Item 1. Financial Statements
KOHL’S CORPORATION
CONSOLIDATED BALANCE SHEETS
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
|
|
|
October 29,
2016
|
January 30,
2016
|
October 31,
2015
|
Assets
|
(Unaudited)
|
(Audited)
|
(Unaudited)
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
597
|
|
$
|
707
|
|
$
|
501
|
|
Merchandise inventories
|
4,721
|
|
4,038
|
|
5,254
|
|
Other
|
336
|
|
331
|
|
312
|
|
Total current assets
|
5,654
|
|
5,076
|
|
6,067
|
|
Property and equipment, net
|
8,203
|
|
8,308
|
|
8,499
|
|
Other assets
|
219
|
|
222
|
|
228
|
|
Total assets
|
$
|
14,076
|
|
$
|
13,606
|
|
$
|
14,794
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
Current liabilities:
|
|
|
|
Accounts payable
|
$
|
2,097
|
|
$
|
1,251
|
|
$
|
2,141
|
|
Accrued liabilities
|
1,235
|
|
1,206
|
|
1,244
|
|
Income taxes payable
|
66
|
|
130
|
|
28
|
|
Current portion of capital lease and financing obligations
|
128
|
|
127
|
|
126
|
|
Short-term debt
|
—
|
|
—
|
|
400
|
|
Total current liabilities
|
3,526
|
|
2,714
|
|
3,939
|
|
Long-term debt
|
2,794
|
|
2,792
|
|
2,792
|
|
Capital lease and financing obligations
|
1,702
|
|
1,789
|
|
1,817
|
|
Deferred income taxes
|
298
|
|
257
|
|
216
|
|
Other long-term liabilities
|
649
|
|
563
|
|
556
|
|
Shareholders’ equity:
|
|
|
|
Common stock
|
4
|
|
4
|
|
4
|
|
Paid-in capital
|
2,981
|
|
2,944
|
|
2,926
|
|
Treasury stock, at cost
|
(10,221
|
)
|
(9,769
|
)
|
(9,556
|
)
|
Accumulated other comprehensive loss
|
(15
|
)
|
(17
|
)
|
(18
|
)
|
Retained earnings
|
12,358
|
|
12,329
|
|
12,118
|
|
Total shareholders’ equity
|
5,107
|
|
5,491
|
|
5,474
|
|
Total liabilities and shareholders’ equity
|
$
|
14,076
|
|
$
|
13,606
|
|
$
|
14,794
|
|
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(Dollars in Millions, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
October 29,
2016
|
October 31,
2015
|
October 29,
2016
|
October 31,
2015
|
Net sales
|
$
|
4,327
|
|
$
|
4,427
|
|
$
|
12,481
|
|
$
|
12,817
|
|
Cost of merchandise sold
|
2,720
|
|
2,784
|
|
7,812
|
|
7,990
|
|
Gross margin
|
1,607
|
|
1,643
|
|
4,669
|
|
4,827
|
|
Operating expenses:
|
|
|
|
|
Selling, general and administrative
|
1,080
|
|
1,099
|
|
3,074
|
|
3,120
|
|
Depreciation and amortization
|
232
|
|
236
|
|
700
|
|
695
|
|
Impairments, store closing and other costs
|
(6
|
)
|
—
|
|
186
|
|
—
|
|
Operating income
|
301
|
|
308
|
|
709
|
|
1,012
|
|
Interest expense, net
|
76
|
|
81
|
|
233
|
|
248
|
|
Loss on extinguishment of debt
|
—
|
|
38
|
|
—
|
|
169
|
|
Income before income taxes
|
225
|
|
189
|
|
476
|
|
595
|
|
Provision for income taxes
|
79
|
|
69
|
|
173
|
|
218
|
|
Net income
|
$
|
146
|
|
$
|
120
|
|
$
|
303
|
|
$
|
377
|
|
|
|
|
|
|
Net income per share:
|
|
|
|
|
Basic
|
$
|
0.83
|
|
$
|
0.63
|
|
$
|
1.68
|
|
$
|
1.93
|
|
Diluted
|
$
|
0.83
|
|
$
|
0.63
|
|
$
|
1.68
|
|
$
|
1.92
|
|
|
|
|
|
|
Dividends declared and paid per share
|
$
|
0.50
|
|
$
|
0.45
|
|
$
|
1.50
|
|
$
|
1.35
|
|
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars and Shares in Millions, Except per Share Data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
Paid-In Capital
|
Treasury Stock
|
Accumulated Other Comprehensive Loss
|
Retained Earnings
|
|
|
Shares
|
Amount
|
Shares
|
Amount
|
Total
|
Balance at January 30, 2016
|
370
|
|
$
|
4
|
