UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended August 4, 2001 ---------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ________________ ______________ Commission file number 1-11084 -------- KOHL'S CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) WISCONSIN 39-1630919 - --------------------------------- ---------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (262) 703-7000 -------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 Days. Yes X No ----- ______ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: August 30, 2001 Common ---------------------- Stock, Par Value $.01 per Share, 334,599,944 shares Outstanding. - ---------------------------------------------------------------
KOHL'S CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at August 4, 2001, February 3, 2001 and July 29, 2000 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended August 4, 2001 and July 29, 2000 4 Condensed Statement of Changes in Shareholders' Equity for the Six Months Ended August 4, 2001 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 4, 2001 and July 29, 2000 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-13 PART II. OTHER INFORMATION Item 4 Submission of Matters to a Vote of 14 Security Holders Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 2
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> August 4, February 3, July 29, 2001 2001 2000 ------------------------------------------- (Unaudited) (Audited) (Unaudited) (In thousands, except share amounts) <S> <C> <C> <C> Assets ---------- Current assets: Cash and cash equivalents $ 4,563 $ 123,621 $ 3,925 Short-term investments 164,663 48,600 - Accounts receivable, net 703,630 681,256 534,265 Merchandise inventories 1,167,652 1,003,290 1,007,340 Deferred income taxes 40,770 39,531 22,346 Other 37,437 25,599 35,786 ---------- ---------- ---------- Total current assets 2,118,715 1,921,897 1,603,662 Property and equipment, net 1,909,180 1,726,450 1,539,271 Other assets 76,843 65,634 57,285 Favorable lease rights 174,707 126,635 132,361 Goodwill 11,938 14,538 17,138 ---------- ---------- ---------- Total assets $4,291,383 $3,855,154 $3,349,717 ========== ========== ========== Liabilities and Shareholders' Equity ---------------------------------------- Current liabilities: Accounts payable $ 397,330 $ 399,939 $ 328,714 Accrued liabilities 175,276 188,863 147,136 Income taxes payable 28,685 112,927 15,771 Short-term debt 5,000 5,000 35,000 Current portion of long-term debt 16,358 16,568 16,589 ---------- ---------- ---------- Total current liabilities 622,649 723,297 543,210 Long-term debt 1,091,150 803,081 804,594 Deferred income taxes 96,348 84,256 74,013 Other long-term liabilities 43,565 41,881 37,079 Shareholders' equity: Common stock-$.01 par value, 800,000,000 shares authorized, 334,530,094, 332,167,129 and 330,101,803 issued at August 4, 2001, February 3, 2001 and July 29, 2000, respectively 3,346 3,322 3,301 Paid-in capital 985,491 912,107 855,550 Retained earnings 1,448,834 1,287,210 1,031,970 ---------- ---------- ---------- Total shareholders' equity 2,437,671 2,202,639 1,890,821 ---------- ---------- ---------- Total liabilities and shareholders' equity $4,291,383 $3,855,154 $3,349,717 ========== ========== ========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 3
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) <TABLE> <CAPTION> 3 Months 3 Months 6 Months 6 Months (13 Weeks) (13 Weeks) (26 Weeks) (26 Weeks) Ended Ended Ended Ended August 4, July 29, August 4, July 29, 2001 2000 2001 2000 ----------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Net sales $1,515,750 $1,255,360 $3,004,083 $2,484,026 Cost of merchandise sold 978,915 817,407 1,946,450 1,620,153 ---------- ---------- ---------- ---------- Gross margin 536,835 437,953 1,057,633 863,873 Operating expenses: Selling, general, and administrative 343,898 287,455 682,141 569,490 Depreciation and amortization 37,079 29,903 72,589 57,143 Goodwill amortization 1,300 1,300 2,600 2,600 Preopening expenses 2,208 2,821 15,443 21,950 ---------- ---------- ---------- ---------- Operating income 152,350 116,474 284,860 212,690 Interest expense, net 12,756 11,838 23,332 22,291 ---------- ---------- ---------- ---------- Income before income taxes 139,594 104,636 261,528 190,399 Provision for income taxes 53,081 40,346 99,904 73,491 ---------- ---------- ---------- ---------- Net income $ 86,513 $ 64,290 $ 161,624 $ 116,908 ========== ========== ========== ========== Earnings per share: Basic Net income $ 0.26 $ 0.19 $ 0.48 $ 0.36 Average number of shares 334,159 329,848 333,472 328,827 Diluted Net income $ 0.25 $ 0.19 $ 0.47 $ 0.35 Average number of shares 342,118 338,973 341,583 337,455 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 4
