Kohl’s Corporation — Form 10-K Summary
Period clarification: The request identifies “2021 Q4,” but the supplied filing is Kohl’s fiscal 2022 Form 10-K, covering the 52 weeks ended January 28, 2023. Comparatives are fiscal 2021, ended January 29, 2022.
Business context
Kohl’s operated 1,170 stores and Kohls.com, selling apparel, footwear, accessories, beauty and home products. Its strategy includes improving sales and profitability, targeting a long-term operating margin of 7%–8%, and expanding Sephora shop-in-shops. It opened 406 full-size Sephora shops during fiscal 2022, bringing the total to 606.
Key financial metrics
| Metric | Fiscal 2022 | Fiscal 2021 |
|---|---|---|
| Net sales | $17.161 billion | $18.471 billion |
| Total revenue | $18.098 billion | $19.433 billion |
| Gross margin | 33.2% | 38.1% |
| SG&A | $5.587 billion; 30.9% of revenue | $5.478 billion |
| Operating income | $246 million; 1.4% of revenue | $1.680 billion |
| Net income (loss) | $(19) million; $(0.15) diluted EPS | $938 million; $6.32 diluted EPS |
| Operating cash flow | $282 million | $2.271 billion |
| Free cash flow | $(639) million | $1.556 billion |
| Cash and cash equivalents | $153 million | $1.587 billion |
| Working capital / current ratio | $621 million / 1.20 | $1.737 billion / 1.53 |
At year-end, reported debt was $4.877 billion, including $85 million borrowed under the revolving facility; this excludes operating lease liabilities. The new $1.5 billion asset-based revolver had approximately $1.4 billion available. Adjusted debt to EBITDAR, a company-defined non-GAAP measure, rose to 4.92 from 2.33.
Changes versus fiscal 2021
- Net sales fell 7.1% and comparable sales declined 6.6%; digital sales fell 7% and represented 32% of net sales.
- Gross margin contracted 485 basis points, reflecting higher markdowns, freight costs, product-cost inflation and inventory shrink.
- SG&A increased 2.0%, driven mainly by store investment for Sephora and higher wages; the expense ratio rose 268 basis points.
- Operating income dropped to $246 million from $1.680 billion, and the company moved from net income to a $19 million net loss.
- Operating cash flow decreased substantially, reflecting lower earnings and a decline in accounts payable. Capital expenditures increased to $826 million, contributing to negative free cash flow.
- Cash fell to $153 million. Share repurchases totaled $658 million in cash during the year, including a $500 million accelerated repurchase; the company said it does not plan further repurchases until its balance sheet strengthens.
Outlook, commentary and risks
- Fiscal 2023 guidance: net sales expected to decline 2%–4%, including an approximately 1% benefit from the 53rd week; operating margin approximately 4.0%; diluted EPS $2.10–$2.70 excluding non-recurring charges; capital expenditures $600–$650 million.
- Management expected gross margin to stabilize at 36.0%–36.5% in 2023, with freight and product-cost inflation expected to moderate in the second half. SG&A dollars were expected to deleverage slightly, with wage inflation partly offset by organizational efficiencies and fewer Sephora openings.
- Management prioritized customer experience, value strategies, disciplined inventory and expense management, and strengthening the balance sheet. Its long-term leverage target is 2.5 times using its stated lease-adjusted calculation.
- Credit ratings fell below investment grade in 2022: S&P to BB+ and Moody’s to Ba2, both with stable outlooks. Downgrades increased coupon rates on certain notes, with another step-up scheduled for May 2023. The company reported covenant compliance at year-end.
- The company repaid $164 million of notes when they matured in February 2023 and planned to retire $111 million of notes due in December 2023. A quarterly dividend of $0.50 per share was declared in February 2023.
- Key risks include weakened consumer spending, competition and promotional pressure, excess inventory and markdowns, sourcing and freight disruption, labor and wage costs, cybersecurity and technology risks, and exposure to interest rates and credit-card portfolio performance.
- A putative securities class action filed in 2022 alleges misleading statements and control and governance deficiencies. The case was in early stages; Kohl’s said it intended to seek dismissal and could not estimate a reasonably possible loss.
- Thomas Kingsbury became CEO in February 2023 after serving as interim CEO. The financial-statement audit and internal-control audit received unqualified opinions; management reported effective disclosure controls and internal control over financial reporting.
Investor verification priorities
- Confirm the intended reporting period: the supplied filing is fiscal 2022, not fiscal 2021 Q4.
- Track sales, inventory levels, markdowns, shrink and the delivery of the forecast gross-margin recovery.
- Assess liquidity and leverage, including cash generation, revolver availability, debt maturities, rating-related interest increases and lease obligations.
- Evaluate whether Sephora expansion and planned capital spending generate returns sufficient to support profitability and balance-sheet targets.
- Monitor the securities litigation and the $219 million of gross unrecognized tax benefits disclosed at year-end.