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 August 2, 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: September 10, 1997 Common ------------------------- Stock, Par Value $.01 per Share, 78,781,768 Shares Outstanding. - --------------------------------------------------------------
KOHL'S CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at August 2, 1997, February 1, 1997 and August 3, 1996 3 Condensed Consolidated Statements of Income for the Three Months and Six Months Ended August 2, 1997 and August 3, 1996 4 Consolidated Statement of Changes in Shareholders' Equity for the Six Months Ended August 2, 1997 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended August 2, 1997 and August 3, 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 -2-
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) <TABLE> <CAPTION> August 2, February 1, August 3, 1997 1997 1996 (Unaudited) (Audited) (Unaudited) --------------------------------------- <S> <C> <C> <C> Assets -------- Current assets: Cash and cash equivalents $2,205 $8,906 $4,650 Merchandise inventories 553,242 423,207 441,236 Other 16,406 33,045 12,793 ------------ --------- --------- Total current assets 571,853 465,158 458,679 ------------ --------- --------- Property and equipment, at cost 828,148 725,082 586,496 Less accumulated depreciation 151,125 128,855 109,681 ------------ --------- --------- 677,023 596,227 476,815 Other assets 8,254 7,615 5,636 Favorable lease rights 17,042 18,076 19,567 Goodwill 32,738 35,338 37,938 ------------ ---------- ---------- Total assets $1,306,910 $1,122,414 $998,635 ============ ========== ========== Liabilities and Shareholders' Equity ------------------------------------- Current liabilities: Accounts payable $ 188,635 $ 126,548 $160,394 Accrued liabilities 83,496 79,594 57,311 Income taxes payable 11,156 25,470 6,362 Deferred income taxes - 2,544 6,865 Current portion of long-term debt 1,663 1,663 1,425 ------------ ---------- ---------- Total current liabilities 284,950 235,819 232,357 Long-term debt 404,262 312,031 269,532 Deferred income taxes 39,954 38,731 32,189 Other long-term liabilities 20,447 18,362 23,161 Shareholders' equity Common stock-$.01 par value, 400,000,000 shares authorized, 74,136,042, 73,920,277 and 73,857,108 issued at August 2, 1997, February 1, 1997 and August 3, 1996 respectively. 741 739 739 Paid-in capital 197,026 193,351 191,165 Retained earnings 359,530 323,381 249,492 ------------ ---------- ---------- Total shareholders' equity 557,297 517,471 441,396 ------------ ---------- ---------- Total liabilities and shareholders' equity $1,306,910 $1,122,414 $998,635 ============ ========== ========== See accompanying Notes to Condensed Consolidated Financial Statements </TABLE> 3
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> 3 MONTHS 3 MONTHS 6 MONTHS 6 MONTHS (13 WEEKS) (13 WEEKS) (26 WEEKS) (26 WEEKS) ENDED ENDED ENDED ENDED AUGUST 2, AUGUST 3, AUGUST 2, AUGUST 3, 1997 1996 1997 1996 ---------------------------------------------------- (In thousands except per share data) <S> <C> <C> <C> <C> Sales $623,937 $474,598 $1,224,484 $943,236 Cost of merchandise sold 415,852 318,040 813,229 629,876 ---------- --------- ---------- --------- Gross margin 208,085 156,558 411,255 313,360 Operating expenses: Selling, general, and administrative 152,245 117,439 298,996 233,329 Depreciation and amortization 12,821 9,064 24,521 17,729 Goodwill amortization 1,300 1,300 2,600 2,600 Preopening expenses 56 111 12,168 3,750 ---------- --------- ---------- --------- Operating income 41,663 28,644 72,970 55,952 Interest expense, net 6,986 3,640 12,822 7,742 ---------- --------- ---------- --------- Income before income taxes 34,677 25,004 60,148 48,210 Provision for income taxes 13,836 10,176 23,999 19,621 ---------- --------- ---------- --------- Net income $ 20,841 $ 14,828 $ 36,149 $ 28,589 ========== ========= ========== ========= Earnings per share: Net income $0.28 $0.20 $0.49 $0.39 ========== ========= ========== ========= Weighted average number of common shares 74,095 73,824 74,043 73,798 ========== ========= ========== ========= </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 - - - 36,149 36,149 Exercise of stock options 215,765 2 3,675 - 3,677 ------------------------------------------------------------------------------------------ Balance at August 2, 1997 74,136,042 $741 $197,026 $359,530 $557,297 ========================================================================================== </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 5
