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KSS > SEC Filings for KSS > Form 10-Q on 6-Jun-2014All Recent SEC Filings

Show all filings for KOHLS CORP

Form 10-Q for KOHLS CORP


Quarterly Report

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 first quarter" are for the 13-week fiscal periods ended May 3, 2014 and May 4, 2013.
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 2013 Annual Report on Form 10-K (our "2013 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 2013 Form 10-K (particularly in "Risk Factors").

Executive Summary

As of May 3, 2014, we operated 1,160 family-focused, value-oriented department
stores and a website ( 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 results for the quarter:
                                              (Dollars and Shares in Millions)
Net sales                                    $                   4,070
Change in:
Net sales                                                         (3.1 )%
Comparable sales                                                  (3.4 )%
Gross margin as a percent of net sales                            36.8  %
Selling, general and administrative expenses $                   1,000
Net income                                   $                     125
Net earnings per diluted share               $                    0.60
Shares repurchased                                                 3.2
Treasury stock purchases                     $                     167

For additional details about our financial results, see Results of Operations and Financial Condition and Liquidity.
Our main business objective is to profitably increase sales. In order to increase sales, we believe that we need to increase transactions per store, which is our primary sales driver. During the first quarter of 2014, we introduced a multi-year vision that we believe will increase transactions per store and sales. This vision, which we refer to as "the Greatness Agenda," is built on five pillars - amazing product, incredible savings, easy experience, personalized connections and winning teams.
Amazing product provides a renewed focus on providing the right merchandise mix, being locally relevant, and tailoring products to every customer across every channel. Our new beauty offerings are an example of the new product that customers can find in many of our stores and on-line. We continue to test different beauty department formats. Initial tests show a significant increase in beauty sales for renovated stores. We expect to have renovated beauty departments in approximately 500 stores by the end of the third quarter. We continue to offer new products to our customers as we believe this creates excitement for our customers and increases customer traffic to our stores and website. During the quarter, we launched our first Jumping Beans collection featuring Disney characters. The collection has performed better than expected and we plan to roll out new elements around more of the Disney portfolio throughout the rest of the year. In June 2014, we launched Fitbit as part of extending our active and wellness business. Finally, in the third quarter, we expect to launch both the IZOD brand in Men's and the Juicy Couture brand in Women's and to introduce a partnership with Elie Tahari as the next phase of our DesigNation strategy.
The goal of incredible savings is to help every customer get more from every dollar. In addition to the value offered in our Kohl's Cash and Kohl's-branded credit card, we are designing a rewards system to offer additional savings and to increase customer loyalty, especially for customers who do not have a Kohl's charge card. The program allows enrolled customers to

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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. We expect to expand the loyalty program to our Milwaukee market and relaunch the modified program in our Seattle market in the second quarter. We expect the program to be available in all stores by the end of the third quarter.
We are also making significant investments to create an easy experience for our customers wherever or however they choose to engage with us. Whether they are shopping in one of our stores, from their mobile devices or from their laptops, we are creating a consistent experience to ensure that our customers can connect with us wherever and however they wish. We will be focusing on improving the experience on tablets and smart phones as we progress throughout the remainder of 2014.
Personalized connections is about building lasting relationships with our customers. To build personalized connections during the shopping experience, we are focused on localizing and tailoring what we sell and how we communicate our product to ensure that our product and offers are personally relevant to each and every customer. At the same time, personalized connections is about contributing to causes such as children's health and education or the environment, so our customers see us as sensitive to the issues that are important to them.

The final pillar is winning teams, which is focused on building teams of engaged, talented, empowered and results-oriented management and associates.

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. We are pleased with the progress we have made in these areas, but believe that we have additional opportunities to improve.

