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KSS > SEC Filings for KSS > Form 10-K on 21-Mar-2014All Recent SEC Filings

Show all filings for KOHLS CORP

Form 10-K for KOHLS CORP


21-Mar-2014

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary
As of February 1, 2014, we operated 1,158 family-focused, value-oriented
department stores and a website (www.Kohls.com) that sell moderately priced
exclusive and national brand apparel, footwear, accessories, beauty and home
products. Our stores generally carry a consistent merchandise assortment with
some differences attributable to regional preferences. Our website includes
merchandise which is available in our stores, as well as merchandise which is
available only on-line.
The following table summarizes our recent financial results:
                                                  2013             2012         2011
                                                  (Dollars and Shares in Millions)
Net sales                                    $    19,031        $ 19,279     $ 18,804
Change in:
Net sales                                           (1.3 )%          2.5 %        2.2 %
Comparable sales                                    (1.2 )%          0.3 %        0.5 %
Gross margin as a percent of net sales              36.5  %         36.3 %       38.2 %
Selling, general and administrative expenses $     4,313        $  4,267     $  4,243
Net income                                   $       889        $    986     $  1,167
Net income per diluted share                 $      4.05        $   4.17     $   4.30
Shares repurchased                                    15              26           46
Treasury stock purchases                     $       799        $  1,259     $  2,331
Cash flow from operations                    $     1,884        $  1,265     $  2,139

For additional details about our financial results, see Results of Operations and Liquidity and Capital Resources.

Our main business objective is to profitably increase sales. In order to increase sales, we believe that we need to continue to increase transactions per store, which is our primary sales driver. We have a number of initiatives which we believe will increase transactions per store.

• We continue to improve the quality of our merchandise and to offer items at great values. We are pleased with the progress we have made in these areas, but believe that we have additional opportunities to improve.

•We continue to focus on creating excitement for our customers to increase customer traffic to our stores and website.

In fiscal 2014, we expect to launch several new brands, including Juicy Couture, IZOD, and a Jumping Beans collection featuring Disney characters. The Juicy Couture assortment will include women's and girl's apparel, footwear, accessories, bedding, and home accessories. The IZOD assortment will be one of the largest men's launches in our history and will feature men's sportswear and dress apparel, including golf separates, woven sport shirts, sweaters, knit shirts, shorts, suit separates, dress shirts, and dress pants. The Jumping Beans collection will combine Disney, one of the most recognizable brands in the world, and our own highly-successful Jumping Beans brand. We will also launch the next DesigNation designer, our limited-time special collection.

Approximately 280 of our stores had renovated beauty departments at the end of fiscal 2013. We expect to renovate the beauty department in approximately another 200 stores in 2014. We are testing three different beauty renovations - new fixtures with expanded and/or relocated floor space, new fixtures with no change to department size or location, and existing fixtures with acrylic retrofits. Initial test results are showing a significant increase in beauty sales in the renovated stores.
• We are designing a rewards system to increase customer loyalty, especially for customers who do not have a Kohl's-branded credit card. The program allows enrolled customers to earn various rewards or discounts based upon the volume of their purchases. The loyalty program is currently available in approximately 30% of our stores. Initial results have been very positive and we expect this loyalty program to be available in all stores by the end of fiscal 2014.


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We are also making significant investments to create an exciting omni-channel shopping experience for our customers. Whether they are shopping in one of our stores, from their phones or from their laptops, we are creating a consistent experience to ensure that they can connect with us wherever and however they wish.
We remain committed to meeting the changing shopping needs of our customer, to strengthening our omni-channel experience and to investing in our future in a strategic and profitable manner.

2014 Outlook
Our current expectations for fiscal 2014 compared to 2013 including estimated impacts of these initiatives are as follows:

Total sales Increase 0.5 - 2.5% Comparable sales Increase 0 - 2% Gross margin as a percent of sales Increase 10 - 30 bps SG&A Increase 1.5 - 2.5% Earnings per diluted share $4.05 - $4.45

Our earnings per diluted share expectation assumes share repurchases of $1 billion at an average price of $50 per share.

Results of Operations
53rd Week.

Fiscal 2012 was a 53-week year. During the 53rd week, total sales were $169 million; selling, general and administrative expenses were approximately $30 million; interest was approximately $2 million; net income was approximately $15 million and diluted earnings per share was approximately $0.06. Our comparable sales in both 2013 and 2012 exclude the impact of the 53rd week.

Net Sales.

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. Omni-channel sales are recorded as store or E-Commerce sales based on the fulfillment channel. For example, customer purchases from our in-store kiosks are generally recognized as E-Commerce sales as the orders are shipped from our E-Commerce fulfillment centers and on-line orders which are shipped from our stores are recognized as store sales. Merchandise returns reduce sales at the location of the return. As a result, store sales are reduced by merchandise purchased on-line, but returned to a store.

