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 1, 1997 ------------------------------------------------- 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, 1997 Common Stock, Par Value $.01 per Share, 78,845,697 shares Outstanding.
KOHL'S CORPORATION INDEX <TABLE> <CAPTION> <S> <C> PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at November 1, 1997, February 1, 1997 and November 2, 1996 3 Condensed Consolidated Statements of Income for the Three Months and Nine Months Ended November 1, 1997 and November 2, 1996 4 Consolidated Statement of Changes in Shareholders' Equity for the Nine Months Ended November 1, 1997 5 Condensed Consolidated Statements of Cash Flows for the Nine Months Ended November 1, 1997 and November 2, 1996 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 1, February 1, November 2, 1997 1997 1996 --------------------------------------------- (Unaudited) (Audited) (Unaudited) <S> <C> <C> <C> Assets -------- Current assets: Cash and cash equivalents $8,366 $8,906 $1,950 Merchandise inventories 752,227 423,207 587,754 Deferred income taxes 1,042 - - Other 63,135 33,045 8,824 ------------- ------------- ------------- Total current assets 824,770 465,158 598,528 Property and equipment, at cost 887,769 725,082 670,622 Less accumulated depreciation 163,750 128,855 119,314 ------------- ------------- ------------- 724,019 596,227 551,308 Other assets 10,258 7,615 6,523 Favorable lease rights 16,583 18,076 18,543 Goodwill 31,438 35,338 36,638 ------------- ------------- ------------- Total assets $1,607,068 $1,122,414 $1,211,540 ============= ============= ============= Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $261,198 $126,548 $209,357 Accrued liabilities 86,005 79,594 69,270 Income taxes payable 7,789 25,470 7,468 Deferred income taxes - 2,544 6,783 Current portion of long-term debt 1,769 1,663 1,425 ------------- ------------- ------------- Total current liabilities 356,761 235,819 294,303 Long-term debt 310,932 312,031 395,686 Deferred income taxes 43,472 38,731 35,139 Other long-term liabilities 21,342 18,362 22,357 Shareholders' equity Common stock--$.01 par value, 400,000,000 shares authorized, 78,788,395, 73,920,277 and 73,907,226 issued at November 1, 1997, February 1, 1997 and November 2, 1996 respectively. 788 739 739 Paid-in capital 481,717 193,351 191,907 Retained earnings 392,056 323,381 271,409 ------------- ------------- ------------- Total shareholders' equity 874,561 517,471 464,055 ------------- ------------- ------------- Total liabilities and shareholders' equity $1,607,068 $1,122,414 $1,211,540 ============= ============= ============= </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 1, November 2, November 1, November 2, 1997 1996 1997 1996 -------------------------------------------------------- (In thousands except per share data) <S> <C> <C> <C> <C> Sales $757,773 $598,052 $1,982,257 $1,541,288 Cost of merchandise sold 503,892 399,572 1,317,121 1,029,448 ----------- ----------- ------------- ------------- Gross margin 253,881 198,480 665,136 511,840 Operating expenses: Selling, general, and administrative 173,065 138,324 472,061 371,653 Depreciation and amortization 13,392 10,334 37,913 28,063 Goodwill amortization 1,300 1,300 3,900 3,900 Preopening expenses 6,421 6,552 18,589 10,302 ----------- ----------- ------------- ------------- Operating income 59,703 41,970 132,673 97,922 Interest expense, net 5,583 5,347 18,405 13,089 ----------- ----------- ------------- ------------- Income before income taxes 54,120 36,623 114,268 84,833 Provision for income taxes 21,594 14,706 45,593 34,327 ----------- ----------- ------------- ------------- Net income $32,526 $21,917 $68,675 $50,506 =========== =========== ============= ============= Earnings per share: Net income $0.42 $0.30 $0.91 $0.68 =========== =========== ============= ============= Weighted average number of common shares 78,022 73,897 75,366 73,831 =========== =========== ============= ============= </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 1, 1997 73,920,277 $739 $193,351 $323,381 $517,471 Net income - - - 68,675 68,675 Sale of additional shares 4,570,300 46 282,822 282,868 Exercise of stock options 297,818 3 5,544 - 5,547 ------------------------------------------------------------------- Balance at November 1, 1997 78,788,395 $788 $481,717 $392,056 $874,561 =================================================================== </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 1, 1997 November 2, 1996 ------------------------------------- (In thousands) <S> <C> <C> Operating activities Net income $68,675 $50,506 Adjustments to reconcile net income to net cash used in