Kohl’s Corporation — Form 10-Q Summary
Period clarification: The request identifies 2016 Q2, but the filing is for the quarter and six months ended July 29, 2017, compared with periods ended July 30, 2016.
Business context and reporting period
Kohl’s operated 1,154 department stores, a website, 12 FILA outlets, and four Off-Aisle clearance centers. The company reports as one business unit. Results are seasonal, with a larger share of sales and income typically generated in the second half of the fiscal year.
Key financial results
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $4.144 billion | $4.182 billion | $7.987 billion | $8.154 billion |
| Comparable sales | (0.4%) | Not stated | (1.5%) | Not stated |
| Gross margin | $1.633 billion; 39.4% | $1.650 billion; 39.5% | $3.031 billion; 38.0% | $3.062 billion; 37.6% |
| Operating income | $407 million | $302 million | $591 million | $408 million |
| Net income | $208 million | $140 million | $274 million | $157 million |
| Diluted EPS | $1.24 | $0.77 | $1.62 | $0.86 |
| Operating cash flow | Not provided for quarter | $376 million | $846 million | |
| Free cash flow (company-defined, non-GAAP) | Not provided for quarter | $(90) million | $447 million |
Q2 gross margin rate fell 6 basis points; first-half gross margin rate rose 39 basis points. SG&A was $983 million in Q2 and $1.958 billion year to date. As a share of sales, SG&A deleveraged 12 basis points in Q2 and 4 basis points year to date. Depreciation and amortization was $243 million for Q2 and $482 million for the first half. Net interest expense was $75 million and $150 million, respectively.
Liquidity, debt, and capital allocation
At July 29, 2017, cash and cash equivalents were $552 million, total current assets $4.740 billion, and current liabilities $2.615 billion. Working capital was $2.125 billion and the current ratio was 1.81. Long-term debt was $2.796 billion; capital lease and financing obligations totaled $1.770 billion, including current obligations. The reported debt-to-capitalization ratio was 47.6%.
First-half investing cash outflow was $383 million, including $399 million of property and equipment purchases. Financing cash outflow was $515 million, including $250 million of share repurchases and $186 million of dividends ($1.10 per share). Cash declined by $522 million from the fiscal-year start. The board declared a subsequent quarterly dividend of $0.55 per share, payable September 20, 2017.
The company reported compliance with all debt covenants and expected to remain compliant through the rest of fiscal 2017. Its covenant debt ratio was 2.60 versus a maximum permitted 3.75. It reported investment-grade long-term debt ratings from Moody’s, S&P, and Fitch. No significant changes to contractual obligations were reported.
Changes, commentary, outlook, and risks
- Sales fell 0.9% in Q2 and 2.0% year to date. Comparable sales declined 0.4% and 1.5%, respectively. Lower transaction counts were partly offset by higher average transaction value; management said Q2 transaction trends improved significantly over prior quarters.
- Management attributed Q2 gross-margin pressure chiefly to higher shipping costs, which outweighed benefits from inventory management and markdowns. First-half margin improvement also reflected lower seasonal carryover.
- Q2 net income increased from $140 million to $208 million, while first-half net income rose from $157 million to $274 million. However, 2016 comparisons included impairment, store-closing, and restructuring costs: $128 million in Q2 and $192 million in the first half. Excluding those costs, 2016 adjusted diluted EPS was $1.22 for Q2 and $1.53 year to date, versus 2017 GAAP EPS of $1.24 and $1.62.
- Operating cash flow fell $470 million year over year in the first half, primarily due to timing of inventory receipts and related payments; excess inventory at the start of 2016 also affected the comparison. Higher technology spending and investment in a fifth e-commerce fulfillment center contributed to increased capital spending. First-half free cash flow turned negative.
- Management provided no specific sales or earnings guidance in the supplied filing text. It noted that results are seasonal and that quarterly performance is not necessarily indicative of full-year results.
- The company adopted share-based payment accounting changes that put related tax benefits or detriments through income tax expense; management said this may add volatility to future effective tax rates. The forthcoming revenue standard was not expected to materially affect certain identified items, though other impacts remained under evaluation. The lease standard was expected to materially increase balance-sheet assets and liabilities.
- Management stated that pending legal proceedings were not expected to have a material adverse financial impact. It reported no significant changes to previously disclosed risk factors or market risks, and said disclosure controls were effective.
Important facts for investors to verify
- Confirm the intended period: this filing covers Q2 2017, not Q2 2016.
- Assess whether sales and comparable-sales trends stabilized, and monitor transaction counts, category performance, and regional trends.
- Evaluate the sustainability of earnings growth after accounting for 2016 store-closure and restructuring charges.
- Track operating cash flow, inventory and vendor-payment timing, capital expenditures, and the return on the e-commerce fulfillment-center investment.
- Review the effect of ongoing share repurchases and dividends on cash, equity, and leverage, along with covenant headroom and future lease-accounting impacts.