10-Q 1 kss-20240504.htm 10-Q 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended May 4, 2024

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

img74273611_0.jpg 

KOHL’S CORPORATION

(Exact name of registrant as specified in its charter)

 

Wisconsin

 

39-1630919

(State or other jurisdiction of incorporation or organization)

 

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

 

 

 

N56 W17000 Ridgewood Drive,

Menomonee Falls, Wisconsin

 

53051

(Address of principal executive offices)

 

(Zip Code)

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

 

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

 

Title of each class

Trading

Symbol(s)

Name of each exchange on

which registered

Common Stock, $.01 par value

KSS

New York Stock Exchange

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

 

 

Accelerated Filer

 

Non-Accelerated Filer

 

 

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: May 31, 2024 Common Stock, Par Value $0.01 per Share, 111,205,633 shares outstanding.

 

 


 

KOHL’S CORPORATION

INDEX

 

PART I

FINANCIAL INFORMATION

3

Item 1.

Financial Statements:

3

 

Consolidated Balance Sheets

3

 

Consolidated Statements of Operations

4

 

Consolidated Statements of Changes in Shareholders' Equity

5

 

Consolidated Statements of Cash Flows

6

 

Notes to Consolidated Financial Statements

7

Item 2.

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

11

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

18

Item 4.

Controls and Procedures

18

 

 

 

PART II

OTHER INFORMATION

20

Item 1.

Legal Proceedings

20

Item 1A.

Risk Factors

20

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

20

Item 5.

Other Information

20

Item 6.

Exhibits

21

 

Signatures

22

 

 

 


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KOHL’S CORPORATION

CONSOLIDATED BALANCE SHEETS

 

(Dollars in Millions)

May 4, 2024

February 3, 2024

April 29, 2023

Assets

(Unaudited)

(Audited)

(Unaudited)

Current assets:

 

 

 

Cash and cash equivalents

$228

$183

$286

Merchandise inventories

3,083

2,880

3,526

Other

345

347

347

Total current assets

3,656

3,410

4,159

Property and equipment, net

7,664

7,720

7,803

Operating leases

2,498

2,499

2,368

Other assets

460

380

380

Total assets

$14,278

$14,009

$14,710

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

Current liabilities:

 

 

 

Accounts payable

$1,220

$1,134

$1,310

Accrued liabilities

1,265

1,201

1,164

Borrowings under revolving credit facility

355

92

765

Current portion of:

 

 

 

Long-term debt

111

Finance leases and financing obligations

81

83

93

Operating leases

92

102

111

Total current liabilities

3,013

2,612

3,554

Long-term debt

1,638

1,638

1,637

Finance leases and financing obligations

2,651

2,680

2,710

Operating leases

2,783

2,781

2,634

Deferred income taxes

94

107

129

Other long-term liabilities

286

298

326

Shareholders’ equity:

 

 

 

Common stock

2

2

2

Paid-in capital

3,539

3,528

3,489

Treasury stock, at cost

(2,579)

(2,571)

(2,569)

Retained earnings

2,851

2,934

2,798

Total shareholders’ equity

$3,813

$3,893

$3,720

Total liabilities and shareholders’ equity

$14,278

$14,009

$14,710

 

See accompanying Notes to Consolidated Financial Statements

 

3


KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

Quarter Ended

(Dollars in Millions, Except per Share Data)

May 4, 2024

April 29, 2023

Net sales

$3,178

$3,355

Other revenue

204

216

Total revenue

3,382

3,571

Cost of merchandise sold

1,923

2,047

Operating expenses:

 

 

Selling, general, and administrative

1,228

1,238

Depreciation and amortization

188

188

Operating income

43

98

Interest expense, net

83

84

(Loss) income before income taxes

(40)

14

(Benefit) provision for income taxes

(13)

Net (loss) income

$(27)

$14

Net (loss) income per share:

 

 

Basic

$(0.24)

$0.13

Diluted

$(0.24)

$0.13

 

See accompanying Notes to Consolidated Financial Statements

 

4


KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

 

Quarter Ended

(Dollars in Millions, Except per Share Data)

May 4, 2024

April 29, 2023

Common stock

 

 

Balance, beginning of period

$2

$4

Stock-based awards

Retirement of treasury stock

(2)

Balance, end of period

$2

$2

 

 

 

Paid-in capital

 

 

