KSS 10-Q
KOHLS Corp (KSS)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the Transition period from ________ to _________
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on which registered |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 27, 2022 Common Stock, Par Value $0.01 per Share,
KOHL’S CORPORATION
INDEX
PART I |
3 |
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Item 1. |
3 |
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3 |
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4 |
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5 |
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6 |
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7 |
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Item 2. |
Management's Discussion and Analysis of Financial Condition and Results of Operations |
13 |
Item 3. |
20 |
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Item 4. |
20 |
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PART II |
21 |
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Item 1A. |
21 |
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Item 2. |
21 |
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Item 6. |
22 |
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23 |
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
KOHL’S CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in Millions) |
April 30, 2022 |
January 29, 2022 |
May 1, 2021 |
Assets |
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Current assets: |
|
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Cash and cash equivalents |
$ |
$ |
$ |
Merchandise inventories |
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Other |
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Total current assets |
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Property and equipment, net |
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Operating leases |
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Other assets |
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Total assets |
$ |
$ |
$ |
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Liabilities and Shareholders’ Equity |
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Current liabilities: |
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Accounts payable |
$ |
$ |
$ |
Accrued liabilities |
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Current portion of: |
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Long-term debt |
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— |
— |
Finance lease and financing obligations |
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Operating leases |
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Total current liabilities |
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Long-term debt |
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Finance lease and financing obligations |
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Operating leases |
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Deferred income taxes |
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Other long-term liabilities |
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Shareholders’ equity: |
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Common stock |
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Paid-in capital |
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Treasury stock, at cost |
( |
( |
( |
Retained earnings |
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Total shareholders’ equity |
$ |
$ |
$ |
Total liabilities and shareholders’ equity |
$ |
$ |
$ |
See accompanying Notes to Consolidated Financial Statements
3
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
|
Quarter Ended |
|
(Dollars in Millions, Except per Share Data) |
April 30, 2022 |
May 1, 2021 |
Net sales |
$ |
$ |
Other revenue |
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Total revenue |
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Cost of merchandise sold |
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Operating expenses: |
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Selling, general, and administrative |
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Depreciation and amortization |
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Operating income |
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Interest expense, net |
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Loss on extinguishment of debt |
— |
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Income before income taxes |
|
|
(Benefit) for income taxes |
— |
( |
Net income |
$ |
$ |
Net income per share: |
|
|
Basic |
$ |
$ |
Diluted |
$ |
$ |
See accompanying Notes to Consolidated Financial Statements
4
KOHL’S CORPORATION
(Unaudited)
|
Quarter Ended |
|
(Dollars in Millions, Except per Share Data) |
April 30, 2022 |
May 1, 2021 |
Common stock |
|
|
Balance, beginning of period |
$ |
$ |
Stock-based awards |
— |
— |
Balance, end of period |
$ |
$ |
|
|
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Paid-in capital |
|
|
Balance, beginning of period |
$ |
$ |
Stock-based awards |
|
|
Balance, end of period |
$ |
$ |
|
|
|
Treasury stock |
|
|
Balance, beginning of period |
$( |
$( |
Treasury stock purchases |
( |
( |
Stock-based awards |
( |
( |
Dividends paid |
|
— |
Balance, end of period |
$( |
$( |
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|
Retained earnings |
|
|
Balance, beginning of period |
$ |
$ |
Net income |
|
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Dividends paid |
( |
( |
Balance, end of period |
$ |
$ |
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Total shareholders' equity, end of period |
$ |
$ |
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Common stock |
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Shares, beginning of period |
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Stock-based awards |
— |
— |
Shares, end of period |
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Treasury stock |
|
|
Shares, beginning of period |
( |
( |
Treasury stock purchases |
( |
( |
Shares, end of period |
( |
( |
Total shares outstanding, end of period |
|
|
|
|
