UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
| For the fiscal year ended |
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 registrant as specified in its charter)
Wisconsin |
| 39-1630919 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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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 | KSS | New York Stock Exchange |
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Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes X ☒ No .☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐No X .☒
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 has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulations 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 X ☒ No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X .☐
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 definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer X Accelerated filer Non-accelerated filer
Large Accelerated Filer | ☒ | Accelerated Filer | ☐ | |||
Non-Accelerated Filer | ☐ | Smaller Reporting Company | ☐ | |||
Emerging Growth Company | ☐ |
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 provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐No X .☒
At August 3, 2018,July 31, 2020, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was approximately $12.1approximately $3.0 billion (based(based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on such date).
At March 13, 2019, 10, 2021,the Registrant had outstanding an aggregate of 163,166,004157,716,240 shares of its Common Stock.
Documents Incorporated by Reference:
Portions of the Definitive Proxy Statement for the Registrant’s 2021 Annual Meeting of Shareholders to be held on May 15, 2019 are incorporated into Part III.
KOHL’S CORPORATIONCORPORATION
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Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
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PART I
Kohl’s Corporation (the “Company," “Kohl’s,” "we," "our" or "us") was organized in 1988 and is a Wisconsin corporation. As of February 2, 2019,January 30, 2021, we operated 1,1591,162 Kohl's department stores, a website (www.Kohls.com), and 12 FILA outlets, and four Off-Aisle clearance centers.outlets. Our Kohl's stores and website sell moderately-priced proprietaryprivate 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. Our website includes merchandise thatwhich is available in our stores, as well as merchandise that is available only online.
Our merchandise mix includes both national brands and proprietaryprivate brands that are available only at Kohl's. Our proprietaryprivate portfolio includes well-known established private brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO, and Sonoma Goods for Life, and exclusive brands that are developed and marketed through agreements with nationally-recognized brands such as Food Network, LC Lauren Conrad, Elle and Simply Vera Vera Wang. NationalCompared to private brands, national brands generally have higher selling prices, but lower gross margins, than proprietary brands.margins.
The following tables summarize our net sales penetration by line of business and brand type over the last three years:
Our fiscal year ends on the Saturday closest to January 31st each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report.report:
| Fiscal Year | Ended | Number of Weeks |
| |
| 2018 | February 2, 2019 |
| 52 |
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| 2017 | February 3, 2018 |
| 53 |
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| 2016 | January 28, 2017 |
| 52 |
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Fiscal Year | Ended | Number of Weeks | |
2020 | January 30, 2021 | 52 | |
2019 | February 1, 2020 | 52 | |
2018 | February 2, 2019 | 52 |
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For discussion of our financial results, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
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Distribution
We receive substantially all of our store merchandise at our nine retail distribution centers. A small amount of our merchandise is delivered directly to the stores by vendors or their distributors. The retail distribution centers, which are strategically located throughout the United States, ship merchandise to each store by contract carrier several times a week. Digital sales may be picked up in our stores or are shipped from a Kohl’s fulfillmente-fulfillment center, retail distribution center or store; by astore, third-party fulfillment center;center, or directly by a third-party vendor.
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See Item 2, “Properties,” for additional information about our distribution centers.
EmployeesHuman Capital
At Kohl’s, our purpose is to inspire and empower families to lead fulfilled lives. We are committed to creating a culture where everyone belongs, where diversity and inclusion drive innovation and business results, while enabling associates and customers to be their authentic selves every single day.
Employee Count
During 2018,2020, we employed an average of approximately 129,000110,000 associates, includingwhich included approximately 34,00036,000 full-time and 95,00074,000 part-time associates. The number of associates varies during the year, peaking during the back-to-school and holiday seasons. None of our associates are represented by a collective bargaining unit. We believe ourwe maintain positive relations with our associates.
Health, Safety, and Wellness
We lead initiatives that ensure the way we communicate, work, and develop our product enables our customers and associates to shop, work, and engage in a safe environment. We have a dedicated team responsible to prepare our business for crisis events, including natural disasters and other unplanned disruptions like those brought on by the COVID-19 pandemic. To keep a healthy workforce, we launched an advocacy program that provides associates with 24/7 access to medical professionals following a work accident. We have enhanced the way our stores are built and operated in an effort to create a safer shopping experience for our associates and customers. We continue to pursue innovative ways to educate our teams on safety. Associates at our stores, distribution, and e-fulfillment centers receive specialized training to enhance our safety culture and reduce associate accidents.
Diversity and Inclusion
At Kohl’s, we are committed to creating an environment where everyone feels a sense of equity, where diversity is valued at all levels, and where inclusion is evident across our business. We strive to be purposeful in attracting, growing, and engaging more diverse talent while giving associates equitable opportunities for career growth. We administer our recruiting efforts with a focus on education, training, and sourcing strategies for increasing our diverse talent pipeline. Our diversity and inclusion strategy is embedded into our onboarding for all associates. We strive to drive economic empowerment through conversations, programs, and partnerships that improve quality of life in underserved communities. Along this journey, we are embracing opportunities to address racial disparities, including our recent pledge to double spending among diverse suppliers.
Diversity and inclusion efforts need to start at the top. In 2019, we joined the 1% club — the handful of Fortune 500 firms where both the Chief Executive Officer and Chief Financial Officer are women. We are focused on growing diverse leaders by engaging top and emerging talent in internal and external professional development offerings. Diversity is embedded within our organizational planning for the future, with diversity being an area of consideration during succession planning. We are working to develop inclusive leaders through a program aimed at building awareness and encouraging advocacy.
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We have eight Business Resource Groups (BRGs) with 7,500 members that serve as champions for enhancing our diversity and inclusion efforts across our business. The BRGs make an impact across the organization with a focus on our three diversity and inclusion pillars which are Our People, Our Customers, and Our Communities. We work to provide learning opportunities for our leaders and associates to build a more diverse and inclusive workforce and engage associates on how that creates a competitive advantage. In 2020, we provided unconscious bias training across our workforce to help our associates understand and manage their blind spots and to build stronger connections with colleagues, customers, partners, and our communities.
Compensation and Benefits
As the makeup and needs of the modern family evolve, our products, services, and programs must also transform. We provide competitive compensation and benefits programs for our employees. All eligible associates receive a 100% match (up to 5% of pay) in Kohl’s 401(k) Savings Plan after one year of employment. Full-time associates are very good.offered medical, dental, vision, prescription drug, disability and life insurance coverage, paid time off, and a merchandise discount. Part-time associates are offered dental, vision, supplementary life insurance, and a merchandise discount. We empower our associates’ work-life balance by giving them access to a full range of professional resources.
Training and Development
Behind our success are great teams of talented individuals who embody our values. We actively attract, engage, and hire talent who will drive our purpose. Our talent management team brings together performance management, talent assessment, succession planning, and career planning. This team provides tools, resources, and best practices to ensure we have the right talent in the right roles at the right time. We invest in executive coaching, assessments, internal programs, external courses, peer networks, and more.
From initial onboarding to high potential leadership development, we believe in training and career growth for our associates. We make efforts to stay ahead of the competition by leaning into new technologies and encouraging our associates to keep their skills fresh through our learning management system, which includes more than 1,000 online and in-person courses. We are committed to the highest standards of integrity and maintain a Code of Ethics to guide ethical decision-making for associates. We require associates to take annual ethics training, which is refreshed each year to cover relevant topics.
Competition
The retail industry is highly competitive. Management considers style, quality, price, and convenience to be the most significant competitive factors in the industry. Merchandise mix, brands, service, loyalty programs, credit availability, and customer experience and convenience are also key competitive factors. Our primary competitors are traditional department stores, mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses, and other forms of retail commerce. Our specific competitors vary from market to market.
Merchandise Vendors
We purchase merchandise from numerous domestic and foreign suppliers. All business partnerssuppliers must meet certain requirements to do business with us. Our Terms of Engagement are part of our purchase order terms and conditions and include provisions regarding laws and regulations, employment practices, ethical standards, environmental and legal requirements, communication, monitoring/monitoring and compliance, record keeping, subcontracting, and corrective action. We expect that all business partnerssuppliers will comply with these Terms of Engagementour purchase terms and quickly remediate any deficiencies, if noted, to maintain our business relationship.
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A third-party purchasing agent sources approximately 25%20% of the merchandise we sell. No vendorsvendor individually accounted for more than 10% of our net purchases in 2018.2020. We have no significant long-term purchase commitments or arrangements with any of our suppliers and believe that we are not dependent on any one supplier.supplier or one geographical location. We believe we have good working relationships with our suppliers.
Seasonality
Our business, like that of mostother retailers, is subject to seasonal influences. The majority of our salesSales and income are typically realizedhigher during the second half of each fiscal year. The back-to-school season extends from August through September and represents approximately 15% of our annual sales. Approximately 30% of our annual sales occur during the holiday season in the months of November and December.seasons. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for thea full fiscal year. Due to the impact of COVID-19, typical sales patterns did not occur in fiscal 2020.
Trademarks and Service Marks
KOHL'S®is a registered trademark owned by one of our wholly-owned subsidiaries. We consider this mark and the accompanying goodwill to be valuable to our business. This subsidiary has over 200 additional registered trademarks, most of which are used in connection with our private brand products.
Available Information
Our corporate website is https://corporate.kohls.com. Through the “Investors” portion of this website, we make available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, SECSecurities and Exchange Commission (“SEC”) Forms 3, 4, and 5, and any amendments to those reports as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission (“SEC”).SEC.
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The following have also been posted on our website, under the caption “Investors” and sub-captionsub-captions "Corporate Governance" or “ESG”:
Committee charters of our Board of Directors’ Audit Committee, Compensation Committee and Governance & Nominating Committee
• | Committee charters of our Board of Directors’ Audit Committee, Compensation Committee, and Governance & Nominating Committee |
Corporate Governance Guidelines
• | Corporate Governance Guidelines |
Code of Ethics
• | Code of Ethics |
Corporate Social Responsibility Report
• | Corporate Social Responsibility Report (under “ESG” sub-caption) |
The information contained on our website is not part of this Annual Report on Form 10-K. Paper copies of any of the materials listed above will be provided without charge to any shareholder submitting a written request to our Investor Relations Department at N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051 or via e-mail to Investor.Relations@Kohls.com.
This Form 10-K 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""expects," and similar expressions are intended to identify forward-looking statements. Forward-looking statements alsomay 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 businessstore initiatives, and adequacy of capital resources and reserves. A number of important factorsForward-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 ouractual results to differ materially from those indicated by theprojected. As such, forward-looking statements including, among others,are qualified by those risk factors described below. Forward-looking statements relate to the date made, and we undertake no obligation to update them.
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Our sales, revenues, gross margin, expenses, and operating results could be negatively impacted by a number of factors including, but not limited to those described below. Many of these risk factors are outside of our control. If we are not successful in managing these risks, they could have a negative impact on our sales, revenues, gross margin, expenses, and/or operating results.
Macroeconomic and Industry Risks
General economic conditions, consumer spending levels, and/or other conditions could decline.
Consumer spending habits, including spending for the merchandise that we sell, are affected by many factors including prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy and fuel costs, income tax rates and policies, consumer confidence, consumer perception of economic conditions, and the consumer’s disposable income, credit availability, and debt levels. The moderate-income consumer, which is our core customer, is especially sensitive to these factors. A slowdown in the U.S. economy or an uncertain economic outlook could adversely affect consumer spending habits. As all of our stores are located in the United States, we are especially susceptible to deteriorations in the U.S. economy.
Consumer confidence is also affected by the domestic and international political situation. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers.
Our competitors could make changes to their pricing and other practices.
The retail industry is highly competitive. We compete for customers, associates, locations, merchandise, services, and other important aspects of our business with many other local, regional, and national retailers. Those
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competitors include traditional department stores, mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses, and other forms of retail commerce.
We consider style, quality, price, and convenience to be the most significant competitive factors in our industry. The continuing migration and evolution of retailing to digital channels have increased our challenges in differentiating ourselves from other retailers especially as it relates to national brands. In particular, consumers can quickly and conveniently comparison shop with digital tools, which can lead to decisions based solely on price. Unanticipated changes in the pricing and other practices of our competitors may adversely affect our performance.
Tax and trade policies could adversely change.
Uncertainty with respect to tax and trade policies, tariffs, and government regulations affecting trade between the United States and other countries has recently increased. We source the majority of our merchandise from manufacturers located outside of the United States, primarily in Asia. Major developments in tax policy or trade relations, such as the imposition of tariffs on imported products, could have a material adverse effect on our business, results of operations, and liquidity.
The impact of COVID-19 could continue to have a material adverse impact on our business, financial condition, and results of operations.
The impact of and actions taken in response to COVID-19 have had a significant impact on the retail industry generally and our business specifically, starting in the first quarter of fiscal year 2020. At present, we cannot estimate the full impact of COVID-19, but we expect it to continue to have a material adverse impact on our business, financial condition, and results of operations.
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Risks Relating to Revenues
On March 20, 2020, we temporarily closed our stores nationwide. Our stores remained closed until May 4, 2020, as we began to reopen stores in a phased approach and were fully reopened as of July 2020. In connection with the store closures, we temporarily furloughed store and store distribution center associates, as well as some corporate office associates whose work was significantly reduced by the store closures. Due to the store closures, we experienced a temporary material decline in revenue and operating cash flow. We cannot predict if further outbreaks would necessitate store closures again or if the availability of a vaccine will enable us to resume normal store operations.
Our response to COVID-19 may also impact our customer loyalty. If our customer loyalty is negatively impacted or consumer discretionary spending habits change, including in connection with rising levels of unemployment, our market share and revenue may suffer as a result. To the extent the pandemic significantly impacts spending or payment patterns of our private label credit card holders, we may receive lower fees from our private label credit card program.
Risks Relating to Operations
Because we temporarily closed all of our stores, we took steps to reduce operating costs and improve efficiency, including furloughing a substantial number of our personnel. These steps may have an impact on our ability to attract and retain associates in the future. If we are unable to attract and retain associates in the future, such as those associates who found other employment during the furlough period, we may experience operational challenges. These risks related to our business, financial condition, and results of operations, are especially heightened given the uncertainty as to the extent and duration of COVID-19’s impact. We may also face demands or requests from our associates for additional compensation, healthcare benefits, or other terms as a result of COVID-19 that could increase costs, and we could experience labor disputes or disruptions as we continue to implement our COVID-19 mitigation plans. We cannot predict if further outbreaks would necessitate additional store closures again.
Our management team is focused on mitigating the impact of COVID-19, which required and will continue to require a large investment of time and focus. During fiscal 2020, we reduced certain of our resources, including decreasing planned capital expenditures and significantly reducing expenses across the business including expenses related to marketing, technology, and operations. This focus on mitigating the impact of COVID-19 could result in the delay of new initiatives, including brand launches. It also required us to take measures to make modifications to our stores and their operation to help protect the health and well-being of our customers, associates and others as they re-opened. To the extent these measures are ineffective or perceived as ineffective, it may harm our reputation and customer loyalty and make our customers less likely to shop in our stores.
Most of our corporate office associates continue to work remotely, as our offices are opening pursuant to a phased approach. As a result, we face certain operational risks, including heightened cybersecurity risks that may continue past the time when our associates return to work. We cannot predict if further outbreaks would necessitate corporate office closures again.
In addition, we cannot predict the impact that COVID-19 will have on our suppliers, vendors, and other business partners, and each of their financial conditions; however, any material effect on these parties could adversely impact us.
Risks Relating to Liquidity
In light of the impact of COVID-19 on our business, we took several actions to increase our cash position and preserve financial flexibility, including borrowing $1.5 billion under our senior secured, asset based revolving credit facility and issuing $600 million in aggregate principal amount of 9.50% notes due in 2025, and accordingly, our
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long-term debt had increased substantially since February 1, 2020. However, we fully paid back the $1.5 billion in 2020 and we currently do not have any borrowings under the credit facility. In addition, we completed a sale leaseback for our San Bernardino E-Commerce fulfillment and distribution center which generated net proceeds of $193 million after fees.
Our access to capital is currently similar to that prior to the pandemic. But we maintain a credit rating that is just above non-investment grade and which can be downgraded if we do not demonstrate increasing profits and a willingness to reduce our debt outstanding. If our credit ratings were to be further downgraded, or general market conditions were to ascribe higher risk to our credit rating levels, our industry, or our Company, our access to capital and the cost of debt financing will be negatively impacted. Accordingly, a downgrade may cause our cost of borrowing to further increase. Further, COVID-19 could lead to further disruption and volatility in the capital markets generally, which could increase the cost of accessing financing. Our access to additional financing and its cost continues to depend on a number of factors, including economic conditions, financing markets, and the outlook for our business and the retail industry as a whole.
In addition, the terms of future debt agreements could include more restrictive covenants, or require incremental collateral, which may further restrict our business operations or cause future financing to be unavailable due to our covenant restrictions then in effect. Also, if we are unable to comply with the covenants under our senior secured, asset based revolving credit facility, the lenders under that agreement will have the right to terminate their commitments thereunder and declare the outstanding loans thereunder to be immediately due and payable. A default under our senior secured, asset based revolving credit facility could trigger a cross-default, acceleration, or other consequences under other indebtedness or financial instruments to which we are a party. There is no guarantee that debt financings will be available in the future to fund our obligations, or will be available on terms consistent with our expectations. Additionally, the impact of COVID-19 on the financial markets may adversely impact our ability to raise funds through additional financings.
COVID-19 could also cause or aggravate other risk factors that we identify in this section, which in turn could materially and adversely impact our business, financial condition, and results of operations. Further, COVID-19 may also affect our business, financial condition, and results of operations in a manner that is not presently known to us or that we currently do not consider to present significant risks to our business, financial condition, and results of operations.
Operational Risks
We may be unable to offer merchandise that resonates with existing customers and attracts new customers as well as successfully manage our inventory levels.
