BAF664: Financial Statement Analysis

Student Name: Towkir Ahmad

Student ID: 20204809

Summary of Q2 2021 Kohl’s Corporation’s Earning Conference Call

From the Second quarter 2021 webinar of KOHL’s, there are many significant takeaways that can be
noted. At first, Kohl’s has delivered record Q2 earnings of $2.48 per diluted share as both sales and
margins materially exceeded their forecasting because sales have increased 31% compared to last
year, however digital sales declined 14% due to last year's heightened level that benefited from store
closures. Secondly Kohl’s also achieved decades high operating margin of 12.8% through significant
gross margin expansion and disciplined expense management. Turning to gross margin, Q2 gross
margin was 42.5%, up materially from last year's COVID impact of 33.1% and up 373 basis points
from the second quarter of 2019. Depreciation was $9 million lower than last year due to reduced
capital spend in 2020 and interest expense was $16 million lower than last year due to lower average
debt outstanding during the quarter. Generating positive operating cash flow of $1.4 billion and free
cash flow of $1.25 billion in the second quarter, inventory ended the quarter lower than the
forecasting which is driven by strong sales during the period. Kohl’s ability to generate the cash flow
increase their capex spend as their priorities have always been first to invest back in the business.
Another mention worthy point is Kohl’s repurchased more than 4.7 million shares for $250 million in
the quarter and now expect to repurchase $500 million to $700 million for the year. Kohl’s board of
directors declared a quarterly cash dividend of $0.25 per common share. This signifies their
confidence in the future and commitment to creating shareholder value. This significant upgradation
has been achieved only because of the launching new strategy of increasing sales momentum more
efficiently and relevant to the customer’s demand from October 2020. Kohl’s new strategy of
launching several transformational partnerships will drive sustainable growth for years to come and
further establish Kohl's as the leading destination for the active and casual lifestyle. Since launching
their strategy last October, Kohl’s is executing a clear plan to build sales momentum with an intense
focus on improving profitability. Credit can also be given to the intense focus on inventory
management, optimized pricing and promotional strategies and managed expenses with discipline.
The season of back to school gave a boost to the sales of Kohl’s as students needs their outfits to
return to the schools after the pandemic. Moreover, adults rearranged their wardrobe with new clothes
after the pandemic which is another reason of boost up sales in this quarter. A single store to gather all
types of outfit for all types of consumer gives Kohl’s the advantage to be the consumers priority. In
Q2, men's sales increased 60% and nicely exceeded 2019 levels. And this was achieved despite
significantly less in-store dedicated square footage. During this pandemic, stores delivered nearly
40% of digital sales through ship from store and customer pickup. Digital sales remained strong and
increased 35% compared to the same quarter in 2019. A very low accounts receivable balance and
extremely low credit losses in their quarterly report indicates a healthy consumer base of the brand.
The new strategy was implemented from last October in the midst of the pandemic for meaningful
margin-enhancing and expense-saving initiatives to support overall operating margin expansion with a
2023 goal of achieving 7% to 8%. Simplifying pricing model & promotion equation have also boosted
sales which can be clearly observed from both customer response and gross margin performance.
From a pricing promotion standpoint, Kohl’s is optimizing the equation between how they price and
promote, pulling back offers, reinvesting part and price and reinvesting into the bottom line. In the
case of simplified pricing, Kohl’s is going to observe how the customer is reacting to their pricing as
they approach the back half of the year. Kohl’s is modernizing the store experience through refresh
program and category reflow to highlight outsized growth businesses. To sustain the recent
improvement, Kohl’s is also monitoring industrywide supply chain uncertainties and cost inflation. To
keep the inventory low, Kohl’s is bringing in the seasonal items or event-driven items on time and
increasing the frequency of store deliveries.
After the collaboration with Sephora from December 2020 both online and offline, Kohl’s is trying to
establishing themselves as a leading beauty destination and customer response has been increasing
swiftly in this aspect. In fact, it is a great opportunity on customer acquisition for Kohl's existing 65
million active customer, 30 million loyal customer and 29 million Kohl’s charge card holders. To
retain core customers, Kohl’s is trying to gather most of the great brands in their store under one roof.
Kohl’s is planning to reignite growth in women's fashion by evolving women's business through a
series of bold moves, including a major portfolio consolidation. In terms of getting new customers,
Kohl’s is fuelling this collaboration with lots of digital and social marketing while opening a local
store. 40 million potential customers email have been gathered by digital marketing team in order to
promote the offers of the company. In addition, Kohl’s opened a new e-commerce fulfillment centre
earlier this year. Partnership with Amazon is beneficial to Kohl’s both in terms of customer
acquisition and profitability. Moreover, Kohl’s and Sephora’s joint loyalty program is working as a
boost up creating the loyal customer base. A customer buying Sephora at Kohl's has the opportunity
to get both their Beauty Insider points and Kohl's Rewards. They are trying to provide with
differentiated omni-channel experience to their customer and in return what they are getting is new
expanding loyal customers base. According to Kohl’s plan, 200 stores will be opened in 2021 to deal
with the expanding customer, 400 in the next year and at least 850 stores will be opened by 2023.
These new stores will be decorated absolutely beautiful and truly showcase the power of the Kohl's
transformation. Kohl’s also suffers many problems in various sectors. The consumer has experienced
inventory receipt delays in many areas of the business due to temporary factory closures and port
congestion or mismanagement etc. Moreover, the supply chain disruption is largely around the private
brands because of the collaboration of multiple brands. Emergence of Delta variant, existing problem
of supply chain due to pandemic, upcoming inflation due to excess money supply in the market,
comparatively higher wage due to tight labour market also pose major challenges towards achieving
the goal set by Kohl’s.
To increase the sustainable growth, Kohl’s has given additional focus on ESG. For this reason, it has
published a very comprehensive ESG report earlier this year. Kohl's has published 2025 goals to
reduce energy costs, decrease emissions, increase solar and wind energy, and reduce waste and
increase recycling. Moreover, to improve overall diversity and inclusion efforts, Kohl’s also
appointed a new chief diversity and inclusion officer to the executive team who reports directly to the
CEO. Since employment market was pretty much tight due to pandemic, a retention incentive was
announced for associates working in the stores. Due to the strong financial position, Kohl’s plan to
increase their store investments, sales driving enhancements such as an increase in the number of
mannequins and smooth inventory management by $600 million to $650 million in 2021. Kohl’s
target has also shaped to a new position, to keep the operating margin to be in the range of 7.4% to
7.6%, EPS to be in the range of $5.80 to $6.10 to achieve their 2023 goal this year.