JC Penney Acquiring Kohl's Kohl's Financials

Often, a firm that is taken over is struggling financially. One of the reasons is entirely pragmatic -- a struggling firm likely has a lower stock price, making the takeover more affordable. Over the past four years, Kohl's has seen its revenues flatline. Revenues were $19.2 billion in FY 2016. The company's cost of goods sold is steady as well, at 63.8%. So in that sense, Kohl's is a very stable firm financially. This stability should actually mean that its stock price fairly accurately reflects the present value of future cash flows, making it difficult for the acquiring firm to earn profit from the transaction, given that they have to pay a premium to Kohl's shareholders.

The company has seen its selling, general, and administration expenses increase gradually over the past couple of years, which has resulted in shrinking operating income. The operating profit margin was 9.8% in FY13 and by FY16 had fallen to 8.08%, almost all the difference coming from increased operating expenses. Kohl's has seen a corresponding reduction in its net income and net margin. Kohl's has a very stable income statement, and it would be very easy for JC Penney to accurately price Kohl's based on future cash flows, because Kohls' business is so stable.

The balance sheet shows some more interesting issues. First, the company's cash position has been reduced over the past four years, and this goes along with an increase in inventories. The inventory turnover ratio was 5.14 times in FY13 and 4.75 in FY16. This slight shift indicates a couple of things. First, it indicates that inventory isn't moving as quickly. So while Kohl's is still doing the same business, inflationary price increases are likely allowing to hold real revenue steady while in fact the company is moving its inventory more slowly. There is probably a corresponding decrease in foot traffic through...

The property, plants and equipment line has shown a decrease over the past four years, steadily. Most of this item is going to be property and improvements, the latter of which can be depreciated. In all likelihood, depreciation is the reason the book value of this major asset class is diminishing, but operationally this also confirms that Kohl's is not expanding its operations.
Kohl's has been able to manage its accounts payable. While there is some variability in this line item, it is presently at its lowest level of the past four years. That said, current liabilities are not at their lowest level. Long-term debt has been in a range for the past four years, and there is little indication that the company needs to dip into the debt markets to finance its operations. Again, this is not a company that is being acquired because it is in strife, but rather because it has flatlined. Total liabilities have crept up, and while equity is declining, retained earnings are increasing. The source of this should be evident from the statement of cash flows.

The statement of cash flows has showed some variability in operating cash flows, the weak year of FY15 relating to higher levels of inventories and higher accounts payable; the company seems to have had a down holiday season and was therefore stuck with excessive inventories at the end of this year. That is merely a hypothesis, however, and is not discussed in the financial statements. There has been some acquisition of property and equipment, though not enough to offset depreciation and amortization, hence why on the balance sheet PPE is decreasing. There has been cash used in financing activities as well, in particular Treasury Stock repurchases, and a small amount of dividends paid. Stock repurchases tend to be a means of returning to the shareholders at points…