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  • 1. GROWTH. Innovation. Success. 2006 Annual Report
  • 2. Company Pro le Financial Highlights (dollars in millions) Kohl’s mission is to be the 2006 2005 leading family-focused, Net Sales $15,544 $ 13,402 up 16% value-oriented specialty department store o ering Gross Margin $ 5,654 $ 4,763 up 19% quality exclusive and national Percent of Sales 36.4 % 35.5 % up 0.9% brand merchandise to the SG&A $ 3,401 $ 2,964 up 15% customer in an environment Percent of Sales 21.9 % 22.1 % down 0.2% that is convenient, friendly and exciting. up 28% Operating Income $ 1,815 $ 1,416 Percent of Sales 11.7 % 10.6 % up 1.1% Kohl’s operates from coast Net Income $ 1,109 $ 842 up 32% to coast. At the end of scal Percent of Sales 7.1 % 6.3 % up 0.8% 2006, we served customers in 45 states through 817 stores and Kohls.com. ) ) (1 (1 Net Sales Net Income R R AG AG (in millions of dollars) (in millions of dollars) C C % .7% 9.3 $15,544 15 1 $1,109 $13,402 $11,701 $842 $10,282 $9,120 $703 $601 $7,489 $546 $458 2001 2002 2003 2004 2005 2006 2001 2002 2003 2004 2005 2006 Compounded Annual Growth Rate. (1) Results 1
  • 3. Larry Montgomery, Chairman and Chief Executive Of cer; Kevin Mansell, President; and Tom Kingsbury, Senior Executive Vice President Dear Shareholder, Our scal 2006 performance can best In April, we completed the sale of our Operating Income be described in one word: growth. We proprietary credit card business to (in millions of dollars) ) (1 R delivered solid top- and bottom-line JPMorgan Chase and intered into a multi- G CA performance. We opened 85 exciting year agreement with Chase to share in the . 1% new stores and we successfully executed pro tability of the credit card portfolio. We 18 on our four strategic initiatives. used the net proceeds to begin our authorized $1,815 $2 billion share repurchase program, Strong Financial Growth purchasing 27 million shares in scal 2006 Our sales have grown by 50% over $1,416 Growth across the Nation the past three years, from $10 billion We continue to deliver on our real estate in 2003 to a record $15.5 billion this $1,193 growth strategy. Our ability to successfully year. No other major department $1,021 add new stores and new markets reached $951 store has a growth rate that comes new heights with the grand opening of 65 even close. For this year, comparable $790 stores across the country on a single day in store sales rose 5.9%, increasing in all October, the largest one-day grand opening regions and all four quarters, boosting in our history. us to the top of the rankings among our peer group. Looking ahead, we see many more opportunities for strategic, pro table Operating income grew 28% to $1.8 growth. By the end of 2010, we expect to billion and the operating margin reached 2001 2002 2003 2004 2005 2006 be operating more than 1,200 stores and to an all-time high of 11.7%. This puts us generate approximately $24 billion in sales well on our way to achieving our goal of Compounded Annual Growth Rate. (1) and $1.9 billion in net income. We believe 12.5% operating margin by 2010. these goals are both realistic and achievable. Net income increased 32% to a record Growth throughout the Business $1.1 billion or $3.31 per diluted share, Our strategic initiatives are the roadmap driven by strong improvement in our for our future growth. These initiatives gross margin and prudent expense management. Our balance sheet focus on merchandise content, marketing, remained strong and we again inventory management and the in-store generated signi cant ow from shopping experience. Vision operations. 2
  • 4. “Our sales have grown by 50% over the past three years, from $10 billion in 2003 to a record $15.5 billion this year. No other major department store has a growth rate that comes even close.” Our focus on lifestyle merchandising Enhancing the in-store shopping She retired from the Board in February is designed to meet our objective of experience revolves around making our 2007. Jay was one of the three principals increasing market share by expanding our stores more visually exciting and easier who built the solid foundation for our appeal to a broader range of customers. to shop. Introduced in 2006, our new success, serving as president for 13 Brands such as Chaps continue to attract innovation store design is aimed squarely years. Jay will retire from the Board our core classic customer. In the updated at broadening customer appeal. From the in May 2007. and contemporary categories, daisy exterior showcase windows displaying the Stephen E. Watson joined our Board fuentes, apt. 9, Candie’s, Tony Hawk and latest fashions to creative merchandise of Directors in 2006, bringing his Casa Cristina are just a few of our new displays highlighting the newest trends, 30 years of retail industry experience, brands and brand extensions. our innovation stores encourage shoppers including 23 years with Target to browse every department. Of the 85 Corporation. We also welcomed In 2007, we’ll add even more variety and stores we opened in 2006, approximately