Kohl’s Corporation — Form 10-Q Summary
Period: Quarter and six months ended July 30, 2016; comparable periods ended August 1, 2015. The request metadata says “2015 Q2,” but the filing itself is for 2016 Q2.
Business context and results
Kohl’s operated 1,150 department stores, a website, 12 FILA outlets, and three Off-Aisle clearance centers. It opened three Kohl’s stores, two Off-Aisle centers, and 12 FILA outlets in the first half; 17 underperforming stores closed in June, with one further closure and six smaller-format openings planned for fall.
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net sales | $4,182 million | $4,267 million | $8,154 million | $8,390 million |
| Comparable sales | (1.8)% | Not stated here | (2.8)% | Not stated here |
| Gross margin | $1,650 million; 39.5% | $1,662 million; 38.9% | $3,062 million; 37.6% | $3,184 million; 38.0% |
| Operating income | $302 million | $424 million | $408 million | $704 million |
| Net income | $140 million | $130 million | $157 million | $257 million |
| Diluted EPS | $0.77 | $0.66 | $0.86 | $1.29 |
Quarterly sales fell 2.0%; management attributed the comparable-sales decline mainly to fewer store transactions, partly offset by online transactions. Gross margin rate improved 53 basis points in Q2, primarily from fewer promotional and permanent-clearance markdowns, but declined 40 basis points for the first half. SG&A fell 2% in Q2, though as a share of sales it deleveraged by 3 basis points; first-half SG&A rate deleveraged 38 basis points.
Cash flow, debt, and liquidity
- First-half operating cash flow was $846 million, versus $353 million a year earlier; management cited inventory reductions as the primary driver. Free cash flow, a company-defined non-GAAP measure, was $447 million versus negative $78 million.
- Capital expenditures were $340 million. Cash and cash equivalents were $700 million at July 30, 2016, down from $707 million at January 30, 2016.
- Long-term debt was $2.793 billion, with no current portion reported. Capital lease and financing obligations totaled $1.836 billion, including $127 million current. Debt/capitalization was 47.0%; working capital was $2.152 billion and the current ratio was 1.77.
- The company reported compliance with debt covenants; its covenant debt ratio was 2.52 against a maximum of 3.75. Long-term debt ratings were Baa2 from Moody’s and BBB from both S&P and Fitch.
- First-half financing used $516 million, including $267 million for share repurchases and $182 million in dividends. The board declared a further $0.50-per-share dividend payable September 21, 2016.
Material changes, outlook, and risks
Q2 included $128 million of store-closure and corporate-restructuring costs; first-half costs totaled $192 million. The Q2 charge included $119 million for future store lease obligations, $23 million for software-license write-offs, and $7 million in severance and other costs, partly offset by a $21 million write-off of previously recorded net lease obligations. The lease obligations are expected to be paid over 13 years. Management said it did not expect further material charges related to the announced closures and restructuring.
Excluding these 2016 costs and the prior-year debt-extinguishment loss, management-reported adjusted Q2 net income was $221 million and adjusted diluted EPS was $1.22, up 5% and 14%, respectively. First-half adjusted net income was $279 million and adjusted diluted EPS was $1.53, down 18% and 10%, respectively. These are non-GAAP measures and do not replace GAAP results. In Q2 2015, a $131 million debt-extinguishment loss affected reported results.
The filing provides no specific sales or earnings guidance. Management described the sales environment as challenging and said inventory, gross margin, and expenses were well managed. Results are seasonal, with the major portion of sales and income typically in the second half; quarterly results may not indicate full-year performance. Management reported no significant changes to previously disclosed risk factors, market risks, contractual obligations, or critical accounting estimates. It said pending legal proceedings were not expected to have a material adverse financial impact. The company is evaluating the effects of new lease-accounting requirements.
Important facts for investors to verify
- Confirm the reporting period: this filing covers Q2 2016, notwithstanding the request metadata’s 2015 label.
- Track whether negative comparable sales and transaction trends improve, and whether gross-margin gains can be sustained.
- Assess the cash-flow improvement in light of inventory movements and seasonal working-capital needs.
- Monitor store closures, lease-obligation payments, restructuring costs, and planned smaller-format openings.
- Compare GAAP results with the company’s adjusted non-GAAP figures and review the stated adjustments.
- Review capital allocation, including repurchases, dividends, debt, and lease obligations, alongside holiday-season performance.