Business context and reporting period
Kohl’s Corporation operates department stores and e-commerce, selling apparel, footwear, accessories, beauty and home products. This filing reports the quarter and nine months ended October 28, 2017. The request metadata says 2016 Q3, but the filing itself is for 2017 Q3.
- At quarter-end, Kohl’s operated 1,156 department stores, 12 FILA outlets and four Off-Aisle clearance centers, in addition to Kohls.com.
- The business is seasonal, with a significant portion of annual sales and income typically generated in the second half, particularly during the holiday season.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $4,332 million | $4,327 million | $12,319 million | $12,481 million |
| Gross margin | $1,595 million; 36.8% | $1,607 million; 37.1% | $4,626 million; 37.6% | $4,669 million; 37.4% |
| Operating income | $257 million | $301 million | $849 million | $709 million |
| Net income | $117 million | $146 million | $391 million | $303 million |
| Diluted EPS | $0.70 | $0.83 | $2.32 | $1.68 |
| Cash from operations | Not provided for quarter | Not provided for quarter | $869 million | $1,284 million |
| Free cash flow (non-GAAP) | Not provided for quarter | Not provided for quarter | $221 million | $603 million |
- Quarter comparable sales increased 0.1%; year-to-date comparable sales declined 1.0%. Year-to-date net sales fell 1.3%.
- Quarter gross margin contracted 30 basis points; year-to-date gross margin expanded 15 basis points. Management cited improved markdowns and inventory management, offset by higher shipping costs; Q3 also included higher loyalty-reward and sales-return reserves.
- Quarter SG&A increased $15 million to $1,095 million and rose to 25.3% of sales from 25.0%. Year-to-date SG&A declined $21 million but increased to 24.8% of sales from 24.6%.
- At October 28, cash was $736 million, working capital $2,195 million and the current ratio 1.63. Long-term debt was $2,796 million; capital lease and financing obligations totaled $1,753 million, including current obligations.
- Year-to-date operating cash flow declined $415 million, mainly due to inventory and payment timing. Capital expenditures were $547 million. Cash used for share repurchases was $288 million and dividends paid were $277 million ($1.65 per share).
- Debt-to-capitalization was 47.5%. Kohl’s reported compliance with debt covenants; its covenant debt ratio was 2.63 against a maximum of 3.75.
Changes, outlook and notable items
- Q3 sales were nearly flat year over year, while net income fell to $117 million from $146 million. Q3 2016 included a $6 million reversal of impairment and store-closing costs; excluding those costs, prior-year adjusted diluted EPS was $0.80 versus $0.70 in Q3 2017.
- For the first nine months, net income rose to $391 million from $303 million, while adjusted diluted EPS was $2.32 versus $2.33. The prior-year period included $186 million of impairment, store-closing and other costs.
- Management described sales conditions as improved but still challenging. Transactions remained below the prior year, though Q3 trends improved; higher average transaction value partly offset fewer transactions. Technology costs increased with cloud migration and digital and holiday-capacity investments; distribution costs rose with the opening of a fifth e-commerce fulfillment center.
- The filing provides no specific earnings or sales guidance. Management said it expected to remain in covenant compliance for the rest of fiscal 2017. The board declared a $0.55-per-share dividend payable December 20, 2017.
- A November 3, 2017 settlement of a state tax dispute concerning fiscal 2004–2012 is expected to produce a $30 million pre-tax benefit in the quarter ending February 3, 2018. The same day, the company amended its $1.0 billion, five-year unsecured revolving credit facility, retaining a maximum leverage covenant consistent with the prior agreement.
- Management considers pending legal matters unlikely to have a material adverse financial impact. It reported no significant changes to previously disclosed risk factors or market risks. The upcoming lease accounting standard is expected to materially increase balance-sheet assets and liabilities; income-statement effects remain under evaluation.
- Adoption of share-based payment accounting rules added $8 million of tax expense year to date and may cause future effective-tax-rate volatility. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Important facts for investors to verify
- Confirm the reporting period: the supplied filing is for Q3 2017, not Q3 2016.
- Track comparable sales and transaction trends, including the effect of the company’s revised comparable-sales definition.
- Monitor gross margin, shipping costs, sales-return and loyalty reserves, and SG&A leverage.
- Assess holiday-season inventory, operating cash generation and free cash flow, given the seasonal working-capital build and year-to-date cash-flow decline.
- Review the anticipated $30 million tax-settlement benefit and the effects of new revenue and lease accounting standards.