Kohl’s Corporation — Form 10-Q Summary
Period: The filing covers the 13 and 39 weeks ended November 1, 2014. Although the request identifies “2013 Q3,” the supplied filing is for the third quarter of 2014; comparisons below are with the periods ended November 2, 2013.
Business context
Kohl’s operated 1,163 department stores and Kohls.com, selling apparel, footwear, accessories, beauty and home products. The company operates as one business unit and notes that results are seasonal, with a significant share of annual sales and income typically occurring in the second half.
Financial results
| Metric | Third quarter 2014 | Nine months 2014 |
|---|---|---|
| Net sales | $4.374 billion, down 1.6% | $12.686 billion, down 1.9% |
| Comparable sales | Down 1.8% | Down 2.2% |
| Gross margin | $1.628 billion; 37.2% of sales | $4.778 billion; 37.7% of sales |
| Operating income | $304 million | $1.035 billion |
| Net income | $142 million | $498 million |
| Diluted EPS | $0.70 | $2.43 |
| Operating cash flow | Not separately provided for the quarter | $930 million |
| Free cash flow (non-GAAP) | Not separately provided for the quarter | $287 million |
For the quarter, net sales fell $70 million and net income declined from $177 million; diluted EPS was $0.81 in the prior-year quarter. For the nine months, net income fell from $555 million and diluted EPS from $2.51. Quarterly gross margin contracted 30 basis points, mainly due to a higher mix of lower-margin national brands and increased markdowns; the year-to-date gross margin rate was unchanged. SG&A was $1.097 billion for the quarter and $3.078 billion year to date, with expense ratios rising to 25.1% and 24.3% of sales, respectively.
Balance sheet, liquidity and capital allocation
- At November 1, 2014, cash and cash equivalents were $631 million, inventory $4.973 billion, and current assets and current liabilities were $6.078 billion and $3.655 billion.
- Long-term debt was $2.793 billion; capital lease and financing obligations totaled $1.995 billion, including the current portion. Debt/capitalization was 45.2%, and the current ratio was 1.66.
- Nine-month operating cash flow of $930 million was down from $1.014 billion. Capital expenditures were $561 million, versus $465 million. Free cash flow fell to $287 million from $462 million.
- Cash decreased by $340 million during the nine months to $631 million. Financing activities used $774 million, including $549 million in share repurchases and $239 million in dividends. The company reported $10.1 billion of shares repurchased year to date and dividends of $1.17 per share.
- The company reported compliance with all debt covenants; its debt ratio was 2.43 against a maximum permitted 3.75. A revolving credit facility was available, but its capacity or borrowings are not specified in the supplied text.
Drivers, outlook and risks
- Store comparable sales weakened, while e-commerce comparable sales rose 31.1% in the quarter and 21.1% year to date. Store sales declined 4.0% for the quarter and 3.7% year to date; management cited unfavorable weather as a year-to-date traffic headwind.
- Transactions declined 2.6% in the quarter and 3.4% year to date. Higher selling prices, associated in part with increased national-brand penetration, were partly offset by fewer units per transaction.
- Management’s “Greatness Agenda” focuses on product, value, shopping experience, customer personalization and teams. The nationwide loyalty program had over 17 million enrolled customers by quarter-end. Buy-online-pick-up-in-store launched in about 100 stores, with rollout to all stores expected by the second quarter of 2015. Management expected the new beauty format in about 900 stores by fiscal year-end 2015; 512 stores had it at quarter-end.
- No specific earnings or sales guidance is stated in the supplied filing text. Management described continued investment in omnichannel capabilities, technology, remodels and growth initiatives. Capital spending also reflected a Texas call center and corporate campus expansion.
- Management said legal proceedings were not expected to have a material adverse effect. It reported no significant changes in risk factors, market risks, contractual obligations or critical accounting estimates from the prior annual report. The company was evaluating the impact and adoption method for the new revenue recognition standard, required in fiscal 2017.
- Disclosure controls were assessed as effective at a reasonable assurance level, and no material change in internal control over financial reporting was reported for the quarter.
Important facts for investors to verify
- Confirm the requested period: the supplied filing is for Q3 2014, not Q3 2013.
- Track whether store traffic and comparable sales stabilize, and whether e-commerce growth can offset store declines.
- Assess whether margin pressure from markdowns and national-brand mix persists, and whether SG&A growth can be controlled.
- Review holiday-season performance and liquidity given inventory seasonality, lower year-to-date free cash flow and continued shareholder returns.
- Evaluate capital spending and the returns from the call center, technology, store remodels and omnichannel initiatives; verify rollout milestones against management’s stated expectations.