KOHL'S CORPORATION For purposes of the following discussion, unless noted, all references to "the quarter" and "the third quarter" are for the three fiscal months (13 weeks) endedOctober 29, 2022 orOctober 30, 2021 . References to "year to date" are for the nine fiscal months (39 weeks) endedOctober 29, 2022 orOctober 30, 2021 . References to "the first quarter" are for the three fiscal months (13 weeks) endedApril 30, 2022 orMay 1, 2021 . References to "the second quarter" are for the three fiscal months (13 weeks) endedJuly 30, 2022 orJuly 31, 2021 . 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, and adequacy of capital resources and reserves. 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 our Form 10-Q for the quarter endedApril 30, 2022 , 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 Kohl's is a leading omnichannel retailer operating 1,166 stores and a website (www.Kohls.com) as ofOctober 29, 2022 . Our Kohl's stores and website sell moderately-priced private 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, store size, and presence ofSephora shop-in-shops. 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:
•
Net sales decreased 7.2% and comparable sales decreased 6.9%
•
Earnings of
•
Gross margin was 37.3% of net sales, a 263 basis point decrease from last year
•
SG&A decreased 3.3% and deleveraged as a percent of total revenue by 120 basis points to last year
• Operating margin of 4.7%
•
Entered into$500 million ASR receiving an initial 11.8 million shares in the third quarter, and subsequent to the quarter, completed the ASR and received an additional 6.1 million shares for a total of 17.9 million shares.
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 long-term 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.
14--------------------------------------------------------------------------------
Table of Contents
2022 Outlook
Given the recent volatility in business trends, the significant macroeconomic
headwinds, along with the unexpected CEO transition, the Company is no longer
providing guidance for the fourth quarter, and therefore is withdrawing its
prior full year 2022 guidance.
Results of Operations
Total Revenue
Three Months Ended Nine Months Ended
October October October October
(Dollars in Millions) 29, 2022 30, 2021 Change 29, 2022 30, 2021 Change
Net sales $4,052 $4,366 $(314) $11,386 $12,251 $(865)
Other revenue 225 234 (9) 693 683 10
Total revenue $4,277 $4,600 $(323) $12,079 $12,934 $(855) Net sales decreased 7.2% in the third quarter of 2022 and 7.1% year to date 2022.
•
Comparable sales decreased 6.9% in the third quarter of 2022 and 6.6% year to date 2022 driven by lower traffic and smaller basket sizes.
•
Digital sales decreased 8% for the third quarter of 2022 and decreased 4% year to date 2022. Digital penetration was 29% of net sales in both the third quarter and year to date 2022.
•
From a line of business perspective, Accessories, Women's, and Men's outperformed the Company average for the third quarter and year to date 2022, while Home, Footwear, and Children's underperformed the Company.
•
Active underperformed the overall business in the third quarter of 2022 and year to date 2022 driven by continued softness in active footwear. Total active represented 25% of sales for the third quarter of 2022 and 24% year to date 2022.
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 decreased$9 million for the third quarter and increased$10 million year to date 2022. The decrease for the third quarter was driven by lower credit revenue due to higher write-off activity partially offset by higher late fees. The increase year to date was driven by higher credit revenue due to higher late fees partially offset by higher write-off activity. 15
--------------------------------------------------------------------------------
Table of Contents
OnMarch 14, 2022 , we amended and restated our private label credit card program agreement with Capital One throughMarch 31, 2030 . The agreement will operate in substantially the same manner as it currently operates.
Cost of Merchandise Sold and Gross Margin
Three Months Ended Nine Months Ended
October October October October
(Dollars in Millions) 29, 2022 30, 2021 Change 29, 2022 30, 2021 Change
Net sales $4,052 $4,366 $(314) $11,386 $12,251 $(865)
Cost of merchandise sold 2,541 2,623 (82) 7,013 7,282 (269)
Gross margin $1,511 $1,743 $(232) $4,373 $4,969 $(596)
Gross margin as a percent of
net sales 37.3% 39.9% (263) bps 38.4% 40.6% (215) 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. In the
third quarter of 2022, gross margin was 37.3% of net sales, decreasing 263 basis
points. Year to date 2022 gross margin was 38.4% of net sales, decreasing 215
basis points. The decrease in gross margin for the third quarter was primarily
driven by elevated freight costs, product cost inflation, and elevated shrink
levels partially offset by continued benefit from our pricing and promotional
optimization strategies. Year to date, the decrease was driven by increased
freight costs and shrink.