Our business is dependent on our ability to anticipate fluctuations in consumer demand for a wide variety of merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns, and other lifestyle decisions could create inventory imbalances and adversely affect our performance and long-term relationships with our customers. Additionally, failure to accurately predict changing consumer tastes may result in excess inventory, which could result in additional markdowns and adversely affect our operating results.
We may be unable to source merchandise in a timely and cost-effective manner.
A third-party purchasing agent sources approximately 25%20% of the merchandise we sell. The remaining merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States, substantially all of which are shipped by ocean to ports in the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and
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costs, pandemic outbreaks, work stoppages, port strikes, port congestion and delays, and other factors relating to foreign trade are beyond our control and could adversely impact our performance.
Increases in the price of merchandise, raw materials, fuel, and labor or their reduced availability could increase our cost of merchandise sold. The price and availability of raw materials may fluctuate substantially, depending on a variety of factors, including demand, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and policy, economic climates, market speculation, and other unpredictable factors. An inability to mitigate these cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability.operating results. Any related pricing actions might cause a decline in our sales volume. Additionally, a reduction in the availability of raw materials could impair ourthe ability to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel, and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers.
If any of our significant vendors were to become subject to bankruptcy, receivership, or similar proceedings, we may be unable to arrange for alternate or replacement contracts, transactions, or business relationships on terms as favorable as current terms, which could adversely affect our sales and operating results.
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Our vendors may not adhere to our Terms of Engagement or to applicable laws.
A substantial portion of our merchandise is received from vendors and factories outside of the United States. We require all of our suppliers to comply with all applicable local and national laws and regulations and our Terms of Engagement for Kohl's Business Partners. These Terms of Engagement include provisions regarding laws and regulations, employment practices, ethical standards, environmental and legal requirements, communication, monitoring/compliance, record keeping, subcontracting, and corrective action. From time to time, suppliers may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more suppliers could have a negative impact on our reputation and our results of operations.
Our marketing may be ineffective.
We believe that differentiating Kohl's in the marketplace is critical to our success. We design our marketing and loyalty programs to increase awareness of our brands and to build personalized connections with new and existing customers. We believe these programs will strengthen customer loyalty, increase the number and frequency of customers that shop our stores and website, and increase our sales. If our marketing and loyalty programs are not successful or efficient, our sales and operating results could be adversely affected.
The reputation and brand image of Kohl’s and the brands and products we sell could be damaged.
We believe the Kohl's brand name and many of our proprietary brand names are powerful sales and marketing tools. We devote significant resources to develop, promote, and protect proprietary brands that generate national recognition. In some cases, the proprietary brands or the marketing of such brands are tied to or affiliated with well-known individuals. We also affiliateassociate the Kohl’s brand with third-party national brands that we sell in our store and through our partnerships with companies in pursuit of strategic initiatives. Damage to the reputations (whether or not justified) of the Kohl’s brand, our proprietary brand names, or any affiliated individuals or companies with which we have partnered, could arise from product failures; concerns about human rights, working conditions, and other labor rights and conditions where merchandise is produced; perceptions of our pricing and return policies; litigation; vendor violations of our Terms of Engagement; perceptions of the national vendors and/or third party companies with which we partner; or various other forms of adverse publicity, especially in social media outlets. This type of reputational damage may result in a reduction in sales, earnings,operating results, and shareholder value.
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There may be concerns about the safety of products that we sell.
If our merchandise offerings do not meet applicable safety standards or our customers' expectations regarding safety, we could experience lost sales, experience increased costs, and/or be exposed to legal and reputational risk. Events that give rise to actual, potential, or perceived product safety concerns could expose us to government enforcement action and/or private litigation. Reputational damage caused by real or perceived product safety concerns could have a negative impact on our sales and operating results.
We may be unable to adequately maintain and/or update our information systems.
The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage sales, distribution, and merchandise planning and allocation functions. We also generate sales through the operations of our Kohls.com website. We frequently make investments that will help maintain and update our existing information systems. We also depend on third parties as it relates to our information systems. In particular, we are currently migrating certain systems and applications to cloud environments that are hosted by third-party service providers.The potential problems and interruptions associated with implementing technology initiatives, the failure of our information systems to perform as designed,or the failure to successfully partner with our third party service providers, such as our cloud platform providers, could disrupt our business and harm our sales and profitability.
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Our information technology projects may not yield their intended results.
We regularly have internal information technology projects in process. Although the technology is intended to increase productivity and operating efficiencies, these projects may not yield their intended results or may deliver an adverse user or customer experience. We may incur significant costs in connection with the implementation, ongoing use, or discontinuation of technology projects, or fail to successfully implement these technology initiatives, or achieve the anticipated efficiencies from such projects, any of which could adversely affect our operations, liquidity, and financial condition.
Weather conditions and natural disasters could adversely affect consumer shopping patterns and disrupt our operations.
A significant portion of our business is apparel and is subject to weather conditions. As a result, our operating results may be adversely affected by severe or unexpected weather conditions. Frequent or unusually heavy snow, ice, or rain storms; natural disasters such as earthquakes, tornadoes, floods, fires, and hurricanes; or extended periods of unseasonable temperatures could adversely affect our performance by affecting consumer shopping patterns and diminishingdiminish demand for seasonal merchandise. In addition, these events could cause physical damage to our properties or impact our supply chain, making it difficult or impossible to timely deliver seasonally appropriate merchandise. Although we maintain crisis management and disaster response plans, our mitigation strategies may be inadequate to address such a major disruption event.
We may be unable to successfully execute an omnichannel strategy.
Customer expectations about the methods by which they purchase and receive products or services are evolving. Customers are increasingly using technology and mobile devices to rapidly compare products and prices, and to purchase products. Once products are purchased, customers are seeking alternate options for delivery of those products. We must continually anticipate and adapt to these changes in the purchasing process. Our ability to compete with other retailers and to meet our customer expectations may suffer if we are unable to provide relevant customer-facing technology and omnichannel experiences. Our ability to compete may also suffer if Kohl’s, our suppliers, or our third-party shipping and delivery vendors are unable to effectively and efficiently fulfill and deliver orders, especially during the holiday season when sales volumes are especially high. Consequently, our results of operations could be adversely affected.
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Our business is seasonal in nature, which could negatively affect our sales, revenues, operating results, and cash requirements.
Our business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the back-to-school and holiday seasons.
If we do not adequately stock or restock popular products, particularly during the back-to-school and holiday seasons, we may fail to meet customer demand, which could affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profitability.
We may experience an increase in costs associated with shipping digital orders due to complimentary upgrades, split shipments, freight surcharges due to peak capacity constraints, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our website within a short period of time, we may experience system interruptions that make our website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. Also, third-party delivery and direct ship vendors may be unable to deliver merchandise on a timely basis.
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This seasonality causes our operating results and cash needs to vary considerably from quarter to quarter. Additionally, any decrease in sales or profitability during the second half of the fiscal year could have a disproportionately adverse effect on our results of operations.
Changes in credit card operations could adversely affect our sales, revenues, and/or profitability.
Our credit card operations facilitate merchandise sales and generate additional revenue from fees related to extending credit. The proprietary Kohl's credit card accounts are owned by an unrelated third-party, but we share in the net risk-adjusted revenue of the portfolio, which is defined as the sum of finance charges, late fees, and other revenue less write-offs of uncollectible accounts. Changes in funding costs related to interest rate fluctuations are shared similar to the revenue when interest rates exceed defined amounts. Though management currently believes that increases in funding costs will be largely offset by increases in finance charge revenue, increases in funding costs could adversely impact the profitability of this program.
Changes in credit card use and applications, payment patterns, credit fraud, and default rates may also result from a variety of economic, legal, social, and other factors that we cannot control or predict with certainty. Changes that adversely impact our ability to extend credit and collect payments could negatively affect our results.
We may be unable to attract, develop, and retain quality associates while controlling costs, which could adversely affect our operating results.
Our performance is dependent on attracting and retaining a large number of quality associates, including our senior management team and other key associates. Many associates are in entry-level or part-time positions with historically high rates of turnover. Many of our strategic initiatives require that we hire and/or develop associates with appropriate experience. Our staffing needs are especially high during the holiday season. Competition for these associates is intense. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods.
Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, actions by our competitors in compensation levels, potential labor organizing efforts, and changing demographics. Competitive and regulatory pressures have already significantly increased our labor costs. Further changes that adversely impact our ability to attract and retain quality associates could adversely affect our performance and/or profitability. In addition, changes in federal and state laws relating to employee benefits, including, but not limited to, sick time, paid time off, leave of absence, minimum
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wage, wage-and-hour, overtime, meal-and-break time, and joint/co-employment could cause us to incur additional costs, which could negatively impact our profitability.
Our business could be impacted by a potential proxy contest for the election of directors at our 2021 Annual Meeting of Shareholders.
On February 22, 2021, Macellum Advisors GP, LLC (together with its affiliates, “Macellum”), Ancora Holdings, Inc. (together with its affiliates, “Ancora”), Legion Partners Asset Management, LLC (together with its affiliates, “Legion Partners”), and 4010 Capital, LLC (together with its affiliates, “4010 Capital” and, together with Macellum, Ancora and Legion Partners, the “Activist Investors”), announced the nomination of nine candidates for election to our Board of Directors at our 2021 Annual Meeting of Shareholders. The Activist Investors subsequently reduced the number of candidates to five. A proxy contest with the Activist Investors for the election of directors could result in the Company incurring substantial costs, including proxy solicitation, public relations, and legal fees. Further, such a proxy contest could divert the attention of our Board of Directors, management, and employees, and may disrupt the momentum in our business and operations, as well as our ability to execute our strategic plan. The actions of the Activist Investors may also create perceived uncertainties as to the future direction of our business or strategy, which may be exploited by our competitors and may make it more difficult to attract and retain qualified personnel, and may impact our relationship with investors, vendors, and other third parties. A proxy contest could also impact the market price and the volatility of our common stock.
Capital Risks
We may be unable to raise additional capital or maintain bank credit on favorable terms, which could adversely affect our business and financial condition.
We have historically relied on the public debt markets to raise capital to partially fund our operations and growth. We have also historically maintained lines of credit with financial institutions. Changes in the credit and capital markets, including market disruptions, limited liquidity, and interest rate fluctuations may increase the cost of financing or restrict our access to these potential sources of future liquidity. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating performance and maintaining strong debt ratings. If our credit ratings fall below desirable levels, our ability to access the debt markets and our cost of funds for new debt issuances could be adversely impacted. Additionally, if unfavorable capital market conditions exist if and when we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms and on a timely basis (if at all). If our access to capital was to become significantly constrained or our cost of capital was to increase significantly our financial condition, results of operations, and cash flows could be adversely affected.
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Our capital allocation could be inefficient or ineffective.
Our goal is to invest capital to maximize our overall long-term returns. This includes spending on inventory, capital projects and expenses, managing debt levels, and periodically returning value to our shareholders through share repurchases and dividends. To a large degree, capital efficiency reflects how well we manage our other key risks. The actions taken to address other specific risks may affect how well we manage the more general risk of capital efficiency. If we do not properly allocate our capital to maximize returns, we may fail to produce optimal financial results, and we may experience a reduction in shareholder value.
Legal and Regulatory Risks
Regulatory and legal matters could adversely affect our business operations and change financial performance.
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Various aspects of our operations are subject to federal, state, or local laws, rules, and regulations, any of which may change from time to time. The costs and other effects of new or changed legal requirements cannot be determined with certainty. For example, new legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase prices of goods and services, reduce the availability of raw materials, or further restrict our ability to extend credit to our customers.
We continually monitor the state and federal legal and regulatory environments for developments that may impact us. Failure to detect changes and comply with such laws and regulations may result in an erosion of our reputation, disruption of business, and/or loss of associate morale. Additionally, we are regularly involved in various litigation matters that arise out of the conduct of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance.
Our efforts to protect the privacy and security of sensitive or confidential customer, associate, or company information could be unsuccessful, which could severely damage our reputation, expose us to risks of litigation and liability, disrupt our operations, and harm our business.
As part of our normal course of business, we collect, retain, process, and transmit sensitive and confidential customer, associate, and company information. We also engage third-party vendors that provide technology, systems, and services to facilitate our collection, retention, processing, and transmission of this information. The protection of this data is extremely important to us, our associates, and our customers. As with other companies,However, no security is perfect, and it is possible that our facilities and systems and those of our third-party vendors are vulnerable to cybersecurity threats, security breaches, system failures, acts of vandalism, fraud, misappropriation, malware, ransomware, and other malicious or harmful code, misplaced or lost data, programming and/or human errors, insider threats, or other similar events. Despite our substantial investments in personnel, training, and implementation of programs, procedures, and plans to protect the security, confidentiality, integrity, and availability of our information and to prevent, detect, contain, and respond to cybersecurity threats, there is no assurance that these measures will be adequate to prevent all such cybersecurity threats, particularly given the ever-evolving and increasingly sophisticated methods of cyber-attack that may be difficult or impossible to anticipate and/or detect. In addition, the regulatory environment related to data privacyKohl’s and cybersecurity is constantly changing, which may increaseits third party consultants audit and test our compliance costs and impact our customers’ shopping experience.security program. Any such data security incident involving the breach, misappropriation, loss, or other unauthorized disclosure of sensitive and/or confidential information, whether by us or our vendors, could disrupt our operations, damage our reputation and customers' willingness to shop in our stores or on our website, violate applicable laws, regulations, orders and agreements, and subject us to additional costs and liabilities which could be material. In addition, data privacy and cybersecurity laws are in a period of change, including the recently enacted California Privacy Rights Act which amended and expanded the California Consumer Privacy Act, as well as Virginia’s new data privacy law, and there is potential for the enactment of other federal or state privacy laws relevant to our business. These legal changes may increase our compliance costs, impact our customers’ shopping experience, reduce our business efficiency, and subject us to additional regulatory scrutiny or data breach litigation.
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Item 1B. UnresolvedUnresolved Staff Comments
Not applicable.
Stores
As of February 2, 2019,January 30, 2021, we operated 1,1591,162 Kohl's department stores with 82.682.2 million selling square feet in 49 states. We also operate four Off-Aisle clearance centers andoperated 12 FILA outlets.
Our typical store lease has an initial term of 20-25 years and four to eight five-year renewal options for consecutive five-year extension terms.options. Substantially all of our leases provide for a minimum annual rent that is fixed or adjusts to set
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levels during the lease term, including renewals. Approximately one-fourthSome of theour store leases provide for additional rent based on a percentage of sales over designated levels.
The following tables summarize key information about our Kohl's stores as of February 2, 2019:January 30, 2021:
Number of Stores by State | Number of Stores by State | Number of Stores by State | ||||||||||||
Mid-Atlantic Region: | Mid-Atlantic Region: |
| Northeast Region: |
| South Central Region: | Mid-Atlantic Region: |
| Northeast Region: |
| South Central Region: | ||||
Delaware | 5 |
| Connecticut | 22 |
| Arkansas | 8 | 5 |
| Connecticut | 21 |
| Arkansas | 8 |
Maryland | 23 |
| Maine | 5 |
| Kansas | 12 | 23 |
| Maine | 5 |
| Kansas | 11 |
Pennsylvania | 50 |
| Massachusetts | 25 |
| Louisiana | 8 | 51 |
| Massachusetts | 25 |
| Louisiana | 7 |
Virginia | 31 |
| New Hampshire | 11 |
| Missouri | 27 | 31 |
| New Hampshire | 11 |
| Missouri | 27 |
West Virginia | 7 |
| New Jersey | 38 |
| Oklahoma | 11 | 7 |
| New Jersey | 38 |
| Oklahoma | 11 |
|
|
| New York | 51 |
| Texas | 84 |
|
| New York | 50 |
| Texas | 84 |
|
|
| Rhode Island | 4 |
|
|
|
|
| Rhode Island | 4 |
|
|
|
|
|
| Vermont | 2 |
|
|
|
|
| Vermont | 2 |
|
|
|
Total Mid-Atlantic 116 |
| Total Northeast | 158 |
| Total South Central 150 | |||||||||
Total Mid-Atlantic | 117 |
| Total Northeast | 156 |
| Total South Central | 148 | |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Midwest Region: | Midwest Region: |
| Southeast Region: |
| West Region: | Midwest Region: |
| Southeast Region: |
| West Region: | ||||
Illinois | 66 |
| Alabama | 14 |
| Alaska | 1 | 66 |
| Alabama | 14 |
| Alaska | 1 |
Indiana | 40 |
| Florida | 51 |
| Arizona | 26 | 41 |
| Florida | 51 |
| Arizona | 26 |
Iowa | 18 |
| Georgia | 32 |
| California | 117 | 18 |
| Georgia | 32 |
| California | 117 |
Michigan | 46 |
| Kentucky | 17 |
| Colorado | 24 | 46 |
| Kentucky | 18 |
| Colorado | 24 |
Minnesota | 27 |
| Mississippi | 5 |
| Idaho | 5 | 28 |
| Mississippi | 5 |
| Idaho | 6 |
Nebraska | 7 |
| North Carolina | 31 |
| Montana | 3 | 8 |
| North Carolina | 31 |
| Montana | 3 |
North Dakota | 4 |
| South Carolina | 16 |
| Nevada | 12 | 4 |
| South Carolina | 16 |
| Nevada | 13 |
Ohio | 59 |
| Tennessee | 20 |
| New Mexico | 5 | 59 |
| Tennessee | 20 |
| New Mexico | 5 |
South Dakota | 4 |
|
|
|
| Oregon | 11 | 4 |
|
|
|
| Oregon | 11 |
Wisconsin | 41 |
|
|
|
| Utah | 12 | 41 |
|
|
|
| Utah | 12 |
|
|
|
|
|
| Washington | 19 |
|
|
|
|
| Washington | 19 |
|
|
|
|
|
| Wyoming | 2 |
|
|
|
|
| Wyoming | 2 |
Total Midwest | 312 |
| Total Southeast | 186 |
| Total West | 237 | 315 |
| Total Southeast | 187 |
| Total West | 239 |
Location | Location |
| Ownership | Location |
| Ownership | ||
Strip centers | 780 |
| Owned | 412 | 944 |
| Owned | 409 |
Freestanding | 155 |
| Leased | 516 | ||||
Community & regional malls | 82 |
| Leased | 510 | 63 |
| Ground leased | 237 |
Freestanding | 297 |
| Ground leased | 237 |
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15
Distribution Centers
The following table summarizes key information about each of our distribution centers:
|
|
| Year Opened |
| Square Footage |
| |
| Store distribution centers: |
|
|
|
|
|
|
| Findlay, Ohio |
| 1994 |
|
| 780,000 |
|
| Winchester, Virginia |
| 1997 |
|
| 450,000 |
|
| Blue Springs, Missouri |
| 1999 |
|
| 540,000 |
|
| Corsicana, Texas |
| 2001 |
|
| 540,000 |
|
| Mamakating, New York |
| 2002 |
|
| 605,000 |
|
| San Bernardino, California |
| 2002 |
|
| 575,000 |
|
| Macon, Georgia |
| 2005 |
|
| 560,000 |
|
| Patterson, California |
| 2006 |
|
| 365,000 |
|
| Ottawa, Illinois |
| 2008 |
|
| 330,000 |
|
| Online fulfillment centers: |
|
|
|
|
|
|
| Monroe, Ohio |
| 2001 |
|
| 1,225,000 |
|
| San Bernardino, California |
| 2010 |
|
| 970,000 |
|
| Edgewood, Maryland |
| 2011 |
|
| 1,450,000 |
|
| DeSoto, Texas |
| 2012 |
|
| 1,515,000 |
|
| Plainfield, Indiana |
| 2017 |
|
| 975,000 |
|
|
| Year Opened | Square Footage | ||||
| Store distribution centers: |
|
|
|
|
|
|
| Findlay, Ohio |
| 1994 |
|
| 780,000 |
|
| Winchester, Virginia |
| 1997 |
|
| 450,000 |
|
| Blue Springs, Missouri |
| 1999 |
|
| 540,000 |
|
| Corsicana, Texas |
| 2001 |
|
| 540,000 |
|
| Mamakating, New York |
| 2002 |
|
| 605,000 |
|
| San Bernardino, California |
| 2002 |
|
| 575,000 |
|
| Macon, Georgia |
| 2005 |
|
| 560,000 |
|
| Patterson, California |
| 2006 |
|
| 365,000 |
|
| Ottawa, Illinois |
| 2008 |
|
| 330,000 |
|
| E-commerce fulfillment centers: |
|
|
|
|
|
|
| Monroe, Ohio |
| 2001 |
|
| 1,225,000 |
|
| San Bernardino, California |
| 2010 |
|
| 970,000 |
|
| Edgewood, Maryland |
| 2011 |
|
| 1,450,000 |
|
| DeSoto, Texas |
| 2012 |
|
| 1,515,000 |
|
| Plainfield, Indiana |
| 2017 |
|
| 975,000 |
|
| Etna, Ohio |
| Expected 2021 |
|
| 1,300,000 |
|
We own all of the distribution centers except the San Bernardino, California locations and Corsicana, Texas, which isare leased.
