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KOHLS Corp - Quarter Report: 2023 April (Form 10-Q)

10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 29, 2023

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from ________ to _________

 

Commission file number 1-11084

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KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-1630919

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

N56 W17000 Ridgewood Drive,

Menomonee Falls, Wisconsin

 

53051

(Address of principal executive offices)

 

(Zip Code)

Registrant’s telephone number, including area code (262) 703-7000

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading

Symbol(s)

Name of each exchange on

which registered

Common Stock, $.01 par value

KSS

New York Stock Exchange

 

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. Yes ☒ No ☐

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). Yes ☒ No ☐

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.

Large Accelerated Filer

 

 

Accelerated Filer

 

Non-Accelerated Filer

 

 

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

 

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 26, 2023 Common Stock, Par Value $0.01 per Share, 110,590,659 shares outstanding.

 

 


 

KOHL’S CORPORATION

INDEX

 

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements:

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Changes in Shareholders' Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7

Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

14

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

21

Item 4.

Controls and Procedures

21

 

 

 

PART II

OTHER INFORMATION

22

Item 1.

Legal Proceedings

22

Item 1A.

Risk Factors

22

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

22

Item 6.

Exhibits

23

 

Signatures

24

 

 

 


Table of Contents

 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KOHL’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in Millions)

April 29, 2023

January 28, 2023

April 30, 2022

Assets

 

 

 

Current assets:

 

 

 

Cash and cash equivalents

$286

$153

$646

Merchandise inventories

3,526

3,189

3,736

Other

347

394

381

Total current assets

4,159

3,736

4,763

Property and equipment, net

7,803

7,926

7,790

Operating leases

2,368

2,304

2,224

Other assets

380

379

476

Total assets

$14,710

$14,345

$15,253

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$1,310

$1,330

$1,679

Accrued liabilities

1,164

1,220

1,316

Borrowings under revolving credit facility

765

85

Current portion of:

 

 

 

Long-term debt

111

275

164

Finance leases and financing obligations

93

94

108

Operating leases

111

111

127

Total current liabilities

3,554

3,115

3,394

Long-term debt

1,637

1,637

1,746

Finance leases and financing obligations

2,710

2,786

2,584

Operating leases

2,634

2,578

2,474

Deferred income taxes

129

129

209

Other long-term liabilities

326

337

390

Shareholders’ equity:

 

 

 

Common stock

2

4

4

Paid-in capital

3,489

3,479

3,395

Treasury stock, at cost

(2,569)

(13,715)

(13,150)

Retained earnings

2,798

13,995

14,207

Total shareholders’ equity

$3,720

$3,763

$4,456

Total liabilities and shareholders’ equity

$14,710

$14,345

$15,253

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

Quarter Ended

(Dollars in Millions, Except per Share Data)

April 29, 2023

April 30, 2022

Net sales

$3,355

$3,471

Other revenue

216

244

Total revenue

3,571

3,715

Cost of merchandise sold

2,047

2,140

Operating expenses:

 

 

Selling, general, and administrative

1,238

1,293

Depreciation and amortization

188

200

Operating income

98

82

Interest expense, net

84

68

Income before income taxes

14

14

Provision (benefit) for income taxes

Net income

$14

$14

Net income per share:

 

 

Basic

$0.13

$0.11

Diluted

$0.13

$0.11

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

Quarter Ended

(Dollars in Millions, Except per Share Data)

April 29, 2023

April 30, 2022

Common stock

 

 

Balance, beginning of period

$4

$4

Stock-based awards

Retirement of treasury stock

(2)

Balance, end of period

$2

$4

 

 

 

Paid-in capital

 

 

Balance, beginning of period

$3,479

$3,375

Stock-based awards

10

20

Balance, end of period

$3,489

$3,395

 

 

 

Treasury stock

 

 

Balance, beginning of period

$(13,715)

$(12,975)

Treasury stock purchases

(158)

Stock-based awards

(12)

(18)

Retirement of treasury stock

11,157

Dividends paid

1

1

Balance, end of period

$(2,569)

$(13,150)

 

 

 

Retained earnings

 

 

Balance, beginning of period

$13,995

$14,257

Net income

14

14

Retirement of treasury stock

(11,155)

Dividends paid

(56)

(64)

