Kohl's - 10-Q quarterly report FY2013 Q3

OR

For the Transition period from ________ to _________ 

(Exact name of registrant as specified in its charter)

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

    

Long-term debt consists of the following unsecured senior debt:

ASC No. 820, “Fair Value Measurements and Disclosures,” requires fair value measurements be classified and disclosed in one of the following pricing categories:

    

Our long-term investments consist primarily of investments in auction rate securities (“ARS”). The fair values for our ARS were based on third-party pricing models which utilized a discounted cash flow model for each of the securities as there was no recent activity in the secondary markets in these types of securities. This model used a combination of observable inputs which were developed using publicly available market data obtained from independent sources and unobservable inputs that reflect our own estimates of the assumptions that market participants would use in pricing the investments. Observable inputs include interest rate currently being paid, maturity and credit ratings.

The following table presents a rollforward of our long-term investments:

The following table summarizes stock-based compensation grants:

We are subject to certain legal proceedings and claims arising out of the conduct of our business. In the opinion of management, the outcome of these proceedings and litigation will not have a material adverse impact on our consolidated financial statements.

6. Net Income Per Share

The following table summarizes our basic and diluted net income per share calculations:

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our main business objective is to profitably increase sales. In order to increase sales, we believe that we need to continue to improve the quality of our merchandise and to offer items at great values. We are pleased with the progress we have made in these areas, but believe that we need to continue to progress in order to increase transactions per store, which is our primary sales driver.

We expanded our loyalty program to California and the Pittsburgh market during the third quarter. Including Texas and the original test markets, the program is now available to customers in almost 30% of our stores. The loyalty program allows enrolled customers to earn various rewards or discounts based upon the volume of their purchases. Initial results have shown a low single-digit sales increase in loyalty markets when compared to similar control markets. We continue to review the results of these pilots and modify earning thresholds, redemption time frames, in-store communication and other elements of the program. We believe that over the long-term, the loyalty program could be a powerful tool to increase customer traffic and sales.

Approximately 280 stores have renovated beauty departments. We are testing three different beauty renovations - new fixtures with expanded and/or relocated floor space, new fixtures with no change to department size or location, and existing fixtures with acrylic retrofits. Initial test results are showing a significant increase in beauty sales in the renovated stores.

feet of retail space. We remodeled 30 stores this year and expect to remodel between 35 and 50 stores in 2014. Final remodel decisions will be based on the results of our beauty tests and other remodel concepts that we are testing.

We continue to focus on creating excitement for our customers to increase customer traffic to our stores and website. In fiscal 2014, we expect to launch several new brands, including Juicy Couture, IZOD, and a Jumping Beans collection featuring Disney characters. The Juicy Couture assortment will include women's and girl's apparel, footwear, accessories, bedding, and home accessories. The IZOD assortment will feature men's sportswear and dress apparel, including golf separates, woven sport shirts, sweaters, knit shirts, shorts, suit separates, dress shirts, and dress pants.

Even though our third quarter sales were lower than planned, we were able to effectively manage inventory purchases and, as a result, believe our inventory levels and composition are appropriate as we enter the fourth quarter.

We remain committed to meeting the changing shopping needs of our customer, to strengthening our omni-channel experience and to investing in our future in a strategic and profitable manner.

Results of Operations

Net sales.

Comparable store sales include sales for stores (including relocated or remodeled stores) which were open during both the current and prior year periods. We also include E-Commerce sales in our comparable store sales. Omni-channel sales are recorded as store or E-Commerce sales based on the fulfillment channel. For example, customer purchases from our in-store kiosks are generally recognized as E-Commerce sales as the orders are shipped from our E-Commerce fulfillment centers and on-line orders which are shipped from our stores are recognized as store sales. Merchandise returns reduce sales at the location of the return. As a result, store sales are reduced by merchandise purchased on-line, but returned to a store.

The following tables summarize sales and the changes in sales:

 Drivers of the changes in comparable store sales were as follows:

The decreases in selling price per unit were primarily due to clearance merchandise which represented a higher percentage of our total sales and was sold at slightly deeper discounts than in the prior year periods. Units per transaction increased as customers purchased more items in response to the lower prices. Increases in the number of E-Commerce transactions were more than offset by decreases in our stores. Year-to-date transactions were also negatively impacted by an unseasonably cold spring which reduced customer visits early in the year.