Corporate Facilities
We own our corporate headquarters in Menomonee Falls, Wisconsin. We also own or lease additional buildings and office space, which are used by various corporate departments, including our credit operations.
We are not currently a party to any material legal proceedings but are subject to certain legal proceedings and claims from time to time that arise out of the conduct of our business.
Item 4. Mine Safety Disclosures
Not applicable.
Item 4A. Information about our Executive Officers
Our executive officers as of February 2, 2019January 30, 2021 were as follows:
Name | Age | Position |
Michelle Gass |
| Chief Executive Officer |
|
|
|
|
| Chief Merchandising Officer |
|
| Senior Executive Vice President, Chief Financial Officer |
Marc Chini |
| Senior Executive Vice President, Chief People Officer |
|
| Senior Executive Vice President, Chief Technology Officer |
Greg Revelle |
| Senior Executive Vice President, Chief Marketing Officer |
Jason Kelroy | 46 | Senior Executive Vice President, General Counsel & Corporate Secretary |
16
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Ms. Gass has served as our CEOChief Executive Officer and as a director since May 2018. Ms. Gass was promoted to CEO-elect in October 2017. She joined the Company in 2013 as Chief Customer Officer and was named Chief Merchandising and Customer Officer in June 2015. Prior to Kohl’s, Ms. Gass spent more than 16 years with Starbucks Corporation holding a variety of leadership roles across marketing, global strategy and merchandising, including President, Starbucks Europe, Middle East and Africa. Prior to Starbucks, Ms. Gass was with Procter and Gamble. Ms. Gass has over 25more than 30 years of experience in the retail and consumer goods industries. She is currently a director for PepsiCo Inc., a global food and beverage company. From April 2014 to February 2017, Ms. Gass also served as a director of Cigna Corporation, a global health service company.
Sona Chawla
Ms. Chawla has served as President since May 2018. She served as Chief Operating Officer and President-elect from October 2017 to May 2018. Ms. Chawla joined the Company as Chief Operating Officer in November 2015. Prior to joining the Company, she spent more than 16 years with Starbucks holding a variety of leadership roles across marketing, strategy, merchandising, and operations, including president, Starbucks Europe, Middle East, and Africa. She began her career with Procter & Gamble. Ms. Chawla servedGass has received numerous professional honors, including being named to Fortune’s Most Powerful Women in Business and Businessperson of the Year lists, as well as being named The Visionary 2020 by the National Retail Federation. Ms. Gass currently serves on Walgreen Company’s senior leadership team in the rolesBoard of President, DigitalDirectors for PepsiCo, Retail Industry Leaders Associates, National Retail Federation, and Chief Marketing OfficerChildren’s Wisconsin. She received her undergraduate degree from February 2014 to November 2015, President, E-CommerceWorcester Polytechnic Institute and an MBA from 2011 to February 2014 and Senior Vice President, E-Commerce from 2008 to 2011. Prior to Walgreens, Ms. Chawla served as Vice President, Global Online Business with Dell, Inc. (2006-2008) and previously was a key executive at Wells Fargo & Company serving as Executive Vice President, Online Sales, Service and Marketing (2005-2006), Executive Vice President, Web Channel Management (2003-2005) and Senior Vice President, Enterprise Internet Services (2000-2003). Before Wells Fargo, Ms. Chawla worked at Andersen Consulting (now Accenture) and Mitchell Madison Group. Ms. Chawla has 18 yearsthe University of experience in retail and digital. From 2012 to November 2015, Ms. Chawla served as a director of Express, Inc., a specialty retail apparel chain. She is currently a director of CarMax, Inc., the nation’s largest retailer of used vehicles.Washington.
DouglasDoug Howe
Mr. Howe has served as Chief Merchandising Officer since May 2018. Prior to joining the Company, heMr. Howe served in several senior leadership roles withas global chief merchandising officer at the Qurate Retail Group leading QVC’swhere he led QVC and HSN’s product leadership agenda. Mr. Howe has also held leadership positions in merchandising and product development with QVC, Gap Inc., Walmart, and May Department Stores. Mr. Howe has more than 25 years of retail experience.
Jill Timm
Ms. Timm has served as Chief Merchandising Officer from December 2017 to April 2018,Senior Executive Vice President and Chief Financial Officer since November 2019. Ms. Timm joined the Company in 1999 and has held a number of Merchandising from July 2015 to December 2017, Executive Vice Presidentprogressive leadership roles across several areas of Merchandising and Planning from 2010 to July 2015, and Executive Vice Presidentfinance, most recently having served as executive vice president of Strategic Multichannel Planning and Merchandising from 2008 to 2010.finance. Prior to joining QVC in 2001 as Vice President of Merchandising, Fashion and Beauty, Mr. Howe previouslythe Company, she served as Executive Vice President of Product Design and Development for Old Navy, as well Senior Vice President of Strategy, Design and Development for Walmart. Mr. Howesenior auditor at Arthur Anderson LLP. Ms. Timm has over 25more than 20 years of experience in the retail industry.
Bruce H. Besanko
Mr. Besanko has served as Chief Financial Officer since July 2017. Prior to joining the Company, he spent four years with Supervalu, Inc. as Executive Vice President, Chief Operating Officer and Chief Financial Officer from October 2015 to July 2017 and Executive Vice President and Chief Financial Officer from 2013 to October 2015. Mr. Besanko served as Executive Vice President, Chief Financial Officer and Chief Administrative Officer at OfficeMax, Inc. from 2008 to 2013. Mr. Besanko held several finance leadership positions at Circuit City from 2007 to 2008, The Yankee Candle Company, Inc. from 2005 to 2007, Best Buy Co., Inc. from 2002 to 2005, Sears Roebuck & Company from 1996 to 2002 and Atlantic Richfield Company, Inc. from 1992 to 1996. In addition to his business experience, Mr. Besanko served 26 years in the U.S. Air Force where he rose to the rank of Lieutenant Colonel. Mr. Besanko has 23 years of experience in the retail industry. He is currently a director of Diebold Nixdorf, a multinational financial and retail technology company.
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Mr. Chini has served as Senior Executive Vice President, – Chief People Officer since November 2018. Prior to joining the Company, heMr. Chini served as Executive Vice President, Chief Human Resources Officerchief human resource officer of Synchrony Financial from 2013 to November 2018. Previously,where he built the newly public company’s human resources strategy and function. Mr. Chini worked for General Electric Company for more than 30 years,has also held a variety of chief human resources officer roles across multiple GE business units including serving as Vice President of Human Resources GE Corporate Staff (2011-2013), Executive Vice President of Human Resources for NBC Universal, (2007-2011), Vice President of Human Resources for GE Infrastructure (2005-2006), GE Aviation & Locomotive (2003-2005), and GE Aviation (1998-2003). Prior to beginning his Human Resources career with General Electric in 1984,Industrial Solutions. Mr. Chini served in various Human Resources roles for McGraw-Edison and Liberty Life.has more than 25 years of human resources experience.
Ratnakar LavuPaul Gaffney
Mr. LavuGaffney has served as Senior Executive Vice President, – Chief Technology Officer since April 2018. He served as Executive Vice President – Chief Technology Officer from February 2016 to April 2018 and Executive Vice President – Digital Technology from April 2014 to February 2016. He joined the Company as Senior Vice President – Information Technology, Digital Innovation & Global E-Commerce in 2011.September 2019. Prior to joining the Company, he served as Chief Technology Officer of Redbox Automated Retail LLC from 2009 to 2011. Prior to that, heMr. Gaffney served in a varietynumber of management positionstechnology leadership roles, including chief technology officer of Dick’s Sporting Goods where he led the company’s digital transformation, and senior vice president of information technology at Macys.com from 2000 to 2009, including Group Vice President E-CommerceThe Home Depot, where he was responsible for the organization’s software engineering, user-centered design, and Information Technology from 2008 to 2009applications. Mr. Gaffney has also held leadership roles at Keeps Inc., AAA of Northern California, Nevada & Utah, and Vice President, Technology for Macys.com and Bloomingdales.com from 2006 to 2008.Desktone, Inc. Mr. LavuGaffney has 18more than 25 years of experience in the retail industry.
technology experience.
Greg Revelle
Mr. Revelle has served as Senior Executive Vice President, – Chief Marketing Officer since April 2018. He joined the Company in April 2017 as Executive Vice President, – Chief Marketing Officer. Prior to joining the Company, he served in a number of executive leadership roles, including chief marketing officer at Best Buy, chief marketing officer and general manager of e-commerce at AutoNation, vice president of world online marketing at Expedia, and
17
an investment banker at Credit Suisse. Mr. Revelle has more than 10 years of marketing and retail industry experience.
Jason Kelroy
Mr. Kelroy has served as Senior Executive Vice President, Chief Marketing Officer & General ManagerCounsel and Corporate Secretary since August 2020. He joined the Company in 2004 as Legal Counsel and has held a number of Financial Services for Best Buy Co., Inc. from November 2014 to March 2017 and Senior Vice President, Chief Marketing Officer &progressive leadership roles, serving as General Manager of E-Commerce at AutoNation from 2012 to November 2014.Counsel since 2015. Prior to that, he worked at Expedia, Inc. as Vice President & General Manager, Worldwide Online Marketing from 2009 to 2012 and Vice President, Corporate Development and Strategy from 2005 to 2009. Before Expedia,joining the Company, Mr. Revelle worked at Credit SuisseKelroy served as an Investment Banking Analyst.associate at the law firm of Vorys, Sater, Seymour and Pease LLP. Mr. RevelleKelroy has ninemore than 20 years of experience practicing law, including over 15 years in the online marketing and retail industries. He is currently a director of Cars.com, a digital automotive platform.industry.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market information
Our Common Stock has been traded on the New York Stock Exchange ("NYSE") since May 19, 1992, under the symbol “KSS.”
On February 27, 2019,24, 2021, our Board of Directors approveddeclared a 10% increase in ourquarterly cash dividend to $0.67of $0.25 per common share. The dividend will be paid on April 3, 2019March 31, 2021 to shareholders of record as of March 20, 2019. 17, 2021. In 2018,2020, we paid aggregate cash dividends of $400 million.$108 million prior to the dividend program being temporarily suspended due to the COVID-19 pandemic.
Holders
As of March 13, 2019,10, 2021, there were approximately 3,7003,500 record holders of our Common Stock.
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18
Performance Graph
The graph below compares our cumulative five-year shareholder return to that of the Standard & Poor’s (“S&P”) 500 Index and a Peer Group Index that is consistent with the retail peer groups used in the Compensation Discussion & Analysis section of our Proxy Statement for our May 15, 20192021 Annual Meeting of Shareholders. The Peer Group Index was calculated by S&P Global, a Standard & Poor’s business and includes Bed Bath & Beyond, Inc.; The Gap, Inc.; J.C. Penney Company, Inc.; L Brands, Inc.; Macy’s, Inc.; Nordstrom, Inc.; Ross Stores, Inc.; Target Corporation; and The TJX Companies, Inc. The Peer Group Index excludes Sears Holding Corporation as they are in bankruptcy proceedings. The Peer Group Index is weighted by the market capitalization of each component company at the beginning of each period. The graph assumes an investment of $100 on February 1, 2014January 30, 2016 and reinvestment of dividends. The calculations exclude trading commissions and taxes.
| Company / Index |
| Feb 1, 2014 |
|
| Jan 31, 2015 |
|
| Jan 30, 2016 |
|
| Jan 28, 2017 |
|
| Feb 3, 2018 |
|
| Feb 2, 2019 |
| ||||||
| Kohl’s Corporation |
| $ | 100.00 |
|
| $ | 121.26 |
|
| $ | 104.25 |
|
| $ | 85.43 |
|
| $ | 146.53 |
|
| $ | 159.40 |
|
| S&P 500 Index |
|
| 100.00 |
|
|
| 114.22 |
|
|
| 113.46 |
|
|
| 137.14 |
|
|
| 168.46 |
|
|
| 168.36 |
|
| Peer Group Index |
|
| 100.00 |
|
|
| 127.95 |
|
|
| 121.41 |
|
|
| 113.11 |
|
|
| 123.50 |
|
|
| 130.95 |
|
| Company / Index | Jan 30, 2016 | Jan 28, 2017 | Feb 3, 2018 | Feb 2, 2019 | Feb 1, 2020 | Jan 30, 2021 | ||||||||||||||||||
| Kohl’s Corporation |
| $ | 100.00 |
|
| $ | 81.95 |
|
| $ | 140.56 |
|
| $ | 152.91 |
|
| $ | 103.09 |
|
| $ | 110.19 |
|
| S&P 500 Index |
|
| 100.00 |
|
|
| 120.87 |
|
|
| 148.47 |
|
|
| 148.38 |
|
|
| 180.37 |
|
|
| 211.48 |
|
| Peer Group Index |
|
| 100.00 |
|
|
| 93.91 |
|
|
| 99.76 |
|
|
| 107.43 |
|
|
| 119.52 |
|
|
| 132.13 |
|
Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities
We did not sell any equity securities from 20162018 through 20182020 that were not registered under the Securities Act.Act except as otherwise disclosed in our current Report on Form 8-K dated April 23, 2019.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
In 2016, our Board of Directors increased the remaining share repurchase authorization under our existing share repurchase program to $2.0 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.
