Kohl’s Corporation — Form 10-Q Summary
Reporting-period note: The request metadata says 2017 Q1, but the filing is for the 13 weeks ended May 5, 2018, with comparison to the 13 weeks ended April 29, 2017.
Business context and period
Kohl’s operated 1,158 department stores, a website, 12 FILA outlets and four Off-Aisle clearance centers. It reports as a single business unit. Results are seasonal; management cautions that one quarter is not necessarily indicative of the full year.
Financial performance
| Metric | Quarter ended May 5, 2018 | Prior comparable quarter |
|---|---|---|
| Net sales | $3.953 billion | $3.815 billion |
| Other revenue | $255 million | $250 million |
| Total revenue | $4.208 billion | $4.065 billion |
| Gross margin | $1.457 billion; 36.9% of net sales | $1.387 billion; 36.4% |
| Operating income | $210 million | $185 million |
| Net income | $75 million | $66 million |
| Diluted EPS | $0.45 | $0.39 |
| Operating cash flow | $387 million | $46 million |
GAAP income before taxes was $97 million, including a $42 million loss on extinguishment of debt. Excluding that loss, management reported non-GAAP adjusted net income of $107 million and adjusted diluted EPS of $0.64, versus prior-year adjusted EPS of $0.39. The filing says GAAP diluted EPS increased 15% and adjusted EPS increased 65%.
SG&A was $1.259 billion, or 29.9% of total revenue; management described a 6-basis-point deleverage. Depreciation and amortization was $243 million, and net interest expense was $71 million. The effective tax rate was 22.8%, compared with 39.2%.
Liquidity, debt and cash flows
Cash and cash equivalents were $822 million at May 5, 2018, down from $1.308 billion at February 3, 2018. Net cash decreased $486 million during the quarter. Investing activities used $133 million, including $133 million of property and equipment purchases; financing activities used $740 million.
At May 5, 2018, total current assets were $4.983 billion and current liabilities were $2.830 billion. Working capital was $2.153 billion and the current ratio was 1.76. Long-term debt was $2.301 billion on the balance sheet, and capital lease and financing obligations totaled $1.686 billion, including the current portion. Debt to capitalization was 42.7%, versus 47.9% a year earlier.
Kohl’s completed a $500 million senior-debt tender offer, paying $35 million in premiums and recording a total $42 million extinguishment loss. Management said the transaction reduced the weighted-average coupon by 8 basis points, extended remaining weighted-average maturity by six months and is expected to lower annual interest expense by approximately $25 million. The company paid $101 million in dividends ($0.61 per share) and repurchased $70 million of stock. It reported compliance with all debt covenants and expected to remain compliant for the rest of fiscal 2018.
Changes, outlook and other disclosures
- Comparable sales rose 3.6% on a fiscal basis, but 0.4% on a shifted basis that adjusts for the extra week in fiscal 2017. Average transaction value increased, while transactions were relatively flat on a fiscal basis.
- Home, Footwear and Men’s were the strongest merchandise categories; Children’s was the most challenging. Weather hurt performance in the Northeast and Mid-Atlantic.
- Gross margin improved 50 basis points, which management attributed to a clean starting inventory position and fewer markdowns. Inventory per store declined 7% year over year.
- Other revenue increased 2%, primarily from higher credit-card interest and late fees. SG&A growth was driven mainly by technology investment and executive-transition costs; store expenses were flat.
- No specific sales or earnings guidance was provided in the supplied filing text. Management noted that the back-to-school and holiday periods typically account for substantial portions of annual sales.
- The company adopted ASC 606 retrospectively; it changed reported revenue and expense classifications but had no effect on net income, EPS or cash flows. The company said the new lease standard, effective in Q1 2019, is expected to materially affect the balance sheet.
- Management reported no significant changes to previously disclosed risk factors or market risks, no material expected adverse effect from ongoing legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Confirm the intended period: the supplied filing covers Q1 2018, not Q1 2017.
- Assess the difference between 3.6% fiscal-basis comparable-sales growth and 0.4% shifted-basis growth.
- Review the quality and sustainability of operating cash flow, which increased sharply year over year and was primarily attributed to changes in accounts payable.
- Evaluate the $42 million debt-extinguishment charge and management’s estimate of approximately $25 million in annual interest savings.
- Monitor the expected balance-sheet impact of lease-accounting adoption and ongoing technology and omnichannel investments.