UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 1, 2004
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. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (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 3, 2004 Common Stock, Par Value $0.01 per Share, 340,991,232 shares outstanding.
INDEX
2
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
| May 1, 2004 |
January 31, 2004 |
May 3, 2003 | |||||||
| (Unaudited) | (Audited) | (Unaudited) | |||||||
| Assets |
|||||||||
| Current assets: |
|||||||||
| Cash and cash equivalents |
$ | 99,810 | $ | 112,748 | $ | 94,674 | |||
| Short-term investments |
— | 34,285 | 153,205 | ||||||
| Accounts receivable, net |
1,113,928 | 1,150,157 | 973,256 | ||||||
| Merchandise inventories |
1,862,195 | 1,606,990 | 1,810,978 | ||||||
| Deferred income taxes |
30,612 | 49,822 | 36,064 | ||||||
| Other |
100,328 | 70,837 | 73,598 | ||||||
| Total current assets |
3,206,873 | 3,024,839 | 3,141,775 | ||||||
| Property and equipment, net |
3,448,682 | 3,324,243 | 2,824,510 | ||||||
| Favorable lease rights, net |
233,326 | 235,491 | 181,495 | ||||||
| Goodwill |
9,338 | 9,338 | 9,338 | ||||||
| Other assets |
105,293 | 104,539 | 105,223 | ||||||
| Total assets |
$ | 7,003,512 | $ | 6,698,450 | $ | 6,262,341 | |||
| Liabilities and Shareholders’ Equity |
|||||||||
| Current liabilities: |
|||||||||
| Accounts payable |
$ | 746,449 | $ | 532,599 | $ | 608,383 | |||
| Accrued liabilities |
352,810 | 441,902 | 275,521 | ||||||
| Income taxes payable |
40,111 | 135,327 | 38,909 | ||||||
| Short-term debt |
110,000 | — | — | ||||||
| Current portion of long-term debt and capital leases |
2,760 | 12,529 | 357,919 | ||||||
| Total current liabilities |
1,252,130 | 1,122,357 | 1,280,732 | ||||||
| Long-term debt and capital leases |
1,088,663 | 1,075,973 | 1,064,836 | ||||||
| Deferred income taxes |
261,993 | 236,712 | 187,575 | ||||||
| Other long-term liabilities |
73,975 | 72,069 | 66,524 | ||||||
| Shareholders’ equity: |
|||||||||
| Common stock |
3,409 | 3,401 | 3,388 | ||||||
| Paid-in capital |
1,192,129 | 1,170,519 | 1,122,006 | ||||||
| Retained earnings |
3,131,213 | 3,017,419 | 2,537,280 | ||||||
| Total shareholders’ equity |
4,326,751 | 4,191,339 | 3,662,674 | ||||||
| Total liabilities and shareholders’ equity |
$ | 7,003,512 | $ | 6,698,450 | $ | 6,262,341 | |||
See accompanying Notes to Condensed Consolidated Financial Statements
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In Thousands, Except per Share Data)
| Three Months (13 Weeks) Ended | ||||||
| May 1, 2004 |
May 3, 2003 | |||||
| Net sales |
$ | 2,380,173 | $ | 2,117,744 | ||
| Cost of merchandise sold |
1,532,736 | 1,376,479 | ||||
| Gross margin |
847,437 | 741,265 | ||||
| Operating expenses: |
||||||
| Selling, general, and administrative |
565,648 | 474,125 | ||||
| Depreciation and amortization |
66,002 | 55,417 | ||||
| Preopening expenses |
17,830 | 15,482 | ||||
| Operating income |
197,957 | 196,241 | ||||
| Interest expense, net |
15,004 | 17,766 | ||||
| Income before income taxes |
182,953 | 178,475 | ||||
| Provision for income taxes |
69,159 | 67,462 | ||||
| Net income |
$ | 113,794 | $ | 111,013 | ||
| Net income per share: |
||||||
| Basic |
||||||
| Basic |
$ | 0.33 | $ | 0.33 | ||
| Average number of shares |
340,434 | 338,013 | ||||
| Diluted |
||||||
| Diluted |
$ | 0.33 | $ | 0.32 | ||
| Average number of shares |
343,858 | 342,847 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
4
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In Thousands)
| Common Stock |
Paid-In Capital |
Retained Earnings |
Total | |||||||||||
| Shares |
Amount |
|||||||||||||
| Balance at January 31, 2004 |
340,141 | $ | 3,401 | $ | 1,170,519 | $ | 3,017,419 | $ | 4,191,339 | |||||
