Kohl’s Corporation — Form 10-Q Summary
Period and context: The filing covers the 13 weeks and 26 weeks ended August 4, 2018, compared with the periods ended July 29, 2017. The request metadata says 2017 Q2, but the filing itself is for 2018 Q2. Kohl’s operated 1,158 department stores, a website, 12 FILA outlets, and four Off-Aisle clearance centers.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Total revenue | $4.570B | $4.395B | $8.778B | $8.460B |
| Net sales | $4.310B | $4.147B | $8.263B | $7.962B |
| Operating income | $452M | $407M | $662M | $591M |
| Net income | $292M | $208M | $368M | $274M |
| Diluted EPS | $1.76 | $1.24 | $2.21 | $1.62 |
| Operating cash flow | Not separately reported | Not separately reported | $1.047B | $376M |
- Sales and comparable sales: Net sales rose 3.9% in Q2 and 3.8% year to date. On a shifted basis, comparable sales increased 3.1% for Q2 and 1.8% year to date; on the fiscal comparison basis, they increased 4.3% and 4.0%, respectively. The differing comparisons reflect the 53rd week in 2017.
- Margins and expenses: Gross margin was 39.5% of net sales in Q2, up 42 basis points, and 38.3% year to date, up 46 basis points. SG&A was 27.8% of total revenue in Q2, deleveraging 9 basis points; year-to-date SG&A was 28.8%, deleveraging 7 basis points.
- Cash flow and investment: First-half investing cash outflow was $306M, including $312M of property and equipment spending. Operating cash flow increased $671M year over year, primarily due to changes in accounts payable. Cash declined $242M during the first half to $1.066B.
- Debt and liquidity: Long-term debt on the balance sheet was $2.273B at August 4, down from $2.797B at February 3, 2018. Kohl’s repurchased or redeemed $528M of debt and recorded a $42M extinguishment loss. Working capital was $2.272B; the current ratio was 1.82; debt to capitalization was 41.7%. The company reported compliance with all debt covenants.
- Capital returns: First-half dividends were $202M ($1.22 per share) and treasury-stock purchases were $165M. The board declared a subsequent quarterly dividend of $0.61 per share, payable September 26, 2018.
Material changes versus the prior comparable period
- Q2 net income increased about 40% and diluted EPS rose 42%, alongside higher sales and gross margin. First-half net income benefited from lower income-tax expense, primarily due to tax reform.
- First-half GAAP results included the $42M debt-extinguishment loss. Excluding it, management reported non-GAAP adjusted first-half diluted EPS of $2.40 versus $1.62 a year earlier.
- Interest expense declined $10M in Q2 and $15M year to date, reflecting debt reduction and higher interest income.
- Inventory per store decreased 8% year over year; accounts payable as a percentage of inventory increased 375 basis points to 39.3%.
Outlook, commentary, and risks
- Management highlighted positive comparable sales, improved gross margin, lower inventory per store, and 42% Q2 diluted-EPS growth. It did not provide specific full-year sales or earnings guidance in the supplied filing text.
- Management attributed gross-margin improvement to inventory management, fewer permanent and promotional markdowns, and shipping-cost efficiencies. Technology investment increased SG&A; executive leadership changes contributed to year-to-date corporate expense deleverage.
- Retail results are seasonal, with a larger share of sales and income typically in the second half; management cautioned that interim results are not necessarily indicative of full-year results.
- The new lease accounting standard, effective Q1 2019, is expected to materially increase reported balance-sheet assets and liabilities; income-statement effects were still under evaluation. Management reported no significant risk-factor changes from its 2017 Form 10-K.
- Management believed outstanding legal proceedings would not materially adversely affect the financial statements. The company reported effective disclosure controls and no significant change in market risks.
Important facts for investors to verify
- Confirm the period: this filing is for Q2 2018, not Q2 2017.
- Assess comparable-sales trends using the shifted basis as well as the fiscal basis, and account for the 53rd-week comparison.
- Review the sustainability of margin gains, inventory reductions, and the substantial year-over-year increase in operating cash flow, particularly the role of accounts payable.
- Track debt-reduction effects, ongoing share repurchases and dividends, and the company’s liquidity through the seasonal inventory build.
- Monitor implementation of lease accounting and any finalized tax-reform adjustments; the filing says subsequent tax adjustments were not expected to be material.