The following table summarizes net sales:

                                         2013          2012         2011
Net sales (In Millions)               $ 19,031      $ 19,279     $ 18,804
Sales growth:
Total                                     (1.3 )%        2.5 %        2.2 %
Comparable stores (a)                     (1.2 )%        0.3 %        0.5 %
Net sales per selling square foot (b) $    207      $    213     $    220

(a)Includes sales for stores (including relocated or remodeled stores) which were open throughout both the full current and prior year periods and E-Commerce. 2013 compares the 52 weeks ended February 1, 2014 to the 52 weeks ended January 26, 2013. 2012 compares the 52 weeks ended January 26, 2013 to the 52 weeks ended January 28, 2012.
(b)Net sales per selling square foot is based on stores open for the full current period, excluding E-Commerce. 2012 excludes the impact of the 53rd week.


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The following table summarizes the changes in net sales:

                                        2013                2012
                                    $          %         $         %
Comparable sales:                        (Dollars in Millions)
Stores                           $ (517 )   (3.0 )%    (354 )   (2.0 )%
E-Commerce                          284     20.4  %     411     41.8  %
Total (a)                          (233 )   (1.2 )%      57      0.3  %
New stores and other revenues       154        -        249        -
Net change before 53rd week         (79 )   (0.4 )%     306      1.6  %
Net sales in 53rd week             (169 )      -        169        -
Increase (decrease) in net sales $ (248 )   (1.3 )%   $ 475      2.5  %

(a)2013 compares the 52 weeks ended February 1, 2014 to the 52 weeks ended January 26, 2013. 2012 compares the 52 weeks ended January 26, 2013 to the 52 weeks ended January 28, 2012. Drivers of the changes in comparable sales were as follows:

                           2013      2012
Selling price per unit    (0.4 )%    1.8 %
Units per transaction      1.5         -
Average transaction value  1.1       1.8
Number of transactions    (2.3 )    (1.5 )
Comparable sales          (1.2 )%    0.3 %

The decrease in selling price per unit was primarily due to slightly deeper discounts and clearance merchandise which represented a slightly higher percentage of our total sales than in the prior year periods. Units per transaction increased as customers purchased more items in response to the lower prices. Increases in the number of E-Commerce transactions were more than offset by decreases in our stores. Transactions in 2013 were also negatively impacted by an unseasonably cold spring and winter which reduced customer visits throughout the year.

From a regional perspective, the West, which reported sales consistent with 2012, was the strongest region in 2013. All other regions reported low to mid single-digit sales decreases. E-Commerce revenue, which includes shipping and other revenues and the 53rd week in 2012, increased $286 million to $1.7 billion for 2013. The increase is primarily due to increased transactions and units per transaction.

We have renewed our emphasis on national brands in 2013 in an effort to drive customer traffic and maximize sales growth. In the last 6 months of 2013, national brands had improved sales results and represented a growing percentage of our sales. This focus will continue into 2014, as we continue to rebalance our mix between private and exclusive brands and national brands to drive sales growth.
By line of business, all categories reported low single-digit sales decreases in 2013. Children's, Men's and Home outperformed the Company average and Women's was consistent with the Company average. Toys was the strongest category in Children's. Outerwear and active were the strongest categories in both the Men's and the Women's businesses. Electrics and luggage reported the highest sales increases in the Home business. Comparable sales in the Accessories and Footwear categories were below the Company average. Bath and beauty reported the strongest increase in the Accessories business as a result of our beauty remodel program. In Footwear, athletic shoes reported the highest sales increase. Net sales per selling square foot (which is based on stores open for the full current period and excludes E-Commerce and the 53rd week in 2012), decreased $6 to $207 in 2013. The decrease is primarily due to a 3% decrease in sales at our comparable stores.
Net sales for 2012 increased 2.5% over 2011 and comparable sales increased 0.3%. From a line of business perspective, Children's and Men's reported the strongest comparable sales in 2012. Footwear outperformed the Company average for the year, with a low single-digit increase. Comparable sales in the Accessories, Women's and Home businesses declined slightly for the year. All regions reported modest comparable sales decreases. E-Commerce revenue, which includes shipping and other revenues and the 53rd week, increased $432 million to $1.4 billion in 2012.