15
19
The following table contains information for shares repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ restricted stock during the three fiscal months ended February 2, 2019:January 30, 2021:
| Period |
| Total Number of Shares Purchased During Period |
|
| Average Price Paid Per Share |
|
| Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
|
| Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (Dollars in Millions) |
| ||||
| November 4 - December 1, 2018 |
|
| 487,226 |
|
| $ | 72.16 |
|
|
| 473,087 |
|
| $ | 1,291 |
|
| December 2, 2018 – January 5, 2019 |
|
| 846,310 |
|
|
| 63.31 |
|
|
| 817,900 |
|
|
| 1,239 |
|
| January 6 - February 2, 2019 |
|
| 514,269 |
|
|
| 68.25 |
|
|
| 513,740 |
|
|
| 1,203 |
|
| Total |
|
| 1,847,805 |
|
| $ | 67.00 |
|
|
| 1,804,727 |
|
|
| 1,203 |
|
| Period | Total Number of Shares Purchased During Period | Average Price Paid Per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (Dollars in Millions) | ||||||||||||
| November 1 - November 28, 2020 |
|
| 16,126 |
|
| $ | 21.58 |
|
|
| — |
|
| $ | 726 |
|
| November 29, 2020 – January 2, 2021 |
|
| 9,446 |
|
|
| 38.07 |
|
|
| — |
|
|
| 726 |
|
| January 3 – January 30, 2021 |
|
| 175 |
|
|
| 39.93 |
|
|
| — |
|
|
| 726 |
|
| Total |
|
| 25,747 |
|
| $ | 27.75 |
|
|
| — |
|
| $ | 726 |
|
16
20
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document.
| (Dollars in Millions, Except per Share and per Square Foot Data) |
| 2018 |
| 2017 (e)(f) |
| 2016 (f) |
| 2015 (f) |
| 2014 (f) | ||||||||||
| Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dollars |
| $ | 19,167 |
|
| $ | 19,036 |
|
| $ | 18,636 |
|
| $ | 19,162 |
|
| $ | 18,992 |
|
| Net sales increase (decrease) |
|
| 0.7 | % |
|
| 2.1 | % |
|
| (2.7 | )% |
|
| 0.9 | % |
|
| (0.1 | )% |
| Comparable sales (a) |
|
| 1.7 | % |
|
| 1.5 | % |
|
| (2.4 | )% |
|
| 0.7 | % |
|
| (0.3 | )% |
| Per selling square foot (b) |
| $ | 231 |
|
| $ | 229 |
|
| $ | 224 |
|
| $ | 228 |
|
| $ | 226 |
|
| Total revenue |
| $ | 20,229 |
|
| $ | 20,084 |
|
| $ | 19,681 |
|
| $ | 20,151 |
|
| $ | 19,921 |
|
| Gross margin as a percent of sales |
|
| 36.4 | % |
|
| 36.0 | % |
|
| 35.9 | % |
|
| 36.0 | % |
|
| 36.3 | % |
| Selling, general and administrative expenses ("SG&A") |
|
|
|
|
|
|
|
|
|
|
| �� |
|
|
|
|
|
|
|
|
| Dollars |
| $ | 5,601 |
|
| $ | 5,501 |
|
| $ | 5,430 |
|
| $ | 5,399 |
|
| $ | 5,248 |
|
| As a percent of total revenue |
|
| 27.7 | % |
|
| 27.4 | % |
|
| 27.6 | % |
|
| 26.8 | % |
|
| 26.3 | % |
| Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported (GAAP) |
| $ | 1,361 |
|
| $ | 1,416 |
|
| $ | 1,183 |
|
| $ | 1,553 |
|
| $ | 1,689 |
|
| Adjusted (non-GAAP) (c) |
| $ | 1,465 |
|
| $ | 1,416 |
|
| $ | 1,369 |
|
| $ | 1,553 |
|
| $ | 1,689 |
|
| As a percent of total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported (GAAP) |
|
| 6.7 | % |
|
| 7.1 | % |
|
| 6.0 | % |
|
| 7.7 | % |
|
| 8.5 | % |
| Adjusted (non-GAAP) (c) |
|
| 7.2 | % |
|
| 7.1 | % |
|
| 7.0 | % |
|
| 7.7 | % |
|
| 8.5 | % |
| Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported (GAAP) |
| $ | 801 |
|
| $ | 859 |
|
| $ | 556 |
|
| $ | 673 |
|
| $ | 867 |
|
| Adjusted (non-GAAP) (c) |
| $ | 927 |
|
| $ | 703 |
|
| $ | 673 |
|
| $ | 781 |
|
| $ | 867 |
|
| Diluted earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Reported (GAAP) |
| $ | 4.84 |
|
| $ | 5.12 |
|
| $ | 3.11 |
|
| $ | 3.46 |
|
| $ | 4.24 |
|
| Adjusted (non-GAAP) (c) |
| $ | 5.60 |
|
| $ | 4.19 |
|
| $ | 3.76 |
|
| $ | 4.01 |
|
| $ | 4.24 |
|
| Dividends per share |
| $ | 2.44 |
|
| $ | 2.20 |
|
| $ | 2.00 |
|
| $ | 1.80 |
|
| $ | 1.56 |
|
| Balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 12,469 |
|
| $ | 13,389 |
|
| $ | 13,623 |
|
| $ | 13,660 |
|
| $ | 14,393 |
|
| Working capital |
| $ | 2,105 |
|
| $ | 2,671 |
|
| $ | 2,264 |
|
| $ | 2,352 |
|
| $ | 2,710 |
|
| Long-term debt |
| $ | 1,861 |
|
| $ | 2,797 |
|
| $ | 2,795 |
|
| $ | 2,792 |
|
| $ | 2,780 |
|
| Capital lease and financing obligations |
| $ | 1,638 |
|
| $ | 1,717 |
|
| $ | 1,816 |
|
| $ | 1,916 |
|
| $ | 1,968 |
|
| Shareholders’ equity |
| $ | 5,527 |
|
| $ | 5,419 |
|
| $ | 5,170 |
|
| $ | 5,484 |
|
| $ | 5,983 |
|
| Cash flow |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Net cash provided by operating activities |
| $ | 2,107 |
|
| $ | 1,691 |
|
| $ | 2,153 |
|
| $ | 1,484 |
|
| $ | 2,027 |
|
| Capital expenditures |
| $ | 578 |
|
| $ | 672 |
|
| $ | 768 |
|
| $ | 690 |
|
| $ | 682 |
|
| Free cash flow (d) |
| $ | 1,403 |
|
| $ | 881 |
|
| $ | 1,269 |
|
| $ | 681 |
|
| $ | 1,237 |
|
| Kohl's store information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Number of stores |
|
| 1,159 |
|
|
| 1,158 |
|
|
| 1,154 |
|
|
| 1,164 |
|
|
| 1,162 |
|
| Total square feet of selling space (in thousands) |
|
| 82,620 |
|
|
| 82,804 |
|
|
| 82,757 |
|
|
| 83,810 |
|
|
| 83,750 |
|
| (Dollars in Millions, Except per Share and per Square Foot Data) | 2020 | 2019 | 2018 | 2017(e) | 2016 | |||||||||||||||
Net sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dollars |
| $ | 15,031 |
|
| $ | 18,885 |
|
| $ | 19,167 |
|
| $ | 19,036 |
|
| $ | 18,636 |
| |
Net sales (decrease) increase |
|
| (20.4) | % |
|
| (1.5) | % |
|
| 0.7 | % |
|
| 2.1 | % |
|
| (2.7) | % | |
Comparable sales (a) |
|
| n/a |
|
|
| (1.3) | % |
|
| 1.7 | % |
|
| 1.5 | % |
|
| (2.4) | % | |
Per selling square foot (b) |
| $ | 183 |
|
| $ | 229 |
|
| $ | 231 |
|
| $ | 229 |
|
| $ | 224 |
| |
Total revenue |
| $ | 15,955 |
|
| $ | 19,974 |
|
| $ | 20,229 |
|
| $ | 20,084 |
|
| $ | 19,681 |
| |
Gross margin as a percent of net sales |
|
| 31.1 | % |
|
| 35.7 | % |
|
| 36.4 | % |
|
| 36.0 | % |
|
| 35.9 | % | |
Selling, general, and administrative expenses ("SG&A") |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dollars |
| $ | 5,021 |
|
| $ | 5,705 |
|
| $ | 5,601 |
|
| $ | 5,501 |
|
| $ | 5,430 |
| |
As a percent of total revenue |
|
| 31.5 | % |
|
| 28.6 | % |
|
| 27.7 | % |
|
| 27.4 | % |
|
| 27.6 | % | |
Operating (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Dollars |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reported (GAAP) |
| $ | (262) |
|
| $ | 1,099 |
|
| $ | 1,361 |
|
| $ | 1,416 |
|
| $ | 1,183 |
| |
Adjusted (non-GAAP) (c) |
| $ | (300) |
|
| $ | 1,212 |
|
| $ | 1,465 |
|
| $ | 1,416 |
|
| $ | 1,369 |
| |
As a percent of total revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reported (GAAP) |
|
| (1.6) | % |
|
| 5.5 | % |
|
| 6.7 | % |
|
| 7.1 | % |
|
| 6.0 | % | |
Adjusted (non-GAAP) (c) |
|
| (1.9) | % |
|
| 6.1 | % |
|
| 7.2 | % |
|
| 7.1 | % |
|
| 7.0 | % | |
Net (loss) income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reported (GAAP) |
| $ | (163) |
|
| $ | 691 |
|
| $ | 801 |
|
| $ | 859 |
|
| $ | 556 |
| |
Adjusted (non-GAAP) (c) |
| $ | (186) |
|
| $ | 769 |
|
| $ | 927 |
|
| $ | 703 |
|
| $ | 673 |
| |
Diluted (loss) earnings per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reported (GAAP) |
| $ | (1.06) |
|
| $ | 4.37 |
|
| $ | 4.84 |
|
| $ | 5.12 |
|
| $ | 3.11 |
| |
Adjusted (non-GAAP) (c) |
| $ | (1.21) |
|
| $ | 4.86 |
|
| $ | 5.60 |
|
| $ | 4.19 |
|
| $ | 3.76 |
| |
Dividends per share |
| $ | 0.704 |
|
| $ | 2.68 |
|
| $ | 2.44 |
|
| $ | 2.20 |
|
| $ | 2.00 |
| |
Balance sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total assets |
| $ | 15,337 |
|
| $ | 14,555 |
|
| $ | 12,469 |
|
| $ | 13,389 |
|
| $ | 13,623 |
| |
Working capital |
| $ | 2,813 |
|
| $ | 1,880 |
|
| $ | 2,105 |
|
| $ | 2,671 |
|
| $ | 2,264 |
| |
Long-term debt |
| $ | 2,451 |
|
| $ | 1,856 |
|
| $ | 1,861 |
|
| $ | 2,797 |
|
| $ | 2,795 |
| |
Finance lease and financing obligations |
| $ | 1,502 |
|
| $ | 1,491 |
|
| $ | 1,638 |
|
| $ | 1,717 |
|
| $ | 1,816 |
| |
Operating lease liabilities |
| $ | 2,786 |
|
| $ | 2,777 |
|
| $ | — |
|
| $ | — |
|
| $ | — |
| |
Shareholders’ equity |
| $ | 5,196 |
|
| $ | 5,450 |
|
| $ | 5,527 |
|
| $ | 5,419 |
|
| $ | 5,170 |
| |
Cash flow |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net cash provided by operating activities |
| $ | 1,338 |
|
| $ | 1,657 |
|
| $ | 2,107 |
|
| $ | 1,691 |
|
| $ | 2,153 |
| |
Capital expenditures |
| $ | 334 |
|
| $ | 855 |
|
| $ | 578 |
|
| $ | 672 |
|
| $ | 768 |
| |
Free cash flow (d) |
| $ | 908 |
|
| $ | 700 |
|
| $ | 1,403 |
|
| $ | 881 |
|
| $ | 1,269 |
| |
Kohl's store information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Number of stores |
|
| 1,162 |
|
|
| 1,159 |
|
|
| 1,159 |
|
|
| 1,158 |
|
|
| 1,154 |
| |
Total square feet of selling space (in thousands) |
|
| 82,152 |
|
|
| 82,192 |
|
|
| 82,620 |
|
|
| 82,804 |
|
|
| 82,757 |
|
(a) | Kohl's store sales are included in comparable sales after the store has been open for 12 full months. Digital sales and sales at remodeled and relocated Kohl's stores are included in comparable sales, unless square footage has changed by more than 10%. |
(b) | Net sales per selling square foot includes in-store and digital merchandise sales. |
(c) | Pre-tax adjustments include impairments, store closing, and other costs of $89 million in 2020, $113 million in 2019, $104 million in 2018, and $186 million in 2016; gain on sales of real estate of $127 million in 2020, gain on extinguishment of debt of $9 million in 2019 and debt extinguishment losses of $63 million in |
(d) | Free cash flow is a non-GAAP financial measure |
(e) | Fiscal 2017 was a 53-week year. The impact of the 53rd week is approximated as follows: net sales were $170 million; other revenues were $10 million; SG&A was $40 million; interest was $3 million; net income was $15 million; and diluted earnings per share were approximately $0.10. |
|
|
17
21
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Executive Summary
As of February 2, 2019,January 30, 2021, we operated 1,1591,162 Kohl's department stores, a website (www.Kohls.com), and 12 FILA outlets, and four Off-Aisle clearance centers.outlets. Our Kohl's stores and website sell moderately-priced proprietaryprivate 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. Our website includes merchandise which is available in our stores, as well as merchandise that is available only online.
Key financial results for 20182020 included:
| • |
|
• | Gross margin as a |
• | Selling, general, and administrative expenses ("SG&A") as a percentage of total revenue increased 291 basis points. SG&A expenses decreased $684 million, or 12%, primarily driven by a reduction in store related expenses and lower marketing expenses. |
• | Net loss on a GAAP basis was $163 million, or ($1.06) loss per share. |
• | On an adjusted non-GAAP basis, our net loss was $186 million, or ($1.21) loss per share. |
Gross marginRecent Developments
As discussed in our 2019 Form 10-K, the World Health Organization declared the outbreak of COVID-19 as a percentagepandemic in March 2020. Subsequently, COVID-19 has continued to spread throughout the United States. As a result, the President of net sales increased 32 basis points as effective inventory management contributedthe United States declared a national emergency. Federal, state, and local governing bodies mandated various restrictions, including travel restrictions, restrictions on public gatherings, stay at home orders and advisories, and quarantining of people who may have been exposed to fewer permanentthe virus. The response to the COVID-19 pandemic has negatively affected the global economy, disrupted global supply chains, and promotional markdowns. These increases were partially offset by higher shippingcreated significant disruption in the financial and retail markets, including a decrease in consumer demand for our merchandise.
The COVID-19 pandemic has had, and will likely continue to have, significant adverse effects on our business including, but not limited to the following:
• | On March 20, 2020, the Company furloughed 85,000 store and distribution center associates, as well as some corporate office associates, as a result of temporarily closing all of our stores which limited our business to the digital channel. |
• | Starting on May 4, 2020, we began reopening stores in locations where permitted, and had reopened all of our stores as of July 10, 2020, and furloughed store and distribution center associates have returned to work. |
• | The Company experienced a significant decline in sales demand, and expects to continue to experience volatility in demand for its merchandise. We also experienced pressure in gross margin, and continue to expect pressures on gross margin as we expect digital penetration to remain elevated. In addition, during the fourth quarter of 2020, the Company experienced an impact to gross margin from freight surcharges related to increased digital penetration across the retail industry resulting from the COVID-19 pandemic. |
• | Additionally, social distancing measures or changes in consumer spending behaviors due to COVID-19 may continue to impact store traffic which could result in a loss of sales and profit. As our stores reopened, we implemented numerous social distancing and safety measures which remain in place. These include providing personal protective equipment to our associates, implementing a more rigorous cleaning process, |
22
including enhanced cleaning of high touch surfaces throughout the day, installing protective barriers at all registers, and requiring associates and customers to wear face coverings while inside our stores. To encourage social distancing, we installed social distancing signage and markers throughout the store, closed our fitting rooms, widened aisles by removing in-aisle fixtures, relocated Amazon returns to a separate area of the store, and are limiting occupancy in stores as appropriate. We also implemented a new process for handling merchandise returns, reduced store operating hours, and are providing dedicated shopping hours for at-risk individuals. |
The chart below details costs resulting from digital sales growth.that we believe are directly attributable to COVID-19:
(Dollars In Millions) |
| Twelve Months Ended | ||
Description | Classification | January 30, 2021 | ||
Inventory write-downs | Cost of merchandise sold | $ | 187 |
|
Net compensation and benefits | Selling, general, and administrative |
| 73 |
|
Other costs | Selling, general, and administrative |
| 55 |
|
Asset write-offs and other | Impairments, store closing, and other costs |
| 53 |
|
Total |
| $ | 368 |
|
In response to COVID-19, we took the following actions to preserve financial liquidity and flexibility during fiscal 2020:
• | Managed inventory receipts meaningfully lower, |
• | Significantly reduced expenses across all areas of the business including marketing, technology, operations, and payroll, |
• | Reduced capital expenditures 61%, |
• | Suspended share repurchase program, |
• | Suspended regular quarterly cash dividend beginning in the second quarter of 2020, |
• | Replaced and upsized the unsecured $1.0 billion revolver with a $1.5 billion secured facility, of which all was fully available for utilization as of year-end, |
• | Issued $600 million of 9.5% notes due 2025, and |
• | Completed a sale leaseback for our San Bernardino E-commerce fulfillment and distribution center which generated net proceeds of $193 million after fees and resulted in a $127 million gain. |
Selling, generalWe cannot estimate with certainty the length or severity of this pandemic, or the extent to which the disruption may materially impact our Consolidated Financial Statements.For fiscal 2020, COVID-19 had a material adverse effect on our business, financial condition, and administrative expenses ("SG&A") as a percentageresults of total revenue increased 30 basis points. The increase was primarily driven by strategic technology investments.operations.
Net income on a GAAP basis was $801 million, or $4.84 per diluted share.
On a non-GAAP basis, our net income increased 32% to $927 million and our diluted earnings per share increased 34% to $5.60.
See "Results of Operations" and "Liquidity and Capital Resources" for additional details about our financial results, howresults.
Our Vision and Strategy
As part of our continued efforts to stay ahead in the rapidly changing retail environment, we define comparableintroduced a new strategic framework in October 2020. The Company’s new vision is to be “the most trusted retailer of choice for the active and casual lifestyle.” This new strategy is designed to create long-term shareholder value and has four key focus areas: driving top line growth, expanding operating margin, maintaining disciplined capital management, and sustaining an agile, accountable, and inclusive culture.
23
Driving Top Line Growth
Our initiatives include expanding Kohl’s active and outdoor business to at least 30% of net sales, reigniting growth in the women’s business, building a sizable beauty business, driving category productivity and inventory turn, and capturing market share from the retail industry disruption. We have already taken significant steps in these areas, including forming a new major long-term strategic partnership with Sephora, the largest prestige beauty retailer in the world, where Sephora will become Kohl’s exclusive beauty partner. We plan for this partnership to bring the “Sephora at Kohl’s” experience to 200 stores and online beginning in Fall 2021, and to at least 850 locations by 2023. We expect this strategic partnership to drive incremental customer traffic, significantly grow the Company’s beauty business, and positively impact sales across other categories. Our loyalty and value efforts include simplifying the value delivered to our customers and maintaining our industry-leading loyalty program, which includes Kohl’s Rewards and the Kohl’s Card. We will also continue to offer a compelling and differentiated omnichannel experience through modernized stores and an enhanced digital platform.
