Business context and reporting period
Kohl’s Corporation is an omnichannel retailer operating 1,171 stores and Kohls.com. This 10-Q covers the 13 weeks and six months ended July 29, 2023, compared with the periods ended July 30, 2022. The request metadata says “2022 Q2,” but the supplied filing is for 2023 Q2.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Net sales | $3.678 billion | $3.863 billion | $7.033 billion | $7.334 billion |
| Total revenue | $3.895 billion | $4.087 billion | $7.466 billion | $7.802 billion |
| Gross margin (% of net sales) | 39.0% | 39.6% | 39.0% | 39.0% |
| Operating income | $163 million | $266 million | $261 million | $348 million |
| Net income | $58 million | $143 million | $72 million | $157 million |
| Diluted EPS | $0.52 | $1.11 | $0.65 | $1.22 |
Q2 comparable sales declined 5.0%; first-half comparable sales declined 4.7%. Digital sales fell 17% in Q2 and 18% year to date; digital represented 25% of net sales in both periods. Store sales were in line with the prior-year quarter and positive year to date. Accessories, including Sephora, outperformed the company average.
Q2 SG&A was $1.304 billion, up 1.6%, and equaled 33.5% of revenue, a 208-basis-point increase. First-half SG&A was $2.542 billion, down 1.3%, but rose to 34.1% of revenue, up 103 basis points. Net interest expense increased to $89 million in Q2 and $173 million in the first half.
First-half operating cash flow was $228 million, compared with cash used of $546 million in the prior-year period; management attributed the improvement to inventory management. Investing activities used $335 million and financing activities provided $158 million. Cash was $204 million at July 29, 2023. Inventory was $3.474 billion, down 14% year over year. Working capital was $504 million and the current ratio was 1.15.
At July 29, 2023, revolving-credit borrowings were $560 million, compared with $85 million at January 28, 2023. Long-term debt, including its current portion but excluding the revolver, was approximately $1.748 billion. Kohl’s also reported substantial lease liabilities; operating and finance lease liabilities totaled $5.229 billion. The company was in compliance with debt covenants.
Material changes versus the prior comparable period
- Q2 net sales fell 4.8%, and operating income declined to $163 million from $266 million. Net income fell to $58 million from $143 million.
- Q2 gross margin contracted 61 basis points, reflecting higher product costs and shrink, partly offset by lower digital shipping and freight costs.
- Q2 SG&A increased, driven mainly by store costs related to Sephora operations, wage pressure, and store-experience investments. Lower marketing and distribution costs partly offset the increase.
- First-half cash flow from operations improved substantially, while capital expenditures declined to $338 million from $548 million.
- Credit-rating downgrades raised the coupon rates on specified notes; the company reported an additional 50-basis-point increase in May 2023, with a total increase of 125 basis points since issuance.
Outlook, commentary, risks, and unusual items
- Kohl’s reaffirmed its 2023 outlook: net sales down 2%–4% (including an approximately 1% benefit from the 53rd week), operating margin of approximately 4.0%, diluted EPS of $2.10–$2.70 excluding non-recurring charges, and capital expenditures of $600–$650 million.
- Management’s long-term operating-margin goal is 7%–8%. It is prioritizing customer experience, value strategies, inventory and expense discipline, and balance-sheet strengthening.
- The company plans to pay a quarterly dividend of $0.50 per share and said it does not plan share repurchases until its balance sheet strengthens. It planned to repay $111 million of notes due in December 2023 at maturity.
- Kohl’s opened 194 full-size Sephora shops during Q2 and had 801 full-size shops open at quarter end. It expected a Sephora presence in more than 900 stores by year end.
- Moody’s, S&P, and Fitch all had negative outlooks on Kohl’s credit ratings. Management warned further downgrades could constrain debt-market access or increase borrowing costs.
- A putative shareholder class action alleging securities-law violations and claims concerning disclosures and controls remained in early stages. Kohl’s could not estimate a reasonably possible loss range.
- Management cited exposure to economic conditions, including food, fuel and energy prices, employment, wage inflation, and sourcing costs. Retail results are seasonal and interim results may not indicate full-year performance.
- The board declared a $0.50-per-share dividend on August 8, 2023, payable September 20, 2023.
Important facts for investors to verify
- Whether sales and comparable-sales trends, particularly digital sales, improve against the company’s full-year outlook.
- Progress on gross margin, SG&A leverage, and the approximately 4.0% operating-margin forecast.
- Revolver usage, debt maturities, rating-agency outlooks, and covenant compliance as the company manages liquidity.
- Sephora expansion and capital spending relative to planned returns and the $600–$650 million expenditure range.
- Developments in the shareholder litigation and any subsequent change in the company’s ability to estimate potential exposure.