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 (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP 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 February 3, 2018 (Commission File No. 1-11084) as filed with the Securities and Exchange Commission.
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.
The following table provides a brief description of issued, but not yet effective, accounting standards:
Standard
|
Description
|
Effect on our Financial Statements
|
Leases
(ASC Topic 842)
Issued February 2016
Effective Q1 2019
|
Among other things, the new standard requires us to recognize a right-of-use asset and a lease liability on our balance sheet for each lease. It also changes the presentation and timing of lease-related expenses.
|
Approximately 5% of our store leases and all of our land leases are not currently recorded on our balance sheet. Recording right-of-use assets and lease liabilities for these and other non-store leases is expected to have a material impact on our balance sheet. We are also evaluating the impact that recording right-of-use assets and lease liabilities will have on our income statement and the financial statement impact that the standard will have on leases which are currently recorded on our balance sheet.
|
Cloud Computing
(ASU 2018-15)
Issued August 2018
Effective Q1 2020
|
Under the new standard, implementation costs related to a cloud computing arrangement will be deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs.
The new standard also prescribes the balance sheet, income statement, and cash flow classification of the capitalized implementation costs and related amortization expense.
|
We are evaluating the impact of the new standard, but believe it is generally consistent with our current accounting for cloud computing arrangements and will not have a material impact on our financials.
|
|
|
|
In 2017, we recorded provisional amounts for certain income tax effects of the Tax Cuts & Jobs Act (the “Act"), as addressed in Staff Accounting Bulletin No. 118 (“SAB 118”). During the nine months ended November 3, 2018, we made immaterial adjustments to the previously recorded provisional amounts related to the Act. Any additional adjustments related to the Act, while not expected to be material, will be recorded as income tax expense during the period in which the adjustment is finalized.
8
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
2. Revenue Recognition
Effective February 4, 2018, we adopted
Revenue from Contracts with Customers (ASC Topic 606)
as required. We adopted the new standard using the full retrospective method. The standard eliminated the transaction and industry specific revenue recognition guidance under prior U.S. GAAP and replaced it with a principles-based approach for revenue recognition and disclosures. Under the standard, revenue is recognized when a customer obtains control
of promised goods or services in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services.
Net Sales
Net sales includes revenue from the sale of merchandise and shipping revenues. Net sales are recognized when merchandise is received by the customer and we have fulfilled all performance obligations. We do not have any sales that are recorded as commissions.
The following table summarizes net sales by line of business for the periods ended November 3, 2018 and October 28, 2017:
|
Three Months Ended
|
Nine Months Ended
|
(Dollars in Millions)
|
November 3, 2018
|
October 28, 2017
|
November 3, 2018
|
October 28, 2017
|
Women's
|
$
|
1,287
|
|
$
|
1,276
|
|
$
|
3,982
|
|
$
|
3,883
|
|
Men's
|
|
925
|
|
|
890
|
|
|
2,668
|
|
|
2,550
|
|
Home
|
|
719
|
|
|
713
|
|
|
2,090
|
|
|
2,035
|
|
Children's
|
|
650
|
|
|
640
|
|
|
1,569
|
|
|
1,534
|
|
Footwear
|
|
465
|
|
|
473
|
|
|
1,334
|
|
|
1,288
|
|
Accessories
|
|
323
|
|
|
320
|
|
|
989
|
|
|
984
|
|
Net Sales
|
$
|
4,369
|
|
$
|
4,312
|
|
$
|
12,632
|
|
$
|
12,274
|
|
We maintain various rewards programs whereby customers earn rewards based on their spending and other promotional activities. The rewards are typically in the form of dollar off discounts which can be used on future purchases. These programs create performance obligations which require us to defer a portion of the original sale until the rewards are redeemed. Sales are recorded net of returns. At the end of each reporting period, we record a reserve based on historical return rates and patterns which reverses sales that we expect to be returned in the following period. Revenue from the sale of Kohl's gift cards is recognized when the gift card is redeemed. Liabilities for performance obligations resulting from our rewards programs, return reserves, and unredeemed gift cards and merchandise return cards totaled $337 million as of November 3, 2018, $422 million as of February 3, 2018
and
$335 million as of October 28, 2017.
Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes.
Other Revenue
Other revenue consists primarily of revenue from our credit card operations, unredeemed gift and merchandise return cards (breakage), and other non-merchandise revenues.
Revenue from credit card operations includes our share of the finance charges and interest fees, less charge-offs of the Kohl’s credit card pursuant to the Private Label Credit Card Program Agreement. Expenses related to our credit card operations are reported in SG&A.
Income from unredeemed gift cards and merchandise return cards (breakage) is recorded in proportion and over the time period the cards are actually redeemed.
9
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
The following tables summarize the impact of adoption of the new standard by financial statement line item:
Three Months Ended October 28, 2017
(Dollars in Millions, Except per Share Data)
|
As Previously Reported
|
New Standard Adjustment
|
Adjusted
|
Net sales
|
$
|
4,332
|
|
$
|
(20
|
)
|
$
|
4,312
|
|
Other revenue
|
|
|
|
|
255
|
|
|
255
|
|
Total revenue
|
|
|
|
|
235
|
|
|
4,567
|
|
Cost of merchandise sold
|
|
2,737
|
|
|
(10
|
)
|
|
2,727
|
|
Gross margin
|
|
1,595
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
1,095
|
|
|
245
|
|
|
1,340
|
|
Depreciation and amortization
|
|
243
|
|
|
-
|
|
|
243
|
|
Operating income
|
|
257
|
|
|
-
|
|
|
257
|
|
Interest expense, net
|
|
74
|
|
|
-
|
|
|
74
|
|
Income before income taxes
|
|
183
|
|
|
-
|
|
|
183
|
|
Provision for income taxes
|
|
66
|
|
|
-
|
|
|
66
|
|
Net income
|
$
|
117
|
|
$
|
-
|
|
$
|
117
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.70
|
|
$
|
-
|
|
$
|
0.70
|
|
Diluted
|
$
|
0.70
|
|
$
|
-
|
|
$
|
0.70
|
|
Nine Months Ended October 28, 2017
(Dollars in Millions, Except per Share Data)
|
As Previously Reported
|
New Standard Adjustment
|
Adjusted
|
Net sales
|
$
|
12,319
|
|
$
|
(45
|
)
|
$
|
12,274
|
|
Other revenue
|
|
|
|
|
753
|
|
|
753
|
|
Total revenue
|
|
|
|
|
708
|
|
|
13,027
|
|
Cost of merchandise sold
|
|
7,693
|
|
|
(13
|
)
|
|
7,680
|
|
Gross margin
|
|
4,626
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
3,053
|
|
|
721
|
|
|
3,774
|
|
Depreciation and amortization
|
|
724
|
|
|
-
|
|
|
724
|
|
Operating income
|
|
849
|
|
|
-
|
|
|
849
|
|
Interest expense, net
|
|
225
|
|
|
-
|
|
|
225
|
|
Income before income taxes
|
|
624
|
|
|
-
|
|
|
624
|
|
Provision for income taxes
|
|
233
|
|
|
-
|
|
|
233
|
|
Net income
|
$
|
391
|
|
$
|
-
|
|
$
|
391
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
2.33
|
|
$
|
-
|
|
$
|
2.33
|
|
Diluted
|
$
|
2.32
|
|
$
|
-
|
|
$
|
2.32
|
|
10
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
