Kohl’s Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2023, the 13 weeks ended April 29, 2023. The request metadata says “2022 Q1,” but the filing covers 2023 Q1 and compares results with the quarter ended April 30, 2022.
Business context and results
Kohl’s operates an omnichannel retail business, with 1,171 stores and Kohls.com at quarter-end. It sells apparel, footwear, accessories, beauty and home products, including Sephora shop-in-shops.
- Net sales were $3.355 billion, down 3.3%; comparable sales declined 4.3%. Total revenue was $3.571 billion, down $144 million.
- Digital sales declined 19.6% and were 26% of net sales, compared with 30% a year earlier. Store sales increased, supported by traffic and units per transaction, while average ticket fell.
- Gross margin was 39.0% of net sales, up 67 basis points. Operating income was $98 million, versus $82 million; operating margin was 2.8% of revenue.
- Net income was $14 million in both periods. Diluted EPS was $0.13, compared with $0.11, reflecting fewer weighted-average shares.
- SG&A was $1.238 billion, down 4.2%; it declined to 34.7% of revenue from 34.8%. Net interest expense increased to $84 million from $68 million.
Cash flow, financial position and capital
- Operating cash flow used $202 million, improving from $460 million used a year earlier, primarily because the prior-year inventory build did not recur. Investing activities used $94 million; financing activities provided $429 million.
- Cash and cash equivalents were $286 million, compared with $646 million a year earlier. Merchandise inventory was $3.526 billion, down 6% year over year.
- At April 29, 2023, revolving-credit borrowings were $765 million, with approximately $735 million available. Long-term debt was $1.637 billion, plus $111 million current long-term debt. Kohl’s repaid $164 million of notes that matured in February.
- Operating and finance lease liabilities totaled $5.092 billion; financing obligations were $456 million. These are additional contractual obligations and are distinct from reported borrowings.
- Working capital was $605 million and the current ratio was 1.17, compared with $1.369 billion and 1.40 a year earlier. The company remained in compliance with debt covenants.
- Capital expenditures were $94 million in the quarter. Dividends paid were $55 million, or $0.50 per share; the board declared another $0.50 quarterly dividend after quarter-end. No shares were repurchased under the public program.
Material changes and management commentary
- Sales softened, especially in digital, while gross margin improved due to value-strategy changes and lower shipping and freight costs. Inflation and higher inventory shrink partly offset the improvement.
- Other revenue, primarily from the credit business, fell $28 million, which management attributed to normalizing credit-loss rates. SG&A benefited from lower store-related strategic investment and prior-year proxy-contest and sale-process costs, partly offset by increased wages.
- S&P downgraded senior unsecured debt to BB and Moody’s to Ba3; both, as well as Fitch, had negative outlooks. Coupon provisions will increase interest rates on specified notes by a further 50 basis points in May 2023; the filing says the total increase since issuance will be 125 basis points, with 100 basis points effective in May.
- The company retired 217 million treasury shares during the quarter, returning them to authorized-but-unissued status. This accounting retirement is distinct from a current-quarter share repurchase.
Outlook, risks and contingencies
- Kohl’s affirmed its 2023 outlook: net sales down 2%–4% (including an estimated approximately 1% contribution from the 53rd week), operating margin of approximately 4.0%, and diluted EPS of $2.10–$2.70 excluding non-recurring charges. Planned capital expenditures are $600–$650 million.
- The company plans at least 250 full-size and 45 small-format Sephora shops in 2023; it had 607 full-size shops at quarter-end and expects Sephora presence in more than 900 stores by year-end.
- Management cites economic conditions, including inflation in wages and merchandise sourcing, as potential influences on results. The business is seasonal, with sales and income generally higher during back-to-school and holiday periods.
- A putative shareholder class action alleging securities-law violations related to prior strategic-plan statements, financial results and controls is in an early stage. Kohl’s intends to seek dismissal and defend the case; it cannot estimate a reasonably possible loss.
Important facts for investors to verify
- Confirm the period: this filing is for Q1 fiscal 2023, not Q1 2022.
- Track comparable sales and digital trends, and whether margin gains persist amid inflation and shrink.
- Monitor cash generation, revolver usage, debt-rating developments, and the scheduled coupon increases.
- Assess progress against full-year sales, margin, EPS and capital-spending outlook, including Sephora expansion.
- Review developments in the shareholder lawsuit and the effect, if any, on the company’s financial statements.