Balance, end of period

$2,798

$14,207

 

 

 

Total shareholders' equity, end of period

$3,720

$4,456

 

 

 

Common stock

 

 

Shares, beginning of period

378

377

Stock-based awards

Retirement of treasury stock

(217)

Shares, end of period

161

377

Treasury stock

 

 

Shares, beginning of period

(267)

(246)

Treasury stock purchases

(3)

Retirement of treasury stock

217

Shares, end of period

(50)

(249)

Total shares outstanding, end of period

111

128

 

 

 

Dividends paid per common share

$0.50

$0.50

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Operating activities

 

 

Net income

$14

$14

Adjustments to reconcile net income to net cash used in operating activities:

 

 

Depreciation and amortization

188

200

Share-based compensation

9

18

Deferred income taxes

1

2

Non-cash lease expense

25

31

Other non-cash items

(4)

3

Changes in operating assets and liabilities:

 

 

Merchandise inventories

(336)

(668)

Other current and long-term assets

49

(42)

Accounts payable

(20)

(4)

Accrued and other long-term liabilities

(101)

17

Operating lease liabilities

(27)

(31)

Net cash used in operating activities

(202)

(460)

Investing activities

 

 

Acquisition of property and equipment

(94)

(221)

Proceeds from sale of real estate

1

4

Other

(1)

Net cash used in investing activities

(94)

(217)

Financing activities

 

 

Net borrowings under revolving credit facility

680

Treasury stock purchases

(158)

Shares withheld for taxes on vested restricted shares

(12)

(18)

Dividends paid

(55)

(63)

Repayment of long-term borrowings

(164)

Finance lease and financing obligation payments

(25)

(29)

Proceeds from financing obligations

5

4

Net cash provided by (used in) financing activities

429

(264)

Net increase (decrease) in cash and cash equivalents

133

(941)

Cash and cash equivalents at beginning of period

153

1,587

Cash and cash equivalents at end of period

$286

$646

Supplemental information

 

 

Interest paid, net of capitalized interest

$60

$45

Income taxes paid

2

5

 

See accompanying Notes to Consolidated Financial Statements

 

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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 28, 2023 (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.

Treasury Stock

We retired 217 million shares of treasury stock during the first quarter of 2023. The shares were returned to the status of authorized but unissued shares. The retirement of treasury stock is recognized as a deduction from common stock for the shares' par value and any excess of cost over par as a deduction from retained earnings.

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 29, 2023

April 30, 2022

Women's

$988

$1,077

Men's

695

710

Accessories (including Sephora)

512

390

Home

433

525

Children's

403

411

Footwear

324

358

Net Sales

$3,355

$3,471

 

Unredeemed gift cards and merchandise return card liabilities totaled $317 million as of April 29, 2023, $356 million as of January 28, 2023, and $312 million as of April 30, 2022. In the first quarter of 2023 and 2022, net sales of $68 million and $74 million, respectively, were recognized from gift cards redeemed during the current year and issued in prior years.

3. Debt

Outstanding borrowings under the revolving credit facility, recorded as short-term debt, were $765 million as of April 29, 2023, and approximately $735 million remained available under the revolver as of that date. No amounts were outstanding at April 30, 2022 under our previous credit agreement.

 

 

 

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Long-term debt, which excludes borrowings on the revolving credit facility, consists of the following unsecured debt:

 

 

 

 

Outstanding

Maturity (Dollars in Millions)

Effective Rate at Issuance

Coupon Rate

April 29,
2023

January 28,
2023

April 30,
2022

2023

3.25%

3.25%

$—

$164

$164

2023

4.78%

4.75%

111

111

111

2025

9.50%

9.75%

113

113

113

2025

4.25%

4.25%

353

353

353

2029

7.36%

7.25%

42

42

42

2031

3.40%

3.63%

500

500

500

2033

6.05%

6.00%

112

112

112

2037

6.89%

6.88%

101

101

101

2045

5.57%

5.55%

427

427

427

Outstanding unsecured senior debt

 

 

1,759

1,923

1,923

Unamortized debt discounts and deferred financing costs

 

 

(11)

(11)

(13)

Current portion of unsecured senior debt

 

 

(111)

(275)

(164)

Long-term unsecured senior debt

 

 

$1,637

$1,637

$1,746

Effective interest rate at issuance

 

 

5.04%

4.89%

4.89%

 

Our estimated fair value of unsecured senior long-term debt is determined using Level 1 inputs, using financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our unsecured senior debt was $1.3 billion at April 29, 2023, $1.6 billion at January 28, 2023, and $1.9 billion at April 30, 2022.