|
$
|
2,944
|
|
(184
|
)
|
$
|
(9,769
|
)
|
$
|
(17
|
)
|
$
|
12,329
|
|
$
|
5,491
|
|
Comprehensive income
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
2
|
|
303
|
|
305
|
|
Stock options and awards, net of tax
|
1
|
|
—
|
|
37
|
|
—
|
|
(15
|
)
|
—
|
|
—
|
|
22
|
|
Dividends paid ($1.50 per common share)
|
—
|
|
—
|
|
|
|
—
|
|
4
|
|
—
|
|
(274
|
)
|
(270
|
)
|
Treasury stock purchases
|
—
|
|
—
|
|
—
|
|
(11
|
)
|
(441
|
)
|
—
|
|
—
|
|
(441
|
)
|
Balance at October 29, 2016
|
371
|
|
$
|
4
|
|
$
|
2,981
|
|
(195
|
)
|
$
|
(10,221
|
)
|
$
|
(15
|
)
|
$
|
12,358
|
|
$
|
5,107
|
|
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in Millions)
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
October 29,
2016
|
October 31,
2015
|
Operating activities
|
|
|
Net income
|
$
|
303
|
|
$
|
377
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
Depreciation and amortization
|
700
|
|
695
|
|
Share-based compensation
|
31
|
|
36
|
|
Excess tax benefits from share-based compensation
|
(4
|
)
|
(10
|
)
|
Deferred income taxes
|
40
|
|
(84
|
)
|
Loss on extinguishment of debt
|
—
|
|
169
|
|
Impairments, store closing and other costs
|
57
|
|
—
|
|
Other non-cash revenues and expenses
|
20
|
|
23
|
|
Changes in operating assets and liabilities:
|
|
|
Merchandise inventories
|
(679
|
)
|
(1,433
|
)
|
Other current and long-term assets
|
20
|
|
74
|
|
Accounts payable
|
846
|
|
630
|
|
Accrued and other long-term liabilities
|
23
|
|
(6
|
)
|
Income taxes
|
(77
|
)
|
(64
|
)
|
Net cash provided by operating activities
|
1,280
|
|
407
|
|
Investing activities
|
|
|
Acquisition of property and equipment
|
(591
|
)
|
(551
|
)
|
Other
|
7
|
|
3
|
|
Net cash used in investing activities
|
(584
|
)
|
(548
|
)
|
Financing activities
|
|
|
Treasury stock purchases
|
(441
|
)
|
(789
|
)
|
Shares withheld for taxes on vested restricted shares
|
(15
|
)
|
(26
|
)
|
Dividends paid
|
(270
|
)
|
(264
|
)
|
Proceeds from issuance of debt, net
|
—
|
|
1,088
|
|
Net borrowings under credit facilities
|
—
|
|
400
|
|
Reduction of long-term borrowings
|
—
|
|
(1,085
|
)
|
Premium paid on redemption of debt
|
—
|
|
(163
|
)
|
Capital lease and financing obligation payments
|
(95
|
)
|
(83
|
)
|
Proceeds from stock option exercises
|
6
|
|
146
|
|
Excess tax benefits from share-based compensation
|
4
|
|
10
|
|
Proceeds from financing obligations
|
5
|
|
1
|
|
Net cash used in financing activities
|
(806
|
)
|
(765
|
)
|
Net decrease in cash and cash equivalents
|
(110
|
)
|
(906
|
)
|
Cash and cash equivalents at beginning of period
|
707
|
|
1,407
|
|
Cash and cash equivalents at end of period
|
$
|
597
|
|
$
|
501
|
|
Supplemental information
|
|
|
Interest paid, net of capitalized interest
|
$
|
198
|
|
$
|
220
|
|
Income taxes paid
|
217
|
|
370
|
|
Non-cash investing and financing activities
|
|
|
Property and equipment acquired through additional liabilities
|
$
|
39
|
|
$
|
59
|
|
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States 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 consolidated 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 consolidated financial statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended
January 30, 2016
(Commission File No. 1-11084) as filed with the Securities and Exchange Commission on March 18, 2016.
