Kohl’s Corporation — Form 10-Q Summary
Period clarification: The request identifies “2008 Q2,” but the filing is for the 13 weeks ended August 1, 2009, and the six months ended August 1, 2009, compared with the periods ended August 2, 2008. Amounts are in millions, except per-share data and percentages.
Business context and reporting period
Kohl’s operates as a single business unit. Management described a difficult consumer environment, with weaker discretionary spending and comparable-store sales declines. The company operated 1,022 stores in 49 states at August 1, 2009, versus 957 stores in 47 states a year earlier. Net sales growth reflected new stores; comparable-store sales declined.
Financial results and liquidity
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net sales | $3,806 | $3,725 | $7,445 | $7,350 |
| Comparable-store sales | -2.3% | Not stated | -3.2% | Not stated |
| Gross margin | $1,520; 40.0% | $1,475; 39.6% | $2,889; 38.8% | $2,810; 38.2% |
| Operating income | $399 | $406 | $651 | $678 |
| Net income | $229 | $236 | $368 | $389 |
| Diluted EPS | $0.75 | $0.77 | $1.20 | $1.26 |
- Operating margin was 10.5% in Q2 versus 10.9% a year earlier, and 8.7% year to date versus 9.2%. SG&A increased 3.9% in Q2 and 4.0% year to date; depreciation and amortization also rose, primarily with store growth.
- Net cash from operations was $1,012 for the first six months, compared with $874 in 2008. Capital expenditures were $336 versus $558; reported free cash flow, defined as operating cash flow less capital expenditures, was $676 versus $316.
- At August 1, cash was $221 and short-term investments were $1,133. Working capital was $2,180; the current ratio was 2.04:1. Long-term debt and capital leases were $2,053, with an additional $16 current portion of capital leases. The debt-to-capitalization ratio was 22.5%.
- The company had a $900 revolving credit facility and $50 of demand-note availability, with no draws during the first six months of 2009. No debt maturities were due until 2011; management expected operating funds to repay $400 of debt due in 2011.
Material changes versus prior period
- Quarterly sales increased 2.2% and six-month sales increased 1.3%, while comparable-store sales fell 2.3% and 3.2%, respectively. New stores contributed $165 to Q2 sales growth and $328 to year-to-date growth.
- Gross margin rates improved 40 basis points in Q2 and 60 basis points year to date. Management attributed improvement to inventory discipline, increased private and exclusive brand sales, and markdown and size-optimization initiatives. Private and exclusive brands were 46% of Q2 sales and 45% year to date.
- Net income declined 3.0% in Q2 and 5.4% year to date. Operating income declined 1.7% and 4.0%, respectively. Higher net interest expense partly reflected lower capitalized interest and lower interest income.
- Operating cash flow increased despite lower earnings, with a $272 increase in accounts payable a major source. Short-term investment purchases rose substantially; short-term investments were $1,133 versus $71 a year earlier.
Outlook, commentary, risks and unusual items
- Management cited economic weakness, lower consumer confidence and reduced discretionary spending. It said inventory management and cost controls partly offset these pressures. The filing does not provide specific earnings or sales guidance.
- Kohl’s expected to open 37 stores in September 2009, mostly at former Mervyn’s locations in the Southwest. It planned 65 store remodels in 2010; 51 remodels were completed in the first six months of 2009.
- The $2.5 billion share-repurchase program was temporarily suspended. Management did not anticipate repurchases in 2009, citing the economic environment, market conditions and liquidity.
- Auction-rate securities had $399 par value and $325 fair value, with auctions persistently failing since February 2008. The portfolio had a weighted-average remaining maturity of approximately 27 years. Management intended to hold the securities and stated it did not expect to need to sell them before recovery to par; impairment was treated as temporary. Liquidity and valuation remain important risks.
- Management said legal proceedings in the ordinary course were not expected to have a material adverse effect. The company reported compliance with debt covenants and effective disclosure controls; it reported no significant changes in risk factors from its 2008 Form 10-K.
- Results are seasonal; management noted that the second half typically accounts for most sales and income. It cautioned that quarterly results are not necessarily indicative of full-year results.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q2 and the first six months of 2009, not 2008.
- Track comparable-store sales and the extent to which new-store growth, including former Mervyn’s locations, supports reported sales.
- Assess whether gross-margin gains can offset higher operating expenses and continued declines in operating income and earnings.
- Monitor auction-rate security liquidity, fair value versus par, and management’s ability to hold the portfolio until recovery.
- Review operating cash-flow quality, particularly the contribution from increased accounts payable, alongside capital spending, planned store openings and 2011 debt maturities.