| Exercise of stock options |
814 | 8 | 11,674 | — | 11,682 | |||||||||
| Income tax benefit from exercise of stock options |
— | — | 9,936 | — | 9,936 | |||||||||
| Net income |
— | — | — | 113,794 | 113,794 | |||||||||
| Balance at May 1, 2004 |
340,955 | $ | 3,409 | $ | 1,192,129 | $ | 3,131,213 | $ | 4,326,751 | |||||
See accompanying Notes to Condensed Consolidated Financial Statements
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
| Three Months (13 Weeks) Ended |
||||||||
| May 1, 2004 |
May 3, 2003 |
|||||||
| Operating activities |
||||||||
| Net income |
$ | 113,794 | $ | 111,013 | ||||
| Adjustments to reconcile net income to net cash provided by (used in) operating activities |
||||||||
| Depreciation and amortization |
66,182 | 55,700 | ||||||
| Amortization of debt discount |
53 | 2,403 | ||||||
| Deferred income taxes |
44,491 | 36,253 | ||||||
| Changes in operating assets and liabilities: |
||||||||
| Accounts receivable, net |
36,229 | 17,554 | ||||||
| Merchandise inventories |
(255,205 | ) | (183,982 | ) | ||||
| Other current assets |
(29,491 | ) | (29,884 | ) | ||||
| Accounts payable |
213,850 | (42,348 | ) | |||||
| Accrued and other long-term liabilities |
(87,186 | ) | (82,656 | ) | ||||
| Income taxes |
(85,280 | ) | (78,409 | ) | ||||
| Net cash provided by (used in) operating activities |
17,437 | (194,356 | ) | |||||
| Investing activities |
||||||||
| Acquisition of property and equipment and favorable lease rights |
(167,873 | ) | (122,804 | ) | ||||
| Net sales of short-term investments |
34,285 | 322,786 | ||||||
| Other |
(7,650 | ) | (5,263 | ) | ||||
| Net cash (used in) provided by investing activities |
(141,238 | ) | 194,719 | |||||
| Financing activities |
||||||||
| Proceeds from short-term debt |
50,000 | — | ||||||
| Proceeds from credit facilities |
60,000 | — | ||||||
| Payments of convertible and other long-term debt |
(10,819 | ) | (10,662 | ) | ||||
| Payments of financing fees on debt |
— | (24 | ) | |||||
| Proceeds from stock option exercises |
11,682 | 14,912 | ||||||
| Net cash provided by financing activities |
110,863 | 4,226 | ||||||
| Net (decrease) increase in cash and cash equivalents |
(12,938 | ) | 4,589 | |||||
| Cash and cash equivalents at beginning of period |
112,748 | 90,085 | ||||||
| Cash and cash equivalents at end of period |
$ | 99,810 | $ | 94,674 | ||||
See accompanying Notes to Condensed Consolidated Financial Statements
6
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.
2. Reclassifications
Certain reclassifications have been made to the prior periods’ financial statements to conform to the fiscal 2004 presentation.
3. Stock Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123, “Accounting for Stock-Based Compensation,” to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires expanded and more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results.
The Company has not adopted a method under SFAS No. 148 to expense stock options but rather continues to apply the recognition and measurement provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for those plans. No stock-based employee compensation expense is reflected in net income for the first quarter of fiscal 2004 or 2003 as all options granted under those plans had an exercise price equal to the market value of the underlying common stock at the date of grant. The FASB is currently reviewing the rules governing stock option accounting and has made a tentative decision to require expense recognition of stock options in the income statement. The FASB intends to develop revised rules that would be effective for fiscal 2005. The Company will adopt any new rules required by the FASB when they are effective.
