Kohl’s Corporation — Form 10-Q Summary
Period: The filing covers the 13 and 26 weeks ended August 1, 2015, not 2014 Q2 as indicated in the request metadata. Unless noted otherwise, amounts are in millions.
Business context and performance
Kohl’s operated 1,164 department stores and kohls.com. The filing describes a single business unit and highlights its “Greatness Agenda,” including national-brand growth, digital improvements, personalization, and localized assortments.
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $4,267 | $4,242 | $8,390 | $8,312 |
| Comparable sales growth | 0.1% | — | 0.8% | — |
| Gross margin | $1,662 | $1,654 | $3,184 | $3,150 |
| Gross margin rate | 38.9% | 39.0% | 38.0% | 37.9% |
| Operating income | $424 | $451 | $704 | $731 |
| Net income | $130 | $232 | $257 | $357 |
| Diluted EPS | $0.66 | $1.13 | $1.29 | $1.73 |
Financial condition, cash flow and debt
- First-half operating cash flow was $353, down from $730 in the prior-year period. Capital expenditures were $377; free cash flow, as defined by the company, was negative $78 versus positive $298.
- Cash was $934 at August 1, 2015, versus $1,407 at fiscal year-end and $746 a year earlier. Inventory was $4,252, up $353 year over year; management cited lower-than-expected sales and early receipt of fall merchandise.
- Working capital was $2,448 and the current ratio was 1.77, compared with $2,393 and 1.88 a year earlier. Management attributed the lower current ratio primarily to higher inventory.
- Long-term debt on the balance sheet was $2,791, with $317 classified as current; capital lease and financing obligations totaled $1,938. Debt/capitalization was 47.1%, or 45.4% excluding the $318 of short-term debt settled in August. The company was in compliance with covenants; its debt ratio was 2.50 against a 3.75 maximum.
- Financing activity included issuing $650 of 4.25% notes due 2025 and $450 of 5.55% notes due 2045, tendering $767 of debt, and redeeming $318 of 6.25% notes due 2017 in August. Kohl’s also entered a $1.0 billion, five-year unsecured revolving credit facility.
- First-half share repurchases were $543 and dividends paid were $178 ($0.90 per share). The board declared a further $0.45 quarterly dividend payable September 23, 2015.
Changes, outlook and risks
- Sales rose modestly, but operating income and earnings declined. Excluding the $131 debt-extinguishment loss, management reported quarterly net income of $211, down 9%, and diluted EPS of $1.07, down 5%; first-half adjusted net income was $340, down 5%, and diluted EPS was $1.70, down 2%.
- Q2 SG&A increased 2% to $1,005 and rose to 23.6% of sales from 23.1%; first-half SG&A was $2,021, up 2%. Higher store payroll, repairs and maintenance, IT investment, and incentive compensation contributed. Higher credit-card revenues partly offset costs.
- Merchandise margin improved, but higher online shipping costs offset the benefit. Q2 transactions fell 1.2%; management said timing of tax-free events partly affected the quarter. Higher selling prices per unit were accompanied by fewer units per transaction.
- The $131 Q2 debt-extinguishment loss included a $126 tender premium and $5 of non-cash write-offs. The August redemption incurred an additional $37 make-whole premium and $1 non-cash write-off, expected to be expensed in Q3.
- Management highlighted BOPUS availability at all stores, with mobile and tablet capabilities expected in Q3, and expected the service to contribute to digital sales and store traffic in the holiday season. The company expected to launch Stride Rite footwear in early 2016 and to localize all departments by the end of 2016. No quantified earnings or sales guidance is provided in the filing.
- Results are seasonal, with the majority of sales and income generally in the second half. Management reported no significant change in previously disclosed risk factors or market risks. It considered pending legal proceedings not likely to have a material adverse financial impact.
Investor verification points
- Verify the period mismatch: the supplied request says 2014 Q2, while this filing reports the quarter ended August 1, 2015.
- Assess whether modest comparable-sales growth and transaction trends improve, and whether inventory levels normalize after the seasonal build.
- Track gross-margin effects from merchandise margin improvements versus shipping costs, and SG&A leverage as sales develop.
- Review operating cash flow and free cash flow, including cash needs from inventory, capital expenditures, buybacks and dividends.
- Confirm the effects of debt refinancing, the Q3 redemption premium, and covenant compliance in subsequent filings.