In February 2023, $164 million in aggregate principal amount of our 3.25% notes matured and was repaid.

During the first quarter of 2023, S&P downgraded our senior unsecured credit rating from BB+ to BB and Moody's downgraded our rating from Ba2 to Ba3. As a result of the downgrades, the interest rate on our 3.375% notes due May 2031 and 9.50% notes due May 2025 will increase another 50 bps in May 2023 due to the coupon adjustment provisions within these notes. In 2022, our credit rating was also downgraded which resulted in the interest rates increasing 75 bps, of which 25 bps was effective in 2022 and the remaining 50 will become effective in May 2023. In total, the interest rate of the notes will increase 125 bps since their issuance, of which 25 bps was in effect during the three fiscal months ended April 29, 2023 and the remaining 100 bps will be effective in May 2023.

Our various debt agreements contain covenants including limitations on additional indebtedness and certain financial tests. As of April 29, 2023, 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 payments that are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options.

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.

 

 

 

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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 have 607 full size Sephora shop-in-shops within our Kohl's stores as of the end of the first quarter of 2023. We plan on opening at least 250 of the full size shops in 2023. Due to the investments we are making in the shop-in-shops, we reassessed our lease term when construction began as these assets will have significant economic value to us when 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

 

 

 

(Dollars in Millions)

Classification

April 29,
2023

January 28,
2023

April 30,
2022

Assets

 

 

 

 

Operating leases

Operating leases

$2,368

$2,304

$2,224

Finance leases

Property and equipment, net

1,950

2,033

1,883

Total operating and finance leases

4,318

4,337

4,107

Liabilities

 

 

 

 

Current

 

 

 

 

Operating leases

Current portion of operating leases

111

111

127

Finance leases

Current portion of finance leases and financing obligations

76

76

82

Noncurrent

 

 

 

 

Operating leases

Operating leases

2,634

2,578

2,474

Finance leases

Finance leases and financing obligations

2,271

2,344

2,140

Total operating and finance leases

$5,092

$5,109

$4,823

 

Consolidated Statement of Operations

Quarter Ended

(Dollars in Millions)

Classification

April 29, 2023

April 30, 2022

Operating leases

Selling, general, and administrative

$67

$69

Finance leases

 

 

 

Amortization of leased assets

Depreciation and amortization

32

29

Interest on leased assets

Interest expense, net

36

32

Total operating and finance leases

 

$135

$130

 

Consolidated Statement of Cash Flows

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Cash paid for amounts included in the measurement of leased liabilities

 

 

Operating cash flows from operating leases

$69

$70

Operating cash flows from finance leases

35

30

Financing cash flows from finance leases

21

22

 

 

 

 

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Table of Contents

 

 

The following table summarizes future lease payments by fiscal year:

 

 

April 29, 2023

(Dollars in Millions)

Operating Leases

Finance Leases

Total

2023

$193

$159

$352

2024

253

208

461

2025

245

202

447

2026

238

201

439

2027

237

202

439

After 2027

3,672

3,439

7,111

Total lease payments

$4,838

$4,411

$9,249

Amount representing interest

(2,093)

(2,064)

(4,157)

Lease liabilities

$2,745

$2,347

$5,092

The following table summarizes weighted-average remaining lease term and discount rate:

 

 

April 29, 2023

January 28, 2023

Weighted-average remaining term (years)

 

 

   Operating leases

20

20

   Finance leases

20

20

Weighted-average discount rate

 

 

   Operating leases

6%

6%

   Finance leases

6%

6%

 

Other lease information is as follows:

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Property and equipment acquired (disposed) through exchange of:

 

 

Finance lease liabilities

$(56)

$472

Operating lease liabilities

74

11

 

Financing Obligations

The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:

 

Consolidated Balance Sheets

 

 

 

(Dollars in Millions)

Classification

April 29,
2023

January 28,
2023

April 30,
2022

Assets

 

 

 

 