Tom Kingsbury as a principal in innovation to our merchandise through half were innovation stores. We plan to the newly created position of senior exclusive licensing agreements for Simply incorporate elements of this format into executive vice president. Vera Vera Wang, ELLE and Food Network all new and remodeled stores in 2007. collections. Together, these will be the Coming o another outstanding year, For us, growth is an all-encompassing largest number and by far the largest it is appropriate that we again thank and never-ending process. Through volume of new and expanded o erings the people who made it happen – our ongoing innovation across the business, we have ever launched. To support our Associates, shareholders, customers and we are converting our core concepts growing portfolio of world-class brands, business partners. With their help, you of brands, value and convenience we will open a design of ce in the heart can continue to expect great things into sustained long-term growth and of New York’s garment district in spring from Kohl’s. pro tability. The signi cant increase of 2007. in our stock price in 2006 re ects our Our marketing program is designed success in achieving these goals. to di erentiate our stores in the marketplace. The program uses a The People behind our Growth strategically selected variety of media It’s no secret that the key to our success to build awareness and desire for our has always been the talent within our Larry Montgomery national, private and exclusive brands, organization and our 114,000 dedicated Chairman and Chief Executive Of cer and to increase traf c and sales. Our Associates who make our customers their marketing statement, “Only at Kohl’s,” rst priority. Our commitment to our distinguishes our stores and our exclusive great team of Associates was underscored brands, giving customers an even more in 2006 with our selection by Business compelling reason to shop our stores. Kevin Mansell Week magazine as one of the top 50 President companies to launch a career. Our focus on inventory management includes activities to improve inventory We wish to extend a deep and heartfelt ow and increase speed-to-market. As thank you to Arlene Meier and Jay Baker. always, our goal is to meet customer Arlene retired after 16 years with the expectations for in-stock merchandise in Tom Kingsbury company, serving for the past six years a broad range of sizes and colors. Senior Executive Vice President as chief operating of cer and a director. 3
  • 5. GROWTH. Innovation. Success. Our success in growth and innovation has made Kohl’s a major force in retailing across the nation. ® 4
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  • 7. New State GROWTH in 2006 Projected Stores Across the Nation by 2010 We continue to deliver successful, 1,200 + pro table growth. In the last 10 years New State alone, we’ve grown from 150 stores in 2006 in 16 states in 1996, to 817 stores in 45 states at the end of scal 2006. By the end of 2010, we expect to be operating more than 1,200 stores – a strategically developed and very 817 achievable target. Growing our Regions In addition to signi cantly increasing our number of stores, over the past 10 years we have also expanded from our Midwestern base to become a major national retailer. In 2006, we entered the Northwest with new stores in Oregon and 382 Washington. We now operate in every region of the country. To support this new store for markets of all region, as well as our continuing growth in sizes. All three formats will be the Southwest, we opened a distribution part of our expansion, with our 88,000 center in Patterson, California, with the 150 square-foot suburban store remaining capacity to support 110 stores. the predominant format. We will also continue to remodel our existing Successful Strategy stores, with all of the remodels in 2007 We’ve proven that our growth strategy incorporating key elements of our new works. With our three formats: suburban, 1996 2001 2006 2010 innovation store concept. small and urban, we have the right-sized “By the end of 2010, we expect to be operating more than 1,200 stores – a strategically developed and very achievable target.” Number of Stores 2% 3% 1% by Region 5% These charts show 11% 12% the successful 32% expansion from our 11% 14% Midwestern base 46% into every region 13% 14% across the country. 15% 90% 16% 12% 3% 1996 2001 2006 6
  • 8. New State in 2006 New State in 2006 With the opening of 85 NEW STORES, New Stores in 2006 New States in 2007 we operated 817 stores in 45 states Northwest Region at the end of scal 2006. (10 stores) Midwest Region (260 stores) South Central Region (106 stores) Growth Northeast Region (124 stores) Mid-Atlantic Region (85 stores) Southeast Region (100 stores) Southwest Region (132 stores) 7
