Kohl’s Corporation — Form 10-Q Summary
Business context and reporting period. This filing covers the 13 and 26 weeks ended August 3, 2013, compared with the periods ended July 28, 2012. Although the request metadata identifies 2012 Q2, the filing itself reports 2013 Q2. Kohl’s operated 1,155 department stores and Kohls.com and reported as a single business unit. Amounts below are in millions unless stated otherwise. Results are seasonal and the company cautions that interim results are not necessarily indicative of full-year performance.
Financial performance and position
| Metric | Quarter ended August 3, 2013 | Prior-year quarter | Six months ended August 3, 2013 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $4,289 | $4,205 | $8,488 | $8,447 |
| Comparable sales | +0.9% | Not stated here | -0.5% | Not stated here |
| Gross margin rate | 39.1% | 39.0% | 37.7% | 37.5% |
| Operating income | $451 | $457 | $768 | $778 |
| Net income | $231 | $240 | $378 | $394 |
| Diluted EPS | $1.04 | $1.00 | $1.70 | $1.63 |
| Cash from operations | Not separately provided for quarter | $762 | $582 | |
| Capital expenditures | Not separately provided for quarter | $284 | $429 |
- Quarterly sales rose 2.0%, while net income fell about 4%; diluted EPS increased due to a lower weighted-average share count. For the six months, sales rose 0.5% and net income fell about 4%.
- Quarterly gross margin improved 2 basis points; year-to-date gross margin improved 27 basis points. Management attributed merchandise-margin improvement to lower markdowns and reduced inventory shortage. E-commerce reduced the gross-margin rate by approximately 80 basis points in both periods.
- SG&A was $1,000 for the quarter and $1,997 year to date, up 3% and 1%, respectively. Depreciation and amortization increased 7% in both comparisons; net interest expense increased 5% for the quarter and 3% year to date.
- Six-month free cash flow, a company-defined non-GAAP measure, was $426 versus $96. Cash and cash equivalents were $592 at August 3, 2013, versus $600 at July 28, 2012.
- At August 3, 2013, long-term debt was $2,492; capital lease and financing obligations were $2,095 in total, including $147 current. Debt/capitalization was 43.1%, versus 40.6% a year earlier. The company reported a 1.82 current ratio and $2,199 of working capital.
- Inventory was $3,856, up from $3,521 a year earlier. The company said inventory excluding e-commerce was up 6% per store year over year, reflecting a move toward more normalized levels.
Changes, outlook, and risks
- Comparable-store sales were uneven: store sales declined 0.7% in the quarter while e-commerce sales increased 27.9%. E-commerce revenue was $303 for the quarter and $632 year to date. Store transaction counts declined; management cited lower selling prices, clearance mix, and an unseasonably cold spring as factors.
- Management’s stated priority is profitable sales growth, with continued focus on merchandise quality, value, customer transactions, and the omni-channel experience. The filing provides no specific earnings or sales guidance.
- After a Texas loyalty-program pilot, Kohl’s expected to expand the program to California in the third quarter and continued to adjust program terms. It also completed a staged replacement of its e-commerce platform during the quarter and invested in omni-channel-related technology.
- Operating cash flow increased, while capital spending fell by $145, primarily due to fewer remodels and new stores and lower e-commerce fulfillment-center spending, partly offset by higher technology spending. Share repurchases were $279 for the six months, down from $623; dividends paid were $153 in both periods.
- The company issued $350 of senior debt in September 2012, contributing to higher leverage and interest expense. It amended its $1 billion revolving credit facility in June 2013, extending the remaining term to June 2018 and changing a debt covenant. Kohl’s reported covenant compliance and expected continued compliance in fiscal 2013.
- Legal proceedings were not expected by management to have a material adverse impact. The filing reported no significant changes to previously disclosed risk factors, market risks, or contractual obligations. Management said disclosure controls were effective and reported no material internal-control changes during the quarter.
- Long-term investments included auction-rate securities with a $58 fair value and Level 3 valuation inputs; management said it intended to hold them until maturity or recovery at par and did not expect to need to sell before recovery. The filing notes that assumptions about redemption timing and discount rates affect valuation.
Important facts for investors to verify
- Whether e-commerce growth can translate into profitable growth given its lower gross margin and shipping costs.
- Whether comparable-store sales and store traffic improve, particularly after the weak year-to-date store trend.
- Inventory levels, turnover, accounts payable relative to inventory, and the effect of clearance activity on margins.
- Capital spending needs, operating cash generation, and the sustainability of free cash flow alongside dividends and repurchases.
- Debt and lease obligations, covenant terms, and refinancing or interest-cost exposure; the filing states debt covenant compliance as of August 3, 2013.
- The valuation assumptions and eventual recovery of auction-rate securities, and developments in legal proceedings and other risks described in the company’s prior annual filing.