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Dividends paid per common share |
$ |
$ |
See accompanying Notes to Consolidated Financial Statements
5
KOHL’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Quarter Ended |
|
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Operating activities |
|
|
Net income |
$ |
$ |
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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Share-based compensation |
|
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Deferred income taxes |
|
( |
Loss on extinguishment of debt |
— |
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Non-cash lease expense |
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Other non-cash expense |
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Changes in operating assets and liabilities: |
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Merchandise inventories |
( |
( |
Other current and long-term assets |
( |
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Accounts payable |
( |
( |
Accrued and other long-term liabilities |
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Operating lease liabilities |
( |
( |
Net cash (used in) provided by operating activities |
( |
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Investing activities |
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Acquisition of property and equipment |
( |
( |
Proceeds from sale of real estate |
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Net cash used in investing activities |
( |
( |
Financing activities |
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Proceeds from issuance of debt |
— |
|
Deferred financing costs |
— |
( |
Treasury stock purchases |
( |
( |
Shares withheld for taxes on vested restricted shares |
( |
( |
Dividends paid |
( |
( |
Reduction of long-term borrowings |
— |
( |
Premium paid on redemption of debt |
— |
( |
Finance lease and financing obligation payments |
( |
( |
Proceeds from financing obligations |
|
— |
Proceeds from stock option exercises |
— |
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Other |
— |
( |
Net cash used in financing activities |
( |
( |
Net decrease in cash and cash equivalents |
( |
( |
Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period |
$ |
$ |
Supplemental information |
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Interest paid, net of capitalized interest |
$ |
$ |
Income taxes paid |
|
|
See accompanying Notes to Consolidated Financial Statements
6
KOHL’S CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for fiscal year end Consolidated Financial Statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended January 29, 2022 (Commission File No. 1-11084) as filed with the Securities and Exchange Commission.
Due to the seasonality of the business of Kohl’s Corporation (the “Company,” “Kohl’s,” “we,” “our,” or “us”), results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.
We operate as a single business unit.
Recent Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material impact on our Consolidated Financial Statements.
2. Revenue Recognition
The following table summarizes net sales by line of business:
|
Quarter Ended |
|
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Women's |
$ |
$ |
Men's |
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Home |
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Children's |
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Accessories |
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Footwear |
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Net Sales |
$ |
$ |
Unredeemed gift cards and merchandise return card liabilities totaled $
7
3. Debt
Long-term debt, which includes draws on the revolving credit facility, consists of the following unsecured debt:
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Outstanding |
||
Maturity (Dollars in Millions) |
Effective Rate |
Coupon Rate |
April 30, |
January 29, |
May 1, |
2023 |
$ |
$ |
$ |
||
2023 |
|
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2025 |
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2025 |
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2029 |
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2031 |
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2033 |
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2037 |
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2045 |
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Outstanding unsecured senior debt |
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Unamortized debt discounts and deferred financing costs |
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( |
( |
( |
Current portion of unsecured senior debt |
|
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( |
— |
— |
Long-term unsecured senior debt |
|
|
$ |
$ |
$ |
Effective interest rate |
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|||
Our unsecured senior long-term debt is classified as Level 1, financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our unsecured senior debt was $
Our various debt agreements contain covenants including limitations on additional indebtedness and certain financial tests. As of April 30, 2022, we were in compliance with all covenants of the various debt agreements.
4. Leases
We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a percentage of sales over contractual levels or which are adjusted periodically for inflation. Our typical store lease has an initial term of
Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on the value of the lease liability and are adjusted for any lease payments made to the lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee.
Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments.
Leases with a term of 12 months or less are excluded from the balance; we recognize lease expense for these leases on a straight-line basis over the lease term. We combine lease and non-lease components for new and modified leases.
We opened an additional
8
the lease term becomes exercisable. The impact of these assessments resulted in additional lease term, additional lease assets and liabilities, and, in some cases, changes to the classification.
