Kohl’s Corporation — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 31, 2009. The request metadata says 2008 Q3, but the filing itself is for 2009 Q3. Unless otherwise stated, amounts are in millions of dollars.
Business context and results
Kohl’s operated 1,059 stores in 49 states at quarter-end, versus 1,004 stores in 48 states a year earlier. Results reflect a still-challenging consumer environment, store growth, and seasonal retail patterns; management cautions that quarterly results may not indicate full-year performance.
| Metric | Q3 2009 | Q3 2008 | Nine months 2009 | Nine months 2008 |
|---|---|---|---|---|
| Net sales | $4,051 | $3,804 | $11,496 | $11,153 |
| Comparable-store sales | +2.4% | — | -1.3% | — |
| Operating income | $339 | $285 | $990 | $963 |
| Net income | $193 | $160 | $560 | $549 |
| Diluted EPS | $0.63 | $0.52 | $1.83 | $1.79 |
Financial position and cash flow
- Gross margin was 38.0% in Q3, up about 58 basis points, and 38.5% year to date, up about 57 basis points. Management attributed improvement to inventory management, markdown initiatives, and greater private- and exclusive-brand sales.
- Q3 operating margin was 8.4%, versus 7.5%; year-to-date operating margin was 8.6%, approximately flat. Q3 SG&A was 25.4% of sales, improving from 25.8%; year-to-date SG&A rose to 25.7% from 25.4%.
- Operating cash flow for the first nine months was $1,358, versus $828. Capital expenditures were $550, producing reported free cash flow of $808, compared with negative $15 a year earlier. Higher accounts payable, including inventory payment timing, was a significant contributor to operating cash flow.
- At October 31, cash was $232 and short-term investments were $1,299. Working capital was $2,568 and the current ratio was 1.85:1. Inventory was $3,807; accounts payable was $2,071.
- Long-term debt and capital leases totaled $2,054 on the balance sheet; the covenant calculation reported total debt of $2,071. No short-term debt was outstanding. Kohl’s had a $900 revolving facility, with no draws in 2009, and reported compliance with debt covenants.
Changes, outlook, and risks
- Q3 sales rose 6.5%, including $156 of growth from new stores; comparable sales increased 2.4%. Management estimated Mervyn’s closures added about 200 basis points to Q3 comparable sales and 160 basis points year to date. E-commerce revenue increased 38% in Q3 to $112 and 35% year to date to $289.
- Management said the core customer continued to face economic pressures and expected a highly competitive fourth-quarter market. It planned to invest more in store payroll in Q4 to support customer service.
- Management expected fiscal 2009 free cash flow of $950–$1,000, compared with $687 in fiscal 2008. It planned 30 new stores and 65 remodels in 2010. The filing gives two capital-spending outlook figures: approximately $750 for 2010 in the executive summary and approximately $650 for the fiscal year ending January 31, 2010 in the liquidity discussion; the periods may differ, but the text does not clearly reconcile them.
- Auction-rate securities had $387 par value and $325 fair value at quarter-end; auctions had persistently failed since February 2008. Kohl’s classified them as long-term, stated it intended to hold them until value recovered to par, and said liquidity needs did not require an earlier sale. Substantially all principal and interest were described as insured.
- Management cited economic weakness, reduced discretionary spending, and competitive conditions as risks. It reported no significant changes to the risk factors in its 2008 Form 10-K. It said routine legal matters were not expected to materially affect the financial statements and that contractual obligations and market risks had not significantly changed.
- The $2.5 billion share-repurchase program was temporarily suspended; management did not anticipate repurchases in 2009. Disclosure controls were deemed effective at a reasonable assurance level, with no material changes to internal control reported.
Important facts for investors to verify
- Confirm the correct reporting period: the filing is for the quarter ended October 31, 2009, notwithstanding the “2008 Q3” request metadata.
- Clarify the different capital-expenditure estimates and the fiscal periods they cover.
- Assess how much of the operating-cash-flow increase came from accounts-payable timing and whether that level is sustainable.
- Review auction-rate-security liquidity, valuation, insurance coverage, and the assumptions behind management’s expectation of recovery to par.
- Evaluate comparable-sales performance excluding the estimated benefit from Mervyn’s closures, as well as the seasonal and macroeconomic risks to fourth-quarter results.