   Financing obligations

Property and equipment, net

$47

$49

$53

Liabilities

 

 

 

 

   Current

Current portion of finance leases and financing obligations

17

18

26

   Noncurrent

Finance leases and financing obligations

439

442

444

Total financing obligations

$456

$460

$470

 

Consolidated Statement of Operations

Quarter Ended

(Dollars in Millions)

Classification

April 29, 2023

April 30, 2022

Amortization of financing obligation assets

Depreciation and amortization

2

2

Interest on financing obligations

Interest expense, net

16

12

Total financing obligations

 

$18

$14

 

 

 

 

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Consolidated Statement of Cash Flows

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Cash paid for and proceeds from amounts included in the measurement of financing obligations

 

 

Operating cash flows from financing obligations

$16

$12

Financing cash flows from financing obligations

4

7

Proceeds from financing obligations

5

4

The following table summarizes future financing obligation payments by fiscal year:

 

 

April 29, 2023

(Dollars in Millions)

Financing Obligations

2023

$58

2024

77

2025

75

2026

74

2027

71

After 2027

931

Total lease payments

$1,286

Non-cash gain on future sale of property

157

Amount representing interest

(987)

Financing obligation liability

$456

 

The following table summarizes the weighted-average remaining term and discount rate for financing obligations:

 

 

April 29, 2023

January 28, 2023

Weighted-average remaining term (years)

14

13

Weighted-average discount rate

14%

14%

 

5. Stock-Based Awards

The following table summarizes our stock-based awards activity for the three months ended April 29, 2023:

 

 

Nonvested Restricted Stock Awards and Units

Performance Share Units

(Shares and Units in Thousands)

Shares

Weighted
Average
Grant Date
Fair Value

Units

Weighted
Average
Grant Date
Fair Value

Balance - January 28, 2023

2,439

$39.40

813

$45.87

Granted

1,625

22.55

683

20.37

Exercised/vested

(704)

39.56

(582)

23.78

Forfeited/expired

(225)

33.57

(59)

67.99

Balance - April 29, 2023

3,135

$31.05

855

$39.01

 

In 2019, we issued 1,747,441 stock warrants. The total vested and unvested warrants as of April 29, 2023 were 1,397,953 and 349,488, respectively.

 

 

 

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6. Contingencies

On September 2, 2022, Sean Shanaphy, an alleged shareholder of the Company, filed a putative class action lawsuit in the U.S. District Court for the Eastern District of Wisconsin against the Company, its directors, and its Chief Financial Officer alleging violations of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934. Shanaphy v. Kohl’s Corporation, No. 2:22-cv- 01016-LA (E.D. Wis.). The plaintiff asserts claims on behalf of persons and entities that purchased or otherwise acquired the Company’s securities between October 20, 2020 and May 19, 2022, and seeks compensatory damages, interest, fees, and costs. The complaint alleges that members of the putative class suffered losses as a result of (1) false or misleading statements and withholding of information regarding the conception, execution, and outcomes of the Company’s strategic plan announced on October 20, 2020 and the Company’s financial results for the first quarter of fiscal 2022 and (2) the Company’s internal controls over financial reporting, disclosure controls, and corporate governance mechanisms. The case is in its early stages. Lead plaintiff applications were submitted on November 1, 2022, and a lead plaintiff has not yet been selected. The Company intends to file a motion to dismiss the complaint and to vigorously defend against these claims. Due to the early stages of this matter, the Company is unable to estimate a reasonably possible range of loss, if any, that may result from this matter.

In addition to what is noted above, we are subject to certain legal proceedings and claims arising out of the ordinary conduct of our business. In the opinion of management, the outcome of these proceedings and claims will not have a material adverse effect on our Consolidated Financial Statements.

7. Income Taxes

The effective income tax rate for the first quarter of 2023 was 3.8% compared to a (2.8%) net benefit for the first quarter of 2022. In both periods, the tax rate was driven by the recognition of favorable tax items. The impact of the benefit of the favorable tax items, when compared to a low pre-tax income, results in the low tax rate for each period.

