2007 annual store offering quality exclusive and national brand merchandise ... and easier to...

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  • 2007 Annual Report

    39275_AR_PFC.pgs 03.19.2008 18:13

  • Company Profi le

    Kohls mission is to be the leading family-focused, value-oriented specialty

    department store offering quality exclusive and national brand merchandise

    to the customer in an environment that is convenient, friendly and exciting.

    Kohls operates from coast to coast. At the end of fiscal 2007, we served

    customers in 929 stores in 47 states and on Kohls.com.

    Net Income(in millions of dollars)

    1 Compounded Annual Growth Rate

    Net Sales(in millions of dollars)

    12.4% CAGR1

    03 04 05 06 07

    $16,474 $15,597

    $13,444

    $11,740 $10,312

    18.7% CAGR1

    03 04 05 06 07

    $546

    $703

    $1,109 $1,084

    $842

    Financial Highlights

    (Dollars in millions, except per share amounts) 2007 2006 % Change

    Net Sales $ 16,474 $ 15,597 +5.6%

    Gross Margin $ 6,014 $ 5,675 +6.0%

    Percent of Sales 36.5 % 36.4 % +0.1%

    SG&A $ 3,697 $ 3,423 +8.0%

    Percent of Sales 22.4 % 21.9 % +0.5%

    Operating Income $ 1,804 $ 1,815 0.6%

    Percent of Sales 11.0 % 11.6 % 0.6%

    Net Income $ 1,084 $ 1,109 2.2%

    Percent of Sales 6.6 % 7.1 % 0.5%

    Earnings per Diluted Share $ 3.39 $ 3.31 +2.4%

    COVER: Simply Vera Vera Wang

    39275_AR_PIFC.pgs 03.06.2008 17:06

  • At Kohls, weve created an experience that is inviting,

    inspiring, comfortable and just for her. Thats the essence

    of great shoppingand a great company.

    1

    39275_AR_P01.pgs 03.05.2008 19:15

  • Dear Shareholders,The 2007 retail environment proved challenging for most retailers, and

    Kohls was no exception. Although we achieved record sales for our

    16th consecutive year as a public company, our earnings performance

    was disappointing relative to our expectations entering the year.

    Net sales for the year increased 5.6 percent to $16.5 billion. On a

    comparable store basis, sales decreased 0.8 percent. Net income decreased

    2.2 percent to $1.08 billion. Earnings per diluted share increased

    from $3.31 to $3.39.

    Financial Discipline

    Kohls continues to be fi nancially

    strong. Our sales per square foot are

    among the highest in the industry.

    Our operating margin of 11 percent

    in 2007 was also one of the highest

    in the industry. Our capital structure is

    well positioned to support our expan-

    sion plans. Internally generated cash

    fl ows will continue to be the primary

    source of funding for our future growth

    and will provide liquidity in a challenging

    economic environment.

    We completed our 2006 $2 billion

    share repurchase program in the

    second quarter of 2007. In September,

    we announced a new $2.5 billion

    share repurchase program which is

    expected to be completed by the end

    of fi scal 2010. We are committed to

    maintaining our BBB+ credit rating

    as well as distributing excess capital

    to our shareholders.

    In 2007, we invested $1.5 billion in

    capital projects to grow our store base,

    remodel existing stores, support our

    future growth and enhance productivity.

    Growing Market Share

    We added 112 stores in 2007, increasing

    our store base from 817 to 929 stores.

    We opened 80 stores on a single day

    in October, marking the largest grand

    opening in company history. Signifi cant

    expansion occurred in the Pacifi c

    Northwest and Florida as well as in

    established markets.

    In 2008, we expect to open approxi-

    mately 7075 stores led by our entry

    into the Miami-Ft. Lauderdale-West

    Palm Beach market. As an ongoing

    strategy to increase our market share,

    well also continue to expand our pres-

    ence in existing markets. To support

    both new and existing growth, we also

    will open a new distribution center.

    Strategies to Deliver

    Our strategic initiatives remain

    consistent and are the roadmap for our

    future success. These initiatives focus

    on merchandise content, marketing,

    2

    39275_AR_P02.pgs 03.05.2008 19:15

  • inventory management and the in-store

    shopping experience, ultimately posi-

    tioning Kohls as the store just for her.

