UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THIS SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 1999
----------------------------------------
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
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KOHL'S CORPORATION
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(Exact name of registrant as specified in its charter)
WISCONSIN 39-1630919
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (414) 703-7000
--------------
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 X No_____
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: September 7, 1999 Common Stock,
-------------------------------
Par Value $.01 per Share, 162,947,401 shares Outstanding.
- --------------------------------------------------------
KOHL'S CORPORATION
INDEX
PART I. FINANCIAL INFORMATION
Item 1 Financial Statements:
Condensed Consolidated Balance Sheets at
July 31, 1999, January 30, 1999 and August 1, 1998 3
Condensed Consolidated Statements of Income for the
Three Months and Six Months Ended July 31, 1999 and
August 1, 1998 4
Consolidated Statement of Changes in Shareholders' Equity
for the Six Months Ended July 31, 1999 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended July 31, 1999 and August 1, 1998 6
Notes to Condensed Consolidated Financial Statements 7-8
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations 9-15
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K 16
Signatures 17
-2-
KOHL'S CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
July 31, January 30, August 1,
1999 1999 1998
-------------------------------------------------------
(Unaudited) (Audited) (Unaudited)
(In thousands)
Assets
------
Current assets:
Cash and cash equivalents $2,960 $2,858 $2,534
Short-term investments 58,753 26,736 14,850
Accounts receivable trade, net 395,005 270,704 191,519
Merchandise inventories 753,964 617,362 634,805
Deferred income taxes 17,863 14,412 8,520
Other 9,327 7,366 4,572
--------- --------- ---------
Total current assets 1,237,872 939,438 856,800
Property and equipment, net 1,086,985 933,011 831,116
Other assets 33,969 25,027 18,569
Favorable lease rights 140,628 13,681 14,926
Goodwill 22,338 24,938 27,538
--------- --------- ---------
Total assets $2,521,792 $1,936,095 $1,748,949
========= ========= =========
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $286,844 $212,926 $239,827
Accrued liabilities 120,081 117,200 90,255
Income taxes payable 11,901 48,572 14,363
Current portion of long-term debt 11,578 1,533 1,877
--------- --------- ---------
Total current liabilities 430,404 380,231 346,322
Long-term debt 498,667 310,912 312,659
Deferred income taxes 58,036 53,787 48,102
Other long-term liabilities 30,638 28,386 26,441
Shareholders' equity
Common stock-$.01 par value, 800,000,000 shares
authorized, 162,882,522, 158,394,735, and 158,054,978
issued at July 31, 1999, January 30, 1999 and
August 1, 1998, respectively. 1,629 1,584 1,581
Paid-in capital 760,946 504,275 490,994
Retained earnings 741,472 656,920 522,850
--------- --------- ---------
Total shareholders' equity 1,504,047 1,162,779 1,015,425
--------- --------- ---------
Total liabilities and shareholders' equity $2,521,792 $1,936,095 $1,748,949
========= ========= =========
See accompanying Notes to Condensed Consolidated Financial Statements
3
KOHL'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
3 Months 3 Months 6 Months 6 Months
(13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks)
Ended Ended Ended Ended
July 31, August 1, July 31, August 1,
1999 1998 1999 1998
--------------------------------------------------------
(In thousands except per share data)
Net sales $939,503 $758,747 $1,849,759 $1,503,318
Cost of merchandise sold 614,199 502,170 1,211,327 993,272
--------- --------- ----------- -----------
Gross margin 325,304 256,577 638,432 510,046
Operating expenses:
Selling, general, and administrative 218,870 182,771 434,902 363,124
Depreciation and amortization 19,745 15,660 38,322 30,644
Goodwill amortization 1,300 1,300 2,600 2,600
Preopening expenses 5,110 - 13,055 7,542
--------- --------- ----------- -----------
Operating income 80,279 56,846 149,553 106,136
Interest expense, net 6,488 5,201 11,620 10,260
--------- --------- ----------- -----------
Income before income taxes 73,791 51,645 137,933 95,876
Provision for income taxes 28,558 20,297 53,381 37,680
--------- --------- ----------- -----------
Net income $45,233 $31,348 $84,552 $58,196
========= ========= =========== ===========
Earnings per share:
Basic
Net income $0.28 $0.20 $0.52 $0.37
Average number of shares 162,823 158,022 161,630 157,944
Diluted
Net income $0.27 $0.19 $0.51 $0.36
Average number of shares 167,548 162,752 166,502 162,475
See accompanying Notes to Condensed Consolidated Financial Statements
4
KOHL'S CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock
------------------ Paid-In Retained
Shares Amount Capital Earnings Total
------- ------ -------- ---------- ----------
(In thousands)
Balance at January 30, 1999 158,395 $1,584 $504,275 $656,920 $1,162,779
Issuance of common shares 2,800 28 199,598 - 199,626
Exercise of stock options 1,688 17 14,708 - 14,725
Income tax benefit from stock options - - 42,365 - 42,365
Net income - - - 84,552 84,552
------- ----- ------- ------- ---------
Balance at July 31, 1999 162,883 $1,629 $760,946 $741,472 $1,504,047
======= ===== ======= ======= =========
See accompanying Notes to Condensed Consolidated Financial Statements
5
KOHL'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
6 Months 6 Months
(26 Weeks) (26 Weeks)
Ended Ended
July 31, 1999 August 1, 1998
----------------------------------------------
(In thousands)
Operating activities
Net income $84,552 $58,196
Adjustments to reconcile net income to net
cash provided by (used in) operating activities
Depreciation and amortization 41,051 33,344
Deferred income taxes 798 1,093
Other noncash charges 1,659 1,314
Changes in operating assets and liabilities:
Accounts receivable (124,301) 48,098
Merchandise inventories (136,602) (119,015)
Other current assets (1,961) 687
Accounts payable 73,918 89,148
Accrued and other long-term liabilities 5,648 (3,081)
Income taxes (36,671) (24,119)
---------------- -----------------
Net cash provided by (used in) operating activities (91,909) 85,665
Investing activities
Acquisition of property and equipment
and favorable lease rights, net (323,960) (110,390)
Proceeds from sale of assets 4,350 -
Purchase of short-term investments, net (32,017) (14,850)
Other (9,038) (6,824)
---------------- -----------------
Net cash used in investing activities (360,665) (132,064)
Financing activities
Net borrowings under credit facilities 1,300 2,000
Proceeds from debt offering, net 197,258 -
Net borrowings (repayments) of other long-term debt (758) 325
Payment of financing fees on debt (1,840) -
Net proceeds from issuance of common shares 256,716 2,447
---------------- -----------------
Net cash provided by financing activities 452,676 4,772
---------------- -----------------
Net increase (decrease) in cash and cash equivalents 102 (41,627)
Cash and cash equivalents at beginning of period 2,858 44,161
---------------- -----------------
Cash and cash equivalents at end of period $2,960 $2,534
================ =================
See accompanying Notes to Condensed Consolidated Financial Statements
6
KOHL'S CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for fiscal year end 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 financial statements and
footnotes thereto included in the Company's Form 10-K (Commission File No.
1-11084) filed with the Securities and Exchange Commission.
Shareholders' equity, share and per share amounts for all periods
presented have been adjusted for the 2 for 1 stock split declared by the
Company's Board of Directors on March 9, 1998, effected in the form of a stock
dividend.
Certain reclassifications have been made to prior years' financial
statements to conform to the fiscal 1999 presentation.
2. Merchandise Inventories
The Company uses the last-in, first out (LIFO) method of accounting for
merchandise inventory because it results in a better matching of cost and
revenues. The following information is provided to show the effects of the LIFO
provision on the quarter, as well as to provide users with information to
compare to other companies not on LIFO.
LIFO Expense 6 Months Ended
------------
Quarter July 31, 1999 August 1, 1998
------- ------------- --------------
(In Thousands)
First $1,363 $1,861
Second 1,409 1,896
----- -----
Total $2,772 $3,757
Inventories would have been $4,694,000, $1,921,000 and $8,540,000 higher
at July 31, 1999, January 30, 1999 and August 1, 1998, respectively if they had
been valued using the first-in, first-out (FIFO) method.
-7-
3. Contingencies
The Company is involved in various legal matters arising in the normal
course of business. In the opinion of management, the outcome of such
proceedings and litigation will not have a material adverse impact on the
Company's financial position or results of operations.