The following tables summarize our operating and finance leases and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheets |
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(Dollars in Millions) |
Classification |
April 30, |
January 29, |
May 1, |
Assets |
|
|
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|
Operating leases |
Operating leases |
$ |
$ |
$ |
Finance leases |
|
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Total operating and finance leases |
|
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Liabilities |
|
|
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Current |
|
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Operating leases |
Current portion of operating leases |
|
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Finance leases |
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Noncurrent |
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Operating leases |
Operating leases |
|
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Finance leases |
|
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Total operating and finance leases |
$ |
$ |
$ |
|
Consolidated Statement of Operations |
Quarter Ended |
||
(Dollars in Millions) |
Classification |
April 30, 2022 |
May 1, 2021 |
Operating leases |
Selling, general, and administrative |
$ |
$ |
Finance leases |
|
|
|
Amortization of leased assets |
Depreciation and amortization |
|
|
Interest on leased assets |
Interest expense, net |
|
|
Total operating and finance leases |
|
$ |
$ |
Consolidated Statement of Cash Flows |
Quarter Ended |
|
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Cash paid for amounts included in the measurement of leased liabilities |
|
|
Operating cash flows from operating leases |
$ |
$ |
Operating cash flows from finance leases |
|
|
Financing cash flows from finance leases |
|
|
The following table summarizes future lease payments by fiscal year:
|
April 30, 2022 |
||
(Dollars in millions) |
Operating Leases |
Finance Leases |
Total |
2022 |
$ |
$ |
$ |
2023 |
|
|
|
2024 |
|
|
|
2025 |
|
|
|
2026 |
|
|
|
After 2026 |
|
|
|
Total lease payments |
$ |
$ |
$ |
Amount representing interest |
( |
( |
( |
Lease liabilities |
$ |
$ |
$ |
9
The following table summarizes weighted-average remaining lease term and discount rate:
|
April 30, 2022 |
January 29, 2022 |
Weighted-average remaining term (years) |
|
|
Operating leases |
||
Finance leases |
||
Weighted-average discount rate |
|
|
Operating leases |
||
Finance leases |
Other lease information is as follows:
|
Quarter Ended |
|
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Property and equipment acquired through exchange of: |
|
|
Finance lease liabilities |
$ |
$ |
Operating lease liabilities |
|
|
Financing Obligations
The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:
Consolidated Balance Sheets |
|
|
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|
(Dollars in millions) |
Classification |
April 30, |
January 29, |
May 1, |
Assets |
|
|
|
|
Financing obligations |
Property and equipment, net |
$ |
$ |
$ |
Liabilities |
|
|
|
|
Current |
Current portion of finance leases and financing obligations |
|
|
|
Noncurrent |
Finance leases and financing obligations |
|
|
|
Total financing obligations |
$ |
$ |
$ |
|
Consolidated Statement of Operations |
Quarter Ended |
||
(Dollars in Millions) |
Classification |
April 30, 2022 |
May 1, 2021 |
Amortization of financing obligation assets |
Depreciation and amortization |
|
|
Interest on financing obligations |
Interest expense, net |
|
|
Total financing obligations |
|
$ |
$ |
Consolidated Statement of Cash Flows |
Quarter Ended |
|
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Cash paid for amounts included in the measurement of financing obligations |
|
|
Operating cash flows from financing obligations |
$ |
$ |
Financing cash flows from financing obligations |
|
|
Proceeds from financing obligations |
|
— |
10
The following table summarizes future financing obligation payments by fiscal year:
|
April 30, 2022 |
(Dollars in millions) |
Financing Obligations |
2022 |
$ |
2023 |
|
2024 |
|
2025 |
|
2026 |
|
After 2026 |
|
Total lease payments |
$ |
Non-cash gain on future sale of property |
|
Amount representing interest |
( |
Financing obligation liability |
$ |
The following table summarizes the weighted-average remaining term and discount rate for financing obligations:
|
April 30, 2022 |
January 29, 2022 |
Weighted-average remaining term (years) |
||
Weighted-average discount rate |
5. Stock-Based Awards
The following table summarizes our stock-based awards activity for the quarter ended April 30, 2022:
|
Stock Options |
Nonvested Stock Awards |
Performance Share Units |
|||
(Shares and Units in Thousands) |
Shares |
Weighted |
Shares |
Weighted |
Units |
Weighted |
Balance - January 29, 2022 |
|
$ |
|
$ |
|
$ |
Granted |
— |
— |
|
|
|
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Exercised/vested |
— |
— |
( |
|
— |
— |
Forfeited/expired |
— |
— |
( |
|
— |
— |
Balance - April 30, 2022 |
|
$ |
|
$ |
|
$ |
In 2019, we issued
6. Contingencies
We are subject to certain legal proceedings and claims arising out of the conduct of our business. In the opinion of management, the outcome of these proceedings and litigation will not have a material adverse impact on our Consolidated Financial Statements.
