Kohl’s Corporation — Form 10-Q Summary
Period clarification: The request identifies 2011 Q3, but the filing is for the 13-week quarter and 39 weeks ended October 27, 2012, compared with October 29, 2011.
Business context and reporting period
Kohl’s operates as a single business unit in retail. Results are seasonal, with a significant portion of annual sales typically occurring in the holiday season. At October 27, 2012, the company operated 1,146 stores, versus 1,127 a year earlier.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net sales | $4.490 billion | $4.376 billion | $12.937 billion | $12.786 billion |
| Gross margin | $1.712 billion; 38.1% | $1.688 billion; 38.6% | $4.878 billion; 37.7% | $5.002 billion; 39.1% |
| Operating income | $425 million | $415 million | $1.203 billion | $1.353 billion |
| Net income | $215 million | $211 million | $609 million | $711 million |
| Diluted EPS | $0.91 | $0.80 | $2.54 | $2.56 |
| Interest expense, net | $80 million | $75 million | $243 million | $223 million |
- Quarterly sales increased 2.6%; comparable sales rose 1.1%. E-commerce sales grew 49.6% to $295 million. Year-to-date sales increased 1.2%, while comparable sales declined 0.5%; e-commerce grew 41.0% to $782 million.
- Quarterly SG&A was $1.077 billion, or 24.0% of sales, versus 24.5% a year earlier. Nine-month SG&A was $3.055 billion, or 23.6% of sales, versus 24.0%.
- Operating cash flow for the first nine months was $703 million, down from $1.096 billion. Capital expenditures were $641 million; free cash flow, a company-defined non-GAAP measure, was negative $18 million versus positive $284 million.
- Cash and cash equivalents were $550 million at October 27, 2012, versus $760 million a year earlier. Inventory was $4.818 billion, up from $4.130 billion. Working capital was $2.102 billion and the current ratio was 1.57:1.
- Long-term debt was $2.492 billion; capital lease and financing obligations totaled $2.086 billion, including current obligations. The company issued $350 million of 3.25% notes due 2023 in September. Debt-to-capitalization was 42.8%, versus 39.6% a year earlier. Kohl’s reported compliance with debt covenants.
- Nine-month treasury stock purchases were $883 million and dividends paid were $227 million. Cash declined $655 million over the period.
Material changes versus prior comparable periods
- Quarterly net income increased 1.9%, while diluted EPS increased to $0.91 from $0.80, supported in part by fewer weighted-average shares. For the first nine months, net income fell 14.3% and diluted EPS decreased slightly.
- Gross margin fell 44 basis points in Q3 and 142 basis points year to date. Management attributed the decline mainly to store merchandise margin pressure from apparel costs, partly offset by pricing; e-commerce shipping losses also weighed on the rate.
- Year-to-date operating income declined 11%. Higher depreciation and interest expense contributed, with interest expense increases primarily related to debt issued in October 2011.
- Operating cash flow was lower mainly because of higher inventory purchases. Management said inventory had been increased toward more normalized levels; inventory excluding e-commerce was 13% higher per store than a year earlier.
- Share repurchases reduced the share count and equity. In November, the board increased the remaining repurchase authorization by $3.2 billion, to $3.5 billion.
Outlook, commentary, risks, and unusual items
- No specific earnings or sales guidance is provided in the supplied filing text. Kohl’s expected approximately $800 million of capital spending for fiscal 2012, planned 12 store openings and 30 remodels in 2013, and expected to resume a normalized pace of about 100 remodels annually in 2014, subject to results of tests in home and beauty areas.
- Management cited lower transactions and units per transaction as factors in year-to-date comparable-sales weakness, including insufficient inventory earlier in the year. It also noted apparel-cost pressures and the lower gross margin of e-commerce relative to stores.
- The company stated that legal proceedings arising in the ordinary course were not expected to materially adversely affect its financial statements. It reported no significant changes to previously disclosed risk factors, market risks, contractual obligations, or critical accounting estimates.
- Auction-rate securities had a par value of $124 million and estimated fair value of $90 million at period-end. They are Level 3 investments valued using models with significant unobservable assumptions; management intends to hold them until maturity or recovery and said it did not expect to need to sell them prematurely.
- Management reported that disclosure controls were effective. A previously identified material weakness in lease accounting controls was determined to be remediated in August 2012.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing covers Q3 2012, not Q3 2011.
- Assess whether inventory normalization supports holiday demand or creates markdown and cash-flow risk, and monitor subsequent comparable sales and gross margins.
- Review the pace and funding of the enlarged share-repurchase authorization alongside debt, liquidity, and capital spending.
- Evaluate the valuation assumptions and potential recovery timing for Level 3 auction-rate securities.
- Check subsequent filings for actual results against the stated store, remodel, and capital-spending plans; the filing provides no explicit earnings guidance.