October 28, 2017
(Dollars in Millions)
|
As Previously Reported
|
New Standard Adjustment
|
Adjusted
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
736
|
|
$
|
-
|
|
$
|
736
|
|
Merchandise inventories
|
|
4,632
|
|
|
-
|
|
|
4,632
|
|
Other
|
|
332
|
|
|
47
|
|
|
379
|
|
Total current assets
|
|
5,700
|
|
|
47
|
|
|
5,747
|
|
Property and equipment, net
|
|
7,974
|
|
|
-
|
|
|
7,974
|
|
Other assets
|
|
226
|
|
|
-
|
|
|
226
|
|
Total assets
|
$
|
13,900
|
|
$
|
47
|
|
$
|
13,947
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
2,113
|
|
$
|
-
|
|
$
|
2,113
|
|
Accrued liabilities
|
|
1,237
|
|
|
57
|
|
|
1,294
|
|
Income taxes payable
|
|
24
|
|
|
-
|
|
|
24
|
|
Current portion of capital lease and financing obligations
|
|
131
|
|
|
-
|
|
|
131
|
|
Total current liabilities
|
|
3,505
|
|
|
57
|
|
|
3,562
|
|
Long-term debt
|
|
2,796
|
|
|
-
|
|
|
2,796
|
|
Capital lease and financing obligations
|
|
1,622
|
|
|
-
|
|
|
1,622
|
|
Deferred income taxes
|
|
275
|
|
|
(3
|
)
|
|
272
|
|
Other long-term liabilities
|
|
673
|
|
|
-
|
|
|
673
|
|
Total shareholders’ equity
|
|
5,029
|
|
|
(7
|
)
|
|
5,022
|
|
Total liabilities and shareholders’ equity
|
$
|
13,900
|
|
$
|
47
|
|
$
|
13,947
|
|
11
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
February 3, 2018
(Dollars in Millions)
|
As Previously Reported
|
New Standard Adjustment
|
Adjusted
|
Assets
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
1,308
|
|
$
|
-
|
|
$
|
1,308
|
|
Merchandise inventories
|
|
3,542
|
|
|
-
|
|
|
3,542
|
|
Other
|
|
481
|
|
|
49
|
|
|
530
|
|
Total current assets
|
|
5,331
|
|
|
49
|
|
|
5,380
|
|
Property and equipment, net
|
|
7,773
|
|
|
-
|
|
|
7,773
|
|
Other assets
|
|
236
|
|
|
-
|
|
|
236
|
|
Total assets
|
$
|
13,340
|
|
$
|
49
|
|
$
|
13,389
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
1,271
|
|
$
|
-
|
|
$
|
1,271
|
|
Accrued liabilities
|
|
1,155
|
|
|
58
|
|
|
1,213
|
|
Income taxes payable
|
|
99
|
|
|
-
|
|
|
99
|
|
Current portion of capital lease and financing obligations
|
|
126
|
|
|
-
|
|
|
126
|
|
Total current liabilities
|
|
2,651
|
|
|
58
|
|
|
2,709
|
|
Long-term debt
|
|
2,797
|
|
|
-
|
|
|
2,797
|
|
Capital lease and financing obligations
|
|
1,591
|
|
|
-
|
|
|
1,591
|
|
Deferred income taxes
|
|
213
|
|
|
(2
|
)
|
|
211
|
|
Other long-term liabilities
|
|
662
|
|
|
-
|
|
|
662
|
|
Total shareholders’ equity
|
|
5,426
|
|
|
(7
|
)
|
|
5,419
|
|
Total liabilities and shareholders’ equity
|
$
|
13,340
|
|
$
|
49
|
|
$
|
13,389
|
|
The adoption of the new standard had no impact on our basic or diluted earnings per share or our net cash provided by (used in) operating, financing, or investing activities.
