Kohl's 2010 Annual Report Download

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Table of Contents




(Mark One)
xAnnual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 29, 2011
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 No. 1-11084

(Exact name of registrant as specified in its charter)
 
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer Identification No.)
,
 
(Address of principal executive offices) (Zip Code)
Registrant’s telephone number, including area code 
Securities registered pursuant to Section 12(b) of the Act:
 
Common Stock, $.01 Par Value New York Stock Exchange
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 and posted on its corporate Website, if any, every Interactive Data File required
to be submitted and posted 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 and post such files). Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K 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. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See
definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer X Accelerated filer Non-accelerated filer (Do not check if a smaller reporting company) Smaller reporting company
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 July 31, 2010, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was
approximately $14.7 billion (based upon the closing price of Registrant’s Common Stock on the New York Stock Exchange on such date). At March 9, 2011,
the Registrant had outstanding an aggregate of 290,417,880 shares of its Common Stock.

Portions of the Proxy Statement for the Registrant’s Annual Meeting of Shareholders to be held on May 12, 2011 are incorporated into Parts II and III.

Table of contents

  • Page 1
    ... Drive , Menomonee Falls, Wisconsin (Address of principal executive offices) 39-1630919 (I.R.S. Employer Identification No.) 53051 (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 Name...

  • Page 2
    ...Market Risk Financial Statements and Supplementary Data Changes In and Disagreements with Accountants on Accounting and Financial Disclosures Controls and Procedures Other Information 21 34 34 34 34 36 37 37 38 Directors, Executive Officers and Corporate Governance Executive Compensation Security...

  • Page 3
    ... 1. Business Kohl's Corporation (the "Company" or "Kohl's") was organized in 1988 and is a Wisconsin corporation. We operate family-oriented department stores that sell moderately priced apparel, footwear and accessories for women, men and children; soft home products such as sheets and pillows...

  • Page 4
    ... Hours. Our marketing also emphasized our flexible, no questions asked, return policy. We used all media types to communicate our marketing message including print advertising, direct mail, e-mail, digital and social media, Kohls.com, television, radio, in-store and - new for the holiday 2010 season...

  • Page 5
    ... Analysis of Financial Condition and Results of Operations." Expansion Our expansion strategy has been, and will continue to be, designed to achieve profitable growth. At the time of our initial public offering in 1992, we had 79 stores in the Midwest. As of year-end 2010, we operated 1,089 stores...

  • Page 6
    .... The retail distribution centers, which are strategically located through the United Sates, ship merchandise to each store by contract carrier several times a week. We also operate fulfillment centers in Monroe, Ohio and San Bernardino, California that service our E-Commerce business. See...

  • Page 7
    ... trade names and service marks, most of which are used in our private label program. Tvailable Information Our internet website is www.Kohls.com. Through the "Investor Relations" portion of this website, we make available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly...

  • Page 8
    ... operations and funds available on our lines of credit are insufficient to fund our future activities, including capital expenditures, or repay debt when it becomes due, we may need to raise additional funds through public or private equity or debt financing. If unfavorable capital market conditions...

  • Page 9
    ... be shared similar to the revenue. 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, payment patterns...

  • Page 10
    ...open new stores codld adversely affect odr financial performance. Our plan to continue to increase the number of our stores will depend in part upon the availability of existing retail stores or store sites on acceptable terms. Increases in real estate, construction and development costs could limit...

  • Page 11
    ... insured. The changes required by this legislation could cause us to incur additional health care and other costs, but we do not expect any material short-term impact on our financial results as a result of the legislation and are currently assessing the extent of any long-term impact. The Credit...

  • Page 12
    ... trade areas of 100,000 to 150,000 people. Our "urban" stores, currently located in the New York and Chicago markets, serve very densely populated areas of up to 500,000 people and average approximately 125,000 gross square feet of retail space. Our typical lease has an initial term of 20-25 years...

  • Page 13
    Table of Contents Number of Stores Retail Square Footage 2009 Tdditions 2010 2010 (In thousands) Northeast Region: Connecticut Maine Massachusetts New Hampshire New Jersey New York Rhode Island Vermont Total Northeast South Central Region: 18 5 21 9 38 - - - - - 3 18 5 1,339 388 1,682 640 ...

