KOHL'S CORPORATION For purposes of the following discussion, unless noted, all references to "the
quarter" and "the first quarter" are for the three fiscal months (13 weeks)
ended
This Form 10-Q contains "forward-looking statements" made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "plans," "may," "intends," "will," "should," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements may include comments about our future sales or financial performance and our plans, performance, and other objectives, expectations, or intentions, such as statements regarding our liquidity, debt service requirements, planned capital expenditures, future store initiatives, and adequacy of capital resources and reserves. Forward-looking statements are based on our management's then current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors described in Part I, Item 1A of our 2019 Form 10-K or disclosed from time to time in our filings with theSEC , that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made and we undertake no obligation to update them.
Executive Summary
As ofMay 2, 2020 , we operated 1,159 Kohl's stores, a website (www.Kohls.com), and 12 FILA outlets. Our Kohl's stores and website sell moderately-priced proprietary 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 that is available only online.
Key financial results for the quarter included:
• Significantly increased financial flexibility during quarter, ending with
• Swift and aggressive actions taken in response to COVID-19 resulted in
positive operating cash flow
• 43.5% decrease in net sales
• 1,950 basis point decrease in gross margin as a percent of net sales
• 16.4% decrease in SG&A
• $3.52 diluted loss per share
• $3.22 diluted loss per share on a non-GAAP basis
Recent Developments
As discussed in our 2019 Form 10-K, theWorld Health Organization declared the outbreak of COVID-19 as a pandemic inMarch 2020 . Subsequently, COVID-19 has continued to spread throughoutthe United States . As a result, the President ofthe United States declared a national emergency. Federal, state, and local governing bodies mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of peoplewho may have been exposed to the virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and created significant disruption in the financial and retail markets, including a decrease in consumer demand for our merchandise. 12
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The COVID-19 pandemic has had, and will likely continue to have, significant adverse effects on our business including, but not limited to the following:
• On
center associates, as well as some corporate office associates, as a result
of temporarily closing all of our stores which limited our business to the
digital channel.
• Starting on
permitted. As of June 5, 2020 , we have reopened approximately 80% of our
stores.
• The Company experienced a significant decline in sales demand, and expects
to continue to experience volatility in demand for its merchandise.
• Additionally, social distancing measures or changes in consumer spending
behaviors due to COVID-19 may continue to impact store traffic after normal
operations are resumed and such actions could result in a loss of sales and
profit. As our stores reopen, we have implemented numerous social distancing
and safety measures. These include providing personal protective equipment
to our employees, implementing a more rigorous cleaning process, including
enhanced cleaning of high touch surfaces throughout the day, and installing
protective barriers at all registers. To encourage social distancing, we
installed social distancing signage and markers throughout the store, closed
our fitting rooms, relocated Amazon returns to a separate area of the store,
and are limiting occupancy in stores as appropriate. We have implemented a
new process for handling merchandise returns, reduced store operating hours,
and are providing dedicated shopping hours for at-risk individuals.
The chart below details costs that we believe are directly attributable to
COVID-19:
(Dollars In Millions) Quarter Ended
Description Classification May 2, 2020
Inventory write-downs Cost of merchandise sold $ 187Net compensation and benefits Selling, general, and administrative
34
Supplies and other costs Selling, general, and administrative 6
Asset write-offs and other Impairments, store closing, and other costs 53
Total $ 280
In response to COVID-19 we have taken the following actions to preserve financial liquidity and flexibility:
• Managed inventory receipts meaningfully lower,
• Significantly reduced expenses across all areas of the business including
marketing, technology, operations, and payroll,
• Decreased planned capital expenditures by approximately $500 million ,
• Suspended share repurchase program,
• Suspended regular quarterly cash dividend beginning in the second quarter of
2020,
• Replaced and upsized the unsecured
secured facility, of which
• Issued
We cannot estimate with certainty the length or severity of this pandemic, or the extent to which the disruption may materially impact our Consolidated Financial Statements. However, we do expect the impact to continue to have a material adverse effect on our business, financial condition, and results of operations for the full year 2020.
See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results.
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Results of Operations
Total Revenue
Quarter Ended
(Dollars in Millions) May 2, 2020 May 4, 2019 Change
Net sales $ 2,160 $ 3,821 $ (1,661 )
Other revenue 268 266 2
Total revenue $ 2,428 $ 4,087 $ (1,659 ) Net sales declined 43.5% for the first quarter of 2020 compared to the first quarter of 2019.
• The decrease in net sales reflects the temporary nationwide closure of our
stores on March 20, 2020 due to COVID-19 which resulted in a decrease in
transactions.
• Digital sales increased 24% for the first quarter of 2020. Digital
penetration represented 45% of net sales for the first quarter of 2020 and
21% of net sales for the first quarter of 2019.
• All lines of business reported increases in digital sales for the first
quarter of 2020 with Home and Children's outperforming the Company average.
• Active continues to be a key strategic initiative and outperformed the rest
of the Company.