Due to 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.
We operate as a single business unit.
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:
|
|
|
|
|
|
|
(Dollars in Millions)
|
Prior Classification
|
Current Classification
|
|
Deferred taxes
|
Current deferred tax asset
|
Long-term deferred tax liability
|
$
|
136
|
|
Deferred taxes
|
Long-term deferred tax liability
|
Other long-term assets
|
32
|
|
Deferred taxes
|
Other long-term liabilities
|
Long-term deferred tax liability
|
15
|
|
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Debt
Long-term debt consists of the following unsecured senior debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
|
Maturity
|
Effective
Rate
|
Coupon Rate
|
October 29, 2016
|
January 30, 2016
|
October 31, 2015
|
|
|
|
(Dollars in Millions)
|
2021
|
4.81
|
%
|
4.00
|
%
|
$
|
650
|
|
$
|
650
|
|
$
|
650
|
|
2023
|
3.25
|
%
|
3.25
|
%
|
350
|
|
350
|
|
350
|
|
2023
|
4.78
|
%
|
4.75
|
%
|
300
|
|
300
|
|
300
|
|
2025
|
4.25
|
%
|
4.25
|
%
|
650
|
|
650
|
|
650
|
|
2029
|
7.36
|
%
|
7.25
|
%
|
99
|
|
99
|
|
99
|
|
2033
|
6.05
|
%
|
6.00
|
%
|
166
|
|
166
|
|
166
|
|
2037
|
6.89
|
%
|
6.88
|
%
|
150
|
|
150
|
|
150
|
|
2045
|
5.57
|
|
5.55
|
|
450
|
|
450
|
|
450
|
|
|
4.88
|
%
|
|
2,815
|
|
2,815
|
|
2,815
|
|
Unamortized debt discount
|
|
|
(5
|
)
|
(5
|
)
|
(5
|
)
|
Deferred financing costs
|
|
|
(16
|
)
|
(18
|
)
|
(18
|
)
|
Long-term debt
|
|
|
$
|
2,794
|
|
$
|
2,792
|
|
$
|
2,792
|
|
ASC No. 820, "Fair Value Measurements and Disclosures", requires fair value measurements be classified in various pricing categories. Our long-term debt is classified as Level 1, financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our long-term debt was $3.0 billion at
October 29, 2016
, $2.8 billion at January 30, 2016, and $2.9 billion at October 31, 2015.
3. Stock-Based Compensation
The following table summarizes our stock-based compensation activity for the nine months ended
October 29, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Options
|
Nonvested Stock Awards
|
Performance Share Units
|
(Shares and Units in Thousands)
|
Shares
|
Weighted
Average
Exercise
Price
|
Shares
|
Weighted
Average Grant Date Fair Value
|
Units
|
Weighted
Average Grant Date Fair Value
|
Balance at beginning of period
|
3,076
|
|
$
|
52.65
|
|
2,211
|
|
$
|
57.37
|
|
347
|
|
$
|
67.53
|
|
Granted
|
—
|
|
—
|
|
1,342
|
|
46.26
|
|
12
|
|
67.48
|
|
Exercised/vested
|
(150
|
)
|
41.80
|
|
(835
|
)
|
56.19
|
|
—
|
|
—
|
|
Forfeited/expired
|
(298
|
)
|
55.07
|
|
(235
|
)
|
55.34
|
|
(32
|
)
|
67.98
|
|
Balance at end of period
|
2,628
|
|
$
|
53.00
|
|
2,483
|
|
$
|
51.95
|
|
327
|
|
$
|
67.49
|
|
4. Contingencies
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.