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited) <TABLE> <CAPTION> Common Stock Paid-In Retained ------------------------------- Shares Amount Capital Earnings Total -------------- --------------- ------------ -------------- ------------- (In thousands, except share amounts) <S> <C> <C> <C> <C> <C> Balance at February 3, 2001 332,167,129 $ 3,322 $ 912,107 $ 1,287,210 $ 2,202,639 Exercise of stock options 2,362,965 24 27,766 - 27,790 Income tax benefit from exercise of stock options - - 45,618 - 45,618 Net income - - - 161,624 161,624 ----------- ----------- ----------- ----------- ----------- Balance at August 4, 2001 334,530,094 $ 3,346 $ 985,491 $ 1,448,834 $ 2,437,671 =========== =========== =========== =========== =========== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 5
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> 6 Months 6 Months (26 Weeks) (26 Weeks) Ended Ended August 4, 2001 July 29, 2000 ---------------------------------- (In thousands) <S> <C> <C> Operating activities Net income $ 161,624 $ 116,908 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 75,575 59,923 Amortization of debt discount 4,523 1,175 Deferred income taxes 10,853 7,369 Other noncash charges 2,345 2,197 Income tax benefit from exercise of stock options 45,618 57,238 Changes in operating assets and liabilities: Accounts receivable (22,374) (29,255) Merchandise inventories (164,362) (212,901) Other current assets (11,838) (14,619) Accounts payable (2,609) (7,718) Accrued and other long-term liabilities (12,820) (5,075) Income taxes (84,242) (48,184) --------- --------- Net cash provided by (used in) operating activities 2,293 (72,942) Investing activities Acquisition of property and equipment and favorable lease rights, net (299,140) (239,107) (Purchase) sale of short-term investments, net (116,063) 27,500 Other (15,705) (11,448) --------- --------- Net cash used in investing activities (430,908) (223,055) Financing activities Repayments of short-term debt - (50,000) Net borrowings under credit facilities - 5,300 Proceeds from public debt offering, net 299,503 319,379 Repayments of long-term debt and capital lease obligations (16,167) (11,253) Payments of financing fees on debt (1,569) (7,284) Net proceeds from issuance of common shares including stock options 27,790 31,172 --------- --------- Net cash provided by financing activities 309,557 287,314 --------- --------- Net decrease in cash and cash equivalents (119,058) (8,683) Cash and cash equivalents at beginning of period 123,621 12,608 --------- --------- Cash and cash equivalents at end of period $ 4,563 $ 3,925 ========= ========= </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 6
KOHL'S CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year end financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company's Form 10-K (Commission File No. 1-11084) filed with the Securities and Exchange Commission (SEC). 2. Reclassifications Certain reclassifications have been made to the prior period financial statements to conform to the fiscal 2001 presentation. 3. New Accounting Pronouncements During June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," effective for fiscal years beginning after December 15, 2001. Under SFAS No. 142, goodwill and intangible assets deemed to have indefinite lives will no longer be amortized. Fu11 year amortization expense of goodwill for fiscal year 2001 is projected to be $5.2 million. The remaining balance of goodwill at the end of fiscal year 2001 is projected to be $9.3 million. In accordance with SFAS No. 142, the Company will cease amortization of its remaining goodwill balance beginning in fiscal year 2002. The Company will perform the required impairment tests of goodwill and has not yet determined the extent of any impairment losses on its existing goodwill. However, such losses, if any, are not expected to be material to the consolidated financial statements. 4. Merchandise Inventories The Company uses the last-in, first out (LIFO) method of accounting for merchandise inventory because it results in a better matching of cost and revenues. The following information is provided to show the effects of the LIFO provision on the quarter, as well as to provide users with the information to compare to other companies not on LIFO. 7