4. Net Income Per Share
The numerator for the calculation of basic and diluted net income per
share is net income. The denominator is summarized as follows (in thousands):
6 Months Ended
July 31, 1999 August 1, 1998
--------------------------------
Denominator for
basic earnings
per share -
weighted average
shares 161,630 157,944
Employee stock
options 4,872 4,531
------- -------
Denominator for
diluted earnings
per share 166,502 162,475
======= =======
-8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
---------------------------------------
FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
----------------------------------------------
THREE MONTHS AND SIX MONTHS ENDED July 31, 1999
-----------------------------------------------
Results of Operations
- ---------------------
At July 31, 1999, the Company operated 231 stores compared with 197 stores
at the same time last year. During the quarter, the Company successfully opened
five stores in the Denver, CO market. The Company opened nine stores on August
20th: six in the St. Louis, MO market, a store in Hickory, NC and additional
stores in the Richmond, VA and Washington, D.C. markets. In October, Kohl's
plans to open 17 stores: 11 in Dallas/Ft. Worth, TX market and additional stores
in the Harrisburg, PA; Chicago, IL; Lansing, MI; Minneapolis, MN; Grand Rapids,
MI and the Denver, CO markets. In November, the Company plans to open two
additional stores in the Dallas/Ft. Worth, TX market. To support the expansion
in the St. Louis, Denver and Dallas/Ft. Worth markets, the Company will open a
distribution center in Blue Springs, MO in December, 1999.
The Company plans to open 55-60 new stores in the year 2000. Approximately
38 are planned to open in the first half of the year: 33 stores in New York, New
Jersey, Connecticut and Maryland previously operated by Caldor and additional
stores in the Dallas/Ft. Worth, TX, St. Louis, MO and Rochester, MN markets.
Net sales increased $180.8 million or 23.8% to $939.5 million for the three
months ended July 31, 1999 from $758.7 million for the three months ended August
1, 1998. Of the increase, $114.0 million is attributable to the inclusion of 17
new stores opened in 1998 and 18 new stores opened in 1999. The remaining $66.8
million is attributable to comparable store sales growth of 8.8%.
Net sales increased $346.5 million or 23.0% to $1,849.8 million for the six
months ended July 31, 1999 from $1,503.3 million for the six months ended August
1, 1998. Of the increase, $207.9 million is attributable to the inclusion of 32
new stores opened in 1998 and 18 new stores opened in 1999. The remaining $138.6
million is attributable to comparable stores sales growth of 9.7%.
Gross margin for the three months ended July 31, 1999 was 34.6% compared to
33.8% for the three months ended August 1, 1998. Gross margin for the six months
ended July 31, 1999 was 34.5% compared to 33.9% for the six months ended August
1, 1998. These increases are primarily attributable to a change in merchandise
mix and improvements related to inventory management.
-9-
Effective January 30, 1999, the Company implemented SOP 98-5, "Reporting on
the Costs of Start-up Activities", which requires preopening costs to be
expensed as incurred. For new stores opened in March, April, and May, 1999,
approximately $1 million in preopening costs was expensed in fiscal 1998 and
$8.2 million was expensed during the six months ended July 31, 1999 for a
total average cost per store of $0.5 million. In addition, the Company incurred
$4.9 million in preopening costs for stores to be opened later in fiscal 1999.
The expenses relate to the cost associated with new store openings, including
advertising, hiring and training costs for new employees, and processing and
transporting initial merchandise.
Operating income for the three months ended July 31, 1999, increased $23.4
million or 41.2% over the three months ended August 1, 1998. Operating income
for the six months ended July 31, 1999 increased $43.4 million or 40.9% over the
six months ended August 1, 1998. Excluding pre-opening expenses, operating
income increased 43.0% for the six months ended July 31, 1999. These increases
resulted from the increased sales, improved gross margin and the Company's
ability to leverage its selling, general and administrative expenses as net
sales increased. Selling, general and administrative expenses declined to 23.3%
of net sales for the three months ended July 31, 1999 from 24.1% of net sales
for the three months ended August 1, 1998. Selling, general and administrative
expenses declined to 23.5% of net sales for the six months ended July 31, 1999
from 24.2% of the net sales for the six months ended August 1, 1998.
Net interest expense for the three months ended July 31, 1999 increased $1.3
million from the three months ended August 1, 1998. Net interest expense for the
six months ended July 31, 1999 increased $1.4 million from the six months ended
August 1, 1998. The increase was primarily attributed to the $200 million 7.25%
unsecured debentures issued in June 1999.
For the three months ended July 31, 1999 net income increased 44.3% to
$45.2 million from $31.3 million in the three months ended August 1, 1998.
Earnings were $.27 per diluted share for the three months ended July 31, 1999
compared to $.19 per diluted share for the three months ended August 1, 1998.
Net income for the six months ended July 31, 1999 increased 45.3% to $84.6
million or $.51 per diluted share from $58.2 million or $.36 per diluted share
in the six months ended August 1, 1998.
-10-
Seasonality & Inflation
- -----------------------
The Company's business, like that of most retailers, is subject to seasonal
influences, with the major portion of sales and income realized during the last
half of each fiscal year, which includes the back-to-school and holiday seasons.