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 units and awards and stock warrants. Potentially dilutive shares include unvested restricted stock units and awards, performance share units, and warrants 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

(Dollars and Shares in Millions, Except per Share Data)

April 29,
2023

April 30,
2022

Numerator—Net income

$14

$14

Denominator—Weighted-average shares:

 

 

Basic

110

127

Dilutive impact

1

2

Diluted

111

129

Net income per share:

 

 

Basic

$0.13

$0.11

Diluted

$0.13

$0.11

 

 

 

 

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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 29,
2023

April 30,
2022

Anti-dilutive shares

3

3

 

9. Subsequent Events

On May 10, 2023, the Board of Directors of Kohl's Corporation declared a quarterly cash dividend of $0.50 per share. The dividend will be paid on June 21, 2023, to all shareholders of record at the close of business on June 7, 2023.

 

 

 

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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 29, 2023 or April 30, 2022.

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 “2023 Financial and Capital Allocation 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 2022 Form 10-K, 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 1,171 stores and a website (www.Kohls.com) as of April 29, 2023. 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 and store size, as well as Sephora at Kohl's shop-in-shop. 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 3.3%, to $3.4 billion, with comparable sales down 4.3%.
Gross margin as a percentage of net sales was 39.0%, an increase of 67 basis points to last year.
SG&A expenses decreased 4.2%, to $1.2 billion. As a percentage of total revenue, SG&A expenses were 34.7%, a decrease of 13 basis points.
Operating income was $98 million compared to $82 million in the prior year. As a percentage of total revenue, operating income was 2.8%, an increase of 55 basis points.
Net income was $14 million, or $0.13 per share. This compares to net income of $14 million, or $0.11 per share in the prior year.
Inventory was $3.5 billion, a decrease of 6%.
Operating cash flow was a use of $(202) million.

Our Strategy

Kohl's is focused on delivering long-term shareholder value through driving improved sales and profitability through four key strategies: driving top line growth, delivering a long-term operating margin of 7% to 8%, maintaining disciplined capital management, and sustaining an agile, accountable, and inclusive culture. In 2023, the Company outlined the following priorities to drive this strategy: enhancing the customer experience, accelerating and simplifying its value strategies, managing inventory and expenses with discipline, and strengthening the balance sheet.

 

 

 

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2023 Financial and Capital Allocation Outlook

For the full year 2023, the Company affirms its financial outlook and currently expects the following:

Net sales: A decrease of (2%) to (4%), includes the impact of the 53rd week which is worth approximately 1%.
Operating margin: Approximately 4.0%.
Diluted earnings per share: In the range of $2.10 to $2.70, excluding any non-recurring charges.
Capital expenditures: $600 million to $650 million, including expansion of its Sephora partnership and store refresh activity.

Results of Operations

Total Revenue

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

Net sales

$3,355

$3,471

$(116)

Other revenue

216

244

(28)

Total revenue

$3,571

$3,715

$(144)

 

Net sales decreased 3.3% in the first quarter of 2023 compared to the first quarter of 2022.

Comparable sales decreased 4.3% driven by lower digital sales partially offset by positive store sales. Digital sales decreased 19.6%, and digital penetration represented 26% of net sales compared to 30% for the first quarter of 2022. Store sales saw an increase in store traffic and higher units per transaction which more than offset a lower average ticket driven by our clearance actions.
From a line of business perspective, Accessories, which includes Sephora, Children's, and Men's outperformed the Company average.
Active outperformed the company average with positive growth in apparel and continued success in outdoor.

Net sales includes revenue from the sale of merchandise, net of expected returns and deferrals due to future performance obligations, 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 that have been relocated 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 may not be consistent with the similarly-titled measures reported by other companies.

Other revenue, which is primarily our credit business, decreased $28 million. The decrease was driven by normalizing credit loss rates.

 

 

 

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Cost of Merchandise Sold and Gross Margin

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

Net sales

$3,355

$3,471

$(116)

 

Cost of merchandise sold

2,047

2,140

(93)

 

Gross margin

$1,308

$1,331

$(23)

 

Gross margin as a percent of net sales

39.0%

38.3%

67

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 with that of other retailers because we include distribution center and buying costs in selling, general, and administrative (SG&A) 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 2023, gross margin was 39.0%, an increase of 67 basis points compared to the first quarter of 2022. The increase in gross margin was driven by continued benefit from simplifying our value strategies, lower digital-related cost of shipping, and reduced freight expense. Partially offsetting this was headwinds from higher product cost inflation and higher shrink.

