Annual Reports

 
Quarterly Reports

  • 10-Q (Dec 1, 2017)
  • 10-Q (Aug 31, 2017)
  • 10-Q (Jun 2, 2017)
  • 10-Q (Dec 2, 2016)
  • 10-Q (Sep 2, 2016)
  • 10-Q (Jun 3, 2016)

 
8-K

 
Other

KOHLS CORPORATION 10-Q 2007
Form 10-Q
Table of Contents

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

(Mark One)

 

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

For the quarterly period ended May 5, 2007

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

 


KOHL’S CORPORATION

(Exact name of the 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

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.    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    x  No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: June 5, 2007 Common Stock, Par Value $0.01 per Share, 322,625,936 shares outstanding.

 



Table of Contents

KOHL’S CORPORATION

INDEX

 

PART I

  FINANCIAL INFORMATION  

Item 1

  Financial Statements: Condensed Consolidated Balance Sheets at May 5, 2007, February 3, 2007 and April 29, 2006   3
  Condensed Consolidated Statements of Income for the Three Months Ended May 5, 2007, and April 29, 2006   4
  Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Three Months Ended May 5, 2007   5
  Condensed Consolidated Statements of Cash Flows for the Three Months Ended May 5, 2007, and April 29, 2006   6
  Notes to Condensed Consolidated Financial Statements   7-10

Item 2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations   11-19

Item 3

  Quantitative and Qualitative Disclosures about Market Risk   20

Item 4

  Controls and Procedures   21

PART II

  OTHER INFORMATION  

Item 1A

  Risk Factors   22

Item 2

  Unregistered Sales of Equity Securities and Use of Proceeds   23
  Issuer Purchases of Securities   23

Item 4

  Submission of Matters to a Vote of Security Holders   24-26

Item 6

  Exhibits   27
  Signatures  

 

2


Table of Contents

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements

KOHL’S CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(In Thousands)

 

     May 5, 2007     February 3, 2007     April 29, 2006  
     (Unaudited)     (Audited)     (Unaudited)  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 250,889     $ 189,170     $ 195,202  

Short-term investments

     252,741       431,230       1,401,136  

Merchandise inventories

     2,713,646       2,588,099       2,347,891  

Deferred income taxes

     11,590       40,190       —    

Other

     169,555       152,351       185,228  
                        

Total current assets

     3,398,421       3,401,040       4,129,457  

Property and equipment, net

     5,576,938       5,352,974       4,791,447  

Favorable lease rights, net

     216,420       219,286       209,225  

Goodwill

     9,338       9,338       9,338  

Other assets

     60,301       58,539       52,500  
                        

Total assets

   $ 9,261,418     $ 9,041,177     $ 9,191,967  
                        

Liabilities and Shareholders’ Equity

      

Current liabilities:

      

Accounts payable

   $ 1,022,304     $ 934,376     $ 868,691  

Accrued liabilities

     651,688       732,178       672,053  

Income taxes payable

     122,201       233,263       94,158  

Deferred income taxes

     —         —         3,210  

Current portion of long-term debt and capital leases

     9,921       18,841       8,440  
                        

Total current liabilities

     1,806,114       1,918,658       1,646,552  

Long-term debt and capital leases

     1,040,915       1,040,057       1,043,952  

Deferred income taxes

     255,270       243,530       210,623  

Other long-term liabilities

     248,705       235,537       211,457  

Shareholders’ equity:

      

Common stock

     3,503       3,485       3,458  

Paid-in capital

     1,847,744       1,748,792       1,615,074  

Treasury stock at cost

     (1,629,320 )     (1,628,416 )     (77,247 )

Retained earnings

     5,688,487       5,479,534       4,538,098  
                        

Total shareholders’ equity

     5,910,414       5,603,395       6,079,383  
                        

Total liabilities and shareholders’ equity

   $ 9,261,418     $ 9,041,177     $ 9,191,967  
                        

See accompanying Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

(In Thousands, Except per Share Data)

 

     Three Months (13 Weeks) Ended
     May 5, 2007    April 29, 2006

Net sales

   $ 3,572,040    $ 3,196,337

Cost of merchandise sold

     2,255,719      2,040,965
             

Gross margin

     1,316,321      1,155,372

Operating expenses:

     

Selling, general, and administrative

     856,959      768,888

Depreciation and amortization

     104,688      93,272

Preopening expenses

     8,589      10,997
             

Operating income

     346,085      282,215

Interest expense, net

     10,147      14,195
             

Income before income taxes

     335,938      268,020

Provision for income taxes

     126,985      100,775
             

Net income

   $ 208,953    $ 167,245
             

Net income per share:

     

Basic

     

Basic

   $ 0.65    $ 0.48

Average number of shares

     321,775      345,277

Diluted

     

Diluted

   $ 0.64    $ 0.48

Average number of shares

     325,068      347,285

See accompanying Notes to Condensed Consolidated Financial Statements

 

4


Table of Contents

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited) (In Thousands)

 

     Common Stock    Paid-In
Capital
   Treasury
Stock
    Retained
Earnings
   Total  
     Shares    Amount           

