Kohl’s Corporation — Form 10-Q Summary
Reporting period: Quarter and nine months ended October 29, 2022, compared with October 30, 2021. The request metadata says “2021 Q3,” but the filing itself is for 2022 Q3.
Business context and key results
Kohl’s operated 1,166 stores and its e-commerce site as an omnichannel retailer. It reported one business segment. Dollar amounts below are in millions except per-share data.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $4,052 | $4,366 | $11,386 | $12,251 |
| Total revenue | $4,277 | $4,600 | $12,079 | $12,934 |
| Operating income | $200 | $387 | $548 | $1,230 |
| Net income | $97 | $243 | $254 | $639 |
| Diluted EPS | $0.82 | $1.65 | $2.02 | $4.19 |
| Operating margin | 4.7% | 8.4% | 4.5% | 9.5% |
Performance, cash flow, and liquidity
- Q3 net sales fell 7.2%; comparable sales declined 6.9%. For the nine months, net sales fell 7.1% and comparable sales declined 6.6%, driven by lower traffic and smaller baskets. Digital sales declined 8% in Q3 and 4% year to date; digital penetration was 29% in both periods.
- Q3 gross margin was 37.3% of net sales, down 263 basis points; nine-month gross margin was 38.4%, down 215 basis points. Management cited freight costs, product-cost inflation, and shrink, partly offset in Q3 by pricing and promotional optimization.
- Q3 SG&A decreased 3.3% to $1,334, but rose to 31.2% of revenue from 30.0%. Nine-month SG&A increased 3.1% to $3,910 and was 32.4% of revenue versus 29.3%. Store and corporate cost reductions helped Q3; year-to-date costs included Sephora investments, proxy-contest and strategic-review expenses, transportation costs, and wage increases.
- Operating cash flow was a use of $425 for the nine months, versus a source of $1,774 a year earlier. The filing attributes the decline to lower earnings and inventory growth, including beauty inventory for Sephora and inventory rebuilt toward normalized levels. Capital expenditures were $733, versus $426; investing cash use was $702.
- Cash and cash equivalents were $194 at October 29, 2022, down from $1,873 a year earlier and $1,587 at fiscal year-end. Working capital was $948, compared with $1,949 a year earlier; the current ratio was 1.21 versus 1.49.
- Revolving-credit borrowings were $668; unsecured senior debt was $1,923 before discounts and current-portion classification ($1,747 reported as long-term debt and $164 current). The company reported compliance with all debt covenants. Lease liabilities totaled $5,128; financing-obligation liabilities totaled $462.
Changes, outlook, and notable items
- Interest expense rose to $81 in Q3 from $66 and to $226 year to date from $195, reflecting more financing leases and revolving-credit borrowing. The prior-year nine-month period included a $201 loss on debt extinguishment; 2022 had no such charge.
- Kohl’s withdrew its prior full-year 2022 guidance and said it would not provide Q4 guidance, citing volatile trends, macroeconomic headwinds, and the unexpected CEO transition. Its stated long-term strategic objectives include 7%–8% operating margin.
- In September 2022, S&P downgraded Kohl’s from BBB- to BB+; Moody’s placed its rating under review for downgrade. The downgrade triggered 25-basis-point coupon increases on certain notes. Further rating reductions could affect debt-market access and borrowing costs.
- The company opened 399 Sephora shop-in-shops year to date, for 599 total, and planned seven more in 2022 and at least 250 in 2023. It also planned to expand Sephora’s presence to approximately 300 remaining stores.
- Kohl’s used $500 million for an accelerated share repurchase (ASR), receiving 11.8 million shares in Q3 and a further 6.1 million after quarter-end, 17.9 million total at approximately $28 per share. Year-to-date cash dividends were $184 million ($1.50 per share); a $0.50 quarterly dividend was declared after quarter-end.
- CEO Michelle Gass announced her resignation effective December 2, 2022; Thomas Kingsbury was appointed interim CEO from that date. A putative shareholder securities class action filed in September alleges misleading statements and control deficiencies. The company intends to seek dismissal; it could not estimate a reasonably possible loss.
- After quarter-end, CFO Jill Timm received a $900,000 cash award, payable in two installments subject to the agreement’s employment terms.
Important facts for investors to verify
- Whether sales, comparable-sales trends, margins, and inventory levels improved in subsequent quarters, and how management’s withdrawal of guidance was addressed.
- Cash needs and access to liquidity, including revolving-credit availability, debt maturities, covenant terms, and the effects of credit-rating changes.
- Returns on Sephora and other capital investments, including store build-out spending and the planned expansion schedule.
- Progress and potential financial impact of the shareholder lawsuit, and any developments in executive leadership or related compensation arrangements.
- Whether share repurchases and dividends remain consistent with the company’s liquidity and capital-allocation priorities.