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; and housewares. Our stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences. Our stores feature quality private and exclusive brands which are found “Only at Kohl’s” as well as national brands. Our apparel and home fashions appeal to customers with style preferences ranging from classic to contemporary. As of January 31, 2009, we operated 1,004 stores in 48 states.
In addition, we offer on-line shopping on our website at www.Kohls.com. Designed as an added service for customers who prefer to shop using the internet, the website offers key items, family apparel, and home merchandise. We continue to expand our on-line offerings to include both items which can be purchased in our stores and items which are not generally available in our stores, such as furniture and certain electronics. The website is designed to provide a convenient, easy-to-navigate, on-line shopping environment that complements our in-store focus.
An important aspect of our pricing strategy and overall profitability is a culture focused on maintaining a low cost structure. Critical elements of this low cost structure are our unique store format, lean staffing levels, sophisticated management information systems and operating efficiencies which are the result of centralized buying, advertising and distribution.
Our fiscal year ends on the Saturday closest to January 31. Unless otherwise noted, references to years in this report relate to fiscal years, rather than to calendar years. Fiscal year 2008 (“2008”) ended on January 31, 2009 and was a 52-week year. Fiscal year 2007 (“2007”) ended on February 2, 2008 and was a 52-week year. Fiscal year 2006 (“2006”) ended on February 3, 2007 and was a 53-week year.
Strategic Initiatives
Management believes that its four strategic initiatives are keys to achieving future success. These initiatives focus on merchandise content, marketing, inventory management and the in-store shopping experience.
Our merchandise content initiatives are focused on increasing market share by expanding Kohl’s appeal to a broader range of customers. New brand launches in 2008 included:
• Jumping Beans – our classic opening price point brand in the children’s category
• Bobby Flay – an expansion of the Food Network brand with celebrity talent, featuring Mediterranean influences, bold colors and rich textures
• FILA Sport – performance and leisure apparel, footwear and accessories for women, men and children
• ELLE – expansion of this exclusive brand of Women’s apparel to all stores
• Abbey Dawn – a new juniors’ lifestyle brand by award-winning singer/songwriter Avril Lavigne
• Gold Toe – a national hosiery brand
In 2009, Kohl’s is expected to become the exclusive U.S. retailer for the following brands:
• Dana Buchman – a classic lifestyle brand, which spans several categories, including women’s apparel, intimate apparel, accessories, and footwear, launched in February 2009. Ultimately, the brand may extend into home, beauty and fragrance categories.
• Hang Ten – a California lifestyle collection for young shoppers is expected to be available in April 2009
• Mudd – expansion of Kohl’s current Mudd merchandise assortment in apparel, accessories, jewelry and domestics is expected to be available beginning in July 2009.
Our marketing initiatives are designed to differentiate Kohl’s in the marketplace while maximizing the return on our marketing investment. Our 2008 marketing efforts, especially during the holiday season, were designed to showcase Kohl’s as THE one-stop destination for shoppers looking to get the most for their money during a challenging economic environment. We continued to target our most loyal customer – the Kohl’s charge card customer. We also emphasized our flexible return policy.
Our inventory management initiatives are designed to ensure that we have the right inventory, in the right stores, at the right time. Size optimization is focused on ensuring that each of our individual stores has inventory in the correct style, color and size. Markdown optimization is focused on pricing clearance items at the appropriate price for each location’s inventory and sales history. Another important inventory management initiative is to increase our speed-to-market through our “Concept to Customer” initiative which allows us to develop and deliver product quicker, while meeting our customers’ needs and remaining trend right. Since launching our cycle time reduction initiative, we have achieved a 10-15 week reduction in cycle time, with the majority of our products designed and delivered to our stores within 32 weeks. Brands requiring “fast-fashion”, such as ELLE, are developed in as little as 12-16 weeks. During 2008, we aggressively managed our inventory levels by reducing seasonal inventory levels, while maintaining levels in basic areas such as hosiery and underwear. As a result of strong inventory management and cycle time reductions, clearance inventory levels were also down significantly compared to 2007.
The objective of our in-store shopping experience initiatives is to satisfy the changing needs and expectations of our customers. Practical, easy shopping is about convenience. At Kohl’s, convenience begins even before the customer enters the store, with a neighborhood location close to home. Other aspects of convenience include convenient parking, easily accessible entry, knowledgeable and friendly associates, wide aisles, a functional store layout, shopping carts/strollers and fast, centralized checkouts. Our new point-of-sale (“POS”) system was installed in all stores in 2007. The face-to-face customer interaction, touch screens, signature capture, customer display and other features of the new POS system are improving time-in-line resulting in a modern, efficient and improved customer experience. The physical layout of the store and our focus on strong in-stock position in style, color and size is aimed at providing a convenient shopping experience for an increasingly time-starved customer.
In 2006, we introduced a new “innovation” store design to make our stores more visually exciting and easier to shop. Enhancements included new and updated exteriors; improved fitting rooms, lounges, restrooms and customer service areas; and specialty fixturing including new residential-styled home hutches. We have also updated the junior’s area with trendy concrete flooring, a fun lounge area, full wardrobe strikepoints and additional cross-shopping opportunities; redesigned our center core to improve sightlines throughout the store; and introduced upgraded fixturing and wayfinding signage. In 2008, our in-store shopping experience efforts were focused on improving customer service scores.
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 2008, we had 1,004 stores, located in every large market in all 48 of the continental United States. As a result of economic conditions throughout the United States, we slowed our actual store growth in 2008 and our plans for 2009.
Merchandise Vendors
We purchase merchandise from numerous domestic and foreign suppliers. We have Terms of Engagement requirements which set forth the basic minimum requirements all business partners must meet in order to do business with Kohl’s. Our Terms of Engagement include provisions regarding laws and regulations, employment practices, ethical standards, environmental and legal requirements, communication, monitoring/compliance, record keeping, subcontracting and corrective action. Our expectation is that all business partners will comply with these Terms of Engagement and quickly remediate any deficiencies, if noted, in order to maintain our business relationship.
None of our suppliers accounted for more than 5% of our net purchases during 2008. We have no long-term purchase commitments or arrangements with any of our suppliers, and believe that we are not dependent on any one supplier. We believe we have good working relationships with our suppliers.
Seasonality
Our business, like that of most retailers, is subject to seasonal influences. The majority of our sales and income are typically realized during the second half of each fiscal year. The back-to-school season extends from August through September and represents approximately 15% of our annual sales. Approximately 30% of our sales occur during the holiday season in the months of November and December. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the fiscal year. In addition, quarterly results of operations depend significantly upon the timing and amount of revenues and costs associated with the opening of new stores.
Trademarks and Service Marks
The name “Kohl’s” is a registered service mark of one of our wholly-owned subsidiaries. We consider this mark and the accompanying name recognition to be valuable to our business. This subsidiary has over 100 additional registered trademarks, trade names and service marks, most of which are used in our private label program.