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 3, 1996 ---------------------------------- 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 10, 1996 Common Stock, Par Value $.01 per Share, 73,887,746 Shares Outstanding.
KOHL'S CORPORATION INDEX <TABLE> <CAPTION> PART I. FINANCIAL INFORMATION Item 1 Financial Statements: <S> <C> Condensed Consolidated Balance Sheets at August 3, 1996, February 3, 1996 and July 29, 1995 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended August 3, 1996 and July 29, 1995 4 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended August 3, 1996 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 3, 1996 and July 29, 1995 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-12 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 13 Signatures 14 </TABLE> -2-
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> August 3, February 3, July 29, 1996 1996 1995 ----------- ----------- ----------- (Unaudited) (Audited) (Unaudited) <S> <C> <C> <C> Assets ------ Current assets: Cash and cash equivalents $ 4,650 $ 2,819 $ 1,528 Merchandise inventories 440,541 320,325 351,228 Other 12,360 7,020 11,575 -------- -------- -------- Total current assets 457,551 330,164 364,331 Property and equipment, at cost 586,496 502,406 423,446 Less accumulated depreciation 109,681 93,238 79,128 -------- -------- -------- 476,815 409,168 344,318 Other assets 5,636 4,564 5,388 Favorable lease rights 19,567 20,491 22,431 Goodwill 37,938 40,538 43,138 -------- -------- -------- Total assets $997,507 $804,925 $779,606 ======== ======== ======== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $159,266 $ 68,810 $137,039 Accrued liabilities 57,311 57,259 41,740 Income taxes payable 6,362 21,628 5,374 Deferred income taxes 6,865 5,674 10,224 Current portion of long-term debt 1,425 1,425 1,345 -------- -------- -------- Total current liabilities 231,229 154,796 195,722 Long-term debt 269,532 187,699 177,844 Deferred income taxes 32,189 30,731 25,009 Other long-term liabilities 23,161 21,061 23,480 Shareholders' equity Common stock-$.01 par value, 400,000,000 shares authorized, 73,857,108, 73,736,670 and 73,552,136 issued at August 3, 1996, February 3, 1996 and July 29, 1995 respectively. 738 737 736 Paid-in capital 191,166 188,998 185,625 Retained earnings 249,492 220,903 171,190 -------- -------- -------- Total shareholders' equity 441,396 410,638 357,551 -------- -------- -------- Total liabilities and shareholders' equity $997,507 $804,925 $779,606 ======== ======== ======== </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 3, 1996 July 29, 1995 August 3, 1996 July 29, 1995 -------------- ------------- -------------- ------------- (In thousands except per share data) <S> <C> <C> <C> <C> Sales $474,598 $363,536 $943,236 $731,901 Cost of merchandise sold 318,040 242,279 629,876 486,266 -------- -------- -------- -------- Gross margin 156,558 121,257 313,360 245,635 Operating expenses: Selling, general, and administrative 117,439 91,389 233,329 183,940 Depreciation and amortization 9,064 6,507 17,729 13,163 Goodwill amortization 1,300 1,300 2,600 2,600 Preopening expenses 111 -- 3,750 1,492 -------- -------- -------- -------- Operating income 28,644 22,061 55,952 44,440 Interest expense, net 3,640 3,237 7,742 5,690 -------- -------- -------- -------- Income before income taxes 25,004 18,824 48,210 38,750 Provision for income taxes 10,176 7,681 19,621 15,811 -------- -------- -------- -------- Net income $ 14,828 $ 11,143 $ 28,589 $ 22,939 ======== ======== ======== ======== Earnings per share: Net income $ 0.20 $ 0.15 $ 0.39 $ 0.31 ======== ======== ======== ======== Weighted average number of common shares 73,824 73,538 73,798 73,528 ======== ======== ======== ======== </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, except share data) <S> <C> <C> <C> <C> <C> Balance at February 3, 1996 73,736,670 $737 $188,998 $220,903 $410,638 Net income - - - 28,589 28,589 Exercise of stock options 120,438 1 2,168 - 2,169 ---------------------------------------------------------------- Balance at August 3, 1996 73,857,108 $738 $191,166 $249,492 $441,396 ================================================================ </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 3, 1996 July 29, 1995 --------------------------------- (In thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $28,589 $22,939 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 20,418 15,802 Deferred income taxes 2,649 9,478 Other noncash charges 735 592 Changes in operating assets and liabilities (48,949) (87,162) ----------- ----------- Net cash provided by (used in) operating activities 3,442 (38,351) INVESTING ACTIVITIES Acquisition of property and equipment, net (84,090) (52,571) Other (626) (1,081) ----------- ----------- Net cash used in investing activities (84,716) (53,652) FINANCING ACTIVITIES Net borrowings (repayments) under working capital loan (17,500) 63,300 Proceeds from public debt offering 100,000 - Repayments of long-term debt (667) (538) Payment of financing fees on debt (897) - Net proceeds from issuance of common shares (including stock options) 2,169 363 ----------- ----------- Net cash provided by financing activities 83,105 63,125 ----------- ----------- Net increase (decrease) in cash and cash equivalents 1,831 (28,878) Cash and cash equivalents at beginning of period 2,819 30,406 ----------- ----------- Cash and cash equivalents at end of period $4,650 $1,528 ========== ========== </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 11, 1996 effected in the form of a stock dividend. The dilutive effect of stock options on earnings per share is immaterial. 2. 