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 May 1, 1999 ---------------------------------- 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: June 8, 1999 Common Stock, -------------------------- Par Value $.01 per Share, 162,803,837 shares Outstanding. - --------------------------------------------------------
KOHL'S CORPORATION INDEX PART I. FINANCIAL INFORMATION Item 1 Financial Statements: Condensed Consolidated Balance Sheets at May 1, 1999, January 30, 1999 and May 2, 1998 3 Condensed Consolidated Statements of Income for the Three Months Ended May 1, 1999 and May 2, 1998 4 Consolidated Statement of Changes in Shareholders' Equity for the Three Months Ended May 1, 1999 5 Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 1, 1999 and May 2, 1998 6 Notes to Condensed Consolidated Financial Statements 7-8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 9-14 PART II. OTHER INFORMATION Item 4 Submission of Matters to a Vote of 15 Security Holders Item 6 Exhibits and Reports on Form 8-K 16 Signatures 17 -2-
KOHL'S CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS <TABLE> <CAPTION> May 1, January 30, May 2, 1999 1999 1998 ------------------------------------------------------- (Unaudited) (Audited) (Unaudited) (In thousands) <S> <C> <C> <C> Assets ------ Current assets: Cash and cash equivalents $ 2,960 $ 2,858 $ 2,551 Short-term investments 15,000 26,736 15,000 Accounts receivable trade, net 235,764 270,704 183,079 Merchandise inventories 721,955 617,362 623,486 Income taxes receivable 12,680 - - Deferred income taxes 14,548 14,412 5,226 Other 14,130 7,366 8,335 ----------- ----------- ----------- Total current assets 1,017,037 939,438 837,677 Property and equipment, net 984,831 933,011 781,325 Other assets 28,930 25,027 16,181 Favorable lease rights 141,053 13,681 15,388 Goodwill 23,638 24,938 28,838 ----------- ----------- ----------- Total assets $ 2,195,489 $ 1,936,095 $ 1,679,409 =========== =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Current liabilities: Accounts payable $ 237,079 $ 212,926 $ 209,403 Accrued liabilities 108,036 117,200 84,479 Income taxes payable - 48,572 17,358 Current portion of long-term debt 1,578 1,533 1,845 ----------- ----------- ----------- Total current liabilities 346,693 380,231 313,085 Long-term debt 308,878 310,912 311,142 Deferred income taxes 56,670 53,787 46,185 Other long-term liabilities 28,520 28,386 25,931 Shareholders' equity Common stock-$.01 par value, 400,000,000 shares authorized, 162,762,962, 158,394,735, and 157,947,202 issued at May 1, 1999, January 30, 1999 and May 2, 1998, respectively. 1,628 1,584 1,579 Paid-in capital 756,861 504,275 489,985 Retained earnings 696,239 656,920 491,502 ----------- ----------- ----------- Total shareholders' equity 1,454,728 1,162,779 983,066 ----------- ----------- ----------- Total liabilities and shareholders' equity $ 2,195,489 $ 1,936,095 $ 1,679,409 =========== =========== =========== </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 (13 Weeks) (13 Weeks) Ended Ended May 1, May 2, 1999 1998 ------------------------------------ (In thousands except per share data) <S> <C> <C> Net sales $ 910,256 $ 744,571 Cost of merchandise sold 597,128 491,102 ----------- ----------- Gross margin 313,128 253,469 Operating expenses: Selling, general, and administrative 216,032 180,353 Depreciation and amortization 18,577 14,984 Goodwill amortization 1,300 1,300 Preopening expenses 7,945 7,542 ----------- ----------- Operating income 69,274 49,290 Interest expense, net 5,132 5,059 ----------- ----------- Income before income taxes 64,142 44,231 Provision for income taxes 24,823 17,383 ----------- ----------- Net income $39,319 $26,848 =========== =========== Earnings per share: Basic Net income $0.25 $0.17 Average number of shares 160,436 157,867 Diluted Net income $0.24 $0.17 Average number of shares 165,376 162,181 </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) <S> <C> <C> <C> <C> <C> Balance at January 30, 1999 158,395 $1,584 $504,275 $656,920 $1,162,779 Issuance of common shares 2,800 28 199,598 - 199,626 Exercise of stock options 1,568 16 13,394 - 13,410 Income tax benefit from stock options - - 39,594 - 39,594 Net income - - - 39,319 39,319 ----------- ----------- ------------- ------------- ------------ Balance at May 1, 1999 162,763 $1,628 $756,861 $696,239 $1,454,728 =========== =========== ============= ============= ============ </TABLE> See accompanying Notes to Condensed Consolidated Financial Statements 5