Expanding Operating Margin
We have established a goal of expanding the Company’s operating margin with a multi-year plan of achieving 7% to 8%. To achieve that goal, we are focused on driving both gross margin improvement and selling, general, and administrative expense leverage. Our gross margin initiatives include disciplined inventory management and increased inventory turn, optimized pricing and promotion strategies, efficient sourcing, and a reconciliationtransformed end-to-end supply chain. Our initiatives to drive selling, general, and administrative expense efficiency are focused on store expenses, marketing, technology, and corporate expenses.
Maintaining Disciplined Capital Management
We are committed to prudent balance sheet management with the long-term objective of GAAPsustaining Kohl’s Investment Grade credit rating. The Company has a long history of strong cash flow generation, investing in the business, and returning significant capital to non-GAAP net incomeshareholders—all of which will remain important in the future.
Sustaining an Agile, Accountable, and diluted earnings per share.Inclusive Culture
2019Fostering a diverse, equitable, and inclusive environment for Kohl’s associates, customers, and suppliers is an important focus of ours. We established a diversity and inclusion framework in 2020 that includes a number of key initiatives across three pillars: Our People, Our Customers, and Our Communities. In addition, we continue to build on the Company’s commitment to Environmental, Social, and Corporate Governance (“ESG”). We have established 2025 goals related to climate change, waste and recycling, and sustainable sourcing, and Kohl’s has earned many ESG-related awards.
2021 Outlook
Our current expectations for 20192021 are as follows:
|
|
| Increase |
|
|
|
|
|
|
|
|
|
|
Earnings per diluted share | $ |
Capital expenditures | $ |
Share repurchases | $ |
This guidance includes the impact
24
Results of Operations
53rd Week
Fiscal 2017 was a 53-week year. During the 53rd week, net sales were approximately $170 million; other revenue was approximately $10 million; SG&A expenses were approximately $40 million; and interest was approximately $3 million. The 53rd week increased our 2017 net income by approximately $15 million and our diluted earnings per share by approximately $0.10. For 2018, comparable sales compare the 52-week periods ended
18
February 2, 2019 and February 3, 2018. For 2017, comparable sales compare the 52-week periods ended January 27, 2018 and January 28, 2017.
Net Sales
As an omnichannel retailer, it is often difficult to distinguish between a "store"Net sales includes revenue from the sale of merchandise, net of expected returns and a "digital" sale. Belowshipping revenue.
Comparable sales is a list of some omnichannel examples:
Digital customers can choose to have most online orders either shipped to their home or picked up in anymeasure that highlights the performance of our stores.
Approximately 75%stores and digital channel by measuring the change in sales for a period over the comparable, prior-year period of our digital customers also shop in our stores.
Digital orders may be shipped from a dedicated E-Commerce fulfillment center, aequivalent length. Comparable sales includes all store a retail distribution center, third parties or any combination of the above.
Stores increaseand digital sales, by providing customers opportunities to view, touch and/or try on physical merchandise before ordering online.
Online purchases can easily be returned in our stores.
Kohl's Cash couponsexcept sales from stores open less than 12 months, stores that have been closed, and Yes2You rewards can be redeemed online or in store regardless ofstores where they were earned.
In-store customers can order from online kiosks in our stores.
Customers who utilize our mobile app while in the store may receive mobile coupons to use when they check out.
Because we do not have a clear distinction between "store" sales and "digital" sales, we do not report them separately.
Kohl’s store sales are included in comparable sales after the store has been open for 12 full months. Digital sales and sales at remodeled and relocated Kohl’s stores are included in comparable sales unless square footage has changed by more than 10%. We measure the change in digital sales by including all sales initiated online or through mobile applications, including omnichannel transactions which are fulfilled through our stores.
As our stores were closed for a period during fiscal 2020, we have not included a discussion of 2020 comparable sales as we do not believe it is a meaningful metric over this period of time.
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 is a meaningful metric in evaluating our performance of ongoing operations period over period. 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.
The following graph summarizes net sales dollars and comparable sales (Dollars in Millions):over the prior year:
2018
2020 compared to 20172019
Net sales increased $131 million,decreased $3.9 billion, or 0.7%20.4%, to $19.2$15.0 billion for 2018. The increase was primarily due to a 1.7% increase in comparable sales mostly reflecting higher average transaction values. The increase was partially offset by $170 million of sales in the 53rd week of 2017.2020.
19
| • | The decrease reflects the continued impact of COVID-19 which includes the temporary nationwide closure of our stores on March 20, 2020 resulting in a decrease in transactions. All of our stores reopened during the second quarter of 2020. |
• | Digital sales increased 29% for the year. Digital penetration represented 40% of net sales in 2020. |
• | By line of business, Home and Children’s outperformed the Company average. Women’s, Men’s, Footwear, and Accessories underperformed the Company average. |
• | Active continued to be a key strategic initiative for 2020 and outperformed the Company average. |
25
By line of business, Men’s, Children’s and Footwear were the strongest categories. Home and Women’s also reported positive comparable sales. Accessories was slightly negative.
Geographically, all regions reported higher comparable sales in 2018.
20172019 compared to 20162018
Net sales increased $400decreased $282 million, or 2.1%,1.5% to $19.0$18.9 billion for 2017. Approximately $170 million of the increase was due to the 53rd week in the fiscal 2017 calendar. The remaining increase was primarily due to a 1.5% increase in comparable sales. The increase in comparable sales reflects higher average transaction values.2019.
| • | The decrease was primarily due to a 1.3% decrease in comparable sales driven by a decrease in average transaction value. |
• | Digital sales had a low double digits percentage increase in 2019. Digital penetration represented 24% of net sales in 2019. |
• | By line of business, Children’s, Men’s, Accessories, and Footwear outperformed the Company average. Home and Women’s underperformed the Company average. |
• | Active continued to be a key strategic initiative that contributed to our sales growth in 2019. |
• | Geographically, the Midwest, Mid-Atlantic, and Northeast outperformed the Company average. |
Other Revenue
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.
The following graph summarizes other revenue (Dollars in Millions):revenue:
Other revenue increased $14decreased $165 million in 20182020 and $3increased $27 million in 2017.2019. The decrease in 2020 was due to lower credit card revenue due to lower accounts receivable balances associated with lower sales and a higher payment rate resulting in less interest, late fees, and write-off activity. The increase in 2018 is2019 was due to higher credit card revenue, third-party advertising on our website and breakage. The increase in 2017 is due to $10 million of revenue earned in the 53rd week and higher third-party advertising on our website, partially offset by lower credit card revenue.
Cost of Merchandise Sold and Gross Margin
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; terms cash discount; and depreciation of product development facilities and equipment. 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.
20
26
The following graph summarizes cost of merchandise sold and gross margin as a percent of net sales (Dollars in Millions):sales:
Gross margin is calculated as net sales less cost of merchandise sold. Gross margin as a percent of net sales increased 32decreased 464 basis points in 20182020 and 1364 basis points in 2017.2019. The increases weredecrease in 2020 was driven by effectiveapproximately 195 bps due to the inventory actions taken in the first quarter of 2020, approximately 210 bps due to higher shipping costs resulting from increased digital sales penetration, and approximately 60 bps due to the mix of business partially offset by strong inventory management which contributed to fewer permanent and promotional markdowns, partially offsetpricing and promotion optimization. The decrease in 2019 was driven by higher shipping costs resulting from digital growth. growth, an increase in promotional markdowns, and mix of business.
Selling, General, and Administrative Expenses
SG&A includes compensation and benefit costs (including stores, corporate, headquarters, buying, and merchandising, and distribution centers); occupancy and operating costs of our retail, distribution, and corporate facilities; expenses from our Kohl’s credit card operations; freight expenses associated with moving merchandise from our distribution centers to our retail stores and among distribution and retail facilities;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 non-operatingadministrative revenues and expenses. We do not include depreciation and amortization in SG&A. The classification of these expenses varies across the retail industry.
Many of our expenses, including store payroll and distribution costs, are variable in nature. These costs generally increase as sales increase, and decrease as sales decrease. We measure both the change in these variable expenses and the expense as a percent of sales.revenue. If the expense as a percent of salesrevenue decreased from the prior year, the expense "leveraged". If the expense as a percent of salesrevenue increased over the prior year, the expense "deleveraged".
27
The following graph summarizes the increases and (decreases)decreases in SG&A by expense type (Dollars in Millions):
21between 2019 and 2020:
SG&A increased $100decreased $684 million, or 2%12%, to $5.6$5.0 billion for 2018. The increase is net of approximately $40 million of incremental expense in 2017 due to the 53rd week in the fiscal 2017 calendar.2020. As a percentage of revenue, SG&A deleveraged by 30291 basis points.
The increasedecrease was primarily driven by a reduction in store expenses due to a reduction in sales and staffing model changes, lower marketing expense due to reductions in all working media channels, reduced capital spending in technology, and lower credit expenses reflects higher spend as we migrate technology systemsdue to the cloud. Leadership changes drove the increase inlower payroll and operating costs. Corporate expenses decreased due to lower general corporate expenses.costs. Distribution costs, which exclude payroll related to online originated orders that were shipped from our stores, were $312$346 million for 20182020 compared to $350 million for 2019. This decrease was driven by lower payroll and increased $9 milliontransportation costs as a result of lower volume due to higher transportation costs. Marketing costs reflect higher digitalCOVID-19. Partially offsetting the decrease in SG&A expenses in 2020 were expenses related to the COVID-19 pandemic which primarily consisted of incremental employee compensation and personalization spend. In our stores, increasesbenefits as well as cleaning and protective supplies. Included in these expenses driven by omnichannel supportwas the retention credit benefit we were eligible for under The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"). The CARES Act, enacted on March 27, 2020, provides eligible employers with an employee retention credit equal to 50% of ship-from-store and buy online, pick-up in store operationsqualified wages paid to employees who were offset by productivity improvements. Expenses from our credit card operations decreasednot providing services to the Company due to savings in payroll and operating costs.
the impact of COVID-19.
The following graph summarizes the increases and (decreases) in SG&A by expense type (Dollars in Millions):between 2018 and 2019:
SG&A increased $71$104 million, or 1%1.9%, to $5.5$5.7 billion for 2017. Approximately $40 million of the increase was due to the 53rd week in the fiscal 2017 calendar.2019. As a percentage of revenue, SG&A leverageddeleveraged by 2088 basis points.
28
The increase in corporate expenses was driven by higher incentive compensation as a result of our strong financial performance in 2017. The increase in technologystore expenses reflects higher costs as we migraterent expense, primarily due to the cloud.new lease accounting standard, costs related to brand launches, the Amazon returns program, and wage pressure. Distribution costs, which exclude payroll related to online originated orders that were shipped from our stores, were $303$350 million for 2017. The increase of $232019. This increased $38 million was due to higher transportation and payroll costs at our E-Commerce fulfillment centers driven by growth in digital salessales. Marketing costs reflect higher digital and the opening ofbroadcast spend. Technology costs increased as we continue to invest in our fifth E-Commerce facility. In our stores, decreases in controllable expenses were substantially offset by higher store payroll due to on-going wage pressure and omnichannel support of ship-from-store and buy online, pick-up in store operations.business. Expenses from our credit card operations decreased due to lowersavings in payroll and operating costs. MarketingCorporate and other expenses decreased due to lower general corporate costs reflect efficiencies in our non-customer facing spend and the benefit of not repeating a non-productive marketing event. incentives.
Other Expenses
(Dollars in Millions) |
| 2018 |
|
| 2017 |
|
| 2016 |
| 2020 | 2019 | 2018 | ||||||||||||
Depreciation and amortization |
| $ | 964 |
|
| $ | 991 |
|
| $ | 938 |
|
| $ | 874 |
|
| $ | 917 |
|
| $ | 964 |
|
Impairments, store closing, and other costs |
|
| 89 |
|
|
| 113 |
|
|
| 104 |
| ||||||||||||
(Gain) on sale of real estate |
|
| (127) |
|
|
| — |
|
|
| — |
| ||||||||||||
Interest expense, net |
|
| 256 |
|
|
| 299 |
|
|
| 308 |
|
|
| 284 |
|
|
| 207 |
|
|
| 256 |
|
Impairments, store closing and other costs |
|
| 104 |
|
|
| — |
|
|
| 186 |
| ||||||||||||
Loss on extinguishment of debt |
|
| 63 |
|
|
| — |
|
|
| — |
| ||||||||||||
(Gain) loss on extinguishment of debt |
|
| — |
|
|
| (9 | ) |
|
| 63 |
|
22
The changes in depreciationDepreciation and amortization reflectdecreases were driven by maturity of our store portfolio and reduced capital spending in 2020.
Depreciation and amortization decreases in 2019 were driven by the net impact of lower depreciation due to maturing of our stores and the impact of the new lease accounting standard offset by higher amortization due to investments in technology, higher depreciation from our fifth E-Commerce fulfillment center which opened in 2017, and a $22 million write-off in 2017 of information technology projects that no longer fit into our strategic and cloud migration plans.
The decrease in interest expense in 2018 was driven by the benefits of debt reductions in 2018. Higher interest income due to higher yields and investment balances and lower interest on capital leases as the portfolio matures also contributed to the decreases in both periods.technology.
Impairments, store closing, and other costs includein 2020 included total asset impairments of $68 million, which consisted of $51 million related to capital reductions and strategy changes due to COVID-19 and $17 million related to impairments of corporate facilities and lease assets. It also included a $21 million corporate restructuring charge, $15 million in brand exit costs, and a $2 million contract termination fee due to COVID-19, offset by a $13 million gain on an investment previously impaired and $4 million gain on lease termination.
Impairments, store closing, and other costs in 2019 included $52 million of asset impairment charges related to the closure of four Kohl’s stores and four Off-Aisle clearance centers, $30 million in severance, which included our corporate restructuring effort along with the execution of a voluntary role reduction program, $10 million related to brand exits, and a $21 million impairment related to technology projects that no longer aligned with our strategic plans. Impairments, store closing, and other costs in 2018 included the following expenses related to closing four stores, consolidating call center locations which supportsupported both Kohl’s charge and online customers, a voluntary retirement program, and the impairment of certain assetsassets.
(Dollars in Millions) | 2020 | 2019 | 2018 | ||||||
Severance, early retirement, and other | $ | 21 |
| $ | 40 |
| $ | 32 |
|
Impairments: |
|
|
|
|
|
|
|
|
|
Buildings and other store assets |
| 18 |
|
| 52 |
|
| 36 |
|
Intangible and other assets |
| 50 |
|
| 21 |
|
| 36 |
|
Impairments, store closings, and other costs | $ | 89 |
| $ | 113 |
| $ | 104 |
|
During fiscal 2020, we recognized a gain of $127 million from the sale leaseback transaction of our San Bernardino E-commerce fulfillment and distribution centers.
Net interest expense increased in 2018. In 2016,2020 as a result of higher interest expense due to the costs related to closing 18 storesoutstanding balance on the revolving credit facility which was fully paid in October 2020, and the organizational realignment at our corporate office:$600 million of notes issued in April 2020. Net interest expense decreased in 2019 due primarily to the benefits of debt reductions in 2018 and adoption of the new lease accounting standard in the first quarter of 2019.
29
(Dollars in Millions) | 2018 |
| 2017 |
| 2016 |
| |||
Severance, early retirement, and other | $ | 32 |
| $ | — |
| $ | 17 |
|
Impairments: |
|
|
|
|
|
|
|
|
|
Buildings and other store assets |
| 36 |
|
| — |
|
| 53 |
|
Intangible and other assets |
| 36 |
|
| — |
|
| 23 |
|
Store leases: |
|
|
|
|
|
|
|
|
|
Record future obligations |
| — |
|
| — |
|
| 114 |
|
Write-off net obligations |
| — |
|
| — |
|
| (21 | ) |
Total | $ | 104 |
| $ | — |
| $ | 186 |
|
Gain on extinguishment of debt of $9 million in 2019 resulted from the purchase of leased equipment that was accounted for as a financing obligation.
Loss on the extinguishment of debt of $63 million in 2018 resulted from a $413 million make wholemake-whole call and a $500 million cash tender offer in 2018.
Income Taxes
(Dollars in Millions) |
| 2018 |
|
| 2017 |
|
| 2016 |
| 2020 | 2019 | 2018 | ||||||||||||
Provision for income taxes |
| $ | 241 |
|
| $ | 258 |
|
| $ | 319 |
| ||||||||||||
(Benefit) provision for income taxes |
| $ | (383 | ) |
| $ | 210 |
|
| $ | 241 |
| ||||||||||||
Effective tax rate |
|
| 23.2 | % |
|
| 23.1 | % |
|
| 36.5 | % |
|
| 70.2 | % |
|
| 23.3 | % |
|
| 23.2 | % |
On December 22, 2017, H.R. 1, originally the Tax Cuts & Jobs Act, was signed into law making significant changes to the Internal Revenue Code. Changes include a corporate rate decrease from 35% to 21%, effective January 1, 2018, as well as a variety of other changes including the acceleration of expensing of certain business assets and reductions in the amount of executive pay that could qualify as a tax deduction.
Our effective tax rate in 20182020 includes the full year benefit offor the decreasenet operating loss carryback provision from the CARES Act enacted on March 27, 2020. This provision allows losses generated in 2020 to be carried back to the corporate rate. For 2017,five preceding years, which include years in which the reduction in thestatutory tax rate was prorated, resulting35%. The effective tax rates in a2019 and 2018 reflect the federal statutory federal tax rate of 33.7%21%. In 2017, we recorded a total tax benefit of $136 million related
GAAP to the federal tax rate reduction and the re-measurement of our deferred tax assets and liabilities as well as a $20 million benefit from the settlement of a significant state tax dispute. These items reduced our 2017 effective tax rate by 10.9 percentage points.
