Kohl’s Corporation — Form 10-K Summary
Period note: The filing is for fiscal 2016, the 52 weeks ended January 28, 2017, compared with fiscal 2015, ended January 30, 2016. This does not match the requested “2015 Q4” period.
Business context
Kohl’s operated 1,154 department stores in 49 states, its Kohls.com website, 12 FILA outlets and three Off-Aisle clearance centers. It sells moderately priced apparel, footwear, accessories, beauty and home goods through stores and digital channels. Fiscal 2016 results reflect a challenging retail sales environment and continued investment in omnichannel operations.
Financial results and key metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $18.686 billion | $19.204 billion |
| Comparable sales | Down 2.4% | Up 0.7% |
| Gross margin | $6.742 billion; 36.1% | $6.939 billion; 36.1% |
| SG&A | $4.435 billion; 23.7% of sales | $4.452 billion; 23.2% of sales |
| Operating income, GAAP | $1.183 billion | $1.553 billion |
| Net income, GAAP | $556 million | $673 million |
| Diluted EPS, GAAP | $3.11 | $3.46 |
| Adjusted diluted EPS, excluding specified unusual items | $3.76 | $4.01 |
| Cash from operations | $2.148 billion | $1.474 billion |
| Capital expenditures | $768 million | $690 million |
| Free cash flow, company-defined | $1.264 billion | $671 million |
| Cash and cash equivalents at year-end | $1.074 billion | $707 million |
| Working capital / current ratio | $2.273 billion / 1.76 | $2.362 billion / 1.87 |
Gross margin rate was effectively flat: higher merchandise margin was substantially offset by higher online shipping costs. SG&A dollars declined modestly, but SG&A as a share of sales rose 55 basis points as sales fell. Credit-card operations contributed $484 million of net earnings, up $28 million, primarily from higher finance charges and late fees.
Long-term debt was $2.795 billion and capital lease and financing obligations totaled $1.816 billion at year-end. Total debt, net of discount, was $4.626 billion; debt-to-capitalization was 47.2%, and adjusted debt to adjusted EBITDAR was 2.65x. The company reported compliance with its debt covenants; its $1 billion revolving credit facility matures in June 2020. Dividends paid were $358 million, and share repurchases were $557 million.
Material changes and unusual items
- Sales declined 2.7%; comparable sales fell 2.4%. Fewer transactions (down 5.5%) more than offset higher average transaction value (up 3.1%).
- GAAP operating income and net income declined. Excluding 2016 store-closure, impairment and other costs, and 2015 debt-extinguishment loss, adjusted net income was $673 million versus $781 million, down about 14%.
- 2016 included $186 million of impairment, store-closing and other costs, including charges associated with closing 18 underperforming stores and a corporate-office realignment. The store lease reserve was $103 million at year-end; related future obligations extend as long as 13 years.
- 2015 included a $169 million loss on extinguishment of debt associated with a $1.085 billion debt tender and redemption. Kohl’s issued $1.1 billion of notes in 2015 to refinance debt.
- Operating cash flow rose by $674 million, mainly reflecting lower inventory and higher accounts payable. Inventory per store decreased 5%; management cited vendor payment-term extensions and the timing of spring receipts as contributors.
- The store count decreased from 1,164 to 1,154. Capital spending increased to $768 million, including investment in a fifth e-commerce fulfillment center expected to open in 2017.
Outlook, risks and contingencies
For fiscal 2017, management forecast net sales down 1.3% to up 0.7% including a 53rd week, or down 2% to flat excluding it; comparable sales down 2% to flat; gross margin rate up 10–15 basis points; and diluted EPS of $3.50–$3.80 including the extra week, or $3.40–$3.70 excluding it. Planned capital expenditures were approximately $700 million and planned share repurchases $350 million. The company also expected $960 million of depreciation and amortization and a 37.5% effective tax rate.
Key risks identified include weak consumer spending, intense store and online competition, shifting customer preferences and inventory markdown exposure, higher shipping and labor costs, supply-chain and foreign-trade disruption, weather and seasonality, and the execution and profitability of omnichannel operations. Management specifically noted that omnichannel sales currently carry lower operating margins than its historical store-focused business. Cybersecurity, customer-data protection, supplier compliance, product safety, credit-card portfolio performance, and access to capital are also risks. Most long-term debt is fixed-rate, but higher interest rates could affect credit-card portfolio economics.
The company said it was not party to material legal proceedings, while noting that claims and proceedings arise in the ordinary course of business. It disclosed $149 million of gross unrecognized tax benefits at year-end; management did not anticipate a significant change in that balance over the next 12 months. No financial guarantees or material off-balance-sheet entities were reported. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended period: this filing reports fiscal 2016, not fiscal 2015 Q4.
- Track comparable-sales trends and transaction counts against the 2017 forecast, especially whether demand stabilizes.
- Assess whether gross-margin improvement can offset shipping, labor and other omnichannel costs.
- Review the durability of operating cash flow and free cash flow, including the roles of inventory reduction and extended vendor payment terms.
- Monitor debt and lease obligations, covenant headroom, shareholder returns and the planned $350 million of 2017 repurchases.
- Follow execution of store closures, fulfillment-center investment and the expected earnings contribution from these initiatives.