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
5. Net Income Per Share
The following table summarizes our basic and diluted net income per share calculations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
(Dollar and Shares in Millions)
|
October 29,
2016
|
October 31,
2015
|
October 29,
2016
|
October 31,
2015
|
Numerator—Net income
|
$
|
146
|
|
$
|
120
|
|
$
|
303
|
|
$
|
377
|
|
Denominator—Weighted average shares:
|
|
|
|
|
Basic
|
177
|
|
191
|
|
180
|
|
196
|
|
Impact of dilutive stock-based awards
|
—
|
|
1
|
|
—
|
|
1
|
|
Diluted
|
177
|
|
192
|
|
180
|
|
197
|
|
Antidilutive shares
|
3
|
|
3
|
|
4
|
|
1
|
|
6. Impairments, Store Closing and Other Costs
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:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
(Dollars in Millions)
|
October 29, 2016
|
October 29, 2016
|
Store leases:
|
|
|
Record future obligations
|
$
|
(5
|
)
|
$
|
114
|
|
Write-off net obligations
|
—
|
|
(21
|
)
|
Impairments:
|
|
|
Software licenses
|
—
|
|
23
|
|
Buildings and other store assets
|
—
|
|
53
|
|
Severance and other
|
(1
|
)
|
17
|
|
Total
|
$
|
(6
|
)
|
$
|
186
|
|
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.
During the quarter ended October 29, 2016, we reversed
$6 million
of costs that were recorded earlier in the year. 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.
The following table summarizes changes in the store closure and restructure reserve during the quarter:
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
Store Lease Operations
|
Severance
|
Total
|
Balance - July 30, 2016
|
$
|
118
|
|
$
|
6
|
|
$
|
124
|
|
Payments
|
(3
|
)
|
(1
|
)
|
(4
|
)
|
Reversals
|
(5
|
)
|
(1
|
)
|
(6
|
)
|
Balance - October 29, 2016
|
$
|
110
|
|
$
|
4
|
|
$
|
114
|
|
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For purposes of the following discussion, all references to "the quarter" and "the third quarter" are for the three fiscal months (13 weeks) ended
October 29, 2016
and
October 31, 2015
and all references to "year to date" and "first three quarters" are for the nine fiscal months (39 weeks) ended
October 29, 2016
and
October 31, 2015
.
The following discussion should be read in conjunction with our Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in our
2015
Annual Report on Form 10-K (our "
2015
Form 10-K"). The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Our actual results could materially differ from those discussed in these forward-looking statements. Factors that could cause or contribute to those differences include, but are not limited to, those discussed elsewhere in this report and in our
2015
Form 10-K (particularly in "Risk Factors").
Executive Summary
As of
October 29, 2016
, we operated 1,155 Kohl's department stores, a website (www.Kohls.com), 12 FILA outlets, and three Off-Aisle clearance centers. Our Kohl's stores and website sell moderately-priced private label, exclusive and national brand apparel, footwear, accessories, beauty and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise which is available in our stores, as well as merchandise which is available only on-line.
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.
|
|
•
|
Inventory per store decreased 9%.
|
|
|
•
|
Gross margin as a percentage of sales increased 2 basis points to 37.1% driven by fewer promotional markdowns which were offset by higher shipping costs.
|
|
|
•
|
Selling, general and administrative expenses (“SG&A”) decreased $19 million, or 2%, on strong expense management against the lower sales volume; however, we still experienced expense deleveraging.
|
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.
Results of Operations
Net sales.
Net sales decreased $100 million, or 2.3%, to $4.3 billion for the third quarter of 2016. Year to date, net sales decreased $336 million, or 2.6%, to $12.5 billion. Comparable sales decreased 1.7% for the third quarter and 2.4%
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:
|
|
|
|
|
|
Change in Comparable Sales
|
Quarter
|
Year to Date
|
Selling price per unit
|
1.9
|
%
|
0.3
|
%
|
Units per transaction
|
2.1
|
|
2.4
|
|
Average transaction value
|
4.0
|
|
2.7
|
|
Number of transactions
|
(5.7
|
)
|
(5.1
|
)
|
Comparable sales
|
(1.7
|
)%
|
(2.4
|
)%
|
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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Year to Date
|
|
2016
|
2015
|
Increase/(Decrease)
|
2016
|
2015
|
(Decrease)
|
(Dollars in Millions)
|
$
|
%
|
$
|
%
|
Gross margin
|
$1,607
|
$1,643
|
$
|
(36
|
)
|
(2
|
)%
|
$4,669
|
$4,827
|
$
|
(158
|
)
|
(3
|
)%
|
As a percent of net sales
|
37.1
|
%
|
37.1
|
%
|
|
0.02
|
%
|
37.4
|
%
|
37.7
|
%
|
|
(0.26
|
)%
|
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; freight expenses associated with moving merchandise from our vendors to our distribution centers; shipping and handling expenses of on-line sales; and terms cash discount. Our gross margin may not be comparable with that of other retailers because we include distribution center and buying costs in selling, general and administrative expenses while other retailers may include these expenses in cost of merchandise sold.