23
Adjusted Net Income and Earnings per Diluted ShareNon-GAAP Reconciliation
(Dollars in Millions, Except per Share Data) | Income before Taxes |
| Net Income | Earnings per Diluted Share | Operating (Loss) Income | (Loss) Income before Income Taxes | Net (Loss) Income | (Loss) Earnings per Diluted Share | ||||||||||||||||||||
2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GAAP | $ | (262 | ) | $ | (546 | ) | $ | (163 | ) | $ | (1.06 | ) | ||||||||||||||||
Impairments, store closing, and other costs |
|
| 89 |
|
|
| 89 |
|
|
| 89 |
|
|
| 0.58 |
| ||||||||||||
(Gain) on sale of real estate |
|
| (127 | ) |
|
| (127 | ) |
|
| (127 | ) |
|
| (0.82 | ) | ||||||||||||
Income tax impact of items noted above |
|
| — |
|
|
| — |
|
|
| 15 |
|
|
| 0.09 |
| ||||||||||||
Adjusted (non-GAAP) | $ | (300 | ) | $ | (584 | ) | $ | (186 | ) | $ | (1.21 | ) | ||||||||||||||||
2019 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
GAAP | $ | 1,099 |
|
| $ | 901 |
| $ | 691 |
| $ | 4.37 |
| |||||||||||||||
Impairments, store closing, and other costs |
|
| 113 |
|
|
| 113 |
|
|
| 113 |
|
|
| 0.71 |
| ||||||||||||
(Gain) on extinguishment of debt |
|
| — |
|
|
| (9 | ) |
|
| (9 | ) |
|
| (0.06 | ) | ||||||||||||
Income tax impact of items noted above |
|
| — |
|
|
| — |
|
|
| (26 | ) |
|
| (0.16 | ) | ||||||||||||
Adjusted (non-GAAP) | $ | 1,212 |
| $ | 1,005 |
| $ | 769 |
| $ | 4.86 |
| ||||||||||||||||
2018 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP |
| $ | 1,042 |
|
| $ | 801 |
|
| $ | 4.84 |
| $ | 1,361 |
| $ | 1,042 |
| $ | 801 |
| $ | 4.84 |
| ||||
Impairments, store closing and other costs |
|
| 104 |
|
|
| 78 |
|
|
| 0.47 |
| ||||||||||||||||
Impairments, store closing, and other costs |
|
| 104 |
|
|
| 104 |
|
|
| 104 |
|
|
| 0.63 |
| ||||||||||||
Loss on extinguishment of debt |
|
| 63 |
|
|
| 48 |
|
|
| 0.29 |
|
|
| — |
|
|
| 63 |
|
|
| 63 |
|
|
| 0.38 |
|
Income tax impact of items noted above |
|
| — |
|
|
| — |
|
|
| (41 | ) |
|
| (0.25 | ) | ||||||||||||
Adjusted (non-GAAP) |
| $ | 1,209 |
|
| $ | 927 |
|
| $ | 5.60 |
| $ | 1,465 |
| $ | 1,209 |
| $ | 927 |
| $ | 5.60 |
| ||||
2017 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
GAAP |
| $ | 1,117 |
|
| $ | 859 |
|
| $ | 5.12 |
| ||||||||||||||||
Federal tax reform benefits |
|
| — |
|
|
| (136 | ) |
|
| (0.81 | ) | ||||||||||||||||
State tax settlement |
|
| — |
|
|
| (20 | ) |
|
| (0.12 | ) | ||||||||||||||||
Adjusted (non-GAAP) |
| $ | 1,117 |
|
| $ | 703 |
|
| $ | 4.19 |
| ||||||||||||||||
2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
GAAP |
| $ | 875 |
|
| $ | 556 |
|
| $ | 3.11 |
| ||||||||||||||||
Impairments, store closing and other costs |
|
| 186 |
|
|
| 117 |
|
|
| 0.65 |
| ||||||||||||||||
Adjusted (non-GAAP) |
| $ | 1,061 |
|
| $ | 673 |
|
| $ | 3.76 |
|
We believe adjusted results are useful because they provide enhanced visibility into our ongoing results for the periods excluding the impact of uniquecertain items such as those included in the table above. However, these non-GAAP financial measures are not intended to replace GAAP measures.
Inflation
WeIn addition to COVID-19, we expect that our operations will continue to be influenced by general economic conditions, including food, fuel, and energy prices, higher wagesunemployment, and by costs to source our merchandise.merchandise, including tariffs. There can be no assuranceassurances that our businesssuch factors will not be impacted by such factorsimpact our business in the future.
30
Liquidity and Capital Resources
Financial liquidity and flexibility are a key focus of our response to COVID-19. As previously mentioned, we took various actions during 2020 to preserve our financial liquidity and flexibility.
The following table presents our primary cash requirementsuses and sources of funds.cash:
Cash | Cash Sources |
• Operational needs, including salaries, rent, taxes, and other operating costs • Capital expenditures • Inventory • Share repurchases • Dividend payments • Debt reduction | • Cash flow from operations • Short-term trade credit, in the form of extended payment terms • Line of credit under our revolving credit facility • Issuance of debt |
Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season. Due to COVID-19, typical working capital and inventory patterns did not occur in 2020.
The following table includes cash balances and changes:
| (Dollars in Millions) |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
| Cash and cash equivalents |
| $ | 934 |
|
| $ | 1,308 |
|
| $ | 1,074 |
|
| Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating activities |
| $ | 2,107 |
|
| $ | 1,691 |
|
| $ | 2,153 |
|
| Investing activities |
|
| (572 | ) |
|
| (649 | ) |
|
| (756 | ) |
| Financing activities |
|
| (1,909 | ) |
|
| (808 | ) |
|
| (1,030 | ) |
| Free cash flow (a) |
| $ | 1,403 |
|
| $ | 881 |
|
| $ | 1,269 |
|
(Dollars in Millions) | 2020 | 2019 | 2018 | |||||||||
Cash and cash equivalents |
| $ | 2,271 |
|
| $ | 723 |
|
| $ | 934 |
|
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
| $ | 1,338 |
|
| $ | 1,657 |
|
| $ | 2,107 |
|
Investing activities |
|
| (137 | ) |
|
| (837 | ) |
|
| (572 | ) |
Financing activities |
|
| 347 |
|
|
| (1,031 | ) |
|
| (1,909 | ) |
Free cash flow (a) |
| $ | 908 |
|
| $ | 700 |
|
| $ | 1,403 |
|
(a) |
| Non-GAAP financial measure |
24
NetOperating activities generated cash provided by operations increased $416 million to $2.1of $1.3 billion in 2018. The increase was primarily attributable2020 compared to changes in accounts payable and other operating assets and liabilities.
Net cash provided by operations decreased $462 million toof $1.7 billion in 2017.2019. The decrease was primarily attributable to the decline in net income resulting from decreased sales due to the temporary nationwide store closures due to COVID-19 and changes in accounts payable.other current and long-term assets offset by the decrease in merchandise inventories.
Operating activities generated cash of $1.7 billion in 2019 compared to cash of $2.1 billion in 2018. The decrease was primarily attributable to lower net income and changes in accrued and other operating liabilities.
Investing Activities
Net cash used in investingInvesting activities decreased $77$700 million to $572$137 million in 2018.2020. The decrease was due to reductions in capital spending as part of our response to COVID-19 as well as the proceeds from the sale of real estate.
Net cash used in Investing activities increased $265 million to $837 million in 2019. The increase was primarily due to the timing of technology spending.
Net cash usedinvestments in investing activities decreased $107 million to $649 million in 2017. The decrease was primarily due to the completion of the beauty rollout, corporate improvements, andour sixth E-commerce fulfillment center, store strategies that include new stores in 2016.and capital improvements to existing stores, and technology investments.
31
The following chart summarizes capital expenditures by major category:
We expect total capital expenditures of approximately $850 million in fiscal 2019. The increase is driven by omnichannel investments as we construct our sixth E-commerce fulfillment center. The total actual amount of our future capital expenditures will depend on store strategies; construction of and renovations to distribution centers; mix of owned, leased or acquired stores; and technology and corporate spending. We do not anticipate that our capital expenditures will be limited by any restrictive covenants in our financing agreements.
Financing Activities
NetFinancing activities generated cash of $347 million in 2020 compared to $1.0 billion used in financing activities increased $1.12019.
In March 2020, we fully drew down our $1.0 billion senior unsecured revolver. In April 2020, we replaced and upsized the unsecured credit facility with a $1.5 billion senior secured, asset based revolving credit facility maturing in July 2024. In October 2020, we paid $1.0 billion to $1.9fully repay our revolver and have $1.5 billion in 2018, primarily due to $943available for utilization. No borrowings were outstanding on the credit facility as of January 30, 2021, February 1, 2020, or February 2, 2019.
In April 2020, we issued $600 million of debt reductions during9.50% notes with semi-annual interest payments beginning in November 2020. The notes mature in May 2025. We used part of the year.net proceeds from this offering to repay $500 million of the borrowings under our senior secured, asset based revolving credit facility with the remainder for general corporate purposes.
Net cash usedAs a result of the suspension of our share repurchase program in financing activities decreased $222response to COVID-19, treasury stock purchases in 2020 were $8 million compared to $808$470 million in 2017, primarily due to a $251 million decrease in treasury stock purchases.2019. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors.
We may again seekCash dividend payments were $108 million ($0.704 per share) in 2020 and $423 million ($2.68 per share) in 2019.In response to retire or purchase our outstanding debt through open market cash purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictionsCOVID-19, the dividend program was suspended beginning in the second quarter of 2020. The Company remains committed to paying a dividend and other factors. The amounts involved could be material.reinstated the dividend in the first quarter of 2021.
25
As of February 2, 2019,January 30, 2021, our credit ratings and outlook were as follows:
| Moody’s | Standard & Poor’s | Fitch |
Long-term debt | Baa2 | BBB- |
|
Outlook | Negative | Negative | Negative |
During 2018, we paid cash dividends of $400 million as detailed in the following table:
|
|
| First Quarter |
|
| Second Quarter |
|
| Third Quarter |
|
| Fourth Quarter |
| ||||
| Declaration date |
| February 28 |
|
| May 16 |
|
| August 14 |
|
| November 14 |
| ||||
| Record date |
| March 14 |
|
| June 13 |
|
| September 12 |
|
| December 12 |
| ||||
| Payment date |
| March 28 |
|
| June 27 |
|
| September 26 |
|
| December 26 |
| ||||
| Amount per common share |
| $ | 0.61 |
|
| $ | 0.61 |
|
| $ | 0.61 |
|
| $ | 0.61 |
|
On February 27, 2019, our Board of Directors declared a quarterly cash dividend on our common stock of $0.67 per share, a 10% increase over our prior dividend. The dividend is payable April 3, 2019 to shareholders of record at the close of business on March 20, 2019.
Free Cash Flow
We generated $1.4 billion$908 million of free cash flow for 2018; an increase of $5222020 compared to $700 million or 59%, over 2017. As discussed above, thein 2019. The increase is primarily the resultdue to reductions in capital spending as part of changesour response to COVID-19, partially offset by a reduction in cash provided by operating assets and liabilities.activities. Free cash flow is a non-GAAP financial measure which we define as net cash provided by operating activities and proceeds from financing obligations (which generally represent landlord reimbursements of construction costs) less capital expenditures and capitalfinance lease and financing obligation
32
payments. Free cash flow should be evaluated in addition to, and not considered a substitute for, other financial measures such as net income and net cash provided by operating activities. We believe that free cash flow represents our ability to generate additional cash flow from our business operations. See the key financial ratio calculations section below.
Liquidity Ratios
The following table provides additionalreconciles net cash provided by operating activities (a GAAP measure) to free cash flow (a non-GAAP measure):
(Dollars in Millions) | 2020 | 2019 | 2018 | |||||||||
Net cash provided by operating activities |
| $ | 1,338 |
|
| $ | 1,657 |
|
| $ | 2,107 |
|
Acquisition of property and equipment |
|
| (334 | ) |
|
| (855 | ) |
|
| (578 | ) |
Finance lease and financing obligation payments |
|
| (105 | ) |
|
| (113 | ) |
|
| (126 | ) |
Proceeds from financing obligations |
|
| 9 |
|
|
| 11 |
|
|
| — |
|
Free cash flow |
| $ | 908 |
|
| $ | 700 |
|
| $ | 1,403 |
|
Key Financial Ratios
Key financial ratios that provide certain measures of our liquidity:liquidity are as follows:
| (Dollars in Millions) |
| 2018 |
|
| 2017 |
| ||
| Working capital |
| $ | 2,105 |
|
| $ | 2,671 |
|
| Current ratio |
|
| 1.77 |
|
|
| 1.99 |
|
(Dollars in Millions) | 2020 | 2019 | ||||||
Working capital |
| $ | 2,813 |
|
| $ | 1,880 |
|
Current ratio |
|
| 1.93 |
|
|
| 1.68 |
|
Liquidity measures
The increase in our ability to meet short-term cash needs. Workingworking capital decreased $566 million and our current ratio decreased 22 basis points over year-end 2017are primarily due to lowerhigher cash balances as a result of debt reductions.issuances, lower capital expenditures, proceeds from the sale of real estate, cash provided by operating activities, lower dividend payment, and share repurchases, offset by a decrease in merchandise inventory.
Return on Investment Ratios
The following table provides additional non-GAAP financial measures of our return on investments:
| 2018 |
| 2017 |
| 2016 |
| |||
Return on assets ("ROA") |
| 6.1 | % |
| 6.4 | % |
| 4.1 | % |
Return on gross investment ("ROI") (a) |
| 13.4 | % |
| 14.0 | % |
| 12.6 | % |
Excluding non-recurring items (a) |
|
|
|
|
|
|
|
|
|
ROA |
| 7.0 | % |
| 5.2 | % |
| 4.9 | % |
ROI |
| 14.0 | % |
| 14.0 | % |
| 13.6 | % |
| 2020 | 2019 | 2018 | ||||||
Return on gross investment ("ROI") |
| 5.2 | % |
| 12.8 | % |
| 13.4 | % |
Adjusted ROI |
| 4.9 | % |
| 13.4 | % |
| 14.0 | % |
|
|
Changes in earnings drove changes in our return on investment ratios. Additionally, the adoption of the new lease accounting standard impacted our return on investment ratios positively by approximately 60 bps in 2019 compared to 2018.
26
We believe that ROI is a useful financial measure in evaluating our operating performance. When analyzed in conjunction with our net earnings and total assets and compared with the return on assets, it provides investors with a useful tool to evaluate our ongoing operations and our management of assets from period to period. ROI is a non-GAAP financial measure which we define as earnings before interest, taxes, depreciation, amortization, and rent (“EBITDAR”) divided by average gross investment. EBITDAR is a useful non-GAAP measure that excludes items that are non-operating in nature and focuses on items that are key to our operating performance. Our ROI calculation may not be comparable to similarly titled measures reported by other companies. ROI should be evaluated in addition to, and not considered a substitute for, other GAAP financial measures. Return on investment ratios that are adjusted for certain items are useful financial measures such as returnbecause they illustrate the impact of these items on assets.each metric. See the key financial ratio calculations below for our ROI and ROA andAdjusted ROI excluding non-recurring items calculations.
33
Capital Structure RatiosRatio
The following table provides additional non-GAAP financial measures of our capital structure:
|
|
| 2018 |
|
| 2017 |
| ||
| Debt/capitalization |
|
| 38.8 | % |
|
| 45.4 | % |
| Adjusted debt to adjusted EBITDAR (a) |
|
| 2.16 |
|
|
| 2.54 |
|
| 2020 | 2019 | ||||||
Adjusted debt to adjusted EBITDAR |
|
| 7.59 |
|
|
| 2.51 |
|
|
|
The decreasesincrease in our capital structure ratios areAdjusted debt to adjusted EBITDAR ratio is primarily due to debt reductions in 2018.lower operating income.
Adjusted Debtdebt to adjusted EBITDAR is a non-GAAP financial measure which we define as our adjusted outstanding debt balance divided by adjusted EBITDAR. We believe that our debt levels are best analyzed using this measure. Our current goals are to maintain a ratio that demonstrates our commitment to an investment grade rating and allows us to operate with an efficient capital structure for our size, growth plans, and industry. Our Adjusted Debtadjusted debt to adjusted EBITDAR calculation may not be comparable to similarly-titled measures reported by other companies. Adjusted Debtdebt to adjusted EBITDAR should be evaluated in addition to, and not considered a substitute for, other GAAP financial measures such as debt/capitalization.measures. See the key financial ratio calculations section below for our Adjusted Debtadjusted debt to adjusted EBITDAR calculation.
Our debt agreements contain varioussenior secured, asset based revolving credit facility contains customary events of default and financial, affirmative and negative covenants, including limitationsbut not limited to, a springing financial covenant relating to our fixed charge coverage ratio and restrictions on additional indebtedness, liens, investments, asset dispositions, and a maximum permitted debt ratio.restricted payments. As of February 2, 2019,January 30, 2021, we were in compliance with all debt covenants and expect to remain in compliance during 2019. See the key financial ratio calculations section below for our debt covenant calculation. 2021.