<TABLE> <CAPTION> KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) 6 Months 6 Months (26 Weeks) (26 Weeks) Ended Ended August 2, 1997 August 3, 1996 -------------------------------- (In thousands) <S> <C> <C> OPERATING ACTIVITIES Net income $ 36,149 $ 28,589 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 27,364 20,418 Deferred income taxes (1,321) 2,649 Other noncash charges 1,067 735 Changes in operating assets and liabilities (60,375) (48,949) ---------- --------------- Net cash provided by operating activities 2,884 3,442 INVESTING ACTIVITIES Acquisition of property and equipment, net (104,300) (84,090) Other (1,098) (626) ---------- --------------- Net cash used in investing activities (105,398) (84,716) FINANCING ACTIVITIES Net borrowings (repayments) under working capital loan 93,000 (17,500) Proceeds from public debt offering - 100,000 Repayments of long-term debt (769) (667) Payment of financing fees on debt (95) (897) Net proceeds from issuance of common shares (including stock options) 3,677 2,169 ---------- --------------- Net cash provided by financing activities 95,813 83,105 ---------- --------------- Net increase (decrease) in cash and cash equivalents (6,701) 1,831 Cash and cash equivalents at beginning of period 8,906 2,819 ---------- --------------- Cash and cash equivalents at end of period $ 2,205 $ 4,650 ========== =============== </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 6 Months Ended ------------ -------------- Quarter August 2, 1997 August 3, 1996 ------- -------------- -------------- (In Thousands) <S> <C> <C> First $1,501 $1,171 Second 1,560 1,184 ----- ----- Total $3,061 $2,355 </TABLE> Inventories would have been $7,937,000, $4,876,000 and $2,016,000 higher at August 2, 1997, February 1, 1997 and August 3, 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") has audited the Company's federal income tax returns for fiscal years ended August 1986, 1987 and 1988. In January 1994, the IRS proposed approximately $20 million of tax consisting primarily of an adjustment to the LIFO inventory method used by the Company. The impact of the proposed adjustments before interest had previously been reflected in the Company's deferred income tax accounts. The Company contested the proposed adjustments vigorously within the administrative appeals process of the IRS and has reached a tentative resolution of the matter which, if finalized, would 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 $0.27 and $0.20 for the three months ended August 2, 1997 and August 3, 1996, respectively. For the six months ended August 2, 1997 and August 3, 1996, earnings per share would have been $0.48 and $0.38, 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 SIX MONTHS ENDED AUGUST 2, 1997 ------------------------------------------------ RESULTS OF OPERATIONS - --------------------- At August 2, 1997, the Company operated 172 stores compared with 138 stores at the same time last year. The Company successfully opened two new stores during the last week of the quarter: an additional store in the Philadelphia market and its second store in Louisville, Kentucky. Net sales increased $149.3 million or 31.5% to $623.9 million for the three months ended August 2, 1997 from $474.6 million for the three months ended August 3, 1996. Of the increase, $101.2 million is attributable to the inclusion of 22 new stores opened in 1996 and 22 new stores opened in 1997. The remaining $48.1 million is attributable to comparable store sales growth of 10.6% (excluding the discontinued electronics business). Net sales increased $281.3 million or 29.8% to $1,224.5 million for the six months ended August 2, 1997 from $943.2 million for the six months ended August 3, 1996. Of the increase, $193.4 million is attributable to the inclusion of 22 new stores opened in 1996 and 22 new stores opened in 1997. The remaining $87.8 million is attributable to comparable store sales growth of 10.1% (excluding the discontinued electronics business). Gross margin for the three months ended August 2, 1997 was 33.4% compared to 33.0% in the three months ended August 3, 1996. Gross margin for the six months ended August 2, 1997 was 33.6% compared to 33.2% in the six months ended August 3, 1996. This increase is primarily attributable to the elimination of the Company's electronics business in 1996. Operating income for the three months ended August 2, 1997 increased $13.0 million or 45.5% over the three months ended August 3, 1996. Operating income for the six months ended August 2, 1997, increased $17.0 million or 30.4% over the six months ended August 3, 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 24.4% of net sales for the three months ended August 2, 1997 from 24.7% of net sales for the three months ended August 3, 1996. Selling, general and administrative expenses declined to 24.4% of net sales for the six months ended August 2, 1997 from 24.7% of net sales for the six months ended August 3, 1996. -9-