KOHL'S CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) <TABLE> <CAPTION> 3 Months 3 Months (13 Weeks) (13 Weeks) Ended Ended May 1, 1999 May 2, 1998 --------------------------------------- (In thousands) Operating activities <S> <C> <C> Net income $39,319 $26,848 Adjustments to reconcile net income to net cash provided by (used in) operating activities Depreciation and amortization 19,927 16,335 Deferred income taxes 2,747 2,470 Other noncash charges 732 1,234 Changes in operating assets and liabilities: Accounts receivable 34,940 56,538 Merchandise inventories (104,593) (107,696) Other current assets (6,764) (3,076) Accounts payable 24,153 58,724 Accrued and other long-term liabilities (7,587) (9,287) Income taxes (61,252) (21,124) ------------- ------------- Net cash provided by (used in) operating activities (58,378) 20,966 Investing activities Acquisition of property and equipment and favorable lease rights, net (203,344) (45,846) Proceeds from sale of assets 4,350 - Sale (purchase) of short-term investments, net 11,736 (15,000) Other (4,903) (3,942) ------------- ------------- Net cash used in investing activities (192,161) (64,788) Financing activities Net repayments under credit facilities (1,600) - Net borrowings (repayments) of other long-term debt (389) 776 Net proceeds from issuance of common shares 252,630 1,436 ------------- ------------- Net cash provided by financing activities 250,641 2,212 ------------- ------------- Net increase (decrease) in cash and cash equivalents 102 (41,610) Cash and cash equivalents at beginning of period 2,858 44,161 ------------- ------------- Cash and cash equivalents at end of period $2,960 $2,551 ============= ============= </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. Shareholders' equity, share and per share amounts for all periods presented have been adjusted for the 2 for 1 stock split declared by the Company's Board of Directors on March 9, 1998, effected in the form of a stock dividend. Certain reclassifications have been made to prior years' financial statements to conform to the fiscal 1999 presentation. 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. LIFO Expense 3 Months Ended ------------ --------------------------- Quarter May 1, 1999 May 2, 1998 ------- ----------- ----------- (In Thousands) First $1,363 $1,861 Inventories would have been $3,284,000, $1,921,000 and $6,644,000 higher at May 1, 1999, January 30, 1999 and May 2, 1998, respectively if they had been valued using the first-in, first-out (FIFO) method. -7-
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. 4. Net Income Per Share In February, 1997 the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings per Share", which specifies the computation, presentation and disclosure requirements of earnings per share. All net income per share amounts for all periods have been presented to conform to SFAS No. 128 disclosure requirements. The numerator for the calculation of basic and diluted net income per share is net income. The denominator is summarized as follows (in thousands): <TABLE> <CAPTION> 3 Months Ended ---------------------------- May 1, 1999 May 2, 1998 ----------- ----------- <S> <C> <C> Denominator for basic earnings per share - weighted average shares 160,436 157,867 Employee stock options 4,940 4,314 ------- ------- Denominator for diluted earnings per share 165,376 162,181 ======= ======= </TABLE> -8-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF --------------------------------------- FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS ---------------------------------------------- THREE MONTHS ENDED May 1, 1999 ------------------------------ Results of Operations - --------------------- At May 1, 1999, the Company operated 226 stores compared with 197 stores at the same time last year. During the quarter, the Company successfully opened 13 new stores: two stores in the Chicago, IL market; two stores in the Washington, D.C. market; two stores in the Detroit, MI market; two stores in the York, PA market; and stores in the Philadelphia, PA; Omaha, NE; Indianapolis IN; Goshen, IN; and Lexington, KY markets. Kohl's opened five stores in the Denver, CO market on May 15th. The Company plans to open nine stores in August: six in the St. Louis, MO market, a store in Hickory, NC and additional stores in Richmond, VA and Washington, D.C. In October, Kohl's plans to open 17 stores: 11 in Dallas/Ft. Worth, TX and additional stores in Harrisburg, PA; Chicago, IL; Lansing, MI; Minneapolis, MN; Grand Rapids, MI and Denver, CO. Net sales increased $165.7 million or 22.3% to $910.3 million for the three months ended May 1, 1999 from $744.6 million for the three months ended May 2, 1998. Of the increase, $89.5 million is attributable to the inclusion of 32 new stores opened in 1998 and 13 