  • 9. INNOVATION with Impact Making our stores more visually exciting experience. Higher ceilings, attractive restrooms. The spacious tting rooms have and easier to shop took a bold step carpeting and soft wall colors create three-way mirrors and lounge areas, with forward with the introduction of our new a more open, spacious environment. laminate wood ooring, sofas and decorative innovation store design. The innovation Large signs make departments easy to wall art. The streamlined customer service begins with the storefront, with bright white nd. High-impact graphics highlight desk is more inviting and redesigned columns and large windows showcasing merchandise for every lifestyle. Eye- customer check-out stations improveow products and lifestyles to give customers a catching displays provide apparel and and speed up the check-out process. glimpse of the great merchandise inside. accessory ideas and stately wooden Our friendly and knowledgeable hutches showcase our home merchandise. Enhancing the Customer Experience Associates are always nearby to provide the Inside, the new store design is aimed Innovation throughout the store also shopping assistance and courteous service squarely at broadening customer appeal includes a comfortable and luxurious that make our stores a destination for and reach through an enhanced shopping residential look in our tting rooms and shoppers across the U.S. erience 9
  • 10. In 2006, Kohl’s Cares for Kids merchandise included Sandra Boynton’s fun- lled, special edition books, sing-along CDs and snuggly plush animals. 15
  • 11. “Developing exclusive collections of world-class brands is a key growth strategy.” SUCCESS with Style In 2006, we gave our customer even develop another new brand available more of what she’s looking for with new “Only at Kohl’s.” The ELLE line of misses’ world-class brands and brand extensions. apparel will feature contemporary, runway- We introduced West End and AB Studio inspired looks that appeal to the younger in misses’ and Stamp 10 in both misses’ segment of our core customer base. The and men’s. In young men’s and boys’, we line, which launches in selected stores in launched the Tony Hawk brand. Chaps is spring 2007, demonstrates a speed-to- now in misses’, men’s, boys’, footwear and market strategy that will bring new ELLE infants’/toddlers’ and will expand into fashions into our stores every month. women’s, girls’ and home in 2007. Expanding in Home Food preparation is one of the fastest Top-Fashion Apparel in 2007 growing areas in our home assortment. In Developing exclusive collections of world- 2006, we added the Rachael Ray line of class brands is a key growth strategy. Our cookware. We also formed an exclusive most signi cant initiative for 2007, and relationship with Food Network, the the largest launch in our history, is the undisputed authority in cooking and introduction of the Simply Vera Vera Wang entertainment, to develop a Food Network- premium fashion and lifestyle brand, branded line of home goods. We will beginning in fall 2007. The collection introduce this brand in fall 2007. spans the store, including misses’, accessories, jewelry, footwear, intimate We also introduced a new home furnishings apparel and soft home. Vera Wang is one line, Casa Cristina, by Cristina Saralegui, an of the most respected designers in the in uential role model in today’s Hispanic world, making her collection a strong community. This line will ultimately addition to our exclusive brand selection. expand across several home categories in We’ve also teamed up with ELLE magazine, 2007. Other extensions in 2007 include the world’s largest fashion magazine, to daisy fuentes and Chaps in soft home. World-Class 10
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  • 14. GROWTH through Di erentiation Growth through di erentiation means exciting than ever by adding inspiring enabling our customer to nd everything she strikepoints and large graphic displays. wants for her home, her family and herself – These new visuals showcase di erent lifestyle in a single shopping trip. We’ve captured brands and provide wardrobe suggestions, market share by expanding our merchandise complete with accessories such as jewelry, assortment to reach a broader group of shoes and handbags. Lifestyle merchandising customers. While classic American families also includes specialty departments for our continue to be our primary customer, we are important special-size customers. adding brands and merchandise targeted to With the addition of ne fragrances, various lifestyles. we have all the elements in place Lifestyle Merchandising to launch the “Kohl’s Beauty Dept.,” To appeal to this expanded customer base, creating awareness for the total beauty we’ve reorganized departments to re ect category – cosmetics, skincare, bath & di erent customer lifestyles: classic, updated body and fragrance. and contemporary. Whether she is a busy Exceptional Customer Service mom with young children, a recent college Of course, it is our Associates who make graduate on her way up the career ladder or the shopping experience truly exceptional. an empty nester, we have the look she wants, We value and appreciate all of the Associates in the sizes and colors she needs. behind our recognition for Top 10 Our goal is to deliver a consistent experience achievement in customer service for 2006 for every customer, in every store, every by the National Retail Federation and time. We made shopping our stores more American Express Research. Lifestyle 13
