Business Context and Reporting Period
Company: Kohl's Corporation
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: February 1, 2003 (52-week year)
Business Overview: Kohl's operates family-oriented, specialty department stores featuring moderately priced national brand apparel, shoes, accessories, and home products. As of February 1, 2003, the company operated 457 stores in 33 states. By April 1, 2003, store count increased to 485 following the opening of 28 additional stores in March, including a major entry into the Los Angeles area.
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 2002 (Ended Feb 1, 2003) | Fiscal 2001 (Ended Feb 2, 2002) |
|---|---|---|
| Net Sales | $9,120,287 | $7,488,654 |
| Gross Margin | $3,139,068 (34.4% of sales) | $2,565,127 (34.3% of sales) |
| Operating Income | $1,090,383 (12.0% of sales) | $849,975 (11.4% of sales) |
| Net Income | $643,381 | $495,676 |
| Diluted EPS | $1.87 | $1.45 |
| Operating Cash Flow | $669,584 | $541,817 |
| Capital Expenditures | $715,968 | $662,011 |
| Total Assets | $6,315,503 | $4,929,586 |
| Total Long-Term Debt | $1,058,784 | $1,095,420 |
| Working Capital | $1,776,102 | $1,584,073 |
Liquidity: Cash and cash equivalents totaled $90.1 million, with short-term investments of $476.0 million. The company maintains $665 million in revolving credit facilities and a $225 million receivable purchase agreement.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 21.8% year-over-year, driven by the opening of 75 new stores and a 5.3% increase in comparable store sales.
- Profitability: Net income rose 29.8% to $643.4 million. Operating income margin improved to 12.0% from 11.4%, aided by a 0.1% increase in gross margin rate and a 47 basis point reduction in SG&A expenses as a percentage of sales.
- Debt Structure: In November 2002, the company issued $300 million in 6% unsecured senior debentures. Additionally, $343.3 million of Liquid Yield Option Subordinated Notes (LYONs) were reclassified as current liabilities due to a put option exercisable by holders in 2003.
- Inventory: Merchandise inventories increased by $428.7 million to support new store openings and existing store demand.
Guidance, Outlook, and Risks
- Expansion Plans: Management plans to open approximately 80 new stores in fiscal 2003 and 95-100 stores in fiscal 2004. Planned entries include Phoenix, Tucson, Las Vegas, and further expansion in California.
- Capital Expenditures: Total capital expenditures for fiscal 2003 are expected to be approximately $825 million.
- Seasonality: The business is highly seasonal, with approximately 45% of sales occurring during the back-to-school and holiday seasons (15% and 30% respectively).
- Risks: Primary risks include intense competition from traditional department stores and mass merchandisers, reliance on seasonal sales, and the ability to successfully execute rapid geographic expansion. The company notes that forward-looking statements are subject to risks that could cause actual results to differ materially.
- Accounting Changes: The company adopted SFAS No. 142, ceasing the amortization of goodwill. This resulted in no goodwill amortization expense in fiscal 2002 compared to $5.2 million in fiscal 2001.
Investor Verification Checklist
- Comparable Store Sales: Verify the 5.3% comparable store sales growth rate and the definition of the comparable store base (320 stores).
- Debt Maturities: Confirm the impact of the $343.3 million LYONs reclassified as current debt and the company's ability to refinance or repay this obligation in 2003.
- Capital Allocation: Review the $825 million capital expenditure forecast for fiscal 2003 against cash flow from operations to assess funding sufficiency.
- Inventory Levels: Monitor the $428.7 million increase in inventory to ensure it aligns with sales velocity and does not lead to excessive markdowns.
- Store Economics: Assess the performance of the 75 new stores opened in fiscal 2002 and the 28 stores opened in March 2003, particularly in new markets like Los Angeles.