Key Financial Ratio Calculations
The following tables includetable includes our ROA and ROI calculations.calculation. All ratios except ROA are non-GAAP financial measures.measures:
| (Dollars in Millions) | 2018 |
| 2017 |
| 2016 |
| |||
| Net income | $ | 801 |
| $ | 859 |
| $ | 556 |
|
| Impairments, store closing and other costs |
| 78 |
|
| - |
|
| 117 |
|
| Loss on extinguishment of debt |
| 48 |
|
| - |
|
| - |
|
| Federal tax reform benefits |
| - |
|
| (136 | ) |
| - |
|
| State tax settlement |
| - |
|
| (20 | ) |
| - |
|
| Adjusted net income |
| 927 |
|
| 703 |
|
| 673 |
|
| Average total assets (a) | $ | 13,161 |
| $ | 13,467 |
| $ | 13,637 |
|
| ROA (b) |
| 6.1 | % |
| 6.4 | % |
| 4.1 | % |
| Adjusted ROA (b) |
| 7.0 | % |
| 5.2 | % |
| 4.9 | % |
(Dollars in Millions) | 2020 | 2019 | 2018 | ||||||
Operating (loss) income | $ | (262 | ) | $ | 1,099 |
| $ | 1,361 |
|
Depreciation and amortization |
| 874 |
|
| 917 |
|
| 964 |
|
Rent expense |
| 314 |
|
| 314 |
|
| 301 |
|
EBITDAR |
| 926 |
|
| 2,330 |
|
| 2,626 |
|
Impairments, store closing, and other costs |
| 89 |
|
| 113 |
|
| 104 |
|
(Gain) on sale of real estate |
| (127 | ) |
| — |
|
| — |
|
Adjusted EBITDAR | $ | 888 |
| $ | 2,443 |
| $ | 2,730 |
|
Average: (a) |
|
|
|
|
|
|
|
|
|
Total assets | $ | 15,288 |
| $ | 14,802 |
| $ | 13,161 |
|
Cash equivalents and long-term investments (b) |
| (1,704 | ) |
| (393 | ) |
| (753 | ) |
Other assets |
| (30 | ) |
| (31 | ) |
| (33 | ) |
Accumulated depreciation and amortization |
| 7,414 |
|
| 6,854 |
|
| 7,812 |
|
Accounts payable |
| (1,559 | ) |
| (1,495 | ) |
| (1,580 | ) |
Accrued liabilities |
| (1,193 | ) |
| (1,264 | ) |
| (1,235 | ) |
Other long-term liabilities |
| (275 | ) |
| (231 | ) |
| (658 | ) |
Capitalized rent (c) |
| — |
|
| — |
|
| 2,831 |
|
Gross investment (“AGI”) | $ | 17,941 |
| $ | 18,242 |
| $ | 19,545 |
|
ROI (d) |
| 5.2 | % |
| 12.8 | % |
| 13.4 | % |
Adjusted ROI (d) |
| 4.9 | % |
| 13.4 | % |
| 14.0 | % |
(a) |
| Represents average of five most recent quarter-end balances. For 2019, fourth quarter 2018 balances were adjusted to reflect the impact of the new lease accounting standard. |
(b) |
|
|
27
(Dollars in Millions) | 2018 |
| 2017 |
| 2016 |
| ||||
| Operating income | $ | 1,361 |
| $ | 1,416 |
| $ | 1,183 |
|
| Depreciation and amortization |
| 964 |
|
| 991 |
|
| 938 |
|
| Rent expense |
| 301 |
|
| 293 |
|
| 276 |
|
| EBITDAR |
| 2,626 |
|
| 2,700 |
|
| 2,397 |
|
| Impairments, store closing and other costs |
| 104 |
|
| - |
|
| 186 |
|
| Adjusted EBITDAR | $ | 2,730 |
| $ | 2,700 |
| $ | 2,583 |
|
| Average: (a) |
|
|
|
|
|
|
|
|
|
| Total assets | $ | 13,161 |
| $ | 13,467 |
| $ | 13,637 |
|
| Cash equivalents and long-term investments (b) |
| (753 | ) |
| (629 | ) |
| (476 | ) |
| Other assets |
| (33 | ) |
| (32 | ) |
| (35 | ) |
| Accumulated depreciation and amortization |
| 7,812 |
|
| 7,217 |
|
| 6,558 |
|
| Accounts payable |
| (1,580 | ) |
| (1,548 | ) |
| (1,515 | ) |
| Accrued liabilities |
| (1,235 | ) |
| (1,213 | ) |
| (1,252 | ) |
| Other long-term liabilities |
| (658 | ) |
| (674 | ) |
| (620 | ) |
| Capitalized rent (c) |
| 2,831 |
|
| 2,767 |
|
| 2,654 |
|
| Gross investment (“AGI”) | $ | 19,545 |
| $ | 19,355 |
| $ | 18,951 |
|
| ROI (d) |
| 13.4 | % |
| 14.0 | % |
| 12.6 | % |
| Adjusted ROI (d) |
| 14.0 | % |
| 14.0 | % |
| 13.6 | % |
|
|
| Represents excess cash not required for |
(c) |
| Represents ten times store rent and five times equipment/other |
(d) |
| EBITDAR or adjusted EBITDAR, as applicable, divided by gross |
The following table reconciles net cash provided by operating activities (a GAAP measure) to free cash flow (a non-GAAP measure):34
| (Dollars in Millions) |
| 2018 |
|
| 2017 |
|
| 2016 |
| |||
| Net cash provided by operating activities |
| $ | 2,107 |
|
| $ | 1,691 |
|
| $ | 2,153 |
|
| Acquisition of property and equipment |
|
| (578 | ) |
|
| (672 | ) |
|
| (768 | ) |
| Capital lease and financing obligation payments |
|
| (126 | ) |
|
| (138 | ) |
|
| (127 | ) |
| Proceeds from financing obligations |
|
| - |
|
|
| - |
|
|
| 11 |
|
| Free cash flow |
| $ | 1,403 |
|
| $ | 881 |
|
| $ | 1,269 |
|
The following table includes our debt/capitalization and Adjusted Debtadjusted debt to Adjustedadjusted EBITDAR calculations:calculation:
| (Dollars in Millions) |
| 2018 |
|
| 2017 |
| ||
| Capital lease and financing obligations |
| $ | 1,638 |
|
| $ | 1,717 |
|
| Long-term debt |
|
| 1,861 |
|
|
| 2,797 |
|
| Debt |
|
| 3,499 |
|
|
| 4,514 |
|
| Equity |
|
| 5,527 |
|
|
| 5,419 |
|
| Capitalization |
| $ | 9,026 |
|
| $ | 9,933 |
|
| Debt/capitalization |
|
| 38.8 | % |
|
| 45.4 | % |
|
|
|
|
|
|
|
|
|
|
| Total debt |
| $ | 3,499 |
|
| $ | 4,514 |
|
| Rent x 8 |
|
| 2,408 |
|
|
| 2,344 |
|
| Adjusted debt |
| $ | 5,907 |
|
| $ | 6,858 |
|
| Operating income |
| $ | 1,361 |
|
| $ | 1,416 |
|
| Depreciation and amortization |
|
| 964 |
|
|
| 991 |
|
| Rent expense |
|
| 301 |
|
|
| 293 |
|
| EBITDAR |
|
| 2,626 |
|
|
| 2,700 |
|
| Impairments, store closing and other costs |
|
| 104 |
|
|
| - |
|
| Adjusted EBITDAR |
| $ | 2,730 |
|
| $ | 2,700 |
|
| Adjusted debt to adjusted EBITDAR |
|
| 2.16 |
|
|
| 2.54 |
|
(Dollars in Millions) | 2020 | 2019 | ||||||
Finance lease and financing obligations |
| $ | 1,502 |
|
| $ | 1,491 |
|
Long-term debt |
|
| 2,451 |
|
|
| 1,856 |
|
Total debt |
| $ | 3,953 |
|
| $ | 3,347 |
|
Operating leases |
|
| 2,786 |
|
|
| 2,777 |
|
Adjusted debt |
| $ | 6,739 |
|
| $ | 6,124 |
|
Operating (loss) income |
| $ | (262 | ) |
| $ | 1,099 |
|
Depreciation and amortization |
|
| 874 |
|
|
| 917 |
|
Rent expense |
|
| 314 |
|
|
| 314 |
|
EBITDAR |
|
| 926 |
|
|
| 2,330 |
|
Impairments, store closing, and other costs |
|
| 89 |
|
|
| 113 |
|
(Gain) on sale of real estate |
|
| (127 | ) |
|
| — |
|
Adjusted EBITDAR |
| $ | 888 |
|
| $ | 2,443 |
|
Adjusted debt to adjusted EBITDAR |
|
| 7.59 |
|
|
| 2.51 |
|
28
The following table includes our debt ratio calculation, as defined by our debt agreements:
| (Dollars in Millions) | 2018 |
| ||
| Included Indebtedness |
|
|
|
|
| Consolidated indebtedness |
| $ | 3,511 |
|
| Permitted exclusions for L/C obligations |
|
| - |
|
| Permitted exclusions for unamortized debt discount |
|
| (2 | ) |
| Subtotal |
|
| 3,509 |
|
| Rent x 8 |
|
| 2,408 |
|
| Included indebtedness |
| $ | 5,917 |
|
| Debt Compliance EBITDAR |
|
|
|
|
| Net income |
| $ | 801 |
|
| Impairments, store closing and other costs |
|
| 104 |
|
| Interest charges |
|
| 256 |
|
| Income taxes |
|
| 241 |
|
| Depreciation and amortization |
|
| 964 |
|
| Loss on extinguishment of debt |
|
| 63 |
|
| Capital losses from the disposition of fixed assets |
|
| - |
|
| Other non-cash expenses reducing net income |
|
| 100 |
|
| Subtotal |
|
| 2,529 |
|
| Non-cash items increasing net income |
|
| (7 | ) |
| Capital gains from the disposition of fixed assets |
|
| (1 | ) |
| Subtotal |
|
| 2,521 |
|
| Rent |
|
| 301 |
|
| Consolidated EBITDAR |
| $ | 2,822 |
|
| Debt ratio (a) |
|
| 2.10 |
|
| Maximum permitted debt ratio |
|
| 3.75 |
|
|
|
29
Our contractual obligations as of February 2, 2019January 30, 2021 were as follows:
|
|
| Maturing in: |
| |||||||||||||||||
| (Dollars in Millions) |
| Total |
|
| 2019 |
|
| 2020 and 2021 |
|
| 2022 and 2023 |
|
| 2024 and after |
| |||||
| Recorded contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Outstanding long-term debt |
| $ | 1,873 |
|
| $ | — |
|
| $ | — |
|
| $ | 534 |
|
| $ | 1,339 |
|
| Capital lease and financing obligations |
|
| 1,157 |
|
|
| 103 |
|
|
| 218 |
|
|
| 170 |
|
|
| 666 |
|
|
|
|
| 3,030 |
|
|
| 103 |
|
|
| 218 |
|
|
| 704 |
|
|
| 2,005 |
|
| Unrecorded contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Interest payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Long-term debt |
|
| 1,169 |
|
|
| 89 |
|
|
| 177 |
|
|
| 171 |
|
|
| 732 |
|
| Capital lease and financing obligations |
|
| 2,054 |
|
|
| 157 |
|
|
| 286 |
|
|
| 250 |
|
|
| 1,361 |
|
| Operating leases (a) |
|
| 4,977 |
|
|
| 275 |
|
|
| 535 |
|
|
| 498 |
|
|
| 3,669 |
|
| Other (b) |
|
| 856 |
|
|
| 386 |
|
|
| 275 |
|
|
| 142 |
|
|
| 53 |
|
|
|
|
| 9,056 |
|
|
| 907 |
|
|
| 1,273 |
|
|
| 1,061 |
|
|
| 5,815 |
|
| Total |
| $ | 12,086 |
|
| $ | 1,010 |
|
| $ | 1,491 |
|
| $ | 1,765 |
|
| $ | 7,820 |
|
| Maturing in: | |||||||||||||||||||
(Dollars in Millions) | Total | 2021 | 2022 and 2023 | 2024 and 2025 | 2026 and after | |||||||||||||||
Recorded contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding long-term debt |
| $ | 2,467 |
|
| $ | — |
|
| $ | 534 |
|
| $ | 1,250 |
|
| $ | 683 |
|
Finance lease and financing obligations (a) |
|
| 1,283 |
|
|
| 109 |
|
|
| 185 |
|
|
| 128 |
|
|
| 861 |
|
Operating leases (a) |
|
| 2,786 |
|
|
| 157 |
|
|
| 313 |
|
|
| 247 |
|
|
| 2,069 |
|
Other (b) |
|
| 4 |
|
|
| 2 |
|
|
| 2 |
|
|
| — |
|
|
| — |
|
|
|
| 6,540 |
|
|
| 268 |
|
|
| 1,034 |
|
|
| 1,625 |
|
|
| 3,613 |
|
Unrecorded contractual obligations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest payments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
| 1,247 |
|
|
| 153 |
|
|
| 300 |
|
|
| 191 |
|
|
| 603 |
|
Finance lease and financing obligations (a) |
|
| 1,735 |
|
|
| 131 |
|
|
| 240 |
|
|
| 214 |
|
|
| 1,150 |
|
Operating leases (a) |
|
| 2,077 |
|
|
| 156 |
|
|
| 286 |
|
|
| 256 |
|
|
| 1,379 |
|
Other (b) |
|
| 540 |
|
|
| 245 |
|
|
| 232 |
|
|
| 56 |
|
|
| 7 |
|
|
|
| 5,599 |
|
|
| 685 |
|
|
| 1,058 |
|
|
| 717 |
|
|
| 3,139 |
|
Total |
| $ | 12,139 |
|
| $ | 953 |
|
| $ | 2,092 |
|
| $ | 2,342 |
|
| $ | 6,752 |
|
(a) |
| Our leases typically require that we pay taxes, insurance and maintenance costs in addition to the minimum rental payments included in the table above. Such costs vary from period to period and totaled $183 million for |
(b) |
| Other includes royalties, legally binding minimum lease and interest payments for stores opening in |
Off-Balance Sheet Arrangements
We have not provided any financial guarantees as of year-end 2018.2020.
We have not created, and are not 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 the financial statements that are reasonably likely to materially affect our financial condition, liquidity, results of operations, or capital resources.
35
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the reported amounts. Management has discussed the development, selection, and disclosure of these 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 2018 Form 10-K.
Retail Inventory Method and Inventory Valuation
Merchandise inventories are valued at the lower of cost or market using the retail inventory method (“RIM”). Under RIM, the valuation of inventory at cost and the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of inventory. RIM is an averaging method that has been widely used in the retail industry due to its practicality. The use of RIM will result in inventory being valued at the lower of cost or market since permanent markdowns are taken as a reduction of the retail value of inventories. We would record an additionalA reserve is recorded if the future estimated selling price is less than cost.
RIM inherently requires management judgment and estimates, such as the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may impact the ending inventory valuation as well
30
as gross margin. Factors considered in the determination of permanent markdowns include current and anticipated demand, customer preferences, age of the merchandise, fashion trends, and weather conditions.
Inventory shrinkage is estimated as a percent of sales for the period between the last physical inventory count and the balance sheet date. Shrink is the difference between the recorded amount of inventory and the physical inventory. We perform an annual physical inventory count at the majority of our stores, E-Commerce fulfillment centers, and distribution centers. The shrinkage rate from the most recent physical inventory, in combination with current events and historical experience, is used as the standard for the shrinkage accrual rate for the next inventory cycle. Historically, our actual physical inventory count results have shown our estimates to be reliable.
Vendor Allowances
We frequently receive allowances from our vendors for discountsmarkdowns that we have taken in order to sell the vendor’s merchandise and/or to support gross margins earned on those sales. This markdown support generally relates to sold inventory or permanent markdowns and, accordingly, is reflected as a reduction to cost of merchandise sold. Markdown support related to merchandise that has not yet been sold is recorded in inventory.
We also receive support from vendors for marketing and other costs that we have incurred to sell the vendors’ merchandise. To the extent the reimbursements are for specific, incremental, and identifiable costs incurred to sell the vendor's products and do not exceed the costs incurred, they are recognized as a reduction of selling, general, and administrative expenses. If these criteria are not met, the support is recorded in inventory and reflected as a reduction of costs of merchandise sold when the related merchandise is sold.
Insurance Reserve Estimates
We are primarily self-insured for costs related to workers’ compensation, general liability, and employee-related health care benefits. We use a third-party actuary to estimate the liabilities associated with these risks. The actuary considers historical claims experience, demographic and severity factors, health care trends, and actuarial assumptions to estimate the liabilities associated with these risks. Historically, our actuarial estimates have not been materially different from actual results.
36
Impairment of Long-Lived Assets
We review our long-lived assets for impairment when events or changes in circumstances, such as decisions to close a store or significant operatingcash flow losses, indicate the carrying value of the asset may not be recoverable. All long-lived assets are reviewed for impairment at least annually.
If our evaluations, which are performed on an undiscounted cash flow basis, indicate that the carrying amount of the asset may not be recoverable, the potential impairment is measured as the excess of carrying value over the fair value of the impaired asset.
Identifying impaired assets and quantifying the related impairment loss, if any, requires significant estimates by management. The most significant of these estimates is the cash flow expected to result from the use and eventual disposition of the asset. When determining the stream of projected future cash flows associated with an individual store, management estimates future store performance including sales, gross margin, and controllable expenses, such as store payroll and occupancy expense. Projected cash flows must be estimated for future periods throughout the remaining life of the property, which may be as many as 40 years in the future. The accuracy of these estimates will be impacted by a number of factors including general economic conditions, changes in competitive landscape and our ability to effectively manage the operations of the store.
Other than stores which we have closed and the trademark that was impaired in the fourth quarter of 2018, we have not historically experienced any significant impairment of long-lived assets. Additionally, impairment of an
31
individual building and related improvements, net of accumulated depreciation, would not generally be material to our financial results.
Store Closure Reserve
In 2016, we closed numerous leased stores prior to their scheduled lease expiration. In addition to future rent obligations, the closed store reserve includes estimates for operating and other expenses expected to be incurred over the remaining lease term, some of which extend through January 2030.
Income Taxes
We regularly evaluate the likelihood of realizing the benefit for income tax positions we have taken in various federal and state filings by considering all relevant facts, circumstances, and information available to us. If we believe it is more likely than not that our position will be sustained, we recognize a benefit at the largest amount which we believe is cumulatively greater than 50% likely to be realized.
