Kohl’s Corporation — Form 10-Q Summary
Reporting period: 13 weeks ended May 4, 2019. The filing covers first-quarter 2019, compared with the quarter ended May 5, 2018; this differs from the request metadata’s “2018 Q1.” Amounts are in U.S. dollars unless noted.
Business context
Kohl’s operated 1,155 department stores, its website, 12 FILA outlets and four Off-Aisle clearance centers. The company reports as one business unit and notes that results are seasonal, with a substantial portion of sales and income typically occurring in the second half of the fiscal year.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $3.821 billion | $3.953 billion | Down 3.3%; comparable sales down 3.4% |
| Other revenue | $266 million | $255 million | Up $11 million, primarily from credit revenue |
| Total revenue | $4.087 billion | $4.208 billion | Down $121 million |
| Gross margin | $1.406 billion; 36.8% of net sales | $1.457 billion; 36.9% | Down 6 basis points |
| SG&A | $1.275 billion; 31.2% of total revenue | $1.259 billion; 29.9% | Expense up $16 million; deleveraged 126 basis points |
| Operating income | $118 million | $210 million | Down $92 million |
| Net income | $62 million | $75 million | Down $13 million |
| Diluted EPS | $0.38 | $0.45 | Down 16% as reported |
| Adjusted diluted EPS | $0.61 | $0.64 | Down 5%; non-GAAP measure |
| Cash from operations | $136 million | $387 million | Down $251 million |
| Capital expenditures | $238 million | $133 million | Increase primarily reflected investment in e-commerce fulfillment centers |
Balance sheet, debt and liquidity
- Cash and cash equivalents were $543 million at May 4, 2019, versus $934 million at February 2, 2019 and $822 million a year earlier.
- Long-term debt was $1.855 billion, compared with $2.301 billion a year earlier. The company repurchased $6 million of debt during the quarter.
- Working capital was $1.843 billion and the current ratio was 1.66, versus $2.153 billion and 1.76 a year earlier. Kohl’s attributed the decline partly to lower cash and the new lease-accounting presentation.
- Cash used in financing was $289 million, including $121 million of treasury-stock purchases and $108 million of dividends. The quarterly dividend was $0.67 per share.
- Adoption of ASC 842 added operating lease assets and liabilities to the balance sheet. At quarter-end, operating lease liabilities were $2.838 billion and finance lease liabilities were $791 million. Prior-period financial statements were not restated, so balance-sheet comparisons are affected by the accounting change.
- Standard & Poor’s upgraded Kohl’s long-term debt rating from BBB- to BBB during the quarter. The company said it complied with all debt covenants and expected to remain in compliance for the rest of fiscal 2019.
Material changes and management commentary
- Comparable sales fell mainly because of fewer transactions. Children’s, Men’s and Women’s outperformed the company average; Home and Footwear underperformed. The Midwest and Mid-Atlantic were the strongest regions.
- Management attributed lower gross margin primarily to an unfavorable product mix between spring and fall goods and higher digital-sales penetration.
- SG&A increased mainly because of marketing investment intended to support long-term market-share gains.
- Quarterly results included $49 million of impairment, store-closing and other costs, including lease-asset impairment charges related to the announced closure of four stores. The prior-year quarter included a $42 million debt-extinguishment loss related to a $500 million cash tender offer.
- The income-tax provision was $4 million versus $22 million; the effective tax rate was 6.3% versus 22.8%. Kohl’s cited a favorable state tax settlement and the timing of deductions.
- ASC 842 adoption increased reported assets and liabilities and resulted in a cumulative retained-earnings adjustment. Management did not expect a material prospective effect on net income, describing expected income-statement classification changes as largely offsetting.
Outlook, risks and contingencies
The filing provides no specific sales, earnings or capital-spending guidance. Management cautioned that quarterly results are not necessarily indicative of full-year results because of seasonality. It also cited exposure to general economic conditions, wages, energy and sourcing costs. The company reported no significant changes to the risk factors or market risks described in its 2018 Form 10-K. Management said pending legal proceedings were not expected to have a material adverse effect. The filing also states that no financial guarantees or material off-balance-sheet entities or arrangements were in place.
On April 18, 2019, Kohl’s issued an Amazon affiliate warrants to purchase up to 1,747,441 shares at $69.68. The warrants vest in five annual installments beginning January 15, 2020, and unvested warrants generally will not vest if the commercial agreement ends or is not renewed without a substitute written returns arrangement.
Most important facts for investors to verify
- Confirm the intended period: this filing is for Q1 2019, not Q1 2018.
- Review the drivers and sustainability of the 3.4% comparable-sales decline and the deterioration in operating income.
- Assess the cash-flow decline, capital-spending increase and cash uses for buybacks and dividends against liquidity needs.
- Separate the effects of ASC 842 adoption from underlying year-over-year balance-sheet and expense trends.
- Review the four-store closure charges and the terms, vesting conditions and potential dilution from the Amazon-affiliate warrants.