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.
Selling, general and administrative expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Year to Date
|
|
2016
|
2015
|
Increase/(Decrease)
|
2016
|
2015
|
Increase/(Decrease)
|
(Dollars in Millions)
|
$
|
%
|
$
|
%
|
Selling, general and administrative expenses
|
$1,080
|
$1,099
|
$
|
(19
|
)
|
(2
|
)%
|
$3,074
|
$3,120
|
$
|
(46
|
)
|
(1
|
)%
|
As a percent of net sales
|
25.0
|
%
|
24.8
|
%
|
|
0.12
|
%
|
24.6
|
%
|
24.3
|
%
|
|
0.29
|
%
|
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:
|
|
|
|
|
|
|
|
(Dollars In Millions)
|
Quarter
|
Year to Date
|
Increase in net revenues from credit card operations
|
$
|
(10
|
)
|
$
|
(23
|
)
|
Corporate expenses
|
(9
|
)
|
(20
|
)
|
Marketing costs, excluding credit card operations
|
(4
|
)
|
9
|
|
Distribution costs
|
1
|
|
(2
|
)
|
Store expenses
|
3
|
|
(10
|
)
|
Total decrease
|
$
|
(19
|
)
|
$
|
(46
|
)
|
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.
Other Expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Year to Date
|
|
2016
|
2015
|
Increase/(Decrease)
|
2016
|
2015
|
Increase/(Decrease)
|
(Dollars in Millions)
|
$
|
%
|
$
|
%
|
Depreciation and amortization
|
$
|
232
|
|
$
|
236
|
|
$
|
(4
|
)
|
(2
|
)%
|
$
|
700
|
|
$
|
695
|
|
$
|
5
|
|
1
|
%
|
Interest expense, net
|
76
|
|
81
|
|
(5
|
)
|
(6
|
)%
|
233
|
|
248
|
|
(15
|
)
|
(6
|
)%
|
Impairments, store closing and other costs
|
(6
|
)
|
—
|
|
6
|
|
100
|
%
|
186
|
|
—
|
|
186
|
|
100
|
%
|
Loss on extinguishment of debt
|
—
|
|
38
|
|
(38
|
)
|
(100
|
)%
|
—
|
|
169
|
|
(169
|
)
|
(100
|
)%
|
Provision for income taxes
|
79
|
|
69
|
|
10
|
|
14
|
%
|
173
|
|
218
|
|
(45
|
)
|
(21
|
)%
|
Effective tax rate
|
35.0
|
%
|
36.5
|
%
|
|
|
36.3
|
%
|
36.6
|
%
|
|
|
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:
|
|
|
|
|
|
|
|
|
Three Months Ended
|
Nine Months Ended
|
(Dollars in Millions)
|
October 29, 2016
|
October 29, 2016
|
Store leases:
|
|
|
Record future obligations
|
$
|
(5
|
)
|
$
|
114
|
|
Write-off net obligations
|
—
|
|
(21
|
)
|
Impairments:
|
|
|
Software licenses
|
—
|
|
23
|
|
Buildings and other store assets
|
—
|
|
53
|
|
Severance and other
|
(1
|
)
|
17
|
|
Total
|
$
|
(6
|
)
|
$
|
186
|
|
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.
The provision for income taxes reflects changes in pretax income and the effective tax rate. Our income tax rate was 35.0% in the third quarter, 150 basis points lower than last year. The decrease was driven by an increase in non-taxable trust income in 2016. Year to date, our income tax rate decreased 30 basis points as a result of higher non-taxable trust income and federal tax credits that were enacted in the fourth quarter of 2015. These decreases were partially offset by favorable state audit settlements in the first quarter of 2015.