On May 14, 2014, we extended our current private-label credit card agreement with Capital One for an additional five years, through March 31, 2023. The extension allows us to focus on long-term growth strategies for the credit card portfolio and is not expected to significantly impact the overall profitability of the portfolio.
Results of Operations
Net sales.
Net sales decreased 3.1% to $4.1 billion for the quarter. Comparable sales decreased 3.4% for the quarter. 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. E-Commerce includes sales which originated on-line and are shipped from our E-Commerce fulfillment centers, shipped from our stores, or shipped directly from third-party vendors to our customers. 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 changes in net sales for the quarter:

                                    $                %
                                  (Dollars In Millions)
Net Sales - 2013              $     4,199
Comparable sales:
Stores                               (184 )        (4.8)  %
E-Commerce                             41           12.3
Total                                (143 )        (3.4)
New stores and other revenues          14              -
Total decrease in net sales          (129 )        (3.1)  %
Net Sales - 2014              $     4,070

Drivers of the changes in comparable sales were as follows:

Selling price per unit     2.6  %
Units per transaction     (1.5 )
Average transaction value  1.1
Number of transactions    (4.5 )%
Comparable sales          (3.4 )%

The increase in selling price per unit was primarily due to clearance merchandise which represented a lower percentage of our total sales and was sold at higher prices in the current year quarter. Units per transaction decreased as customers purchased fewer clearance items this year. Increases in the number of E-Commerce transactions were more than offset by decreases in our stores. Transactions were also negatively impacted by unusually cold weather during the quarter which reduced customer visits.

The West region reported the strongest comparable sales for the quarter. The Southeast and South Central regions also outperformed the store average. The Midwest was consistent with the store average. The Northeast and Mid-Atlantic regions reported the largest comparable sales decreases for the quarter. By line of business, Children's and Footwear outperformed the Company average. Infants and toddlers reported the strongest sales in Children's. In Footwear, athletic shoes reported higher sales. The Men's and Women's businesses were consistent with the Company average. Notable Men's categories included active and young men's. In Women's, juniors was the strongest category for the first time in many quarters and reported higher sales. The Accessories and Home businesses were below the Company average. Accessories reported its strongest results in beauty due to the new beauty brands introduced last year. Soft home was the best performing category in Home.

Gross margin.

Increase (Decrease) 2014 2013 $ %
(Dollars in Millions)
Gross margin $1,496 $1,528 $(32) (2.1)% As a percent of net sales 36.8% 36.4% 0.4%

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 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 40 basis points over 2013. This increase was primarily due to modest decreases in apparel costs in 2014.

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Selling, general and administrative expenses.
                                               2014       2013       $       %
                                                    (Dollars in Millions)
Selling, general and administrative expenses $ 1,000     $ 997     $  3      - %
As a percent of net sales                       24.6 %    23.7 %           0.9 %

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; 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. SG&A also includes the costs incurred prior to new store openings, such as advertising, hiring and training costs for new employees, processing and transporting initial merchandise, and rent expense. 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:
(In Millions)

Corporate expenses                                $         6
Store expenses                                              3
Distribution costs                                          2
Net revenues from credit card operations                   (3 )
Marketing costs, excluding credit card operations          (5 )
Increase in SG&A                                  $         3

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 80 basis points for the quarter.

IT spending, which is included in corporate expenses, increased over the prior year period due to growth and infrastructure investments related to our omni-channel strategy. The increases in store expenses are primarily due to remodeling costs occurring earlier this year than last year. Distribution costs were higher for the quarter due to higher distribution and fulfillment costs related to our growing E-Commerce business. The increase 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. Marketing costs decreased for the quarter as we shifted spending to the second quarter.

On May 14, 2014, we extended our current private-label credit card agreement with Capital One for an additional five years, through March 31, 2023. The extension allows us to focus on long-term growth strategies for the credit card portfolio and is not expected to significantly impact the overall profitability of the portfolio.

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Other Expenses.
                                                     Increase (Decrease)
                               2014      2013          $              %
                                          (Dollars in Millions)
Depreciation and amortization $ 216     $ 214     $     2               -  %
Interest expense, net            85        83           2               2
Provision for income taxes       70        87         (17 )           (19 )
Effective tax rate             36.0 %    37.0 %

Depreciation and amortization was consistent with last year. The increase in interest expense is primarily due to higher outstanding long-term debt. The decrease in the provision for income taxes is due to lower income before taxes, primarily driven by lower sales in the quarter, and a lower effective tax rate. The decrease in the effective tax rate was primarily due to a favorable state audit settlement during the quarter.
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. Revenues and expenses associated with the opening of new stores may also effect our quarterly results. 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 impacted by such factors in the future.

Financial Condition and Liquidity
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 sources of funds are cash flows provided by operations, short-term trade credit and our line of credit. 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 may from time to time issue new debt. The amount of new debt issued, if any, will depend on prevailing market conditions, our cash needs and our capital structure. Seasonal cash needs may be met by cash on hand and/or the line of credit available 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.

                                                      Decrease in Cash
                                 2014      2013          $           %
Net cash provided by (used in):           (Dollars in Millions)
Operating activities            $ 179     $ 305     $    (126 )    (41 )%
Investing activities             (172 )    (123 )         (49 )    (40 )%
Financing activities             (261 )    (201 )         (60 )    (30 )%

Operating Activities. Operating activities generated $179 million of cash in 2014, compared to $305 million in the first quarter of 2013.
Merchandise inventory increased $20 million to $3.98 billion at May 3, 2014. Excluding E-Commerce, merchandise inventory dollars per store decreased 1% and units per store decreased 4% from May 4, 2013. Accounts payable as a percent of inventory was 34.7% at May 3, 2014, compared to 36.7% at May 4, 2013. The decrease is primarily due to slower inventory turn.
Investing Activities. The increase in net cash used in investing activities reflects a $41 million increase in capital spending primarily due to a call center purchased in Texas and remodel spending, which occurred earlier this year than last year.

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Financing Activities. Financing activities used cash of $261 million in the first quarter of 2014 and $201 million in the first quarter of 2013. We paid cash for treasury stock purchases of $167 million in 2014 and $101 million in 2013. 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 $80 million ($0.39 per share) in 2014 and $77 million ($0.35 per share) in 2013. On May 14, 2014, our board of directors declared a quarterly cash dividend of $0.39 per common share. The dividend is payable June 25, 2014 to shareholders of record at the close of business on June 11, 2014. Free Cash Flow. Higher capital spending and timing of tax and non-inventory payments resulted in negative free cash flow for the quarter. 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.

The following table reconciles net cash provided by operating activities (a GAAP measure) to free cash flow (a non-GAAP measure).

                                                        2014          2013          (Decrease)
                                                          (In Millions)
Net cash provided by operating activities           $      179     $     305     $       (126 )
Acquisition of property & equipment                       (176 )        (135 )            (41 )
Capital lease & financing obligation payments              (29 )         (24 )             (5 )
Proceeds from financing obligations                          3             -                3
Free cash flow                                      $      (23 )   $     146     $       (169 )

Key financial ratios. Key financial ratios that provide certain measures of our liquidity are as follows:

                               May 3, 2014     May 4, 2013
Working capital (In Millions) $     2,494     $     2,212
Current ratio                        1.95            1.82
Debt/capitalization                  45.2 %          43.0 %

The increases in working capital and the current ratio are primarily due to higher cash and lower income taxes payable. The increase in the debt/capitalization ratio reflects the issuance of $300 million of debt in September 2013 and lower capitalization, primarily due to share repurchases.

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Debt Covenant Compliance. As of May 3, 2014, we were in compliance with all debt covenants and expect to remain in compliance during fiscal 2014.

(Dollars in Millions)

Included Indebtedness
Total debt                                                               $             4,831
Permitted exclusions                                                                      (8 )
Subtotal                                                                               4,823
Rent x 8                                                                               2,160
Included Indebtedness                                                    $             6,983

Rolling 12-month Adjusted Debt Compliance EBITDAR
Net income                                                               $               866
Rent expense                                                                             270
Depreciation and amortization                                                            892
Net interest                                                                             340
Provision for income taxes                                                               498
EBITDAR                                                                                2,866
Stock based compensation                                                                  57
Other non-cash revenues and expenses                                                      17
Rolling 12-month Adjusted Debt Compliance EBITDAR                        $             2,940

Debt Ratio (a)                                                                          2.38
Maximum permitted Debt Ratio                                                            3.75
   (a) Included Indebtedness divided by Adjusted Debt Compliance EBITDAR

Contractual Obligations
There have been no significant changes in the contractual obligations disclosed in our 2013 Form 10-K.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of May 3, 2014. 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 2013 Form 10-K.

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