7. Income Taxes
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.
8. Net Income Per Share
Basic Net income per share is Net income divided by the average number of common shares outstanding during the period. Diluted Net income per share includes incremental shares assumed for share-based awards and stock warrants. Potentially dilutive shares include stock options, unvested restricted stock units and awards, and warrants
11
outstanding during the period, using the treasury stock method. Potentially dilutive shares are excluded from the computations of diluted earnings per share (“EPS”) if their effect would be anti-dilutive.
The information required to compute basic and diluted Net income per share is as follows:
|
Quarter Ended |
|
(Dollar and Shares in Millions, Except per Share Data) |
April 30, 2022 |
May 1, 2021 |
Numerator—Net income |
$ |
$ |
Denominator—Weighted-average shares: |
|
|
Basic |
|
|
Dilutive impact |
|
|
Diluted |
|
|
Net income per share: |
|
|
Basic |
$ |
$ |
Diluted |
$ |
$ |
The following potential shares of common stock were excluded from the diluted Net income per share calculation because their effect would have been anti-dilutive:
|
Quarter Ended |
|
(Shares in Millions) |
April 30, 2022 |
May 1, 2021 |
Anti-dilutive shares |
|
|
12
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 April 30, 2022 or May 1, 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, 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 SEC, 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 1,165 stores and a website (www.Kohls.com) as of April 30, 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 of Sephora 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:
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.
13
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 |
$6.45 - $6.85 |
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.
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 $19 million. The increase was driven by higher credit revenue due to higher late fees.
On March 14, 2022, we amended and restated our private label credit card program agreement with Capital One through March 31, 2030. The agreement will operate in substantially the same manner as it currently operates.
14
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) |
April 30, 2022 |
May 1, 2021 |
Change |
|
SG&A |
$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 |
15
SG&A expenses increased $123 million, or 10.5%, to $1.3 billion. As a percentage of revenue, SG&A deleveraged by 468 basis points. The increase in SG&A during the quarter was primarily driven by strategic investments made in our stores, including nearly $50 million in costs to support the Sephora openings, store refreshes, and reflows. In addition, Corporate and other costs increased primarily driven by $17 million of expenses related to the proxy contest and ongoing sale process. Last, distribution costs increased driven by additional units and transportation costs.
Other Expenses
|
Quarter Ended |
||
(Dollars in Millions) |
April 30, 2022 |
May 1, 2021 |
Change |
Depreciation and amortization |
$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 $201 million from the extinguishment of debt.
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
(Dollars in Millions, Except per Share Data) |
Operating Income |
Income before |
Net Income |
Earnings Per Diluted |
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 |
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.
16
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 $646 million from $1.6 billion in the first quarter of 2021. Our cash and cash equivalents balance includes short-term investments of $431 million and $1.4 billion as of April 30, 2022, and May 1, 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, rent, taxes, and other operating costs • Inventory • Capital expenditures • Dividend payments • Share repurchases • Debt reduction |
|
• Cash flow from operations • Line of credit under our revolving credit facility • Issuance of debt
|
|
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.
17
Operating activities used $460 million in the first quarter of 2022 compared to $278 million generated in the first quarter of 2021. The decrease in operating cash flow was primarily driven by an increase in inventory. The inventory increase was due to increased beauty inventory to support the Sephora shop-in-shop rollouts, elevated in-transit levels due to continued supply chain challenges, and a rebuild of inventory in key areas such as active and women's.
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 $217 million in the first quarter of 2022 and $57 million in the first quarter of 2021. The increase was driven by in-store investments related to Sephora shop-in-shop build-outs, store refreshes, and other customer experience and sales driving enhancements.
During the first quarter of 2022 we opened 48 Sephora-branded retail shop-in-shops and now have a total of 248 Sephora shop-in-shops open. We are planning on opening another 352 shop-in-shops in 2022 and 250 shop-in-shops in 2023.