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Gross margin.
                            2013        2012        2011
                                (Dollars in Millions)
Gross margin              $ 6,944     $ 6,990     $ 7,179
As a percent of net sales    36.5 %      36.3 %      38.2 %

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 percentage of sales increased approximately 20 basis points over 2012. The increase includes a 45 basis point increase in our merchandise sales margin. This increase was primarily due to modest decreases in apparel costs in 2013. Partially offsetting this increase were higher shipping losses in our on-line business. The losses were due to higher costs to ship merchandise during the fourth quarter holiday season and to growth in our on-line business.

Gross margin as a percent of net sales decreased approximately 190 basis points from 2012 to 2011 due to reductions in selling price to drive customer traffic and higher apparel costs, especially in the first six months of 2012, which were only partially offset by higher selling prices early in the year. Selling, general and administrative expenses.

                                                2013        2012        2011
                                                    (Dollars in Millions)
Selling, general, and administrative expenses $ 4,313     $ 4,267     $ 4,243
As a percent of net sales                        22.7 %      22.1 %      22.6 %

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 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 changes in SG&A by expense type:

                                                      2013             2012
                                                      (Dollars In Millions)
Distribution costs                                $      27         $      42
Corporate expenses                                       32               (10 )
Store expenses                                           27               (11 )
Marketing costs, excluding credit card operations         9                14
Net revenues from credit card operations                (19 )             (41 )
SG&A in 53rd week                                       (30 )              30
Total increase                                    $      46         $      24

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 approximately 60 basis points in 2013.


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Distribution costs increased in 2013 due to higher distribution and fulfillment costs related to our growing on-line business, particularly in the fourth quarter.

IT spending, which is included in corporate expenses, increased over 2012 due to growth and infrastructure investments related to our omni-channel strategy.

The increases in store expenses are the result of higher store payroll, higher rent-related expenses due to new stores, increases in real estate taxes, and higher controllable expenses including repairs and maintenance.

Marketing costs were higher in 2013 as we increased our spending in digital and broadcast and added additional markets to our loyalty program pilot.

The increases in net revenues from credit card operations are the result of higher finance charge revenues and late fees due to growth in the portfolio. Partially offsetting these increases were higher bad debt expenses and operational costs. The increased operating costs were primarily due to growth in the portfolio.

SG&A for 2012 increased $24 million, or 1% over 2011. As a percentage of sales, SG&A decreased, or "leveraged", by approximately 40 basis points in 2012. The increase in SG&A is due primarily to higher distribution costs, increased marketing, investments in technology and infrastructure related to our E-Commerce business and the extra week in the 2012 retail calendar. These increases were partially offset by lower incentive costs.

Other Expenses.
                                 2013        2012      2011
                                   (Dollars In Millions)
Depreciation and amortization $   889       $ 833     $ 778
Interest expense, net             338         329       299
Provision for income taxes        515         575       692
Effective tax rate               36.7 %      36.8 %    37.2 %

The increase in depreciation and amortization in 2013 was primarily due to our E-Commerce fulfillment centers and IT amortization. The increase in depreciation and amortization in 2012 was primarily due to recent computer and hardware additions which have a short amortization period as well as the addition of new stores, remodels and the opening of our fourth E-Commerce fullfillment center in DeSoto, Texas.
Net interest expense, including $2 million in the 53rd week of 2012, increased $9 million, or 3%, in 2013 and increased $30 million in 2012. The increases in interest expense are primarily due to the increases in our outstanding long-term debt.
The decreases in the effective tax rate for 2013 and 2012 were primarily due to favorable settlements of state tax audits in the first six months of both years. Inflation
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. We experienced 10-15% increases in apparel costs in 2011. We saw modest increases in apparel costs in the first six months of 2012 and modest decreases in the last six months of 2012 and in 2013. In 2014, we expect to see modest increases in apparel costs.

Liquidity and Capital Resources
Our primary ongoing cash requirements are for capital expenditures for new stores, remodels and IT spending and for seasonal and new store inventory purchases. Share repurchases and dividend payments to shareholders are currently other significant usages of cash. These payments are discretionary and can be discontinued at any time should we require cash for other uses. Our primary source of funds is cash flow provided by operations. Short-term trade credit, in the form of extended payment terms for inventory purchases, often represents a significant source of financing for merchandise inventories. We also have a line of credit available under our revolving credit facility which could be used to meet cash needs. Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.


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As of February 1, 2014, we had cash and cash equivalents of $971 million. We generated $1.1 billion of free cash flow in 2013. (See the Free Cash Flow discussion later in this Liquidity and Capital Resources section for additional discussion of this non-GAAP financial measure.)

                                  2013        2012        2011
                                          (In Millions)
Net cash provided by (used in):
Operating activities            $ 1,884     $ 1,265     $ 2,139
Investing activities               (623 )      (660 )      (802 )
Financing activities               (827 )    (1,273 )    (2,409 )

Operating activities.