Balance, beginning of period

$3,528

$3,479

Stock-based awards

11

10

Balance, end of period

$3,539

$3,489

 

 

 

Treasury stock

 

 

Balance, beginning of period

$(2,571)

$(13,715)

Stock-based awards

(9)

(12)

Dividends paid

1

1

Retirement of treasury stock

11,157

Balance, end of period

$(2,579)

$(2,569)

 

 

 

Retained earnings

 

 

Balance, beginning of period

$2,934

$13,995

Net (loss) income

(27)

14

Dividends paid

(56)

(56)

Retirement of treasury stock

(11,155)

Balance, end of period

$2,851

$2,798

 

 

 

Total shareholders' equity, end of period

$3,813

$3,720

 

 

 

Common stock

 

 

Shares, beginning of period

161

378

Stock-based awards

Retirement of treasury stock

(217)

Shares, end of period

161

161

Treasury stock

 

 

Shares, beginning of period

(50)

(267)

Retirement of treasury stock

217

Stock-based awards

Shares, end of period

(50)

(50)

Total shares outstanding, end of period

111

111

 

 

 

Dividends paid per common share

$0.50

$0.50

 

See accompanying Notes to Consolidated Financial Statements

 

5


KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Operating activities

 

 

Net (loss) income

$(27)

$14

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:

 

 

Depreciation and amortization

188

188

Share-based compensation

10

9

Deferred income taxes

(13)

1

Non-cash lease expense

22

25

Other non-cash items

3

(4)

Changes in operating assets and liabilities:

 

 

Merchandise inventories

(202)

(336)

Other current and long-term assets

(81)

49

Accounts payable

86

(20)

Accrued and other long-term liabilities

34

(101)

Operating lease liabilities

(27)

(27)

Net cash used in operating activities

(7)

(202)

Investing activities

 

 

Acquisition of property and equipment

(126)

(94)

Proceeds from sale of real estate

1

Other

(1)

Net cash used in investing activities

(126)

(94)

Financing activities

 

 

Net borrowings under revolving credit facility

263

680

Shares withheld for taxes on vested restricted shares

(9)

(12)

Dividends paid

(55)

(55)

Repayment of long-term borrowings

(164)

Finance lease and financing obligation payments

(21)

(25)

Proceeds from financing obligations

5

Net cash provided by financing activities

178

429

Net increase in cash and cash equivalents

45

133

Cash and cash equivalents at beginning of period

183

153

Cash and cash equivalents at end of period

$228

$286

Supplemental information

 

 

Interest paid, net of capitalized interest

$70

$60

Income taxes paid

1

2

Property and equipment acquired (disposed) through exchange of:

 

 

  Finance lease liabilities

(11)

(56)

  Operating lease liabilities

21

74

 

See accompanying Notes to Consolidated Financial Statements

 

6


KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for fiscal year end Consolidated Financial Statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the Consolidated Financial Statements and related footnotes included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024 (Commission File No. 1-11084) as filed with the Securities and Exchange Commission ("SEC").

Due to the seasonality of the business of Kohl’s Corporation (the “Company,” “Kohl’s,” “we,” “our,” or “us”), results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We operate as a single business unit.

Recent Accounting Pronouncements

Accounting Standards Issued and Adopted

There are no recently adopted accounting pronouncements that had a material impact on our financial statements.

Accounting Standards Issued but not yet Effective

 

Standard

Description

Effect on our Financial Statements

Segment Reporting

(ASU 2023-07)

Issued November 2023

 

Effective for Fiscal Years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024

The amendments in this ASU improve reportable segment disclosure requirements, primarily through enhanced disclosures around significant segment expenses.

We are evaluating the impact of the new required disclosures on our financial statements but do not expect the effect of the adoption to be material.

Income Taxes

(ASU 2023-09)

Issued December 2023

 

Effective for Fiscal Years beginning after December 15, 2024

The ASU requires entities to provide additional information in the rate reconciliation table and additional disclosures around income taxes paid.

We are evaluating the impact of the new required disclosures on our financial statements but do not expect the effect of the adoption to be material.