7
The following table illustrates the pro forma effect on net income and net income per share assuming the fair value recognition provisions of SFAS No. 123 would have been adopted for options granted since fiscal 1995.
| Three Months Ended | ||||||
| May 1, 2004 |
May 3, 2003 | |||||
| (In Thousands, Except per Share Data) | ||||||
| Net income as reported |
$ | 113,794 | $ | 111,013 | ||
| Less total stock-based employee compensation expense determined under fair value method for all awards, net of tax |
7,699 | 9,158 | ||||
| Pro forma net income |
$ | 106,095 | $ | 101,855 | ||
| Net income per share: |
||||||
| Basic-as reported |
$ | 0.33 | $ | 0.33 | ||
| Basic-pro forma |
$ | 0.31 | $ | 0.30 | ||
| Diluted-as reported |
$ | 0.33 | $ | 0.32 | ||
| Diluted-pro forma |
$ | 0.31 | $ | 0.30 | ||
The Black-Scholes option pricing model was used to estimate the weighted-average fair values of options granted. For the three months ended May 1, 2004 and May 3, 2003, the weighted-average fair values of options granted were $19.37 and $19.86, respectively. The model uses the following assumptions:
| Three Months Ended |
||||||||
| May 1, 2004 |
May 3, 2003 |
|||||||
| Risk-free interest rate |
3.5 | % | 4.0 | % | ||||
| Expected dividend |
$ | 0.0 | $ | 0.0 | ||||
| Expected option life (years) |
6 | 6 | ||||||
| Expected volatility |
34 | % | 32 | % | ||||
The SFAS No. 123 expense reflected above only includes options granted since fiscal 1995 and, therefore, may not be representative of future expense.
8
4. Merchandise Inventories
The Company uses the last–in, first-out (LIFO) method of accounting for merchandise inventories. The Company did not record LIFO expense for the three months ended May 1, 2004 and May 3, 2003. The LIFO cost of merchandise was equal to the first-in, first-out (FIFO) cost of merchandise as of May 1, 2004 and January 31, 2004. Inventories would have been $4,980,000 higher at May 3, 2003, if they had been valued using the FIFO method.
5. 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 financial position or results of operations.
6. 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 1, 2004 |
May 3, 2003 | |||||
| (In Thousands) | ||||||
| Numerator for dilutive earnings per share-net income |
$ | 113,794 | $ | 111,013 | ||
| Denominator for basic earnings per share – weighted average shares |
340,434 | 338,013 | ||||
| Impact of dilutive employee stock options (a) |
3,424 | 4,834 | ||||
| Denominator for dilutive earnings per share |
343,858 | 342,847 | ||||
| (a) | For the three months ended May 1, 2004 and May 3, 2003, 8,225,190 and 5,041,498 options, respectively, were not included in the earnings per share calculation as the impact of such options was antidilutive. |
9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
The Company’s focus in 2004 centers around four major initiatives: inventory management, the customer shopping experience, merchandise content, and differentiation in marketing.
The Company has appropriately reduced inventory levels. At the end of the first quarter, inventory per store was down 14 percent from last year. The reductions were primarily made in seasonal merchandise classifications. The Company remains committed to being in-stock on basics and key item programs. Less inventory is being brought in at the beginning of the season in order for the Company to flow goods in throughout the season based on rate of sale, which should lead to improved gross margins.
The customer shopping experience was not up to the Company’s standards in 2003. The stores were difficult to shop—mainly as a result of too much merchandise. In addition to reducing the overall inventory level in 2004, reductions have been made in the number of in-aisle programs at the entrance and throughout the store. Standards have been reinforced to ensure that the appropriate amount of space between fixtures is maintained to allow for easier movement throughout the merchandise areas. Quantities allowed on any one fixture have been reduced to allow customers to freely select garments from the fixture.
From a merchandise content standpoint, new brands have been introduced in womens and home and successful existing brands have been extended into other areas of the store. Updated brands performed better overall in most apparel areas in the first quarter of 2004 while more traditional brands struggled. The Company will continue to focus on newness in merchandise content throughout the year to increase market share.
Management believes that differentiation in marketing will help the Company achieve its goal of returning to positive comparable store sales increases. In the first quarter, the Company created some new events and added newness to existing events in order to attract more occasional and new shoppers. The mix of print, broadcast (both in TV and radio) and direct mail is being adjusted to find the most effective medium for each type of event. The Company will continue to test new events and make adjustments to existing events throughout the coming year.