Balance at February 3, 2007

   348,502    $ 3,485    $ 1,748,792    $ (1,628,416 )   $ 5,479,534    $ 5,603,395  

Exercise of stock options

   1,810      18      82,537      —         —        82,555  

Excess income tax benefit from exercise of stock options

   —        —        6,856      —         —        6,856  

Share-based compensation expense

   —        —        9,559      —         —        9,559  

Treasury stock purchases

   —        —        —        (904 )     —        (904 )

Net income

   —        —        —        —         208,953      208,953  
                                          

Balance at May 5, 2007

   350,312    $ 3,503    $ 1,847,744    $ (1,629,320 )   $ 5,688,487    $ 5,910,414  
                                          

See accompanying Notes to Condensed Consolidated Financial Statements

 

5


Table of Contents

KOHL’S CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In Thousands)

 

     Three Months (13 Weeks) Ended  
     May 5, 2007     April 29, 2006  

Operating activities

    

Net income

   $ 208,953     $ 167,245  

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     104,821       93,407  

Amortization of debt discount

     53       36  

Share-based compensation

     9,100       9,918  

Excess tax benefits from share-based compensation

     (6,856 )     (6,952 )

Deferred income taxes

     40,340       19,709  

Changes in operating assets and liabilities:

    

Accounts receivable, net

     —         1,652,065  

Merchandise inventories

     (125,547 )     (110,323 )

Other current and long-term assets

     (43,561 )     (104,538 )

Accounts payable

     87,928       38,720  

Accrued and other long-term liabilities

     (67,406 )     56,096  

Income taxes

     (104,206 )     (65,798 )
                

Net cash provided by operating activities

     103,619       1,749,585  

Investing activities

    

Acquisition of property and equipment and favorable lease rights

     (322,295 )     (280,635 )

Purchases of short-term investments

     (1,856,719 )     (3,588,105 )

Sales of short-term investments

     2,035,208       2,347,046  

Proceeds from sale of property, plant and equipment

     25,400       —    

Other

     (411 )     (2,576 )
                

Net cash used in investing activities

     (118,817 )     (1,524,270 )

Financing activities

    

Excess tax benefits from share-based compensation

     6,856       6,952  

Payments of other long-term debt

     (11,590 )     (101,689 )

Treasury stock purchases

     (904 )     (77,247 )

Proceeds from stock option exercises

     82,555       15,032  
                

Net cash provided by (used in) financing activities

     76,917       (156,952 )
                

Net increase in cash and cash equivalents

     61,719       68,363  

Cash and cash equivalents at beginning of period

     189,170       126,839  
                

Cash and cash equivalents at end of period

   $ 250,889     $ 195,202  
                

Supplemental information:

    

Interest paid, net of capitalized interest

   $ 13,305     $ 18,768  

Income taxes paid

   $ 190,848     $ 147,481  

See accompanying Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

KOHL’S CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for fiscal year end 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 financial statements and footnotes thereto included in the Company’s Form 10-K (Commission File No. 1-11084) filed with the Securities and Exchange Commission.

Due to the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of sales and costs associated with the opening of new stores.

The Company operates as a single business unit.

Certain reclassifications have been made to prior year’s financial information to conform to the current year presentation.

 

2. Net Sales

Revenue from the sale of the Company’s merchandise at its stores is recognized at the time of sale, net of any returns. E-commerce sales are recorded upon the shipment of merchandise. Net sales do not include sales tax as the Company considers itself a pass-through conduit for collecting and remitting sales taxes. Revenue from gift card sales is recognized when the gift card is redeemed.

Gift card breakage revenue is based on historical redemption patterns and represents the balance of gift cards for which the Company believes the likelihood of redemption by a customer is remote.

 

3. Income Taxes

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting and disclosure for uncertainty in tax positions, as defined. FIN 48 seeks to reduce the diversity in practice associated with certain aspects of the recognition and measurement related to accounting for income taxes.

 

7


Table of Contents

The Company has analyzed filing positions in all of the federal and state jurisdictions where it is required to file income tax returns, as well as all open tax years in these jurisdictions. The only periods subject to examination for the Company’s federal return are the 2003 through 2006 tax years. The audits of the tax years 2001 and 2002 have been completed without material adjustment. The periods subject to examination for the Company’s state returns are generally years 2002 through 2006. Certain states have proposed adjustments. The Company is currently appealing the proposed adjustments. If it does not prevail on its appeals, the Company does not anticipate that the adjustments would result in a material change in its financial position.

The Company adopted the provisions of FIN 48 on February 4, 2007. As a result of the implementation of FIN 48, the Company recognized no change in the liability for unrecognized tax benefits. At the time of adoption of FIN 48, the Company had $52,603,000 of unrecognized tax benefits recorded on its financial statements, net of any federal tax impact related to state taxes, all of which, if recognized, would impact the effective tax rate.

The Company recognizes interest and penalty expense related to unrecognized tax benefits in its provision for income tax expense. As of February 4, 2007, the Company had $8,158,000 of accrued interest and penalities included in the amount of unrecognized tax benefits.