Unrecognized tax benefits require significant management judgment regarding applicable statutes and their related interpretation, the status of various income tax audits, and our particular facts and circumstances. Also, as audits are completed or statutes of limitations lapse, it may be necessary to record adjustments to our taxes payable, deferred tax assets, tax reserves, or income tax expense. Although we believe we have adequately reserved for our uncertain tax positions, no assurance can be given that the final tax outcome of these matters will not be different. Income taxes are further described in Note 5 of the Consolidated Financial Statements.
Leases
Accounting for leased properties requires compliance with technical accounting rules and significant judgment by management. Application of these accounting rules and assumptions made by management will determine whetherif we are considered the owner for accounting purposes or whether the lease is accounted for as a capitalfinance or operating lease.
If weThe following are considered the owner for accounting purposes or the lease is considered a capital lease, we record the property and related financing or capital lease obligation on our balance sheet. The asset is then depreciated over its expected lease term. Rent payments for these properties are recognized as interest expense and a reduction of the financing or capital lease obligation.
If the lease is considered an operating lease, it is not recorded on our balance sheet and rent expense is recognized on a straight-line basis over the expected lease term.
The most significant estimates used by management in accounting for property leasesreal estate and the impact of these estimates are as follows:other leases:
Expected lease term—Our expected lease term includes both contractual lease periods and cancelable option periods where failure to exercise such options would result in an economic penalty.
• | Accounting lease term—Our accounting lease term includes all noncancelable periods and renewal periods that are reasonably assured of being exercised. Typically, renewal options are considered reasonably assured of being exercised if we have made significant leasehold improvements that would exceed the initial or renewal lease term and the cash flow performance of the store remains strong. The expected lease term is
37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk All of our long-term debt at year-end We share in the net risk-adjusted revenue of the Kohl’s credit card portfolio as defined by the sum of finance charges, late fees, and other revenue less write-offs of uncollectible accounts. We also share the costs of funding the outstanding receivables as interest rates exceed defined rates. As a result, our share of profits from the credit card portfolio may be negatively impacted by increases in interest rates. The reduced profitability, if any, will be impacted by various factors, including our ability to pass higher funding costs on to the credit card holders and the outstanding receivable
38 Item 8. Financial
Schedules have been omitted as they are not applicable.
39 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of Kohl’s Corporation Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Kohl’s Corporation (the “Company“) as of We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of
Basis for Opinion These financial statements are the responsibility of the Company‘s management. Our responsibility is to express an opinion on the Company‘s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures 40 Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
41
/s/ Ernst & Young LLP We have served as the Company’s auditor since 1986. Milwaukee, Wisconsin March 42
KOHL’S CORPORATION CONSOLIDATED BALANCE SHEETS
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION CONSOLIDATED STATEMENTS OF
See accompanying Notes to Consolidated Financial Statements
44 KOHL’S CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
See accompanying Notes to Consolidated Financial Statements
KOHL’S CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying Notes to Consolidated Financial Statements
46
1. Business As of Our authorized capital stock consists of 800 million shares of $0.01 par value common stock and 10 million shares of $0.01 par value preferred stock. Consolidation The Accounting Period Our fiscal year ends on the Saturday closest to January 31st each year. Unless otherwise stated, references to years in these notes relate to fiscal years rather than to calendar years. The following fiscal periods are presented in these notes:
Use of Estimates The preparation of Cash and Cash Equivalents In addition to money market investments, cash equivalents include commercial paper and certificates of deposit with original maturities of three months or less. We carry these investments at cost which approximates fair value. Also included in cash and cash equivalents are amounts due from credit card transactions with settlement terms of less than five days. Credit and debit card receivables included within cash were
Merchandise inventories are valued at the lower of cost or market using the 47 Other Current Assets Other current assets consist of the following:
Property and Equipment Property and equipment consist of the following:
Construction in progress includes property and equipment which is not ready for its intended use. Property and equipment are recorded at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets. Owned buildings and improvements include owned buildings on owned and leased land as well as leasehold improvements on leased properties. Leased property and improvements to leased property are amortized on a straight-line basis over the term of the lease or useful life of the asset, whichever is less. Leases are further described in Note 3 of the Consolidated Financial Statements. The annual provisions for depreciation and amortization generally use the following ranges of useful lives:
All property and equipment and other long-lived assets are reviewed for potential impairment at least annually or when events or changes in circumstances indicate that the asset’s carrying value may not be recoverable. If such indicators are present, it is determined whether the sum of the estimated undiscounted future cash flows attributable to such assets is less than the carrying value of the assets. A potential impairment has occurred if projected future undiscounted cash flows are less than the carrying value of the assets. We recorded impairments of 48 Leases In the first quarter of 2020, we negotiated rent deferrals for a significant number of our stores, with repayment at later dates, primarily in the third and fourth quarter of 2020 and first and second quarter of 2021. These concessions provide a deferral of rent payments with no substantive changes to the original contract. Consistent with updated guidance from the Financial Accounting Standards Board (“FASB”) in April 2020, we have elected to treat the COVID-19 pandemic-related rent deferrals as accrued liabilities. We continued to recognize expense during the deferral periods. Other Noncurrent Assets Other noncurrent assets consist of the following:
Accrued Liabilities Accrued liabilities consist of the following:
Restructuring Reserve The following table summarizes changes in the restructuring reserve during 2020:
Charges related to corporate restructuring efforts are recorded in Impairments, store closing, and other costs. Self-Insurance We use a combination of insurance and self-insurance for a number of risks. We retain the initial risk of $500,000 per occurrence in workers’ compensation claims and $250,000 per occurrence in general liability claims. We record reserves for workers’ compensation and general liability claims which include the total amounts that we expect to pay for a fully developed loss and related expenses, such as fees paid to attorneys, experts, and investigators. We are fully self-insured for employee-related health care benefits, a portion of which is paid by our associates. 49 We use a third-party actuary to estimate the liabilities associated with workers’ compensation, general liability, and employee-related health care risks. These liabilities include amounts for both reported claims and incurred, but not reported losses. The total liabilities, net of collateral held by third parties, for these risks were For property losses we are subject to a $5 million
Treasury Stock We account for repurchases of common stock and shares withheld in lieu of taxes when restricted stock vests using the cost method with common stock in treasury classified in the Consolidated Balance Sheets as a reduction of shareholders’ equity.
Net Sales Net sales includes revenue from the sale of merchandise and shipping revenues. Net sales are recognized when merchandise is received by the customer and we have fulfilled all performance obligations. We do not have any sales that are recorded as commissions. The following table summarizes net sales by line of business:
We maintain various rewards programs whereby customers earn rewards based on their spending and other promotional activities. The rewards are typically in the form of dollar-off discounts which can be used on future purchases. These programs create performance obligations which require us to defer a portion of the original sale until the rewards are redeemed. Sales are recorded net of returns. At the end of each reporting period, we record a reserve based on historical return rates and patterns which reverses sales that we expect to be returned in the following period. Revenue from the sale of Kohl's gift cards is recognized when the gift card is redeemed.
merchandise return 1, 2020. Net sales do not include sales tax as we are considered a pass-through conduit for collecting and remitting sales taxes. Other Revenue Other revenue consists primarily of revenue from our credit card operations, unredeemed gift cards and merchandise return cards (breakage), and other non-merchandise revenues. 50 Revenue from credit card operations includes our share of the finance charges, late fees, and
over the time period the cards are actually redeemed.
Cost of Merchandise Sold and Selling, General, and Administrative Expenses The following table illustrates the primary costs classified in Cost of Merchandise Sold and Selling, General, and Administrative Expenses:
The classification of these expenses varies across the retail industry. Vendor Allowances We receive consideration for a variety of vendor-sponsored programs, such as markdown allowances, volume rebates, and promotion and marketing support. The vendor consideration is recorded as earned either as a reduction of Fair Value Fair value measurements are required to be classified and disclosed in one of the following pricing categories:
51 Current assets and liabilities are reported at cost, which approximates fair value.
Marketing Marketing costs are expensed when the marketing is first seen. Marketing costs, net of related vendor allowances, are as follows:
Income taxes are accounted for under the asset and liability method. Under this method, deferred tax assets and liabilities are recorded based on differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax purposes. Deferred tax assets and liabilities are calculated using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. We establish valuation allowances for deferred tax assets when we believe it is more likely than not that the asset will not be realizable for tax purposes. We recognize interest and penalty expense related to unrecognized tax benefits in our provision for income tax expense. 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 The information required to compute basic and diluted net (loss) income per share is as follows:
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:
52
Share-Based Awards Stock-based compensation expense is generally recognized on a straight-line basis over the vesting period based on the fair value of awards which are expected to vest. The fair value of all share-based awards is estimated on the date of grant.
Recent Accounting Pronouncements We adopted the new accounting standard on accounting for expected credit losses (ASU 2016-13), effective at the beginning of fiscal 2020. We applied the new principle using a modified retrospective approach. There was not a material impact on our financial statements due to adoption of the new standard. We adopted the new accounting standard on recognizing implementation costs related to a cloud computing arrangement (ASU 2018-15), effective at the beginning of fiscal 2020. We applied the new principle using a prospective approach. There was not a material impact on our financial statements due to adoption of the new standard. The following table provides a brief description of issued, but not yet effective, accounting standards:
Long-term debt
Our unsecured senior long-term debt is classified as Level 1, financial instruments with unadjusted, quoted prices listed on active market exchanges. The estimated fair value of our
53
In In April 2020, we issued $600 million of 9.50% notes with semi-annual interest payments beginning in November 2020. The notes include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating by Our various debt agreements contain covenants including limitations on additional indebtedness and certain financial tests. As of We also 3. Leases We lease certain property and equipment used in our operations. Some of our store leases include additional rental payments based on a percentage of sales over contractual levels or which are adjusted periodically for inflation. Our typical store lease has an initial term of 20 to 25 years and four to eight five-year renewal options. Lease assets represent our right to use an underlying asset for the lease term. Lease assets are recognized at commencement date based on the value of the lease liability and are adjusted for any lease payments made to the lessor at or before commencement date, minus any lease incentives received and any initial direct costs incurred by the lessee. Lease liabilities represent our contractual obligation to make lease payments. At the commencement date, the lease liabilities equal the present value of minimum lease payments over the lease term. As the implicit interest rate is not readily identifiable in our leases, we estimate our collateralized borrowing rate to calculate the present value of lease payments. Leases with 54
Rent expense charged to operations was $301 million for
The following table summarizes future
Total lease payments 55 The following table summarizes weighted-average remaining lease term and discount rate:
A sale leaseback was completed during the second quarter of 2020 for our San Bernardino E-commerce fulfillment and distribution center. The properties were sold for $195 million and generated net proceeds of $193 million after fees. A gain of $127 million was recognized during the second quarter of 2020 and is recorded in Gain on sale of real estate. An initial operating lease liability and a corresponding right of use asset of $84 million were recorded for these leased locations. Financing Obligations Historical failed sale-leasebacks that did not qualify for sale-leaseback accounting upon adoption of ASC 842 continue to be accounted for as financing obligations. The following tables summarize our financing obligations and where they are presented in our Consolidated Financial Statements:
In 2019, we purchased leased equipment that was accounted for as a financing obligation resulting in recognition of a $9 million gain on extinguishment of debt. 56 The following table summarizes future financing obligation payments by fiscal year:
Total payments exclude $7.3 million of legally binding payments for contracts signed, but not yet commenced. The following table summarizes the weighted-average remaining term and discount rate for financing obligations:
4. Benefit Plans We have a defined contribution savings plan covering all full-time and certain part-time associates. Participants in this plan may invest up to 99% of their base compensation, subject to certain statutory limits. We match 100% of the first 5% of each participant’s contribution, subject to certain statutory limits. We also offer a non-qualified deferred compensation plan to a group of executives which provides for pre-tax compensation deferrals up to 75% of salary and 100% of bonus. Deferrals and credited investment returns are 100% vested.
The total costs for these benefit plans were $50 million for Deferred income taxes consist of the following:
57 Deferred tax assets included in other long-term assets totaled The components of the (benefit) provision for income taxes were as follows:
On
The effective tax rate differs from the amount that would be provided by applying the statutory U.S. corporate tax rate due to the following items:
The
We have analyzed filing positions in all of the federal and state jurisdictions where we are required to file income tax returns, as well as all open tax years in these jurisdictions. The federal returns subject to examination are 58 We assess our income tax positions and record tax liabilities for all years subject to examination based upon management’s evaluation of the facts and circumstances and information available at the reporting dates. For those income tax positions where it is more-likely-than-not, based on technical merits, that a tax benefit will be sustained upon the conclusion of an examination, we have recorded the largest amount of tax benefit having a cumulatively greater than 50% likelihood of being realized upon ultimate settlement with the applicable taxing authority, assuming that it has full knowledge of all relevant information. For those tax positions which do not meet the more-likely-than-not threshold regarding the ultimate realization of the related tax benefit, no tax benefit has been recorded in the financial statements. In addition, we provide for interest and penalties, as applicable, and record such amounts as a component of the overall income tax provision. A reconciliation of the beginning and ending gross amount of unrecognized tax benefits is as follows:
Not included in the unrecognized tax benefits reconciliation above are gross unrecognized accrued interest and penalties of Our total unrecognized tax benefits that, if recognized, would affect our effective tax rate were We have both payables and receivables for
We currently grant share-based compensation pursuant to the Kohl’s Corporation 2017 Long-Term Compensation Plan, which provides for the granting of various forms of equity-based awards, including nonvested stock, performance share units, and options to purchase shares of our common stock, to officers, key employees, and directors. As of Annual grants are typically made in the first quarter of the fiscal year. Grants to newly-hired and promoted employees and other discretionary grants are made periodically throughout the remainder of the year. 59 Stock Options The majority of stock options previously granted to employees vest in All stock options have an exercise price equal to the fair market value of the common stock on the date of grant. The fair value of each option award was estimated using a Black-Scholes option valuation model. The following table summarizes our stock option activity:
The intrinsic value of options exercised represents the excess of our stock price at the time the option was exercised over the exercise price and was $0 in 2020, $1 million in 2019, and $16 million in
Nonvested Stock Awards We have also awarded shares of nonvested common stock to eligible key employees and to our Board of Directors. Substantially all awards have restriction periods tied primarily to employment and/or service. Employee awards generally vest over five years. Director awards vest over the term to which the director was elected, generally one year. In lieu of cash dividends, holders of nonvested stock awards are granted restricted stock equivalents which vest consistently with the underlying nonvested stock awards. The fair value of nonvested stock awards is the closing price of our common stock on the date of grant. We may acquire shares from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employee’s unvested stock award. Such shares are then designated as treasury shares. The following table summarizes nonvested stock activity, including restricted stock equivalents issued in lieu of cash dividends:
60
The aggregate fair value of awards at the time of vesting was $56 million in 2020, $50 million in 2019, and $57 million in Performance Share Units We grant performance-based share units ("performance share units") to certain executives. The performance measurement period for these performance share units is three fiscal years. The fair market value of the grants is determined using a Monte-Carlo valuation on the date of grant. The actual number of shares which will be earned at the end of the three-year vesting periods will vary based on our cumulative financial performance over the vesting periods. Due to COVID-19, the calculation methodology for certain shares granted in 2018 was modified from a three-year cumulative measurement period to a three-year average measurement period, with each year measured against one-third of the cumulative goal. The number of performance share units earned will be modified up or down based on
The following table summarizes performance share unit activity by
Stock Warrants Effective April 18, 2019, in connection with our entry into a commercial agreement with Amazon.com Services, Inc. (“Amazon”), we issued warrants to an affiliate of Amazon, to purchase up to 1,747,441 shares of our common stock at an exercise price of $69.68, subject to customary anti-dilution provisions. The fair value was estimated to be $17.52 per warrant using a binomial lattice method. The warrants vest in 5 equal annual installments. The first installment vested on January 15, 2020, and the second installment on January 15, 2021. Total vested and unvested shares as of January 30, 2021 were 698,977 and 1,048,464, respectively. The warrants will expire on April 18, 2026. Unvested warrants will not vest if the commercial agreement is terminated, not renewed, or if no substitute written returns arrangement is entered into between the parties. Other Required Disclosures Stock-based compensation expense, other than that included in Impairments, store closing, and other costs, is included in Selling, 61 Table of Contents
7. Contingencies We are subject to
Due to changes in stock prices during the year and timing of share repurchases and issuances, the sum of quarterly net (loss) income per share may not equal the annual net (loss) income per share.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures None 62 Item 9A. 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 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. 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. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of our published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of our internal control over financial reporting. Changes in Internal Control Over Financial Reporting
63 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Kohl’s Corporation Opinion on Internal Control We have audited Kohl’s Corporation’s internal control over financial reporting as of We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of Basis for Opinion The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. 64 Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Milwaukee, Wisconsin March
None Item 10. Directors, Executive Officers, and Corporate Governance For information with respect to our Directors, the Board of Directors’ committees and our written code of ethics, see the applicable portions of the Any amendment to or waiver from the provisions of the Code of Ethics that is applicable to our Chief Executive Officer, Chief Financial Officer, or other key finance associates will be disclosed on the “Corporate Governance” portion of http://corporate.kohls.com. We intend to satisfy our disclosure requirements under item 5.05 of form 8-K regarding any amendments or waivers by posting such information at this location or our website. See also Item 4A, Information about our Executive Officers of Part 1. Item 11. Executive Compensation See the information provided in the applicable portions of the Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters See the information provided in the “Security Ownership of Certain Beneficial Owners, Directors, and Management” section of our
65 The following table includes shares of common stock outstanding and available for issuance under our existing equity compensation plans as of
Item 13. Certain Relationships and Related Transactions, and Director Independence See the information provided in the Item 14. Principal Accounting Fees and Services See the information provided in the “Fees Paid to Ernst & Young” section of our
66 PART IV Item 15. Exhibits and Financial Statement Schedules Documents filed as part of this report
See Index to Consolidated Financial Statements, the Report of Independent Registered Public Accounting Firm, and the Consolidated Financial Statements, in Part II, Item 8 of this Form 10-K.
All schedules have been omitted as they are not applicable.
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Not applicable.
69 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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.
Dated:March Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated above:
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