Kohl’s(KSS) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Kohl's unaudited consolidated financial statements for Q2 2024 are presented, showing decreased total revenue but increased net income Consolidated Balance Sheets Consolidated Balance Sheet Highlights (Dollars in Millions): | Metric | August 3, 2024 | February 3, 2024 | July 29, 2023 | | :--------------------------- | :------------- | :--------------- | :------------ | | Cash and cash equivalents | $231 | $183 | $204 | | Merchandise inventories | $3,151 | $2,880 | $3,474 | | Total assets | $14,180 | $14,009 | $14,794 | | Total current liabilities | $3,438 | $2,612 | $3,470 | | Long-term debt | $1,173 | $1,638 | $1,637 | | Total shareholders' equity | $3,830 | $3,893 | $3,735 | Consolidated Statements of Operations Consolidated Statements of Operations Highlights (Dollars in Millions, Except per Share Data): | Metric | Three Months Ended Aug 3, 2024 | Three Months Ended Jul 29, 2023 | Six Months Ended Aug 3, 2024 | Six Months Ended Jul 29, 2023 | | :--------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net sales | $3,525 | $3,678 | $6,703 | $7,033 | | Other revenue | $207 | $217 | $411 | $433 | | Total revenue | $3,732 | $3,895 | $7,114 | $7,466 | | Operating income | $166 | $163 | $209 | $261 | | Net income | $66 | $58 | $39 | $72 | | Diluted EPS | $0.59 | $0.52 | $0.35 | $0.65 | Consolidated Statements of Changes in Shareholders' Equity Shareholders' Equity Changes (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Six Months Ended Aug 3, 2024 | | :----------------------------------- | :----------------------------- | :--------------------------- | | Paid-in capital (end of period) | $3,546 | $3,546 | | Retained earnings (end of period) | $2,861 | $2,861 | | Total shareholders' equity (end of period) | $3,830 | $3,830 | | Dividends paid per common share | $0.50 | $1.00 | Consolidated Statements of Cash Flows Consolidated Statements of Cash Flows Highlights (Dollars in Millions): | Activity | Six Months Ended Aug 3, 2024 | Six Months Ended Jul 29, 2023 | Change (YoY) | | :------------------------------- | :--------------------------- | :---------------------------- | :----------- | | Net cash from operating activities | $247 | $228 | +$19 | | Net cash used in investing activities | $(237) | $(335) | +$98 | | Net cash from financing activities | $38 | $158 | -$(120) | | Net increase in cash | $48 | $51 | -$(3) | | Cash at end of period | $231 | $204 | +$27 | Notes to Consolidated Financial Statements 1. Basis of Presentation - The company operates as a single business unit, and quarterly results are not necessarily indicative of full fiscal year results due to the seasonal nature of the business[12] - Recently issued accounting pronouncements (ASU 2023-07 on Segment Reporting and ASU 2023-09 on Income Taxes) are being evaluated but are not expected to have a material impact on the financial statements upon adoption[12] 2. Revenue Recognition Net Sales by Line of Business (Dollars in Millions): | Line of Business | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :-------------------------- | :----------------------------- | :----------- | :--------------------------- | :----------- | | Women's | $1,004 | (8.6%) | $1,927 | (7.7%) | | Men's | $740 | (8.5%) | $1,340 | (10.9%) | | Accessories (including Sephora) | $666 | 16.6% | $1,284 | 18.6% | | Home | $436 | (5.6%) | $828 | (7.5%) | | Children's | $359 | (7.2%) | $703 | (11.0%) | | Footwear | $320 | (8.6%) | $621 | (7.9%) | | Total Net Sales | $3,525 | (4.2%) | $6,703 | (4.7%) | - Accessories sales, including Sephora, significantly increased by 16.6% in the second quarter and 18.6% year-to-date, driven by Sephora sales increasing approximately 45% and 50% respectively[13][34] 3. Debt Debt Overview (Dollars in Millions): | Metric | August 3, 2024 | February 3, 2024 | July 29, 2023 | | :--------------------------------------- | :------------- | :--------------- | :------------ | | Borrowings under revolving credit facility | $410 | $92 | $560 | | Outstanding unsecured senior debt | $1,535 | $1,648 | $1,759 | | Current portion of unsecured senior debt | $(353) | $0 | $(111) | | Long-term unsecured senior debt | $1,173 | $1,638 | $1,637 | - In June 2024, Kohl's completed a voluntary redemption of the remaining $113 million of outstanding 9.50% notes due May 15, 2025, recognizing a $5 million loss on extinguishment of debt[16] - As of August 3, 2024, the company was in compliance with all covenants of its various debt agreements[17] 4. Stock-Based Awards Stock-Based Awards Activity (Six Months Ended August 3, 2024): | Metric | Nonvested Restricted Units Shares (Thousands) | Weighted Average Grant Date Fair Value | Performance Units (Thousands) | Weighted Average Grant Date Fair Value | | :----------------------------------- | :-------------------------------------------- | :------------------------------------- | :---------------------------- | :------------------------------------- | | Balance - February 3, 2024 | 3,099 | $29.66 | 777 | $31.26 | | Granted | 1,510 | $26.26 | 652 | $29.33 | | Vested | (1,024) | $30.40 | (38) | $74.68 | | Forfeited | (91) | $30.58 | — | — | | Balance - August 3, 2024 | 3,494 | $27.95 | 1,391 | $29.17 | 5. Contingencies - A new shareholder derivative lawsuit was filed on May 16, 2024, alleging breach of fiduciary duty and unjust enrichment against current and former board members, with claims similar to a previously disclosed shareholder class action[20] - The company denies the allegations and intends to vigorously defend against them, but is currently unable to estimate a reasonably possible range of loss due to the early stages of the matter[20] 6. Income Taxes Effective Income Tax Rate: | Period | August 3, 2024 | July 29, 2023 | | :--------------------------- | :------------- | :------------ | | Three Months Ended | 17.8% | 21.7% | | Six Months Ended | 3.4% | 18.8% | - The year-to-date effective tax rate decreased significantly from 18.8% in 2023 to 3.4% in 2024, primarily due to lower pre-tax income amplifying the impact of favorable discrete items[22][44] 7. Net Income Per Share Net Income Per Share (Dollars and Shares in Millions, Except per Share Data): | Metric | Three Months Ended Aug 3, 2024 | Three Months Ended Jul 29, 2023 | Six Months Ended Aug 3, 2024 | Six Months Ended Jul 29, 2023 | | :--------------------------- | :----------------------------- | :------------------------------ | :--------------------------- | :---------------------------- | | Net income | $66 | $58 | $39 | $72 | | Basic shares | 111 | 110 | 111 | 110 | | Dilutive shares | 112 | 111 | 112 | 111 | | Basic EPS | $0.59 | $0.52 | $0.35 | $0.65 | | Diluted EPS | $0.59 | $0.52 | $0.35 | $0.65 | - 4 million anti-dilutive shares were excluded from the diluted net income per share calculation for the six months ended August 3, 2024[24] 8. Subsequent Events - On August 13, 2024, Kohl's Board of Directors declared a quarterly cash dividend of $0.50 per share, payable on September 25, 2024[25] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Kohl's Q2 and H1 2024 financial condition and results, highlighting decreased net sales but improved gross margin Executive Summary Q2 2024 Key Financial Results (Dollars in Millions, Except per Share Data): | Metric | Q2 2024 | Q2 2023 | Change (YoY) | | :--------------------------- | :------ | :------ | :----------- | | Net sales | $3,525 | $3,678 | (4.2%) | | Comparable sales | | | (5.1%) | | Gross margin (% of net sales)| 39.6% | 39.0% | +59 bps | | SG&A expenses | $1,250 | $1,304 | (4.2%) | | Operating income | $166 | $163 | +$3 | | Net income | $66 | $58 | +$8 | | Diluted EPS | $0.59 | $0.52 | +$0.07 | | Inventory | $3,151 | $3,474 | (9%) | | Operating cash flow | $254 | $430 | -$(176) | | Long-term debt reduction | $113 | | | Our Strategy - Kohl's strategy is centered on four key priorities: enhancing customer experience, accelerating and simplifying value strategies, disciplined inventory and expense management, and strengthening the balance sheet to drive long-term shareholder value[31] Updated 2024 Financial and Capital Allocation Outlook Updated 2024 Financial Outlook: | Metric | Guidance Range | | :--------------------------- | :------------- | | Net sales decrease | (4%) to (6%) | | Comparable sales decrease | (3%) to (5%) | | Operating margin | 3.4% to 3.8% | | Diluted earnings per share | $1.75 to $2.25 | | Capital expenditures | ~$500 million | | Quarterly cash dividend | $0.50 per share| - Capital expenditures of approximately $500 million for 2024 include investments in 350 impulse queuing lines, 140 small format Sephora shop openings, the launch of 200 Babies "R" Us shops, and six new store openings[32] Results of Operations Total Revenue Total Revenue (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :------------ | :----------------------------- | :----------- | :--------------------------- | :----------- | | Net sales | $3,525 | (4.2%) | $6,703 | (4.7%) | | Other revenue | $207 | (4.6%) | $411 | (5.1%) | | Total revenue | $3,732 | (4.2%) | $7,114 | (4.7%) | - The decrease in net sales was driven by a 6% decrease in average transaction value in Q2, partially offset by a 2% increase in transaction volume[34] - Accessories sales, including Sephora, increased by 16.6% in Q2 and 