Cash provided by operations increased $619 million, or 49%, in 2013 to $1.9 billion. The increase was primarily due to reduced inventory growth and to lower bonus and other payroll-related liability payments in 2013.

Inventory units per store, excluding E-commerce, as of year-end 2013 were 4% lower than year-end 2012. At cost, inventory per store, excluding E-Commerce, was approximately 1% higher than year-end 2012. The increase in cost per store is primarily due to our renewed focus on national brands which generally have a higher cost than our private and exclusive brands.
Accounts payable as a percent of inventory was 35.2% at February 1, 2014, compared to 34.9% at year-end 2012. The increase reflects lower markdowns and extended payment terms; partially offset by slower inventory turn.
Cash provided by operations decreased $874 million from $2.1 billion in 2011 to $1.3 billion in 2012. The decrease was primarily due to lower earnings, a decrease in deferred taxes related to depreciation and higher inventory levels.

Investing activities.
Net cash used in investing activities decreased $37 million to $623 million in 2013. The decrease reflects a $142 million decrease in capital expenditures which was substantially offset by a $108 million decrease in auction rate securities sales.
Capital expenditures totaled $643 million for 2013, a $142 million decrease from 2012. The decrease reflects multiple changes in our capital expenditures including fewer remodels and new stores and lower spending on E-Commerce fulfillment centers, partially offset by higher IT spending.
The following table summarizes expected and actual capital expenditures by major category:

                                  2014
                                Estimate    2013    2012    2011
Computer hardware and software      39 %     45 %    33 %    18 %
Fixtures and store improvements     30       25      18       7
Remodels/relocations                13       10      14      26
New stores                           6        9      18      27
Other                               12        9       3       7
Distribution centers                 -        2      14      15
Total                              100 %    100 %   100 %   100 %

We expect total capital expenditures of approximately $725 million in fiscal 2014. The expected increase over 2013 reflects higher spending for corporate expansion and IT, partially offset by fewer new store openings. The actual amount of our future capital expenditures will depend on the number and timing of new stores and remodels, distribution centers and E-Commerce fulfillment centers opened and remodeled; the mix of owned, leased or acquired stores; and IT spending. We do not anticipate that our capital expenditures will be limited by any restrictive covenants in our financing agreements.
Net cash used in investing activities decreased $142 million to $660 million in 2012. The decrease reflects lower capital expenditures primarily due to fewer remodels and new stores, partially offset by higher technology spending.


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Financing activities.
Our financing activities used cash of $827 million in 2013 and $1.3 billion in 2012. The decrease is primarily due to lower share repurchases.
We repurchased 15 million shares of our common stock for $799 million in 2013 and 26 million shares for $1.3 billion in 2012. Share repurchases are discretionary in nature. The timing and amount of repurchases is based upon available cash balances, our stock price and other factors. The shares were purchased as part of our share repurchase program. We have $2.3 billion of authorized share repurchases remaining from the $3.5 billion program approved by our Board of Directors in November 2012. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions, and to complete the program in early fiscal 2016. In September 2013, we issued $300 million of 4.75% notes with semi-annual interest payments beginning in December 2013. In September 2012, we issued $350 million of 3.25% notes with semi-annual interest payments beginning in February 2013.
We have various facilities upon which we may draw funds, including a 5-year, $1 billion senior unsecured revolving credit facility. In June 2013, we amended the revolving line of credit that we finalized in June 2011. The amendment extended the remaining term from June 2016 to June 2018 and changed the debt ratio covenant. There were no draws on these facilities during 2013 or 2012. Our credit ratings have been unchanged since September 2007 when we issued $1 billion in debt. As of February 1, 2014, our ratings were as follows:

Moody's Standard & Poor's Fitch
Long-term debt Baa1 BBB+ BBB+

We may from time to time seek to retire or purchase our outstanding debt through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved could be material.
During 2013, we paid cash dividends of $302 million as detailed in the following table:

                              First Quarter   Second Quarter   Third Quarter   Fourth Quarter
Declaration date               February 27        May 15         August 13      November 13
Record date                     March 13         June 12       September 11     December 11
Payment date                    March 27         June 26       September 25     December 24
Amount per common share           $0.35           $0.35            $0.35           $0.35

On February 26, 2014 our Board of Directors approved a dividend of $0.39 per common share which will be paid on March 26, 2014 to shareholders of record as of March 12, 2014.
Our financing activities used cash of $1.3 billion in 2012 and $2.4 billion in 2011. The decrease is primarily due to lower treasury stock purchases.


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Key financial ratios.
The following ratios provide certain measures of our liquidity, return on investments, and capital structure. . . .

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