Kohl's - 10-Q quarterly report FY2017 Q1

Washington, D.C. 20549

(Mark One)

OR

For the Transition period from ________ to _________ 

(Exact name of registrant as specified in its charter)

 

Item 1. Financial Statements

 

See accompanying Notes to Consolidated Financial Statements

 

See accompanying Notes to Consolidated Financial Statements

 

See accompanying Notes to Consolidated Financial Statements

(Unaudited)

See accompanying Notes to Consolidated Financial Statements

1. Basis of Presentation

During the quarter ended April 29, 2017, we adopted the new accounting standard on share-based payments as required.  The guidance simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of excess tax benefits in the Statements of Cash Flows. The adoption of the new standard resulted in the following:

We elected not to change our policy on accounting for forfeitures and continue to estimate the total number of awards for which the requisite service period will not be rendered. At this time, we have not changed our policy on statutory withholding requirements and will continue to allow employees to withhold up to the minimum statutory withholding requirements.

2. Store Closure and Restructure Reserve

During 2016, we closed 18 underperforming stores. The following table summarizes changes in the store closure and restructure reserve during the quarter:

3. Debt

Long-term debt consists of the following unsecured senior debt as of April 29, 2017, January 28, 2017, and April 30, 2016:

4. Stock-Based Compensation

5. Contingencies

6. Net Income Per Share

Sales were $3.8 billion for the quarter, 3.2% lower than the first quarter of last year. On a comparable store basis, sales were 2.7% lower than the first quarter of 2016. The decreases were primarily driven by fewer transactions partially offset by higher average transaction value.

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

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

Results of Operations

Net sales decreased $129 million, or 3.2%, to $3.8 billion for the first quarter of 2017. Comparable sales decreased 2.7% during the quarter. During the quarter, we changed our comparable sales definition to align with our internal company reporting. Under the new definition, Kohl's store sales are included in comparable sales after the store has been open for 12 full months. On-line sales and sales at remodeled and relocated Kohl's stores are included in comparable sales, unless square footage has changed by more than 10%. The prior definition included sales for stores (including relocated or remodeled stores) which were open during all of the current and prior periods. Comparable sales decreased 2.7% using both definitions.

Gross margin includes the total cost of products sold, including product development costs, net of vendor payments other than reimbursement of specific, incremental and identifiable costs; inventory shrink; markdowns;

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:

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 decreased, or "leveraged," by 2 basis points for the quarter. The largest contributors to the SG&A leverage were marketing and store expenses. Marketing spend was positively impacted by not repeating an unproductive event and through efficiencies gained in our non-customer facing spend. Stores operated more productively and managed expenses down with lower sales. 

The provision for income taxes reflects changes in pretax income and the effective tax rate. Our income tax rate was 39.2% during the quarter, 160 basis points higher than last year. This increase was due to the new stock based compensation rules adopted during the quarter, partially offset by an increase in favorable tax settlements. The new rules require us to recognize income tax benefits and tax deficiencies related to share-based awards as income tax expense rather than as equity on our balance sheet.

We believe the adjusted results in the table above are useful because they provide enhanced visibility into our results excluding the impact of store closures and restructuring charges in 2016.  However, these non-GAAP financial measures are not intended to replace the comparable GAAP measures.

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.

Although we expect that our operations will be influenced by general economic conditions, including food, fuel and energy prices, and by costs to source our merchandise, we do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be impacted by such factors in the future.

The following table presents our primary cash requirements and sources of funds.

Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.

Free cash flow is a non-GAAP financial measure which we define as net cash provided by operating activities and proceeds from financing obligation payments (which generally represent landlord reimbursements of construction costs) less capital expenditures and capital lease and financing obligation payments. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and net cash provided by operating activities. We believe that free cash flow represents our ability to generate additional cash flow from our business operations.

The following table reconciles net cash provided by operating activities (a GAAP measure) to free cash flow (a non-GAAP measure).

Key financial ratios that provide certain measures of our liquidity are as follows:

The decreases in working capital and the current ratio are primarily due to higher accounts payable and income taxes payable balances and lower inventory in 2017, which were partly offset by higher cash balances. The debt/capitalization ratio increased primarily due to lower shareholders' equity, which was primarily due to share repurchases.

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our 2016 Form 10-K.

Off-Balance Sheet Arrangements

We have not created, and are not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our financial condition, liquidity, results of operations or capital resources.

Critical Accounting Policies and Estimates

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes in the market risks described in our 2016 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer (who is also serving as our Interim Principal 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.

Based upon the Evaluation, our Chief Executive Officer has concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are defined by Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") as controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer, to allow timely decisions regarding required disclosures.

It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control Over Financial Reporting

PART II. OTHER INFORMATION

Item 1A. Risk Factors

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

Item 6. Exhibits

 

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.