The decision to buy, sell or hold Kohl’s stock is a difficult one. Their 2012 financial statements reflect a descending trend in cash, which may be a positive indication of the company reinvesting funds back into the company and distributing dividends to shareholders. However, their financial statements also reflect an increase in total liabilities, which may be a negative indication of more leverage being used to finance the company. The more leverage the company has the greater the financial risk. In the final analysis, investors should buy Kohl’s stock.

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Kohl’s stock is affordably priced and the company has extraordinary growth potential. Outlined below are the factors that were taken into consideration before deciding if this was a financially healthy company to invest in. DuPont return on investment (ROI) can simply be defined as: “A primary measure of a firm’s profitability. ” (Berman, 2006) DuPont ROI is an “expansion of the basic ROI calculation that factors in profitability from sales and the utilization of assets to generate revenue. ” (Marshall,2011) Calculations of Kohl’s ROI revealed that the firm gained an 8% profit for every one dollar invested and

slightly reduced to 7% in 2012. This illustration of ROI is demonstrated in exhibit 1. 1. The gradual decrease in the DuPont ROI is primarily driven by the shifts in net income and average total assets. Net income for Kohl’s slightly dwindled from 2011-2012. This calculation of net income is illustrated in exhibit 4. 1. As the cost of goods sold and expenses increased net income reduced. The contributing factors directly related to these factors will be further explained. After the United States emerged from a recession, sales increased 2% from 2010-2011 to $18 billion dollars.

The incline was attributed to the growth of Kohl’s online E-Commerce shopping site. The site experienced $ 1 billion in revenue, a $269 million increase from 2010. The Huffington Post reported shoppers spent an estimated “$1 billion dollars in the week following Thanksgiving”, breaking previous online shopping sales. (Barr, 2012)Kohl’s E-commerce shopping sales increased because of the optional size availability and merchandiseselection not offered in the retail store. The sales of their “private and exclusive brands” consisted of 50% of net sales.

Page 2 Kohls 2013 Annual Report Essay

These items have higher margins; therefore the company makes a greater profit on them. Increased spending on marketing and advertisement contributed to the increase in sales. Moreover, in2012 revenue numbers reflected continued growth that was cultivated by strong E-commerce sales. Despite strong E-commerce sales retail stores produced less than stellar results. The sluggish retail store sales were brought forth by the slow holiday shopping season in 2012. Shoppers were cautious on spending during the holiday season, as the government’s “fiscal cliff” raised concern. (Barr, 2012).

Retail locations in the Northeast and Mid-Atlantic region suffered a loss due to hurricane Sandy that caused destruction to the area. Finally, throughout the United States warmer climates caused the retailer to experience a decline in the sales of seasonal apparel, due to increased temperatures. In addition, as mentioned above the COGS also affected the firm’s net income. The COGS began to steadily trend up from 2010-2012. This calculation of COGS is illustrated in exhibit 4. 1. During the first six months of 2012, the company experienced a hike in apparel cost from manufactures.

The hike in apparel cost was contributed to higher cotton prices. In June 2012, the price of cotton increased as “demand outpaced supplies” (Laya, 2012) these costs were passed along to shoppers resulting in mark-ups on merchandise. In addition, distribution expenses also increased from $187 million in 2010 to $245 million in 2012. The additional expense is a direct result of higher gas prices and the expansion of their E-commerce site. According to the U. S Energy Information administration, “the average price per gallon of gas in the United States in 2010 was $2. 70”.

“The average price per gallon of gas in the United States in 2012 was $3. 54. ” (U. S. Energy Informantion Administration, 2012)Oil prices continued to increase as the demand for crude oil intensifies. Moreover, the slight increase in Kohl’s average total assets has impacted their Du Pont ROI. Attributing to the decrease is the increased inventory and significant shrinkage in cash. Inventory turnover “measures how many times inventory turns over in a year. ” (Berman, 2006) On average Kohl’s turned inventory 3. 81 times in 2010, as compared to 3. 53 times in 2012. This calculation of inventory turnover is illustrated in exhibit1.

On average, the higher the ratio the better the company is at managing inventory it also gives them a better cash position. However, the company anticipated higher sales, but due to external factors mentioned above the company was unable to quickly convert inventory into sales as expected. To move inventory Kohl’s offered discount pricing on merchandise in the last six months of 2012. In anticipation of the 2012 holiday season, Kohl’s spent $523 million on inventory. This investment contributed to the reduction of cash, which adversely impacted average total assets.