The Company’s earnings for the first quarter of 2004 were in line with its guidance entering the quarter. Although the Company was disappointed with its comparable store sales performance, this was offset by better than expected gross margin and continued expense control.
Results of Operations
Expansion Update
At May 1, 2004, the Company operated 589 stores compared with 492 stores at the same time last year. Total square feet of selling space increased 21.1% from 37.3 million at May 3, 2003 to 45.2 million at May 1, 2004.
During the quarter, the Company opened 47 stores significantly increasing its presence in the Southwest region. In March, the Company opened 21 stores including entering into the Sacramento, CA market with seven stores; the Memphis, TN market with three stores; and the Bakersfield, CA market with two stores. In April, the Company opened 26 stores including entering into the San Diego, CA market with five stores; and the Fresno, CA market with three stores. In addition, the Company added eight stores in the Northeast region, seven stores in the Southwest region, four stores in the Midwest region, four stores in the Southeast region, two stores in the Mid-Atlantic region and two stores in the South Central region.
The Company expects to open approximately 48 stores in the third fiscal quarter including its entry into the San Francisco, CA market with 11 stores and the Salt Lake City, UT market with five stores. The remaining new stores to be opened in existing markets will be spread across all regions of the country. In total the Company plans to open approximately 95 stores in fiscal 2004.
Net Sales
Net sales increased $262.5 million or 12.4% to $2,380.2 million for the three months ended May 1, 2004, from $2,117.7 million for the three months ended May 3, 2003. Net sales increased $264.8 million due to the opening of 47 new stores in the first quarter of 2004 and to the inclusion of 85 new stores opened in fiscal 2003. The offsetting $2.3 million decrease is attributable to a decline in comparable store sales of 0.1%. The number of transactions in comparable stores increased 0.9% while the average transaction value declined 1.0%. The Accessories business led the Company for the quarter, while the Shoes business was the most difficult. The Northeast region had the strongest comparable store sales performance, while the Midwest region was the most difficult.
Gross Margin
Gross margin increased $106.1 million to $847.4 million for the three months ended May 1, 2004, from $741.3 million for the three months ended May 3, 2003. Gross margin increased $91.1 million due to the opening of 47 new stores in the first quarter of 2003 and to the inclusion of 85 new stores opened in fiscal 2003. Comparable store gross margin increased $15.0 million. The Company’s gross margin as a percent of net sales was 35.6% for the three months ended May 1, 2004, and 35.0% for the three months
10
ended May 3, 2003, an increase of 60 basis points. Approximately 40 basis points of the increase was due to the impact of Emerging Issues Task Force (EITF) No. 02-16, “Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor.” The new standard affects how the Company accounts for vendor advertising support, primarily funding received from vendors for new store openings. Prior to fiscal 2004, vendor support received for new store advertising had been recognized as a reduction of selling, general and administrative (S,G&A) expenses.
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 $91.5 million or 19.3% to $565.6 million for the three months ended May 1, 2004, from $474.1 million for the three months ended May 3, 2003. The S,G&A expenses increased to 23.8% of net sales for the three months ended May 1, 2004, from 22.4% of net sales for the three months ended May 3, 2003, an increase of 138 basis points. Store operating expenses increased 17.4%, which is consistent with the Company’s square footage growth. Advertising expenses as a percent of sales increased by 105 basis points, with the change in accounting for vendor support in accordance with EITF No. 02-16 representing approximately 70 basis points of the increase. Expenses as a percent of sales related to distribution center costs declined by 10 basis points, credit costs declined by 8 basis points and other corporate expenses decreased by 13 basis points.
Depreciation and amortization for the three months ended May 1, 2004, was $66.0 million compared to $55.4 million for the three months ended May 3, 2003. The increase is primarily attributable to the addition of new stores and the remodeling and expansion of existing 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, and processing and transporting initial merchandise. Preopening expense for the three months ended May 1, 2004, was $17.8 million compared to $15.5 million for the three months ended May 3, 2003. The increase is primarily due to an increase in the number of new stores opened during the quarter and the timing of related expenses. The Company opened 47 new stores during the three months ended May 1, 2004 compared to 35 new stores opened during the three months ended May 3, 2003.