 

4. Stock Based Compensation

As of May 5, 2007, the Company has three long-term compensation plans pursuant to which stock-based compensation may be granted. The Company’s 1994 and 2003 long-term compensation plans provide for the granting of various forms of equity-based awards, including nonvested stock and options to purchase shares of the Company’s common stock, to officers and key employees. The 1997 Stock Option Plan for Outside Directors provides for granting of equity-based awards to outside directors.

The majority of stock options granted to employees vest in four equal annual installments. Remaining stock options granted vest in five to ten year annual installments. Outside directors’ stock options are typically granted upon a director’s election or reelection to the Company’s Board of Directors. The vesting periods for outside directors’ options are one to three years, depending on the length of the term to which the director is elected. Options that are surrendered or terminated without issuance of shares are available for future grants. All stock options have an exercise price equal to the fair market value of the common stock on the date of grant.

Share-based compensation transactions are accounted for in accordance with the provisions of SFAS No. 123(R), “Share-based Payment,” requiring the Company to recognize expense related to the fair value of its employee stock option awards. The fair value of all share-based awards is estimated on the date of grant, which is defined as the date the award is approved by the Board of Directors (or management with the appropriate authority) for ongoing employees.

 

8


Table of Contents

Stock compensation cost is recognized for new, modified and unvested stock option awards, measured at fair value and recognized as compensation cost over the vesting period. The Black-Scholes option valuation model was used to estimate the fair value of each option award based on the following assumptions:

 

     2007     2006  

Dividend yield

     0 %     0 %

Volatility

     0.304       0.311  

Risk-free interest rate

     4.7 %     4.7 %

Expected life in years

     5.2       5.2  

Weighted average fair value at grant date

   $ 27.62     $ 18.91  

The total compensation cost recognized related to options for the quarters ended May 5, 2007 and April 29, 2006 was $8.3 million and $9.0 million, respectively.

The Company has awarded nonvested shares of common stock to eligible key employees. All awards have restriction periods tied primarily to employment and/or service. The awards vest over three to four years. The awards are expensed on a straight-line basis over the vesting period.

Unearned compensation cost related to the nonvested stock granted under the plan as of May 5, 2007 was $13.1 million and was $7.4 million as of April 29, 2006. That cost is expected to be recognized over a weighted-average period of 1.7 years. The total compensation cost recognized related to nonvested stock during the quarter ended May 5, 2007 was $1.2 million and was $0.9 million for the quarter ended April 29, 2006.

 

5. Short-term Investments

Short-term investments consist primarily of municipal auction rate securities and are stated at cost, which approximates market value. Short-term investments are classified as available-for-sale securities and are highly liquid. These securities generally have a put option feature that allows the Company to liquidate the investments at par.

 

6. Contingencies

The Company is involved in various legal matters arising in the normal course of business. In the opinion of management, the outcome of such proceedings and litigation will not have a material adverse impact on the Company’s consolidated financial statements.

 

9


Table of Contents
7. Net Income Per Share

The calculations of the numerator and denominator for basic and diluted net income per share are summarized as follows:

 

     Three Months Ended
     May 5, 2007    April 29, 2006
     (In Thousands)

Numerator for basic and diluted earnings per share-net income

   $ 208,953    $ 167,245
             

Denominator for basic earnings per share – weighted average shares

     321,775      345,277

Impact of dilutive employee stock options and non vested stock (a)

     3,293      2,008
             

Denominator for diluted earnings per share

     325,068      347,285
             

(a) For the three months ended May 5, 2007 and April 29, 2006, 4,295,000 and 8,803,000 options, respectively, were not included in the earnings per share calculation as the impact of such options was antidilutive.

 

10


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Executive Summary

Fiscal 2007 has started very well from both a sales and earnings perspective. The Company earned $209.0 million in net income during the three months ended May 5, 2007, an increase of 24.9% over last year. The Company’s net sales increased 11.8% while comparable store sales increased 3.9%. The Company’s gross margin rate improved by approximately 70 basis points from 36.1% last year to 36.9% this year. The Company leveraged S,G&A expenses by approximately 6 basis points, decreasing from 24.1% last year to 24.0% this year.

The comparable store sales growth for the quarter was achieved through consistent sales performance from all regions of the country and all six lines of business. The men’s and footwear lines of business had the strongest comparable store sales. Men’s strong performance was led by the active, suit separates and sportswear categories. The footwear business was driven by the customer responding to fashion, especially in juniors and women’s.

The Company continues to see strong performance from new exclusive brand initiatives during the first quarter including the expansion of Chaps into plus sizes in apparel and Tony Hawk in footwear. The Company also experienced positive performance from Stamp 10 in women’s as well as Casa Cristina in home. In addition, the launch of the Elle exclusive brand has been very successful and plans have been made to accelerate its rollout to additional stores later this fall.