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 $264 million in the first quarter of 2022 and $883 million in the first quarter of 2021.
In March 2021, we issued $500 million in aggregate principal amount of 3.375% notes with semi-annual interest payments beginning in November 2021. The notes include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating by S&P Global Ratings or Baa3 by Moody’s Investors Service, Inc. The notes mature in May 2031.
In April 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 $158 million in the first quarter of 2022 and $46 million in the first quarter of 2021. The 2022 purchases were made pursuant to a Rule 10b5-1 plan adopted in November 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.
18
Cash dividend payments were $63 million ($0.50 per share) in the first quarter of 2022 and $39 million ($0.25 per share) in the first quarter of 2021. On May 10, 2022, our Board of Directors declared a quarterly cash dividend on our common stock of $0.50 per share. The dividend is payable June 22, 2022 to shareholders of record at the close of business on June 8, 2022.
As of April 30, 2022, our credit ratings and outlook were as follows:
|
Moody’s |
Standard & |
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 April 30, 2022, we were in compliance with all covenants in our debt instruments and expect to remain in compliance during the remainder of fiscal 2022.
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 April 30, 2022.
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 U.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.
19
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no significant changes in the market risks described in our 2021 Form 10-K.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (the “Evaluation”) at a reasonable assurance level as of the last day of the period covered by this report.
Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are defined by Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") as controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended April 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
20
PART II. OTHER INFORMATION
Item 1A. Risk Factors
There have been no significant changes in the Risk Factors described in our 2021 Form 10-K, other than what is noted below.
We are engaged in a strategic review process, and there can be no assurance as to its outcome.
Our board of directors previously announced that it is engaged in a process to review strategic alternatives, including a potential sale of the company. While we have engaged with multiple parties, and have received preliminary, non-binding proposals to acquire our company, there can be no assurance that we will receive fully financed bids to acquire our company or when those bids may be received, that those proposals will result in an agreement to sell the company or that any such agreement will be consummated. If our board decides to proceed with a strategic transaction, it may not be at a price that our investors view as attractive relative to the value of our standalone strategic plan. Additionally, the closing of any such transaction would be dependent upon a number of factors that may be beyond our control, including, among other factors, market conditions, regulatory factors, industry trends, the interest of third parties in our business and the availability of financing to potential buyers on reasonable terms. If our board decides not to proceed with a strategic transaction, this could have a negative effect on the market price and volatility of our common stock. In either case, we may incur substantial expenses associated with identifying and evaluating potential strategic transactions, the process may be time consuming and disruptive to our business, and we may be subject to costly and time-consuming litigation regarding our board of directors’ decision to proceed or not to proceed with a strategic transaction. Speculation and uncertainty regarding this process may also have a negative effect on the market price and volatility of our common stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In February 2022, our Board of Directors increased the remaining share repurchase authorization under our existing share repurchase program to $3.0 billion. Purchases under the repurchase program may be made in the open market, through block trades, and other negotiated transactions. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued, or accelerated at any time.
The following table contains information for shares of common stock repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ stock-based compensation during the three fiscal months ended April 30, 2022:
(Dollars in Millions, Except per Share Data) |
Total Number |
Average |
Total Number |
Approximate |
January 30 - February 26, 2022 |
2,176,268 |
$58.60 |
2,172,300 |
$548 |
February 27 - April 2, 2022 |
817,871 |
58.79 |
541,090 |
2,976 |
April 3 - April 30, 2022 |
6,464 |
60.97 |
— |
2,976 |
Total |
3,000,603 |
$58.66 |
2,713,390 |
|
21
Item 6. Exhibits
Exhibit |
|
Description |
10.1 |
|
|
31.1 |
|
|
31.2 |
|
|
32.1 |
|
|
32.2 |
|
|
101.INS |
|
Inline XBRL Instance Document |
101.SCH |
|
Inline XBRL Taxonomy Extension Schema |
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase |
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase |
104 |
|
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101) |
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
Kohl’s Corporation (Registrant) |
|
|
Date: June 2, 2022 |
/s/ Jill Timm |
|
Jill Timm On behalf of the Registrant and as Chief Financial Officer (Principal Financial Officer) |
23