11
Operating Income
As a result of the above factors, operating income for the three months ended May 1, 2004, was $198.0 million or 8.3% of net sales compared to $196.2 million or 9.3% of net sales for the three months ended May 3, 2003.
Net Interest Expense
Net interest expense for the three months ended May 1, 2004, was $15.0 million compared to $17.8 million for the three months ended May 3, 2003. The decrease is due to the redemption of the Company’s 2.75% Liquid Yield Option Subordinated Notes (LYONs) during the second quarter of 2003.
Net Income
Net income for the three months ended May 1, 2004, was $113.8 million compared to $111.0 million for the three months ended May 3, 2003. Earnings were $0.33 per diluted share for the three months ended May 1, 2004, compared to $0.32 per diluted share for the three months ended May 3, 2003. The application of EITF No. 02-16 reduced net income per share by approximately $0.01 for the three months ended May 1, 2004.
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 revenues 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.
Financial Condition and Liquidity
The Company’s primary ongoing cash requirements are for capital expenditures in connection with the expansion and remodeling programs, seasonal and new store inventory purchases, and the growth in proprietary credit card accounts receivable. 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.
12
Operating Activities. Cash flow provided by operations was $17.4 million for the three months ended May 1, 2004 compared to cash used in operating activities of $194.4 million for the three months ended May 3, 2003. The primary source of cash flow was net income of $113.8 million. Merchandise inventory increased $255.2 million for the three months ended May 1, 2004, which was offset by a $213.9 million increase in accounts payable. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories. Seasonal cash needs are met by financing secured by its proprietary accounts receivable and lines of credit available under its revolving credit facilities.
Key financial ratios that provide certain measures of the Company’s liquidity are as follows:
| May 1, 2004 |
January 31, 2004 |
May 3, 2003 |
||||||||||
| Working Capital (In Thousands) |
$ | 1,954,743 | $ | 1,902,482 | $ | 1,861,043 | ||||||
| Current Ratio |
2.6 | 2.7 | 2.5 | |||||||||
| Debt/Capitalization |
21.7 | % | 20.6 | % | 28.0 | % | ||||||
The Company’s net accounts receivable balance at May 1, 2004 decreased $36.2 million from the January 31, 2004 balance due to the seasonality of the Company’s business. The accounts receivable balance typically peaks during the holiday season and decreases during the first quarter as balances are paid. The May 1, 2004 net accounts receivable balance increased $140.7 million over the May 3, 2003 balance. The increase is primarily due to proprietary credit card sales increasing to $894.4 million or 37.5% of net sales for the three months ended May 1, 2004, from $739.8 million or 34.9% of net sales for the three months ended May 3, 2003, offset by increased payment rates. The following table summarizes information related to the Company’s proprietary credit card receivables:
| May 1, 2004 |
January 31, 2004 |
May 3, 2003 |
||||||||||
| (In Thousands) | ||||||||||||
| Gross accounts receivable |
$ | 1,135,400 | $ | 1,172,678 | $ | 994,232 | ||||||
| Allowance for doubtful accounts (a) |
$ | 21,472 | $ | 22,521 | $ | 20,976 | ||||||
| Allowance as a % of gross accounts receivable |
1.9 | % | 1.9 | % | 2.1 | % | ||||||
| Accounts receivable turnover (rolling 4 quarters) (b) |
3.6 | x | 3.6 | x | 3.4 | x | ||||||
| (a) | Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. Bad debts written off, net of recoveries and other allowances, for |
13
the three months ended May 1, 2004, were 1.0% of average gross accounts receivable compared to 1.1% of average gross accounts receivable for the three months ended May 3, 2003.
| (b) | Turnover is computed using a rolling four quarters of credit card sales divided by average quarterly gross accounts receivable. |
The Company’s merchandise inventories increased $51.2 million, an increase of 2.8% from the May 3, 2003 balance and increased $255.2 million, an increase of 15.9% from the January 31, 2004 balance due to normal business seasonality. On an average store basis, the inventory at May 1, 2004, was down approximately 14.0% and the number of units per store declined approximately 11.0% from the May 3, 2003 balance. Accounts payable increased $138.1 million from May 3, 2003, and increased $213.9 million from January 31, 2004. Accounts payable as a percent of inventory at May 1, 2004 is 40.1%, compared to 33.6% last year. The change in the level of accounts payable reflects the benefits of executing the Company’s strategy to flow goods closer to point of sale.