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. <TABLE> <CAPTION> 6 Months Ended LIFO Expense ------------------------------ Quarter August 3, 1996 July 29, 1995 ------------ -------------- ------------- (In Thousands) <S> <C> <C> First $1,171 $1,104 Second 1,184 1,090 ------ ------ Total $2,355 $2,194 </TABLE> Inventories would have been $2,016,000 higher at August 3, 1996, $339,000 lower at February 3, 1996 and $3,253,000 higher at July 29, 1995 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. The Internal Revenue Service (the "IRS") is currently auditing the Company's federal income tax returns for fiscal years ended August 1986, 1987 and 1988. In January 1994, the IRS proposed approximately $20 million of tax consisting primarily of an adjustment to the LIFO inventory method used by the Company. The impact of the proposed adjustments before interest had previously been substantially reflected in the Company's deferred income tax accounts. If the Company were unsuccessful on all issues asserted by the IRS, the estimated interest to date on the adjustments would be approximately $30 million ($18 million after tax). The Company is contesting the proposed adjustments vigorously within the administrative appeals process of the IRS and intends to litigate if necessary. The Company's management and tax advisors strongly believe that the Company's positions are correct and consistent with governing tax law and regulations, and expect the Company will prevail. Management does not believe the ultimate resolution of these issues will have a material adverse impact on the Company's results of operations or liquidity. -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS THREE MONTHS AND SIX MONTHS ENDED AUGUST 3, 1996 RESULTS OF OPERATIONS At August 3, 1996, the Company operated 138 stores compared with 109 stores at the same time last year. The Company successfully opened two new stores during the last week of the quarter: Toledo, Ohio and the fourth store in the Kansas City market. Net sales increased $111.1 million or 30.6% to $474.6 million for the three months ended August 3, 1996 from $363.5 million for the three months ended July 29, 1995. Of the increase, $73.5 million is attributable to the inclusion of 19 new stores opened in 1995 and ten new stores opened in 1996. The remaining $37.6 million is attributable to comparable store sales growth of 10.4%. The Company completed its discontinuance of the electronics business during the second quarter. Excluding electronics, comparable store sales increased 11.9%. Net sales increased $211.3 million or 28.9% to $943.2 million for the six months ended August 3, 1996 from $731.9 million for the six months ended July 29, 1995. Of the increase, $140.8 million is attributable to the inclusion of 22 new stores opened in 1995 (net of the sales of two underperforming stores closed in 1995) and ten new stores opened in 1996. The remaining $70.5 million is attributable to comparable store sales growth of 9.9%. Excluding electronics, comparable store sales increased 11.4%. Due to a shift in the fiscal accounting calendar, the fiscal quarter ending dates are one week later this year than a year ago. On a calendar basis, matching the thirteen weeks ended August 3, 1996 with the thirteen weeks ended August 5, 1995, total sales increased 29.1%. Comparable store sales increased 9.9% on this basis. Excluding electronics, comparable store sales increased 11.4% on this basis. Matching the twenty-six weeks ended August 3, 1996 with the twenty-six weeks ended August 5, 1995, total sales increased 26.0% and comparable sales increased 7.9% on this basis. Excluding electronics, comparable stores sales increased 9.3% on this basis. Gross margin for the three months ended August 3, 1996 was 33.0% compared to 33.4% in the three months ended July 29, 1995. Gross margin for the six months ended August 3, 1996 was 33.2% compared to 33.6% in the six months ended July 29, 1995. These decreases are primarily attributable to clearance markdowns taken -9-
to eliminate the Company's electronics business. A low-cost operating environment and continued focus on expense control allows the Company to profitably offer value to its customers. Operating income for the three months ended August 3, 1996 increased $6.6 million or 29.8% over the three months ended July 29, 1995. Operating income for the six months ended August 3, 1996, increased $11.5 million or 25.9% over the six months ended July 29, 1995. These increases resulted primarily from the increased sales and the Company's ability to leverage its selling, general and administrative expenses as net sales increased. Selling, general and administrative expenses declined to 24.7% of net sales for the three months ended August 3, 1996 from 25.1% of net sales for the three months ended July 29, 1995. Selling, general and administrative expenses declined to 24.7% of net sales for the six months ended August 3, 1996 from 25.1% of net sales for the six months ended July 29, 1995. Costs associated with the opening of new stores are accumulated for the 6-8 weeks prior to opening and expensed over the two week grand opening period. The Company expensed $0.1 million of preopening expenses associated with the opening of the two stores in the last week of the three months ended August 3, 1996. The balance of the preopening expense related to these two stores will be expensed in the three months ended November 2, 1996. The Company expensed no preopening expense for the three months ended July 29, 1995. In the six months ended August 3, 1996, the Company expensed $3.8 million of preopening expenses associated with the opening of ten stores, with the balance of the preopening expense of two stores to be expensed in the three months ended November 2, 1996. The Company expensed $1.5 million of preopening expenses for three stores opened in the six months ended July 