Net Income and Earnings Per Share.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
|
2016
|
2015
|
|
Income before Taxes
|
Net Income
|
Earnings Per Share
|
Income before Taxes
|
Net Income
|
Earnings Per Share
|
(Dollars in Millions, Except per Share Data)
|
GAAP
|
$
|
225
|
|
$
|
146
|
|
$
|
0.83
|
|
$
|
189
|
|
$
|
120
|
|
$
|
0.63
|
|
Adjustments
|
|
|
|
|
|
|
Impairments, store closing and other costs
|
(6
|
)
|
(4
|
)
|
(0.03
|
)
|
—
|
|
—
|
|
—
|
|
Loss on extinguishment of debt
|
—
|
|
—
|
|
—
|
|
38
|
|
24
|
|
0.12
|
|
Adjusted (Non-GAAP)
|
$
|
219
|
|
$
|
142
|
|
$
|
0.80
|
|
$
|
227
|
|
$
|
144
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year to Date
|
|
2016
|
2015
|
|
Income before Taxes
|
Net Income
|
Earnings Per Share
|
Income before Taxes
|
Net Income
|
Earnings Per Share
|
(Dollars in Millions, Except per Share Data)
|
GAAP
|
$
|
476
|
|
$
|
303
|
|
$
|
1.68
|
|
$
|
595
|
|
$
|
377
|
|
$
|
1.92
|
|
Adjustments
|
|
|
|
|
|
|
Impairments, store closing and other costs
|
186
|
|
117
|
|
0.65
|
|
—
|
|
—
|
|
—
|
|
Loss on extinguishment of debt
|
—
|
|
—
|
|
—
|
|
169
|
|
107
|
|
0.54
|
|
Adjusted (Non-GAAP)
|
$
|
662
|
|
$
|
420
|
|
$
|
2.33
|
|
$
|
764
|
|
$
|
484
|
|
$
|
2.46
|
|
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.
Seasonality and Inflation
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.
Liquidity and Capital Resources
The following table presents our primary cash requirements and sources of funds.
|
|
|
Cash Requirements
|
Sources of Funds
|
• Operational needs, including
salaries, rent, taxes and other
costs of running our business
• Capital expenditures
• Inventory (seasonal and new store)
• Share repurchases
• Dividend payments
|
• Cash flow from operations
• Short-term trade credit, in the form of extended payment terms
• Line of credit under our revolving credit facility
|
Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase/(Decrease)
in Cash
|
(Dollars in Millions)
|
2016
|
2015
|
$
|
%
|
Net cash provided by (used in):
|
|
|
|
|
Operating activities
|
$
|
1,280
|
|
$
|
407
|
|
$
|
873
|
|
214
|
%
|
Investing activities
|
(584
|
)
|
(548
|
)
|
(36
|
)
|
(7
|
)%
|
Financing activities
|
(806
|
)
|
(765
|
)
|
(41
|
)
|
(5
|
)%
|
Operating Activities.
Operating activities generated $
1.3 billion
of cash in the first three quarters of
2016
, an increase of $873 million over the first three quarters of
2015
. The increase is primarily due to reductions in inventory.
Merchandise inventories decreased $533 million from
October 31, 2015
to
$4.7 billion
at
October 29, 2016
. Inventory per store decreased 9% from the third quarter of 2015. Accounts payable as a percent of inventory was 44.4% at
October 29, 2016
, compared to 40.7% at
October 31, 2015
. The increase is due to lower ending inventory levels in 2016 compared to 2015.
Investing Activities.
Investing activities used cash of
$584 million
in the first three quarters of
2016
and
$548 million
in the first three quarters of
2015
. Substantially all of the increase is due to spending on our fifth e-commerce fulfillment center, which we plan to open in 2017.
Financing Activities.
Financing activities used cash of $
806 million
in the first three quarters of
2016
and $
765 million
in the first three quarters of
2015
.
We paid cash for treasury stock purchases of $
441 million
in the first three quarters of
2016
and
$789 million
in the first three quarters of
2015
. Share repurchases are discretionary in nature. The timing and amount of repurchases is based upon available cash balances, our stock price and other factors.
