KSS

Kohl's Corporation 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended November 1, 1997, and the nine-month period ended on the same date. Kohl's Corporation is a department store retailer operating 182 stores as of the period end, up from 150 stores in the prior year. The company continues an aggressive expansion strategy, having opened 32 new stores in the current fiscal year.

Key Financial Metrics

Cash Flow (9 Months): Net cash used in operating activities was $120.5 million, primarily due to a $234.0 million increase in operating assets (inventory buildup). Net cash used in investing activities was $167.4 million, driven by capital expenditures of $163.9 million. Net cash provided by financing activities was $287.3 million, largely from the issuance of common stock.

Material Changes vs. Prior Period

• Revenue Growth: Net sales increased 26.7% ($159.7 million) for the quarter and 28.6% ($441.0 million) for the nine months compared to the prior year. Growth was driven by 32 new stores opened in 1997 and 22 from 1996, plus comparable store sales growth of 10.6% (quarter) and 10.2% (nine months).
• Profitability: Net income rose 48.4% for the quarter and 36.0% for the nine months. Gross margin percentages improved slightly (33.5% vs 33.2% for the quarter) due to sales mix and the elimination of the electronics business in 1996.
• Expense Leverage: Selling, general, and administrative (SG&A) expenses as a percentage of sales declined to 22.8% for the quarter (from 23.1%) and 23.8% for the nine months (from 24.1%), demonstrating operational leverage.
• Balance Sheet: Merchandise inventories increased by $329.0 million from the beginning of the fiscal year to support fall inventory and new store openings. Total shareholders' equity increased significantly to $874.6 million following a public stock offering.

Guidance, Outlook, and Risks

Management Commentary: Management attributes financial improvements to successful store expansion and the ability to leverage fixed costs against higher sales volumes. Preopening expenses were $6.4 million for the quarter and $18.6 million for the nine months, associated with new store openings.

Liquidity and Capital: In August 1997, the company issued 4,570,300 shares of common stock, generating net proceeds of approximately $282.9 million. These funds were used for general corporate purposes, including financing store growth and debt paydown. Management anticipates that current working capital, operating cash flows, and credit facilities will satisfy future operating needs and capital expenditures.

Risks and Contingencies:

• Seasonality: Operations are seasonal, with peak buying in "back-to-school" and Christmas seasons.
• Legal/Tax: The company is involved in routine legal matters, which management does not expect to have a material adverse impact. An IRS audit for fiscal years 1986-1991 was resolved in September 1997 with no material adverse impact.
• Forward-Looking Statements: The filing contains forward-looking statements regarding debt service and capital expenditures which are subject to risks and uncertainties.

Investor Verification Checklist

• Inventory Valuation: Verify the impact of the LIFO method on inventory valuation; inventories would be approximately $9.8 million higher under FIFO.
• Comparable Store Sales: Confirm the sustainability of the 10.2% - 10.6% comparable store sales growth rate in future quarters.
• Capital Expenditures: Monitor the $163.9 million in capital expenditures against the $282.9 million equity raise to assess remaining liquidity for future expansion.
• EPS Dilution: Note that under the new FASB Statement No. 128 (effective Dec 1997), diluted EPS would be slightly lower ($0.41 and $0.90) due to unexercised stock options.
• Operating Cash Flow: Review the $120.5 million cash outflow from operations, which is typical for the seasonal inventory buildup but requires monitoring of working capital efficiency.