Published: 2021-12-02 16:03:34 ET

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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

For the quarterly period ended October 30, 2021

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.)
N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin		53051
(Address of principal executive offices)		(Zip Code)

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

 

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

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $.01 par value	KSS	New York Stock Exchange

 

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

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

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

Large Accelerated Filer		☒		Accelerated Filer		☐
Non-Accelerated Filer		☐		Smaller Reporting Company		☐
				Emerging Growth Company		☐

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

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

Yes ☐ No ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: November 26, 2021 Common Stock, Par Value $0.01 per Share, 139,158,063 shares outstanding.

 

 

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KOHL’S CORPORATION

INDEX

PART I	FINANCIAL INFORMATION	3
Item 1.	Financial Statements:	3
	Consolidated Balance Sheets	3
	Consolidated Statements of Operations	4
	Consolidated Statements of Changes in Shareholders' Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	7
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21
Item 4.	Controls and Procedures	21
PART II	OTHER INFORMATION	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 6.	Exhibits	24
	Signatures	25

 

 

 

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

KOHL’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

(Dollars in Millions)	October 30, 2021	January 30, 2021	October 31, 2020
Assets
Current assets:
Cash and cash equivalents	$1,873	$2,271	$1,939
Merchandise inventories	3,642	2,590	3,607
Other	373	974	450
Total current assets	5,888	5,835	5,996
Property and equipment, net	7,329	6,689	6,876
Operating leases	2,293	2,398	2,422
Other assets	441	415	150
Total assets	$15,951	$15,337	$15,444
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$2,135	$1,476	$2,184
Accrued liabilities	1,545	1,270	1,272
Current portion of:
Finance lease and financing obligations	117	115	127
Operating leases	142	161	160
Total current liabilities	3,939	3,022	3,743
Long-term debt	1,909	2,451	2,450
Finance lease and financing obligations	2,072	1,387	1,402
Operating leases	2,537	2,625	2,644
Deferred income taxes	196	302	74
Other long-term liabilities	367	354	293
Shareholders’ equity:
Common stock	4	4	4
Paid-in capital	3,362	3,319	3,303
Treasury stock, at cost	(12,426)	(11,595)	(11,594)
Retained earnings	13,991	13,468	13,125
Total shareholders’ equity	$4,931	$5,196	$4,838
Total liabilities and shareholders’ equity	$15,951	$15,337	$15,444

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

	Three Months Ended		Nine Months Ended
(Dollars in Millions, Except per Share Data)	October 30, 2021	October 31, 2020	October 30, 2021	October 31, 2020
Net sales	$4,366	$3,779	$12,251	$9,152
Other revenue	234	200	683	662
Total revenue	4,600	3,979	12,934	9,814
Cost of merchandise sold	2,623	2,424	7,282	6,360
Operating expenses:
Selling, general, and administrative	1,380	1,302	3,791	3,418
Depreciation and amortization	210	210	631	656
Impairments, store closing, and other costs	—	21	—	85
(Gain) on sale of real estate	—	—	—	(127)
Operating income (loss)	387	22	1,230	(578)
Interest expense, net	66	78	195	214
Loss on extinguishment of debt	—	—	201	—
Income (loss) before income taxes	321	(56)	834	(792)
Provision (benefit) for income taxes	78	(44)	195	(286)
Net income (loss)	$243	$(12)	$639	$(506)
Net income (loss) per share:
Basic	$1.67	$(0.08)	$4.24	$(3.28)
Diluted	$1.65	$(0.08)	$4.19	$(3.28)

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(Unaudited)

 