LIFO Expense 6 Months Ended ------------ -------------- Quarter August 4, 2001 July 29, 2000 ------- -------------- ------------- (In Thousands) First $1,786 $1,844 Second 1,819 1,884 ------ ------ Total $3,605 $3,728 ====== ====== Inventories would have been $8,456,000, $4,851,000 and $6,711,000 higher at August 4, 2001, February 3, 2001 and July 29, 2000, respectively, if they had been valued using the first-in, first-out (FIFO) method. 5. Debt On March 8, 2001, the Company issued $300 million aggregate principal amount of non-callable 6.30% unsecured senior notes due March 1, 2011. Net proceeds were $297.4 million and will be used for general corporate purposes, including continued store growth. 6. Contingencies The Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the outcome of such proceedings and litigation will not have a material adverse impact on the Company's financial position or results of operations. 7. Net Income Per Share The numerator for the calculation of basic and diluted net income per share is net income. The denominator is summarized as follows: 6 Months Ended August 4, 2001 July 29, 2000 -------------- ------------- (In Thousands) Denominator for basic earnings per share - weighted average shares 333,472 328,827 The impact of dilutive employee stock options 8,111 8,628 ------- ------- Denominator for diluted earnings per share 341,583 337,455 ======= ======= 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED AUGUST 4, 2001 Results of Operations - --------------------- At August 4, 2001, the Company operated 354 stores compared with 298 stores at the same time last year. During the first half of the year, the Company successfully opened 34 stores including entering the Atlanta, GA market with 15 stores and the Fayetteville/Ft. Smith market in Arkansas with three stores. The remaining 16 stores included the addition of four stores in the Hartford/New Haven, CT market and 12 stores in other existing regions. The Company opened four additional stores after August 4, 2001: two stores in El Paso, TX and two additional stores in the Chicago market. In October, Kohl's plans to open 24 new stores entering the Oklahoma City, OK market with four stores and the Austin, TX market with three stores. In addition, the Company will add three stores in the Atlanta, GA market; two stores in the Louisville, KY market and two stores in the Baltimore, MD market. The remaining 10 stores include stores in other existing regions. The 28 store openings during the second half of the year will bring the total new stores opened during fiscal 2001 to 62. Net sales increased $260.3 million or 20.7% to $1,515.7 million for the three months ended August 4, 2001 from $1,255.4 million for the three months ended July 29, 2000. Of the increase, $192.2 million is attributable to the inclusion of 22 new stores opened in 2000 and 34 new stores opened in 2001. The remaining $68.1 million is attributable to comparable store sales growth of 5.4%. Net sales increased $520.1 million or 20.9% to $3,004.1 million for the six months ended August 4, 2001 from $2,484.0 million for the six months ended July 29, 2000. Of the increase, $397.3 million is attributable to the inclusion of 61 new stores opened in 2000 and 34 new stores opened in 2001. The remaining $122.8 million is attributable to comparable stores sales growth of 5.6%. Gross margin for the three months ended August 4, 2001 was $536.8 million or 35.4% compared to 34.9% for the three months ended July 29, 2000. Gross margin for the six months ended August 4, 2001 was $1,057.6 million or 35.2% compared to 34.8% for the six months ended July 29, 2000. These increases are primarily attributable to the mix of merchandise sold and continued improvements related to inventory management. Selling, general and administrative expenses declined to 22.7% of net sales for the three months ended August 4, 2001 from 22.9% of net sales for the three months ended July 29, 2000. Selling, 9
general and administrative expenses for the six months ended August 4, 2001 declined to 22.7% of net sales from 22.9% for the six months ended July 29, 2000. These decreases are a result of leverage achieved on the increase in net sales. Depreciation and amortization for the three months ended August 4, 2001, was $38.4 million compared to $31.2 million for the three months ended July 29, 2000. Depreciation and amortization for the six months ended August 4, 2001 was $75.2 million compared to $59.7 million for the six months ended July 29, 2000. These increases are primarily attributable to capital spending related to new store openings. Preopening expense for the three months ended August 4, 2001 was $2.2 million compared to $2.8 million for the three months ended July 29, 2000. Preopening expense for the six months ended August 4, 2001 was $15.4 