Approximately 17% and 30% of sales occur during the back-to-school and holiday
seasons, respectively. Because of the seasonality of the Company's business,
results for any quarter are not necessarily indicative of the rsults that may be
achieved for a full fiscal year. In addition, quarterly results of operations
depend significantly upon the timing and amount of revenues and costs associated
with the opening of new stores.
The Company does not believe that inflation has had a material effect on the
results during the periods presented. However, there can be no assurance that
the Company's business will not be affected in the future.
Impact of Year 2000
- -------------------
The Company currently has a Year 2000 Readiness Plan implemented. Detailed
in the plan are compliance definitions and testing guidelines for in-house
developed applications and computer hardware platforms. The plan defines a
methodology for assessing in-house developed applications and provides a means
for documentation. Team members and their responsibilities are defined including
senior executives that participate on the Year 2000 steering committee. The plan
includes three phases to address the Year 2000 issue and a status of these key
milestones is summarized below:
Year 2000 Readiness Plan Phases Current Status
- ------------------------------- --------------
Assessment Complete
Remediation Complete
Verification
. Replacement code systems Complete
. Packaged financial systems October 1999 target completion date
. Non-IS system (including September 1999 target completion date
merchandise vendor EDI
transactions)
The phases of the Year 2000 Readiness Plan are defined below:
. The Assessment phase involved the inventory of all in-house developed
applications, purchased software and hardware, merchandise vendors, non-IT
systems, utilities and service providers. The Assessment phase also included
developing a plan for addressing each item and/or vendor to ensure Year 2000
compliance. This phase is complete.
-11-
. The Remediation phase involved implementing the changes required to reach
compliance and unit testing. This included correspondence with vendors that
have products or services that impact the Company's ability to continue
normal business operations. This phase is also complete.
. The Verification phase is system testing the changes in similar environments.
This includes testing with vendors and service provider organizations. The
Company has installed a Year 2000 test lab that is identical to the
production environment so that Year 2000 date simulation testing can be
performed without affecting production files. The Verification testing phase,
except for all packaged financial systems and non-IS systems, is complete.
The rollout of the packaged financial systems is approximately 75% complete
and will be finished by the end of October 1999. Even though the packaged
financial systems are identified Year 2000 compliant, the Company will be
conducting integrated testing in October 1999.
The Company has initiated formal communications with all significant
suppliers to determine the extent to which the Company's interface systems are
vulnerable to those parties' failure to remediate their own Year 2000 issues.
The Company is currently unit testing merchandise vendor EDI transactions and
non-IS systems and is over 90% complete. The Company continues to refine its
contingency plans and is enhancing and adding to the plans for each business
area. The Company has identified that it may experience certain inconveniences
or inefficiencies as a result of a supplier's failure to remediate its Year 2000
issues. The Company believes however, the vast majority of the Company's
business will proceed without any significant interruption.
The Company's total Year 2000 project costs and estimates to complete
include the impact of third party Year 2000 issues based on presently available
information. However, there can be no guarantee that the systems of other
companies on which the Company's systems rely will be timely converted and would
not have an adverse effect on the Company's systems.
The total cost of the Year 2000 project is estimated at $9 million and
is being funded through operating cash flows. Of the total project cost,
approximately $5 million is attributable to the purchase of new software and
hardware that will be capitalized. The remaining $4 million of programming and
testing costs will be expensed as incurred and is not expected to have a
material effect on the results of the operations. Of the capitalized portion,
approximately $4 million is for a new financial system. The new financial system
was a previously planned project that supports the Company's growth, provides
significant business enablement and
-12-
eliminates a substantial Year 2000 effort. To date, the Company has incurred
approximately $7.1 million ($2.6 million expensed and $4.5 million capitalized)
related to the assessment of, and preliminary efforts on, its Year 2000 project
and the development of a modification plan, purchase of new systems and systems
modifications.
The cost of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates.
However, there can be no guarantee that these estimates will be achieved and
actual results could differ materially from those anticipated. In addition to
the Company's reliance on certain third parties to remediate their own Year 2000
issues, specific factors that might cause such material differences include, but
are not limited to, the continued availability and cost of personnel trained in
this area and the ability to locate and correct all relevant computer codes.