operating activities Depreciation and amortization 42,107 32,102 Deferred income taxes 1,155 5,517 Other noncash charges 1,593 1,213 Changes in operating assets and liabilities ( 234,015) ( 130,917) ------------- ------------- Net cash used in operating activities ( 120,485) ( 41,579) Investing activities Acquisition of property and equipment, net ( 163,921) ( 168,236) Other ( 3,455) 10 ------------- ------------- Net cash used in investing activities ( 167,376) ( 168,226) Financing activities Net borrowings under working capital loan - 9,000 Proceeds from public debt offering - 200,000 Repayments of long-term debt ( 993) ( 1,013) Payment of financing fees on debt ( 101) ( 1,962) Net proceeds from issuance of common shares (including stock options) 288,415 2,911 ------------- ------------- Net cash provided by financing activities 287,321 208,936 ------------- ------------- Net decrease in cash and cash equivalents ( 540) ( 869) Cash and cash equivalents at beginning of period 8,906 2,819 ------------- ------------- Cash and cash equivalents at end of period $8,366 $1,950 ============ ============ </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. 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 1, 1997 November 2, 1996 ------- ---------------- ---------------- (In Thousands) <S> <C> <C> First $1,501 $1,171 Second 1,560 1,184 Third 1,895 1,495 ------ ------ Total $4,956 $3,850 </TABLE> Inventories would have been $9,832,000, $4,876,000 and $3,511,000 higher at November 1, 1997, February 1, 1997 and November 2, 1996, respectively if they had been valued using the first-in, first-out (FIFO) method. 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. -7-
The Internal Revenue Service (the "IRS") audited the Company's federal tax returns for fiscal years August, 1986-1991. The Company and IRS came to final resolution on the audit of the aforementioned years in September, 1997. The resolution did not have a material adverse impact on the Company's results of operations or liquidity. 4. New Accounting Pronouncement In February 1997, the FASB issued Statement No. 128, Earnings Per Share, which specifies the computation, presentation and disclosure requirements for earnings per share (EPS) for entities with publicly held common stock or potential common stock. Statement 128 will require reporting of both basic and diluted EPS effective for annual and interim periods ending after December 15, 1997. If the Company were reporting pursuant to Statement 128, earnings per share would have been $0.41 and $0.29 for the three months ended November 1, 1997 and November 2, 1996, respectively. For the nine months ended November 1, 1997 and November 2, 1996, earnings per share would have been $0.90 and $0.67, respectively. The dilutive effect is a result of unexercised stock options. -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ---------------------------------------------- THREE MONTHS AND NINE MONTHS ENDED November 1, 1997 --------------------------------------------------- Results of Operations - --------------------- At November 1, 1997, the Company operated 182 stores compared with 150 stores at the same time last year. In October, Kohl's opened ten new stores: four additional stores in the Philadelphia trade area (three in New Jersey and one in Pennsylvania); three stores in the Pittsburgh market; an additional store in the Washington, D.C. market; its second store in Omaha, Nebraska and a store in Binghamton, New York. Net sales increased $159.7 million or 26.7% to $757.8 million for the three months ended November 1, 1997 from $598.1 million for the three months ended November 2, 1996. Of the increase, $102.4 million is attributable to the inclusion of 22 new stores opened in 1996 and 32 new stores opened in 1997. The remaining $57.3 million is attributable to comparable store sales growth of 10.6%. Net sales increased $441.0 million or 28.6% to $1,982.3 million for the nine months ended November 1, 1997 from $1,541.3 million for the nine months ended November 2, 1996. Of the increase, $295.9 million is attributable to the inclusion of 22 new stores opened in 1996 and 32 new stores opened in 1997. The remaining $145.1 million is attributable to comparable store sales growth of 10.2% (excluding the discontinued electronics business). Gross margin for the three months ended November 1, 1997 was 33.5% compared to 33.2% in the three months ended November 2, 1996. Gross margin for the nine months ended November 1, 1997 was 33.6% compared to 33.2% in the nine months ended November 2, 1996. This year-to-date increase is attributable to the sales mix and the elimination of the Company's electronic business in 1996. Operating income for the three months ended November 1, 1997 increased $17.7 million over the three months ended November 2, 1996. Operating income for the nine months ended November 1, 1997, increased $34.8 million over the nine months ended November 2, 1996. 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 22.8% of net sales for the three months ended November 1, 1997 from 23.1% of net sales for the three months ended November 2, 1996. Selling, general and administrative expenses declined to 23.8% of net sales for the nine months ended November 1, 1997 from 24.1% of net sales for the nine months ended November 2, 1996. -9-