  • Page 14
    Table of Contents Number of Stores by Greater Metropolitan Trea 2009 Tdditions 2010 New York City Los Angeles Chicago Philadelphia Atlanta Dallas/Fort Worth Boston Detroit 63 53 50 33 27 25 24 24 24 23 San Francisco Washington DC Minneapolis/St. Paul Milwaukee Phoenix Cleveland/Akron Houston ...

  • Page 15
    ... where we lease the land and/or building 2009 Number of Stores by Location Tdditions 2010 Strip centers Community & regional malls Free standing 746 73 239 1,058 5 5 21 31 Number of Stores 751 78 260 1,089 2009 by Building Type Tdditions 2010 One-story Multi-story 971 87 1,058 15 29...

  • Page 16
    ... buildings used by various corporate departments, including our credit operations, in Menomonee Falls, Wisconsin. Our product development business has leased office space in New York City. We also lease a credit card servicing facility in Texas. Item 3. Legal Proceedings We are not currently...

  • Page 17
    ... Securities (a) Market information Our Common Stock has been traded on the New York Stock Exchange since May 19, 1992, under the symbol "KSS." The prices in the table set forth below indicate the high and low sales prices of our Common Stock per the New York Stock Exchange Composite Price History...

  • Page 18
    ... billion share repurchase program authorized by our Board of Directors in September 2007. On November 18, 2010, we paid $1.0 billion to Morgan Stanley from cash on hand. We received 17.9 million shares of Kohl's common stock during the fiscal year ended January 29, 2011. The final 900,000 shares due...

  • Page 19
    ... vesting of the employees' restricted stock during the three fiscal months ended January 29, 2011: Total Number Total Number of Shares Purchased of Shares Purchased as Part of Publicly Tnnounced Plans or During Period Period Tverage Price Paid Per Share Tpproximate Dollar Value of Shares that May...

  • Page 20
    ... sales per selling square foot (b) Total square feet of selling space (end of period, in thousands) Number of stores open (end of period) Return on average shareholders' equity (c) Balance Sheet Data (end of period): Working capital Property and equipment, net Total assets Long-term debt and capital...

  • Page 21
    ... Financial Condition and Results of Operations Executive Summary Total net sales for 2010 were $18.4 billion, a 7.1% increase over 2009. Comparable store sales increased 4.4% over 2009. The Southeast region and the Footwear business reported the strongest comparable store sales growth. Gross margin...

  • Page 22
    ... year periods Net sales per selling square foot is based on stores open for the full current period, excluding E-Commerce. The changes in net sales were due to the following: 2010 2009 (Dollars in millions) 2008 Comparable store sales: Stores E-commerce Total Sales from new stores Total net sales...

  • Page 23
    ..., fashion jewelry and handbags. Footwear and Home outperformed the comparable store sales for the year, while Women's and Children's trailed the company. Men's was similar to the company average. The West region, which was favorably impacted by the closure of Mervyn's department stores, reported the...

  • Page 24
    ... 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...

  • Page 25
    ... Chase"), we entered into a service and revenue-sharing agreement. Pursuant to this agreement, JPMorgan Chase issues Kohl's branded private label credit cards to new and existing Kohl's customers. Since we do not own the receivables, the receivables and the related allowance for bad debt reserve are...

  • Page 26
    ... capital expenditures in connection with our expansion and remodeling programs and seasonal and new store inventory purchases. Our primary sources of funds are cash flow provided by operations, short-term trade credit and our lines of credit. Short-term trade credit, in the form of extended payment...

  • Page 27
    ... financing management. Short-term trade credit, in the form of extended payment terms for inventory purchases, represents a significant source of financing for merchandise inventories. Compared to year-end 2008, total merchandise inventories at January 30, 2010 increased 4% and inventory per store...