The Company expensed $0.1 million of preopening expenses for the quarters ended August 2, 1997 and August 3, 1996. In the six months ended August 2, 1997, the Company expensed $12.2 million of preopening expenses associated with the opening of 22 stores and the relocation of one store, with the balance of the preopening expense of two stores to be expensed in the three months ended November 1, 1997. The Company expensed $3.8 million of preopening expenses for ten stores opened in the six months ended August 3, 1996. These 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 August 2, 1997 increased $3.3 million from the three months ended August 3, 1996. Net interest expense for the six months ended August 2, 1997 increased $5.1 million from the six months ended August 3, 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, and increased capital spending and working capital requirements of new stores. For the three months ended August 2, 1997, net income increased 40.6% to $20.8 million from $14.8 million in the three months ended August 3, 1996. Earnings were $.28 per share for the three months ended August 2, 1997 compared to $.20 per share for the three months ended August 3, 1996. Net income for the six months ended August 2, 1997 increased 26.4% to $36.1 million or $.49 per share from $28.6 million or $.39 per share in the six months ended August 3, 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 August 2, 1997, the Company's merchandise inventories had increased $130.0 million over the February 1, 1997 balance and $112.0 million over the August 3, 1996 balance. These increases reflect the purchase of fall inventory as well as inventory for new stores. The Company's working capital increased to $286.9 million at August 2, 1997 from $229.3 million at February 1, 1997 and $226.3 million at August 3, 1996. The increase is due primarily to higher inventory levels offset in part by increased accounts payable. The Company expects working capital levels to continue to grow as new stores are opened. Cash provided by operating activities was $2.9 million for the six months ended August 2, 1997 compared to $3.4 million for the six months ended August 3, 1996. Excluding changes in operating assets and liabilities, cash provided by operating activities was $63.3 million for the six months ended August 2, 1997 compared to $52.4 million for the six months ended August 3, 1996. Capital expenditures for the six months ended August 2, 1997 were $104.3 million compared to $84.1 million for the same period a year ago. The increase in expenditures in 1997 is primarily attributable to the opening of 22 new stores and the construction of a third distribution center for the six months ended August 2, 1997 compared to ten new stores for the six months ended August 3, 1996 and the relocation of the Company's Corporate headquarters within Menomonee Falls in July 1996 to an owned facility. Total capital expenditures for fiscal 1997 are currently expected to be approximately $200.0 to $220.0 million (excluding assets under capital leases). 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. -11-
In August, 1997 the Company issued 4,570,300 of its common stock to the public. Net proceeds of approximately $282.9 million will be used for general corporate purposes, including financing the Company's continued store growth. 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 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 10.1 Revolving Credit Agreement dated as of June 13, 1997, among Kohl's Corporation, Kohl's Department Stores, Inc., various commercial banking institutions, the Bank of New York, as Administrative Agent, and The First National Bank of Chicago, as Syndication Agent. 10.2 Amendment No. 2 to Receivables Purchase Agreement dated as of May 3, 1997. 10.3 Amendment No. 3 to Receivables Purchase Agreement dated as of July 24, 1997. 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 August 2, 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: September 11, 1997 /s/ William Kellogg ----------------------------------- William Kellogg Chairman, Chief Executive Officer Date: September 11, 1997 /s/ Arlene Meier ----------------------------------- Arlene Meier Executive Vice President - Finance Chief Financial Officer -14-