UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THIS SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended July 31, 1999 ---------------------------------------- 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 (414) 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: September 7, 1999 Common Stock, ------------------------------- Par Value $.01 per Share, 162,947,401 shares Outstanding. - --------------------------------------------------------
KOHL'S CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at July 31, 1999, January 30, 1999 and August 1, 1998 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended July 31, 1999 and August 1, 1998 4 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended July 31, 1999 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended July 31, 1999 and August 1, 1998 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-15 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 16 Signatures 17 -2-
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> July 31, January 30, August 1, 1999 1999 1998 ------------------------------------------------------- (Unaudited) (Audited) (Unaudited) (In thousands) Assets ------ Current assets: <S> <C> <C> <C> Cash and cash equivalents $2,960 $2,858 $2,534 Short-term investments 58,753 26,736 14,850 Accounts receivable trade, net 395,005 270,704 191,519 Merchandise inventories 753,964 617,362 634,805 Deferred income taxes 17,863 14,412 8,520 Other 9,327 7,366 4,572 --------- --------- --------- Total current assets 1,237,872 939,438 856,800 Property and equipment, net 1,086,985 933,011 831,116 Other assets 33,969 25,027 18,569 Favorable lease rights 140,628 13,681 14,926 Goodwill 22,338 24,938 27,538 --------- --------- --------- Total assets $2,521,792 $1,936,095 $1,748,949 ========= ========= ========= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $286,844 $212,926 $239,827 Accrued liabilities 120,081 117,200 90,255 Income taxes payable 11,901 48,572 14,363 Current portion of long-term debt 11,578 1,533 1,877 --------- --------- --------- Total current liabilities 430,404 380,231 346,322 Long-term debt 498,667 310,912 312,659 Deferred income taxes 58,036 53,787 48,102 Other long-term liabilities 30,638 28,386 26,441 Shareholders' equity Common stock-$.01 par value, 800,000,000 shares authorized, 162,882,522, 158,394,735, and 158,054,978 issued at July 31, 1999, January 30, 1999 and August 1, 1998, respectively. 1,629 1,584 1,581 Paid-in capital 760,946 504,275 490,994 Retained earnings 741,472 656,920 522,850 --------- --------- --------- Total shareholders' equity 1,504,047 1,162,779 1,015,425 --------- --------- --------- Total liabilities and shareholders' equity $2,521,792 $1,936,095 $1,748,949 ========= ========= ========= </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 July 31, August 1, July 31, August 1, 1999 1998 1999 1998 -------------------------------------------------------- (In thousands except per share data) <S> <C> <C> <C> <C> Net sales $939,503 $758,747 $1,849,759 $1,503,318 Cost of merchandise sold 614,199 502,170 1,211,327 993,272 --------- --------- ----------- ----------- Gross margin 325,304 256,577 638,432 510,046 Operating expenses: Selling, general, and administrative 218,870 182,771 434,902 363,124 Depreciation and amortization 19,745 15,660 38,322 30,644 Goodwill amortization 1,300 1,300 2,600 2,600 Preopening expenses 5,110 - 13,055 7,542 --------- --------- ----------- ----------- Operating income 80,279 56,846 149,553 106,136 Interest expense, net 6,488 5,201 11,620 10,260 --------- --------- ----------- ----------- Income before income taxes 73,791 51,645 137,933 95,876 Provision for income taxes 28,558 20,297 53,381 37,680 --------- --------- ----------- ----------- Net income $45,233 $31,348 $84,552 $58,196 ========= ========= =========== =========== Earnings per share: Basic Net income $0.28 $0.20 $0.52 $0.37 Average number of shares 162,823 158,022 161,630 157,944 Diluted Net income $0.27 $0.19 $0.51 $0.36 Average number of shares 167,548 162,752 166,502 162,475 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 4
KOHL'S CORPORATION CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY <TABLE> <CAPTION> Common Stock ------------------ Paid-In Retained Shares Amount Capital Earnings Total ------- ------ -------- ---------- ---------- (In thousands) <S> <C> <C> <C> <C> <C> Balance at January 30, 1999 158,395 $1,584 $504,275 $656,920 $1,162,779 Issuance of common shares 2,800 28 199,598 - 199,626 Exercise of stock options 1,688 17 14,708 - 14,725 Income tax benefit from stock options - - 42,365 - 42,365 Net income - - - 84,552 84,552 ------- ----- ------- ------- --------- Balance at July 31, 1999 162,883 $1,629 $760,946 $741,472 $1,504,047 ======= ===== ======= ======= ========= </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 July 31, 1999 August 1, 1998 ---------------------------------------------- (In thousands) Operating activities <S> <C> <C> Net income $84,552 $58,196 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 41,051 33,344 Deferred income taxes 798 1,093 Other noncash charges 1,659 1,314 Changes in operating assets and liabilities: Accounts receivable (124,301) 48,098 Merchandise inventories (136,602) (119,015) Other current assets (1,961) 687 Accounts payable 73,918 89,148 Accrued and other long-term liabilities 5,648 (3,081) Income taxes (36,671) (24,119) ---------------- ----------------- Net cash provided by (used in) operating activities (91,909) 85,665 Investing activities Acquisition of property and equipment and favorable lease rights, net (323,960) (110,390) Proceeds from sale of assets 4,350 - Purchase of short-term investments, net (32,017) (14,850) Other (9,038) (6,824) ---------------- ----------------- Net cash used in investing activities (360,665) (132,064) Financing activities Net borrowings under credit facilities 1,300 2,000 Proceeds from debt offering, net 197,258 - Net borrowings (repayments) of other long-term debt (758) 325 Payment of financing fees on debt (1,840) - Net proceeds from issuance of common shares 256,716 2,447 ---------------- ----------------- Net cash provided by financing activities 452,676 4,772 ---------------- ----------------- Net increase (decrease) in cash and cash equivalents 102 (41,627) Cash and cash equivalents at beginning of period 2,858 44,161 ---------------- ----------------- Cash and cash equivalents at end of period $2,960 $2,534 ================ ================= </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 generally accepted accounting principles 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. Shareholders' equity, share and per share amounts for all periods presented have been adjusted for the 2 for 1 stock split declared by the Company's Board of Directors on March 9, 1998, effected in the form of a stock dividend. Certain reclassifications have been made to prior years' financial statements to conform to the fiscal 1999 presentation. 2. 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 information to compare to other companies not on LIFO. LIFO Expense 6 Months Ended ------------ Quarter July 31, 1999 August 1, 1998 ------- ------------- -------------- (In Thousands) First $1,363 $1,861 Second 1,409 1,896 ----- ----- Total $2,772 $3,757 Inventories would have been $4,694,000, $1,921,000 and $8,540,000 higher at July 31, 1999, January 30, 1999 and August 1, 1998, respectively if they had been valued using the first-in, first-out (FIFO) method. -7-
3. 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. 4. 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 (in thousands): 6 Months Ended July 31, 1999 August 1, 1998 -------------------------------- Denominator for basic earnings per share - weighted average shares 161,630 157,944 Employee stock options 4,872 4,531 ------- ------- Denominator for diluted earnings per share 166,502 162,475 ======= ======= -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ---------------------------------------------- THREE MONTHS AND SIX MONTHS ENDED July 31, 1999 ----------------------------------------------- Results of Operations - --------------------- At July 31, 1999, the Company operated 231 stores compared with 197 stores at the same time last year. During the quarter, the Company successfully opened five stores in the Denver, CO market. The Company opened nine stores on August 20th: six in the St. Louis, MO market, a store in Hickory, NC and additional stores in the Richmond, VA and Washington, D.C. markets. In October, Kohl's plans to open 17 stores: 11 in Dallas/Ft. Worth, TX market and additional stores in the Harrisburg, PA; Chicago, IL; Lansing, MI; Minneapolis, MN; Grand Rapids, MI and the Denver, CO markets. In November, the Company plans to open two additional stores in the Dallas/Ft. Worth, TX market. To support the expansion in the St. Louis, Denver and Dallas/Ft. Worth markets, the Company will open a distribution center in Blue Springs, MO in December, 1999. The Company plans to open 55-60 new stores in the year 2000. Approximately 38 are planned to open in the first half of the year: 33 stores in New York, New Jersey, Connecticut and Maryland previously operated by Caldor and additional stores in the Dallas/Ft. Worth, TX, St. Louis, MO and Rochester, MN markets. Net sales increased $180.8 million or 23.8% to $939.5 million for the three months ended July 31, 1999 from $758.7 million for the three months ended August 1, 1998. Of the increase, $114.0 million is attributable to the inclusion of 17 new stores opened in 1998 and 18 new stores opened in 1999. The remaining $66.8 million is attributable to comparable store sales growth of 8.8%. Net sales increased $346.5 million or 23.0% to $1,849.8 million for the six months ended July 31, 1999 from $1,503.3 million for the six months ended August 1, 1998. Of the increase, $207.9 million is attributable to the inclusion of 32 new stores opened in 1998 and 18 new stores opened in 1999. The remaining $138.6 million is attributable to comparable stores sales growth of 9.7%. Gross margin for the three months ended July 31, 1999 was 34.6% compared to 33.8% for the three months ended August 1, 1998. Gross margin for the six months ended July 31, 1999 was 34.5% compared to 33.9% for the six months ended August 1, 1998. These increases are primarily attributable to a change in merchandise mix and improvements related to inventory management. -9-
Effective January 30, 1999, the Company implemented SOP 98-5, "Reporting on the Costs of Start-up Activities", which requires preopening costs to be expensed as incurred. For new stores opened in March, April, and May, 1999, approximately $1 million in preopening costs was expensed in fiscal 1998 and $8.2 million was expensed during the six months ended July 31, 1999 for a total average cost per store of $0.5 million. In addition, the Company incurred $4.9 million in preopening costs for stores to be opened later in fiscal 1999. The expenses relate to the cost associated with new store openings, including advertising, hiring and training costs for new employees, and processing and transporting initial merchandise. Operating income for the three months ended July 31, 1999, increased $23.4 million or 41.2% over the three months ended August 1, 1998. Operating income for the six months ended July 31, 1999 increased $43.4 million or 40.9% over the six months ended August 1, 1998. Excluding