Kohl’s Corporation — Form 10-K Summary
Period clarification: The filing is for fiscal 2012, ended February 2, 2013, a 53-week year. It is not a 2011 Q4 filing. Fiscal 2011 ended January 28, 2012, and had 52 weeks.
Business context
Kohl’s operated 1,146 department stores in 49 states and Kohls.com, selling apparel, footwear, accessories and home products. E-commerce sales exceeded $1.4 billion, about 7% of total sales, and grew more than 40%. Private and exclusive brands accounted for 52% of sales.
Financial performance
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $19.279 billion | $18.804 billion |
| Comparable sales | +0.3% (52-week comparison) | +0.5% |
| Gross margin | $6.990 billion; 36.3% of sales | $7.179 billion; 38.2% |
| Operating income | $1.890 billion; 9.8% of sales | $2.158 billion; 11.5% |
| Net income | $986 million | $1.167 billion |
| Diluted EPS | $4.17 | $4.30 |
| Operating cash flow | $1.265 billion | $2.139 billion |
| Free cash flow | $381 million | $1.135 billion |
Reported sales rose 2.5%, including $169 million from the extra week; excluding that week, sales increased 1.6%. Net income declined about 15%, while diluted EPS fell about 3%. The 53rd week contributed approximately $15 million of net income and $0.06 of diluted EPS. Fiscal 2012 fourth-quarter sales were $6.342 billion and net income was $378 million; the quarter had 14 weeks versus 13 weeks in the prior-year fourth quarter.
Gross margin fell about 190 basis points, primarily because of lower prices to attract customers, holiday markdowns and higher apparel costs earlier in the year. SG&A increased slightly in dollars but declined to 22.1% of sales from 22.6%, supported by payroll and corporate expense management. E-commerce gross margin was 25.1%, compared with 37.2% for stores, reflecting product mix and shipping costs.
Liquidity, debt and capital allocation
- Cash and equivalents were $537 million at year-end, down from $1.205 billion. Working capital was $2.184 billion and the current ratio was 1.86.
- Long-term debt was $2.492 billion; capital lease and financing obligations totaled $2.061 billion. Debt/capitalization was 42.9%, up from 39.5%; adjusted debt to EBITDAR was 2.23, versus 1.99.
- The company had a $1 billion revolving credit facility and a $30 million demand note, with no draws in 2012. It reported compliance with debt covenants and ratings of Baa1/BBB+/BBB+.
- Capital expenditures were $785 million. The company repurchased approximately $1.3 billion of shares and paid $300 million in dividends. A $3.5 billion repurchase authorization was in place after a November 2012 increase.
Outlook, commentary and risks
For fiscal 2013, management expected total and comparable sales growth of 0–2%, gross-margin expansion of 15–30 basis points, SG&A growth of 1.5–3%, and diluted EPS of $4.15–$4.45. The EPS outlook assumed $1 billion of share repurchases at an average price of $50. Management planned approximately 12 new stores, 30 remodels and about $700 million in capital expenditures.
Management cited weaker-than-expected holiday sales, fewer transactions and excess inventory as challenges. Year-end inventory was up 15% overall and 12% per store excluding e-commerce; slower turnover also reduced accounts payable as a percentage of inventory. Key stated risks include consumer spending and competition, inventory and markdown management, sourcing and input costs, weather, e-commerce profitability, information-system and data-security disruptions, and legal or regulatory developments.
Auction-rate securities had $83 million par value and an estimated fair value of $52 million at year-end; limited market liquidity constrained sales, though management said it did not expect a material effect on operating funding. The filing reported no material legal proceedings. Management and the auditor concluded internal controls over financial reporting were effective; the financial-statement audit opinion was unqualified.
Important facts for investors to verify
- Confirm the reporting-period distinction: this is fiscal 2012, with a 53rd week, not a 2011 Q4 filing; assess the extra week when comparing sales and earnings.
- Track whether sales and transactions improve and whether elevated inventory clears without further significant markdowns.
- Assess progress on gross-margin recovery and e-commerce profitability, including shipping costs and channel mix.
- Monitor operating cash flow, free cash flow, debt and lease obligations, and the pace of buybacks and dividends.
- Review the assumptions behind fiscal 2013 guidance, especially the planned repurchases and margin improvement, and watch for changes in the value or liquidity of auction-rate securities.