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 November 2, 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: December 11, 1996 Common ------------------------- Stock, Par Value $.01 per Share, 73,914,752 Shares Outstanding. - - --------------------------------------------------------------
<TABLE> <CAPTION> KOHL'S CORPORATION INDEX <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at November 2, 1996, February 3, 1996 and October 28, 1995 3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended November 2, 1996 and October 28, 1995 4 Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended November 2, 1996 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 2, 1996 and October 28, 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> November 2, February 3, October 28, 1996 1996 1995 ------------------------------------------- (Unaudited) (Audited) (Unaudited) Assets ------ <S> <C> <C> <C> Current assets: Cash and cash equivalents $1,950 $2,819 $3,265 Merchandise inventories 587,090 320,325 469,007 Other 8,264 7,020 9,983 ------------ ------------ ----------- Total current assets 597,304 330,164 482,255 Property and equipment, at cost 670,622 502,406 474,304 Less accumulated depreciation 119,314 93,238 85,542 ------------ ------------ ----------- 551,308 409,168 388,762 Other assets 6,523 4,564 5,262 Favorable lease rights 18,543 20,491 20,796 Goodwill 36,638 40,538 41,838 ------------ ------------ ----------- Total assets $1,210,316 $804,925 $938,913 ============ ============ =========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $208,495 $68,810 $189,312 Accrued liabilities 68,908 57,259 58,045 Income taxes payable 7,468 21,628 6,523 Deferred income taxes 6,783 5,674 8,200 Current portion of long-term debt 1,425 1,425 1,345 ------------ ------------ ----------- Total current liabilities 293,079 154,796 263,425 Long-term debt 395,686 187,699 260,250 Deferred income taxes 35,139 30,731 25,738 Other long-term liabilities 22,357 21,061 23,846 Shareholders' equity Common stock-$.01 par value, 400,000,000 shares authorized, 73,907,226, 73,736,670 and 73,589,578 issued at November 2, 1996, February 3, 1996 and October 28, 1995 respectively. 739 737 736 Paid-in capital 191,907 188,998 186,102 Retained earnings 271,409 220,903 178,816 ------------ ------------ ----------- Total shareholders' equity 464,055 410,638 365,654 ------------ ------------ ----------- Total liabilities and shareholders' equity $1,210,316 $804,925 $938,913 ============ ============ =========== </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 9 Months 9 Months (13 Weeks) (13 Weeks) (39 Weeks) (39 Weeks) Ended Ended Ended Ended November 2, October 28, November 2, October 28, 1996 1995 1996 1995 ----------------------------------------------------------------------------- (In thousands except per share data) <S> <C> <C> <C> <C> Sales $598,052 $486,750 $1,541,288 $1,218,651 Cost of merchandise sold 399,572 326,145 1,029,448 812,411 ----------- ----------- ----------- ----------- Gross margin 198,480 160,605 511,840 406,240 Operating expenses: Selling, general, and administrative 138,324 113,534 371,653 297,474 Depreciation and amortization 10,334 7,459 28,063 20,622 Goodwill amortization 1,300 1,300 3,900 3,900 Credit operations non-recurring - 14,052 - 14,052 Preopening expenses 6,552 7,452 10,302 8,944 ----------- ----------- ----------- ----------- Operating income 41,970 16,808 97,922 61,248 Interest expense, net 5,347 3,924 13,089 9,614 ----------- ----------- ----------- ----------- Income before income taxes 36,623 12,884 84,833 51,634 Provision for income taxes 14,706 5,258 34,327 21,069 ----------- ----------- ----------- ----------- Net income $21,917 $7,626 $50,506 $30,565 =========== =========== =========== =========== Earnings per share: Net income $0.30 $0.10 $0.68 $0.42 =========== =========== =========== =========== Weighted average number of common shares 73,897 73,580 73,831 73,544 =========== =========== =========== =========== </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 - - - 50,506 50,506 Exercise of stock options 170,556 2 2,909 - 2,911 ----------------------------------------------------------- Balance at November 2, 1996 73,907,226 $739 $191,907 $271,409 $464,055 =========================================================== </TABLE> See Accompanying Notes to Condensed Consolidated Financial Statements 5