Selling, General, and Administrative Expense (“SG&A”)

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

SG&A

$1,238

$1,293

$(55)

 

As a percent of total revenue

34.7%

34.8%

(13)

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 29, 2023

Corporate and other

$(18)

Store expenses

(17)

Marketing

(15)

Distribution

(5)

Total decrease

$(55)

 

 

 

 

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SG&A expenses decreased $55 million, or 4.2%, to $1.2 billion. As a percentage of revenue, SG&A leveraged by 13 basis points. The decrease in SG&A during the quarter was primarily driven by lower strategic investments made in our stores to support the Sephora shop-in-shops openings and store refreshes offset by increased wages. Additionally, corporate costs decreased due to $17 million of expenses related to the proxy contest and sale process incurred in the prior year. Lastly, marketing expenses decreased driven by lower investments across all channels.

Other Expenses

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

Depreciation and amortization

$188

$200

$(12)

Interest expense, net

84

68

16

 

The decrease in depreciation and amortization was primarily driven by reduced capital spending in technology.

Net interest expense increased due to Sephora related lease amendments as well as borrowings under the revolving credit facility.

Income Taxes

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

Provision (benefit) for income taxes

$—

$—

$—

Effective tax rate

3.8%

(2.8%)

 

In both periods, the tax rate was driven by the recognition of favorable tax items. The rates, coupled with low pre-tax income, result in a minimal provision (benefit) for income taxes for each period.

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.

We expect that our operations will continue to be influenced by general economic conditions, including food, fuel, energy prices, higher unemployment, wage inflation, 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

Capital Allocation

Our capital allocation strategy is to invest to maximize our overall long-term return and maintain a strong balance sheet, with a long-term objective of achieving an 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 debt reduction transactions.

 

 

 

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We will continue to invest in the business, as we plan to invest $600 to $650 million in 2023, including the expansion of the Sephora shops and store refresh activity. We remain committed to the dividend, and on May 10, 2023, our Board of Directors declared a quarterly cash dividend of $0.50 per share. The dividend will be paid on June 21, 2023 to all shareholders of record at the close of business on June 7, 2023. Last, we retired $164 million of notes due in February 2023, and plan on retiring $111 million of notes due December 2023 when they mature. We are not planning any share repurchases until our balance sheet is strengthened on a path towards the long term target leverage ratio of 2.5 times adjusted earnings before interest, taxes, depreciation, amortization, and rent ("EBITDAR") utilizing an eight times cash rent calculation for lease obligations.

Our period-end cash and cash equivalents balance decreased to $286 million from $646 million in the first quarter of 2022. Our cash and cash equivalents balance includes short-term investments of $108 million and $431 million as of April 29, 2023, and April 30, 2022, 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
Debt reduction
Share repurchases

 

Cash flow from operations
Line of credit under our revolving credit facility
Issuance of debt

 

 

 

Quarter Ended

(Dollars in Millions)

April 29, 2023

April 30, 2022

Change

Net cash (used in) provided by:

 

 

 

Operating activities

$(202)

$(460)

$258

Investing activities

(94)

(217)

123

Financing activities

429

(264)

693

 

Operating Activities

Our operating cash outflows generally consist of payments to our employees for wages, salaries and other 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.

Operating activities used $202 million in the first quarter of 2023 compared to $460 million used in the first quarter of 2022. Operating cash flow increased year over year due to not repeating the inventory build that occurred in 2022.

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.

 

 

 

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Investing activities used $94 million in the first quarter of 2023 and $217 million in the first quarter of 2022. The decrease was primarily driven by less rollouts of Sephora shop-in-shop build-outs and store refreshes planned for 2023.

In 2023, we are planning to open at least 250 full size 2,500 square feet shops and 45 small format 750 square feet Sephora shop-in-shops. At the end of 2023 we plan to have a Sephora presence in over 900 of our stores, including 860 full size and 50 small format shop-in-shops.

Financing Activities

Our financing strategy is to ensure adequate 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.

During the first quarter of 2023, S&P downgraded our senior unsecured credit rating from BB+ to BB and Moody's downgraded our rating from Ba2 to Ba3 while both also revising their outlook to negative. While Fitch reaffirmed our credit rating, they also revised their outlook to negative.