 

 

 

 

7


2. Revenue Recognition

The following table summarizes Net sales by line of business:

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Women's

$923

$988

Accessories (including Sephora)

618

512

Men's

600

695

Home

392

433

Children's

344

403

Footwear

301

324

Net Sales

$3,178

$3,355

 

Unredeemed gift cards and merchandise return card liabilities totaled $294 million as of May 4, 2024, $327 million as of February 3, 2024, and $317 million as of April 29, 2023. In the first quarter of 2024 and 2023, net sales of $57 million and $68 million, respectively, were recognized from gift cards redeemed in the current period and issued in prior years.

3. Debt

Outstanding borrowings under the revolving credit facility, recorded as short-term debt, were $355 million as of May 4, 2024, $92 million as of February 3, 2024, and $765 million as of April 29, 2023.

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

 

 

 

 

Outstanding

Maturity (Dollars in Millions)

Effective Rate at Issuance

Coupon Rate

May 4,
2024

February 3,
2024

April 29,
2023

2023

4.78%

4.75%

$—

$—

$111

2025

9.50%

10.75%

113

113

113

2025

4.25%

4.25%

353

353

353

2029

7.36%

7.25%

42

42

42

2031

3.40%

4.63%

500

500

500

2033

6.05%

6.00%

112

112

112

2037

6.89%

6.88%

101

101

101

2045

5.57%

5.55%

427

427

427

Outstanding unsecured senior debt

 

 

1,648

1,648

1,759

Unamortized debt discounts and deferred financing costs

 

 

(10)

(10)

(11)

Current portion of unsecured senior debt

 

 

(111)

Long-term unsecured senior debt

 

 

$1,638

$1,638

$1,637

Effective interest rate at issuance

 

 

5.06%

5.06%

5.04%

 

Our estimated fair value of unsecured senior long-term debt is determined using Level 1 inputs, using financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our unsecured senior debt was $1.4 billion at May 4, 2024, $1.3 billion at February 3, 2024, and $1.3 billion at April 29, 2023.

Our various debt agreements contain covenants including limitations on additional indebtedness and certain financial tests. As of May 4, 2024, we were in compliance with all covenants of the various debt agreements.

 

 

 

8


4. Stock-Based Awards

The following table summarizes our stock-based awards activity for the three months ended May 4, 2024:

 

 

Nonvested Restricted Stock Awards and Units

Performance Share Units

(Shares and Units in Thousands)

Shares

Weighted
Average
Grant Date
Fair Value

Units

Weighted
Average
Grant Date
Fair Value

Balance - February 3, 2024

3,099

$29.66

777

$31.26

Granted

1,322

26.32

622

29.33

Vested

(877)

31.47

(38)

74.68

Forfeited

(68)

30.98

Balance - May 4, 2024

3,476

$27.91

1,361

$29.17

 

In 2019, we issued 1,747,441 stock warrants. All 1,747,441 shares were vested and unexercised as of May 4, 2024.

5. Contingencies

Note 7, Contingencies, of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024, contains a description of an ongoing legal proceeding, as to which there have been no material developments as of May 4, 2024.

On May 16, 2024, David Kelley, an alleged shareholder of the Company, filed a shareholder derivative lawsuit in the U.S. District Court for the Eastern District of Wisconsin purportedly on behalf of the Company and against current and former members of the Board of Directors of the Company as Defendants, and the Company as Nominal Defendant. Kelley v. Boneparth, No. 2:24-cv-00604-LA (E.D. Wis.). The plaintiff asserts claims for breach of fiduciary duty and unjust enrichment and seeks declaratory and injunctive relief, compensatory damages, restitution, fees, and costs. The complaint makes similar allegations to the shareholder class action described in Note 7, Contingencies, of the notes to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended February 3, 2024. In particular, the complaint alleges that the Defendants breached their fiduciary duties to the Company and were unjustly enriched by causing or allowing the Company to disseminate allegedly false or misleading statements regarding (1) the conception, execution, and outcomes of the Company’s strategic plan announced on October 20, 2020, (2) the Company’s internal controls over financial reporting, disclosure controls, and corporate governance mechanisms, and (3) the Company’s consideration of acquisition offers. Defendants deny the allegations in the complaint and intend to vigorously defend against them. Due to the early stages of this matter, the Company is unable to estimate a reasonably possible range of loss, if any, that may result from this matter.

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

6. Income Taxes

The effective income tax rate for the first quarter of 2024 was 32.5% compared to 3.8% for the first quarter of 2023. In both periods, the tax rate was driven by the recognition of favorable tax items. The impact of the 2024 benefit of the favorable tax items, when compared to a pre-tax loss, results in increasing the tax rate from the statutory rate. The impact of the 2023 benefit of the favorable tax items, when compared to pre-tax income, results in decreasing the tax rate from the statutory rate.

