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| KSS > SEC Filings for KSS > Form 10-Q on 4-Sep-2009 | All Recent SEC Filings |
4-Sep-2009
Quarterly Report
For purposes of the following discussion, all references to "the quarter" are for the 13-week fiscal periods ended August 1, 2009 and August 2, 2008 and all references to "year-to-date" are for the 26-week fiscal periods ended August 1, 2009 and August 2, 2008.
The following discussion should be read in conjunction with our Condensed Consolidated Financial Statements and the related notes included elsewhere in this report, as well as the financial and other information included in our 2008 Annual Report on 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 2008 Annual Report on Form 10-K (particularly in "Risk Factors").
Executive Summary
The current economic slowdown has caused disruptions and significant volatility in financial markets, increased rates of mortgage loan default and personal bankruptcy, and declining consumer and business confidence, which has led to decreased levels of consumer spending, particularly on discretionary items. Our sales reflect these reductions in consumer spending. Partially offsetting the effects of these sales declines, however, are the positive results of our inventory management and cost control initiatives.
For the quarter, net sales increased 2.2% and comparable store sales decreased 2.3% compared to the prior year quarter. Year to date, net sales increased 1.3% and comparable store sales decreased 3.2% over the comparable prior year period. All regions, except the Southwest, reported lower comparable store sales. The Accessories, Home and Footwear businesses reported the strongest comparable store sales.
Gross margin as a percent of net sales for the quarter increased 40 basis points to 40.0% compared to the prior year quarter. The year-to-date gross margin rate was 38.8%, a 60 basis point improvement over 38.2% in 2008. Strong inventory management as well as increased penetration of private and exclusive brands contributed to the margin strength. Ending inventory per store (in dollars) decreased 6.2% compared to the prior year quarter.
Selling, general and administrative expenses increased approximately 4% compared to both the prior year quarter and year-to-date period. As expected, these expenses increased at a rate faster than sales, but at a rate slower than new store growth of 6.8%.
Net income for the quarter was $229 million, or $0.75 per diluted share, compared to $236 million, or $0.77 per diluted share, in the second quarter of last year. Year to date, net income was $368 million, or $1.20 per diluted share, compared to $389 million, or $1.26 per diluted share, for the six months ended August 2, 2008.
We opened 8 stores in March and 11 stores in April of 2009. As of August 1, 2009, we operated 1,022 stores in 49 states compared to 957 stores in 47 states as of August 2, 2008. Selling square footage totaled 76 million square feet at August 1, 2009 and
72 million square feet at August 2, 2008. In September 2009, we expect to open 37 additional stores, the majority of which are former Mervyn's locations in the Southwest. We closed one underperforming store in Michigan during the first quarter of 2009.
We completed 51 store remodels in the first six months of 2009. This is an increase of 15 remodels from the 36 stores which were remodeled in fiscal 2008. We have been able to compress the remodel duration period from 16 weeks to nine weeks over the past two years to minimize costs and disruptions to our stores, benefiting our sales and customer experience. Remodels remain a critical part of our long-term strategy as we believe it is extremely important to maintain our existing store base, even in this difficult environment. In 2010, we plan to remodel 65 stores.
Results of Operations
Net Sales
New stores contributed $165 million in net sales over the prior year quarter and $328 million over the prior year-to-date period. Comparable store sales for the quarter, which are sales from stores (including E-Commerce sales and relocated or expanded stores) open throughout the full current and prior fiscal year periods, declined $84 million, or 2.3%, compared to the second quarter of last year and $233 million, or 3.2%, compared to the six months ended August 2, 2008.
Drivers of the changes in comparable stores sales were as follows:
Year to
Quarter Date
Units per transaction (4.5 )% (6.0 )%
Selling price per unit 1.9 3.9
Average transaction value (2.6 ) (2.1 )
Number of transactions 0.3 (1.1 )
Comparable store sales (2.3 )% (3.2 )%
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Net sales were favorably impacted by the closure of Mervyn's department stores. We estimate that former Mervyn's customers increased our comparable stores sales by approximately 180 basis points for the quarter and approximately 130 basis points year to date.
The Southwest region reported the strongest comparable store sales for both the quarter and year to date, due partly to sales attributable to former Mervyn's customers. For the quarter, we achieved high single digit comparable stores sales growth in the Southwest. All regions other than the Southwest and all lines of business reported lower comparable store sales for both the quarter and year-to-date period compared to the prior year periods.
Accessories reported the strongest comparable store sales for both the quarter and year to date, with strong comparable store sales growth in sterling silver and fashion jewelry and handbags. In addition, the Home and Footwear businesses outperformed our company average for both periods. Home was led by bedding and small electrics and Footwear was led by children's and athletic shoes. Men's was led by active, basics and casual sportswear. Children's was led by boys and infant/toddler. In Women's, intimate and updated sportswear were the strongest categories.
E-Commerce revenues were $88 million for the quarter, compared to $66 million for the second quarter of last year, an increase of 33%. Year to date, E-Commerce revenues were $177 million, compared to $133 million last year, an increase of 33%.