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> 9 Months 9 Months (39 Weeks) (39 Weeks) Ended Ended November 2, 1996 October 28, 1995 ------------------------------------ (In thousands) <S> <C> <C> Operating activities Net income $50,506 $30,565 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 32,102 24,522 Deferred income taxes 5,517 8,183 Other noncash charges 1,213 912 Changes in operating assets and liabilities (130,917) (131,989) -------------- -------------- Net cash used in operating activities (41,579) (67,807) Investing activities Acquisition of property and equipment, net (168,236) (104,248) Other 10 (1,094) -------------- -------------- Net cash used in investing activities (168,226) (105,342) Financing activities Net borrowings under working capital loan 9,000 146,000 Proceeds from public debt offering 200,000 - Repayments of long-term debt (1,013) (832) Payment of financing fees on debt (1,962) - Net proceeds from issuance of common shares (including stock options) 2,911 840 -------------- -------------- Net cash provided by financing activities 208,936 146,008 -------------- -------------- Net decrease in cash and cash equivalents (869) (27,141) Cash and cash equivalents at beginning of period 2,819 30,406 -------------- -------------- Cash and cash equivalents at end of period $1,950 $3,265 ============== ============== </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 state- ments. 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 foot- notes 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> LIFO Expense 9 Months Ended ------------ -------------- Quarter November 2, 1996 October 28, 1995 ------- ---------------- ---------------- (In Thousands) <S> <C> <C> First $1,171 $1,104 Second 1,184 1,090 Third 1,495 1,464 ------ ------ Total $3,850 $3,658 </TABLE> Inventories would have been $3,511,000 higher at November 2, 1996, $339,000 lower at February 3, 1996 and $4,717,000 higher at October 28, 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 reflected in the Company's deferred income tax accounts. The Company is contesting the proposed adjustments vigorously within the administrative appeals process of the IRS and has reached a tentative resolution of the matter which, if finalized, would not 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 NINE MONTHS ENDED NOVEMBER 2, 1996 --------------------------------------------------- Results of Operations - - --------------------- At November 2, 1996, the Company operated 150 stores compared with 128 stores at the same time last year. The Company successfully opened twelve new stores during the three months ended November 2, 1996. Seven new stores opened in September: three stores in the Charlotte, North Carolina market; the seventh store in Cleveland, Ohio and stores in Lancaster, Pennsylvania; Moline, Illinois and Omaha, Nebraska. In October, the Company opened five new stores: the 25th store in the Chicago market, the 11th store in the Twin Cities; Lincoln, Nebraska; Mishawaka, Indiana and Huntington, West Virginia. In addition, the Company relocated one of its Indianapolis stores to a larger location. Net sales increased $111.3 million or 22.9% to $598.1 million for the three months ended November 2, 1996 from $486.8 million for the three months ended October 28, 1995. Of the increase, $71.2 million is attributable to the inclusion of 22 new stores opened in 1995 and 22 new stores opened in 1996. The remaining $40.1 million is attributable to comparable store sales growth of 10.8% (excluding the discontinued electronics business). Net sales increased $322.6 million or 26.5% to $1,541.3 million for the nine months ended November 2, 1996 from $1,218.7 million for the nine months ended October 28, 1995. Of the increase, $213.9 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 22 new stores opened in 1996. The remaining $108.7 million is attributable to comparable store sales growth of 11.1% (excluding the discontinued electronics business). 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 November 2, 1996 with the thirteen weeks ended November 4, 1995, total sales increased 18.4%. Comparable store sales increased 7.6% (excluding the discontinued electronics business). Matching the 39 weeks ended November 2, 1996 with the 39 weeks ended November 4, 1995, total sales increased 22.9% and comparable sales increased 8.6% (excluding the discontinued electronics business) on this basis. Gross margin for the three months ended November 2, 1996 was 33.2% compared to 33.0% in the three months ended October 28, 1995. Gross margin for the nine months ended November 2, 1996 was 33.2% compared to 33.3% in the nine months ended October 28, 1995. A low-cost operating environment and continued focus on expense control allows the Company to profitably offer value to its customers. -9-