new stores opened in 1999. The remaining $76.2 million is attributable to comparable store sales growth of 10.8%. Gross margin for the three months ended May 1, 1999 was 34.4% compared to 34.0% in the three months ended May 2, 1998. This increase is primarily attributable to a change in merchandise mix and improvements related to inventory management. Effective January 30, 1999, the Company implemented SOP 98-5, "Reporting on the Costs of Start-Up Activities", which requires preopening costs to be expensed as incurred. For new stores opened in March and April, 1999, approximately $1 million in preopening costs was expensed in fiscal 1998 and $5.2 million was expensed during the three months ended May 1, 1999 for a total average cost per store of $0.5 million. In addition, the Company incurred $2.7 million in preopening costs for stores to be opened later in fiscal 1999. The expenses relate to the cost associated with new store openings, including hiring and training costs for new employees, Kohl's charge account solicitations and processing and transporting initial merchandise. Operating income for the three months ended May 1, 1999, increased $20.0 million or 40.5% over the three months ended May 2, 1998. Excluding pre-opening expenses, operating income increased 35.9%. This increase resulted primarily from the increased sales, improved gross margin and the Company's ability to leverage its -9-
selling, general and administrative expenses as net sales increased. Selling, general and administrative expenses declined to 23.7% of net sales for the three months ended May 1, 1999 from 24.2% of net sales for the three months ended May 2, 1998. For the three months ended May 1, 1999, net income increased 46.5% to $39.3 million from $26.8 million in the three months ended May 2, 1998. Earnings were $.24 per diluted share for the three months ended May 1, 1999 compared to $.17 per diluted share for the three months ended May 2, 1998. Seasonality & Inflation - ----------------------- The Company's business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income realized during the last half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 17% and 30% of sales occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and costs associated with the opening of new stores. The Company does not believe that inflation has had a material effect on the results during the periods presented. However, there can be no assurance that the Company's business will not be affected in the future. Impact of Year 2000 - ------------------- The Company currently has a Year 2000 Readiness Plan implemented. Detailed in the plan are compliance definitions and testing guidelines for in-house developed applications and computer hardware platforms. The plan defines a methodology for assessing in-house developed applications and provides a means for documentation. Team members and their responsibilities are defined including senior executives that participate on the Year 2000 steering committee. The plan includes three phases to address the Year 2000 issue and a status of these key milestones is summarized below: Year 2000 Readiness Plan Phases Current Status - -------------------------------- -------------- Assessment Complete Remediation Complete Verification On schedule . Replacement code systems August 1999 target completion date . Packaged financial systems September 1999 target completion date . Non-IS systems (including September 1999 target completion date merchandise vendor EDI transactions) -10-
The phases of the Year 2000 Readiness Plan are defined below: . The Assessment phase involved the inventory of all in-house developed applications, purchased software and hardware, merchandise vendors, non-IT systems, utilities and service providers. The Assessment phase also included developing a plan for addressing each item and/or vendor to ensure Year 2000 compliance. This phase is complete. . The Remediation phase involved implementing the changes required to reach compliance and unit testing. This included correspondence with vendors that have products or services that impact the Company's ability to continue normal business operations. This phase is also complete. . The Verification phase is system testing the change(s) in similar environments. This includes testing with vendors and service provider organizations. The Company has installed a Year 2000 test lab that is identical to the production environment so that Year 2000 date simulation testing can be performed without affecting production files. The Verification testing phase, except for all packaged financial systems, will be completed in August 1999. The rollout