Kohl's - 10-Q quarterly report FY2016 Q3

OR

For the Transition period from ________ to _________ 

Commission file number 1-11084

KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

KOHL’S CORPORATION

INDEX

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KOHL’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(Dollars in Millions)

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(Dollars in Millions, Except per Share Data)

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars and Shares in Millions, Except per Share Data)

 

KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in Millions)

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers (Topic 606)", which supersedes the revenue recognition requirements in Accounting Standards Codification ("ASC") No. 605, "Revenue Recognition". In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date", which defers the effective date of ASU 2014-09 for all entities by one year. The original ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU is effective in the first quarter of 2018. It will change the way we account for sales returns, our loyalty program and certain promotional programs. Based on current estimates, we do not expect these provisions of the ASU to have a material impact on our financial statements. We are currently evaluating the impact other provisions of the standard may have on our financial statements.

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)". The core principle of the standard is that a lessee should recognize the assets and liabilities that arise from leases. A lessee should recognize in its statement of financial position a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. We will be required to adopt the new standard in the first quarter of 2019. We are currently evaluating the impact this new standard will have on our financial statements.

In March 2016, the FASB issued ASU 2016-09, "Compensation - Stock Compensation (Topic 718)". This ASU modifies several aspects of accounting and reporting for share-based payment transactions. Under the new rules, excess income tax benefits and tax deficiencies related to share-based payments will be recognized within income tax expense in the statement of income, rather than within additional paid-in capital on the balance sheet. We are currently evaluating the potential impact that this provision, which is to be applied prospectively, will have on our financial statements. ASU 2016-09 also permits changes to an employers’ accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures. We will be required to adopt this new standard in the first quarter of 2017. We do not expect these provisions will have a material impact on our financial statements.

In 2015, we adopted ASU No. 2015-17, "Balance Sheet Classification of Deferred Taxes (Topic 740)" which requires us to present deferred tax liabilities and assets as non-current in our balance sheet and corrected the presentation of certain other tax assets and liabilities. The following table summarizes changes to our October 31, 2015 balance sheet:

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

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.

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

On February 25, 2016, we announced plans to close 18 underperforming stores in fiscal 2016. The specific locations were announced in March 2016. Seventeen of the stores closed in June 2016. We closed the final store in November. Store employees impacted by the closures were offered the opportunity to work at nearby Kohl’s locations or a severance package.

We recorded the following costs related to the store closures and the organizational realignment at our corporate office:

The store lease future obligation charge represents the discounted value of rents and other lease liabilities under non-cancellable lease terms and will be paid over the next 13 years. All of the severance will be paid out within two years. The remaining charge is primarily non-cash write-offs of assets and liabilities that were previously recorded on our books.

The following table summarizes changes in the store closure and restructure reserve during the quarter:

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

Executive Summary

In the first three quarters of 2016, we opened one traditional and eight small format Kohl's stores, two Off-Aisle clearance centers, and 12 FILA outlets. We closed 17 underperforming Kohl's stores in June, one store which we have chosen not to re-open after extensive flood damage in August, and one additional underperforming store in November.

Sales were $4.3 billion for the quarter, 2.3% lower than the third quarter of last year. On a comparable store basis, sales were 1.7% lower. The decreases were primarily driven by fewer transactions in our stores partially offset by higher average transaction value.

 

Inventory, gross margin and expenses were well-managed in a challenging sales environment.

During the quarter, we reversed $6 million of previously recorded expenses associated with store closing and restructuring costs. The reversal includes severance for corporate associates that have found re-employment elsewhere and lease liabilities for a store that will be used for corporate purposes.

Net income for the quarter was $146 million, or $0.83 per diluted share. Excluding the store closure and restructuring items in 2016 and loss on extinguishment of debt in 2015, net income was $142 million, or $0.80 per diluted share, 7% higher than the third quarter of last year.