  • 15. The District 16 A-Team in western Michigan won the “Kohl’s Award of Excellence” three years in a row. INNOVATION with Spirit “Our Associates are We believe that caring for our friends, In 2006, A-Team members volunteered neighbors and families is what over 57,800 hours, a 171% increase over leading by example, communities are all about. From the 2005, raising over $1.2 million. following their hearts, volunteer support of our Associates to Kohl’s Cares for Kids is a promise our corporate nancial contributions, inspiring others and of hope for a brighter, healthier future we want to have a positive impact in for children in our communities. making a real di erence each community we serve. In 2006, we Throughout the year, we sell special provided approximately $33 million to for children in our Kohl’s Cares for Kids merchandise with support our communities across the U.S. communities.” 100% of the net pro ts supporting Our Associates are leading by example, health and educational opportunities following their hearts, inspiring others for children. Our well-established and making a real di erence for children Kohl’s Cares for Kids children’s hospital in our communities through the Kohl’s program continues to grow. In 2006, A-Team. As A-Team members, our we partnered with 143 hospitals in Associates choose youth-focused non- 45 states. pro t organizations they want to support. Our annual Kohl’s Kids Who Care After they have given the gift of time and scholarship program gives us the talent to the organization, they become opportunity to recognize and reward youth eligible for a corporate grant given who volunteer in their communities. In directly to their charity. 2006, we recognized 152 young volunteers We are proud of our Associates and with Kohl’s Kids Who Care scholarships their commitment to their communities. totaling more than $200,000. Inspiration 14
  • 16. Strength SUCCESS through Performance Fiscal Year 2006 2005 2004 2003 2002 2001 Summary of Operations (In millions) $ 11,701 $ 9,120 Net sales $ 15,544 $ 13,402 $10,282 $ 7,489 4,114 3,139 Gross margin 5,654 4,763 3,395 2,565 2,584 1,884 Selling, general & administrative expenses 3,401 2,964 2,158 1,583 49 41 Preopening expenses 50 44 47 33 288 193 Depreciation and amortization 388 339 239 159 1,193 1,021 Operating income 1,815 1,416 951 790 63 56 Interest expense, net 41 70 73 50 1,130 965 Income before income taxes 1,774 1,346 878 740 703 601 Net income 1,109 842 546 458 Diluted Earnings Per Share $ 3.31 $ 2.43 $ 2.04 $ 1.59 $ 1.75 $ 1.35 Financial Position Data (Dollars in millions) Working capital $ 1,482 $ 2,520 $ 2,187 $ 1,902 $ 1,776 $ 1,584 Property and equipment, net 5,353 4,616 4,063 3,390 2,806 2,253 Total assets 9,041 9,153 7,979 6,691 6,311 4,927 Long-term debt 1,040 1,046 1,103 1,076 1,059 1,095 Shareholders’ equity 5,603 5,957 5,034 4,212 3,532 2,803 Return on average shareholders’ equity 19.2 % 15.3 % 15.2 % 14.1 % 19.0 % 18.3 % Other Data Comparable store sales growth 5.9 % 3.4 % 0.3 % (1.6 )% 5.3 % 6.8 % Net sales per selling square foot $ 256 $ 252 $ 255 $ 268 $ 284 $ 283 Stores open at year end 817 732 637 542 457 382 Total square feet of selling space (In thousands) 62,357 56,625 49,201 41,447 34,507 28,576 Report of Management The management of Kohl’s Corporation is responsible for the integrity and objectivity of the nancial and operating information contained in this Annual Report, including the consolidated nancial statements covered by the Report of Independent Registered Public Accounting Firm. These statements were prepared in conformity with U.S. generally accepted accounting principles and include amounts that are based on the best estimates and judgments of management. We remain committed to managing our business both ethically and responsibly and to representing the best interest of our shareholders through good corporate governance. After thorough review by its Governance and Nominating Committee, the Board of Directors believes Kohl’s is in full compliance with all applicable corporate governance rules of the Securities and Exchange Commission (SEC) and the New York Stock Exchange (NYSE). Accordingly, in 2006, Kohl’s provided the NYSE with an unquali ed Annual CEO Certi cation of Compliance, and has led with the SEC, as an exhibit to our Annual Report on Form 10-K for the scal year 2006, the Sarbanes-Oxley Act Section 302 certi cation regarding the quality of the company’s public disclosure. The consolidated nancial statements and related notes have been audited by Ernst & Young LLP, independent registered public ccounting rm, whose a report is based on audits conducted in accordance with the standards of the Public Company Accounting Oversight Board (United States). The Company’s consolidated nancial statements including the Report of Independent Registered Public Accounting Firm are included in the Com pany’s Form 10-K for the year ended February 3, 2007. The Audit Committee