The Company will continue to focus on introducing new brands and extending successful brands into additional areas of the store. The Company will add two new brands, Daisy Fuentes and Moments, in intimate apparel in June. During fall 2007, the Company’s two most important initiatives will be its partnership with Vera Wang for merchandise categories across the store and the Food Network alliance in the home area.

The Company’s marketing initiatives are focusing on trying to increase the Company’s share of wallet with both existing and new customers by encouraging her to shop other areas of the store. During the second quarter, the Company will launch that effort under an “Explore the Store” advertising campaign. In addition, the Company will continue to support private and exclusive brand growth through its “Only at Kohl’s” marketing effort. Direct mail will be used to target customers in newly remodeled stores to encourage them to see the changes made as the Company adopts some of its innovation initiatives in older stores. In addition, the Company will continue to focus on opportunities provided by its credit partnership with JPMorgan Chase to reach new customers.

The Company continues to concentrate on profitable expansion. The Company’s future growth plans are to increase its presence in all of the regions it currently serves and to expand into new markets. During the first quarter of fiscal 2007, the Company opened seventeen new stores in a blend of new and fill-in markets, which brings the Company’s total store count to 834.

 

11


Table of Contents

The Company remains on track to meet the goal of opening 415 stores over the next four years, including the seventeen stores which opened during the first quarter of 2007. The Company continues to expect to open 110 to 115 stores in 2007, with the majority of them opening in the third quarter. The Company will open the majority of the Mervyn’s locations it previously acquired in the Pacific Northwest in the fall of 2007, giving the Company a greater presence in the Portland and Seattle markets.

Results of Operations

Expansion Update

At May 5, 2007, the Company operated 834 stores in 46 states compared with 749 stores in 43 states at the same time last year. Total square feet of selling space increased 9.8% from 57.9 million at April 29, 2006 to 63.5 million at May 5, 2007.

The Company successfully opened 17 stores during the first quarter, including its initial entry into the state of Idaho with three stores. In addition, the Company added three stores in both the Northeast region and Southeast region, two stores each in the Mid-Atlantic region, the South Central region, and the Southwest region, and one store each in the Midwest and Northwest regions.

Net Sales

Net sales increased $375.7 million or 11.8% to $3,572.0 million for the three months ended May 5, 2007, from $3,196.3 million for the three months ended April 29, 2006. Net sales increased $253.0 million due to the opening of 17 new stores in the first quarter and the inclusion of 85 new stores opened in fiscal 2006 and other revenue growth. The remaining $122.7 million increase is attributable to an increase in comparable store sales of 3.9%. Comparable store sales growth for the period is based on the sales of stores (including e-commerce sales and relocated or expanded stores) open throughout the full period and throughout the full prior fiscal year. The 3.9% comparable store sales increase was a result of an increase in average transaction value of 4.0% offset by a 0.1% decrease in number of transactions per store. All lines of business posted positive comparable sales increases for the quarter. The men’s and footwear businesses led the Company for the quarter. All regions delivered a positive comparable sales increase for the quarter, with the Southwest region having the strongest performance for the quarter. E-commerce sales increased 65.6% to $52.5 million for the three months ended May 5, 2007 as the Company continues to expand the selections offered on-line.

 

12


Table of Contents

Gross Margin

Gross margin increased $160.9 million to $1,316.3 million for the three months ended May 5, 2007, from $1,155.4 million for the three months ended April 29, 2006. Gross margin increased $82.1 million due to the opening of 17 new stores in the first quarter of 2007 and the inclusion of 85 new stores opened in fiscal 2006 and other revenue growth. Comparable store gross margin increased $78.8 million. The Company’s gross margin as a percent of net sales was 36.9% for the three months ended May 5, 2007 compared to 36.1% for the three months ended April 29, 2006. The improvement in gross margin was driven by better merchandise content, improved inventory flow and better inventory shortage results. Gross margin was also helped by increased penetration of private and exclusive brands. Private and exclusive brands increased to 35.9% of sales for the three months ended May 5, 2007 compared to 32.6% of sales for the three months ended April 29, 2006.

Operating Expenses

S,G&A expenses include all direct store expenses such as payroll, occupancy and store supplies and all costs associated with the Company’s distribution centers, advertising and corporate functions, but exclude depreciation and amortization and preopening expenses.

S,G&A expenses increased $88.1 million or 11.5% to $857.0 million for the three months ended May 5, 2007, from $768.9 million for the three months ended April 29, 2006. The S,G&A expenses decreased to 24.0% of net sales for the three months ended May 5, 2007, from 24.1% of net sales for the three months ended April 29, 2006, a decrease of 6 basis points. The Company achieved leverage in advertising, credit, distribution center and corporate costs for the quarter offset by the store operating expenses deleveraging for the quarter. The increase in store operating expenses was primarily driven by the incremental expenses associated with the increased number of store remodels completed during the three months ended May 5, 2007 compared to the three months ended April 29, 2006. The Company completed 29 store remodels during the three months ended May 5, 2007 compared to 5 store remodels during the three months ended April 29, 2006.

Depreciation and amortization for the three months ended May 5, 2007, was $104.7 million compared to $93.3 million for the three months ended April 29, 2006. The increase is primarily attributable to the addition of new stores and the mix of owned compared to leased stores.