As of April 29, 2023, our senior unsecured credit ratings and outlook were as follows:

 

 

Moody’s

S&P

Fitch

Long-term debt

Ba3

BB

BBB-

Outlook

Negative

Negative

Negative

 

As a result of the downgrades, the interest rate on our 3.375% notes due May 2031 and 9.50% notes due May 2025 will increase another 50 bps in May 2023 due to the coupon adjustment provisions within these notes. In 2022, our credit rating was also downgraded which resulted in the interest rates increasing 75 bps, of which 25 bps was effective in 2022 and the remaining 50 will become effective in May 2023. In total, the interest rate of the notes will increase 125 bps since their issuance, of which 25 bps was in effect during the three months ended April 29, 2023 and the remaining 100 bps will be effective in May 2023. 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 and/or repayments of long-term debt, and dividend payments. Financing cash outflows also include payments to our landlords for leases classified as financing leases and financing obligations.

Financing activities generated $429 million in the first quarter of 2023 and used $264 million in the first quarter of 2022.

During the quarter we drew $680 million on our credit facility. As of April 29, 2023, outstanding borrowings under the revolving credit facility were $765 million and were recorded as short-term debt. Approximately $735 million remained available under the revolver as of that date. No amounts were outstanding at April 30, 2022 under our previous credit agreement.

In February 2023, $164 million in aggregate principal amount of our 3.25% notes matured and was repaid.

 

 

 

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There was no cash used for treasury stock purchases in the first quarter of 2023 compared to $158 million used in the first quarter of 2022. 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 $55 million ($0.50 per share) in the first quarter of 2023 compared to $63 million ($0.50 per share) in the first quarter of 2022.

Key Financial Ratios

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

 

(Dollars in Millions)

April 29, 2023

April 30, 2022

Working capital

$605

$1,369

Current ratio

1.17

1.40

 

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 and an increase in borrowings under the revolver.

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. As of April 29, 2023, we were in compliance with all covenants and expect to remain in compliance during the remainder of 2023.

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our 2022 Form 10-K other than borrowings under 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 April 29, 2023.

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 2022 Form 10-K.

 

 

 

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in the market risks described in our 2022 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 29, 2023 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

For a description of our legal proceedings, see Note 7, Contingencies, of the notes to our consolidated financial statements included in our 2022 Form 10-K.

Item 1A. Risk Factors

There have been no significant changes in the Risk Factors described in our 2022 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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 29, 2023:

 

(Dollars in Millions, Except per Share Data)

Total Number
of Shares
Purchased

Average
Price
Paid Per
Share

Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs

Approximate
Dollar Value
of Shares
that May Yet
Be Purchased
Under the Plans
or Programs

January 29 - February 25, 2023

22,722

$32.54

$2,476

February 26 - April 1, 2023

445,666

$25.34

$2,476

April 2 - April 29, 2023

7,714

$24.77

$2,476

Total

476,102

$25.67

 

 

 

 

 

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Item 6. Exhibits

 

Exhibit

 

Description

10.1

 

Executive Compensation Agreement between David Alves and Kohl's, Inc. dated as of March 27, 2023, incorporated by reference to Exhibit 10.1 to Amendment No. 1 to the Company’s Current Report on Form 8-K filed on March 31, 2023

10.2

 

Restricted Stock Unit Agreement by and between Jill Timm and Kohl's Corporation dated as of April 21, 2023, incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed on April 25, 2023

10.3

 

Employment Agreement between Thomas Kingsbury and Kohl's, Inc. and Kohl’s Corporation dated as of May 10, 2023, incorporated by reference to Exhibit 10.1 to Amendment No. 2 to the Company’s Current Report on Form 8-K filed on May 12, 2023

10.4

 

Executive Compensation Agreement between Jennifer Kent and Kohl's, Inc. dated as of February 20, 2023

10.5

 

Executive Compensation Agreement between Nicholas Jones and Kohl's, Inc. dated as of March 20, 2023

10.6

 

Letter Agreement between Marc Chini and Kohl’s, Inc. dated as of March 21, 2023

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1

 

Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2

 

Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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)

 

 

 

 

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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 1, 2023

/s/ Jill Timm

 

Jill Timm

On behalf of the Registrant and as Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

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