 

 

 

9


7. Net (Loss) Income Per Share

Basic net (loss) income per share is net (loss) income divided by the average number of common shares outstanding during the period. Diluted net (loss) income per share includes incremental shares assumed for share-based awards and stock warrants. The potentially dilutive shares outstanding during the period include unvested restricted stock units, unvested restricted stock awards, and warrants, which utilize the treasury stock method, as well as unvested performance share units that utilize the contingently issuable share method. Potentially dilutive shares are excluded from the computations of diluted (loss) earnings per share ("EPS") if their effect would be anti-dilutive.

The information required to compute basic and diluted net (loss) income per share is as follows:

 

 

Quarter Ended

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

May 4, 2024

April 29, 2023

Numerator—Net (loss) income

$(27)

$14

Denominator—Weighted-average shares:

 

 

Basic

111

110

Dilutive impact

1

Diluted

111

111

Net (loss) income per share:

 

 

Basic

$(0.24)

$0.13

Diluted

$(0.24)

$0.13

 

The following potential shares of common stock were excluded from the diluted net (loss) income per share calculation because their effect would have been anti-dilutive:

 

 

Quarter Ended

(Shares in Millions)

May 4, 2024

April 29, 2023

Anti-dilutive shares

7

3

 

8. Subsequent Events

On May 14, 2024, we sent notification of a make whole call to noteholders to redeem the remaining $113 million of outstanding 9.50% notes due May 15, 2025, which will result in an approximately $4.5 million pre-tax charge. The redemption will be completed on June 13, 2024.

On May 15, 2024, the Board of Directors of Kohl's Corporation declared a quarterly cash dividend of $0.50 per share. The dividend will be paid on June 26, 2024, to all shareholders of record at the close of business on June 12, 2024.

 

 

 

10


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

For purposes of the following discussion, unless noted, all references to "the quarter” and “the first quarter” are for the three fiscal months (13 weeks) ended May 4, 2024 or April 29, 2023.

This Form 10-Q contains “forward-looking statements” made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "plans," "may," "intends," "will," "should," "expects," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include the statements under management's discussion and analysis, financial and capital allocation outlook and may include comments about our future sales or financial performance and our plans, performance and other objectives, expectations or intentions, such as statements regarding our liquidity, debt service requirements, planned capital expenditures, future store initiatives, and adequacy of capital resources and reserves. Forward-looking statements are based on management’s then-current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors, described in Part I Item 1A of our 2023 Form 10-K, or disclosed from time to time in our filings with the SEC, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made, and we undertake no obligation to update them.

Executive Summary

Kohl's is a leading omnichannel retailer operating 1,176 stores and a website (www.Kohls.com) as of May 4, 2024. Our Kohl's stores and website sell moderately-priced private and national brand apparel, footwear, accessories, beauty, and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences, store size, and Sephora at Kohl's shop-in-shops ("Sephora shops"). Our website includes merchandise which is available in our stores, as well as merchandise that is available only online.

Key financial results for the quarter include:

Net sales decreased 5.3%, to $3.2 billion, with comparable sales down 4.4%.
Gross margin as a percentage of Net sales was 39.5%, an increase of 48 basis points.
Selling, general, and administrative ("SG&A") expenses decreased 0.8%, to $1.2 billion. As a percentage of total revenue, SG&A expenses were 36.3%, an increase of 166 basis points year-over-year.
Operating income was $43 million compared to $98 million in the prior year. As a percentage of total revenue, operating income was 1.3%, a decrease of 148 basis points to last year.
Net loss was $27 million, or ($0.24) per diluted share. This compares to net income of $14 million, or $0.13 per diluted share in the prior year.
Inventory was $3.1 billion, a decrease of 13% to last year.
Operating cash flow was a use of $7 million as compared to a use of $202 million in the prior year.

Our Strategy

Kohl's strategy is focused on delivering long-term shareholder value. To achieve this, the Company has established four overarching priorities to drive improved sales and profitability. These priorities include enhancing the customer experience, accelerating and simplifying its value strategies, managing inventory and expenses with discipline, and strengthening the balance sheet.