Operating income for the three months ended November 2, 1996 increased $25.2 million over the three months ended October 28, 1995. Operating income for the nine months ended November 2, 1996, increased $36.7 million over the nine months ended October 28, 1995. Last year, the Company incurred a non- recurring charge related to bringing the credit card operation in-house. Excluding the non-recurring credit charge, operating income increased $11.1 million or 36.0% over the three months ended October 28, 1995. Excluding the non-recurring credit charge, operating income increased $22.6 million or 30.0% over the nine months ended October 28, 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 23.1% of net sales for the three months ended November 2, 1996 from 23.3% of net sales for the three months ended October 28, 1995. Selling, general and administrative expenses declined to 24.1% of net sales for the nine months ended November 2, 1996 from 24.4% of net sales for the nine months ended October 28, 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 $6.6 million of preopening expenses in the three months ended November 2, 1996. The expenses relate to the balance of the preopening expense for two stores which opened in the last week of the three month period ended August 3, 1996 and the expenses of 12 new stores and one relocated store opened during the three months ended November 2, 1996. The Company expensed $7.5 million in the three months ended October 28, 1995 in opening 19 new stores and relocating one store. In the nine months ended November 2, 1996, the Company expensed $10.3 million of preopening expenses associated with the opening of 22 new stores and the relocation of one store. The Company expensed $8.9 million of preopening expenses for 22 new stores and the relocation of one store in the nine months ended October 28, 1995. The 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 November 2, 1996 increased $1.4 million from the three months ended October 28, 1995. Net interest expense for the nine months ended November 2, 1996 increased $3.5 million from the nine months ended October 28, 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 on its fixed rate debt. -10-
For the three months ended November 2, 1996, net income increased to $21.9 million or $.30 per share from $7.6 million or $.10 per share in the three months ended October 28, 1995. Excluding the non-recurring charge related to bringing the credit card operation in-house last year, net income was $15.9 million or $.22 per share for the three months ended October 28, 1995. For the nine months ended November 2, 1996, net income increased to $50.5 million or $.68 per share from $30.6 million or $.42 per share. Excluding the non- recurring credit charge, net income was $38.9 million or $.53 per share for the nine months ended October 28, 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 November 2, 1996, the Company's merchandise inventories had increased $266.8 million over the February 3, 1996 balance and $118.1 million over the October 28, 1995 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $304.2 million at November 2, 1996 from $175.4 million at February 3, 1996 and $218.8 million at October 28, 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. -11-
Cash used in operating activities was $41.6 million for the nine months ended November 2, 1996 compared to cash used of $67.8 million for the nine months ended October 28, 1995. Excluding changes in operating assets and liabilities, cash provided by operating activities was $89.3 million for the nine months ended November 2, 1996 compared to $64.2 million for the nine months ended October 28, 1995. Capital expenditures for the nine months ended November 2, 1996 were $168.2 million (no additional assets under capital lease) compared to $110.6 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 1997 new stores program, and the relocation of the Company's corporate headquarters within Menomonee Falls, Wisconsin in July 1996 to an owned facility. Total capital expenditures for fiscal 1996 are currently expected to be approximately $220.0 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 $395.7 million at November 2, 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 notes mature on February 1, 2006. On October 15, 1996, the Company issued $100 million non- callable 7.375% unsecured senior notes under the Company's $250 million shelf registration statement. The notes mature on October 15, 2011. The proceeds were used to paydown borrowings under its $200 million unsecured revolving credit facility and will support future Company 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 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 10.10 Amendment No. 4 dated September 16, 1996 and Waiver and Amendment No. 5 dated November 3, 1996 to the Receivables Purchase Agreement dated as of September 1, 1995 by and among Kohl's Department Stores, Inc., Preferred Receivables Funding Corporation and the First National Bank of Chicago as agent, incorporated herein by reference. 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 November 2, 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: December 13, 1996 /s/ William Kellogg --------------------------------- William Kellogg Chairman, Chief Executive Officer Date: December 13, 1996 /s/ Arlene Meier --------------------------------- Arlene Meier Senior Vice President - Finance Chief Financial Officer -14-