pre-opening expenses, operating income increased 43.0% for the six months ended July 31, 1999. These increases resulted from the increased sales, improved gross margin and the Company's ability to leverage its selling, general and administrative expenses as net sales increased. Selling, general and administrative expenses declined to 23.3% of net sales for the three months ended July 31, 1999 from 24.1% of net sales for the three months ended August 1, 1998. Selling, general and administrative expenses declined to 23.5% of net sales for the six months ended July 31, 1999 from 24.2% of the net sales for the six months ended August 1, 1998. Net interest expense for the three months ended July 31, 1999 increased $1.3 million from the three months ended August 1, 1998. Net interest expense for the six months ended July 31, 1999 increased $1.4 million from the six months ended August 1, 1998. The increase was primarily attributed to the $200 million 7.25% unsecured debentures issued in June 1999. For the three months ended July 31, 1999 net income increased 44.3% to $45.2 million from $31.3 million in the three months ended August 1, 1998. Earnings were $.27 per diluted share for the three months ended July 31, 1999 compared to $.19 per diluted share for the three months ended August 1, 1998. Net income for the six months ended July 31, 1999 increased 45.3% to $84.6 million or $.51 per diluted share from $58.2 million or $.36 per diluted share in the six months ended August 1, 1998. -10-
Seasonality & Inflation - ----------------------- The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income realized during the last half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 17% and 30% of sales 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 rsults 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. Impact of Year 2000 - ------------------- The Company currently has a Year 2000 Readiness Plan implemented. Detailed in the plan are compliance definitions and testing guidelines for in-house developed applications and computer hardware platforms. The plan defines a methodology for assessing in-house developed applications and provides a means for documentation. Team members and their responsibilities are defined including senior executives that participate on the Year 2000 steering committee. The plan includes three phases to address the Year 2000 issue and a status of these key milestones is summarized below: Year 2000 Readiness Plan Phases Current Status - ------------------------------- -------------- Assessment Complete Remediation Complete Verification . Replacement code systems Complete . Packaged financial systems October 1999 target completion date . Non-IS system (including September 1999 target completion date merchandise vendor EDI transactions) The phases of the Year 2000 Readiness Plan are defined below: . The Assessment phase involved the inventory of all in-house developed applications, purchased software and hardware, merchandise vendors, non-IT systems, utilities and service providers. The Assessment phase also included developing a plan for addressing each item and/or vendor to ensure Year 2000 compliance. This phase is complete. -11-
. The Remediation phase involved implementing the changes required to reach compliance and unit testing. This included correspondence with vendors that have products or services that impact the Company's ability to continue normal business operations. This phase is also complete. . The Verification phase is system testing the changes in similar environments. This includes testing with vendors and service provider organizations. The Company has installed a Year 2000 test lab that is identical to the production environment so that Year 2000 date simulation testing can be performed without affecting production files. The Verification testing phase, except for all packaged financial systems and non-IS systems, is complete. The rollout of the packaged financial systems is approximately 75% complete and will be finished by the end of October 1999. Even though the packaged financial systems are identified Year 2000 compliant, the Company will be conducting integrated testing in October 1999. The Company has initiated formal communications with all significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those parties' failure to remediate their own Year 2000 issues. The Company is currently unit testing merchandise vendor EDI transactions and non-IS systems and is over 90% complete. The Company continues to refine its contingency plans and is enhancing and adding to the plans for each business area. The Company has identified that it may experience certain inconveniences or inefficiencies as a result of a supplier's failure to remediate its Year 2000 issues. The Company believes however, the vast majority of the Company's business will proceed without any significant interruption. The Company's total Year 2000 project costs and estimates to complete include the impact of third party Year 2000 issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The total cost of the Year 2000 project is estimated at $9 million and is being funded through operating cash flows. Of the total project cost, approximately $5 million is attributable to the purchase of new software and hardware that will be capitalized. The remaining $4 million of programming and testing costs will be expensed as incurred and is not expected to have a material effect on the results of the operations. Of the capitalized portion, approximately $4 million is for a new financial system. The new financial system was a previously planned project that supports the Company's growth, provides significant business enablement and -12-