3. Store Closure and Restructure Reserve
The following table summarizes changes in the store closure and restructure reserve during the nine months ended November 3, 2018:
(Dollars in Millions)
|
|
|
|
Balance - February 3, 2018
|
$
|
87
|
|
Payments, reversals and additions
|
|
(13
|
)
|
Balance - November 3, 2018
|
$
|
74
|
|
12
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
4. Debt
Long-term debt consists of the following unsecured senior debt:
|
|
|
|
|
|
|
Outstanding
|
Maturity
(Dollars in Millions)
|
Effective
Rate
|
Coupon
Rate
|
November 3,
2018
|
February 3,
2018 & October 28, 2017
|
2021
|
|
4.81
|
%
|
|
4.00
|
%
|
$
|
413
|
|
$
|
650
|
|
2023
|
|
3.25
|
%
|
|
3.25
|
%
|
|
350
|
|
|
350
|
|
2023
|
|
4.78
|
%
|
|
4.75
|
%
|
|
184
|
|
|
300
|
|
2025
|
|
4.25
|
%
|
|
4.25
|
%
|
|
650
|
|
|
650
|
|
2029
|
|
7.36
|
%
|
|
7.25
|
%
|
|
42
|
|
|
99
|
|
2033
|
|
6.05
|
%
|
|
6.00
|
%
|
|
112
|
|
|
166
|
|
2037
|
|
6.89
|
%
|
|
6.88
|
%
|
|
101
|
|
|
150
|
|
2045
|
|
5.57
|
%
|
|
5.55
|
%
|
|
433
|
|
|
450
|
|
|
|
4.76
|
%
|
|
|
|
$
|
2,285
|
|
$
|
2,815
|
|
Long-term debt is net of unamortized debt discounts and deferred financing costs of $13 million at November 3, 2018, $18 million at February 3, 2018, and $19 million at October 28, 2017.
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 $2.3 billion at November 3, 2018 and $2.9 billion at both February 3, 2018 and October 28, 2017.
Year to date, we have reduced our outstanding debt by $530 million including $500 million which was repurchased pursuant to a cash tender offer and $30 million which was repurchased on the open market. In conjunction with the debt reduction, we recorded a one-time $42 million loss on extinguishment of debt which includes $35 million of premium paid to holders of the debt, $4 million related to an interest rate hedge, and $3 million of deferred financing fees and original issue discounts.
5. Stock-Based Compensation
The following table summarizes our stock-based compensation activity for the nine months ended November 3, 2018:
|
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 - February 3, 2018
|
|
1,139
|
|
$
|
50.51
|
|
|
2,811
|
|
$
|
45.60
|
|
|
660
|
|
$
|
44.97
|
|
Granted
|
|
—
|
|
|
—
|
|
|
1,017
|
|
|
63.57
|
|
|
187
|
|
|
65.71
|
|
Exercised/vested
|
|
(992
|
)
|
|
50.46
|
|
|
(1,102
|
)
|
|
47.56
|
|
|
(38
|
)
|
|
78.35
|
|
Forfeited/expired
|
|
(2
|
)
|
|
53.38
|
|
|
(78
|
)
|
|
48.78
|
|
|
(5
|
)
|
|
46.91
|
|
Balance - November 3, 2018
|
|
145
|
|
$
|
51.87
|
|
|
2,648
|
|
$
|
51.62
|
|
|
804
|
|
$
|
48.21
|
|
13
Table of Contents
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
6. 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.
7. Net Income Per Share
Basic net income per share is net income divided by the average number of common shares outstanding during the period. Diluted net income per share includes incremental shares assumed for share-based awards.
The information required to compute basic and diluted net income per share is as follows:
|
Three Months Ended
|
Nine Months Ended
|
(Dollar and Shares in Millions, Except per Share Data)
|
November 3,
2018
|
October 28,
2017
|
November 3,
2018
|
October 28,
2017
|
Numerator—Net income
|
$
|
161
|
|
$
|
117
|
|
$
|
529
|
|
$
|
391
|
|
Denominator—Weighted average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
164
|
|
|
166
|
|
|
165
|
|
|
168
|
|
Impact of dilutive stock-based awards
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Diluted
|
|
165
|
|
|
166
|
|
|
166
|
|
|
168
|
|
Antidilutive shares
|
|
—
|
|
|
2
|
|
|
—
|
|
|
3
|
|
Net income per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.98
|
|
$
|
0.70
|
|
$
|
3.21
|
|
$
|
2.33
|
|
Diluted
|
$
|
0.98
|
|
$
|
0.70
|
|
$
|
3.19
|
|
$
|
2.32
|
|
14
Table of Contents