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 October 30, 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 (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: December 6, 1999 Common Stock, ------------------------------ Par Value $.01 per Share, 163,025,086 shares Outstanding. - --------------------------------------------------------
KOHL'S CORPORATION INDEX <TABLE> <CAPTION> <S> <C> <C> PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at October 30, 1999, January 30, 1999 and October 31, 1998 3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended October 30, 1999 and October 31, 1998 4 Condensed Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended October 30, 1999 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended October 30, 1999 and October 31, 1998 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 PART II. OTHER INFORMATION Item 6 Exhibits and Reports on Form 8-K 15 Signatures 16 </TABLE> -2-
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> October 30, January 30, October 31, 1999 1999 1998 (Unaudited) (Audited) (Unaudited) ------------- ------------- ------------- (In thousands) Assets ------ <S> <C> <C> <C> Current assets: Cash and cash equivalents $ 16,066 $ 2,858 $ 2,757 Short-term investments 20,000 26,736 15,000 Accounts receivable trade, net 291,713 270,704 123,459 Merchandise inventories 1,010,965 617,362 832,338 Deferred income taxes 16,449 14,412 6,576 Other 12,476 7,366 5,180 ------------- ------------- ------------- Total current assets 1,367,669 939,438 985,310 Property and equipment, net 1,226,584 933,011 883,602 Other assets 37,749 25,027 20,783 Favorable lease rights 140,202 13,681 14,153 Goodwill 21,038 24,938 26,238 ------------- ------------- ------------- Total assets $2,793,242 $1,936,095 $1,930,086 ============= ============= ============= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 466,013 $ 212,926 $ 315,770 Accrued liabilities 136,103 117,200 88,283 Income taxes payable 30,068 48,572 13,141 Current portion of long-term debt 11,578 1,533 1,559 ------------- ------------- ------------- Total current liabilities 643,762 380,231 418,753 Long-term debt 495,416 310,912 379,076 Deferred income taxes 60,442 53,787 51,318 Other long-term liabilities 32,772 28,386 24,001 Shareholders' equity Common stock-$.01 par value, 800,000,000 shares authorized, 162,990,520, 158,394,735, and 158,202,170 issued at October 30, 1999, January 30, 1999 and October 31, 1998, respectively. 1,630 1,584 1,582 Paid-in capital 764,734 504,275 492,498 Retained earnings 794,486 656,920 562,858 ------------- ------------- ------------- Total shareholders' equity 1,560,850 1,162,779 1,056,938 ------------- ------------- ------------- Total liabilities and shareholders' equity $2,793,242 $1,936,095 $1,930,086 ============= ============= ============= </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 October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ------------------------------------------------------------------- (In thousands, except per share data) <S> <C> <C> <C> <C> Net sales $1,099,852 $888,897 $2,949,611 $2,392,215 Cost of merchandise sold 724,193 589,275 1,935,520 1,582,547 -------------- -------------- ------------- -------------- Gross margin 375,659 299,622 1,014,091 809,668 Operating expenses: Selling, general, and administrative 246,751 202,156 681,653 565,280 Depreciation and amortization 22,060 16,839 60,382 47,483 Goodwill amortization 1,300 1,300 3,900 3,900 Preopening expenses 11,033 8,049 24,088 15,591 -------------- -------------- ------------- -------------- Operating income 94,515 71,278 244,068 177,414 Interest expense, net 8,033 5,367 19,653 15,627 -------------- -------------- ------------- -------------- Income before income taxes 86,482 65,911 224,415 161,787 Provision for income taxes 33,468 25,903 86,849 63,583 -------------- -------------- ------------- -------------- Net income $ 53,014 $ 40,008 $ 137,566 $ 98,204 ============== ============== ============= ============== Earnings per share: Basic Net income $ 0.33 $ 0.25 $ 0.85 $ 0.62 Average number of shares 162,953 158,132 162,073 158,007 Diluted Net income $ 0.32 $ 0.25 $ 0.82 $ 0.60 Average number of shares 167,675 162,723 166,842 162,492 </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements. 4
KOHL'S CORPORATION CONDENSED 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 1,796 18 15,955 - 15,973 Income tax benefit from stock options - - 44,906 - 44,906 Net income - - - 137,566 137,566 ---------------- --------------- --------------- ---------------- --------------- Balance at October 30, 1999 162,991 $1,630 $764,734 $794,486 $1,560,850 ================ =============== =============== ================ =============== </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 October 30, 1999 October 31, 1998 -------------------------------------------- (In thousands) <S> <C> <C> Operating activities Net income $ 137,566 $ 98,204 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 64,501 51,532 Deferred income taxes 4,618 6,253 Other noncash charges 2,291 1,573 Changes in operating assets and liabilities: Accounts receivable (21,009) 116,158 Merchandise inventories (393,603) (316,548) Other current assets (5,110) 79 Accounts payable 253,087 165,091 Accrued and other long-term liabilities 23,172 (4,677) Income taxes (18,504) (25,341) ------------------ ------------------ Net cash provided by operating activities 47,009 92,324 Investing activities Acquisition of property and equipment and favorable lease rights, net (483,843) (183,784) Proceeds from sale of assets 4,350 1,292 Sale (purchase) of short-term investments, net 6,736 (15,000) Other (14,220) (9,562) ------------------ ------------------ Net cash used in investing activities (486,977) (207,054) Financing activities Net borrowings (repayments) under credit facilities (1,600) 69,500 Proceeds from debt offering, net 197,258 - Net repayments of other long-term debt (1,147) (126) Payment of financing fees on debt (1,840) - Net proceeds from issuance of common shares 260,505 3,952 ------------------ ------------------ Net cash provided by financing activities 453,176 73,326 ------------------ ------------------ Net increase (decrease) in cash and cash equivalents 13,208 (41,404) Cash and cash equivalents at beginning of period 2,858 44,161 ------------------ ------------------ Cash and cash equivalents at end of period $ 16,066 $ 2,757 ================== ================== </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 the prior year 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 the information to compare to other companies not on LIFO. <TABLE> <CAPTION> LIFO Expense ------------ 9 Months Ended Quarter October 30, 1999 October 31, 1998 ------- ---------------- ---------------- (In Thousands) <S> <C> <C> First $1,363 $1,861 Second 1,409 1,896 Third 1,651 1,900 ------ ------ Total $4,423 $5,657 </TABLE> Inventories would have been $6,344,000, $1,921,000 and $10,440,000 higher at October 30, 1999, January 30, 1999 and October 31, 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): <TABLE> <CAPTION> 3 Months Ended 9 Months Ended October 30, October 31, October 30, October 31, 1999 1998 1999 1998 ---- ---- ---- ---- <S> <C> <C> <C> <C> Denominator for basic earnings per share -weighted average shares 162,953 158,132 162,073 158,007 Employee stock options 4,722 4,591 4,769 4,485 ------- ------- ------- ------- Denominator for diluted earnings per share 167,675 162,723 166,842 162,492 ======= ======= ======= ======= </TABLE> -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ---------------------------------------------- THREE MONTHS AND NINE MONTHS ENDED October 30, 1999 --------------------------------------------------- Results of Operations - --------------------- At October 30, 1999, the Company operated 257 stores compared with 214 stores at the same time last year. During the quarter, the Company opened 26 new stores and relocated one store. The new stores opened included the following: 6 in the St. Louis, MO market, 11 in the Dallas/Ft. Worth, TX market, stores in Hickory, NC, and Lansing, MI, and additional stores in the Richmond, VA; Washington, D.C.; Harrisburg, PA; Chicago, IL; Minneapolis, MN; Grand Rapids, MI and Denver, CO markets. On November 5th, the Company opened two additional stores in the Dallas/Ft. Worth, TX market, increasing the total number of new store openings for 1999 to 46. 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: 32 stores in New York, New Jersey and Connecticut previously operated by Caldor and additional stores in the Dallas/Ft. Worth, TX, St. Louis, MO, Baltimore, MD and Rochester, MN markets. Net sales increased $211.0 million or 23.7% to $1,099.9 million for the three months ended October 30, 1999 from $888.9 million for the three months ended October 31, 1998. Of the increase, $152.2 million is attributable to the inclusion of 17 new stores opened in 1998 and 44 new stores opened in 1999. The remaining $58.8 million is attributable to comparable store sales growth of 6.9%. Net sales increased $557.4 million or 23.3% to $2,949.6 million for the nine months ended October 30, 1999 from $2,392.2 million for the nine months ended October 31, 1998. Of the increase, $365.9 million is attributable to the inclusion of 32 new stores opened in 1998 and 44 new stores opened in 1999. The remaining $191.5 million is attributable to comparable stores sales growth of 8.6%. Gross margin for the three months ended October 30, 1999 was 34.2% compared to 33.7% for the three months ended October 31, 1998. Gross margin for the nine months ended October 30, 1999 was 34.4% compared to 33.8% for the nine months ended October 31, 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 the 46 new stores opened during fiscal 1999, approximately $1 million in preopening costs was expensed in fiscal 1998 and $23.5 million was expensed during the nine months ended October 30, 1999 for a total average cost per store of $0.5 million. In addition, the Company incurred approximately $0.6 million in preopening costs for stores to be opened in fiscal 2000. 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 October 30, 1999, increased $23.2 million or 32.6% over the three months ended October 31, 1998. Operating income for the nine months ended October 30, 1999 increased $66.7 million or 37.6% over the nine months ended October 31, 1998. These increases resulted from 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 22.4% of net sales for the three months ended October 30, 1999 from 22.7% of net sales for the three months ended October 31, 1998. Selling, general and administrative expenses declined to 23.1% of net sales for the nine months ended October 30, 1999 from 23.6% of the net sales for the nine months ended October 31, 1998. Net interest expense for the three months ended October 30, 1999 increased $2.7 million from the three months ended October 31, 1998. Net interest expense for the nine months ended October 30, 1999 increased $4.0 million from the nine months ended October 31, 1998. The increase was primarily attributed to the $200 million 7.25% unsecured debentures issued in June 1999. For the three months ended October 30, 1999, net income increased 32.5% to $53.0 million from $40.0 million in the three months ended October 31, 1998. Earnings were $.32 per diluted share for the three months ended October 30, 1999 compared to $.25 per diluted share for the three months ended October 31, 1998. Net income for the nine months ended October 30, 1999 increased 40.1% to $137.6 million or $.82 per diluted share from $98.2 million or $.60 per diluted share in the nine months ended October 31, 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 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. 