Preopening expenses are expensed as incurred and relate to the costs associated with new store openings including advertising, hiring and training costs for new employees, processing and transporting initial merchandise and rent expenses. The average cost per store fluctuates based on the mix of stores opened in new markets compared to existing markets, with new markets being more expensive. Preopening expense for the three months ended May 5, 2007, was $8.6 million compared to $11.0 million for the three

 

13


Table of Contents

months ended April 29, 2006. The Company opened 17 new stores during each of the three months ended May 5, 2007 and April 29, 2006. The decrease in the average cost to open a store for the three months ended May 5, 2007 compared to the three months ended April 29, 2006 was due to shifting more advertising to the post-grand opening period.

Operating Income

As a result of the above factors, operating income for the three months ended May 5, 2007, was $346.1 million or 9.7% of net sales compared to $282.2 million or 8.8% of net sales for the three months ended April 29, 2006, an increase of 22.6% from last year.

Net Interest Expense

Net interest expense for the three months ended May 5, 2007 was $10.1 million compared to $14.2 million for the three months ended April 29, 2006. The decrease in net interest expense was primarily due to an increase in interest income and an increase in capitalized interest.

Provision for Income Taxes

The Company’s effective tax rate was 37.8% for the three months ended May 5, 2007 compared to 37.6% for the three months ended April 29, 2006. The increase in effective tax rate is due to the mix of new stores in certain jurisdictions.

Net Income

Net income for the three months ended May 5, 2007 was $209.0 million compared to $167.2 million for the three months ended April 29, 2006, an increase of 24.9% from last year. Net income per diluted share was $0.64 for the three months ended May 5, 2007, compared to $0.48 per diluted share for the three months ended April 29, 2006, an increase of 33.5% over last year.

Seasonality & Inflation

The Company’s business, like that of most retailers, is subject to seasonal influences, with the major portion of sales and income typically realized during the last half of each fiscal year, which includes the back-to-school and holiday seasons. Approximately 15% and 30% of sales typically occur during the back-to-school and holiday seasons, respectively. Because of the seasonality of the Company’s business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of sales and costs associated with the opening of new stores.

The Company does not believe that inflation has had a material effect on its results during the periods presented. However, there can be no assurance that the Company’s business will not be affected by such factors in the future.

 

14


Table of Contents

Financial Condition and Liquidity

The Company’s primary ongoing cash requirements are for capital expenditures in connection with the Company’s expansion and remodeling programs and seasonal and new store inventory purchases. The Company’s primary sources of funds for its business activities are cash flow from operations, short-term trade credit and its lines of credit.

Operating Activities. Cash flow provided by operations was $103.6 million for the three months ended May 5, 2007, compared to $1.7 billion for the three months ended April 29, 2006. The decrease in cash flow provided by operations was due to the cash proceeds of $1.6 billion received by the Company in conjunction with the sale of the proprietary credit card accounts on April 21, 2006. The primary use of cash flow for the three months ended May 5, 2007, was an increase of merchandise inventory of $125.5 million. The primary sources of cash flow for the three months ended May 5, 2007, were an increase in accounts payable of $87.9 million and a 24.9% increase in net income. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories.

Key financial ratios that provide certain measures of the Company’s liquidity are as follows:

 

    

May 5,

2007

    February 3,
2007
    April 29,
2006
 

Working Capital (In Thousands)

   $ 1,592,307     $ 1,482,382     $ 2,482,905  

Current Ratio

     1.88:1       1.77:1       2.51:1  

Debt/Capitalization

     15.1 %     15.9 %     14.8 %

The reduction in working capital and the current ratio and the related increase in the debt/capitalization ratio as of May 5, 2007 compared to April 29, 2006, was due to the $1.6 billion of share repurchases made during fiscal 2006.

The Company’s merchandise inventories increased $365.8 million, or 15.6% from the April 29, 2006 balance due to the increase in the number of stores. On an average per store basis, the inventory at May 5, 2007 increased 3.8% from the April 29, 2006 balance. The Company’s merchandise inventories increased $125.5 million, or 4.9% from the February 3, 2007 balance due to normal business seasonality and the opening of 17 new stores. Accounts payable at May 5, 2007, increased $153.6 million from April 29, 2006, and increased $87.9 million from February 3, 2007. Accounts payable as a percent of inventory at May 5, 2007, was 37.7%, compared to 37.0% at April 29, 2006. The increase in accounts payable as a percent of inventory reflects the benefits of executing the Company’s strategy to flow goods closer to point of sale.

Investing Activities. Net cash used in investing activities was $118.8 million in the first quarter of 2007 compared to $1.5 billion in the first quarter of 2006. Investing activities in 2007 included the net sales of $178.5 million of short-term investments and $322.3 million of capital expenditures. Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs.

 

15


Table of Contents

The decrease in cash used in investing activities from April 29, 2006 was due to investment of the proceeds received from the private label credit card transaction on April 21, 2006 in excess of the cash used to repurchase common stock during the first quarter last year.

