Kohl’s Corporation — Form 10-Q Summary
Period clarification: The filing covers the 13 weeks and 26 weeks ended August 1, 2020, not 2019 Q2 as indicated in the request metadata. Comparatives are the periods ended August 3, 2019. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Kohl’s operated 1,163 stores, a website, and 12 FILA outlets. The quarter was heavily affected by COVID-19: stores closed starting March 20 and all had reopened by August 1. Management cautions that seasonality and pandemic uncertainty make interim results poor indicators of full-year performance.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $3,213 | $4,169 | $5,373 | $7,990 |
| Total revenue | $3,407 | $4,430 | $5,835 | $8,517 |
| Operating income (loss) | $118 | $376 | $(600) | $494 |
| Net income (loss) | $47 | $241 | $(494) | $303 |
| Diluted EPS | $0.30 | $1.51 | $(3.21) | $1.89 |
| Gross margin as % of net sales | 33.1% | 38.8% | 26.8% | 37.9% |
- Q2 net sales declined 22.9%; first-half net sales declined 32.8%. Digital sales rose 58% in Q2 and 41% year to date; digital represented 41% and 43% of net sales, respectively.
- Q2 gross margin contracted 569 basis points. Management attributed the decline mainly to business mix and promotions (about 295 bps) and higher shipping costs from increased digital penetration (about 275 bps). First-half margin was also affected by $187 million of first-quarter inventory write-downs.
- Q2 SG&A fell 17.3% to $1,050 million, but rose as a share of revenue to 30.8% from 28.6%. First-half SG&A declined 16.8% to $2,116 million.
- Q2 GAAP results included a $127 million gain on a sale-leaseback. Excluding specified items, including that gain, adjusted non-GAAP diluted loss per share was $0.25. First-half adjusted non-GAAP diluted loss per share was $3.47; these measures are not GAAP results.
- First-half operating cash flow was $304 million, versus $676 million a year earlier. Investing activities used $3 million, versus $439 million; financing activities provided $1,404 million, versus $546 million used in the prior period. Cash ended the period at $2,428 million.
- At August 1, cash was $2,428 million, total long-term debt was $3,450 million, and shareholders’ equity was $4,837 million. Working capital was $3,122 million and the current ratio was 2.22. The filing reports $1.0 billion outstanding under the $1.5 billion secured revolving facility.
Material changes and unusual items
- In March, Kohl’s drew its former $1.0 billion unsecured revolver; in April it replaced that facility with a $1.5 billion secured asset-based revolver, maturing July 2024. It also issued $600 million of 9.50% notes due May 2025. The higher borrowings contributed to increased interest expense.
- The San Bernardino e-commerce fulfillment and distribution center sale-leaseback generated $193 million of net proceeds and a $127 million gain; an $84 million operating lease liability and matching right-of-use asset were recorded.
- First-half COVID-related costs identified by management totaled $307 million, including inventory write-downs, compensation and benefits, other costs, and asset write-offs. The filing also reports $51 million of first-quarter impairment charges.
- The company suspended share repurchases and its regular dividend beginning in Q2, reduced capital expenditures 55% year to date, and cut expenses and inventory receipts. First-half dividends paid were $108 million, principally before suspension.
Outlook, risks, and contingencies
Management said the pandemic was expected to continue to have a material adverse effect on full-year 2020 business, financial condition, and results, but did not provide numerical sales or earnings guidance. It expected ongoing demand volatility, gross-margin pressure from elevated digital penetration and possible heavier promotions, and potential store-traffic disruption from consumer behavior and social-distancing measures. Management said the company was in compliance with credit-facility covenants at quarter-end and expected to remain compliant for the rest of fiscal 2020. The facility includes a springing fixed-charge coverage covenant and restrictions on certain actions, including dividends under specified borrowing conditions. Management stated that pending legal proceedings were not expected to have a material adverse effect.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is for Q2 2020, not Q2 2019.
- Track subsequent sales recovery, digital mix, shipping costs, promotional intensity, and inventory levels, all of which could affect margins.
- Assess liquidity and debt servicing, including the $1.0 billion revolver borrowing, 9.50% notes, variable-rate exposure, and covenant restrictions.
- Distinguish recurring operating performance from the sale-leaseback gain and other adjustments; review the reconciliation of non-GAAP results.
- Monitor the timing and conditions for any dividend resumption and the continuing effects of COVID-19 on stores and consumer demand.