We paid cash dividends of $
270 million
($1.50 per share) in the first three quarters of
2016
and $
264 million
($1.35 per share) in the first three quarters of
2015
. On November 9, 2016, our Board of Directors declared a quarterly cash dividend of $0.50 per common share. The dividend is payable on December 21, 2016 to shareholders of record at the close of business on December 7, 2016.
In 2015, we completed a cash tender offer for $767 million of our debt and exercised our right to redeem $318 million of 2017 notes which were not initially tendered. In conjunction with the tender offer, we recognized a loss on extinguishment of debt of $169 million. We used the proceeds from a $1.1 billion debt issuance and cash on hand to pay the principal, premium, and accrued interest of the tendered and redeemed debt. During the third quarter of 2015, we drew $400 million on our revolving credit facility to temporarily fund inventory purchases.
We received proceeds from stock option exercises of
$6 million
in the first three quarters of
2016
and
$146 million
in the first three quarters of
2015
. The decrease is due to high stock prices in the first quarter of 2015, which led to a large number of exercised options.
As of
October 29, 2016
, our credit ratings were as follows:
|
|
|
|
|
|
Moody’s
|
Standard & Poor’s
|
Fitch
|
Long-term debt
|
Baa2
|
BBB
|
BBB
|
Free Cash Flow.
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 obligations. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and cash flow provided by operations. 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).
|
|
|
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
2016
|
2015
|
Increase/(Decrease) in Free Cash Flow
|
Net cash provided by operating activities
|
$
|
1,280
|
|
$
|
407
|
|
$
|
873
|
|
Acquisition of property and equipment
|
(591
|
)
|
(551
|
)
|
(40
|
)
|
Capital lease and financing obligation payments
|
(95
|
)
|
(83
|
)
|
(12
|
)
|
Proceeds from financing obligations
|
5
|
|
1
|
|
4
|
|
Free cash flow
|
$
|
599
|
|
$
|
(226
|
)
|
$
|
825
|
|
Key financial ratios.
Key financial ratios that provide certain measures of our liquidity are as follows:
|
|
|
|
|
|
|
|
(Dollars in Millions)
|
October 29, 2016
|
October 31, 2015
|
Working capital
|
$
|
2,128
|
|
$
|
2,128
|
|
Current ratio
|
1.60
|
|
1.54
|
|
Debt/capitalization
|
47.5
|
%
|
48.4
|
%
|
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.
Debt Covenant Compliance.
As of
October 29, 2016
, we were in compliance with all debt covenants and expect to remain in compliance during the remainder of fiscal
2016
.
|
|
|
|
|
(Dollars in Millions)
|
|
Included Indebtedness
|
|
Total debt
|
$
|
4,645
|
|
Permitted exclusions
|
(5
|
)
|
Subtotal
|
4,640
|
|
Rent x 8
|
2,208
|
|
Included Indebtedness
|
$
|
6,848
|
|
|
|
Debt Compliance Adjusted EBITDAR - Rolling 12-month
|
|
Net income
|
$
|
599
|
|
Rent expense
|
276
|
|
Depreciation and amortization
|
939
|
|
Net interest
|
312
|
|
Provision for income taxes
|
339
|
|
EBITDAR
|
2,465
|
|
Impairments, store closing and other costs
|
186
|
|
Adjusted EBITDAR
|
2,651
|
|
Stock based compensation
|
46
|
|
Other non-cash revenues and expenses
|
8
|
|
Debt Compliance Adjusted EBITDAR - Rolling 12-month
|
$
|
2,705
|
|
|
|
Debt Ratio (a)
|
2.53
|
|
Maximum permitted Debt Ratio
|
3.75
|
|
(a) Included Indebtedness divided by Debt Compliance Adjusted EBITDAR
|
|
Contractual Obligations
There have been no significant changes in the contractual obligations disclosed in our 2015 Form 10-K.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of
October 29, 2016
. 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 liquidity or the availability of capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect reported amounts. Management has discussed the development, selection and disclosure of its estimates and assumptions with the Audit Committee of our Board of Directors. There have been no significant changes in the critical accounting policies and estimates discussed in our
2015
Form 10-K.