Total capital expenditures for fiscal 2007 are expected to be approximately $1.6 billion. This estimate includes new store spending as well as remodeling and base capital needs. The actual amount of the Company’s future annual capital expenditures will depend primarily on the number of new stores opened, the mix of owned, leased or acquired stores, the number of stores remodeled and the timing of opening distribution centers.

Financing Activities. The Company expects to fund growth with available cash and short-term investments, proceeds from cash flows from operations, short-term trade credit, seasonal borrowings under its revolving credit facilities and other sources of financing. The Company believes it has sufficient lines of credit, cash and short-term investments and expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company has a $900 million senior unsecured revolving facility (“revolver”) in which no amounts were outstanding at May 5, 2007. The Company had a $532 million unsecured revolving facility (“previous revolver”) in which no amounts were outstanding at April 29, 2006. In addition, the Company has two demand notes with availability totaling $50.0 million. No amounts were outstanding under these notes at May 5, 2007 and April 29, 2006.

Contractual Obligations

The Company has aggregate contractual obligations at May 5, 2007, of $15,313.3 million related to debt repayments, capital leases, operating leases, royalties and purchase obligations as follows:

 

     Fiscal Year
     Remaining
2007
   2008    2009    2010    2011    Thereafter    Total
     (In Thousands)

Recorded contractual obligations:

                    

Long-term debt, net of discount

   $ 4    $ —      $ —      $ —      $ 400,000    $ 495,881    $ 895,885

Capital leases

     7,347      10,540      9,783      7,286      7,200      112,795      154,951

Other (b)

     652      930      238      —        —        —        1,820
                                                
   $ 8,003    $ 11,470    $ 10,021    $ 7,286    $ 407,200    $ 608,676    $ 1,052,656
                                                

Unrecorded contractual obligations:

                    

Interest payments on long-term debt

   $ 58,775    $ 58,775    $ 58,775    $ 58,775    $ 49,325    $ 801,850    $ 1,086,275

Interest payments on capital leases

     9,013      12,306      11,568      10,900      10,255      78,031      132,073

Operating leases

     284,227      388,780      383,686      375,388      373,504      7,322,797      9,128,382

Royalties

     12,327      26,731      31,092      36,118      19,082      18,395      143,745

Purchase obligations (a)

     3,729,705      1,042      —        —        —        —        3,730,747

Other (b)

     21,799      304      328      354      381      16,268      39,434
                                                
   $ 4,115,846    $ 487,938    $ 485,449    $ 481,535    $ 452,547    $ 8,237,341    $ 14,260,656
                                                

Total

   $ 4,123,849    $ 499,408    $ 495,470    $ 488,821    $ 859,747    $ 8,846,017    $ 15,313,312
                                                

 

16


Table of Contents

(a) The Company’s purchase obligations consist mainly of purchase orders for merchandise. Amounts committed under open purchase orders for merchandise are cancelable without penalty prior to a date that precedes the vendors’ scheduled shipment date.
(b) The other category above includes commitments for stores to be opened in fiscal 2007 and 2008.

The Company has adopted the provisions of FIN 48, on February 4, 2007 and the related liability for unrecognized tax benefits was $52.6 million. Although payment of such amounts in future periods could affect our liquidity and cash flows, we are currently unable to reasonably estimate the period of cash settlement.

The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $52.5 million at May 5, 2007. If certain conditions were met under these arrangements, the Company would be required to satisfy the obligations in cash. Due to the nature of these arrangements and based on historical experience, the Company does not expect to make any significant payments. Therefore, they have been excluded from the preceding table.

The various debt agreements contain certain covenants that limit, among other things, additional indebtedness, as well as require the Company to meet certain financial tests. As of May 5, 2007, the Company was in compliance with all financial covenants of the debt agreements and expects to remain in compliance for the upcoming year.

Off-Balance Sheet Arrangements

The Company has not provided any financial guarantees as of May 5, 2007.

The Company has not created, and is not party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt or operating the Company’s business. The Company does not have any arrangements or relationships with entities that are not consolidated into the financial statements that are reasonably likely to materially affect the Company’s liquidity or the availability of capital resources.

 

17


Table of Contents

Critical Accounting Policies and Estimates

The preparation of the financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and assumptions that affect the reported amounts. A discussion of the more significant estimates follows. Management has discussed the development, selection and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.

Retail Inventory Method and Inventory Valuation

The Company values its inventory at the lower of cost or market with cost determined on the first-in, first-out (FIFO) basis using the retail inventory method (RIM). Under RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value inventories. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of the retail inventory method will result in inventories being valued at the lower of cost or market as markdowns are currently taken as a reduction of the retail value of inventories.

Based on a review of historical clearance markdowns, current business trends, expected vendor funding and discontinued merchandise categories, an adjustment to inventory is recorded to reflect additional markdowns which are estimated to be necessary to liquidate existing clearance inventories and reduce inventories to the lower of cost or market. Management believes that the Company’s inventory valuation approximates the net realizable value of clearance inventory and results in carrying inventory at the lower of cost or market.

