Kohl’s Corporation — Form 10-Q Summary
Period clarification: The request metadata says 2012 Q3, but the filing is for the 13-week quarter and 39 weeks ended November 2, 2013, compared with periods ended October 27, 2012.
Business context
Kohl’s operated 1,158 department stores and Kohls.com, selling apparel, footwear, accessories, home products and housewares. The company reports one business segment. Results are seasonal, with a substantial portion of annual sales typically occurring in the holiday season.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $4.444 billion, down 1.0% | $12.932 billion, essentially flat |
| Comparable sales | Down 1.6% | Down 0.9% |
| Gross margin | 37.5%, down 64 basis points | 37.7%, down 4 basis points |
| Operating income | $365 million, versus $425 million | $1.133 billion, versus $1.203 billion |
| Net income | $177 million, versus $215 million | $555 million, versus $609 million |
| Diluted EPS | $0.81, versus $0.91 | $2.51, versus $2.54 |
| Net cash from operations | Not provided for the quarter | $1.014 billion, versus $703 million |
| Free cash flow | Not provided for the quarter | $462 million, versus negative $18 million |
Quarterly merchandise margin fell primarily because of higher markdowns; increased e-commerce sales also weighed on gross margin through shipping costs and promotions. Selling, general and administrative expense was $1.073 billion for the quarter and $3.071 billion year to date. Depreciation and amortization increased to $228 million for the quarter and $665 million year to date, primarily due to technology investment. Net interest expense rose to $84 million and $251 million, respectively.
Balance sheet and liquidity
- At November 2, 2013, cash was $598 million and inventory was $4.959 billion. Current assets were $5.987 billion and current liabilities $3.641 billion; working capital was $2.346 billion and the current ratio was 1.64.
- Long-term debt was $2.792 billion. Capital lease and financing obligations totaled $2.091 billion, including the current portion. The company issued $300 million of 4.75% notes due 2023 in September 2013.
- Debt-to-capitalization was 45.2%, compared with 42.9% a year earlier. The company reported compliance with debt covenants; its debt ratio was 2.31 against a maximum permitted 3.75.
- Operating cash flow improved by $311 million year over year. Lower capital spending contributed to investing cash outflow declining to $451 million. Financing activities used $502 million, including $562 million of share repurchases and $229 million of dividends.
Material changes and management commentary
- Store comparable sales declined 2.8% for the quarter, while e-commerce comparable sales grew 14.9%. E-commerce revenue was $339 million for the quarter and $970 million year to date; growth slowed after a platform replacement in the second quarter.
- Lower selling prices reflected a greater share of clearance sales and somewhat deeper discounts. More units per transaction partly offset the decline, but store transactions fell.
- Management said inventory levels and composition were appropriate entering the fourth quarter. Inventory excluding e-commerce was down 1% versus the prior-year quarter-end, or 5% on a shifted-period, per-store basis.
- The company expanded its loyalty-program pilot and continued beauty-department renovations; management reported encouraging initial sales results in those tests. It also cited continued investment in its omni-channel experience and technology.
Outlook, risks and unusual items
- Management expected e-commerce growth to re-accelerate in the fourth quarter. It planned approximately 10 new stores and 35–50 remodels in 2014; substantially all planned new stores were expected to be small-format.
- Fiscal 2013 capital expenditures were expected to be approximately $725 million. The filing does not provide clear full-year sales or earnings guidance.
- Risks highlighted include seasonality, economic conditions, competition and execution of sales, loyalty, store-remodel and omni-channel initiatives. The filing reported no significant change in risk factors or market risks from the 2012 Form 10-K.
- Management said pending legal proceedings were not expected to have a material adverse effect. The filing reported no material changes in contractual obligations other than the new $300 million debt issuance, and no off-balance-sheet arrangements likely to materially affect liquidity.
- Long-term investments included auction-rate securities valued at $57 million using Level 3 inputs. Their valuation relied on assumptions including a seven-year redemption period and a 7.64% weighted-average discount rate; some securities may not be recoverable until maturity in 2037–2039.
- The board declared a $0.35-per-share quarterly dividend on November 13, 2013, payable December 24, 2013.
Most important facts to verify
- Confirm the reporting-period discrepancy in the request metadata: this filing covers Q3 2013, not Q3 2012.
- Track holiday-quarter comparable sales, markdown levels and whether e-commerce growth re-accelerated as management expected.
- Assess the durability of operating cash flow and free cash flow, including the effects of seasonal inventory and reduced capital spending.
- Monitor leverage, interest costs, share repurchases and liquidity against planned investment and seasonal cash needs.
- Review the assumptions and recoverability of the Level 3 auction-rate securities.