Kohl’s Corporation — FY2013 Form 10-K
Business context and reporting period. Kohl’s operates value-oriented department stores and Kohls.com. This filing covers the 52-week fiscal year ended February 1, 2014 (FY2013), with FY2012 as the prior comparable year and comprising 53 weeks. The metadata refers to Q4 2012, but the filing is the FY2013 10-K; fourth-quarter figures are included below for context.
Key financial results
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net sales | $19.031 billion | $19.279 billion |
| Comparable sales growth | -1.2% | +0.3% |
| Gross margin | $6.944 billion; 36.5% of sales | $6.990 billion; 36.3% of sales |
| Operating income | $1.742 billion; 9.2% of sales | $1.890 billion; 9.8% of sales |
| Net income | $889 million | $986 million |
| Diluted EPS | $4.05 | $4.17 |
| Cash from operations | $1.884 billion | $1.265 billion |
| Free cash flow, non-GAAP | $1.127 billion | $381 million |
FY2013 fourth-quarter sales were $6.099 billion versus $6.342 billion, net income was $334 million versus $378 million, and diluted EPS was $1.56 versus $1.66. FY2013 Q4 was 13 weeks; FY2012 Q4 was 14 weeks, including the extra fiscal week, so the quarterly comparison is not like-for-like.
Liquidity, debt and capital allocation
- Year-end cash and cash equivalents were $971 million, up from $537 million. Working capital was $2.556 billion and the current ratio was 1.93.
- Long-term debt was $2.792 billion; capital lease and financing obligations totaled $2.069 billion. Adjusted debt to EBITDAR, a non-GAAP measure, rose to 2.42 from 2.23. Debt to capitalization increased to 44.8% from 42.9%.
- The company issued $300 million of 4.75% notes in 2013. Its $1 billion revolving credit facility had no borrowings outstanding, and the company reported compliance with debt covenants.
- FY2013 capital expenditures were $643 million. The company repurchased 15 million shares for $799 million and paid $302 million in dividends.
Material changes and management commentary
- Annual sales declined 1.3%, following 2.5% growth in FY2012. Store comparable sales fell 3.0%, partly offset by 20.4% growth in e-commerce. Online sales reached $1.7 billion, about 9% of total sales.
- Gross margin rate improved 20 basis points, mainly from lower apparel costs and higher merchandise margin, but gross-margin dollars declined with sales. Higher online shipping costs partly offset the margin improvement.
- SG&A rose $46 million and increased to 22.7% of sales from 22.1%, reflecting distribution and fulfillment costs, IT investment, store expenses, and marketing. Depreciation and interest expense also increased.
- Operating cash flow improved primarily because inventory growth and certain payroll-related cash payments were lower. Management reported store inventory units per store, excluding e-commerce, down 4% year over year.
- Management’s FY2014 outlook called for total sales growth of 0.5%–2.5%, comparable sales growth of 0%–2%, gross-margin expansion of 10–30 basis points, SG&A growth of 1.5%–2.5%, and diluted EPS of $4.05–$4.45. The EPS outlook assumed $1 billion of share repurchases at an average $50 per share. Planned capital expenditures were approximately $725 million.
- Initiatives included national-brand launches, beauty-department renovations, a broader loyalty program, and continued investment in omnichannel capabilities. Management noted that e-commerce growth can weigh on profitability because of shipping costs, merchandise mix, and infrastructure investment.
Risks, contingencies and notable items
- Key risks include weak consumer spending, intense retail competition, inventory and markdown execution, sourcing and vendor compliance, merchandise and labor cost inflation, severe weather, and execution of e-commerce and omnichannel operations.
- Security or information-system disruptions, unauthorized disclosure of customer data, reputational or product-safety issues, and changes in credit-card portfolio economics could harm results.
- The business is seasonal, with a significant share of sales and income in the second half of the year. FY2012’s extra week added $169 million of sales and approximately $15 million of net income.
- Unrecognized tax benefits were $125 million, with $21 million of accrued interest and penalties; the filing said timing of potential settlements could not be reasonably estimated and did not expect a material liquidity impact.
- The company reported no material legal proceedings, no material impairment charges in FY2011–FY2013, effective internal controls, and an unqualified audit opinion.
Important facts for investors to verify
- Whether FY2014 sales and comparable-sales guidance was achieved, particularly after FY2013’s decline in store transactions.
- Whether online growth translated into improved profitability and whether fulfillment and holiday shipping costs were controlled.
- Whether gross-margin gains were sustainable amid expected modest apparel-cost increases and competitive pricing.
- How share repurchases, dividends, capital spending, and new debt affect leverage; management’s stated adjusted-debt-to-EBITDAR target was approximately 2.25.
- The comparability of reported FY2012 and FY2013 results, especially for fourth-quarter trends, given FY2012’s extra week.