See "Results of Operations" and "Financial Condition and Liquidity" for additional details about our financial results.

Net sales.

year to date. Comparable 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 sales. Orders that have been shipped, but not yet been received by the customer, are excluded from net sales, but are included in our comparable sales.

Drivers of the changes in comparable sales for the quarter and year to date were as follows:

From a regional perspective, including on-line originated sales, the West was the strongest region for both the quarter and year to date. The Mid-Atlantic and Northeast regions underperformed the company in both periods.

By line of business, Men's and Footwear were the strongest categories for both the quarter and year to date. Accessories, Children's, and Women's underperformed the company in both periods.

Gross margin as a percent of sales increased 2 basis points for the quarter and decreased 26 basis points year to date.  Merchandise margin increased in both periods due to fewer promotional markdowns.  For the quarter, the increase in merchandise margin was offset by shipping costs.  Year to date, the benefit of fewer promotional markdowns was more than offset by additional clearance markdowns and shipping costs.

SG&A expenses include compensation and benefit costs (including stores, headquarters, buying and merchandising, and distribution centers); occupancy and operating costs of our retail, distribution and corporate facilities; freight expenses associated with moving merchandise from our distribution centers to our retail stores and among distribution and retail facilities; marketing expenses, offset by vendor payments for reimbursement of specific, incremental and identifiable costs; net revenues from our Kohl’s credit card operations; and other administrative revenues and expenses. We do not include depreciation and amortization in SG&A. The classification of these expenses varies across the retail industry.

The following table summarizes the increases and (decreases) in SG&A by expense type for the quarter and year to date:

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 12 basis points for the quarter and 29 basis points year to date.

The increases in net revenues from credit card operations reflect growth in the portfolio which was partially offset by higher operating costs.  The decreases in corporate expenses are primarily due to lower incentive compensation.  Marketing costs include higher digital spending in both periods.  For the quarter, increases in digital spend and in tab marketing were more than offset by lower consulting and agency fees.  Year-to-date marketing includes additional spending for our Academy Awards sponsorship in the first quarter of 2016.  Store expenses include higher payroll in both periods due to on-going wage pressures and in-store support of ship-from-store and buy-online, pick-up from store. Reductions in controllable store expenses partially offset the higher payroll during the quarter, but more than offset year-to-date payroll increases.

 

Depreciation and amortization reflects the net impact of higher IT amortization due to continued investments and offset by lower store amortization due to maturing of the portfolio and the store closures in the second quarter of 2016. Interest expense decreased in both periods due to lower interest on capital leases as the portfolio matures and due to the store closures. Last summer's refinancing also lowered year-to-date interest expense.

Impairments, store closing and other costs includes the following:

For the quarter, impairments, store closing and other costs includes the reversal of severance costs for corporate associates that have found re-employment elsewhere and lease liabilities for a store that will be used for corporate purposes. We do not expect future charges for the store closures and corporate restructuring related to this announcement to be material.

We believe adjusted results are useful because they provide enhanced visibility into our results for the periods excluding the impact of store closures and restructuring charges in 2016 and the loss on extinguishment of debt in 2015.  However, these non-GAAP financial measures are not intended to replace GAAP measures.

The increase in the current ratio is primarily due to draws on our revolver in 2015 and higher cash balances in 2016, which were partially offset by lower inventory. The decrease in the debt/capitalization ratio was primarily due to revolver draws in 2015 partially offset by lower shareholders' equity resulting from share repurchases.

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our 2015 Form 10-K.

Critical Accounting Policies and Estimates

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

Forward-looking Statements

This Form 10-Q contains "forward-looking statements" made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," “anticipates,” “plans,” "may," "intends," "will," "should," “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements

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

In November 2016, our Board of Directors increased the remaining share repurchase authorization under our existing share repurchase program to $2.0 billion. We expect to repurchase shares in open market transactions, subject to market conditions, over the next three years.

 

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.