Kohl’s Corporation — FY2018 Form 10-K
Period clarification: The filing is for the fiscal year ended February 2, 2019 (52 weeks), not 2017 Q4 as stated in the request metadata. Fiscal 2017 ended February 3, 2018 and comprised 53 weeks. Amounts below are in U.S. dollars; financial statement amounts are in millions unless indicated.
Business context and reporting period
Kohl’s operated 1,159 department stores, Kohls.com, 12 FILA outlets and four Off-Aisle clearance centers. It sells apparel, footwear, accessories, beauty and home products through stores and digital channels. Management notes that store and digital sales are interconnected and are not reported separately. The business is seasonal, with most sales and income generally occurring in the second half of the year.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $19,167 | $19,036 |
| Total revenue | $20,229 | $20,084 |
| Comparable sales | +1.7% | +1.5% |
| Gross margin as % of net sales | 36.4% | 36.0% |
| SG&A | $5,601 | $5,501 |
| Operating income, GAAP | $1,361 | $1,416 |
| Net income, GAAP | $801 | $859 |
| Diluted EPS, GAAP | $4.84 | $5.12 |
| Adjusted net income, non-GAAP | $927 | $703 |
| Adjusted diluted EPS, non-GAAP | $5.60 | $4.19 |
| Net cash from operating activities | $2,107 | $1,691 |
| Capital expenditures | $578 | $672 |
| Free cash flow, non-GAAP | $1,403 | $881 |
Net sales rose 0.7%; comparable sales increased 1.7%, partly offset by the absence of approximately $170 million of sales from fiscal 2017’s 53rd week. Gross margin improved 32 basis points, primarily from fewer permanent and promotional markdowns, partly offset by higher digital shipping costs. SG&A increased 2%; as a share of total revenue it rose 30 basis points, with strategic technology investment and cloud migration among the cited drivers.
GAAP operating income and net income declined year over year. Adjusted net income and EPS increased, but these non-GAAP results exclude specified unusual items and are not substitutes for GAAP measures. Fiscal 2018 included $104 million of impairments, store-closing and other costs and a $63 million debt-extinguishment loss. Fiscal 2017 GAAP results included $156 million of tax benefits from tax reform and a state tax settlement; the filing’s adjusted figures remove those benefits.
At year-end, cash and equivalents were $934 million, working capital was $2,105 million and the current ratio was 1.77, down from 1.99. Long-term debt was $1,861 million; capital lease and financing obligations were $1,638 million. Combined debt and these obligations totaled $3,499 million, versus $4,514 million a year earlier. Debt/capitalization was 38.8% versus 45.4%, and adjusted debt to adjusted EBITDAR was 2.16 versus 2.54. Kohl’s reported compliance with debt covenants; its maximum permitted debt ratio was 3.75, compared with a reported ratio of 2.10 under the agreement’s calculation.
Operating cash flow increased by $416 million, primarily due to changes in accounts payable and other operating assets and liabilities. Free cash flow is a company-defined non-GAAP measure. The company paid $400 million in dividends and reduced long-term borrowings by $943 million during the year. In February 2019, the board approved a 10% dividend increase to $0.67 per share.
Material changes and quarterly information
- The 53rd week in fiscal 2017 contributed approximately $170 million in net sales and $15 million in net income, complicating annual comparisons.
- Reported fourth-quarter total revenue was $6,823 million and net income was $272 million in FY2018, versus $7,057 million and $468 million in FY2017. The FY2017 quarter’s comparison includes the 53-week fiscal-year calendar; quarterly diluted EPS was $1.67 and $2.81, respectively.
- Kohl’s reduced debt by $943 million, including a $500 million cash tender offer and voluntary redemption of $413 million of 2021 bonds. The transactions extended the remaining debt maturity profile by about two years and resulted in the $63 million extinguishment loss.
- Fiscal 2018 included costs associated with closing four stores, call-center consolidation, a voluntary retirement program and asset impairments. The filing reports $104 million in total impairments, store-closing and other costs.
Outlook, management commentary and risks
For FY2019, management projected comparable sales growth of 0%–2%, gross margin improvement of up to 10 basis points, SG&A growth of 1%–2%, depreciation and amortization of $930 million, net interest expense of $210 million, an effective tax rate of 24%–25%, and diluted EPS of $5.80–$6.15. Planned capital expenditures were approximately $850 million, including construction of a sixth e-commerce fulfillment center; planned share repurchases were $400–$500 million. Guidance includes adoption of the new lease standard but excludes non-recurring charges.
Adoption of the lease standard effective February 3, 2019 was expected to add approximately $2 billion of assets and liabilities, primarily for operating leases. Management estimated an approximately $5 million increase in FY2019 net income from adoption, with changes in SG&A, depreciation and interest partly offsetting one another.
Key disclosed risks include weak consumer spending, intense and evolving digital competition, tariffs and trade-policy changes, inventory forecasting and markdown exposure, sourcing and transportation disruption, higher merchandise, wage and shipping costs, and execution of omnichannel and technology initiatives. The filing also highlights seasonal sales concentration, weather and natural-disaster exposure, credit-card portfolio performance, cybersecurity and data-privacy threats, and the ability to attract and retain associates. Kohl’s stated it was not party to any material legal proceeding, while noting that routine claims and proceedings arise in the ordinary course.
Important facts for investors to verify
- Compare annual and quarterly results on a consistent basis, accounting for FY2017’s 53rd week and reviewing the company’s non-GAAP reconciliations.
- Assess whether comparable-sales growth and margin gains persist, particularly given higher digital fulfillment costs and planned technology and omnichannel investment.
- Review debt reduction, lease obligations and the effect of the new lease accounting standard on reported assets, liabilities and earnings.
- Evaluate FY2019 guidance against actual results, especially sales, margin, capital spending, share repurchases and the sixth fulfillment-center investment.
- Consider the judgment involved in inventory markdown and shrink estimates, and monitor the company’s disclosed unrecognized tax benefits of $133 million and related tax matters.