of the packaged financial systems has started and will be completed by the end of August 1999. Even though the packaged financial systems are identified Year 2000 compliant, the Company will be conducting integrated testing in September 1999. Several years ago, the Company changed its client server and mainframe date routine standards to incorporate four digits for all new systems development. As a result, there are many systems that need only to be certified and have the interfaces reviewed and tested. There are however, a number of legacy and package financial systems that are not Year 2000 compliant. The Company has assessed these systems and presently believes that with modification to existing software and conversions to new software, the Year 2000 issue will not pose significant operational problems. The Company is utilizing both internal and external resources to reprogram, or replace and test the software for Year 2000 modifications. The Company has initiated formal communications with all significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those parties' failure to remediate their own Year 2000 issues. The Company is currently unit testing merchandise vendor EDI transactions and non-IS systems and expects to be over 90% complete by the end of July, 1999. The Company continues to refine its contingency plans and is enhancing and adding to the plans for each business area. The Company has identified that it may experience certain -11-
inconveniences or inefficiencies as a result of a supplier's failure to remediate its Year 2000 issues. The Company believes however, the vast majority of the Company's business will proceed without any significant interruption. The Company's total Year 2000 project costs and estimates to complete include the impact of third party Year 2000 issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems. The total cost of the Year 2000 project is estimated at $10 million and is being funded through operating cash flows. Of the total project cost, approximately $6 million is attributable to the purchase of new software and hardware that will be capitalized. The remaining $4 million of programming and testing costs will be expensed as incurred and is not expected to have a material effect on the results of the operations. Of the capitalized portion, approximately $4 million is for a new financial system. The new financial system was a previously planned project that supports the Company's growth, provides significant business enablement and eliminates a substantial Year 2000 effort. To date, the Company has incurred approximately $6.1 million ($2.1 million expensed and $4.0 million capitalized) related to the assessment of, and preliminary efforts on, its Year 2000 project and the development of a modification plan, purchase of new systems and systems modifications. The cost of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. In addition to the Company's reliance on certain third parties to remediate their own Year 2000 issues, specific factors that might cause such material differences include, but are not limited to, the continued availability and cost of personnel trained in this area and the ability to locate and correct all relevant computer codes. Financial Condition and Liquidity - --------------------------------- The Company's primary ongoing cash requirements are for inventory purchases, capital expenditures in connection with expansion and remodeling programs and pre-opening expenses. The Company's primary sources of funds for its business activities are cash flow from operations, sale of its proprietary accounts receivable, 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 -12-
merchandise inventories. The Company's working capital and inventory levels typically build throughout the fall, peaking during the holiday selling season. At May 1, 1999, the Company's merchandise inventories had increased $104.6 million over the January 30, 1999 balance and $98.5 million over the May 2, 1998 balance. These increases reflect the purchase of summer inventory as well as inventory for new stores. The Company's working capital increased to $670.3 million at May 1, 1999 from $559.2 million at January 30, 1999 and increased from $524.6 million at May 2, 1998. Of the $145.7 million increase from May 2, 1998, $52.7 million is attributable to higher credit card receivables as the Company internally financed a higher percentage of receivables. Approximately $30.0 million of the increase is attributed to the change in income taxes receivable/(payable) which resulted primarily from the tax benefit associated with the exercise of employee stock options. The