18.6% year-to-date, with Sephora sales specifically increasing approximately 45% and 50% respectively[34] - Other revenue decreased due to increasing credit loss rates, and the company is evaluating the impact of a new CFPB rule lowering credit card late fees[37] Cost of Merchandise Sold and Gross Margin Cost of Merchandise Sold and Gross Margin (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :----------------------------------- | :----------------------------- | :----------- | :--------------------------- | :----------- | | Cost of merchandise sold | $2,128 | (5.1%) | $4,051 | (5.5%) | | Gross margin | $1,397 | (2.7%) | $2,652 | (3.3%) | | Gross margin as a percent of net sales | 39.6% | +59 bps | 39.6% | +54 bps | - The increase in gross margin was primarily driven by strong inventory management (inventory down 9% YoY) and lower freight costs, partially offset by elevated shrink levels year-to-date[39] Selling, General, and Administrative Expense SG&A Expenses (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :----------------------------------- | :----------------------------- | :----------- | :--------------------------- | :----------- | | SG&A | $1,250 | (4.2%) | $2,478 | (2.5%) | | As a percent of total revenue (QoQ) | 33.5% | (1) bps | | | | As a percent of total revenue (YTD) | | | 34.8% | 78 bps | - The decrease in SG&A expenses was primarily due to a reduction in store expenses, including lower costs from fewer Sephora shop openings and store refreshes, partially offset by investments in marketing and technology[41] Other Expenses Other Expenses (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :---------------------------- | :----------------------------- | :----------- | :--------------------------- | :----------- | | Depreciation and amortization | $188 | +$2 | $376 | +$2 | | Interest expense, net | $86 | -$(3) | $169 | -$(4) | - Net interest expense decreased due to reduced outstanding balances on the revolving credit facility and unsecured senior debt, despite a $5 million loss on extinguishment from the voluntary redemption of $113 million of 9.50% notes[43] Income Taxes Income Taxes (Dollars in Millions): | Metric | Three Months Ended Aug 3, 2024 | Change (YoY) | Six Months Ended Aug 3, 2024 | Change (YoY) | | :--------------------------- | :----------------------------- | :----------- | :--------------------------- | :----------- | | Provision for income taxes | $14 | -$(2) | $1 | -$(15) | | Effective tax rate (QoQ) | 17.8% | -3.9% | | | | Effective tax rate (YTD) | | | 3.4% | -15.4% | - The significant decrease in the year-to-date effective tax rate (from 18.8% to 3.4%) was primarily due to lower pre-tax income, which amplified the impact of favorable discrete items[44] Seasonality and Inflation - The company's business is seasonal, with sales and income typically higher during back-to-school and holiday seasons, meaning quarterly results are not necessarily indicative of full-year performance[45] - Operations are expected to be influenced by general economic conditions, including food, fuel, energy prices, employment rates, wage inflation, and merchandise sourcing costs[45] Liquidity and Capital Resources Capital Allocation - Kohl's capital allocation strategy prioritizes investing in the business for long-term profitable growth, paying a quarterly dividend, completing debt reduction transactions, and returning excess cash to shareholders through share repurchases, aiming for an investment grade rating[46] - The company plans to invest approximately $500 million in 2024, including 350 impulse queuing lines, 140 small format Sephora shop openings, the launch of 200 Babies "R" Us shops, and six new store openings[47] - A quarterly cash dividend of $0.50 per share was declared on August 13, 2024, and the company completed a voluntary redemption of $113 million of outstanding 9.50% notes. No share repurchases are planned for the current year[47] Operating Activities - Operating activities generated $247 million in cash in the first half of 2024, up from $228 million in 2023, primarily due to improved inventory management (7% reduction in receipts) and an increase in accounts payable[51] Investing Activities - Cash used in investing activities decreased to $237 million in the first half of 2024 (from $335 million in 2023), mainly due to fewer Sephora shop openings and other investments, aligning with reduced capital expenditure plans[52] - As of the end of the quarter, Kohl's had a Sephora presence in over 1,000 stores (861 full-size, 189 small format) and anticipates approximately $500 million in capital expenditures for 2024[52][53] Financing Activities - Financing