	Three Months Ended		Nine Months Ended
(Dollars in Millions, Except per Share Data)	October 30, 2021	October 31, 2020	October 30, 2021	October 31, 2020
Common stock
Balance, beginning of period	$4	$4	$4	$4
Stock-based awards	—	—	—	—
Balance, end of period	$4	$4	$4	$4
Paid-in capital
Balance, beginning of period	$3,349	$3,290	$3,319	$3,272
Stock-based awards	13	13	43	31
Balance, end of period	$3,362	$3,303	$3,362	$3,303
Treasury stock, at cost
Balance, beginning of period	$(11,920)	$(11,594)	$(11,595)	$(11,571)
Treasury stock purchases	(506)	—	(807)	(8)
Stock-based awards	(1)	—	(26)	(21)
Dividends paid	1	—	2	6
Balance, end of period	$(12,426)	$(11,594)	$(12,426)	$(11,594)
Retained earnings
Balance, beginning of period	$13,786	$13,137	$13,468	$13,745
Net income (loss)	243	(12)	639	(506)
Dividends paid	(38)	—	(116)	(114)
Balance, end of period	$13,991	$13,125	$13,991	$13,125
Total shareholders' equity, end of period	$4,931	$4,838	$4,931	$4,838
Common stock
Shares, beginning of period	377	377	377	375
Stock-based awards	—	—	—	2
Shares, end of period	377	377	377	377
Treasury stock
Shares, beginning of period	(225)	(219)	(219)	(219)
Treasury stock purchases	(10)	—	(16)	—
Shares, end of period	(235)	(219)	(235)	(219)
Total shares outstanding, end of period	142	158	142	158
Dividends paid per common share	$0.25	—	$0.75	$0.704

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

	Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020
Operating activities
Net income (loss)	$639	$(506)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization	631	656
Share-based compensation	35	26
Deferred income taxes	(103)	(181)
Impairments, store closing, and other costs	—	49
(Gain) on sale of real estate	—	(127)
Loss on extinguishment of debt	201	—
Non-cash inventory costs	—	187
Non-cash lease expense	107	111
Other non-cash expense	10	15
Changes in operating assets and liabilities:
Merchandise inventories	(1,044)	(251)
Other current and long-term assets	574	(45)
Accounts payable	659	978
Accrued and other long-term liabilities	172	111
Operating lease liabilities	(107)	(113)
Net cash provided by operating activities	1,774	910
Investing activities
Acquisition of property and equipment	(426)	(264)
Proceeds from sale of real estate	35	194
Net cash used in investing activities	(391)	(70)
Financing activities
Proceeds from issuance of debt	500	2,097
Deferred financing costs	(8)	(19)
Treasury stock purchases	(807)	(8)
Shares withheld for taxes on vested restricted shares	(26)	(21)
Dividends paid	(114)	(108)
Reduction of long-term borrowings	(1,044)	(1,497)
Premium paid on redemption of debt	(192)	—
Finance lease and financing obligation payments	(96)	(72)
Proceeds from stock option exercises	1	—
Proceeds from financing obligations	8	4
Other	(3)	—
Net cash (used in) provided by financing activities	(1,781)	376
Net (decrease) increase in cash and cash equivalents	(398)	1,216
Cash and cash equivalents at beginning of period	2,271	723
Cash and cash equivalents at end of period	$1,873	$1,939
Supplemental information
Interest paid, net of capitalized interest	$167	$159
Income taxes paid	221	138

 

See accompanying Notes to Consolidated Financial Statements

 

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KOHL’S CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

 

 

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

For purposes of the following discussion, unless noted, all references to "the quarter” and “the third quarter” are for the three fiscal months (13 weeks) ended October 30, 2021, October 31, 2020, or November 2, 2019. References to “year to date” are for the nine fiscal months (39 weeks) ended October 30, 2021 or October 31, 2020. References to “the first quarter” are for the three fiscal months (13 weeks) ended May 1, 2021 or May 2, 2020. References to “the second quarter” are for the three fiscal months (13 weeks) ended July 31, 2021 or August 1, 2020.

This Form 10-Q contains “forward-looking statements” made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "plans," "may," "intends," "will," "should," "expects," and similar expressions are intended to identify forward-looking statements. Forward-looking statements include the information under “2021 Outlook,” as well as statements about our future sales or financial performance and our plans, performance, and other objectives, expectations, or intentions, such as statements regarding our liquidity, debt service requirements, planned capital expenditures, future store initiatives, and adequacy of capital resources and reserves. Forward-looking statements are based on management’s then-current views and assumptions and, as a result, are subject to certain risks and uncertainties that could cause actual results to differ materially from those projected. Any such forward-looking statements are qualified by the important risk factors, described in Part I Item 1A of our 2020 Form 10-K or disclosed from time to time in our filings with the SEC, that could cause actual results to differ materially from those predicted by the forward-looking statements. Forward-looking statements relate to the date initially made and we undertake no obligation to update them.

Executive Summary

Kohl's is a leading omnichannel retailer operating 1,162 stores and a website (www.Kohls.com) as of October 30, 2021. Our Kohl's stores and website sell moderately-priced private and national brand apparel, footwear, accessories, beauty, and home products. Our Kohl's stores generally carry a consistent merchandise assortment with some differences attributable to local preferences. Our website includes merchandise which is available in our stores, as well as merchandise that is available only online.

Key financial results for the third quarter included:

COVID-19

As discussed in our 2020 Form 10-K, the COVID-19 pandemic has had significant adverse effects on our business. We are closely monitoring the effects of the ongoing COVID-19 pandemic and its continued impact on our business. We 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. During the first nine months of 2021, we saw momentum in our business which allowed us to resume our capital allocation strategy including reinstating dividends, resuming our share repurchase program, and employing liability management strategies.

 

 

 

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Comparison of Financial Results to 2019

Due to the significant impact of COVID-19 on 2020 operating results, we are providing the below comparisons to the third quarter of 2019 to provide additional context.

Our Vision and Strategy

In 2020, the Company announced a new strategic framework with a vision to be “the most trusted retailer of choice for the active and casual lifestyle.” This 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.

One of the initiatives to drive top line growth includes building a sizable beauty business through a long-term strategic partnership with Sephora. We entered into a partnership with Sephora in 2020 to be our exclusive beauty partner and to bring a transformational, elevated beauty experience to Kohl’s. We sell prestige beauty products through Sephora-branded retail shop-in-shops in certain Kohl’s stores and through a Sephora-branded offering on Kohls.com. We opened 200 shop-in-shops in the third quarter of 2021 and are planning to open another 400 shop-in-shops in 2022 and 250 in 2023.

2021 Outlook

Our updated expectations for fiscal 2021 are as follows:

 

Net sales	Increase mid-twenties % vs 2020
Operating margin	8.4% - 8.5%
Adjusted diluted earnings per share (a)	$7.10 - $7.30
Capital expenditures	$600 - $650 million
Share repurchases	$1.3 billion

 

Our financial outlook for the balance of the year continues to incorporate ongoing uncertainty related to COVID-19, as well as industry-wide supply chain challenges and headwinds related to higher digital penetration and wages.

Results of Operations

Total Revenue

 

	Three Months Ended			Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change	October 30, 2021	October 31, 2020	Change
Net sales	$4,366	$3,779	$587	$12,251	$9,152	$3,099
Other revenue	234	200	34	683	662	21
Total revenue	$4,600	$3,979	$621	$12,934	$9,814	$3,120

 

Net sales increased 15.5% for the third quarter of 2021 and 33.9% for year to date 2021.

 

 

 

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Comparable sales is a measure that highlights the performance of our stores and digital channel by measuring the change in sales for a period over the comparable, prior-year period of equivalent length. Comparable sales includes all store and digital sales, except sales from stores open less than 12 months, stores that have been closed, and stores where 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 the first nine months of 2020, we have not included a discussion of year to date 2021 comparable sales as we do not believe it is a meaningful metric over this period of time. Quarter to date comparable sales is disclosed above as our stores were open for the entire third quarter of 2020.

We measure digital penetration as digital sales over net sales. These amounts do not take into consideration fulfillment node, digital returns processed in stores, and coupon behaviors.

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

Other revenue increased $34 million for the third quarter of 2021 and $21 million year to date. The increases were driven by increases in credit revenue due to lower write-off activity partially offset by lower accounts receivable balances associated with decreased sales in 2020 and higher payment rates in 2021.

Cost of Merchandise Sold and Gross Margin

 

	Three Months Ended				Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change		October 30, 2021	October 31, 2020	Change
Net sales	$4,366	$3,779	$587		$12,251	$9,152	$3,099
Cost of merchandise sold	2,623	2,424	199		7,282	6,360	922
Gross margin	$1,743	$1,355	$388		$4,969	$2,792	$2,177
Gross margin as a percent of net sales	39.9%	35.8%	408	bps	40.6%	30.5%	1,005	bps

 

Cost of merchandise sold includes the total cost of products sold, including product development costs, net of vendor payments other than reimbursement of specific, incremental, and identifiable costs; inventory shrink; markdowns; freight expenses associated with moving merchandise from our vendors to our distribution centers; shipping expenses for digital sales; 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.

For the third quarter of 2021, gross margin was 39.9% of net sales, increasing 408 basis points. YTD 2021 gross margin was 40.6% of net sales, increasing 1,005 basis points.

 

 

 

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Gross margin benefited from strong inventory management and further scaling our pricing and promotion optimization strategies, partially offset by incremental transportation costs related to the constrained global supply chain. In executing against our strategy, we have structurally improved our margin efficiency and are confident in our ability to sustain the recent improvement, while we are also monitoring industry-wide supply chain uncertainties and cost inflation. We have navigated the challenges to date, but acknowledge there still remains a lot of uncertainty as we look to the balance of the year.

Selling, General, and Administrative Expense (“SG&A”)

 

	Three Months Ended				Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change		October 30, 2021	October 31, 2020	Change
SG&A	$1,380	$1,302	$78		$3,791	$3,418	$373
As a percent of total revenue	30.0%	32.7%	(273)	bps	29.3%	34.8%	(552)	bps

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

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

The following table summarizes the increases (decreases) in SG&A by expense type:

 

	Three Months Ended	Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 30, 2021
Store expenses	$42	$190
Distribution	27	79
Marketing	23	57
Corporate and other	(1)	85
Technology	(13)	(38)
Total increase	$78	$373

 

SG&A expenses increased $78 million, or 6.0%, to $1.4 billion in the third quarter of 2021, and $373 million, or 10.9%, to $3.8 billion year to date. As a percentage of revenue, SG&A leveraged by 273 basis points for the quarter and 552 basis points year to date as we continue to deliver against our efforts to drive marketing and technology efficiency and improve store productivity, which more than offset increased wage pressure across our stores and distribution centers.

The increase in SG&A during the third quarter and year to date 2021 was primarily driven by increases in store, distribution, and marketing expenses as sales recovered and expenses normalized after our store closures last year due to COVID-19. Corporate expenses also increased year to date due to the retention credit benefit we were eligible for under The Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) in 2020. Partially offsetting the increase in SG&A expense was a decrease in technology expense driven by a more balanced staffing model.

 

 

 

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Wage inflation is expected to remain a headwind as the employment market remains very tight. To strengthen our position for the upcoming holiday season, we employed a retention incentive for associates in our stores and distribution centers. We will continue to monitor our positioning in the market to ensure that we remain competitive. We will look to mitigate the higher costs through increased store productivity and efficiency across other areas of the business.

Other Expenses

 

	Three Months Ended			Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change	October 30, 2021	October 31, 2020	Change
Depreciation and amortization	$210	$210	$—	$631	$656	$(25)
Impairments, store closing, and other costs	—	21	(21)	—	85	(85)
(Gain) on sale of real estate	—	—	—	—	(127)	127
Interest expense, net	66	78	(12)	195	214	(19)
Loss on extinguishment of debt	—	—	—	201	—	201

 

The depreciation and amortization decrease for year to date 2021 was driven by reduced capital spending in 2020 due to COVID-19.

In the third quarter of 2020, we recognized a corporate restructuring charge of $21 million in Impairments, store closing, and other costs. In the second quarter of 2020, we recognized a gain of $2 million related to a lease amendment which was partially offset by an asset impairment on assets held for sale. In the first quarter of 2020, we incurred $51 million in asset write-offs, $2 million related to capital reductions and strategy changes due to COVID-19, and $13 million in brand exit costs.

In the second quarter of 2020, we recognized a gain of $127 million from the sale leaseback of our San Bernardino E-commerce fulfillment and distribution centers.

Net interest expense decreased in the third quarter and year to date 2021 as a result of higher interest expense in 2020 due to the outstanding balance on the revolving credit facility which was fully paid in October 2020 and the $600 million notes issued in April 2020 partially offset by liability management strategies employed in 2021.

In the first quarter of 2021, we completed a cash tender offer and recognized a loss of $201 million from the extinguishment of debt.

Income Taxes

 

	Three Months Ended			Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change	October 30, 2021	October 31, 2020	Change
Provision (benefit) for income taxes	$78	$(44)	$122	$195	$(286)	$481
Effective tax rate	24.3%	78.6%		23.4%	36.1%

 

The third quarter and year to date 2021 resulted in income tax expense driven by book income. The effective income tax rate in the third quarter and year to date 2020 was driven by the net loss due to the temporary closure of our stores and the benefit of the net loss carryback to years with a federal statutory tax rate of 35%.

 

 

 

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GAAP to Non-GAAP Reconciliation

 

(Dollars in Millions, Except per Share Data)	Operating Income (Loss)	Income (Loss) before Income Taxes	Net Income (Loss)	Earnings (Loss) Per Diluted Share
Three Months Ended October 30, 2021
GAAP	$387	$321	$243	$1.65
Loss on extinguishment of debt	—	—	—	—
Impairments, store closing, and other costs	—	—	—	—
(Gain) on sale of real estate	—	—	—	—
Income tax impact of items noted above	—	—	—	—
Adjusted (non-GAAP) (1)	$387	$321	$243	$1.65
Three Months Ended October 31, 2020
GAAP (2)	$22	$(56)	$(12)	$(0.08)
Loss on extinguishment of debt	—	—	—	—
Impairments, store closing, and other costs	21	21	21	0.14
(Gain) on sale of real estate	—	—	—	—
Income tax impact of items noted above	—	—	(7)	(0.05)
Adjusted (non-GAAP) (3)	$43	$(35)	$2	$0.01
Nine Months Ended October 30, 2021
GAAP	$1,230	$834	$639	$4.19
Loss on extinguishment of debt	—	201	201	1.32
Impairments, store closing, and other costs	—	—	—	—
(Gain) on sale of real estate	—	—	—	—
Income tax impact of items noted above	—	—	(50)	(0.33)
Adjusted (non-GAAP)	$1,230	$1,035	$790	$5.18
Nine Months Ended October 31, 2020
GAAP	$(578)	$(792)	$(506)	$(3.28)
Loss on extinguishment of debt	—	—	—	—
Impairments, store closing, and other costs	85	85	85	0.55
(Gain) on sale of real estate	(127)	(127)	(127)	(0.82)
Income tax impact of items noted above	—	—	16	0.10
Adjusted (non-GAAP)	$(620)	$(834)	$(532)	$(3.45)

 

We believe the adjusted results in the table above are useful because they provide enhanced visibility into our results for the periods excluding the impact of certain items such as those included in the table above. However, these non-GAAP financial measures are not intended to replace the comparable GAAP measures.

Seasonality and Inflation

Our business, like that of other retailers, is subject to seasonal influences. Sales and income are typically higher during the back-to-school and holiday seasons. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full fiscal year. Due to the impact of COVID-19, typical sales patterns may not occur this year.

In 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 unemployment, wage inflation, and costs to source our merchandise, including tariffs. There can be no assurances that such factors will not impact our business in the future.

 

 

 

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Liquidity and Capital Resources

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

 

Cash Uses		Cash Sources
• Operational needs, including salaries, rent, taxes, and other operating costs • 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.

 

	Nine Months Ended
(Dollars in Millions)	October 30, 2021	October 31, 2020	Change
Net cash provided by (used in):
Operating activities	$1,774	$910	$864
Investing activities	(391)	(70)	(321)
Financing activities	(1,781)	376	(2,157)

 

Operating Activities

Operating activities generated $1.8 billion year to date 2021 compared to $910 million year to date 2020. The increase was primarily due to an increase in net income resulting from increased sales due to the impact of COVID-19 last year and a tax refund received in 2021 related to the net loss we incurred in 2020 and the carryback provision under the CARES Act. Partially offsetting this was increased inventory purchases in 2021 due to reduced inventory receipts in 2020 in response to COVID-19.

Investing Activities

Investing activities used $391 million year to date 2021 and $70 million year to date 2020. The increase was driven by in-store investments related to Sephora buildouts, refreshes, and other customer experience and sales driving enhancements; our new e-commerce fulfillment center opened earlier this year as well as proceeds from the sale of real estate in 2020.

Financing Activities

Financing activities used $1.8 billion year to date 2021 and generated $376 million year to date 2020.

In March 2021, we issued $500 million in aggregate principal amount of 3.375% notes with semi-annual interest payments beginning in November 2021. The notes include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating by S&P Global Ratings or Baa3 by Moody’s Investors Service, Inc. The notes mature in May 2031.

In April 2021, we completed a cash tender offer for $1.0 billion of senior unsecured debt. We recognized a $201 million loss on extinguishment of debt in the first quarter of 2021, which includes the $192 million tender premium paid to tendering note holders in accordance with the terms of the tender offer, a $6 million non-cash write-off of

 

 

 

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deferred financing costs and original issue discounts associated with the extinguished debt, and $3 million in other fees.

In October 2021, we entered into a Credit Agreement with various lenders which provides for a $1.0 billion senior unsecured five-year revolving credit facility that will mature in October 2026 and replaces our existing senior secured revolving credit facility. Among other things, the agreement includes a maximum leverage ratio financial covenant and restrictions on liens and subsidiary indebtedness, all of which are generally consistent with the prior 2019 senior unsecured five-year revolving credit facility. We may request an increase in revolving credit commitments under the facility of up to $500 million in certain circumstances. Events of default under the Credit Agreement include, among other things, a change of control of the Company and the Company’s default on other debt exceeding $75 million. No borrowings were outstanding on the credit facility in place as of October 30, 2021, January 30, 2021, or October 31, 2020.

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 April 2020, we issued $600 million in aggregate principal amount of 9.50% notes with semi-annual interest payments beginning in November 2020. The notes mature in May 2025. We used part of the 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.

In October 2020, we fully repaid $1.0 billion outstanding on the revolver and had $1.5 billion available for utilization.

We paid cash for treasury stock purchases of $807 million year to date 2021 and $8 million year to date 2020. During the first quarter of 2021, we reinstated our share repurchase program which had been suspended in the first quarter of 2020 in response to COVID-19. Share repurchases are discretionary in nature. The timing and amount of repurchases are based upon available cash balances, our stock price, and other factors.

Cash dividend payments were $114 million ($0.75 per share) year to date 2021 and $108 million ($0.704 per share) year to date 2020. During the first quarter of 2021, we reinstated our dividend program which had been suspended beginning in the second quarter of 2020 in response to COVID-19. On November 10, 2021, our Board of Directors declared a quarterly cash dividend on our common stock of $0.25 per share. The dividend is payable December 22, 2021 to shareholders of record at the close of business on December 8, 2021.

As of October 30, 2021, our credit ratings were as follows:

 

	Moody’s	Standard & Poor’s	Fitch
Long-term debt	Baa2	BBB-	BBB-
Outlook	Negative	Stable	Stable

 

Key Financial Ratios

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

 

(Dollars in Millions)	October 30, 2021	October 31, 2020
Working capital	$1,949	$2,253
Current ratio	1.49	1.60

 

The decrease in our working capital and current ratio is primarily due to an increase in accrued liabilities.

 

 

 

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Debt Covenant Compliance

Our senior unsecured five-year revolving credit facility includes terms and covenants generally consistent with our prior 2019 senior unsecured five-year revolving credit facility. These covenants vary from the calculation disclosed in our Annual Report on Form 10-K, which related to our prior credit agreement. As of October 30, 2021, we were in compliance with all covenants in our debt instruments and expect to remain in compliance during the remainder of fiscal 2021.

Contractual Obligations

During the first nine months of 2021, we issued $500 million in aggregate principal amount of 3.375% notes due in 2031 and completed a cash tender offer for $1.0 billion of our senior unsecured debt. We also replaced our senior secured, asset based revolving credit facility, under which no borrowings were outstanding at the end of the quarter. See "Liquidity and Capital Resources" for additional details about these financing activities. See Note 3 of the Consolidated Financial Statements for additional details about outstanding debt. There have been no other significant changes in the contractual obligations disclosed in our 2020 Form 10-K.

Off-Balance Sheet Arrangements

We have not provided any financial guarantees arising from arrangements with unconsolidated entities or persons as of October 30, 2021.

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

Critical Accounting Policies and Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts. Management has discussed the development, selection, and disclosure of its estimates and assumptions with the Audit Committee of our Board of Directors. There have been no significant changes in the critical accounting policies and estimates discussed in our 2020 Form 10-K.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our operating results are subject to interest rate risk as the $500 million of notes issued in March 2021 include coupon rate step ups if our long-term debt is downgraded to below a BBB- credit rating by S&P Global Ratings or Baa3 by Moody’s Investors Service, Inc. There have been no other significant changes in the Quantitative and Qualitative Disclosures About Market Risk described in our 2020 Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

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

Based upon the Evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective at the reasonable assurance level. Disclosure controls and procedures are

 

 

 

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

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

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended October 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

 

 

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PART II. OTHER INFORMATION

Item 1A. Risk Factors

There have been no significant changes in the Risk Factors described in our 2020 Form 10-K.

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

In April 2021, 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.

The following table contains information for shares of common stock repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees’ stock-based compensation during the three fiscal months ended October 30, 2021:

 

(Dollars in Millions, Except per Share Data)	Total Number of Shares Purchased	Average Price Paid Per Share	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
August 1 - August 28, 2021	1,425,362	$54.31	1,423,294	$1,652
August 29 - October 2, 2021	4,282,792	52.19	4,263,392	1,430
October 3 - October 30, 2021	4,348,871	47.54	4,340,984	1,224
Total	10,057,025	$50.48	10,027,670	$1,224

 

 

 

 

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Item 6. Exhibits

 

Exhibit		Description
10.1		Credit Agreement dated as of October 22, 2021 by and among the Company, the various lenders party thereto, Wells Fargo Bank, National Association, as Administrative Agent, a Swing Line Lender and an Issuing Bank, Bank of America, N.A., JPMorgan Chase Bank, N.A., MUFG Bank, Ltd. and U.S. Bank National Association, as Syndication Agents, Swing Line Lenders, and Issuing Banks, and BMO Harris Bank, N.A., Capital One, N.A., Goldman Sachs Bank USA, Morgan Stanley Senior Funding, Inc., and TD Bank, N.A., as Documentation Agents, and Wells Fargo Securities, LLC, BofA Securities, Inc., JP Morgan Chase Bank, N.A., MUFG Bank, Ltd., and U.S. Bank National Association, as Joint Lead Arrangers and Bookrunners.
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS		Inline XBRL Instance Document
101.SCH		Inline XBRL Taxonomy Extension Schema
101.CAL		Inline XBRL Taxonomy Extension Calculation Linkbase
101.DEF		Inline XBRL Taxonomy Extension Definition Linkbase
101.LAB		Inline XBRL Taxonomy Extension Label Linkbase
101.PRE		Inline XBRL Taxonomy Extension Presentation Linkbase
104		Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibits 101)

 

 

 

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

	Kohl’s Corporation (Registrant)
Date: December 2, 2021	/s/ Jill Timm
	Jill Timm On behalf of the Registrant and as Chief Financial Officer (Principal Financial Officer)

 

 

 

 

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