million compared to $21.9 million for the six months ended July 29, 2000. These decreases are primarily due to the number of new stores opened and the mix of new market and fill-in locations versus the prior year. Preopening expenses relate to the costs associated with new store openings, including advertising, hiring and training costs for new employees, and processing and transporting initial merchandise. As a result of the above factors, operating income for the three months ended August 4, 2001 increased $35.9 million or 30.8% over the three months ended July 29, 2000. Operating income for the six months ended August 4, 2001 increased $72.2 million or 33.9% over the six months ended July 29, 2000. Net interest expense for the three months ended August 4, 2001 was $12.8 million compared to $11.8 million for the three months ended July 29, 2000. Net interest expense for the six months ended August 4, 2001 was $23.3 million compared to $22.3 million for the six months ended July 29, 2000. These increases are a result of increased net borrowings offset by lower interest rates. Net income for the three months ended August 4, 2001 increased 34.6% to $86.5 million from $64.3 million for the three months ended July 29, 2000. Earnings were $0.25 per diluted share for the three months ended August 4, 2001 compared to $0.19 per diluted share for the three months ended July 29, 2000. Net income for the six months ended August 4, 2001 increased 38.2% to $161.6 million or $0.47 per diluted share from $116.9 million or $0.35 per diluted share for the six months ended July 29, 2000. Seasonality & Inflation - ----------------------- The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last half of each fiscal year, 10
which includes the back-to-school and holiday seasons. Approximately 16% and 30% of sales typically occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and costs associated with the opening of new stores. The Company does not believe that inflation has had a material effect on the results during the periods presented. However, there can be no assurance that the Company's business will not be affected in the future. Financial Condition and Liquidity - --------------------------------- The Company's primary ongoing cash requirements are for seasonal and new store inventory purchases, the growth in credit card accounts receivable and capital expenditures in connection with the expansion and remodeling programs. The Company's primary sources of funds for its business activities are cash flow from operations, financing secured by its proprietary accounts receivable, borrowings under its revolving credit facility and short-term trade credit. Short-term trade credit, in the form of extended payment terms for inventory purchases or third party factor financing, represents a significant source of financing for merchandise inventories. The Company's working capital and inventory levels typically build throughout the fall, peaking during the holiday selling season. In addition, the Company periodically accesses capital markets, as needed, to finance its growth. The Company's working capital increased to $1,496.1 million at August 4, 2001 from $1,198.6 million at February 3, 2001 and from $1,060.5 million at July 29, 2000. Of the $435.6 million increase from July 29, 2000, $169.4 million is attributable to higher credit card receivables and $160.3 million is related to an increase in merchandise inventories offset in part by an increase in accounts payable. These increases are reflective of the Company's store growth and increase in net sales. The remaining increase is primarily related to the short-term investment of proceeds from the issuance of $300 million unsecured senior notes. Cash provided by operating activities was $2.3 million for the six months ended August 4, 2001 compared to cash used in operating activities of $72.9 million for the six months ended July 29, 2000. Excluding changes in operating assets and liabilities, cash provided by operating activities was $300.5 million for the six months ended August 4, 2001 compared to $244.8 million for the six months ended July 29, 2000. 11