eliminates a substantial Year 2000 effort. To date, the Company has incurred approximately $7.1 million ($2.6 million expensed and $4.5 million capitalized) related to the assessment of, and preliminary efforts on, its Year 2000 project and the development of a modification plan, purchase of new systems and systems modifications. The cost of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. In addition to the Company's reliance on certain third parties to remediate their own Year 2000 issues, specific factors that might cause such material differences include, but are not limited to, the continued availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes. Financial Condition and Liquidity - --------------------------------- The Company's primary ongoing cash requirements are for inventory purchases, capital expenditures in connection with the Company's expansion and remodeling programs and pre-opening expenses. The Company's primary sources of funds for its business activities are cash flow from operations, sales of 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. At July 31, 1999, the Company's merchandise inventories had increased $136.6 million over the January 30, 1999 balance and $119.2 million over the August 1, 1998 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $807.5 million at July 31, 1999 from $559.2 million at January 30, 1999 and increased from $510.5 million at August 1, 1998. Of the $297.0 million increase from August 1, 1998, $203.5 million is attributable to higher credit card receivables as the Company sold a lower percentage of receivables. The remaining increase was primarily the result of higher merchandise inventory levels required to support existing stores and incremental new stores locations offset in part by increased accounts payable. -13-
Cash used in operating activities was $91.9 million for the six months ended July 31, 1999 compared to cash provided by operating activities of $85.7 million for the six months ended August 1, 1998. Excluding changes in operating assets and liabilities, cash provided by operating activities was $128.1 million for the six months ended July 31, 1999 compared to $93.9 million for the six months ended August 1, 1998. In March 1999, the Company purchased the right to occupy 33 store locations previously operated by Caldor Corporation for $142 million. The Company expects these stores will be open for business in spring 2000. The Company expects to invest approximately $165 million more to renovate and refixture the stores. To fund the renovation and refixturing, the Company issued 2,800,000 shares of its common stock to the public in March 1999 for net proceeds of approximately $200 million. Capital expenditures, including the acquisition of the rights to occupy the Caldor stores, for the six months ended July 31, 1999 were $324.0 million compared to $110.4 million for the same period a year ago. The increase in expenditures in 1999 is primarily attributable to the acquisition of the rights to occupy the Caldor stores, the Company's new stores spending in the fiscal 1999 and the construction of a fourth distribution center. Total capital expenditures for fiscal 1999 are currently expected to range between $575-$600 million. This estimate includes the purchase of favorable lease rights from Caldor Corporation and renovation and refixturing of the properties. 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 June 1999, the Company issued $200 million redeemable 7.25% unsecured debentures. The debentures mature on June 1, 2029. The proceeds will be used for general corporate purposes and continued store growth. The Company anticipates that it will be able to satisfy its current operating needs, planned capital expenditures and debt service requirements with current working capital, cash flows from operations, seasonal borrowings under its $300 million revolving credit facility, short-term trade credit and other sources of financing. -14-
Information in this document contains "foward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, such as statements relating to debt service requirements and planned capital expenditures. Foward-looking statements can be identified by the use of foward- looking terminology such as "believes", "expects", "may", "will", "should" or "anticipates" or the negative thereof or other variations theron. No assurance can be given that the future results covered by the foward-looking statements will be achieved. -15-
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3.1 Articles of Incorporation, as amended 4.1 First Supplemental Indenture dated as of June 1, 1999 to Indenture dated as of December 1, 1995, between Kohl's Corporation and the Bank of New York, a trustee, incorporated herein by reference to Exhibit 4.2 of the Company's Registration Statement on Form S-4 (Reg. No. 333-83031) 12.1 Statement regarding calculation of ratio of earnings to fixed charges. 27.1 Financial Data Schedule - Article 5 of Regulation S-X, six months ended July 31, 1999 27.2 Financial Data Schedule - Article 5 of Regulation S-X, six months ended August 1, 1998 (restated) b) Reports on Form 8-K There were no reports on Form 8-K filed for three months ended July 31, 1999 -16-
SIGNATURES ---------- Pursuant to the requirements of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed in its behalf by the undersigned thereunto duly authorized. Kohl's Corporation (Registrant) Date: September 14, 1999 /s/ R. Lawrence Montgomery ----------------------------- R. Lawrence Montgomery Vice Chairman-- Chief Executive Officer Date: September 14, 1999 /s/ Arlene Meier ----------------------------- Arlene Meier Executive Vice President - Finance Chief Financial Officer -17-