Investing Activities. Capital expenditures include costs for new store openings, store remodels, distribution center openings and other base capital needs. The Company’s capital expenditures, including favorable lease rights for the three months ended May 1, 2004, were $167.9 million compared to the $122.8 million for the same period a year ago. The increase in expenditures is primarily attributable to the timing and number of new store openings. The Company opened 47 new stores in the first fiscal quarter of 2004 compared to 35 new stores in the first fiscal quarter of 2003.
Total capital expenditures for fiscal 2004 are expected to be approximately $1.0 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 periodically accesses the capital markets, as needed, to finance its growth. The Company believes it has sufficient lines of credit and expects to generate adequate cash flows from operating activities to sustain current levels of operations. The Company has two unsecured revolving bank credit facilities (“revolver”) totaling $665 million. The Company also has a $225 million Receivable Purchase Agreement (RPA) under which the Company periodically sells an undivided interest in its private label credit card receivables. For financial reporting purposes, receivables sold are treated as secured borrowings. At May 1, 2004, accounts receivable of $50 million was sold and $60 million was outstanding under the revolver. At May 3, 2003, no amounts were outstanding under the RPA or the Company’s revolver.
14
Contractual Obligations
The Company has aggregate contractual obligations of $6,114.2 million related to debt repayments, capital leases and operating leases as follows:
| Fiscal Year | |||||||||||||||||||||
| Remaining 2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total | |||||||||||||||
| (In Thousands) | |||||||||||||||||||||
| Short and long-term debt |
$ | 110,105 | $ | 138 | $ | 100,416 | $ | 368 | $ | 329 | $ | 895,231 | $ | 1,106,587 | |||||||
| Capital leases (a) |
1,943 | 2,818 | 3,089 | 3,473 | 4,085 | 79,428 | 94,836 | ||||||||||||||
| Operating leases |
218,602 | 302,606 | 298,092 | 287,663 | 283,735 | 3,522,079 | 4,912,777 | ||||||||||||||
| Total |
$ | 330,650 | $ | 305,562 | $ | 401,597 | $ | 291,504 | $ | 288,149 | $ | 4,496,738 | $ | 6,114,200 | |||||||
| (a) | Annual commitments on capital leases are net of interest. |
The Company has entered into future capital lease commitments for land and buildings that total approximately $9.0 million at May 1, 2004.
The Company also has outstanding letters of credit and stand-by letters of credit that total approximately $33.7 million, at May 1, 2004. 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 requiring the Company to meet certain financial tests. As of May 1, 2004, the Company was in compliance with all financial covenants of the debt agreements.
Off-Balance Sheet Arrangements
The Company has not provided any financial guarantees as of May 1, 2004. All purchase obligations are cancelable and therefore are not included in the above table.
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.
15
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.
Allowance for Doubtful Accounts
The Company records an allowance for doubtful accounts as an estimate of the accounts receivable balance that may not be collected. The Company evaluates the collectibility of accounts receivable based on the aging of accounts, historical write off experience and specific review for potential bad debts. Delinquent accounts are written off automatically after the passage of 180 days without receiving a full scheduled monthly payment. Accounts are written off sooner in the event of customer bankruptcy or other circumstances that make further collection unlikely. For all other accounts, the Company recognizes reserves for bad debts based on the length of time the accounts are past due and the anticipated future write-offs based on historical experience.
Factors that would cause this allowance to increase primarily relate to increased customer bankruptcies or other difficulties that make further collection unlikely. Conversely, improved write-off experience and aging of receivables would result in a decrease in the provision.
Retail Inventory Method and Inventory Valuation
The Company values its inventory at the lower of cost or market with cost determined on the last-in, first-out (LIFO) 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.
16
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 print advertising or fixture programs reduce the Company’s expense or expenditure for the related advertising or fixture program. Vendor 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 in 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.
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 long-lived assets held for use (including favorable lease rights) for impairment 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% in 2004 and 2003. The effective rate is impacted by changes in law, location of new stores, level of earnings and the result of tax audits.
17
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 1, 2004, the Company’s fixed rate long-term debt, excluding capital leases, was $996.6 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 1, 2004, changed by 100 basis points, the Company’s annual interest expense would change by $10.0 million.
