KSS

Business Context and Reporting Period

Company: Kohl's Corporation
Filing Type: Form 10-K (Annual Report)
Reporting Period: Fiscal year ended January 30, 1999 (52 weeks)
Business Overview: Kohl's operates 213 family-oriented specialty department stores as of the period end, primarily in the Midwest and Mid-Atlantic United States. The company targets middle-income customers with moderately priced apparel, shoes, accessories, soft home products, and housewares. The business model relies on a low-cost structure, centralized buying, and a unique store format with fewer departments than traditional department stores.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 20.3% to $3.68 billion. This was driven by the opening of 32 new stores in fiscal 1998 and a full year of results for stores opened in 1997, contributing $408.6 million. Comparable store sales grew 7.9%, contributing an additional $213.1 million.
• Profitability: Operating income rose 30.5% to $337.9 million. Gross margin percentage improved to 33.5% due to merchandise mix changes and inventory management improvements. Selling, general, and administrative (SG&A) expenses decreased as a percentage of sales to 22.0% from 22.5%, reflecting operational leverage.
• Cash Flow: Operating cash flow turned positive, providing $230.7 million compared to a $50.2 million usage in the prior year. This shift was influenced by changes in operating assets and liabilities, particularly higher credit card receivables as the company internally financed a larger balance.
• Store Count: The company expanded from 182 stores at the end of fiscal 1997 to 213 stores at the end of fiscal 1998.

Guidance, Outlook, and Risks

Expansion and Capital Expenditures

Management intends to open approximately 40-45 new stores in fiscal 1999. Total capital expenditures for fiscal 1999 are expected to range between $550 million and $575 million. This includes the purchase of favorable lease rights from Caldor Corporation ($142 million paid in March 1999) and an estimated $165 million investment to renovate and refixture 33 former Caldor locations.

Financing

To fund the Caldor renovation, the company issued 2.8 million shares of common stock in March 1999 for net proceeds of approximately $199 million. The company anticipates satisfying future needs through operating cash flows, a $300 million revolving credit facility (no amounts outstanding at period end), and short-term trade credit.

Risks and Contingencies

• Year 2000 Compliance: The company estimates total Year 2000 project costs at $10 million. While assessment and remediation phases are complete, verification is ongoing. There is a risk that third-party suppliers may fail to remediate their systems, potentially causing operational inefficiencies.
• Seasonality: Approximately 47% of sales occur during the back-to-school and holiday seasons (17% and 30% respectively), making quarterly results volatile.
• Competition: The retail industry is highly competitive, with primary competitors including traditional department stores and upscale mass merchandisers.

Investor Verification Checklist

• Caldor Acquisition Integration: Verify the timeline and cost efficiency of converting the 33 former Caldor stores, as this represents a significant portion of fiscal 1999 capital spending.
• Comparable Store Sales Trend: Monitor if the 7.9% comparable store sales growth can be sustained, as it represents a deceleration from the 10.0% growth in fiscal 1997.
• Year 2000 Execution: Confirm the successful completion of the verification phase for financial and non-IS systems by the August/September 1999 targets to avoid operational disruption.
• Debt Covenants: Review the impact of the $300 million revolving credit facility and senior notes covenants on future dividend policies and additional indebtedness.
• Inventory Management: Assess the effectiveness of inventory controls given the increase in merchandise inventories to $617.4 million to support expansion.