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 include the information under "2022 Outlook," as well
as statements 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, adequacy of capital resources and
reserves, and the outcome and timing of our strategic review process.
Forward-looking statements are based on 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 2021 Form 10-K and in Part II Item 1A of this
Form 10-Q, or disclosed from time to time in our filings with the
Executive Summary
Kohl's is a leading omnichannel retailer operating 1,165 stores and a website
(www.Kohls.com) as of
Key financial results for the quarter included:
•
5.2% decrease in net sales and comparable sales
•
Earnings of
•
Gross margin was 38.3% of net sales, a 69 basis point decrease from last year
•
SG&A increased 10.5% and deleveraged as a percent of total revenue by 468 basis points to last year
• 2.2% operating margin COVID-19
As discussed in our 2021 Form 10-K, the COVID-19 pandemic has had significant adverse effects on our business. We are closely monitoring the effects of the ongoing COVID-19 pandemic and its continued impact on our business. 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.
Our Vision and Strategy
The Company's vision is to be "the most trusted retailer of choice for the active and casual lifestyle" and its strategy is focused on delivering long-term shareholder value. Key strategic focus areas for the Company include: driving top line growth, delivering a 7% to 8% operating margin, maintaining disciplined capital management, and sustaining an agile, accountable, and inclusive culture.
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Table of Contents 2022 Outlook
Our updated outlook for fiscal 2022 is as follows:
Net sales 0% to 1% vs 2021 Operating margin 7.0% - 7.2%
Diluted earnings per share
Capital expenditures$850 million Share repurchases At least$1 billion Results of Operations Total Revenue Quarter Ended (Dollars in Millions) April 30, 2022 May 1, 2021 Change Net sales$3,471 $3,662 $(191) Other revenue 244 225 19 Total revenue$3,715 $3,887 $(172)
Net sales decreased 5.2% for the first quarter of 2022 compared to the first quarter of 2021.
•
Comparable sales decreased 5.2% driven by declines in Home and Children's.
•
Digital sales decreased 4% and digital penetration was 30% of net sales for the first quarters of both 2022 and 2021.
•
From a line of business perspective, Accessories, Men's, and Women's outperformed the Company average.
•
Active performed in line with the Company average and represented 23% of sales.
Net sales includes revenue from the sale of merchandise, net of expected returns, and shipping revenue.
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.
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.
Other revenue increased
On
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Cost of Merchandise Sold and Gross Margin
Quarter Ended
(Dollars in Millions) April 30, 2022 May 1, 2021 Change
Net sales $3,471 $3,662 $(191)
Cost of merchandise sold 2,140 2,233 (93)
Gross margin $1,331 $1,429 $(98) Gross margin as a percent of net sales 38.3% 39.0% (69) 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; terms cash discount; and depreciation of product development facilities and equipment. Our cost of merchandise sold may not be comparable 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.
Gross margin is calculated as net sales less cost of merchandise sold. For the first quarter of 2022, gross margin was 38.3%, a decrease of 69 basis points compared to the first quarter of 2021.
The decrease in gross margin was primarily driven by increased freight costs related to the constrained global supply chain, partially offset by continued benefit from our pricing and promotion optimization strategies.
Selling, General, and Administrative Expense ("SG&A")
Quarter Ended
(Dollars in Millions)
$1,293 $1,170 $123
As a percent of total revenue 34.8% 30.1% 468 bps
SG&A includes compensation and benefit costs (including stores, corporate, 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 other than expenses to fulfill digital sales; 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 revenue. If the expense as a percent of revenue decreased from the prior year, the expense "leveraged". If the expense as a percent of revenue increased over the prior year, the expense "deleveraged".
The following table summarizes the changes in SG&A by expense type:
Quarter Ended
(Dollars in Millions) April 30, 2022
Store expenses $82
Corporate and other 25
Distribution 16
Total increase $123
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SG&A expenses increased
Other Expenses
Quarter Ended
(Dollars in Millions)
$200 $211 $(11) Interest expense, net 68 67 1 Loss on extinguishment of debt - 201 (201)
The decrease in depreciation and amortization was primarily driven by reduced capital spending in technology.
Net interest expense increased due to more financing leases. This was partially offset by a decrease in interest expense due to the continued benefit of debt reductions as a result of our liability management strategies employed during 2021.
