I'm using Kohl's Corporation's Annual Statement trying to answer this question. I've attached the annual report below.

• Assess management performance by calculating Economic Value Added (EVA).

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended January 31, 2015 or Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Transition period from ____________ to ___________ Commission file number 1-11084 KOHL'S CORPORATION (Exact name of registrant as specified in its charter) Wisconsin 39-1630919 (State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.) N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (262) 703-7000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 Par Value New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Yes Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. X No . Yes Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. No X . Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes X No . Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. X . Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of \"large accelerated filer,\" \"accelerated filer\" and \"smaller reporting company\" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer X Accelerated filer reporting company Yes Non-accelerated filer (Do not check if a smaller reporting company) Smaller Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). No X . At August 1, 2014, the aggregate market value of the voting stock of the Registrant held by stockholders who were not affiliates of the Registrant was approximately $11.0 billion (based upon the closing price of Registrant's Common Stock on the New York Stock Exchange on such date). At March 11, 2015, the Registrant had outstanding an aggregate of 202,802,328 shares of its Common Stock. Documents Incorporated by Reference: Portions of the Proxy Statement for the Registrant's Annual Meeting of Shareholders to be held on May 14, 2015 are incorporated into Parts II and III. Table of Contents KOHL'S CORPORATION INDEX PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. 13 Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Consolidated Financial Data Management's Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes In and Disagreements with Accountants on Accounting and Financial Disclosures Controls and Procedures Other Information 13 16 17 30 30 30 31 32 Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services 33 33 34 34 34 34 PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. 3 3 6 10 10 12 12 Exhibits and Financial Statement Schedules Signatures Exhibit Index Index to Consolidated Financial Statements 34 35 36 37 F-1 Table of Contents PART I Item 1. Business Kohl's Corporation (the \"Company\" or \"Kohl's\") was organized in 1988 and is a Wisconsin corporation. As of January 31, 2015, we operated 1,162 department stores in 49 states and an E-Commerce website (www.Kohls.com). We sell moderately-priced private label, exclusive and national brand apparel, footwear, accessories, beauty and home products. Our stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences. Our website includes merchandise which is available in our stores, as well as merchandise which is available only on-line. Our fiscal year ends on the Saturday closest to January 31st each year. Unless otherwise stated, references to years in this report relate to fiscal years rather than to calendar years. The following fiscal periods are presented in this report. Ended 2014 2013 2012 Number of Weeks January 31, 2015 February 1, 2014 February 2, 2013 Fiscal Year 52 52 53 As reflected in the charts below, our merchandise mix by line of business has remained consistent over the last three years. Our strategic framework, which we refer to as "The Greatness Agenda," is built on five pillars - amazing product, incredible savings, easy experience, personalized connections and winning teams. Amazing product provides a renewed focus on providing the right merchandise mix, being locally relevant and tailoring products to every customer across every shopping channel. We strive to offer the appropriate balance between the fashion that our customers want and the everyday basics that they need. Our merchandise mix includes both national brands and private and exclusive brands which are available only at Kohl's. In 2014, we continued our emphasis on national brands as we believe they drive customer traffic and sales increases. National brands generally have higher selling prices than private and exclusive brands. Most of our private brands are well-known established brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Life + Style. Selling prices for our private brands are generally lower than exclusive and national brands. Exclusive brands are developed and marketed through agreements with nationally-recognized brands. Examples of our exclusive brands include Food Network, Jennifer Lopez, Marc Anthony, Rock & Republic and Simply Vera Vera Wang. Exclusive brands have selling prices which are generally lower than national brands, but higher than private brands. 3 Table of Contents The charts below summarize the percentage of our sales which were national brands and those which were private and exclusive brands over the last three years. We frequently add new products, brands and categories in order to maintain freshness in our inventory assortment and drive customer traffic to our stores and website. In 2014, we launched the Fitbit, IZOD, Juicy Couture, Gaiam, Nespresso and PUMA brands as well as various Jumping Beans collections featuring Disney characters. Another example of new products that customers can find in many of our stores and on-line is our new beauty departments which offer brands which were not previously available at Kohl's. We expect to further expand our beauty offerings in 2015 when we launch Bliss beauty and apparel products. As of year-end, approximately half of our stores have newly-renovated beauty departments. We expect to have the new beauty department in approximately 900 stores by the end of 2015. The goal of incredible savings is to help every customer get more from every dollar. For many years, we have offered special discounts during our Kohl's Cash promotions and for being a