Kohl’s Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended October 31, 2020, not 2019 Q3 as stated in the request metadata. Comparisons below are with the quarter ended November 2, 2019, and the corresponding nine-month periods.
Business context and reporting period
Kohl’s operated 1,162 stores, a website, and 12 FILA outlets. It reports as a single business unit. The filing describes results during the COVID-19 pandemic, following the temporary closure and subsequent reopening of stores.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $3.979 billion | $4.625 billion | $9.814 billion | $13.142 billion |
| Net sales | $3.779 billion | $4.358 billion | $9.152 billion | $12.348 billion |
| Operating income (loss) | $22 million | $204 million | $(578) million | $698 million |
| Net income (loss) | $(12) million | $123 million | $(506) million | $426 million |
| Diluted EPS | $(0.08) | $0.78 | $(3.28) | $2.67 |
Q3 comparable sales declined 13.3%. Digital sales increased 25% in the quarter and 35% year to date; digital represented 32% and 38% of net sales, respectively. Home and Children’s outperformed the company average, as did the active category.
Q3 gross margin was 35.8% of net sales, down 48 basis points; the nine-month margin was 30.5%, down 680 basis points. Q3 SG&A decreased 8.2% to $1.302 billion, but rose to 32.7% of revenue from 30.7%. Nine-month SG&A fell 13.7% to $3.418 billion but increased to 34.8% of revenue from 30.1%. Q3 GAAP diluted EPS was $(0.08); adjusted non-GAAP EPS was $0.01.
Year-to-date operating cash flow was $910 million, versus $1.045 billion. Investing activities used $70 million, compared with $670 million; financing activities provided $376 million, versus $819 million used. Cash at quarter-end was $1.939 billion. Working capital was $2.253 billion and the current ratio was 1.60.
Long-term debt was $2.450 billion, versus $1.856 billion at both comparison dates. This excludes finance lease and financing obligations of $1.529 billion. Kohl’s issued $600 million of 9.50% notes due 2025 and fully repaid its $1.0 billion revolver balance in October. Its $1.5 billion asset-based revolving facility was fully available at quarter-end. The company reported compliance with its debt covenants.
Material changes and unusual items
- COVID-19-related costs totaled $336 million year to date, including $187 million of inventory write-downs, $53 million of asset write-offs, and compensation and other costs. The inventory write-downs were recorded in the first quarter.
- A sale-leaseback of the San Bernardino fulfillment and distribution center generated $193 million in net proceeds and a $127 million gain in the second quarter.
- Q3 included $21 million of corporate restructuring charges. Nine-month impairment, store-closing, and other costs were $85 million.
- Year-to-date capital expenditures fell to $264 million from $678 million. Share repurchases were suspended; the regular dividend was suspended beginning in Q2. Dividends paid in the first nine months totaled $108 million.
- Net interest expense increased to $78 million in Q3 and $214 million year to date, reflecting pandemic-period borrowings and the new notes.
Outlook, management commentary, and risks
Management said Q3 sales and earnings exceeded expectations and improved significantly from Q2, while noting continued volatility in demand and pressure on margins. It anticipated additional Q4 gross-margin pressure from freight surcharges as digital penetration remained elevated. The filing warns that COVID-19 may materially adversely affect full-year 2020 results; management said the pandemic’s duration and severity could not be estimated with certainty.
The company’s strategic framework targets an operating margin of 7% to 8%, alongside top-line growth, disciplined capital management, and an agile and inclusive culture. Management planned to reinstate a dividend during the first half of 2021, subject to circumstances. Tax-loss carrybacks and related planning under the CARES Act produced tax benefits; management was evaluating strategies that could yield further material benefits. Legal proceedings were not expected by management to materially adversely affect the financial statements.
Key risks include continued pandemic-related changes in consumer demand and store traffic, elevated digital fulfillment costs, seasonality, economic conditions, and variable interest rates. The new notes also provide for coupon step-ups if specified credit-rating thresholds are breached.
Important facts for investors to verify
- Confirm the requested period: the source filing is Q3 2020, not Q3 2019.
- Review the reconciliation and assumptions behind adjusted non-GAAP EPS of $0.01 versus GAAP EPS of $(0.08).
- Assess whether cash, operating cash flow, and the available revolving facility remain adequate amid pandemic-related uncertainty and holiday working-capital needs.
- Track the planned dividend reinstatement, the 7%–8% operating-margin goal, and the timing and scale of any further COVID-19 costs or tax benefits.