  • Page 28
    ...future growth. Sales of long-term investments generated cash of $42 million in 2010 and $28 million in 2009. As of January 29, 2011, we had investments in auction rate securities ("ARS") with a par value of $337 million and an estimated fair value of $276 million. ARS are long-term debt instruments...

  • Page 29
    ... capital and the current ratio as of year-end 2010 compared to year-end 2009 was primarily due to the reclassification of $400 million of debt maturing in 2011 from long-term to short-term and the $1.0 billion purchase of Kohl's common stock pursuant to the accelerated stock repurchase program...

  • Page 30
    ... share repurchases offset earnings in equity. The ratio of earnings to fixed charges was consistent with prior years. See Exhibit 12.1 to this Annual Report on Form 10-K for the calculation of this ratio. The increase in working capital and the current ratio as of year-end 2009 compared to year-end...

  • Page 31
    ... in 2010 and $1.6 billion in 2009. The decrease in free cash flow is primarily a result of lower cash provided by operating activities, as discussed above. Free cash flow is a non-GAAP financial measure which we define as net cash provided by operating activities less capital expenditures. Free cash...

  • Page 32
    ... liquidity and cash flows. Off-Balance Sheet Trrangements We have not provided any financial guarantees as of year-end 2010. 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...

  • Page 33
    ... inventory. See also Note 1 to the consolidated financial statements, "Business and Summary of Accounting Policies." Insdrance Reserve Estimates We use a combination of insurance and self-insurance for a number of risks including workers' compensation, general liability and employee-related health...

  • Page 34
    ... payments or the date when we take possession of the building or land. Item 7T. Quantitative and Qualitative Disclosures Tbout Market Risk All of our long-term debt at year-end 2010 is at fixed interest rates and, therefore, is not affected by changes in interest rates. When our long-term debt...

  • Page 35
    ... 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. (c) Changes in Internal Control Over Financial Reporting During the last fiscal quarter...

  • Page 36
    ...become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Kohl's Corporation maintained, in all material respects, effective internal control over financial reporting as of January 29, 2011 based on the COSO...

  • Page 37
    .... McDonald was promoted to Senior Executive Vice President, Chief Financial Officer in November 2010 and is responsible for financial planning and analysis, investor relations, financial reporting, accounting operations, tax, treasury, corporate governance, credit and capital investment. Previously...

  • Page 38
    ... Officer, Department Store Division of Dayton-Hudson Corporation * 2010 Audit Committee member 2010 Compensation Committee member 2010 Governance & Nominating Committee member Denotes Chair Item 11. Executive Compensation See the information provided in the applicable portions of the "Questions...

  • Page 39
    ...Certain Beneficial Owners and Management and Related Stockholder Matters See the information provided in the "Security Ownership of Certain Beneficial Owners, Directors and Management" and "Equity Compensation Plan Information" sections of our 2011 Proxy, which information is incorporated herein by...

  • Page 40
    ... Registered Public Accounting Firm on page F-2 and the Consolidated Financial Statements beginning on page F-3, all of which are incorporated herein by reference. (a) Documents filed as part of this report: 2. Financial Statement Schedule: All schedules have been omitted as they are not applicable...

  • Page 41
    .../S / WESLEY S. MC DONALD Wesley S. McDonald Senior Execdtive Vice President, Chief Financial Officer (Principal Financial and Accodnting Officer) Dated: March 17, 2011 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on...

  • Page 42
    ... Bank USA, National Association, incorporated herein by reference to Exhibit 10.2 of the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 2006. Private Label Credit Card Program Agreement dated as of August 11, 2010 by and between Kohl's Department Stores, Inc and Capital...

  • Page 43
    ...the Company's 2010 Annual Meeting.* 10.11 10.12 10.13 10.14 Form of Executive Stock Option Agreement pursuant to the Kohl's Corporation 2010 Long Term Compensation Plan, incorporated herein by reference to Exhibit 10.1 of the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended May...

  • Page 44
    ... of Contents Exhibit Number Description 21.1 23.1 31.1 31.2 32.1 32.2 Subsidiaries of the Registrant. Consent of Ernst & Young LLP. Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Certification of the Chief Financial Officer pursuant to...

