Kohl's Corporation 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Kohl's Corporation for the 13-week period ended May 3, 2003. As of the reporting date, the company operated 492 stores, an increase from 420 stores in the prior year period. The company opened 35 new stores during the quarter, including significant expansion into the Los Angeles market and entry into San Antonio, Texas.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Net Sales | $2,117.7 million | $1,870.6 million |
| Gross Margin | $741.3 million (35.0%) | $656.8 million (35.1%) |
| Operating Income | $196.2 million | $184.0 million |
| Net Income | $111.0 million | $106.6 million |
| Diluted EPS | $0.32 | $0.31 |
| Cash and Equivalents | $94.7 million | $100.5 million |
| Total Debt (Current + Long-term) | $1,354.3 million | $1,061.3 million |
| Net Cash Used in Operating Activities | ($191.1 million) | ($42.3 million) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 13.2% ($247.1 million) driven by 35 new store openings and the inclusion of 75 stores opened in the prior year. This growth was partially offset by a 2.4% decline in comparable store sales.
- Expense Increases: Selling, general, and administrative (SG&A) expenses rose 15.1% to $474.1 million, increasing as a percentage of sales by 37 basis points. Depreciation and amortization increased to $55.4 million due to new store additions and remodeling.
- Interest Expense: Net interest expense increased to $17.8 million from $12.6 million, primarily due to $300 million in senior debentures issued in November 2002.
- Inventory Build: Merchandise inventories increased by $184.0 million compared to the end of the previous fiscal year, attributed to higher levels required for new stores and a late start on spring apparel sales.
- Cash Flow: Operating cash flow turned negative at $191.1 million used, compared to $42.3 million used in the prior year, largely due to inventory buildup and payments on accounts payable.
Guidance, Outlook, and Risks
- Expansion Plans: Management plans to open approximately 45 new stores in the third quarter of fiscal 2003, including entries into Phoenix, Tucson, Flagstaff, and Las Vegas.
- Capital Expenditures: Total capital expenditures for fiscal 2003 are expected to range between $800 million and $825 million.
- Liquidity and Debt: The company has $532 million and $133 million in revolving credit facilities and a $225 million Receivable Purchase Agreement, none of which were utilized as of May 3, 2003. However, $346.6 million in Liquid Yield Option Notes (LYONs) are callable by holders on June 12, 2003, and are classified as current liabilities.
- Executive Changes: Patricia Johnson resigned as Chief Financial Officer in April 2003; Arlene Meier is serving as Interim CFO.
- Seasonality: Results are subject to seasonal influences, with the majority of sales and income typically realized in the second half of the fiscal year.
Investor Verification Checklist
- Verify the impact of the 2.4% decline in comparable store sales on future profitability.
- Confirm the company's ability to fund the $346.6 million LYONs redemption due June 12, 2003, using cash on hand.
- Monitor the trend of SG&A expenses as a percentage of sales, which increased to 22.4%.
- Review the inventory levels relative to sales velocity to assess potential markdown risks.
- Assess the execution of the planned 45 new store openings in Q3 and their impact on capital expenditure budgets.