| Business and Summary of Accounting Policies | 1. Business and Summary of Accounting Policies Business As of January 30, 2021 www.Kohls.com 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, 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
2020
January 30, 2021
52
2019
February 1, 2020
52
2018
February 2, 2019
52 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. 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 $77 million at January 30, 2021 and $87 million at February 1, 2020. 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 is recorded if the future estimated selling price is less than cost. Other Current Assets Other current assets consist of the following:
(Dollars in Millions)
January 30, 2021
February 1, 2020
Income taxes receivable
$
610
$
15
Other Receivables
179
182
Prepaids
172
171
Other
13
21
Other current assets (a)
$
974
$
389
(a)
See Note 5 of Notes to Consolidated Financial Statements for further discussion on income taxes. Property and Equipment Property and equipment consist of the following:
(Dollars in Millions)
January 30, 2021
February 1, 2020
Land
$
1,091
$
1,107
Buildings and improvements:
Owned
7,783
7,869
Leased
963
867
Fixtures and equipment
1,267
1,426
Information technology
2,855
2,806
Construction in progress
313
279
Total property and equipment, at cost
14,272
14,354
Less accumulated depreciation and amortization
(7,583
)
(7,002
)
Property and equipment, net
$
6,689
$
7,352
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. Owned buildings and improvements include owned buildings on owned and leased land as well as leasehold improvements on leased properties. 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. Leases are further described in Note 3 of the Consolidated Financial Statements. 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 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. We recorded impairments of $68 million in 2020 in Impairments, store closing, and other costs of which $51 million was due to the impact of the COVID-19 pandemic and $17 million was related to impairments of corporate facilities and leases. We recorded impairments of $73 million in 2019 in Impairments, store closing, and other costs. 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 continued to recognize expense during the deferral periods. Other Noncurrent Assets Other noncurrent assets consist of the following:
(Dollars in Millions)
January 30, 2021
February 1, 2020
Income taxes receivable
$
232
$ —
Deferred tax assets
42
18
Other
141
145
Other noncurrent assets (a)
$
415
$
163
(a)
See Note 5 of Notes to Consolidated Financial Statements for further discussion on income taxes. Accrued Liabilities Accrued liabilities consist of the following:
(Dollars in Millions)
January 30, 2021
February 1, 2020
Gift cards and merchandise return cards
$
339
$
334
Sales, property, and use taxes
196
182
Payroll and related fringe benefits
229
101
Credit card liabilities
52
84
Accrued capital
10
104
Other
444
476
Accrued liabilities
$
1,270
$
1,281
Restructuring Reserve The following table summarizes changes in the restructuring reserve during 2020:
(Dollars in Millions)
Severance
Balance - February 1, 2020
$
27
Payments and reversals
(37
)
Additions
23
Balance - January 30, 2021
$
13
Charges related to corporate restructuring efforts are recorded in Impairments, store closing, and other costs. 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 $52 million as of January 30, 2021 and $79 million as of February 1, 2020. For property losses we are subject to a $5 million self-insured retention (“SIR”). Maintenance deductibles (retained amount) apply toward the SIR as follows: for catastrophic claims such as earthquakes, floods, and windstorms, the maintenance deductible varies from 2-5% of the insurance claim. Similarly, for other standard claims, such as fire and building damages, the maintenance deductible of $250,000 applies per occurrence for the property loss. All maintenance deductibles erode the $5 million SIR. Once the SIR is incurred the maintenance deductibles apply. 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)
2020
2019
2018
Women's
$
3,796
$
5,302
$
5,452
Home
3,381
3,249
3,341
Men’s
2,753
3,827
3,828
Children's
2,082
2,460
2,464
Accessories
1,638
2,217
2,227
Footwear
1,381
1,830
1,855
Net Sales
$
15,031
$
18,885
$
19,167
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. Unredeemed gift card and merchandise return card liabilities totaled $339 million as of January 30, 2021 and $334 million as of February 1, 2020. Revenue of $159 million was recognized during 2020 from gift cards issued in prior years and outstanding as of February 1, 2020. 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 cards and merchandise return cards (breakage), and other non-merchandise revenues. Revenue from credit card operations includes our share of the finance charges, late fees, and other revenue less write-offs of uncollectible accounts 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. Revenue from unredeemed gift cards and merchandise return cards (breakage) is recorded in proportion to 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, including buying • Distribution centers • Occupancy and operating costs of our retail, distribution, and corporate facilities • Expenses related to our credit card operations • Freight expenses associated with moving merchandise from our distribution centers to our retail stores and between distribution and retail facilities other than expenses to fulfill digital sales • 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 Cost of Merchandise Sold 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. Cash and cash equivalents are classified as Level 1 as carrying value approximates fair value because maturities are less than three months. Marketing Marketing costs are expensed when the marketing is first seen. Marketing costs, net of related vendor allowances, are as follows:
(Dollars in Millions)
2020
2019
2018
Gross marketing costs
$
824
$
1,156
$
1,133
Vendor allowances
(36
)
(130
)
(143
)
Net marketing costs
$
788
$
1,026
$
990
Net marketing costs as a percent of total revenue
4.9
%
5.1
%
4.9
% 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 (Loss) Income Per Share Basic net (loss) income per share is net (loss) income divided by the average number of common shares outstanding during the period. Diluted net (loss) income 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. The information required to compute basic and diluted net (loss) income per share is as follows:
(Dollars and Shares in Millions, Except per Share Data)
2020
2019
2018
Numerator—Net (loss) income
$
(163)
$
691
$
801
Denominator—Weighted average shares
Basic
154
157
164
Dilutive impact
—
1
1
Diluted
154
158
165
Net (loss) income per share:
Basic
$
(1.06)
$
4.39
$
4.88
Diluted
$
(1.06)
$
4.37
$
4.84
The following potential shares of common stock were excluded from the diluted net (loss) income per share calculation because their effect would have been anti-dilutive:
(Shares in Millions)
2020
2019
2018
Anti-dilutive shares
6
3
—
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 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 not a 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 not a material impact on our financial statements due to adoption of the new standard. The following table provides a brief description of issued, but not yet effective, accounting standards:
Standard
Description
Effect on our Financial Statements
Income Taxes (ASU 2019-12) Issued December 2019 Effective Q1 2021
The new standard is designed to simplify the accounting for income taxes by removing certain exceptions to the general principles as outlined in U.S. GAAP.
We have substantially completed the process of evaluating the effects that will result from adopting the amendments and no material impact on our financial statements has been identified. |