Costs associated with the opening of new stores are accumulated for the weeks prior to opening and expensed over the two week grand opening period. The Company expensed $6.4 million of preopening expenses in the three months ended November 1, 1997. 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 2, 1997 and the expenses of 10 new stores opened during the three months ended November 1, 1997. The Company expensed $6.6 million in the three months ended November 2, 1996 in opening 12 new stores and relocating one store. In the nine months ended November 1, 1997, the Company expensed $18.6 million of preopening expenses associated with the opening of 32 new stores and the relocation of one store. The Company expensed $10.3 million of preopening expenses for 22 new stores and the relocation of one store in the nine months ended November 2, 1996. 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 1, 1997 increased $0.2 million from the three months ended November 2, 1996. Net interest expense for the nine months ended November 1, 1997 increased $5.3 million from the nine months ended November 2, 1996. The increase was due to higher interest rates associated with the $100 million non-callable 7.375% unsecured senior notes issued in October 1996 offset by the reduction in debt from the equity offering. For the three months ended November 1, 1997, net income increased 48.4% to $32.5 million from $21.9 million in the three months ended November 2, 1996. Earnings were $.42 per share for the three months ended November 1, 1997 compared to $.30 per share for the three months ended November 2, 1996. Net income for the nine months ended November 1, 1997 increased 36.0% to $68.7 million or $.91 per share from $50.5 million or $.68 per share in the nine months ended November 2, 1996. 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. -10-
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 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 1, 1997, the Company's merchandise inventories had increased $329.0 million over the February 1, 1997 balance and $164.5 million over the November 2, 1996 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $468.1 million at November 1, 1997 from $229.3 million at February 1, 1997 and $304.2 million at November 2, 1996. The increase is due primarily to higher inventory levels and higher receivable levels, but offset in part by increased accounts payable. The Company expects working capital levels to continue to grow as new stores are opened. Cash used in operating activities was $120.5 million for the nine months ended November 1, 1997 compared to cash used of $41.6 million for the nine months ended November 2, 1996. Excluding changes in operating assets and liabilities, cash provided by operating activities was $113.5 million for the nine months ended November 1, 1997 compared to $89.3 million for the nine months ended November 2, 1996. Capital expenditures for the nine months ended November 1, 1997 were $163.9 million compared to $168.2 million for the same period a year ago. In August, 1997 the Company issued 4,570,300 of its common stock to the public. Net proceeds of approximately $282.9 million were used for general corporate purposes, including financing the Company's continued store growth and paydown of debt. The Company anticipates that with current working capital, cash flows from operations, seasonal borrowings under its revolving credit facility, short-term trade credit and other lending facilities, it will be able to satisfy its current operating needs, planned capital expenditures and debt service requirements. -11-
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 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 1, 1997 -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 12, 1997 /s/William Kellogg --------------------------------- William Kellogg Chairman, Chief Executive Officer Date: December 12, 1997 /s/Arlene Meier ------------------------------------ Arlene Meier Senior Vice President - Finance Chief Financial Officer -14-