Kohl's 2008 Annual Report Download - page 21

Gross margin.
2008 2007 2006
(Dollars in millions)
Gross margin .............................................. $6,055 $6,014 $5,675
As a percent of net sales ...................................... 36.9% 36.5% 36.4%
Gross margin 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 and
handling expenses of e-commerce sales; and terms cash discount. Our gross margin may not be comparable with
that of other retailers because we include distribution center costs in selling, general and administrative expenses
while other retailers may include these expenses in cost of merchandise sold.
The net $41 million, or 0.7%, increase in gross margin dollars for 2008 compared to 2007 reflects
incremental sales at newly-opened stores, substantially offset by decreases at comparable stores. The
improvement in gross margin as a percent of net sales for 2008 compared to 2007 was driven by the continued
impact of our merchandise and inventory management initiatives and increased penetration of private and
exclusive brands. Sales of private and exclusive brands reached approximately 42% of net sales for 2008, an
increase of over 260 basis points over 2007.
Gross margin for 2007 increased $339 million, or 6.0%, over 2006. The improvement in gross margin as a
percent of net sales for 2007 compared to 2006 was driven by the continued impact of our merchandise and
inventory management initiatives, improved markup and shortage results, the adoption of our markdown
optimization systems, and increased penetration of private and exclusive brands. Sales of private and exclusive
brands were approximately 39% of net sales for 2007, an increase of over 300 basis points over 2006.
Selling, general and administrative expenses.
2008 2007 2006
(Dollars in millions)
Selling, general, and administrative expenses ..................... $3,936 $3,697 $3,422
As a percent of net sales ...................................... 24.0% 22.4% 21.9%
Selling, general and administrative expenses (“SG&A”) include compensation and benefit costs (including
stores, headquarters, buying and merchandising 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; advertising expenses, offset
by vendor payments for reimbursement of specific, incremental and identifiable costs; net operations of servicing
the Kohl’s credit card; and other administrative costs. Depreciation and amortization and preopening expenses
are not included in SG&A. The classification of these expenses varies across the retail industry.
SG&A for 2008 increased $239 million, or 6.5%, over 2007. The net increase in SG&A dollars reflects
incremental costs at newly-opened stores, partially offset by decreases at comparable stores reflecting our
ongoing efforts to control costs in the current economic environment. As expected, SG&A increased more than
sales, but less than new store growth of 8.1%.
Distribution center costs, which are included in SG&A, totaled $166 million for 2008, $165 million for 2007
and $150 million for 2006. These costs reflect the benefits of investments in technology in our distribution
centers that continue to generate operating efficiencies.
The revenue-sharing agreement related to our Kohl’s credit card accounts generated higher revenues in 2008
than in 2007. Even though we continue to see an increase in the number of accounts which carry balances and are
ultimately charged-off, these increases were more than offset by increases in finance charges and late charge fees.
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