Financial Condition and Liquidity
- ---------------------------------
The Company's primary ongoing cash requirements are for inventory
purchases, capital expenditures in connection with the Company's expansion and
remodeling programs and pre-opening expenses. The Company's primary sources of
funds for its business activities are cash flow from operations, sales of its
proprietary accounts receivable, borrowings under its revolving credit facility
and short-term trade credit. Short-term trade credit, in the form of extended
payment terms for inventory purchases or third party factor financing,
represents a significant source of financing for merchandise inventories. The
Company's working capital and inventory levels typically build throughout the
fall, peaking during the holiday selling season.
At July 31, 1999, the Company's merchandise inventories had increased
$136.6 million over the January 30, 1999 balance and $119.2 million over the
August 1, 1998 balance. These increases reflect the purchase of fall inventory
as well as inventory for new stores. The Company's working capital increased to
$807.5 million at July 31, 1999 from $559.2 million at January 30, 1999 and
increased from $510.5 million at August 1, 1998. Of the $297.0 million increase
from August 1, 1998, $203.5 million is attributable to higher credit card
receivables as the Company sold a lower percentage of receivables. The remaining
increase was primarily the result of higher merchandise inventory levels
required to support existing stores and incremental new stores locations offset
in part by increased accounts payable.
-13-
Cash used in operating activities was $91.9 million for the six months ended
July 31, 1999 compared to cash provided by operating activities of $85.7 million
for the six months ended August 1, 1998. Excluding changes in operating
assets and liabilities, cash provided by operating activities was $128.1 million
for the six months ended July 31, 1999 compared to $93.9 million for the six
months ended August 1, 1998.
In March 1999, the Company purchased the right to occupy 33 store locations
previously operated by Caldor Corporation for $142 million. The Company expects
these stores will be open for business in spring 2000. The Company expects to
invest approximately $165 million more to renovate and refixture the stores. To
fund the renovation and refixturing, the Company issued 2,800,000 shares of its
common stock to the public in March 1999 for net proceeds of approximately $200
million.
Capital expenditures, including the acquisition of the rights to occupy the
Caldor stores, for the six months ended July 31, 1999 were $324.0 million
compared to $110.4 million for the same period a year ago. The increase in
expenditures in 1999 is primarily attributable to the acquisition of the rights
to occupy the Caldor stores, the Company's new stores spending in the fiscal
1999 and the construction of a fourth distribution center.
Total capital expenditures for fiscal 1999 are currently expected to range
between $575-$600 million. This estimate includes the purchase of favorable
lease rights from Caldor Corporation and renovation and refixturing of the
properties. The actual amount of the Company's future annual capital
expenditures will depend primarily on the number of new stores opened, whether
such stores are owned or leased by the Company and the number of existing stores
remodeled or refurbished.
In June 1999, the Company issued $200 million redeemable 7.25% unsecured
debentures. The debentures mature on June 1, 2029. The proceeds will be used for
general corporate purposes and continued store growth.
The Company anticipates that it will be able to satisfy its current
operating needs, planned capital expenditures and debt service requirements with
current working capital, cash flows from operations, seasonal borrowings under
its $300 million revolving credit facility, short-term trade credit and other
sources of financing.
-14-
Information in this document contains "foward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995, such as
statements relating to debt service requirements and planned capital
expenditures. Foward-looking statements can be identified by the use of foward-
looking terminology such as "believes", "expects", "may", "will", "should" or
"anticipates" or the negative thereof or other variations theron. No assurance
can be given that the future results covered by the foward-looking statements
will be achieved.
-15-
Item 6. Exhibits and Reports on Form 8-K
a) Exhibits
3.1 Articles of Incorporation, as amended
4.1 First Supplemental Indenture dated as of
June 1, 1999 to Indenture dated as of
December 1, 1995, between Kohl's Corporation
and the Bank of New York, a trustee, incorporated
herein by reference to Exhibit 4.2 of the Company's
Registration Statement on Form S-4 (Reg. No. 333-83031)
12.1 Statement regarding calculation of ratio
of earnings to fixed charges.
27.1 Financial Data Schedule - Article 5 of Regulation S-X,
six months ended July 31, 1999
27.2 Financial Data Schedule - Article 5 of Regulation S-X, six
months ended August 1, 1998 (restated)
b) Reports on Form 8-K
There were no reports on Form 8-K filed for three months ended
July 31, 1999
-16-
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed in its behalf by the
undersigned thereunto duly authorized.
Kohl's Corporation
(Registrant)
Date: September 14, 1999 /s/ R. Lawrence Montgomery
-----------------------------
R. Lawrence Montgomery
Vice Chairman--
Chief Executive Officer
Date: September 14, 1999 /s/ Arlene Meier
-----------------------------
Arlene Meier
Executive Vice President - Finance
Chief Financial Officer
-17-