Kohl’s Corporation — Form 10-K Summary
Reporting period: Fiscal 2015, the 52 weeks ended January 30, 2016. Although the request identifies “2014 Q4,” this filing reports fiscal 2015; its unaudited fourth-quarter results are summarized below. Dollar amounts are in millions unless stated otherwise.
Business context
Kohl’s operated 1,164 department stores in 49 states and Kohls.com, selling apparel, footwear, accessories, beauty and home products. The company was pursuing its multi-year “Greatness Agenda,” including stronger national-brand offerings, localized assortments and an expanded omni-channel shopping experience.
Key financial results
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Net sales | $19,204 | $19,023 | +1.0% |
| Comparable sales | +0.7% | -0.3% | Improved |
| Gross margin | $6,939; 36.1% of sales | $6,925; 36.4% | Margin down 30 bps |
| SG&A | $4,452; 23.2% of sales | $4,350; 22.9% | Up 2% |
| Operating income | $1,553 | $1,689 | -8.0% |
| Net income | $673 | $867 | -22.4% |
| Diluted EPS | $3.46 | $4.24 | -18.4% |
| Diluted EPS excluding debt-extinguishment loss | $4.01 | $4.24 | -5% |
| Cash from operations | $1,474 | $2,024 | -$550 |
| Capital expenditures | $690 | $682 | +$8 |
| Free cash flow (company-defined, non-GAAP) | $671 | $1,234 | -$563 |
Fourth quarter: Net sales were $6,387 versus $6,337; gross margin was $2,112 versus $2,147; SG&A was $1,332 versus $1,272; net income was $296 versus $369; diluted EPS was $1.58 versus $1.83.
Liquidity and debt: Year-end cash was $707, down from $1,407; working capital was $2,362 versus $2,721, and the current ratio was 1.87 versus 1.95. Long-term debt was $2,792 and capital lease and financing obligations totaled $1,916. Debt/capitalization was 46.3%, compared with 44.3%; adjusted debt to EBITDAR was 2.52 versus 2.45. Kohl’s reported compliance with debt covenants and no revolver borrowings at year-end; its revolving facility provides $1.0 billion of capacity and matures in 2020.
Material changes and management commentary
- Sales and comparable sales improved modestly. National-brand sales rose 6.2% and represented 52% of sales; active and wellness merchandise performed better than the company average.
- Gross margin fell 30 basis points, reflecting higher shipping costs from online growth, partly offset by improved merchandise margin. Management also cited a highly competitive holiday season and warm weather that led to deeper cold-weather apparel discounts.
- SG&A increased $102, primarily from store payroll and occupancy costs and corporate technology and infrastructure investment; increased credit-card revenue partly offset expense growth. Credit-card net revenue was $456 versus $430.
- Cash from operations declined with higher inventory and lower accounts payable relative to inventory. Inventory rose $224 to $4,038; inventory per store increased 5.7%.
- Kohl’s repurchased $1,001 of shares and paid $349 in dividends in fiscal 2015. The board subsequently raised the quarterly dividend 11% to $0.50 per share.
- The company issued $1,100 of long-dated notes and used proceeds and cash on hand to fund a tender offer and redemption of $1,085 of senior debt. The transaction produced a $169 loss, including a $163 tender premium and $6 of non-cash write-offs.
Outlook, risks and unusual items
Fiscal 2016 outlook: Total sales expected to range from a 0.5% decline to a 0.5% increase; comparable sales growth of 0%–1%; gross-margin improvement of 0–20 basis points; SG&A growth of 1%–2%; diluted EPS of $4.05–$4.25; capital expenditures of approximately $825; and share repurchases of approximately $600 at an assumed $50 per share. Management expected depreciation of $940, interest of $310 and a 37% effective tax rate.
Kohl’s planned to close 18 underperforming stores and realign corporate operations. It estimated related charges of $150–$170, with $55–$65 expected in the first quarter of 2016 and the remainder in the second quarter; expected annual savings were approximately $45 in SG&A and $10 in depreciation.
Key risks include pressure on consumer spending, intense price and digital competition, merchandise selection and inventory markdowns, foreign sourcing and logistics disruption, rising labor and shipping costs, execution and profitability of omni-channel operations, seasonal demand and fulfillment, cybersecurity and system interruptions, credit-card portfolio performance, and legal, regulatory and vendor-compliance matters. Management reported no material legal proceedings and no material long-lived-asset impairments in 2015. The filing identifies $139 of unrecognized tax benefits, excluding accrued interest and penalties, and states that the timing of settlements is uncertain.
Important facts for investors to verify
- Whether comparable-sales momentum and the 2016 sales and EPS outlook were achieved, including the effect of holiday discounting and weather.
- Whether online growth, shipping expense and fulfillment investments improve sufficiently to stabilize gross margin and operating profitability.
- Inventory quality and markdown exposure, given the year-over-year inventory increase and reduced accounts payable relative to inventory.
- Cash generation and leverage trends after substantial buybacks, dividends and the debt refinancing; assess the company’s progress toward its stated adjusted debt-to-EBITDAR target of approximately 2.25.
- Actual store-closure and organizational-realignment charges, savings and execution, as well as the eventual impact of lease obligations and tax audits.