    Expanding our merchandise offering

    is critical to increasing market share

    and engaging a broader range of cus-

    tomers. In the updated and contempo-

    rary categories, we introduced Simply

    Vera Vera Wang and Food Network

    nationwide in September 2007, along

    with the ELLE Contemporary Collection

    in about half the chain. The ELLE

    Contemporary Collection will be avail-

    able in all stores spring 2008. These

    brands were eagerly embraced by our

    customers. Brands such as Chaps

    continue to attract our core classic

    customer while the introduction

    of Dana Buchman in spring 2009

    will enhance our classic offerings.

    In 2008, we will add even more variety

    and innovation to our merchandise

    with the nationwide rollout of the ELLE

    Contemporary Collection, an expan-

    sion of our Food Network relationship

    through a partnership with Bobby Flay,

    the introduction of Gold Toe and the

    introduction of FILA SPORT in the

    fall. To support our growing portfolio

    of world-class brands, we opened a

    design offi ce in 2007 in the heart of

    New Yorks garment district to speed

    the collaboration process with many

    of our exclusive partners.

    Our marketing program is designed

    to differentiate Kohls in the market-

    place. The program uses a strategically

    selected variety of mediums to build

    awareness and desire for our national,

    private and exclusive brands and

    increase traffi c and sales. We focused

    our efforts on encouraging our cus-

    tomer to explore the store to increase

    the number of areas of the store she

    shops for her family and herself. This

    will be a continued focus in 2008 in all

    of our advertising and marketing.

    Improving inventory fl ow and increasing

    speed-to-market continue to be impor-

    tant initiatives. Our goal is to reduce

    our average product cycle time from

    40 weeks to 25 by the end of 2009

    for most products. Brands requiring

    fast fashion, such as the ELLE

    Contemporary Collection, can be devel-

    oped in as few as 1216 weeks. We

    will remain conservative in our inventory

    planning and will rely on our supplier

    partnerships to replenish merchandise

    quickly as business conditions improve.

    Enhancing the in-store shopping

    experience revolves around making

    our stores more visually exciting

    and easier to shop. Introduced in 2006,

    our innovation store design is aimed

    directly at broadening customer appeal.

    Phase II of the innovation store was

    implemented in our fall 2007 new stores

    and focused on encouraging cross-

    shopping in our stores. Elements

    included a redesign of the juniors

    area, including new fi tting rooms, and

    improved presentation of handbags,

    intimate apparel and jewelry. In fall,

    we begin phase III of our innovation in

    select stores focusing on enhance-

    ments in childrens and shoes. We

    continue to evaluate customer reaction

    to these changes and expect that store

    innovations will be a continual process.

    Kohls Cares

    With our Kohls Cares for Kids

    program, we continue to donate signifi -

    cant resources, hours and merchandise

    to improve childrens lives in communi-

    ties nationwide. We also have focused

    our efforts on being a good corporate

    citizen in environmental matters and

    are proud of our recognition by the

    Environmental Protection Agency (EPA)

    as a leader in the retail industry and

    in the use of green power.

    We wish to take this opportunity to

    say thank you to James D. Ericson and

    R. Elton White for their 11 and 14 years

    of service, respectively, as members

    of Kohls board of directors. They both

    will be retiring in April 2008.

    Stephanie A. Streeter joined our board

    of directors in 2007, bringing her exper-

    ience in technology and supply-chain

    management, including six years with

    Banta Corporation, to Kohls. We also

    welcomed Don Brennan and John

    Worthington as principals and senior

    executive vice presidents in charge of

    merchandising and stores, respectively.

    Looking Forward

    We expect 2008 to be a challenging

    year from a macroeconomic perspec-

    tive. We are planning conservatively

    in our sales expectations, inventory

    levels and expenses. We will continue

    to invest the necessary resources to

    ensure our profi table growth over the

    long term through investments in asso-

    ciates and technology. We also will

    utilize our strong fi nancial position to

    continue to expand in new and existing

    markets in order to grow market share

    in a diffi cult environment.

    With prudent fi nancial management in

    2008, we are confi dent we will emerge

    as an even stronger company. While

    we have a lot of work to do, I believe

    our business is well positioned thanks

    to our 125,000 dedicated associates,

    shareholders, customers and business

    partners. It is because of them that y