 

 

 

11


Updated 2024 Financial and Capital Allocation Outlook

For the full year 2024, which has 52 weeks compared to 53 weeks in full year 2023, the Company's guidance includes the potential impact from credit card late fee regulatory changes in the second half of 2024. The Company currently expects the following:

Net sales: A decrease of (2%) to a decrease of (4%)
Comparable sales: A decrease of (1%) to a decrease of (3%)
Operating margin: In the range of 3.0% to 3.5%
Diluted earnings per share: In the range of $1.25 to $1.85
Capital expenditures: Approximately $500 million, including expansion of Sephora partnership and other store-related investments
Dividend: On May 15, 2024, Kohl’s Board of Directors declared a quarterly cash dividend on the Company’s common stock of $0.50 per share. The dividend is payable June 26, 2024 to shareholders of record at the close of business on June 12, 2024.
Debt Reduction: On May 14, 2024, we exercised our right to redeem the remaining $113 million of our 9.50% notes due May 15, 2025. The redemption will be completed on June 13, 2024.

Results of Operations

Total Revenue

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

Net sales

$3,178

$3,355

$(177)

Other revenue

204

216

(12)

Total revenue

$3,382

$3,571

$(189)

 

Net sales includes revenue from the sale of merchandise, net of expected returns and deferrals due to future performance obligations, and shipping revenue.

Net sales decreased 5.3% in the first quarter of 2024 compared to the first quarter of 2023.

The decrease was driven by transaction volume down approximately 3% and approximately a 2% decrease in average transaction value. Positive sales growth in our regular price business was more than offset by lower clearance sales.
The sales decrease was seen across all lines of business except for Accessories, as they underperformed the Company average. Partially offsetting this decrease was a 21% increase in Accessories driven by a 60% increase in Sephora compared to the prior year.

 

 

Quarter Ended

 

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

Women's

$923

$988

(6.6%)

Accessories (including Sephora)

618

512

20.7%

Men's

600

695

(13.7%)

Home

392

433

(9.5%)

Children's

344

403

(14.6%)

Footwear

301

324

(7.1%)

Net Sales

$3,178

$3,355

(5.3%)

 

 

 

 

12


Comparable sales decreased 4.4%. Comparable sales is a measure that highlights the performance of our stores and digital channel by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales includes all store and digital sales, except sales from stores open less than twelve months, stores that have been closed, and stores that have been relocated where square footage has changed by more than 10%.

Digital sales decreased 6%, and digital penetration represented 25% of net sales compared to 26% for the first quarter of 2023. We measure the change in digital sales by including all sales initiated online or through mobile applications, including omnichannel transactions which are fulfilled through our stores. We measure digital penetration as digital sales over net sales. These amounts do not take into consideration fulfillment node, digital returns processed in stores, and coupon behaviors.

Comparable sales and digital penetration measures vary across the retail industry. As a result, our comparable sales calculation and digital penetration may not be consistent with the similarly titled measures reported by other companies.

Other revenue includes revenue from credit card operations, third-party advertising on our website, unused gift cards and merchandise return cards (breakage), and other non-merchandise revenue.

Other revenue decreased $12 million driven by increasing credit loss rates within our credit business.

As it relates to our credit business and recent regulatory developments, on March 5, 2024, the Consumer Financial Protection Bureau finalized a rule lowering the safe harbor dollar amount credit card companies can charge for late fees for a missed payment. Unless blocked by court order prior to becoming effective, the rule reduces the typical amount of late fees that can be charged, which could have a negative impact on Kohl’s credit card revenues, particularly if Kohl’s steps to mitigate the impact of such rule are not successful. We are actively pursuing various initiatives to mitigate the effects of this potential ruling including scaling our recently launched co-brand card and other various initiatives with Capital One, our credit partner. We are closely monitoring developments on the issue.

Cost of Merchandise Sold and Gross Margin

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

Net sales

$3,178

$3,355

$(177)

 

Cost of merchandise sold

1,923

2,047

(124)

 

Gross margin

$1,255

$1,308

$(53)

 

Gross margin as a percent of net sales

39.5%

39.0%

48

bps

 

Cost of merchandise sold includes the total cost of products sold, including product development costs, net of vendor payments other than reimbursement of specific, incremental, and identifiable costs; inventory shrink; markdowns; freight expenses associated with moving merchandise from our vendors to our distribution centers; shipping expenses for digital sales; and terms cash discount. Our cost of merchandise sold may not be comparable with that of other retailers because we include distribution center and buying costs in selling, general, and administrative expenses while other retailers may include these expenses in cost of merchandise sold.

