Kohl’s Corporation — Form 10-Q summary
Period: The filing covers the quarter and nine months ended November 2, 2019, compared with November 3, 2018. Although the request metadata says “2018 Q3,” the supplied filing is for 2019 Q3. Dollar amounts are in millions except per-share data.
Business and performance
Kohl’s operated 1,159 stores, its website and 12 FILA outlets. Third-quarter comparable sales rose 0.4%; year-to-date comparable sales fell 1.9%. Management cited stronger Active and digital sales, improved store performance and gains across most business lines in the quarter. Digital sales grew at a mid-teens rate in the quarter and low double digits year to date, representing 22% and 21% of net sales, respectively.
| Metric | Three months ended Nov. 2, 2019 | Three months ended Nov. 3, 2018 | Nine months ended Nov. 2, 2019 | Nine months ended Nov. 3, 2018 |
|---|---|---|---|---|
| Total revenue | $4,625 | $4,628 | $13,142 | $13,406 |
| Operating income | $204 | $258 | $698 | $920 |
| Net income | $123 | $161 | $426 | $529 |
| Diluted EPS | $0.78 | $0.98 | $2.67 | $3.19 |
| Gross margin as % of net sales | 36.3% | 37.0% | 37.3% | 37.8% |
Financial position and cash flow
- For the nine months, operating cash flow was $1,045, down from $1,423. Capital expenditures were $678, versus $458, and cash used in investing was $670, versus $452. Cash used in financing was $819, compared with $1,232.
- Cash and cash equivalents were $490 at November 2, 2019, versus $1,047 a year earlier. Working capital was $1,706 and the current ratio was 1.42, compared with $2,330 and 1.58, respectively.
- Long-term debt was $1,856, excluding lease and financing obligations. The company also reported $3,715 of operating and finance lease liabilities and $532 of financing obligations. No amounts were drawn on its $1.0 billion revolving credit facility, extended to July 2024.
- Year-to-date share repurchases were $387 and dividends paid were $319 ($2.01 per share). The board declared a $0.67-per-share quarterly dividend payable December 24, 2019.
Material changes and notable items
- Quarterly total revenue was nearly flat, but operating income fell $54 and net income fell $38 year over year. Diluted EPS declined 20%, as management reported.
- Year-to-date revenue declined $264 and net income declined $103. Gross margin contracted 51 basis points year to date.
- Quarterly gross margin declined 67 basis points, reflecting more promotional markdowns amid heightened competition, product mix and higher digital shipping costs. SG&A rose 3.2% in the quarter and 1.4% year to date, with expense deleverage attributed in part to store costs, rent, brand launches, the Amazon returns initiative, wage pressure and marketing investment.
- Year-to-date results included $55 of impairment, store-closing and other costs: $49 of lease-asset impairments related to four Kohl’s store closures and $6 related to closing four Off-Aisle clearance centers and a voluntary role-reduction program. A $9 gain on extinguishment of debt arose from the purchase of leased equipment. The prior-year nine-month period included a $42 debt-extinguishment loss.
- Kohl’s adopted the new lease accounting standard in fiscal 2019 and did not restate prior periods. The adoption added lease assets and liabilities to the balance sheet; management did not expect a material prospective impact on net income.
Outlook, risks and controls
The filing provides no specific sales or earnings guidance. Management noted seasonal concentration of sales and income in the second half, including the holiday period, and identified economic conditions, higher wages, sourcing costs and tariffs as factors that could affect results. Management said it was in compliance with debt covenants and expected to remain compliant for the rest of fiscal 2019. It assessed disclosure controls as effective; implementation of a new ERP system on August 4, 2019 changed internal controls over financial reporting. Management stated that pending legal proceedings were not expected to have a material adverse impact and reported no significant changes to previously disclosed risk factors or market risks.
Important facts for investors to verify
- Confirm the reporting-period mismatch: the supplied filing is for the quarter ended November 2, 2019, not 2018 Q3.
- Assess whether comparable-sales momentum can persist and whether promotions, digital fulfillment costs and competition continue to pressure margins.
- Review cash generation, seasonal inventory needs, planned capital spending, and the balance-sheet impact of lease obligations alongside reported debt.
- Track the effects of store closures, the voluntary role reduction, ERP implementation and the Amazon commercial agreement, including the warrants issued in connection with that agreement.