Gross Margin
Increase
2009 2008 $ %
(Dollars in Millions)
Quarter $ 1,520 $ 1,475 $ 45 3.1 %
Year to date 2,889 2,810 79 2.8
Gross margin as a percent of net sales:
Quarter 40.0 % 39.6 % - -
Year to date 38.8 % 38.2 % - -
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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 E-Commerce sales; and terms cash discount. Our gross margin may not be comparable with that of other retailers because we include distribution center 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 net sales was 40.0% for the second quarter of 2009, an increase of approximately 40 basis points compared to 39.6% for 2008. For the year-to-date period, gross margin as a percentage of sales was 38.8% in 2009 compared to 38.2% in 2008. Strong inventory management and increased penetration of private and exclusive brands contributed to the margin strength. In addition to carrying a lower level of inventory per store, we continue to focus on receiving merchandise in season as needed through our cycle time reduction initiatives. This strategy reduces our seasonal merchandise clearance inventories. Sales of private and exclusive brands reached 46% of net sales for the quarter and 45% year to date, an increase of over 200 basis points over the comparable prior year periods. Additionally, our ongoing markdown and size optimization initiatives continue to develop and have favorable impacts on our gross margin as a percent of net sales.
Operating Expenses
Increase
2009 2008 $ %
(Dollars in Millions)
Quarter $ 966 $ 930 $ 36 3.9 %
Year to date 1,927 1,852 75 4.0
S,G&A as a percent of net sales:
Quarter 25.4 % 25.0 % - -
Year to date 25.9 % 25.2 % - -
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Selling, general and administrative expenses ("SG&A") 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; advertising 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 costs. Depreciation and amortization and preopening expenses are not included in SG&A. The classification of these expenses varies across the retail industry.
SG&A increased approximately 4% over both the prior year quarter and year-to-date period. The net increase in SG&A dollars reflects incremental costs at newly-opened stores, partially offset by decreases at comparable stores, reflecting our ongoing efforts to control costs in the current economic environment. As expected, SG&A increased more than sales, but less than new store growth of 6.8%.
Hourly store payroll costs as a percentage of net sales decreased, or "leveraged," in both periods as reduced inventory and clearance levels resulted in fewer hours spent on replenishment and inventory markdowns. We were able to shift some of these savings to provide additional customer assistance on the selling floor and at point-of-sale. This emphasis on customer service contributed to an 8% improvement in our customer service scores over both the prior year quarter and year-to-date period.
Distribution center costs, which are included in SG&A, totaled $35 million for the second quarter of 2009 and $38 million for the comparable prior year quarter. For the year-to-date periods, distribution costs were $70 million in 2009 and $75 million in 2008. The decreases reflect the benefits of investments in technology in our distribution centers that continue to generate operating efficiencies. Lower fuel costs also contributed to the decrease.
In connection with the April 2006 sale of our proprietary credit card accounts to JPMorgan Chase & Co. ("JPMorgan Chase"), we entered into a revenue-sharing agreement with JPMorgan Chase, which issues private label credit cards to new and existing Kohl's customers. Since we do not own the receivables, the receivables and the related allowance for bad debt reserve are not reported on our balance sheet. Risk-management decisions are jointly managed by Kohl's and JPMorgan Chase. Kohl's handles all customer service functions and is responsible for all advertising and marketing related to credit card customers and the majority of the associated expenses. Net revenues of the program are shared with JPMorgan Chase according to a fixed percentage and are settled monthly. Net revenues include finance charge and late fee revenues, less write-offs of uncollectible accounts. Net revenues from the credit card program were higher in the current year periods than the prior year periods as increases in finance charges and late fee revenues were greater than increases in write-offs of uncollectible accounts.
Information services, measured both in dollars and as a percentage of net sales, decreased slightly from the prior year quarter and year-to-date period. Advertising expenses increased slightly over both the prior year quarter and year-to-date period. As a percentage of net sales, advertising expenses increased during the quarter, but decreased, or leveraged, year to date.
Partially offsetting these expense reductions were higher fixed occupancy and variable store costs due primarily to an increase in the number of stores and higher accrued incentive expenses as a result of improved performance expectations for 2009.
Increase
2009 2008 $ %
(Dollars in Millions)
Depreciation and amortization:
Quarter $ 144 $ 133 $ 11 8.3 %
Year to date 285 263 22 8.4
Depreciation and amortization as a percent of net sales:
Quarter 3.8 % 3.6 % - -
Year to date 3.8 % 3.6 % - -
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The increases in depreciation and amortization are primarily attributable to the addition of new stores.
Increase
2009 2008 $ %
(Dollars in Millions)
Preopening expenses:
Quarter $ 11 $ 6 $ 5 83.3 %
Year to date 26 17 9 52.9
Number of stores opened 19 28 - -
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Preopening expenses increased despite a decrease in the number of stores opened primarily due to an increase in the number of ground leased stores which will open in 2009. Under Generally Accepted Accounting Principles ("GAAP"), we are required to recognize rent expense when we take possession of the property, so we must recognize rental expense for ground leased properties several months prior to the actual opening of the store and, in most cases, before rental payments are due.