Selling, General, and Administrative Expense ("SG&A")
Three Months Ended Nine Months Ended
October October October October
(Dollars in Millions) 29, 2022 30, 2021 Change 29, 2022 30, 2021 Change
SG&A $1,334 $1,380 $(46) $3,910 $3,791 $119
As a percent of total
revenue 31.2% 30.0% 120 bps 32.4% 29.3% 306 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".
16--------------------------------------------------------------------------------
Table of Contents
The following table summarizes the changes in SG&A by expense type:
Three Months Ended Nine Months Ended
(Dollars in Millions) October 29, 2022 October 29, 2022
Store expenses $(22) $104
Distribution (1) 21
Corporate and other (23) (6)
Total (decrease) increase $(46) $119
SG&A expenses decreased $46 million , or 3.3%, to $1.3 billion in the third
quarter of 2022. As a percentage of revenue, SG&A deleveraged by 120 basis
points. Year to date 2022, SG&A expenses increased $119 million , or 3.1%, to
$3.9 billion . As a percentage of revenue, SG&A deleveraged by 306 basis points.
The decrease in SG&A during the third quarter was primarily driven by lower
strategic investments made in our stores to support the Sephora shop-in-shops
openings, store refreshes, and reflows. Additionally, corporate costs decreased
due to lower general corporate costs and incentives. The year to date 2022
increase was primarily driven by the strategic investments made in our stores to
support the approximately 400 Sephora shop-in-shop openings this year compared
to the 200 openings last year. Also contributing to the increase were $26
million of expenses related to the proxy contest and strategic review process,
heightened transportation costs, and increased wages.
Other Expenses
Three Months Ended Nine Months Ended
(Dollars in Millions) October 29, 2022 October 30, 2021 Change October 29, 2022 October 30, 2021 Change
Depreciation and
amortization $202 $210 $(8) $608 $631 $(23)
Interest expense, net 81 66 15 226 195 31
Loss on extinguishment
of debt - - - - 201 (201)
The decrease in depreciation and amortization in the third quarter and year to date 2022 was primarily driven by reduced capital spending in technology.
Net interest expense increased in the third quarter and year to date 2022 due to more financing leases as well as borrowings under the revolving credit facility. Partially offsetting the year to date increase was a decrease in interest expense in the first quarter of 2022 due to the 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
Three Months Ended Nine Months Ended
(Dollars in
Millions) October 29, 2022 October 30, 2021 Change October 29, 2022 October 30, 2021 Change
Provision for
income taxes $22 $78 $(56) $68 $195 $(127)
Effective tax rate 18.3% 24.3% 21.1% 23.4%
The decrease in provision for income taxes was driven by lower taxable income in the third quarter and year to date 2022 as well as the recognition of more favorable tax items in 2022 than in 2021.
17--------------------------------------------------------------------------------
Table of Contents
GAAP to Non-GAAP Reconciliation
Earnings
Per
(Dollars in Millions, Except per Operating Income before
Diluted
Share Data) Income Income Taxes Net Income
Share
Three Months EndedOctober 29, 2022 GAAP$200 $119 $97
Loss on extinguishment of debt - - -
-
Income tax impact of items noted above - - -
-
Adjusted (non-GAAP) (1)$200 $119 $97
Three Months EndedOctober 30, 2021 GAAP$387 $321 $243
Loss on extinguishment of debt - - -
-
Income tax impact of items noted above - - -
-
Adjusted (non-GAAP) (1)$387 $321 $243
Nine Months EndedOctober 29, 2022 GAAP$548 $322 $254
Loss on extinguishment of debt - - -
-
Income tax impact of items noted above - - -
-
Adjusted (non-GAAP) (1)$548 $322 $254
Nine Months EndedOctober 30, 2021 GAAP$1,230 $834 $639
Loss on extinguishment of debt - 201 201
1.32
Income tax impact of items noted above - - (50) (0.33) Adjusted (non-GAAP)$1,230 $1,035 $790 $5.18 (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.
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 and transportation inflation, product cost 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; and third we return
excess cash to shareholders through our share repurchase program. In addition,
when appropriate, we will complete liability management transactions.
