| Business and Summary of Accounting Policies | Business As of February 2, 2019, we operated 1,159 department stores, a website (www.Kohls.com), 12 FILA outlets, and four Off-Aisle clearance centers. Our Kohl's stores and website sell moderately-priced proprietary and national brand apparel, footwear, accessories, beauty and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise which is available in our stores, as well as merchandise which is available only online. 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
Fiscal year
Ended
Number of Weeks
2018
February 2, 2019
52
2017
February 3, 2018
53
2016
January 28, 2017
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 $89 million at February 2, 2019 and $83 million at February 3, 2018. 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. We would record an additional reserve if the future estimated selling price is less than cost. Property and Equipment Property and equipment consist of the following:
(Dollars in Millions)
Feb 2, 2019
Feb 3, 2018
Land
$
1,110
$
1,115
Buildings and improvements:
Owned
8,048
8,062
Leased
1,816
1,813
Fixtures and equipment
1,489
1,700
Information technology
2,628
2,337
Construction in progress
299
152
Total property and equipment, at cost
15,390
15,179
Less accumulated depreciation and amortization
(7,962
)
(7,406
)
Property and equipment, net
$
7,428
$
7,773
Construction in progress includes property and equipment which is not ready for its intended use. Property and equipment are 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
Fixtures and equipment
3-15 years
Information technology
3-8 years Store Closure and Restructure Reserve The following table summarizes changes in the store closure and restructure reserve during 2018:
(Dollars in Millions)
Store Lease Obligations
Severance
Total
Balance - February 3, 2018
$
87
-
$
87
Payments and reversals
(21
)
-
(21
)
Additions
1
31
32
Balance - February 2, 2019
$
67
$
31
$
98
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. We recorded impairments of $72 million in 2018 and $76 million in 2016. Accrued Liabilities Accrued liabilities consist of the following:
(Dollars in Millions)
Feb 2, 2019
Feb 3, 2018
Gift cards and merchandise return cards
$
330
$
330
Sales, property and use taxes
160
151
Payroll and related fringe benefits
154
173
Credit card liabilities
122
125
Accrued capital
117
62
Other
481
372
Accrued liabilities
$
1,364
$
1,213
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. The total liabilities, net of collateral held by third parties, for these risks were $56 million as of February 2, 2019 and $53 million as of February 3, 2018. Our self-insured retention for property losses differs based on the type of claim. For the calendar year ended December 31, 2018, the retained amount for catastrophic claims such as earthquakes, floods and windstorms, varied from 2 - 5% of the insurance claim. For other standard claims, such as fire and building damages, we were 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. Revenue Recognition Net Sales Net sales includes revenue from the sale of merchandise and shipping revenues. Net sales are recognized when merchandise is received by the customer and we have fulfilled all performance obligations. We do not have any sales that are recorded as commissions. The following table summarizes net sales by line of business:
(Dollars in Millions)
2018
2017
2016
Women's
$
5,366
$
5,711
$
5,591
Men's
4,025
3,807
3,727
Home
3,642
3,617
3,541
Children's
2,492
2,475
2,423
Footwear
1,917
1,785
1,595
Accessories
1,725
1,641
1,759
Net sales
$
19,167
$
19,036
$
18,636
We maintain various rewards programs whereby customers earn rewards based on their spending and other promotional activities. The rewards are typically in the form of dollar-off discounts which can be used on future purchases. These programs create performance obligations which require us to defer a portion of the original sale until the rewards are redeemed. Sales are recorded net of returns. At the end of each reporting period, we record a reserve based on historical return rates and patterns which reverses sales that we expect to be returned in the following period. Revenue from the sale of Kohl's gift cards is recognized when the gift card is redeemed. Liabilities for performance obligations resulting from our rewards programs, return reserves, and unredeemed gift cards and merchandise return cards totaled $413 million as of February 2, 2019 and $422 million as of February 3, 2018. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes. Other Revenue Other revenue consists primarily of revenue from our credit card operations, unredeemed gift and merchandise return cards (breakage), and other non-merchandise revenues. Revenue from credit card operations includes our share of the finance charges and interest fees, less charge-offs of the Kohl’s credit card pursuant to the Private Label Credit Card Program Agreement. Expenses related to our credit card operations are reported in SG&A. Income from unredeemed gift cards and merchandise return cards (breakage) is recorded in proportion and over the time period the cards are actually redeemed. 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 expenses for digital sales • Terms cash discount • Depreciation of product development facilities and equipment
• 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 • Expenses related to our Kohl’s credit card operations • 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 non-operating revenues and expenses The classification of these expenses varies across the retail industry. 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. 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 approximates 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 overruns 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 leased property and equipment are recorded as 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. 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)
2018
2017
2016
Gross marketing costs
$
1,133
$
1,124
$
1,164
Vendor allowances
(143
)
(138
)
(148
)
Net marketing costs
$
990
$
986
$
1,016
Net marketing costs as a percent of total revenue
4.9
%
4.9
%
5.2
% 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 and Shares in Millions, Except per Share Data)
2018
2017
2016
Numerator—net income
$
801
$
859
$
556
Denominator—weighted average shares
Basic
164
167
178
Impact of dilutive share-based awards
1
1
1
Diluted
165
168
179
Anti-dilutive shares
-
2
3
Net income per share:
Basic
$
4.88
$
5.14
$
3.12
Diluted
$
4.84
$
5.12
$
3.11
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
Leases (ASC Topic 842) Issued February 2016 Effective Q1 2019
We will adopt the new standard effective February 3, 2019, as required, using a modified prospective transition method.
The new standard includes several practical expedients that were available to reduce the burden of implementing the standard. • We will not restate prior period financials. • We elected the package of practical expedients, which, among other things, allowed us to carryforward our historical lease classifications. • We did not elect the hindsight practical expedient which would allow us to revisit key assumptions, such as lease term, that were made when we originally entered into the lease. • We are combining lease and non-lease costs. Adoption of the new standard is expected to result in the recording of additional assets and liabilities of approximately $2 billion as of February 3, 2019. Substantially all of the change will be due to recording right-of-use assets and lease liabilities for land and other operating leases on the balance sheet. The difference between additional lease assets and lease liabilities, net of tax, will be recorded as an adjustment to retained earnings. Adoption of the new standard is expected to increase 2019 net income by approximately $5 million. We expect Selling, General and Administrative expense will increase by approximately $25 million, Depreciation and Amortization will decrease by approximately $25 million and Interest will decrease by approximately $10 million. Substantially all of the income statement changes will be due to leases that changed classification under the new standard.
Cloud Computing (ASU 2018-15) Issued August 2018 Effective Q1 2020
Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense.
We are evaluating the impact of the new standard, but believe it is generally consistent with our current accounting for cloud computing arrangements and will not have a material impact on our financials. g |