Gross margin is calculated as net sales less cost of merchandise sold. For the first quarter of 2024, gross margin was 39.5% of net sales, an increase of 48 basis points to last year. The increase was driven by strong inventory management as we had fewer markdowns from managing our inventory down 13%, as we continue to benefit from operating with greater flexibility, as well as lower freight costs. This was partially offset by elevated shrink levels.

 

 

 

13


Selling, General, and Administrative Expense

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

SG&A

$1,228

$1,238

$(10)

 

As a percent of total revenue

36.3%

34.7%

166

bps

 

SG&A includes compensation and benefit costs (including stores, corporate, buying, and distribution centers); occupancy and operating costs of our retail, distribution, and corporate facilities; freight expenses associated with moving merchandise from our distribution centers to our retail stores and among distribution and retail facilities other than expenses to fulfill digital sales; marketing expenses, offset by vendor payments for reimbursement of specific, incremental, and identifiable costs; expenses related to our credit card operations; and other administrative revenues and expenses. We do not include depreciation and amortization in SG&A. The classification of these expenses varies across the retail industry.

Many of our expenses, including store payroll and distribution costs, are variable in nature. These costs generally increase as sales increase and decrease as sales decrease. We measure our expenses as a percentage of revenue and changes in this percentage compared to the prior year. If the expense as a percent of revenue decreased from the prior year, the expense "leveraged". If the expense as a percent of revenue increased over the prior year, the expense "deleveraged".

The following table summarizes the changes in SG&A by expense type:

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

Distribution

$(11)

Store expenses

(4)

Corporate and other

1

Marketing

4

Total decrease

$(10)

 

SG&A expenses decreased $10 million, or 0.8%, to $1.2 billion, driven by lower distribution costs. As a percentage of revenue, SG&A deleveraged by 166 basis points. The decrease was driven by disciplined expense management across the organization. Partially offsetting this decrease was an increase in marketing expenses and an investment in our new growth initiatives including Sephora shops and impulse queuing lines.

Other Expenses

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

Depreciation and amortization

$188

$188

$—

Interest expense, net

83

84

(1)

 

Depreciation and amortization was flat to last year as reduced capital spending in technology was offset by increased store investments, including the Sephora shops.

Net interest expense decreased in the first quarter of 2024 due to the reduced outstanding balance on the revolving credit facility partially offset by Sephora shops related lease amendments.

 

 

 

14


Income Taxes

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

(Benefit) provision for income taxes

$(13)

$—

$(13)

Effective tax rate

32.5%

3.8%

 

In both periods, the tax rate was driven by the recognition of favorable tax items. The impact of the 2024 benefit of the favorable tax items, when compared to a pre-tax loss, results in increasing the tax rate from the statutory rate. The impact of the 2023 benefit of the favorable tax items, when compared to pre-tax income, results in decreasing the tax rate from the statutory rate.

Seasonality and Inflation

Our business, like that of other retailers, is subject to seasonal influences. Sales and income are typically higher during the back-to-school and holiday seasons. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year.

We expect that our operations will continue to be influenced by general economic conditions, including food, fuel and energy prices, employment rates, wage inflation, and costs to source our merchandise, including tariffs. There can be no assurances that such factors will not impact our business in the future.

Liquidity and Capital Resources

Capital Allocation

Our capital allocation strategy is to invest to maximize our overall long-term return and maintain a strong balance sheet, with a long-term objective of achieving an investment grade rating. We follow a disciplined approach to capital allocation based on the following priorities: first we invest in our business to drive long-term profitable growth; second we pay a quarterly dividend; third we will complete debt reduction transactions, when appropriate; and fourth we return excess cash to shareholders through our share repurchase program.

We will continue to invest in the business, as we plan to invest approximately $500 million in 2024, which includes investment in impulse queuing lines, small format Sephora shop openings, the launch of the Babies “R” Us partnership, and new store openings. We remain committed to the dividend, and on May 15, 2024, our Board of Directors declared a quarterly cash dividend of $0.50 per share. The dividend will be paid on June 26, 2024 to all shareholders of record at the close of business on June 12, 2024. On May 14, 2024, we exercised our right to redeem the remaining $113 million of our 9.50% notes due May 15, 2025. The redemption will be completed on June 13, 2024. We are not planning any share repurchases during the current year.

