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In early March, Kohl's (NYSE: KSS) reported another quarter of solid profit growth, capping off a strong 2018 fiscal year. For the full year, adjusted earnings per share soared 34% to $5.60. While much of the increase was driven by a lower tax rate, Kohl's also made progress on initiatives to grow its sales and improve its profit margin last year.
Kohl's recently filed its annual report for fiscal 2018, which provides more detail on the company's results for the past year and its plans for 2019. Here are three important details investors might have missed.
Gross margin growth -- despite pivot to national brands
In recent years, Kohl's has been reducing its inventory steadily in order to avoid margin-killing clearance markdowns. This effort is working, as gross margin reached 36.4% in fiscal 2018, up from 36% a year earlier and 35.9% in fiscal 2016.
This gross margin improvement is particularly notable because it comes in the face of two major headwinds. First, Kohl's is posting steady double-digit growth in digital sales, and gross margin tends to be lower for e-commerce transactions due to shipping costs.
Second, gross margin tends to be lower for national brands than for private-label brands, and Kohl's has been making a big push to grow its sales of national brands recently. A key deal to begin selling Under Armour gear went into effect two years ago. As a result, Kohl's derived 61% of its sales from national brands last year, up from 54% in fiscal 2016. Yet Kohl's was able to more than offset the impact of this shift in its merchandise mix and continue expanding its gross margin.
Kohl's has expanded its gross margin for two consecutive years. Image source: Kohl's.
Kohl's plans to continue its focus on growing sales of national brands in 2019. That will include the launch of the Nine West brand at Kohl's this summer. Nevertheless, management expects gross margin to increase slightly once again this year.
Free cash flow soared last year, but it may dip in fiscal 2019
One of the most impressive aspects of Kohl's financial performance last year was its cash-flow production. Free cash flow surged 59% year over year to $1.4 billion: the company's highest full-year total in nearly a decade. Working capital gains and a decline in capex to $578 million -- compared to $768 million just two years earlier -- contributed to this strong result.
Looking ahead to fiscal 2019, free cash flow is likely to recede again, due to higher planned capital spending. Kohl's expects capex to jump to around $850 million this year, mainly thanks to costs associated with building its sixth e-commerce fulfillment center. Omnichannel capex will nearly triple year over year to $280 million.