Operating Income
Decrease
2009 2008 $ %
(Dollars in Millions)
Quarter $ 399 $ 406 $ (7 ) (1.7 )%
Year to date 651 678 (27 ) (4.0 )
Operating income as a percent of net sales:
Quarter 10.5 % 10.9 % - -
Year to date 8.7 % 9.2 % - -
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As a result of the above factors, operating income as a percent of net sales was 10.5% for the three months ended August 1, 2009 compared to 10.9% for the three months ended August 2, 2008. For the year-to-date period, operating income as a percent of net sales was 8.7% for 2009 compared to 9.2% for 2008.
Interest Expense, Net
The increases in net interest expense reflect reductions in capitalized interest due to lower capital expenditures and lower interest income due to lower interest rates on our investments, partially offset by higher average investments.
Provision for Income Taxes
Our effective tax rate was 37.6% for the three months ended August 1, 2009 compared to 37.9% for the three months ended August 2, 2008. For the year-to-date period, the effective tax rate was 37.6% for 2009 and 37.7% for 2008.
Seasonality & 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. In addition, quarterly results of operations depend significantly upon the timing and amount of sales and costs associated with the opening of new stores.
Although we expect that our operations will be influenced by general economic conditions, including rising food, fuel and energy prices, 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 affected by such factors in the future.
Financial Condition and Liquidity
Our primary ongoing cash requirements are for capital expenditures in connection
with our expansion and remodeling programs and seasonal and new store inventory
purchases. Our primary source of funds for our business activities are cash flow
from operations, short-term trade credit and our lines of credit.
Increase (Decrease)
in Cash
2009 2008 $ %
(Dollars in Millions)
Net cash provided by (used in):
Operating activities $ 1,012 $ 874 $ 138 15.8 %
Investing activities (953 ) (571 ) (382 ) (66.9 )
Financing activities (5 ) (267 ) 262 98.1
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Operating Activities. Despite the decrease in net income, cash provided by operations increased 16% in 2009 to $1.0 billion. The most significant source of operating cash flow for 2009 was a $272 million increase in accounts payable. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories.
Merchandise inventories per store were $2.7 million at August 1, 2009 compared to $2.8 million at both January 31, 2009 and August 2, 2008. The decreases in inventories per store reflect continued inventory management, including conservative sales and receipts planning, and lower clearance levels.
Accounts payable at August 1, 2009 increased $130 million from August 2, 2008 and increased $272 million from January 31, 2009. Accounts payable as a percent of inventory was 42.3% at August 1, 2009 compared to 37.6% at August 2, 2008, reflecting the positive results of inventory management, cycle time reduction and vendor finance initiatives.
Investing Activities. The increase in net cash used in investing activities is primarily attributable to net investment activity which used cash of $616 million in 2009 and $16 million in 2008, reflecting increased short-term investment purchases in 2009.
As of August 1, 2009, we had investments in auction rate securities ("ARS") with a par value of $399 million and an estimated fair value of $325 million. To date, all ARS sales and calls have been at par and we have collected all interest payable on outstanding ARS when due and expect to continue to do so in the future. At this time, we have no reason to believe that any of the underlying issuers of our ARS or their insurers are presently at risk or that the underlying credit quality of the assets backing our ARS has been impacted by the reduced liquidity of these investments. While the auction failures, which began in February 2008, limit our ability to liquidate these investments, we do not believe that these failures will have any significant impact on our ability to fund ongoing operations and growth initiatives.
Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs. Capital expenditures totaled $336 million for 2009, a $222 million decrease from the comparable prior year period. This decrease is primarily due to a decrease in the number of new store openings from 75 in fiscal 2008 to 56 in 2009.
Financing Activities. Financing activities were not significant in 2009.
We have various facilities upon which we may draw funds, including a $900 million senior unsecured revolving facility and two demand notes with aggregate availability of $50 million. The $900 million revolving facility expires in October 2011. The co-leads of this facility, The Bank of New York Mellon and Bank of America, have each committed $100 million. The remaining 12 lenders have each committed between $30 and $130 million. There were no draws on these facilities during 2009. Weighted-average borrowings under these facilities were $26 million for the first six months of 2008.
We have no debt maturing until 2011. We expect to use funds from operations to repay both the $300 million of long-term debt which is due in March 2011 and the $100 million of long-term debt which is due in October 2011.
Key Financial Ratios. Key financial ratios that provide certain measures of our liquidity are as follows:
August 1, January 31, August 2,
2009 2009 2008
Working capital (In Millions) $ 2,180 $ 1,885 $ 1,277
Current ratio 2.04:1 2.04:1 1.66:1
Debt/capitalization 22.5 % 23.5 % 24.9 %
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The increase in working capital and the current ratio as of August 1, 2009 compared to August 2, 2008 was primarily due to higher short-term investments. The decrease in the debt/capitalization ratio reflects higher capitalization, primarily due to earnings.
Debt Covenant Compliance. As of August 1, 2009, we were in compliance with all debt covenants and expect to remain in compliance during fiscal 2009.
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