Vendor Allowances

The Company records vendor allowances and discounts in the income statement when the purpose for which those monies were designated is fulfilled. Allowances provided by vendors generally relate to profitability of inventory recently sold and, accordingly, are reflected as reductions to cost of merchandise sold as negotiated. Vendor allowances received for advertising or fixture programs reduce the Company’s expense or expenditure for the related advertising or fixture program when appropriate. Vendors allowances will fluctuate based on the amount of promotional and clearance markdowns necessary to liquidate the inventory.

Insurance Reserve Estimates

The Company uses a combination of insurance and self-insurance for a number of risks including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by its associates. The Company determines the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims frequency and severity of claims from historical experience as well as changes in state statutes and the mix of states in which the Company operates could result in a change to the required reserve levels. Under its workers’ compensation and general liability insurance policies, the Company retains the initial risk of $500,000 and $250,000, respectively, per occurrence. The Company also has a lifetime medical payment limit of $1.5 million.

 

18


Table of Contents

Impairment of Assets and Closed Store Reserves

The Company has a significant investment in property and equipment and favorable lease rights. The related depreciation and amortization is computed using estimated useful lives of up to 50 years. The Company reviews whether indicators of impairment of long-lived assets held for use (including favorable lease rights) are present annually or whenever an event, such as decisions to close a store, indicate the carrying value of the asset may not be recoverable. The Company has historically not experienced any significant impairment of long-lived assets or closed store reserves. Decisions to close a store can also result in accelerated depreciation over the revised useful life. If the store is leased, a reserve is set up for the discounted difference between the rent and the expected sublease rental income when the location is no longer in use. A significant change in cash flows, market valuation, demand for real estate or other factors, could result in an increase or decrease in the reserve requirement or impairment charge.

Income Taxes

The Company pays income taxes based on tax statutes, regulations and case law of the various jurisdictions in which it operates. At any one time, multiple tax years are subject to audit by the various taxing authorities. The Company’s effective income tax rate was 37.8% for the quarter ended May 5, 2007, and 37.6% for the quarter ended April 29, 2006. The effective rate is impacted by changes in law, location of new stores, level of earnings and the result of tax audits.

Operating Leases

The Company leases retail stores under operating leases. Many lease agreements contain rent holidays, rent escalation clauses and/or contingent rent provisions. The Company recognizes rent expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty. The Company uses a time period for its straight-line rent expense calculation that equals or exceeds the time period used for depreciation. In addition, the commencement date of the lease term is the earlier of the date when the Company becomes legally obligated for the rent payments or the date when the Company takes possession of the land or the building for initial setup of fixtures and merchandise.

 

19


Table of Contents
Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company’s primary exposure to market risk consists of changes in interest rates or borrowings. At May 5, 2007, the Company’s fixed rate long-term debt, excluding capital leases, was $895.9 million.

Fixed rate long-term debt is utilized as a primary source of capital. When these debt instruments mature, the Company may refinance such debt at then existing market interest rates, which may be more or less than interest rates on the maturing debt. If interest rates on the existing fixed rate debt outstanding at May 5, 2007, changed by 100 basis points, the Company’s annual interest expense would change by $9.0 million.

During the three months ended May 5, 2007, average borrowings under the Company’s variable rate credit facilities and the revolver, were $5.8 million. If interest rates on the average fiscal 2007 variable rate debt changed by 100 basis points, the Company’s interest expense would change by $58,000 assuming comparable borrowing levels.

 

20


Table of Contents
Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the specified time periods. As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of these disclosure controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective.

There were no changes in the Company’s internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

21


Table of Contents

PART II. OTHER INFORMATION

 

Item 1A Risk Factors

There have been no material changes in the Corporation’s risk factors from those disclosed in our 2006 Annual Report on Form 10-K.

Forward Looking Statements

This report contains statements that may constitute forward-looking statements within the meaning of the safe harbor provisions for forward looking statements contained in the Private Securities Litigation Reform Act of 1995. Those statements relate to developments, results, conditions or other events the Company expects or anticipates will occur in the future. The Company intends words such as “believes,” “anticipates,” “plans,” “expects” and similar expressions to identify forward-looking statements. Without limiting the foregoing, these statements may relate to future outlook, revenues, earnings, store openings, planned capital expenditures, market conditions, new strategies and the competitive environment. 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 Item 1A of the Company’s Annual Report on Form 10-K filed with the SEC on March 23, 2007, 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 the Company undertakes no obligation to update them. An investment in the Company’s common stock or other securities carries certain risks. Investors should carefully consider the risks as stated in the Company’s Form 10-K and other risks which may be disclosed from time to time in the Company’s filings with the SEC before investing in the Company’s securities.