Comparable sales is a measure that highlights the performance of our stores and digital channel by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales includes all store and digital sales, except sales from stores open less than 12 months, stores that have been closed, and stores where square footage has changed by more than 10%. We measure the change in digital sales by including all sales initiated online or through mobile applications, including omnichannel transactions which are fulfilled through our stores. As our stores were closed for over six weeks during the first quarter of 2020, we have not included a discussion of comparable sales as we do not believe it is a meaningful metric over this period of time.
We measure digital penetration as digital sales over net sales. These amounts do not take into consideration fulfillment node, digital returns processed in stores, and coupon behaviors.
Comparable sales and digital penetration measures vary across the retail industry. As a result, our comparable sales calculation and digital penetration are non-GAAP measures that may not be consistent with the similarly titled measures reported by other companies.
The increase in Other revenue of
Cost of Merchandise Sold and Gross Margin
Quarter Ended
(Dollars in Millions) May 2, 2020 May 4, 2019 Change
Net sales $ 2,160 $ 3,821 $ (1,661 )
Cost of merchandise sold 1,787 2,415 (628 )
Gross margin $ 373 $ 1,406 $ (1,033 ) Gross margin as a percent of net sales 17.3 % 36.8 % (1,950 ) bps
Cost of merchandise sold 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 expenses for digital sales; and terms cash
discount. Our Cost of merchandise sold may not be comparable
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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. There were three primary drivers to the decrease in gross margin as a percent of net sales. First, approximately 1,500 bps of the decrease was due to inventory actions including continuing permanent markdown activity early in the first quarter of 2020 followed by an absence of sales in the last half of the quarter, and establishing a reserve for excess seasonal inventory; second, higher shipping costs of approximately 250 bps due to increased digital sales penetration; and third, approximately 200 bps due to mix of business and increased promotional activity.
Selling, General, and Administrative Expenses ("SG&A")
Quarter Ended
(Dollars in Millions) May 2, 2020 May 4, 2019 Change
SG&A $ 1,066 $ 1,275 $ (209 ) As a percent of total revenue 43.9 % 31.2 % 1,271 bps
SG&A expenses include compensation and benefit costs (including stores, headquarters, buying, 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; expenses related to our 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. 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". If the expense as a percent of sales increased over the prior year, the expense "deleveraged".
The following table summarizes the decreases in SG&A by expense type:
Quarter Ended
(Dollars In Millions) May 2, 2020
Credit expenses $ (21 )
Marketing (51 )
Corporate and other (60 )
Store expenses (77 )
Total decrease $ (209 )
SG&A expenses decreased $209 million , or 16.4%, to $1.1 billion . As a percentage
of revenue, SG&A deleveraged by 1,271 bps. The decrease in SG&A was primarily
driven by a reduction in store expenses due to temporary store closures
nationwide, lower marketing expense due to reductions in all working media
channels, and lower credit expenses due to lower interchange fees and payroll.
Partially offsetting the decrease in SG&A expenses were expenses related to the
COVID-19 pandemic which primarily consisted of incremental employee costs such
as emergency pay, incentives and benefits, and cleaning and protective supplies.
Included in these expenses was the retention credit benefit we were eligible for
under The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The
CARES Act, enacted on March 27, 2020 , provides eligible employers with an
employee retention credit equal to 50% of qualified wages paid to employees who
were not providing services to the Company due to the impact of COVID-19.
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Other Expenses
Quarter Ended
(Dollars in Millions) May 2, 2020 May 4, 2019 Change
Depreciation and amortization $ 227 $ 230 $ (3 )
Impairments, store closing, and other costs 66 49 17
Interest expense, net 58 52 6
Depreciation and amortization decreased
In the first quarter of 2020, we incurred$66 million of Impairments, store closing, and other costs. We incurred$51 million in asset write-offs and$2 million in other costs related to capital reductions and strategy changes due to COVID-19 and$13 million in brand exit costs. In the first quarter of 2019, we incurred$49 million in lease impairment charges related to the closure of four stores. Net interest expense increased in the first quarter as a result of higher interest expense due to the outstanding balance on the revolving credit facility. Income Taxes Quarter Ended (Dollars in Millions) May 2, 2020 May 4, 2019 Change
(Benefit) provision for income taxes
30.3 % 6.3 %
The first quarter resulted in a benefit for income taxes driven by a net loss
due to lower sales that resulted from the temporary closure of our stores. The
increase to our effective tax rate was primarily due to the benefit from the net
loss carryback which offset income from taxable years where the federal
statutory tax rate was 35% versus the current federal statutory tax rate of 21%.
In addition, the Company recognized favorable items that lowered the 2019
effective tax rate that did not repeat in 2020.