29, 1995. These expenses relate to the costs associated with new store openings, including hiring and training costs for new employees, Kohl's charge account solicitation, and processing and transporting initial merchandise. Net interest expense for the three months ended August 3, 1996 increased $0.4 million from the three months ended July 29, 1995. Net interest expense for the six months ended August 3, 1996 increased $2.1 million from the six months ended July 29, 1995. The increase was due to higher interest rates associated with the $100 million non-callable 6.7% unsecured senior notes issued in February 1996 and increased spending on capital and working capital requirements of new stores. The Company expects interest expense to continue to increase during the remainder of fiscal 1996 based on increased borrowings for new store's capital and working capital requirements and higher interest rates. -10-
For the three months ended August 3, 1996, net income increased 33.1% to $14.8 million from $11.1 million in the three months ended July 29, 1995. Earnings were $.20 per share for the three months ended August 3, 1996 compared to $.15 per share for the three months ended July 29, 1995. Net income for the six months ended August 3, 1996 increased 24.6% to $28.6 million or $.39 per share from $22.9 million or $.31 per share in the six months ended July 29, 1995. SEASONALITY & INFLATION - - ----------------------- The Company's business is seasonal, reflecting increased consumer buying in the "back-to-school" and Christmas seasons. The Company's financial position and operations are also affected by the timing of new store openings. Inflation did not materially affect the Company's net income during the periods presented. 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 preopening expenses. The Company's primary sources of funds for its business activities are cash flow from operations, borrowings under its revolving credit facility, the availability of the debt securities under the Company's shelf registration statement 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 Christmas selling season. At August 3, 1996, the Company's merchandise inventories had increased $120.2 million over the February 3, 1996 balance and $89.3 million over the July 29, 1995 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $226.3 million at August 3, 1996 from $175.4 million at February 3, 1996 and $168.6 million at July 29, 1995. The increase is due primarily to higher inventory levels offset in part by increased accounts payable. The Company expects working capital levels to continue to grow as new stores are opened. Cash provided from operating activities was $3.4 million for the six months ended August 3, 1996 compared to cash used of $38.4 million for the six months ended July 29, 1995. Excluding changes in operating assets and liabilities, cash provided by operating activities was $52.4 million for the six months ended August 3, 1996 compared to $48.8 million for the six months ended July 29, 1995. -11-
Capital expenditures for the six months ended August 3, 1996 were $84.1 million (no additional assets under capital lease) compared to $59.0 million (including $6.4 million of assets under capital leases) for the same period a year ago. The increase in expenditures in 1996 is primarily attributable to the opening of ten new stores for the six months ended August 3, 1996 compared to three new stores for the six months ended July 29, 1995 and the relocation of the Company's corporate headquarters within Menomonee Falls in July 1996 to an owned facility. Total capital expenditures for fiscal 1996 are currently expected to be approximately $200.0 million (excluding assets under capital leases). 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. The Company's long-term debt increased from $187.7 million at February 3, 1996 to $269.5 million at August 3, 1996. On February 6, 1996 the Company issued $100 million non-callable 6.70% unsecured senior notes under the Company's $250 million shelf registration statement. The proceeds were used to paydown borrowings under its $200 million unsecured revolving credit facility and will support future Company growth. The notes mature on February 1, 2006. 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 revolving credit facility, offerings of debt securities, short-term trade credit and other lending facilities. Information in this document contains "forward-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. Forward-looking statements can be identified by the use of forward-looking terminology such as "believes", "expects", "may", "will", "should" or "anticipates" or the negative thereof or other variations thereon. No assurance can be given that the future results covered by the forward-looking statements will be achieved. -12-
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 4.2 Amendment No. 4 to the Revolving Credit Agreement dated July 19, 1996 among Kohl's Department Stores, Inc. various commercial banking institutions and the Bank of New York, an Administrative Agent, the Bank of Nova Scotia as Agent, and the First National Bank of Chicago, as Agent. 10.16 Articles of Incorporation as Amended 12.1 Statement regarding calculation of ratio of earnings to fixed charges. 27 Financial Data Schedule - Article 5 of Regulation S-X b) Reports on Form 8-K There were no reports on Form 8-K filed for three months ended August 3, 1996 -13-
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: September 12, 1996 /s/ William Kellogg --------------------------------- William Kellogg Chairman, Chief Executive Officer Date: September 12, 1996 /s/ Arlene Meier --------------------------------- Arlene Meier Senior Vice President - Finance Chief Financial Officer -14-