Kohl’s Corporation — Form 10-Q Summary
Period: The filing covers the 13 weeks and 39 weeks ended October 31, 2015. Although the request identifies 2014 Q3, the supplied filing is for 2015 Q3; comparisons below are against the corresponding 2014 periods.
Business context
Kohl’s operated 1,166 department stores and kohls.com. It reported as one business segment. The company described its strategy as the Greatness Agenda, focused on product, value, customer experience, personalization, and teams.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $4.427 billion | $4.374 billion | $12.817 billion | $12.686 billion |
| Comparable sales growth | 1.0% | Not stated | 0.8% | Not stated |
| Gross margin | $1.643 billion; 37.1% | $1.628 billion; 37.2% | $4.827 billion; 37.7% | $4.778 billion; 37.7% |
| Operating income | $308 million | $304 million | $1.012 billion | $1.035 billion |
| Net income | $120 million | $142 million | $377 million | $498 million |
| Diluted EPS | $0.63 | $0.70 | $1.92 | $2.43 |
| Operating cash flow | Not stated separately | Not stated separately | $407 million | $930 million |
| Free cash flow | Not stated separately | Not stated separately | $(226) million | $287 million |
Q3 SG&A was $1.099 billion, or 24.8% of sales, versus 25.1% a year earlier. Nine-month SG&A was $3.120 billion, or 24.3% of sales, versus 24.3%. Interest expense was $81 million for Q3 and $248 million year to date.
At October 31, 2015, cash was $501 million, inventory $5.254 billion, current assets $6.203 billion, and current liabilities $3.939 billion. Working capital was $2.264 billion and the current ratio was 1.57. Debt included $400 million drawn on the revolving facility and $2.792 billion of long-term debt; capital lease and financing obligations were separately reported at $1.943 billion, including current amounts.
Changes and notable items
- Sales rose 1.2% in Q3 and 1.0% year to date; comparable sales rose 1.0% and 0.8%, respectively. Transactions declined, while average transaction value increased.
- Gross margin rate fell 10 basis points in Q3 and was unchanged year to date. Improved merchandise margin was offset by higher online shipping costs.
- Reported earnings included debt-extinguishment losses of $38 million in Q3 and $169 million year to date. Excluding these losses, management reported Q3 net income of $144 million and diluted EPS of $0.75; year-to-date net income was $484 million and diluted EPS $2.46.
- Operating cash flow declined to $407 million from $930 million, reflecting higher inventory and accounts payable payments, partly offset by lower tax payments. Inventory was up $281 million year over year; cost and units per store each increased 5%.
- Cash and cash equivalents declined by $906 million from the fiscal-year start. The company repurchased $789 million of stock and paid $264 million in dividends during the nine months.
Outlook, liquidity, and risks
The filing provides no specific full-year sales or earnings guidance. Management said it expected to repay the $400 million revolver draw in early December 2015 and expected approximately $17 million lower annual interest expense in 2016 following refinancing. It also planned to spend marketing savings in Q4 2015 and test new store formats in fiscal 2016.
The company had a $1.0 billion unsecured revolving credit facility maturing in June 2020 and reported compliance with debt covenants; its debt ratio was 2.52 against a maximum of 3.75. Management cited seasonality, with sales and income typically weighted to the second half, particularly the holiday period. It reported no significant changes in previously disclosed risk factors or market risks. Legal proceedings were not expected by management to have a material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for 2015 Q3, not 2014 Q3.
- Assess whether sales and comparable-sales growth can continue amid declining transaction counts and higher shipping costs.
- Track inventory, holiday-season execution, operating cash flow, and the planned repayment of the revolver draw.
- Distinguish reported earnings from earnings excluding the debt-extinguishment losses, and review the assumptions behind the company’s 2016 interest-savings expectation.
- Evaluate the impact of buybacks and dividends on liquidity and shareholders’ equity.