In the first quarter of 2021, we completed a cash tender offer and recognized a
loss of
Income Taxes
Quarter Ended
(Dollars in Millions) April 30, 2022 May 1, 2021 Change
(Benefit) for income taxes $- $(9) $9
Effective tax rate (2.8%) (184.5%)
The first quarter of both 2022 and 2021 resulted in a net benefit for income taxes driven by the recognition of favorable tax items. The net benefit, when compared to a low pre-tax income, results in a negative tax rate.
GAAP to Non-GAAP Reconciliation
Earnings
Per
(Dollars in Millions, Except per Operating Income before Diluted
Share Data) Income Income Taxes Net Income Share
Quarter Ended April 30, 2022
GAAP $82 $14 $14 $0.11
Loss on extinguishment of debt - - - -
Income tax impact of items noted
above - - - -
Adjusted (non-GAAP) (1) $82 $14 $14 $0.11
Quarter Ended May 1, 2021
GAAP $273 $5 $14 $0.09
Loss on extinguishment of debt - 201 201 1.29
Income tax impact of items noted
above - - (50) (0.33)
Adjusted (non-GAAP) $273 $206 $165 $1.05
(1)
Amounts shown for the three months ended
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.
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Table of Contents Seasonality and Inflation
Our business, like that of other retailers, is subject to seasonal influences. Sales and income are typically higher during the back-to-school and holiday seasons. 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 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, wage inflation, and costs to source our merchandise, including tariffs. There can be no assurances that such factors will not continue to impact our business in the future.
Liquidity and Capital Resources
Capital Allocation
Our capital allocation strategy is to invest to maximize our overall long-term return, maintain a strong balance sheet, and maintain our investment grade rating. We follow a disciplined approach to capital allocation based on the following priorities: first we invest in our business to drive long-term profitable growth; second we pay a quarterly dividend with a goal to increase it annually; and third we return excess cash to shareholders through our share repurchase program. In addition, when appropriate, we will complete liability management transactions.
Our period-end cash and cash equivalents balance decreased to
The following table presents our primary uses and sources of cash:
Cash Uses Cash Sources
• Operational needs, including • Cash flow from operations
salaries, rent, taxes, and other • Line of credit under our revolving
operating costs credit facility
• Inventory • Issuance of debt
• Capital expenditures
• Dividend payments
• Share repurchases
• Debt reduction
Quarter Ended
(Dollars in Millions) April 30, 2022 May 1, 2021 Change
Net cash (used in) provided by:
Operating activities $(460) $278 $(738)
Investing activities (217) (57) (160)
Financing activities (264) (883) 619
Operating Activities
Our operating cash outflows generally consist of payments to our employees for wages, salaries and employee benefits, payments to our merchandise vendors for inventory (net of vendor allowances), payments to our shipping carriers, and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our debt borrowings.
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Operating activities used
Investing Activities
Our investing cash outflows include payments for capital expenditures, including investments in new and existing stores, improvements to supply chain, and technology costs. Our investing cash inflows are generally from proceeds from sales of property and equipment.
Investing activities used
During the first quarter of 2022 we opened 48
Financing Activities
Our financing strategy is to ensure liquidity and access to capital markets. We also strive to maintain a balanced portfolio of debt maturities, while minimizing our borrowing costs. Our ability to access the public debt market has provided us with adequate sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings.
If our credit ratings were lowered, our ability to access the public debt markets, our cost of funds, and other terms for new debt issuances could be adversely impacted. Each of the credit rating agencies reviews its rating periodically and there is no guarantee our current credit ratings will remain the same.
The majority of our financing activities include repurchases of common stock, proceeds and/or repayments of long-term debt, and dividend payments.
Financing activities used
In
In
We paid cash for treasury stock purchases of
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Cash dividend payments were
As of
Standard &
Moody's Poor's Fitch
Long-term debt Baa2 BBB- BBB-
Outlook Stable Stable Stable
Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity are as follows:
(Dollars in Millions)April 30, 2022 May 1, 2021 Working capital$1,369 $2,257 Current ratio 1.40 1.77
Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.
The decrease in our working capital and current ratio is primarily due to lower cash balances as a result of higher share repurchases, higher capital expenditures, and an increase in inventory.
Debt Covenant Compliance
As of
Contractual Obligations
There have been no significant changes in the contractual obligations disclosed in our 2021 Form 10-K other than leases which have been disclosed in Note 4 of the Consolidated Financial Statements.
Off-Balance Sheet Arrangements
We have not provided any financial guarantees arising from arrangements with
unconsolidated entities or persons 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 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 with
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