Our period-end cash and cash equivalents balance decreased to $228 million from $286 million in the first quarter of 2023. Our cash and cash equivalents balance includes short-term investments of $9 million and $108 million as of May 4, 2024, and April 29, 2023, respectively. Our investment policy is designed to preserve principal and liquidity of our short-term investments. This policy allows investments in large money market funds or in highly rated direct short-term instruments. We also place dollar limits on our investments in individual funds or instruments.

 

 

 

15


The following table presents our primary uses and sources of cash:

 

 Cash Uses

 

Cash Sources

Operational needs, including salaries, rent, taxes, and other operating costs
Inventory
Capital expenditures
Dividend payments
Debt reduction
Share repurchases

 

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

 

 

 

Quarter Ended

(Dollars in Millions)

May 4, 2024

April 29, 2023

Change

Net cash (used in) provided by:

 

 

 

Operating activities

$(7)

$(202)

$195

Investing activities

(126)

(94)

(32)

Financing activities

178

429

(251)

 

Operating Activities

Our operating cash outflows generally consist of payments to our employees for wages, salaries and other employee benefits, payments to our merchandise vendors for inventory (net of vendor allowances), payments to our shipping carriers, and payments to our landlords for rent. Operating cash outflows also include payments for income taxes and interest payments on our debt borrowings.

Operating activities used $7 million of cash in the first quarter of 2024 compared to $202 million of cash used in the first quarter of 2023. Operating cash flow increased primarily due to inventory management resulting in managing receipts down 11% versus the prior year. We placed a lower percentage of our overall receipts in the early part of the buying cycle to allow for additional flexibility to chase receipts based on trending sales, establish a better flow of goods to our stores and maintain better in-stock positions, with the goal of minimizing the impact of future markdowns and out-of-stock positions.

Investing Activities

Our investing cash outflows include payments for capital expenditures, including investments in new and existing stores, improvements to supply chain, and technology costs. Our investing cash inflows are generally from proceeds from sales of property and equipment.

Investing activities used $126 million of cash in the first quarter of 2024 and $94 million in the first quarter of 2023. The increase in cash used in investing activities was primarily driven by timing of investments undertaken year to date 2024, consistent with our capital expenditure plans for fiscal 2024.

At the end of the quarter, we had a Sephora presence in over 900 of our stores, including 861 full size 2,500 square foot shops and 77 small format Sephora shops. In 2024, we are planning to open 140 small format Sephora shops, and plan on opening the remaining Sephora shops in 2025 which will bring a Sephora presence to the entire Kohl's chain. In 2024, we anticipate capital expenditures of approximately $500 million, which includes investment in impulse queuing lines, small format Sephora shop openings, the launch of the Babies “R” Us partnership, and new store openings.

 

 

 

16


Financing Activities

Our financing strategy is to ensure adequate liquidity and access to capital markets. We also strive to maintain a balanced portfolio of debt maturities, while minimizing our borrowing costs. Our ability to access the public debt market has provided us with adequate sources of liquidity. Our continued access to these markets depends on multiple factors, including the condition of debt capital markets, our operating performance, and maintaining strong credit ratings.

During the first quarter of 2024, Fitch downgraded our senior unsecured credit rating from BBB- to BB+ and revised their outlook to stable. While Moody's reaffirmed our credit rating, they also revised their outlook to stable.

As of May 4, 2024, our senior unsecured credit ratings and outlook were as follows:

 

 

Moody’s

S&P

Fitch

Long-term debt

Ba3

BB

BB+

Outlook

Stable

Negative

Stable

 

The majority of our financing activities generally include proceeds and/or repayments of long-term debt, dividend payments, and repurchases of common stock. Financing cash outflows also include payments to our landlords for leases classified as financing leases and financing obligations.

Financing activities generated $178 million of cash in the first quarter of 2024 and $429 million of cash in the first quarter of 2023.

During the quarter, we drew $263 million on our credit facility compared to $680 million drawn in the first quarter of 2023. Borrowings under the revolving credit facility, recorded as short-term debt, had $355 million outstanding as of May 4, 2024, and had $765 million as of April 29, 2023.