 

22


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

During the quarter ended May 5, 2007, the Company did not sell any securities which were not registered under the Securities Act or repurchase any of its equity securities.

c. Issuer Purchases of Securities

On March 6, 2006, the Company announced that its Board of Directors authorized a $2.0 billion share repurchase program. Purchases under the repurchase program may be made in the open market, through block trades and other negotiated transactions. The Company expects to execute the share repurchase program primarily in open market transactions, subject to market conditions. The Company expects to complete the program over the next 12 to 18 months. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued or accelerated at any time. No purchases were made pursuant to this repurchase plan during the three fiscal months ended May 5, 2007.

The following table contains information for shares withheld from employees to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the three fiscal months ended May 5, 2007:

 

Period

   Total
Number
of Shares
Purchased
During
Period
   Average
Price
Paid Per
Share
   Total Number
of Shares
Purchased as
Part of
Publicly
Announced
Plans or
Programs
   Maximum
Approximate
Dollar Value of
Shares that May
Yet Be
Purchased
Under the Plans
or Programs

February 4, 2007 – March 3, 2007

   11,092    $ 70.54    0    $ 373,000,000

March 4, 2007 – April 7, 2007

   1,201    $ 73.62    0    $ 373,000,000

April 8, 2007 – May 5, 2007

   431    $ 76.89    0    $ 373,000,000

Total

   12,724    $ 71.04    0    $ 373,000,000

 

23


Table of Contents
Item 4. Submission of Matters to a Vote of Security Holders

The Annual Meeting of Shareholders of Kohl’s Corporation was held on May 2, 2007:

 

  1. To elect eleven directors to serve on our Board of Directors for a one-year term and until their successors are duly elected and qualified;

 

  2. To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending February 2, 2008;

 

  3. To vote on a proposal to amend our 2003 Long Term Compensation Plan;

 

  4. To vote on a proposal to approve our Executive Bonus Plan;

 

  5. To vote on a proposal to amend our Articles of Incorporation to allow the Board of Directors to institute a majority vote requirement for the election of directors;

 

  6. To vote on the shareholder proposal, if properly presented at the meeting; and

 

  7. To act upon any other business that may properly come before the meeting or any adjournment thereof.

Proxies for the meeting were solicited pursuant to Section 14(a) of the Securities Exchange Act of 1934 and there was no solicitation in opposition to management’s solicitation.

The results of the voting were as follows:

 

  1. Election of directors:

Steven A. Burd

For – 279,942,689 shares

Withheld – 13,879,541 shares

Wayne Embry

For – 280,193,393 shares

Withheld – 13,628,837 shares

 

24


Table of Contents

James D. Ericson

For – 279,945,347 shares

Withheld – 13,876,883 shares

John F. Herma

For – 274,516,749 shares

Withheld – 19,305,481 shares

William S. Kellogg

For – 274,753,585 shares

Withheld – 19,068,645 shares

Kevin Mansell

For – 274,597,086 shares

Withheld – 19,225,144 shares

Lawrence Montgomery

For – 274,957,595 shares

Withheld – 18,864,635 shares

Frank V. Sica

For – 274,321,534 shares

Withheld – 19,500,696 shares

Peter M. Sommerhauser

For – 264,171,320 shares

Withheld – 29,650,910 shares

Stephen E. Watson

For – 280,228,549 shares

Withheld – 13,593,681 shares

R. Elton White

For – 274,964,605 shares

Withheld – 18,857,625 shares

 

  2. Ratification of Ernst & Young LLP as the Company’s independent registered public accounting firm:

For – 286,683,980 shares

Against – 5,566,950 shares

Abstain – 1,571,300 shares

 

  3. Management proposal to amend the Company’s 2003 Long Term Compensation Plan:

 

25


Table of Contents

For – 241,622,885 shares

Against – 31,774,184 shares

Abstain – 1,859,593 shares

Broker Non-Vote – 18,565,568

 

  4. Management proposal to approve the Company’s Executive Bonus Plan:

For – 277,876,834 shares

Against – 13,994,202 shares

Abstain – 1,951,194 shares

 

  5. Management proposal to amend the Company’s Articles of Incorporation to allow the Board of Directors to institute a majority vote requirement for the election of directors:

For – 266,893,424 shares

Against – 25,137,714 shares

Abstain – 1,791,092 shares

 

  6. Shareholder proposal to initiate the appropriate process to amend the Company’s Articles of Incorporation to institute a majority voting requirement for the election of directors:

For – 55,544,561 shares

Against – 214,153,616 shares

Abstain – 5,558,485 shares

Broker Non-Vote – 18,565,568

 

26


Table of Contents
Item 6. Exhibits

 

  3.1    Articles of Amendment, dated May 2, 2007
  3.2    Composite Articles of Incorporation, as amended through May 2, 2007
10.1    2003 Long-Term Compensation Plan, as amended through May 2, 2007. Incorporated herein by reference to Annex A to the Company’s definitive proxy statement filed with Schedule 14A on March 27, 2007.
31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Periodic Report by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Periodic Report by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

27


Table of Contents

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 6, 2007    

/s/ R. Lawrence Montgomery

    R. Lawrence Montgomery
    Chief Executive Officer and Director
Date: June 6, 2007    

/s/ Wesley S. McDonald

    Wesley S. McDonald
    Chief Financial Officer

 

28

Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki