SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): August 11, 2011
KOHL’S CORPORATION
(Exact name of registrant as specified in its charter)
Wisconsin | 1-11084 | 39-1630919 |
(State or other jurisdiction | (Commission | (IRS Employer |
N56 W17000 Ridgewood Drive |
| 53051 |
(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (262) 703-7000
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
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¨ | Soliciting material pursuant to Rule 14a-12 under the Securities Act (17 CFR 240.14a-12) |
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¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
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¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations and Financial Condition.
On August 11, 2011, Kohl’s Corporation (the “Company”) issued a press release reporting its earnings for the second quarter ended July 30, 2011 and giving earnings guidance for the third quarter and the remainder of the fiscal year. The earnings reported for the second quarter and the guidance for the remainder of the fiscal year do not include the effects of accounting corrections resulting from recently identified errors in the Company's accounting for its leases, as described below in Item 4.02. A copy of the press release is attached as Exhibit 99.1 and incorporated by reference herein.
The information in this Item 2.02, including the exhibit attached hereto, is furnished solely pursuant to Item 2.02 of Form 8-K. Consequently, such information is not deemed “filed” for the purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liabilities of that section. Further, the information in this Item 2.02, including the exhibit, shall not be deemed to be incorporated by reference into the filings of the registrant under the Securities Act of 1933.
Item 4.02 Non-Reliance on Previously Issued Financial Statements or a Related Audit
Report or Completed Interim Review.
As reported by the Company in its current report on Form 8-K furnished to the Commission on August 4, 2011, the Company has identified certain errors related to its accounting for leases. On August 9, 2011, the audit committee of the Company’s board of directors, in consultation with management, concluded that because of these errors, investors should no longer rely upon the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 (the “2010 Annual Report”) or the Company’s Quarterly Report on Form 10-Q for the quarterly period ended April 30, 2011 (the “1st Quarter 10-Q”). In addition, any related reports of the Company’s independent registered public accounting firm (Ernst & Young LLP) should not be relied upon.
The Company has discovered various errors in its accounting for both store and equipment leases. The most significant errors are the result of misinterpretations of accounting literature related to leases where the lessee (the Company in this case) is involved in asset construction. Historically, the Company has been extensively involved in the construction of leased stores. In many cases, the Company is responsible for construction cost over runs or is responsible for non-standard tenant improvements (i.e. roof or HVAC systems). Pursuant to ASC 840, Leases, the Company is deemed the “owner” for accounting purposes during the construction period, so is required to capitalize the construction costs on its Balance Sheet. If a portion of the construction costs are reimbursed via adjusted rental payments rather than at the time of construction or if the property is subject to a lease which fixes the rents for a significant percentage of its economic life, the Company is precluded from derecognizing the constructed assets from its Balance Sheet when construction is complete.
Additionally, certain stores and equipment leases were improperly recorded as operating leases, rather than capital leases.
As a result of these and other less significant accounting corrections, the Company will record additional property and financing obligations on its Balance Sheet. In the Company’s Statements of Income, lease payments will be recognized as depreciation and interest expense, rather than rent expense (which the Company records in Selling, General and Administrative Expense). The corrections will have no impact on the net increase or decrease in cash and cash equivalents reported in the Company’s Statements of Cash Flows.
The Company, in conjunction with Ernst & Young LLP, is still in the process of completing a review of its historic lease accounting and is currently unable to provide reasonable estimates of the impact by reporting period and/or financial statement line item.
In conjunction with Ernst & Young LLP, the Company is working diligently to complete the restatement of the above-referenced financial statements. The Company expects to file its Quarterly Report on Form 10-Q for the quarter ended July 30, 2011 (the “2nd Quarter 10-Q”) and the restated 2010 Annual Report and 1st Quarter 10-Q, by no later than September 13, 2011, the expiration date of the extension period provided by Rule 12b-25 of the Securities Exchange Act of 1934, as amended. However, there can be no assurance that these filings will be made within this period.
Management has considered, and is continuing to evaluate, the effect of the facts leading to the restatement on the Company’s prior conclusions of the adequacy of its internal control over financial reporting and disclosure controls and procedures as of the end of each of the applicable restatement periods. A final conclusion with respect to the effectiveness of the Company’s internal controls over financial reporting and disclosure controls and procedures has not been made, but management currently expects to conclude that one or more material weaknesses in such controls and procedures was present during each of the applicable restatement periods. The Company will amend any disclosures pertaining to its evaluation of such controls and procedures as appropriate in connection with future filings.
A copy of the press release issued on August 11, 2011 announcing the foregoing information is attached as Exhibit 99.1 hereto.
Item 7.01 Regulation FD Disclosure .
See Item 2.02 above.
Cautionary Statement Regarding Forward-Looking Information
This current report on Form 8-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995, including guidance on the Company's targeted earnings, statements regarding the Company’s intent to restate its prior financial reports, the nature of the estimated adjustments of the restated financial reports and the expected timing of filing the restated financial reports. The Company intends forward-looking terminology such as "believes," "expects," "may," "will," "should," "anticipates," "plans," or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause the Company's actual results to differ materially from those anticipated by the forward-looking statements. These risks and
uncertainties include, but are not limited to, the risk that additional information may arise during the course of the Company’s lease accounting review that would require the Company to make additional adjustments, the time and effort required to complete the restatement of the financial reports as well as other risks described more fully in Item 1A in the Company’s Annual Report on Form 10-K, which is expressly incorporated herein by reference, and other factors as may periodically be described in the Company’s filings with the SEC.
Item 9.01. Financial Statements and Exhibits.
(d)
Exhibits
| Exhibit No. | Description |
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| 99.1 | Press Release dated August 11, 2011 |
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 hereunto duly authorized.
Dated: August 11, 2011
KOHL’S CORPORATION
By: /s/ Richard D. Schepp
Richard D. Schepp
Sr. Executive Vice President
General Counsel and Secretary
EXHIBIT INDEX
Exhibit No. | Description |
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99.1 | Press Release dated August 11, 2011 |
Exhibit 99.1
KOHL'S CORPORATION REPORTS SECOND QUARTER FINANCIAL RESULTS
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Second Quarter Diluted Earnings per Share Increases 30% over prior year
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Raises Annual Diluted Earnings per Share Guidance to $4.45 to $4.60 from $4.25 to $4.40
MENOMONEE FALLS, WI … August 11/BUSINESS WIRE/Kohl’s Corporation (NYSE:KSS). Kohl’s Corporation today reported results for the fiscal periods ended July 30, 2011.
Second Quarter Results
Kohl’s Corporation reported second quarter diluted earnings per share increased 30 percent to $1.09. Net income for the quarter was $303 million, compared with $260 million ($0.84 per diluted share) a year ago. Net sales were $4.2 billion, an increase of 3.6 percent over the comparable prior year quarter. Comparable store sales for the quarter increased 1.9 percent.
On a year-to-date basis, diluted earnings per share increased 22 percent to $1.81. Net income was $514 million, compared with $459 million ($1.48 per diluted share) for the first six months of fiscal 2010. Net sales were $8.4 billion, an increase of 3.4 percent. Year-to-date comparable store sales increased 1.6 percent.
These second quarter and year-to-date results are preliminary to the extent that they do not reflect the impact of any of the lease accounting corrections described below.
Kevin Mansell, Kohl’s chairman, president and chief executive officer, said, “I am extremely pleased with our ability to deliver strong earnings growth in a challenging sales environment. Our gross margin rate increased significantly over second quarter of last year as a result of our increased penetration of private and exclusive brands and disciplined inventory management. Prudent expense management across many of our areas, especially in stores, allowed us to achieve lower-than-planned expense growth. We continue to benefit from strong profitability in our credit card partnership with Capital One as bad debt expenses declined significantly over last year.”
Mansell added, “We are very excited about the introduction of our Jennifer Lopez and Marc Anthony brands which will launch in all stores nationwide and on-line in mid-September with our Anniversary sale. We believe that both brands will resonate strongly with our existing customers and drive new customers into our stores.”
Quarterly Dividend Declared
On August 9, 2011, Kohl's Board of Directors declared a quarterly cash dividend of $0.25 per share of Kohl’s common stock. The dividend is payable September 28, 2011 to shareholders of record at the close of business on September 7, 2011.
Store Update
Kohl’s ended the quarter with 1,097 stores in 49 states, compared with 1,067 stores at the same time last year. During the first half of the year, Kohl’s opened nine stores and completed the remodel of 85 stores. The Company expects to open an additional 31 stores and remodel an additional 15 stores next month.
Earnings Guidance
For the third quarter, Kohl’s expects total sales to increase between 4 and 6 percent; comparable store sales to increase 2 to 4 percent; and gross margin as a percent of sales of down (10) basis points to up 10 basis points over last year. Selling, general and administrative expenses are expected to increase between 1.5 and 3 percent. Assuming share repurchases of approximately $500 million in the third quarter, achieving these assumptions would result in earnings per diluted share of $0.76 to $0.82 for the third quarter.
As a result of its second quarter performance and its third quarter share repurchase estimate, Kohl’s is increasing its fiscal 2011 guidance from $4.25 - $4.40 per diluted share to $4.45 to $4.60 per diluted share.
This earnings guidance does not reflect the impact of any of the lease accounting corrections described below.
Second Quarter 2011 Earnings
Kohl’s will host a second quarter earnings conference call at 8:30 am ET on August 11, 2011. The call can be accessed by dialing (706) 902-0486 and referencing Conference ID 8356191, or via Kohl’s web site at http://www.kohlscorporation.com/InvestorRelations/event-calendar.htm. Replays of the call and web cast will be available for thirty days.
Lease Accounting Update
On August 4, 2011, Kohl’s reported that it had identified certain errors related to its accounting for leases. On August 9, 2011, the audit committee of Kohl’s board of directors, in consultation with management, concluded that because of these errors, investors should no longer rely upon the financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2011 or its Quarterly Report on Form 10-Q for the period ended April 30, 2011. In addition, any related reports of the Company’s independent registered public accounting firm (Ernst & Young LLP) should not be relied upon.
To correct the accounting errors, Kohl’s will record additional property and related financing obligations on its Balance Sheet. In its Statements of Income, Kohl’s will now recognize lease payments as depreciation and interest expense, rather than rent expense (which were previously recorded in Selling, General and Administrative Expense). The corrections will have no impact on the net increase or decrease in cash and cash equivalents reported in Kohl’s Statements of Cash Flows.
Kohl’s management, in conjunction with Ernst & Young LLP, is still in the process of completing a review of its historic lease accounting and is currently unable to provide reasonable estimates of the impact by reporting period and/or financial statement line item.
Refer to Kohl’s Periodic Report on Form 8-K which was filed with the Securities and Exchange Commission on August 11, 2011 for additional information regarding the lease accounting corrections.
The actual results and earnings guidance included above do not include any impact from these lease accounting corrections.
Cautionary Statement Regarding Forward-Looking Information
This press release contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including guidance on Kohl’s targeted earnings, statements regarding Kohl’s intent to restate its prior financial reports, and the nature and timing of the lease accounting corrections described herein. Kohl's intends forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “anticipates,” “plans,” or similar expressions to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, which could cause Kohl's actual results to differ materially from those anticipated by the forward-looking statements. These risks and uncertainties include, but are not limited to the risk that additional information may arise during the course of Kohl’s lease accounting review that would require Kohl’s to make additional adjustments to its financial statements, the time and effort required to complete the restatement of the financial reports as well as other risks described more fully in Item 1A in the Kohl’s Annual Report on Form 10-K,
which is expressly incorporated herein by reference, and other factors as may periodically be described in Kohl’s filings with the SEC.
About Kohl’s
Based in Menomonee Falls, Wis., Kohl’s (NYSE: KSS) is a family-focused, value-oriented specialty department store offering moderately priced, exclusive and national brand apparel, shoes, accessories, beauty and home products in an exciting shopping environment. Kohl’s operates 1,097 stores in 49 states with a commitment to environmental leadership. In support of the communities it serves, Kohl’s has raised more than $180 million for children’s initiatives nationwide through its Kohl’s Cares® cause merchandise program, which operates under Kohl's Cares, LLC, a wholly-owned subsidiary of Kohl's Department Stores, Inc. For a list of store locations and information, or for the added convenience of shopping online, visit www.Kohls.com.
Investor Relations: Wes McDonald, Senior Executive Vice President and Chief Financial Officer, (262) 703-1893
Media: Vicki Shamion, Senior Vice President – Public Relations, (262) 703-1464
KOHL'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In Millions, except per share data)
(Unaudited)
Subject to Reclassification
Before Adjustments for Lease Accounting Corrections
| Three Months |
| Six Months | ||||
| (13 Weeks) Ended |
| (26 Weeks) Ended | ||||
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| July 30, |
| July 31, |
| July 30, |
| July 31, |
| 2011 |
| 2010 |
| 2011 |
| 2010 |
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Net sales | $ 4,248 |
| $ 4,100 |
| $ 8,410 |
| $ 8,135 |
Cost of merchandise sold | 2,520 |
| 2,449 |
| 5,095 |
| 4,948 |
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Gross margin | 1,728 |
| 1,651 |
| 3,315 |
| 3,187 |
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Operating expenses: |
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Selling, general, and administrative | 1,055 |
| 1,049 |
| 2,124 |
| 2,083 |
Depreciation and amortization | 163 |
| 153 |
| 319 |
| 304 |
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Operating income | 510 |
| 449 |
| 872 |
| 800 |
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Interest expense, net | 27 |
| 31 |
| 56 |
| 62 |
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Income before income taxes | 483 |
| 418 |
| 816 |
| 738 |
Provision for income taxes | 180 |
| 158 |
| 302 |
| 279 |
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Net income | $ 303 |
| 260 |
| $ 514 |
| 459 |
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Basic net income per share | $ 1.10 |
| $ 0.84 |
| $ 1.82 |
| $ 1.49 |
Average number of shares | 276 |
| 307 |
| 282 |
| 307 |
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Diluted net income per share | $ 1.09 |
| $ 0.84 |
| $ 1.81 |
| $ 1.48 |
Average number of shares | 278 |
| 308 |
| 284 |
| 308 |
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As a percent of net sales: |
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Gross margin | 40.7% |
| 40.3% |
| 39.4% |
| 39.2% |
Selling, general and |
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administrative expenses | 24.9% |
| 25.5% |
| 25.3% |
| 25.6% |
Operating income | 12.0% |
| 10.9% |
| 10.4% |
| 9.8% |
Net income | 7.1% |
| 6.3% |
| 6.1% |
| 5.6% |
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KOHL'S CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Millions)
(Unaudited)
Subject to Reclassification
Before Adjustments for Lease Accounting Corrections
| July 30, |
| July 31, |
| 2011 |
| 2010 |
Assets |
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Current assets: |
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Cash and cash equivalents | $ 1,169 |
| $ 2,518 |
Merchandise inventories | 3,095 |
| 2,930 |
Deferred income taxes | 88 |
| 95 |
Other | 260 |
| 227 |
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Total current assets | 4,612 |
| 5,770 |
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Property and equipment, net | 7,493 |
| 7,310 |
Long-term investments | 208 |
| 298 |
Favorable lease rights, net | 187 |
| 198 |
Other assets | 213 |
| 130 |
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Total assets | $ 12,713 |
| $ 13,706 |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable | $ 1,345 |
| $ 1,345 |
Accrued liabilities | 1,062 |
| 994 |
Income taxes payable | 18 |
| 35 |
Current portion of long-term |
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debt and capital leases | 119 |
| 319 |
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Total current liabilities | 2,544 |
| 2,693 |
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Long-term debt and capital leases | 1,662 |
| 1,766 |
Deferred income taxes | 484 |
| 365 |
Other long-term liabilities | 679 |
| 505 |
Shareholders' equity | 7,344 |
| 8,377 |
Total liabilities and shareholders' equity | $ 12,713 |
| $ 13,706 |
KOHL'S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Millions)
(Unaudited)
Subject to Reclassification
Before Adjustments for Lease Accounting Corrections
| Six Months | ||
| (26 Weeks) Ended | ||
| July 30, |
| July 31, |
| 2011 |
| 2010 |
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Operating activities |
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Net income | $ 514 |
| $ 459 |
Adjustments to reconcile net income to net cash |
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provided by operating activities: |
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Depreciation and amortization | 319 |
| 304 |
Share-based compensation | 29 |
| 32 |
Excess tax benefits from share-based compensation | 1 |
| 2 |
Deferred income taxes | 53 |
| (33) |
Other non-cash revenues and expenses | 14 |
| 20 |
Changes in operating assets and liabilities: |
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Merchandise inventories | (57) |
| (5) |
Other current and long-term assets | (14) |
| (6) |
Accounts payable | 208 |
| 158 |
Accrued and other long-term liabilities | (105) |
| (154) |
Income taxes | (114) |
| (149) |
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Net cash provided by operating activities | 848 |
| 628 |
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Investing activities |
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Acquisition of property and equipment | (473) |
| (421) |
Sales of investments in auction rate securities | 97 |
| 20 |
Other | (1) |
| 2 |
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Net cash used in investing activities | (377) |
| (399) |
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Financing activities |
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Treasury stock purchases | (1,166) |
| (3) |
Long-term debt and capital lease payments | (310) |
| (9) |
Dividends paid | (142) |
| - |
Proceeds from stock option exercises | 43 |
| 36 |
Excess tax benefits from share-based compensation | (1) |
| (2) |
Other | (3) |
| - |
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Net cash (used in) provided by financing activities | (1,579) |
| 22 |
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Net (decrease) increase in cash and cash equivalents | (1,108) |
| 251 |
Cash and cash equivalents at beginning of period | 2,277 |
| 2,267 |
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Cash and cash equivalents at end of period | $ 1,169 |
| $ 2,518 |
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