There was no cash used for treasury stock purchases in the first quarter of 2024 or 2023. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors. As previously noted, we are not planning any share repurchases during the current year.

Cash dividend payments were $55 million ($0.50 per share) in both the first quarter of 2024 and the first quarter of 2023.

Key Financial Ratios

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

 

(Dollars in Millions)

May 4, 2024

April 29, 2023

Working capital

$643

$605

Current ratio

1.21

1.17

 

Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season.

The increase in our working capital and current ratio are primarily due to a reduction in our borrowings under the revolving credit facility and the repayment of the current portion of long-term debt in 2023 partially offset by a decrease in inventory due to inventory management as our receipts were down 11% versus the prior year.

 

 

 

17


Debt Covenant Compliance

Our senior secured, asset based revolving credit facility contains customary events of default and financial, affirmative and negative covenants, including but not limited to, a springing financial covenant relating to our fixed charge coverage ratio and restrictions on indebtedness, liens, investments, asset dispositions, and restricted payments. As of May 4, 2024, we were in compliance with all covenants.

Contractual Obligations

There have been no significant changes in the contractual obligations disclosed in our 2023 Form 10-K other than borrowings under our revolving credit facility, which have been disclosed in Note 3 of the Consolidated Financial Statements and discussed under "Liquidity and Capital Resources - Financing Activities."

Off-Balance Sheet Arrangements

We have not provided any financial guarantees arising from arrangements with unconsolidated entities or persons as of May 4, 2024.

We have not created, and are not a party to, any special-purpose or off-balance sheet entities for the purpose of raising capital, incurring debt, or operating our business. We do not have any arrangements or relationships with entities that are not consolidated into our financial statements that are reasonably likely to materially affect our financial condition, liquidity, results of operations, or capital resources.

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts. Management has discussed the development, selection, and disclosure of its estimates and assumptions with the Audit Committee of our Board of Directors. There have been no significant changes in the critical accounting policies and estimates discussed in our 2023 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes in the market risks described in our 2023 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (the “Evaluation”) at a reasonable assurance level as of the last day of the period covered by this report.

Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are defined by Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") as controls and other procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

 

 

 

18


It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving our stated goals under all potential future conditions, regardless of how remote.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended May 4, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

19


PART II. OTHER INFORMATION

For a description of our legal proceedings, see Note 5, Contingencies, of the notes to our Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q, which is incorporated by reference in response to this item.

Item 1A. Risk Factors

There have been no significant changes in the Risk Factors described in our 2023 Form 10-K.

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

In February 2022, our Board of Directors increased the remaining share repurchase authorization under our existing share repurchase program to $3.0 billion. Purchases under the repurchase program may be made in the open market, through block trades, and other negotiated transactions. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued, or accelerated at any time.

The following table contains information for shares of common stock repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ stock-based compensation during the three fiscal months ended May 4, 2024:

 

(Dollars in Millions, Except per Share Data)

Total Number
of Shares
Purchased

Average
Price
Paid Per
Share

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

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

February 4 - March 2, 2024

10,373

$28.11

$2,476

March 3 - April 6, 2024

279,696

$26.84

$2,476

April 7 - May 4, 2024

38,049

$23.31

$2,476

Total

328,118

$26.47

 

 

Item 5. Other Information

During the three months ended May 4, 2024, no director or Section 16 officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

 

 

 

20


Item 6. Exhibits

 

Exhibit

 

Description

10.1

 

Kohl's Corporation Annual Incentive Plan Amended and Restated as of March 25, 2024, incorporated by reference to Exhibit 10.1 of the Company's Current Report on Form 8-K filed on March 27, 2024.

10.2

 

Performance Share Unit Agreement by and between Thomas Kingsbury and Kohl's Corporation dated as of March 25, 2024.

10.3

 

Restricted Stock Unit Agreement by and between Thomas Kingsbury and Kohl's Corporation dated as of March 25, 2024.

31.1

 

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

31.2

 

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

32.1

 

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

32.2

 

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

101.INS

 

Inline XBRL Instance Document

101.SCH

 

Inline XBRL Taxonomy Extension Schema With Embedded Linkbase Documents

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101)

 

 

 

 

21


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, 2024

/s/ Jill Timm

 

Jill Timm

On behalf of the Registrant and as Chief Financial Officer

(Principal Financial Officer)

 

 

 

 

22