Kohl’s Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 weeks ended May 2, 2020, compared with the quarter ended May 4, 2019. This is Q1 2020, not Q1 2019 as indicated in the request metadata. Kohl’s operated 1,159 stores, its website, and 12 FILA outlets.
Financial results
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Total revenue | $2.428 billion | $4.087 billion |
| Net sales | $2.160 billion | $3.821 billion |
| Gross margin | $373 million; 17.3% of net sales | $1.406 billion; 36.8% |
| Operating income (loss) | $(718) million | $118 million |
| Net income (loss) | $(541) million | $62 million |
| Diluted EPS | $(3.52) | $0.38 |
| Operating cash flow | $53 million | $136 million |
Net sales fell 43.5%, chiefly because stores closed nationwide on March 20 in response to COVID-19. Digital sales rose 24% and were 45% of net sales, versus 21% a year earlier. Other revenue was $268 million, up $2 million.
Gross margin declined 1,950 basis points. Management attributed approximately 1,500 basis points to inventory markdowns, the absence of late-quarter store sales, and an excess seasonal inventory reserve; approximately 250 basis points to higher digital shipping costs; and approximately 200 basis points to business mix and promotions. SG&A fell 16.4% to $1.066 billion, but rose to 43.9% of revenue from 31.2% as revenue contracted. The quarter included $187 million of inventory write-downs and $66 million of impairment, store-closing, and other costs. Excluding the latter category, the company reported non-GAAP diluted loss per share of $3.22; this measure is not a substitute for GAAP results.
Liquidity, debt, and balance sheet
Cash and cash equivalents were $2.039 billion at May 2, 2020, versus $723 million at February 1, 2020. Working capital was $2.883 billion and the current ratio was 1.88. Operating activities provided $53 million; investing activities used $162 million, including property and equipment purchases; financing activities provided $1.425 billion. The cash increase was therefore substantially supported by financing, not operating cash generation alone.
Long-term debt increased to $3.449 billion from $1.856 billion at February 1, 2020. The company drew $1.0 billion on its revolving facility, then replaced it with a $1.5 billion secured asset-based facility; $1.0 billion was outstanding at quarter-end at a 3.41% effective rate. It also issued $600 million of 9.50% notes due 2025. The new facility includes covenants and restrictions, including a 2020 dividend restriction if facility borrowings exceed $1.0 billion. Kohl’s reported covenant compliance at quarter-end and expected to remain compliant through fiscal 2020. S&P and Fitch downgraded its long-term debt to BBB- during the quarter.
COVID-19 response, outlook, and risks
- All stores were temporarily closed beginning March 20; reopening began May 4. About 80% had reopened by June 5. Management reported significant sales-demand decline and expected continued demand volatility.
- The company furloughed approximately 85,000 store, distribution-center, and some corporate associates. It reduced expenses, managed inventory receipts lower, cut planned capital expenditures by approximately $500 million, suspended share repurchases, and suspended the regular dividend beginning in Q2 2020.
- Management expected COVID-19 to have a material adverse effect on full-year 2020 business, financial condition, and results, but stated it could not estimate the pandemic’s duration or full impact. No specific financial guidance was provided.
- Risks include renewed store closures, weaker consumer demand and customer loyalty, staffing and labor challenges, vendor disruption, cybersecurity exposure, higher financing costs, further credit-rating downgrades, and potential covenant or refinancing pressure. The company noted that litigation was not expected to have a material adverse impact.
- After quarter-end, Kohl’s completed a sale-leaseback of its San Bernardino e-commerce fulfillment and distribution centers on May 22, generating $195 million in cash; it expected to recognize an approximately $127 million gain in Q2 2020.
Most important facts for investors to verify
- How sales, digital demand, store traffic, and gross margins evolved as stores reopened, and whether the quarter’s digital growth persisted.
- Whether inventory reserves and markdowns adequately reflect expected selling prices and the risk of further excess inventory.
- Cash generation, vendor payment terms, capital spending, and liquidity needs relative to the increased debt and interest burden.
- Compliance with facility covenants, borrowing levels and the dividend restriction, plus any further credit-rating changes.
- The realized effects of the San Bernardino sale-leaseback, including the expected gain and ongoing lease costs, and any updated full-year outlook.