During the first fiscal quarter of 2004, average borrowings under the Company’s variable rate credit facilities, the revolver and the RPA, were $13.8 million. If interest rates on the average fiscal 2004 variable rate debt changed by 100 basis points, the Company’s interest expense would change by $138,000, assuming comparable borrowing levels.
18
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.
Forward Looking Statements
Items 2 and 3 of this Form 10-Q contains “forward looking statements,” subject to protections under federal law. The Company intends words such as “believes,” “anticipates,” “plans,” “may,” “will,” “should,” “expects,” and similar expressions to identify forward-looking statements. In addition, statements covering the Company’s future sales or financial performance and the Company’s plans, objectives, expectations or intentions are forward-looking statements, such as statements regarding the Company’s liquidity, planned capital expenditures, future store openings and adequacy of capital resources and reserves. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated by the forward looking statements. These risks and uncertainties include but are not limited to those described in Exhibit 99.1 to the Company’s annual report on Form 10-K filed with the SEC on March 19, 2004, which is expressly incorporated herein by reference, and such other factors as may periodically be described in the Company’s filings with the SEC.
19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
During the quarter ended May 1, 2004, the Company did not sell any equity securities which were not registered under the Securities Act or repurchase any of its equity securities.
Item 4. Submission of Matters to a Vote of Shareholders
The Annual Meeting of Shareholders of Kohl’s Corporation was held on April 28, 2004:
| 1. | To elect four directors to serve for a three-year term; |
| 2. | To ratify the appointment of Ernst & Young LLP as independent auditors; |
| 3. | To vote on two shareholder proposals; and |
| 4. | 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 solicitations. All of management’s nominees for directors as listed in the proxy statement were elected, the appointment of Ernst & Young LLP as independent auditors was ratified, and two shareholder proposals were rejected.
The results of the voting were as follows:
| 1. | Election of directors: |
Wayne Embry
For – 282,176,000 shares
Withheld – 24,697,926 shares
John F. Herma
For – 209,640,747 shares
Withheld –97,233,179 shares
20
R. Lawrence Montgomery
For - 226,650,806 shares
Withheld – 80,223,120 shares
Frank V. Sica
For – 279,617,970 shares
Withheld –27,255,956 shares
2. Ratification of Ernst & Young LLP as independent auditors:
For – 293,748,579 shares
Against – 11,329,575 shares
Abstain – 1,795,772 shares
3. Shareholder proposal requesting that the Board of Directors’ Compensation Committee utilize performance and time-based restricted share programs in lieu of stock options.
For – 69,479,796 shares
Against – 204,160,920 shares
Abstain – 2,321,679 shares
Broker Non-Votes – 30,911,531 shares
4. Shareholder proposal concerning the amendment of the Company’s By-Laws to require that an independent Director, as defined by the rules of the New York Stock Exchange, be its Chairman of the Board of Directors.
For – 85,545,533 shares
Against –188,227,074 shares
Abstain – 2,189,788 shares
Broker Non-Votes – 30,911,531 shares
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
| a) | Exhibits |
| 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 |
| b) | Reports on Form 8-K |
The Company furnished four reports on Form 8-K in the first fiscal quarter:
| (i) | On February 5, 2004, the Company furnished a report dated February 5, 2004, under Item 12, providing a press release announcing its fiscal January 2004, fiscal 2003 fourth quarter and annual sales results; and |
| (ii) | On February 26, 2004, the Company furnished a report dated February 26, 2004, under Item 12, providing a press release announcing its fiscal 2003 fourth quarter and annual financial results; and |
| (iii) | On March 4, 2004, the Company furnished a report dated March 4, 2004, under Item 9, providing a press release announcing its fiscal February 2004 sales results; and |
| (iv) | On April 8, 2004, the Company furnished a report dated April 8, 2004, under Item 9, providing a press release announcing its fiscal March 2004 sales results. |
22
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 4, 2004 |
/s/ R. Lawrence Montgomery | |
| R. Lawrence Montgomery | ||
| Chief Executive Officer and Director | ||
| Date: June 4, 2004 |
/s/ Wesley S. McDonald | |
| Wesley S. McDonald | ||
| Chief Financial Officer | ||
23