However, additional factors that aided in the depletion of cash will be explained below. The company has been successful in the past at managing inventory; however it is important to understand because it is a significant driver in the ROI ratio. Kohl’s ROI is important because it is a positive indication that the company is profiting from investments. Additionally, an analysis of the cash flow statement revealed Kohl’s has maintained a positive cash flow over the past three years, despite significant changes in operating, investing and financing expenses.

Cash flows in operating activities considerably reduced from $2,139 million in 2011 to $1,265 in 2012. Impacting operating cash flow was the increased spending on inventory to meet anticipated seasonal demand, which has been explained above. Also affecting operating activities was the additional spending towards depreciation and amortization. The inclination of depreciation and amortization can be accredited to computer software and hardware for new stores, remodels and the E-commerce center in Texas.

The decline in income from operations due to the factors mentioned is a positive indication to investors that the company is reinvesting profits to promote future growth. Furthermore, investing activities have weakened although Kohl’s has continued to invest in the acquisition of property and equipment. The common size financial statement in the appendix illustrates that property and equipment consisted of 63. 80% of Kohl’s total asset. In 2011, Kohl’s invested $927million dollars into the acquisition of property and equipment and only invested $785 million in 2012.

In 2012, Kohl’s had fewer remodels and store opening, however the company continued to expand. Acquiring property and equipment is important to investors because it implies future growth. As Kohl’s continues to expand, so will their potential for growth in production and revenue. This will ultimately increase the value of the company and the profitability potential for the investor. Finally, financing activities has affected cash flows due to the increase in treasury stock, debt repayment and payment of dividends. Kohl’s repurchased 46 billion shares of common stock for $2. 3 billion in 2011 and 26 million shares for $1.2 billion in 2012. The repurchase of stock depleted the amount of cash and increased treasury stock, which in turn impacted financing activities. Treasury stock repurchase is important to investors because it increases earning per share (EPS). EPS has increased throughout 2012, which means more money for investors. Also the issuance of dividends affected financing activity. In 2012, Kohl’s paid cash dividends of $300 million dollars during. This is important to investors because it is an additional source of income, in addition to the increased stock value or capital appreciation.

Furthermore, investing activities were also affected by the repayment of $400 million dollars of long term debt in 2011, which shows the company’s efforts to pay down debt and reduce interest payments on long term debt. Following the economic recession in 2011 banks were eager to extend credit with reduced interest rates to help encourage consumer spending. After the repayment of $400 million in long-term debt, Kohl’s was granted $650 million of debt with a lower interest rate. The statement of changes of shareholder’s equity displayed in exhibit 5.1 illustrates the increased dependency on debt to finance the company. In 2012, 57% of Kohl’s assets were financed throughcredit and 43% of the assets were financed by investors. As compared to 2011, 54% of the company’s assets were financed through credit and only 46% was financed by investors. The increase in liabilities directly resulting from the increase in long-term debt, increase in treasury stock which impacted shareholders equity and the decline in total assets all contributed to the percentage changes in 2012.

Based on the statement of shareholders equity it is indicated that the company is relying more on credit to finance the company. In addition, the debt to equity ratio (measures how much debt the company has for every dollar of shareholder’s equity) for Kohl’s in 2010 was 0. 89 and significantly increased to 1. 30 in 2012, which shows that the company has more debt than equity. According to the Financial Intelligence text, “debt to equity ratios considerably larger than one has more debt than equity. ” (Berman, 2006) This high debt to equity ratio in 2012 could present the company with difficulties acquiring more debt to raise cash.

However, the increased amount of leverage taken on by Kohl’s comes as no surprise as “more companies are being forced into high financial leverage positions to survive competitive pressure. ” (Marshall, 2011) Despite the amount of leverage, based on the current ratio Kohl’s will have the ability to meet its obligations with vendors and creditors. According to Marshall, McManus and Viele, “Well managed corporations have made the efforts to streamline operations by reducing current ratio to 1. 0-1. 5 or even lower. ” (Marshall, 2011) Target’s declining ratio shows that Kohl’s is meeting industry standards in terms of the current ratio.

The current ratio according to the Authors of Financial Intelligence, the current ratio “measures the company’s current assets against their current liabilities” to see how quickly they will be able to pay off their short-term debt. (Berman, 2006)In 2010, Kohl’s had a current ratio of 2. 03 and in 2012 a current ratio of 1. 86. The slight decrease in the current ratio is due to a smaller cash balance, which has been explained above. Kohl’s is not the only retailer experiencing a declining current ratio. Competitor Target had a current ratio of 1. 70 in 2010 and 1. 16 in 2012.