(Loss) Income Before Income Taxes, Net (Loss) Income, and (Loss) Earnings Per
Diluted Share
Quarter Ended
May 2, 2020 May 4, 2019
Loss Loss Income Earnings
(Dollars in Millions, Except per before Net Per Diluted before Net Per Diluted
Share Data) Income Taxes Loss Share Income Taxes Income Share
GAAP $ (776 ) $ (541 ) $ (3.52 ) $ 66 $ 62 $ 0.38
Impairments, store closing, and
other costs 66 46 0.30 49 36 0.23
Adjusted (non-GAAP) $ (710 ) $ (495 ) $ (3.22 ) $ 115 $ 98 $ 0.61 We believe the adjusted results in the table above are useful because they provide enhanced visibility into our results for the periods excluding the impact of certain items such as those included in the table above. However, these non-GAAP financial measures are not intended to replace the comparable GAAP measures.
Seasonality and Inflation
Our business, like that of most retailers, is subject to seasonal influences,
with the majority 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
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results that may be achieved for a full fiscal year. Due to the impact of COVID-19, typical sales patterns may not occur this year.
In addition to COVID-19, we expect that our operations will continue to be influenced by general economic conditions, including food, fuel and energy prices, higher unemployment, and costs to source our merchandise, including tariffs. There can be no assurances that such factors will not impact our business in the future.
Liquidity and Capital Resources
Financial liquidity and flexibility are a key focus of our response to COVID-19. As previously mentioned, we took various actions during the quarter to preserve our financial liquidity and flexibility.
The following table presents our primary uses and sources of cash:
Cash Uses Cash Sources
•Operational needs, including salaries, rent, •Cash flow from operations taxes, and other costs of running our
•Short-term trade credit, in the
business form of extended payment terms
•Capital expenditures •Line of credit under our
•Inventory revolving credit facility
•Share repurchases •Issuance of debt
•Dividend payments
•Debt reduction
Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.
Quarter Ended
(Dollars in Millions) May 2, 2020 May 4, 2019 Change
Net cash provided by (used in):
Operating activities $ 53 $ 136 $ (83 )
Investing activities (162 ) (238 ) 76
Financing activities 1,425 (289 ) 1,714
Operating Activities
Operating activities generated
Investing Activities
Investing activities used cash of$162 million in the first quarter of 2020 and$238 million in the first quarter of 2019. The decrease was primarily due to reductions in capital expenditures as a part of our response to COVID-19.
Financing Activities
Financing activities generated cash of$1.4 billion in the first quarter of 2020 compared to$289 million cash used for financing activities in the first quarter of 2019. InMarch 2020 , we fully drew down our$1.0 billion senior unsecured revolver. InApril 2020 , we replaced and upsized the unsecured credit facility with a$1.5 billion senior secured, asset based revolving credit facility maturing inJuly 2024 . AtMay 2, 2020 ,$1.0 billion was outstanding on the credit facility bearing an effective interest rate of 3.41%. 17
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InApril 2020 , we issued$600 million of 9.50% notes with semi-annual interest payments beginning inNovember 2020 . The notes mature inMay 2025 . We used part of the net proceeds from this offering to repay$500 million of the borrowings under our senior secured, asset based revolving credit facility with the remainder for general corporate purposes. As a result of the suspension of our share repurchase program in response to COVID-19, treasury stock purchases in the first quarter of 2020 were$8 million compared to$121 million in the first quarter of 2019. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors. Cash dividend payments were$108 million ($0.704 per share) in the first quarter of 2020 and$108 million ($0.67 per share) in the first quarter of 2019. In response to COVID-19, the dividend program has been suspended beginning in the second quarter of 2020. The Company remains committed to paying a dividend over the long-term following stabilization from COVID-19. During the first quarter of 2020, both Standard and Poor's and Fitch downgraded our long-term debt from BBB to BBB-. As ofMay 2, 2020 , our credit ratings were as follows: Standard & Moody's Poor's Fitch Long-term debt Baa2 BBB- BBB- Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity are as follows:
(Dollars in Millions) May 2, 2020 May 4, 2019 Working capital$ 2,883 $ 1,843 Current ratio 1.88 1.66
The increase in our working capital and current ratio are primarily due to higher cash balances as a result of debt issuances.
Debt Covenant Compliance
Our senior secured, asset based revolving credit facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to, a springing financial covenant relating to our fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions, and restricted payments, including a restriction on dividends in 2020 if our outstanding borrowings under the credit facility exceed$1.0 billion . These covenants vary from the calculation presented in our Annual Report on Form 10-K. As ofMay 2, 2020 , we were in compliance with all covenants and expect to remain in compliance during the remainder of fiscal 2020.
Contractual Obligations
During the quarter, we issued$600 million in aggregate principal amount of 9.50% notes due 2025. We also replaced our outstanding unsecured credit facility, of which$1 billion was outstanding at the end of the quarter. See "Liquidity and Capital Resources" for additional details about these financing activities. See Note 3 of the Consolidated Financial Statements for additional details about outstanding debt. There have been no other significant changes in the contractual obligations disclosed in our 2019 Form 10-K.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of
We have not created and are not a 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
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entities that are not consolidated into our financial statements that are reasonably likely to materially affect our financial condition, liquidity, results of operations, or capital resources.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity withU.S. GAAP 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. Other than the items discussed in Footnote 1, there have been no significant changes in the critical accounting policies and estimates discussed in our 2019 Form 10-K.
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