Business context and reporting period
Kohl’s Corporation filed this Form 10-Q for the 13 weeks and 26 weeks ended August 3, 2019, compared with periods ended August 4, 2018. The request metadata says “2018 Q2,” but the filing is for fiscal 2019 Q2. Kohl’s operated 1,155 department stores, Kohls.com and 12 FILA outlets. Results are seasonal; management says the second half typically generates most annual sales and income.
Financial results
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $4.430B | $4.570B | $8.517B | $8.778B |
| Net sales | $4.169B | $4.310B | $7.990B | $8.263B |
| Operating income | $376M | $452M | $494M | $662M |
| Net income | $241M | $292M | $303M | $368M |
| Diluted EPS | $1.51 | $1.76 | $1.89 | $2.21 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $676M | $1.047B |
Q2 comparable sales fell 2.9%; first-half comparable sales fell 3.2%. Digital sales grew in the mid-teens in Q2 and low double digits year to date. Gross margin was 38.8% of net sales in Q2, down 72 basis points, and 37.9% year to date, down 41 basis points. SG&A was $1.269B in Q2, down 0.2% in dollars but up 81 basis points as a share of revenue; first-half SG&A rose 0.5% and deleveraged 102 basis points.
Liquidity, debt and cash flow
At August 3, 2019, cash and equivalents were $625M, working capital was $1.838B and the current ratio was 1.65. Long-term debt was $1.855B. The company also reported $2.805B of operating lease liabilities, $836M of finance lease liabilities and $553M of financing obligations; these should be distinguished from conventional long-term debt. Kohl’s had no borrowings outstanding on its $1.0B revolving credit facility, extended in July 2019 to mature in July 2024, and reported compliance with debt covenants.
First-half operating cash flow was $676M, down $371M year over year, primarily due to increased inventory purchases and changes in operating liabilities. Capital expenditures were $439M, including investment in e-commerce fulfillment centers. Cash used in financing was $546M, including $254M in share repurchases and $214M in dividends; cash ended the period at $625M. The board declared a $0.67-per-share dividend payable September 25, 2019.
Material changes, outlook and risks
- Revenue declined about 3% year over year in both Q2 and the first half. Q2 net income fell about 17%, and diluted EPS fell 14%; adjusted diluted EPS was $1.55 versus $1.76, a 12% decline.
- Management attributed gross-margin pressure to higher digital shipping costs and Q2 pricing and promotions; first-half margin also reflected an unfavorable shift between regular and clearance sales.
- Q2 included $7M of costs related to closing four Off-Aisle clearance centers and a voluntary role reduction. First-quarter 2019 included $49M of lease-asset impairment charges tied to four store closures. First-half 2018 included a $42M debt-extinguishment loss.
- Kohl’s adopted ASC 842 lease accounting in February 2019 without restating prior periods, adding substantial lease assets and liabilities to the balance sheet. Management did not expect a material prospective net-income impact.
- On April 18, 2019, Kohl’s issued Amazon-affiliate warrants for up to 1,747,441 shares at $69.68 in connection with a commercial agreement. Warrants vest in five annual installments beginning January 2020 and are subject to agreement-related conditions.
- No specific earnings or sales guidance is stated in the supplied filing text. Management cited economic conditions, wages, food, fuel and energy prices, and merchandise-sourcing costs including tariffs as potential business pressures. It said there were no significant changes to previously disclosed risk factors or market risks.
- The company implemented a new ERP system on August 4, 2019; management expects it to improve processes, and it will be a significant component of internal financial reporting controls. Management concluded disclosure controls were effective and reported no material control changes during Q2.
Important facts for investors to verify
- Whether comparable-sales trends and digital growth persist, and how pricing, promotions and shipping costs affect gross margin.
- Cash generation, inventory levels and capital spending, given the year-over-year decline in operating cash flow.
- The effect of lease accounting on comparisons, leverage measures and future cash commitments; reported future operating and finance lease payments total $7.243B before interest.
- Potential dilution and commercial-agreement conditions associated with the Amazon warrants.
- Execution and control implications of the new ERP system, and the realization of benefits from fulfillment-center investments.