  • Page 45
    ... Financial Statements Report of Independent Registered Public Accounting Firm F-2 F-3 F-4 Consolidated Balance Sheets Consolidated Statements of Income Consolidated Statements of Changes in Shareholders' Equity Consolidated Statements of Cash Flows Notes to Consolidated Financial Statements...

  • Page 46
    ..., the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Kohl's Corporation at January 29, 2011 and January 30, 2010, and the consolidated results of its operations and its cash flows for each of the three years in the period ended...

  • Page 47
    ... capital leases Total current liabilities Long-term debt and capital leases Deferred income taxes Other long-term liabilities Shareholders' equity: $ 1,138 1,027 127 418 $ 1,188 1,002 184 2,710 1,678 418 656 4 16 2,390 2,052 377 488 4 Common stock-$0.01 par value, 800 million shares authorized...

  • Page 48
    Table of Contents KOHL'S CORPORTTION CONSOLIDTTED STTTEMENTS OF INCOME (In Millions, Except Per Share Data) 2010 2009 2008 Net sales Cost of merchandise sold (exclusive of depreciation shown separately below) Gross margin Operating expenses: Selling, general, and administrative Depreciation and ...

  • Page 49
    Table of Contents KOHL'S CORPORTTION CONSOLIDTTED STTTEMENTS OF CHTNGES IN SHTREHOLDERS' EQUIT9 (In Millions) Common Stock Shares Treasury Stock Paid-In Capital Shares Tmount Tmount Tccumulated Other Comprehensive Gain (Loss) Retained Earnings Total Balance at February 2, 2008 Net income ...

  • Page 50
    ... in auction rate securities Sales of investments in auction rate securities Other Net cash used in investing activities Financing activities Treasury stock purchases Capital lease payments Proceeds from stock option exercises Excess tax benefits from share-based compensation Net cash (used in...

  • Page 51
    ... of Tccounting Policies Business As of January 29, 2011, Kohl's Corporation operated 1,089 family-oriented department stores that feature exclusive and national brand apparel, footwear, accessories, soft home products and housewares targeted to middle-income customers. Our stores are located in 49...

  • Page 52
    ... of the retail value of inventory. We record an additional reserve when the future estimated selling price is less than cost. Property and Equipment Property and equipment consist of the following: Jan. 29, Jan. 30, 2011 (In Millions) 2010 Land Buildings and improvements Store fixtures and...

  • Page 53
    ...to customers include gift cards and merchandise return cards that have been issued but not presented for redemption. Self-Insurance We use a combination of insurance and self-insurance for a number of risks including workers' compensation, general liability and employee-related health care benefits...

  • Page 54
    ... insurance policy and $250,000 per occurrence under our general liability policy. The lifetime medical payment limit of $1.5 million per plan participant was eliminated on December 31, 2010. Total estimated liabilities for workers' compensation, general liability and employee-related health benefits...

  • Page 55
    ... Kohl's credit card agreement with JPMorgan Chase Freight expenses associated with moving merchandise from our distribution centers to our retail stores, and among distribution and retail facilities • Shipping and handling expenses of E-Commerce sales • Terms cash discount • Advertising...

  • Page 56
    ...circulars, are expensed when the advertisement is first seen. Advertising costs, net of related vendor allowances, were as follows: 2010 2009 (In Millions) 2008 Gross advertising costs Vendor allowances Net advertising costs Net advertising costs as a percent of net sales Income Taxes $1,017 (148...

  • Page 57
    ... Investments As of January 29, 2011, the par value of our long-term investments was $338 million and the estimated fair value was $277 million. Our auction rate securities ("ARS") portfolio consists entirely of highly-rated, insured student loan backed securities. Substantially all of the principal...

  • Page 58
    ...recent successful auctions of these securities were very limited. The following table presents a rollforward of our long-term ARS, all of which are measured at fair value on a recurring basis using unobservable inputs (Level 3): 2010 (In Millions) 2009 Balance at beginning of year Sales Unrealized...

