Kohl’s Corporation — Form 10-Q
Period clarification: The filing is for the quarter and nine months ended November 3, 2018 (third quarter of fiscal 2018), not 2017 Q3 as indicated in the request metadata. Comparative 2017 figures are adjusted for the adoption of ASC 606 where noted.
Business context and reporting period
Kohl’s operated 1,159 department stores, its website, 12 FILA outlets, and four Off-Aisle clearance centers. The company reports as one business unit and notes that its retail business is seasonal, with a significant portion of sales and income typically generated in the second half of the fiscal year.
Key financial results
| Metric | Three months ended Nov. 3, 2018 | Nine months ended Nov. 3, 2018 |
|---|---|---|
| Total revenue | $4.628 billion, up 1.3% | $13.406 billion, up 2.9% |
| Net sales | $4.369 billion, up 1.3% | $12.632 billion, up 2.9% |
| Operating income | $258 million | $920 million |
| Net income | $161 million, versus $117 million | $529 million, versus $391 million |
| Diluted EPS | $0.98, versus $0.70 | $3.19, versus $2.32 |
| Gross margin on net sales | 37.0%, up 25 basis points | 37.8%, up 39 basis points |
| SG&A as a percentage of total revenue | 29.7%, up 37 basis points | 29.1%, up 17 basis points |
| Cash from operations | $1.423 billion for nine months, versus $869 million | |
| Capital expenditures | $458 million for nine months, versus $547 million |
At November 3, 2018, cash was $1.047 billion, inventory $4.844 billion, working capital $2.330 billion, and the current ratio 1.58. Long-term debt was $2.272 billion; capital lease and financing obligations totaled $1.649 billion, including the current portion. Debt/capitalization was 41.8%, compared with 47.5% a year earlier.
Material changes and management commentary
- Shifted comparable sales increased 2.5% in the quarter and 2.1% year to date; on a fiscal-period basis, they increased 1.0% and 2.9%, respectively. Management attributed comparable-sales gains chiefly to higher average transaction value; quarterly transactions also improved.
- Gross-margin improvement reflected fewer permanent and promotional markdowns, which management linked to inventory-management initiatives. All merchandise categories except Accessories had comparable-sales increases; Men’s and Children’s led quarterly performance.
- SG&A increased $35 million in the quarter and $133 million year to date. Management cited higher corporate and technology costs, including planned technology investment; marketing costs declined.
- Year-to-date operating cash flow improved, primarily reflecting accounts-payable and inventory changes and timing effects from fiscal 2017’s 53rd week. Inventory and accounts payable were higher at the November seasonal reporting date.
- Kohl’s reduced debt by $530 million year to date, including a $500 million tender offer, and recorded a one-time $42 million debt-extinguishment loss. Lower debt and higher interest income reduced net interest expense.
- The effective tax rate fell to 17.6% for the quarter and 22.3% year to date; management attributed the decline primarily to tax reform and favorable audit results.
Outlook, risks, and unusual items
- The filing provides no specific forward financial guidance. Management expects seasonal patterns to continue and identifies economic conditions, food, fuel and energy prices, higher wages, and merchandise-sourcing costs as factors that could affect results.
- Management said it may pursue further debt repurchases, depending on market conditions, liquidity needs, contractual restrictions, and other factors. Share repurchases are discretionary.
- The forthcoming lease-accounting standard was expected to have a material balance-sheet impact, including recognition of right-of-use assets and lease liabilities; its income-statement effects were still under evaluation.
- The company reported no significant changes to previously disclosed risk factors or market risks. It was in compliance with debt covenants and expected to remain so through the rest of fiscal 2018.
- Management did not expect ongoing legal proceedings and claims to have a material adverse effect on the consolidated financial statements. The store-closure and restructuring reserve was $74 million at period end.
- Disclosure controls were judged effective at a reasonable assurance level; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2018 Q3, despite the request’s 2017 Q3 label.
- Review holiday-season sales, inventory levels, and working-capital needs, given the company’s seasonality and the November reporting-date inventory build.
- Track comparable-sales momentum and whether margin gains from reduced markdowns persist alongside SG&A deleverage.
- Assess cash generation and capital allocation, including dividends, discretionary share repurchases, and any additional debt reduction.
- Monitor the quantified balance-sheet effects and implementation of the new lease-accounting standard.