The West region reported the strongest comparable store sales for both the quarter and year to date. The remaining regions all reported low to mid single-digit decreases. The Southeast and South Central regions reported the largest comparable store sales decreases for the quarter. Year to date, the Mid-Atlantic region had the largest comparable store sales decrease.

E-Commerce revenues totaled $339 million for the quarter and $970 million year to date. Our E-Commerce revenues increased over both prior year periods, but at rates which were slower than our historical growth rates. We replaced our E-Commerce platform in the second quarter of 2013. As expected, this resulted in a temporary deceleration in our E-Commerce growth in the second and third quarters of 2013. We expect E-Commerce growth to re-accelerate in the fourth quarter.

Gross margin.

    

Selling, general and administrative expenses.

The following table summarizes the changes in SG&A by expense type:

Many of our expenses, including store payroll and distribution costs, are variable in nature. These costs generally increase as sales increase and decrease as sales decrease. We measure both the change in these variable expenses and the expense as a percent of sales. If the expense as a percent of sales decreased from the prior year, the expense “leveraged” and indicates that the expense was well-managed or effectively generated additional sales. If the expense as a percent of sales increased over the prior year, the expense "deleveraged" and indicates that sales growth was less than expense growth. SG&A as a percent of sales increased, or "deleveraged," by approximately 15 basis points for the quarter and 10 basis points year to date.

The increases in store expenses are the result of higher store payroll, higher rent-related expenses due to new stores, and higher controllable expenses including repairs and maintenance. The timing and number of remodels resulted in higher expenses for the quarter and lower expenses year to date.

Marketing costs deleveraged for the quarter as we increased our spending in digital and broadcast and added California and Pittsburgh to our loyalty program pilot. Year to date, advertising leveraged approximately 5 basis points.

IT spending, which is included in corporate expenses, increased over both prior year periods due to growth and infrastructure investments related to our omni-channel strategy. For the quarter, these increases were more than offset by lower payroll and benefit expenses, including incentive compensation. Year to date, the IT spending increases were only partially offset by lower payroll and benefit expenses.

Distribution costs deleveraged in both the quarter and year to date due to higher distribution and fulfillment costs related to our growing E-Commerce business.

The increases in net revenues from credit card operations are the result of higher finance charge revenues and late fees due to growth in the portfolio. Partially offsetting these increases were higher bad debt expenses and operational costs. Year-to-date expenses are also higher as a result of the new credit card servicing platform which was implemented in the first quarter of 2012.

Other Expenses.

Our business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the second half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 15% of annual sales typically occur during the back-to-school season and 30% during the holiday season. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Revenues and expenses associated with the opening of new stores may also effect our quarterly results.

Our primary ongoing cash requirements are for capital expenditures for new stores, remodels and IT spending and for seasonal and new store inventory purchases. Share repurchases and dividend payments to shareholders are currently other significant usages of cash. These payments are discretionary and can be discontinued at any time should we require cash for other uses. Our primary sources of funds are cash flows provided by operations, short-term trade credit and our lines of credit. Short-term trade credit, in the form of extended payment terms for inventory purchases, often represents a significant source of financing for merchandise inventories. We may from time to time issue new debt. The amount of new debt issued, if any, will depend on prevailing market conditions, our cash needs and our capital structure. Seasonal cash needs may be met by cash on hand and/or the line of credit available under our revolving credit facility. Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.

Contractual Obligations

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (the “Evaluation”) at a reasonable assurance level as of the last day of the period covered by this Report.

PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no significant changes in our risk factors from those described in our 2012 Form 10-K.

Forward-looking Statements

This report contains statements that may constitute forward-looking statements within the meaning of the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Those statements relate to developments, results, conditions or other events we expect or anticipate will occur in the future. Words such as “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. Without limiting the foregoing, these statements may relate to future outlook, revenues, earnings, store openings, planned capital expenditures, market conditions, new strategies and the competitive environment. Forward-looking statements are based on our management’s then current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors, described in Item 1A of our 2012 Form 10-K, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them. An investment in our common stock or other securities carries certain risks. Investors should carefully consider the risks as stated in our 2012 Form 10-K and other risks which may be disclosed from time to time in our filings with the SEC before investing in our securities.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.