activities generated $38 million in cash in the first half of 2024, a decrease from $158 million in 2023[56] - Net borrowings under the revolving credit facility were $318 million in the first half of 2024, with $410 million outstanding as of August 3, 2024[56] - Fitch downgraded Kohl's senior unsecured credit rating from BBB- to BB with a stable outlook, while Moody's reaffirmed Ba3 with a stable outlook[54][55] - The company repaid $113 million of outstanding 9.50% notes in Q2 2024 and paid $111 million in cash dividends ($1.00 per share) in the first half of 2024. No share repurchases are planned for the current year[57] Key Financial Ratios Key Financial Ratios (Dollars in Millions): | Metric | August 3, 2024 | July 29, 2023 | | :-------------- | :------------- | :------------ | | Working capital | $275 | $504 | | Current ratio | 1.08 | 1.15 | - The decrease in working capital and current ratio is primarily attributed to a decrease in inventory due to inventory management, with receipts down 7% versus the prior year[59] Debt Covenant Compliance - As of August 3, 2024, Kohl's was in compliance with all covenants of its senior secured, asset-based revolving credit facility[60] Contractual Obligations - No significant changes in contractual obligations were reported since the 2023 Form 10-K, other than the voluntary redemption of $113 million in notes and changes in revolving credit facility borrowings[61] Off-Balance Sheet Arrangements - Kohl's has no financial guarantees or special-purpose/off-balance sheet entities that would materially affect its financial condition, liquidity, results of operations, or capital resources[62] Critical Accounting Policies and Estimates - No significant changes were reported in critical accounting policies and estimates since the 2023 Form 10-K[63] Item 3. Quantitative and Qualitative Disclosures about Market Risk No significant changes in market risk disclosures since the 2023 Form 10-K, apart from the June 2024 redemption of $113 million in notes - The only significant change in market risk disclosures is the redemption of $113 million of 9.50% notes due May 2025 in June 2024[64] Item 4. Controls and Procedures Kohl's disclosure controls and procedures were effective as of August 3, 2024, with no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective at a reasonable assurance level as of August 3, 2024[65] Changes in Internal Control over Financial Reporting - No material changes in internal control over financial reporting occurred during the quarter ended August 3, 2024[67] PART II. OTHER INFORMATION Item 1. Legal Proceedings Legal proceedings, including a new shareholder derivative lawsuit, are detailed in Note 5, Contingencies, of the Consolidated Financial Statements - Legal proceedings are detailed in Note 5, Contingencies, of the Consolidated Financial Statements, which includes a new shareholder derivative lawsuit[69] Item 1A. Risk Factors No significant changes in Risk Factors were reported since the company's 2023 Form 10-K - No significant changes in Risk Factors were reported since the 2023 Form 10-K[70] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details of share repurchase activity for Q2 2024 and remaining authorization under the program are provided Share Repurchases (Three Months Ended August 3, 2024): | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (Millions) | | :------------------------- | :------------------------------- | :--------------------------- | :------------------------------------------------------------------------------------------------ | | May 5 - June 1, 2024 | 3,001 | $26.39 | $2,476 | | June 2 - July 6, 2024 | 15,479 | $21.63 | $2,476 | | July 7 - Aug 3, 2024 | 2,997 | $22.76 | $2,476 | | Total | 21,477 | $22.45 | | - The remaining share repurchase authorization under the existing program is $3.0 billion, with $2.476 billion still available as of August 3, 2024[71] Item 5. Other Information A Senior Executive Vice President adopted a Rule 10b5-1 Trading Plan for the sale of company common stock - Siobhán Mc Feeney, SEVP, Chief Technology and Digital Officer, adopted a Rule 10b5-1 Trading Plan on May 31, 2024, to sell up to 44,267 shares of common stock, with sales starting October 3, 2024, and the plan expiring December 1, 2025[72] Item 6. Exhibits Various exhibits filed as part of the Form 10-Q are listed, including compensation plans, stock agreements, and certifications - The exhibits include Kohl's Corporation 2024 Long-Term Compensation Plan, forms of executive and non-employee director stock agreements, and certifications from the CEO and CFO under Sarbanes-Oxley Act sections 302 and 906[73]