Kohl’s Corporation — Form 10-Q Summary
Period: The filing covers the 13 weeks ended April 30, 2016, compared with the 13 weeks ended May 2, 2015. Although the request identifies 2015 Q1, the filing itself is for the first quarter of 2016. Kohl’s operated 1,167 department stores and a website at quarter-end.
Financial performance
| Metric | Quarter ended April 30, 2016 | Prior-year quarter | Change |
|---|---|---|---|
| Net sales | $3.972 billion | $4.123 billion | Down 3.7%; comparable sales down 3.9% |
| Gross margin | $1.412 billion; 35.5% of sales | $1.523 billion; 36.9% of sales | Down 139 basis points as a percentage of sales |
| SG&A | $1.008 billion; 25.4% of sales | $1.016 billion; 24.6% of sales | Expense down 1%; rate deleveraged 75 basis points |
| Operating income | $106 million | $280 million | Down $174 million |
| Net income | $17 million; diluted EPS $0.09 | $127 million; diluted EPS $0.63 | Down $110 million |
| Operating cash flow | $140 million | $102 million | Up $38 million |
| Free cash flow (non-GAAP) | $(64) million | $(101) million | Improved $37 million |
Excluding $64 million of store-closure and corporate-restructuring charges ($41 million net of tax), management reported net income of $58 million and diluted EPS of $0.31, versus $127 million and $0.63 a year earlier.
Balance sheet and liquidity
- Cash and cash equivalents were $423 million at April 30, 2016, down from $707 million at January 30, 2016 and $1.195 billion at May 2, 2015.
- Merchandise inventories were $4.084 billion, down $81 million year over year; inventory per store was down 2%.
- Long-term debt was $2.793 billion. Capital lease and financing obligations totaled $1.897 billion, including current obligations. The filing reports $4.712 billion of total debt for its debt-covenant calculation.
- Working capital was $2.208 billion and the current ratio was 1.83, versus $2.713 billion and 1.91 a year earlier. Debt/capitalization was 47.0%, up from 44.0%, primarily reflecting lower shareholders’ equity associated mainly with repurchases.
- Capital expenditures were $177 million. The company repurchased $126 million of treasury stock and paid $91 million in dividends. The board declared a further quarterly dividend of $0.50 per share, payable June 22, 2016.
- Kohl’s said it was in compliance with debt covenants; its debt ratio was 2.55 against a maximum permitted 3.75. Credit ratings were Baa2 from Moody’s and BBB from both S&P and Fitch.
Material changes and management commentary
- Comparable sales fell 3.9%. Transactions decreased 4.8%, partly offset by a 1.9% increase in units per transaction; average transaction value rose 0.9%. Management attributed the sales decline primarily to fewer store transactions, partly offset by growth in online transactions.
- Clearance activity to reduce excess inventory lowered selling price per unit and was the primary reason gross margin declined 139 basis points.
- SG&A dollars declined $8 million as expenses were reduced in response to lower sales, but SG&A as a share of sales increased. Marketing spending rose, while store and corporate expenses declined.
- Interest expense declined 6%, which the company attributed to debt refinancing completed in the second quarter of 2015. Depreciation and amortization increased 3%, mainly due to higher IT amortization.
- Operating cash flow improved year over year, reflecting lower inventory levels, partly offset by lower net income and the timing of tax payments. Cash declined during the quarter as investing and financing outflows exceeded operating cash generation.
Outlook, unusual items, and risks
- Kohl’s announced plans to close 18 underperforming stores in fiscal 2016; all but one were expected to close in June 2016. The quarter included $53 million of store and asset impairments and $11 million of severance and other costs.
- The company expected an additional $105 million to $110 million of related charges in the second quarter of 2016, slightly above its prior estimate because more employees selected severance rather than relocation.
- No specific sales or earnings guidance is provided in the supplied filing text. Management cautioned that the business is seasonal, with the largest share of sales and income generally in the second half of the fiscal year; quarterly results are not necessarily indicative of full-year results.
- Management said legal proceedings and claims were not expected to have a material adverse impact. The filing reports no significant changes to previously disclosed risk factors or market risks. Forward-looking statements remain subject to risks that could cause actual results to differ.
- The filing says the company expected no material impact from adopting the new revenue standard, planned for the first quarter of 2018, and was evaluating the effects of the new lease standard, required in the first quarter of 2019.
Important facts for investors to verify
- Confirm the period: this is a 2016 first-quarter filing, not a 2015 first-quarter filing.
- Track comparable sales, especially store transactions and online performance, and whether clearance markdowns continue to pressure gross margin.
- Assess the timing and total cost of the 18 store closures and corporate realignment, including the forecast second-quarter charges.
- Monitor cash generation, cash balances, inventory, capital spending, dividends, and discretionary share repurchases.
- Review debt and lease obligations, covenant headroom, and the effect of lower equity on leverage measures.