments under the lease are recognized as a reduction of the capital lease obligation and interest expense. 1. Business and Summary of Accounting Policies (continued) All other leases are considered operating leases. Assets subject to an operating lease and the related lease payments are not recorded on our Balance Sheet. Rent expense is recognized on a straight-line basis over the expected lease term. The lease term for all types of leases begins on the date we become legally obligated for the rent payments or we take possession of the building or land, whichever is earlier. The lease term includes cancelable option periods where failure to exercise such options would result in an economic penalty. Failure to exercise such options would result in the recognition of accelerated depreciation expense of the related assets. Marketing Marketing costs are expensed when the marketing is first seen. Marketing costs, net of related vendor allowances, are as follows: (Dollars in Millions) 2016 2015 2014 Gross marketing costs $ 1,164 $ 1,171 $ 1,189 Vendor allowances (148 ) (160 ) (165 ) Net marketing costs $ 1,016 $ 1,011 $ 1,024 Net marketing costs as a percent of net sales 5.4 % 5.3 % 5.4 % Income Taxes Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recorded based on differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for deferred tax assets when we believe it is more likely than not that the asset will not be realizable for tax purposes. We recognize interest and penalty expense related to unrecognized tax benefits in our provision for income tax expense. Net Income Per Share Basic net income per share is net income divided by the average number of common shares outstanding during the period. Diluted net income per share includes incremental shares assumed for share-based awards. The information required to compute basic and diluted net income per share is as follows: (Dollars in Millions, Except per Share Data) 2016 2015 2014 Numerator—net income $ 556 $ 673 $ 867 Denominator—weighted average shares Basic 178 193 203 Impact of dilutive employee stock options (a) 1 2 1 Diluted 179 195 204 Net income per share: Basic $ 3.12 $ 3.48 $ 4.28 Diluted $ 3.11 $ 3.46 $ 4.24 (a) Excludes 3 million share-based awards for 2016 , 1 million share-based awards for 2015 and 3 million share-based awards for 2014 as the impact of such awards was antidilutive. 1. Business and Summary of Accounting Policies (continued) Share-Based Awards Stock-based compensation expense is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant. Recent Accounting Pronouncements The following table provides a brief description of issued, but not yet effective, accounting standards: Standard Description Effect on our Financial Statements Compensation - Stock Compensation (ASC Topic 718) Issued March 2016 Effective Q1 2017 The new standard modifies several aspects of accounting and reporting for share-based payment transactions. Under the new standard, we will recognize excess income tax benefits and tax deficiencies related to share-based payments as income tax expense in our income statement, rather than as additional paid-in capital on our balance sheet. The new standard also allows us to change the way we account for forfeitures and for shares withheld from employees to satisfy income tax obligations. Generally, the new standard will result in higher tax expense when our stock price declines and lower tax expense when our stock price increases. Based on options and restricted shares outstanding as of year-end, every $1 change in our stock price would change our effective tax rate by approximately 3 basis points. We do not expect to change our accounting for forfeitures or shares withheld for taxes. Revenue from Contracts with Customers (ASC Topic 606) Issued May 2014 Effective Q1 2018 The standard eliminates the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replaces it with a principles-based approach for revenue recognition and disclosures. The standard will change the way we account for sales returns, our loyalty program and certain promotional programs. Based on current estimates, we do not expect these provisions of the standard will have a material impact on our financial statements. We are currently evaluating the impact other provisions of the standard may have on our financial statements, including principal vs agent considerations and presentation of net earnings of our credit card operations. Under current accounting, substantially all merchandise sales are reported gross as we are considered the principal in the transaction and net credit card earnings are reported in Selling, General and Administrative Expenses. We will elect an adoption methodology after we have evaluated the impact that all provisions of the standard will have on our financial statements. Leases (ASC Topic 842) Issued February 2016 Effective Q1 2019 Among other things, the new standard requires us to recognize a right of use asset and a lease liability on our balance sheet for leases. It also changes the presentation and timing of lease-related expenses. Approximately 5% of our store leases and all of our land leases are not currently recorded on our balance sheet. Recording right of use assets and liabilities for these and other non-store leases is expected to have a material impact on our balance sheet. We are also evaluating the impact that recording right of use assets and liabilities will have on our income statement and the financial statement impact that the standard will have on leases which are currently recorded on our balance sheet. |
