Kohl’s Corporation — Form 10-Q Summary
Reporting period: First quarter of fiscal 2017, the 13 weeks ended April 29, 2017. The request metadata says “2016 Q1,” but the filing itself covers 2017 Q1 and compares it with the 13 weeks ended April 30, 2016.
Business context and results
Kohl’s operated 1,154 department stores, a website, 12 FILA outlets, and three Off-Aisle clearance centers. The company reports as one business unit. First-quarter results are seasonal and are not necessarily indicative of full-year performance.
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $3.843 billion | $3.972 billion |
| Comparable sales | Down 2.7% | — |
| Gross margin | $1.398 billion; 36.4% of sales | $1.412 billion; 35.5% of sales |
| SG&A | $975 million; 25.4% of sales | $1.008 billion; 25.4% of sales |
| Operating income | $185 million | $106 million |
| Net income | $66 million | $17 million |
| Diluted EPS | $0.39 | $0.09 |
| Net cash from operations | $46 million | $140 million |
| Free cash flow (non-GAAP) | $(202) million | $(64) million |
Material changes and management commentary
- Sales fell 3.2%; management attributed the comparable-sales decline primarily to fewer transactions, partly offset by higher average transaction value. Inventory per store declined 1% year over year.
- Gross margin rate improved 83 basis points, which management attributed to improved inventory management, lower seasonal carryover, and better promotional markdown levels.
- SG&A fell $33 million, mainly from lower marketing and store expenses, and leveraged by 2 basis points as a share of sales.
- 2016 included $64 million of impairment, store-closing, and other costs; no such costs were recorded in Q1 2017. Excluding those costs, prior-year adjusted net income was $58 million and adjusted diluted EPS was $0.31, versus $66 million and $0.39 in 2017.
- The company adopted new share-based payment accounting rules. A $5 million net tax detriment increased income tax expense, and management said the change may add volatility to future effective tax rates.
Cash, debt, and liquidity
- Cash and cash equivalents were $625 million at April 29, 2017, down from $1.074 billion at January 28, 2017. The quarterly decrease was $449 million.
- Operating activities provided $46 million; investing activities used $203 million, including $216 million in capital expenditures; financing activities used $292 million, including $156 million of share repurchases and $94 million of dividends.
- Working capital was $2.105 billion and the current ratio was 1.74. Long-term debt was $2.795 billion; capital lease and financing obligations totaled $1.791 billion, including current amounts. Debt-to-capitalization was 47.9%.
- The company reported compliance with all debt covenants and expected to remain compliant during the rest of fiscal 2017. Its debt ratio was 2.59 against a maximum permitted 3.75. Credit ratings were Baa2 from Moody’s and BBB from S&P and Fitch.
- Capital spending included work on a fifth e-commerce fulfillment center, planned to open in 2017. The board declared a $0.55-per-share quarterly dividend payable June 21, 2017.
Outlook, risks, and unusual items
The filing provides no specific earnings or sales guidance. Management noted the challenging sales environment and seasonal nature of the business; it also stated that inflation had not materially affected results to date, while warning that economic and sourcing costs could affect future performance. There were no significant changes to the risk factors or market risks described in the 2016 Form 10-K. Management said pending legal proceedings were not expected to have a material adverse impact. The 2016 store-closure reserve was $102 million at quarter-end, mostly for store lease costs. No significant changes in contractual obligations were reported.
Revenue accounting changes effective Q1 2018 were not expected, based on current estimates, to materially affect sales returns, loyalty, and promotional accounting; the impact of other provisions remained under evaluation. Lease accounting changes effective Q1 2019 are expected to materially increase balance-sheet assets and liabilities.
Important facts for investors to verify
- Whether sales and comparable-sales trends improve, particularly transaction counts, and whether gross-margin gains persist.
- Whether inventory, payables timing, and operating cash flow normalize, given the decline in quarterly operating cash generation and negative free cash flow.
- Capital spending and the opening and performance of the planned fifth e-commerce fulfillment center.
- Future share repurchases, dividends, debt and lease obligations, and ongoing covenant compliance.
- The effects of share-based tax accounting and upcoming revenue and lease accounting standards.