  • Page 59
    ... borrowed bear interest at competitive bid rates; LIBOR plus a margin, depending on our long-term unsecured debt ratings; or the agent bank's base rate. The $900 million revolving facility expires in October 2011. The co-leads of this facility, The Bank of New York Mellon and Bank of America, have...

  • Page 60
    ... Present value of lease payments $ 202 5. Benefit Plans We have an Employee Stock Ownership Plan ("ESOP") for the benefit of our non-management associates. Contributions are made at the discretion of the Board of Directors. ESOP expenses totaled $20 million for 2010, $17 million for 2009 and...

  • Page 61
    ...following: Jan. 29, Jan. 30, 2011 (In Millions) 2010 Deferred tax liabilities: Property and equipment Deferred tax assets: Merchandise inventories Accrued and other liabilities, including stock options Accrued step rent liability Unrealized loss on auction rate securities $ 747 27 231 124 24 406...

  • Page 62
    ... is not anticipated that a significant impact to the unrecognized tax benefit balance will occur. 7. Stock-Based Compensation We currently grant share-based compensation pursuant to the Kohl's Corporation 2010 Long-Term Compensation Plan, which provides for the granting of various forms of equity...

  • Page 63
    ...Continued) 7. Stock-Based Compensation (continued) years. Outstanding options granted to employees prior to 2006 have a term of up to 15 years. Options granted to directors have a term of 10 years. All stock options have an exercise price equal to the fair market value of the common stock on the...

  • Page 64
    ... exercise price multiplied by the applicable number of stock options. 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...

  • Page 65
    ....39 The aggregate fair value of awards at the time of vesting was $12 million in 2010, $3 million in 2009 and $2 million in 2008. Other reqdired disclosdres Stock-based compensation expense for both stock options and nonvested stock awards is included in Selling, General and Administrative expense...

  • Page 66
    ... Blackhawk distributes our prepaid gift cards for sale in various retail outlets and, beginning in 2008, to which we will sell prepaid gift cards for other retailers in our stores. We pay Blackhawk a fee for Kohl's gift cards which are sold at other retailers and receive a fee for selling gift cards...

  • Page 67
    ... 18, 2010, 3.8 million shares on December 7, 2010, 1.5 million on January 11, 2011, and a final delivery of 0.9 million shares on March 3, 2011. The total number of shares received was generally determined by the discounted average of the daily volume weighted average price of shares traded during...

  • Page 68
    ... shares are granted to non-employee directors from time to time pursuant to our 2010 Long Term Compensation Plan. These grants are typically made following a director's initial election to the Board and each time the director is re-elected by the shareholders to serve a new term. The annual...

  • Page 69
    ... (Dollars in Millions) 2010 2009 2008 Earnings Income before income taxes Fixed Charges Less: interest capitalized during period $1,782 502 (6) $2,278 Fixed Charges Interest (expensed or capitalized) Portion of rent expense representative of interest Amortization of deferred financing fees Ratio...

  • Page 70
    ... Name State of Incorporation or Formation Kohl's Deparsmens Ssores, Inc. Kohl's Illinois, Inc.* Kohl's Indiana, Inc.* Kohl's Indiana, L.P. Kohl's Michigan, L.P. Kohl's Value Services, Inc.* Kohl's Cares, LLC* Delaware Nevada Delaware Delaware Delaware Virginia KWAL, LLC Wisconsin Wisconsin...

  • Page 71
    ... the related prospectuses, of our reports dated March 18, 2011, with respect to the consolidated financial statements of Kohl's Corporation, and the effectiveness of internal control over financial reporting of Kohl's Corporation, included in this Annual Report (Form 10-K) for the year ended January...

  • Page 72
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 73
    ... end of the period covered by this report based on such evaluation; and Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual...

  • Page 74
    ...-K of the Company foi the annual peiiod ended Januaiy 29, 2011 (the "Repoit") fully complies with the iequiiements of Section 13(a) oi 15(d) of the Secuiities Exchange Act of 1934, and That the infoimation contained in the Repoit faiily piesents, in all mateiial iespects, the financial condition and...

  • Page 75
    ... ended January 29, 2011 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, and That the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company...

  • Page 76