18--------------------------------------------------------------------------------
Table of Contents
Our period-end cash and cash equivalents balance decreased to$194 million from$1.9 billion in the third quarter of 2021. Our cash and cash equivalents balance includes short-term investments of$8 million and$1.6 billion as ofOctober 29, 2022 , andOctober 30, 2021 , respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments. We also place dollar limits on our investments in individual funds or instruments.
The following table presents our primary uses and sources of cash:
Cash Uses Cash Sources
• •
Operational needs, including salaries, Cash flow from operations
rent, taxes, and other operating costs •
• Line of credit under our revolving
Inventory credit facility
• •
Capital expenditures Issuance of debt
•
Dividend payments
•
Share repurchases
•
Debt reduction
Nine Months Ended
(Dollars in Millions) October 29, 2022 October 30, 2021 Change
Net cash (used in) provided by:
Operating activities $(425) $1,774 $(2,199)
Investing activities (702) (391) (311)
Financing activities (266) (1,781) 1,515
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 on our debt borrowings.
Operating activities used $425 million of cash year to date 2022 compared to
$1.8 billion of cash generated year to date 2021. Operating cash flow decreased
due to decreased net income and an increase in inventory driven by beauty
inventory to support the Sephora shop-in-shop rollouts as well as rebuilding
inventory to more normalized levels.
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$702 million year to date 2022 and$391 million year to date 2021. The increase was primarily driven by in-store investments related toSephora shop-in-shop build-outs, store refreshes, and other customer experience and sales driving enhancements. Year to date 2022, we opened 399Sephora -branded retail shop-in-shops and now have a total of 599Sephora shop-in-shops open. We are planning on opening seven additional shop-in-shops in 2022 and at least 250 shop-in-shops in 2023. We are also working withSephora to have aSephora presence in the remaining approximately 300 stores. 19
--------------------------------------------------------------------------------
Table of Contents 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 the strength of our credit ratings. InSeptember 2022 ,Standard & Poor's downgraded our credit rating from BBB- to BB+. Additionally, inSeptember 2022 Moody's placed our credit rating on review for downgrade. As ofOctober 29, 2022 , our rating at Moody's remained under review.
As of
Standard &
Moody's Poor's Fitch
Long-term debt Baa2 BB+ BBB-
Outlook Under Review Stable Stable
As a result of the downgrade, the interest rate on our 3.375% notes and 9.50%
notes increased 25 bps due to the coupon adjustment provisions within these
notes. If our credit ratings are lowered further, 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 from and/or repayments of long-term debt, and dividend payments.
Financing activities used
During the year we drew on our credit facility. As of
InMarch 2021 , we issued$500 million in aggregate principal amount of 3.375% notes with semi-annual interest payments beginning inNovember 2021 . The notes include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating byS&P Global Ratings or Baa3 by Moody's Investors Service, Inc. The notes mature inMay 2031 . InApril 2021 , we completed a cash tender offer for$1.0 billion of senior unsecured debt. We recognized a$201 million loss on extinguishment of debt in the first quarter of 2021, which includes the$192 million tender premium paid to tendering note holders in accordance with the terms of the tender offer, a$6 million non-cash write-off of deferred financing costs and original issue discounts associated with the extinguished debt, and$3 million in other fees. We paid cash for treasury stock purchases of$658 million year to date 2022 and$807 million year to date 2021.$158 million of the 2022 purchases were made pursuant to a Rule 10b5-1 plan adopted inNovember 2021 . Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors. OnAugust 18, 2022 , we entered into an ASR with Goldman Sachs, pursuant to the previously announced share repurchase program, to repurchase$500 million of the Company's common stock. OnAugust 22, 2022 , we received an initial delivery of 11.8 million shares of common stock, representing 80% of the total shares that were expected to be repurchased under the ASR. Final settlement occurred 20
--------------------------------------------------------------------------------
Table of Contents
on
Cash dividend payments were
Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity are as follows:
(Dollars in Millions)October 29, 2022 October 30, 2021 Working capital$948 $1,949 Current ratio 1.21 1.49
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 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, and borrowings in our revolving credit facility, which have been disclosed in Note 3 of the Consolidated Financial Statements and under "Liquidity and Capital Resources - Financing Activities".
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 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. There have been no significant changes in the critical accounting policies and estimates discussed in our 2021 Form 10-K.
© Edgar Online, source