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 Complete . Non-IS systems (including Complete merchandise vendor EDI transactions) . Contingency Planning Complete 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. -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. . The Verification phase was system testing the changes in similar environments. This included testing with vendors and service provider organizations. . The Contingency Planning Phase was undertaken to prepare for potential Year 2000 disruptions. This phase involved developing and implementing Company wide initiatives in order to effectively respond to Year 2000 disruptions. In that regard, the Company continues to refine its contingency plans and is enhancing and adding to the plans for each business area. A plan for the night of December 31, 1999 and days to follow has been developed. The staffing portion of the plan includes on-site coverage by the Company's associates. The Company had 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. Depending on the circumstances, formal certifications of Year 2000 compliance have been requested and received. The Company has no knowledge of any primary or critical supplier with potential Year 2000 issues that may have a material adverse effect on the Company's performance. The total cost of the Year 2000 project was $8.4 million and was funded through operating cash flows. Of the total project cost, $7.1 million was attributable to the purchase of new software and hardware and related development costs that was capitalized. The remaining $1.3 million of programming and testing costs was expensed as incurred and did not have a material effect on the results of the operations. Of the capitalized portion, approximately $5 million was for the purchase and installation of new financial systems. The new financial systems were previously planned projects that support the Company's growth, provide significant business enablement and eliminate a substantial Year 2000 effort. The Company believes that Year 2000 issues will not have a material adverse impact on the Company's performance. However, there can be no guarantee that Year 2000 issues will not impact the Company's business due to the Company's reliance on certain third parties to remediate their own Year 2000 issues and the Company's ability to locate and correct all relevant computer codes should a Year 2000 issue arise. -12-
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 October 30, 1999, the Company's merchandise inventories had increased $393.6 million over the January 30, 1999 balance and $178.6 million over the October 31, 1998 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $723.9 million at October 30, 1999 from $559.2 million at January 30, 1999 and increased from $566.6 million at October 31, 1998. Of the $157.3 million increase from October 31, 1998, $168.3 million is attributable to higher credit card receivables as the Company sold a lower percentage of receivables. The remaining variance was primarily the result of higher merchandise inventory levels required to support existing stores and incremental new store locations offset in part by increased accounts payable. Cash provided by operating activities was $47.0 million for the nine months ended October 30, 1999 compared to $92.3 million for the nine months ended October 31, 1998. Excluding changes in operating assets and liabilities, cash provided by operating activities was $209.0 million for the nine months ended October 30, 1999 compared to $157.6 million for the nine months ended October 31, 1998. Capital expenditures for the nine months ended October 30, 1999 were $483.8 million compared to $183.8 million for the same period a year ago. The increase in expenditures in 1999 is primarily attributable to the March 1999 acquisition of the rights to occupy 33 stores previously operated by Caldor Corporation and the related expenditures to renovate and refixture these locations. The remaining increase is attributed to the Company's new store spending and the construction of a fourth distribution center. Total capital expenditures for fiscal 1999 are currently expected to range between $575-$600 million. 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. -13-
To fund the renovation and refixturing of the Caldor stores, the Company issued 2,800,000 shares of its common stock to the public in March 1999 for net proceeds of approximately $200 million. In June 1999, the Company issued $200 million redeemable 7.25% unsecured debentures. The debentures mature on June 1, 2029. The proceeds are being 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. 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. -14-
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 3.1 Bylaws of the Company, as amended. 12.1 Statement regarding calculation of ratio of earnings to fixed charges. 27.1 Financial Data Schedule - Article 5 of Regulation S-X, nine months ended October 30, 1999. 27.2 Financial Data Schedule - Article 5 of Regulation S-X, nine months ended October 31, 1998 (restated). b) Reports on Form 8-K There were no reports on Form 8-K filed for three months ended October 30, 1999. -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: December 14, 1999 /s/ R. Lawrence Montgomery ---------------------------- R. Lawrence Montgomery Vice Chairman - Chief Executive Officer Date: December 14, 1999 /s/ Arlene Meier ---------------------------- Arlene Meier Executive Vice President - Finance Chief Financial Officer -16-