Target’s current ratio increased because of the significant amount of cash on hand . Illustrated in exhibit 6. 1 In the midst of the recession retailers were clinging to cash to avoid bankruptcy or financial loss as most business were experiencing during this time. Based on the scale of Kohl’s operations the current ratio in comparison to Target demonstrates the retails growing dependency on leverage to remain competitive in the market. In 2010, Target invested $1,729 million dollars in expenditures for property and equipment. In 2011, the company increased spending to $2,129 million.

The increase in 2011 is due to acquisition of 189 “Zeller sites” totaling $1,861 million. (10-k, 2012) Target also sold 54 Canadian sites for $225 million and invested $74 in start-up for Target stores in Canada. These investments impacted cash. The firm reported a cash balance of $1712 in 2010, which declined to $794 million in 2011 and remained flat in 2012 after the investments. In comparison to Kohl’s, the company operates on a much larger scale. Target has expanded their operations to groceries, electronics and other household items not available for sale at Kohl’s.

Target also includes “highly liquid short-term investments” in their cash balance. (10-k, 2012), on the other hand Kohl’s does not include these items in the cash balance. The depletion of cash is primarily due to investments, which in turn decreased the total current assets for Target. However Target has account receivables, which is something that Kohl’s does not have. Target accounts receivable has contributed to the Target’s current assets. In addition, Target paid $869 million in dividends in 2012 and $750 million in 2011. The repayment of dividends reduced the firm’s cash and current assets.

Target has a significant amount of current liabilities, due to an incline in accounts payable. Accounts payable increased from $6,857 million in 2011 to $7056 million in 2012. The significant increase can be attributed to “book overdrafts. ” Based on Target and Kohl’s ratio it is clear that more firms are depending on leverage to finance operations and promote future sales growth. Moreover, after a careful assessment the estimated growth rate for Kohl’s department 2012 is 2. 5%. This projection was determined by subtracting 2011 revenue from 2012’s revenue then dividing the sum by 2012’s revenue.

Sales are expected to grow based on historical sales trends. In addition, retail sales are up 10% in the United States. The growth in sales can be contributed to the creation of jobs and reduction in unemployment in the United States. According Bloomberg, retailers are expected to see a “3. 9% increase in sales over the holiday season, with majority of the sales being generated online. ” (Rupp, 2013) With continued investments in the expansion of the E-commerce online shopping site Kohl’s will experience a significant growth in sales. Cost of goods sold for 2013 is estimated to account for 63.8% of sales. The estimate is relatively consistent with the previous years. As the cost of fuel continues to increase in the United States, the cost to transport goods will also increase for Kohl’s, as explained above. Operating expense is estimated to remain consistent with the previous years, declining slightly. The company plans to continue increasing marketing efforts to increase sales. The increased sales would offset the increase in distribution cost that’s trending up as gas prices climb and store payroll as the company continues to grow.

Income tax rates will remain fairly consistent with previous years Furthermore, after carefully reviewing Kohl’s financial statements, management discussion, financial statements and balance sheet it was revealed that non-reoccurring or extraordinary items did not apply to the firm. The decision to encourage the purchase of Kohl’s stock was discovered during the research of the company’s 10-k. After carefully reviewing financial statements and balance sheet I accurately calculated the firm’s ratios to help determine the financial health of the company.

Using the information from the company’s income statement and balance sheet I manually calculated and composed a common size financial statement to better analyze and pinpoint value changes over the past three years. After identifying the driving factors that contributed to the fluctuation in values using the materials reviewed, I was able to make a sound decision on the investment in the company. In conclusion, the purchase of Kohl’s stock will be a valuable asset as time progresses. Kohl’s has managed to increase revenue each year through strategic planning and robust marketing efforts.

The increase has awarded them with a return allowing them to reinvest in the growth of the company. The growth potential has been exhibited through the acquisition of property and equipment and the expansion of the E-commerce shopping site. Despite an unexpected upset in the sales forecast, which depleted cash and increased inventory the firm maintained a positive cash flow. This is a great stock to purchase low with the potential to sell high or hold to reap the benefits of increased EPS and additional income from dividends. Kohl’s has the proven capabilities to continue to invest in the future of the company and in its shareholders

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