remaining increase was primarily the result of higher merchandise inventory levels required to support existing stores and incremental new store locations offset in part by increased accounts payable. Cash used in operating activities was $58.4 million for the three months ended May 1, 1999 compared to cash provided by operating activities of $21.0 million for the three months ended May 2, 1998. Excluding changes in operating assets and liabilities, cash provided by operating activities was $62.7 million for the three months ended May 1, 1999 compared to $46.9 million for the three months ended May 2, 1998. In March 1999, the Company purchased the right to occupy 33 store locations previously operated by Caldor Corporation for $142 million. The Company expects that the stores will be open for business in spring 2000. The Company expects to invest approximately $165 million more to renovate and refixture the stores. To fund the renovation and refixturing, the Company issued 2,800,000 shares of its common stock to the public in March 1999 for net proceeds of approximately $200 million. Capital expenditures, including the acquisition of the rights to occupy the Caldor stores, for the three months ended May 1, 1999 were $203.3 million compared to $45.8 million for the same period a year ago. Approximately $142 million of the increase in expenditures in 1999 is attributable to the acquisition of the rights to occupy the Caldor stores. The remaining increase is primarily attributable to the Company's new store spending in fiscal 1999. -13-
Total capital expenditures for fiscal 1999 are currently expected to range between $550-$575 million. This estimate includes the purchase of favorable lease rights from Caldor Corporation and renovation and refixturing of the properties. 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. In June 1999, the Company issued $200 million redeemable 7.25% unsecured debentures. The debentures mature on June 1, 2029. The proceeds will be used for general corporate purposes and continued store growth. The Company anticipates that it will be able to satisfy its current operating needs, planned capital expenditures and debt service requirements with proceeds from the June 1999 debt offering and March 1999 stock offering, current working capital, cash flows from operations, seasonal borrowings under its $300 million revolving credit facility, short-term trade credit and other sources of financing. 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. -14-
PART II OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders The Annual Meeting of Stockholders of Kohl's Corporation was held on May 25, 1999: 1. To elect three directors to serve for a three-year term. 2. To ratify the appointment of Ernst & Young LLP as independent auditors. 3. To amend the Articles of Incorporation to increase authorized common stock from 400,000,000 shares authorized to 800,000,000 shares authorized. Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management's solicitations. All of management's nominees for directors as listed in the proxy statement were elected. The results of the voting were as follows: 1. Election of directors James D. Ericson For - 127,357,625 shares Withheld - 1,104,117 shares William S. Kellogg For - 126,784,783 shares Withheld - 1,676,959 shares R. Elton White For - 127,361,114 shares Withheld - 1,100,628 shares 2. Ratification of Ernst & Young LLP as independent auditors For - 128,356,759 shares Against - 43,568 shares Abstain - 61,415 shares 3. To amend the Articles of Incorporation to increase authorized common stock from 400,000,000 shares authorized to 800,000,000 shares authorized. For - 118,787,491 shares Against - 9,574,576 shares Abstain - 99,675 shares -15-
Item 6. Exhibits and Reports on Form 8-K a) Exhibits 10.1 Employment agreement between the Company and Kevin Mansell. 12.1 Statement regarding calculation of ratio of earnings to fixed charges. 27.1 Financial Data Schedule - Article 5 of Regulation S-X, 3 Months ended May 1, 1999 27.2 Financial Data Schedule - Articles of Regulation S-X, 3 Months ended May 2, 1998, (restated) b) Reports on Form 8-K During the three months ended May 1, 1999, the Company filed a report on Form 8-K dated March 9, 1999 with respect to Item 5 of Form 8-K. The Form 8-K includes the Company's press release announcing 1998 operating results. -16-
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: June 9, 1999 /s/ William Kellogg ----------------------------- William Kellogg Chairman Date: June 9, 1999 /s/ Arlene Meier ----------------------------- Arlene Meier Executive Vice President - Finance Chief Financial Officer -17-