of the Board of Directors is composed of four independent Directors. The Committee is responsible for assis the Board in its oversight ting of Kohl’s nancial accounting and reporting practices. The Audit Committee is directly responsible for the compensation, appoi ntment and oversight of the Company’s independent registered public accounting rm. The Audit Committee meets periodically with the independent registered public accounting rm, as well as with management, to review accounting, auditing, internal accounting control and nancial reporting matters. The in dependent registered public accounting rm has unrestricted access to the Audit Committee. Larry Montgomery Wesley S. McDonald Chairman and Chief Executive Of cer Executive Vice President - Chief Financial Of cer 16
  • 17. Corporate Information Corporate Headquarters Executive Committee Kohl’s Corporation Kenneth Bonning John J. Lesko N56 W17000 Ridgewood Drive Executive Vice President – Logistics Executive Vice President – Administration Menomonee Falls, WI 53051-5660 Jack Boyle Kevin Mansell (262) 703-7000 Executive Vice President – General Merchandise President Web site: www.kohls.com Manager, Women’s Apparel and Accessories Wesley McDonald Transfer Agent and Registrar Donald A. Brennan Executive Vice President – Chief Financial Of cer The Bank of New York Executive Vice President – General Merchandise R. Lawrence Montgomery Shareholder Relations Dept. 12-E Manager, Men’s and Children’s Chairman and Chief Executive Of cer P.O. Box 11258 Peggy Eskenasi Church Street Station Jon Nordeen Executive Vice President – Product Development New York, New York 10286 Executive Vice President – Planning & Allocation (800) 524-4458 Julie Gardner Richard D. Schepp Web site: www.stockbny.com Executive Vice President – Chief Marketing Of cer Executive Vice President – General Counsel, Janelle Havner Secretary Annual Meeting Executive Vice President – Of ce of Store The Kohl’s 2007 Annual Meeting of Rick Seeger Administration/Merchandise Presentation Shareholders will be held on Wednesday, Executive Vice President – General Merchandise May 2, 2007 at 10:00 a.m. at the Telvin Je ries Manager, Home and Footwear Midwest Airlines Center, Milwaukee, Executive Vice President – Human Resources John Worthington Wisconsin. Thomas Kingsbury Executive Vice President – Director of Stores Investor Information/Quarterly Reports Senior Executive Vice President For quarterly earnings reports and other Directors investor information, please visit our Jay H. Baker Arlene Meier Web site at www.kohls.com or direct Retired President, Kohl’s Corporation (b) (c) Retired Chief Operating Of cer, Kohl’s Corporation your inquiries to the company, Attention: (Retired from Board of Directors in February 2007) Investor Relations. (Retiring from Board of Directors in May 2007) R. Lawrence Montgomery Steven A. Burd Form 10-K Chairman and Chief Executive Of cer, Chairman, President and Chief Executive Of cer, Parts I-III of Kohl’s Annual Report on Form Kohl’s Corporation Safeway Inc. (b) (c) 10-K, as led with the Securities and Exchange Commission, are included with Frank V. Sica Wayne Embry this report for all shareholders. President, Menemsha Capital Partners, Ltd. (b) (c) Senior Advisor to the General Manager of the Toronto Raptors (a) (c)* Peter M. Sommerhauser Shareholder in the law rm of Godfrey & Kahn, S.C. Forward-Looking Statement James D. Ericson Certain statements made within this report are Retired Chairman, President and Chief Executive Of cer, Stephen E. Watson “forward-looking statements” within the meaning Northwestern Mutual Life Insurance Company (b)* (c) Retired President and CEO, Gander Mountain, L.L.C. of the Private Securities Litigation Reform Act of (a) (c) John F. Herma 1995. Such forward-looking statements re ect Retired Chief Operating Of cer, Kohl’s Corporation (a) (c) R. Elton White management’s current views of future events Retired President, NCR Corporation (a)* (c) William S. Kellogg and nancial performance. These statements Retired Chief Executive Of cer, Kohl’s Corporation (a) 2006 Audit Committee are subject to certain risks and uncertainties (b) 2006 Compensation and Stock Option Committee which could cause Kohl’s actual results to di er Kevin Mansell (c) 2006 Governance and Nominating Committee materially from those anticipated by the forward- * Denotes Chair President, Kohl’s Corporation looking statements. These risks and uncertainties C ommon S tock Price Ra nge S tock Listing include, but are not limited to, those described Fiscal 2006 High Low Fiscal 2005 High Low Kohl’s common stock is listed on the New York in Exhibit 99.1 to Kohl’s annual report on Form First Quarter $ 56.00 $44.13 First Quarter $ 53.86 $45.26 Stock Exchange under the symbol KSS. 10-K and other factors as may periodically be Second Quarter 59.82 52.93 Second Quarter 58.90 46.50 described in Kohl’s lings with the SEC. Third Quarter 73.58 56.61 Third Quarter 57.44 43.63 Fourth Quarter 73.97 66.25 Fourth Quarter 50.96 42.78
  • 18. N56 W17000 Ridgewood Drive Menomonee Falls, WI 53051-5660 www.kohls.com