Capital expenditures for the six months ended August 4, 2001 were $299.1 million compared to $239.1 million for the same period a year ago. The increase in expenditures is primarily attributable to the timing of spending related to new stores. The Company opened 34 new stores during the first half of the year, four stores after August 4, 2001 and plans to open 24 additional stores in October. At the end of fiscal 2001, a distribution center is scheduled to open in Mamakating, New York to support Northeast Expansion, including the entry into Boston, MA. In addition, Kohl's has acquired the lease rights to a distribution facility in Corsicana, Texas. This facility is expected to open by the end of the year and will serve existing Texas locations and support further expansion in the region, including the entry into Houston in spring 2002. Total capital expenditures for fiscal 2001 are expected to be approximately $700 million. This estimate includes the purchase of favorable lease rights for 15 stores from Bradlees Inc., the renovation and refixturing of the properties, the capital required to open distribution facilities, new store spending as well as base capital needs. The actual amount of the Company's future annual capital expenditures will depend primarily on the number of new stores opened, whether such stores are owned or leased by the Company and the number of existing stores remodeled or refurbished. In March 2001, the Company issued $300 million aggregate principle amount of non-callable 6.3% unsecured senior notes due March 2011. The proceeds will be used for general corporate purposes, including continued store growth. The Company anticipates that it will be able to satisfy its working capital requirements, planned capital expenditures and debt service requirements with proceeds from its recent $300 million note issuance, short term trade credit, $225 million of available financing secured by its proprietary credit card accounts receivable, seasonal borrowings under its $300 million revolving credit facility and other sources of financing. The Company expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company maintains favorable banking relations and anticipates that the necessary credit agreements will be extended or new agreements will be entered into in order to provide future borrowing requirements as needed. Forward Looking Statements - -------------------------- Item 2 of this Form 10-Q contains "forward-looking statements," subject to protections under federal law. The Company intends words such as "believes", "anticipates", "plans", "may", "will", "should", "expects", and similar expressions to identify forward-looking statements. In addition, statements covering 12
Company's future sales or financial performance and the Company's plans, objectives, expectations or intentions are forward-looking statements, such as statements regarding the Company's liquidity, debt service requirements, planned capital expenditures, future store openings and adequacy and capital resources. There are a number of important factors that could cause the Company's results to differ materially from those indicated by the forward-looking statements. Among these factors are those risk factors described in Exhibit 99.1 to the Company's annual report on Form 10-K filed with the SEC on April 17, 2001 and such factors as may periodically be described in the Company's filings with the SEC. 13
PART II OTHER INFORMATION ------------------------- Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Kohl's Corporation was held on May 31, 2001: 1. To elect three directors to serve for a three-year term. 2. To ratify the appointment of Ernst & Young LLP as independent auditors. 3. To act upon any other business that may properly come before the meeting or any adjournment thereof. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. All of management's nominees for directors as listed in the proxy statement were elected and the appointment of Ernst & Young LLP as independent auditors was ratified. The results of the voting were as follows: 1. Election of directors Wayne Embry For - 302,287,775 shares Withheld - 5,811,419 shares John F. Herma For - 301,167,971 shares Withheld - 6,931,223 shares R. Lawrence Montgomery For - 301,180,447 shares Withheld - 6,918,747 shares Frank V. Sica For - 302,327,483 shares Withheld - 5,771,711 shares 2. Ratification of Ernst & Young LLP as independent auditors For - 305,848,184 shares Against - 1,367,823 shares Abstain - 883,187 shares 14
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 12.1 Statement regarding calculation of ratio of earnings to fixed charges. b) Reports on Form 8-K The Company filed one current report of Form 8-K dated June 26, 2001 with respect to Item 5 - Other Events. 15
SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Kohl's Corporation (Registrant) Date: August 31, 2001 /s/ R. Lawrence Montgomery ---------------------------- R. Lawrence Montgomery Chief Executive Officer and Director Date: August 31, 2001 /s/ Arlene Meier ---------------------------- Arlene Meier Chief Operating Officer 16