Kohl's-branded private label credit card holder. In 2014, we launched a nationwide loyalty program called Yes2You rewards. Customers who enroll earn rewards based on the dollar amount of purchases that they make. As of year-end 2014, approximately 25 million customers had enrolled. We're able to offer incredible savings to our customers because of our ongoing commitment to a lean operating model. Critical elements of this low-cost structure are our unique store format; lean staffing levels; sophisticated systems which enhance productivity and support personalization, predictive analytics and real-time savings offers; and operating efficiencies which are the result of centralized buying, advertising and distribution. We are also making significant investments to create an easy experience for our customers wherever or however they choose to engage with us. Whether they are shopping in one of our stores, from their mobile devices or from their laptops, we are creating a consistent experience to ensure that our customers can connect with us wherever and however they wish. In 2014, we focused on improving the tablet and smart phone shopping experience and tested buy on-line and pick up in store in approximately 100 stores. We expect to offer this shopping option in all of our stores by the second quarter of 2015. Personalized connections is about building lasting relationships with our customers. To build personalized connections during the shopping experience, we are focused on localizing and tailoring what we sell and how we communicate our product. This ensures that our products and offers are personally relevant to each and every customer. At the same time, personalized connections is about contributing to causes such as children's health and education or the environment, so our customers know we are sensitive to the issues that are important to them. The final pillar is winning teams, which focuses on building teams of engaged, talented, empowered and results-oriented management and employees. For discussion of our financial results, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations." Distribution We receive substantially all of our store merchandise at our nine retail distribution centers. A small amount of our merchandise is delivered directly to the stores by vendors or their distributors. The retail distribution centers, which are strategically located throughout the United Sates, ship merchandise to each store by contract carrier several times a week. Online sales are shipped from four Kohl's fulfillment centers, from third-party fulfillment centers, from our retail distribution centers, directly by third-party vendors, and from a majority of our stores. We expect to have ship-from-store capabilities in all of our stores by the end of 2015. See Item 2, \"Properties,\" for additional information about our distribution centers. 4 Table of Contents Employees As of January 31, 2015, we employed approximately 137,000 associates, including approximately 32,000 full-time and 105,000 part-time associates. The number of associates varies during the year, peaking during the back-to-school and holiday seasons. None of our associates are represented by a collective bargaining unit. We believe our relations with our associates are very good. Competition The retail industry is highly competitive. Management considers style, quality and price to be the most significant competitive factors in the industry. Merchandise mix, brands, service, customer experience and convenience are also key competitive factors. Our primary competitors are traditional department stores, upscale mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses and other forms of retail commerce. Our specific competitors vary from market to market. 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 us. 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. Approximately 30% of the merchandise we sell is sourced through a third-party purchasing agent. None of our vendors individually accounted for more than 5% of our net purchases during 2014. We have no significant 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 annual 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. Revenues and costs associated with the opening of new stores may also affect our quarterly results. 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 180 additional registered trademarks, trade names and service marks, most of which are used in connection with our private label program. Available Information Our corporate website is www.KohlsCorporation.com. Through the \"Investor Relations\" portion of this website, we make available, free of charge, our proxy statements, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, SEC Forms 3, 4 and 5 and any amendments to those reports as soon as reasonably practicable after such material has been filed with, or furnished to, the Securities and Exchange Commission (\"SEC\"). The following have also been posted on our website, under the caption \"Investor Relations-Corporate Governance\": Committee charters of our Board of Directors' Audit Committee, Compensation Committee and Governance & Nominating Committee Report to Shareholders on Social Responsibility Corporate Governance Guidelines Code of Ethics Any amendment to or waiver from the provisions of the Code of Ethics that is applicable to our Chief Executive Officer, Chief Financial Officer or other key finance associates will be disclosed on the \"Corporate Governance\" portion of the website. 5 Table of Contents Information contained on our website is not part of this Annual Report on Form 10-K. Paper copies of any of the materials listed above will be provided without charge to any shareholder submitting a written request to our Investor Relations Department at N56 W17000 Ridgewood Drive, Menomonee Falls, Wisconsin 53051 or via e-mail to Investor.Relations@Kohls.com. Item 1A. Risk Factors Forward-Looking Statements This Form 10-K contains \"forward-looking statements\" made within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as "believes," "anticipates," "plans," "may," "intends," "will," "should," "expects" and similar expressions are intended to identify forward-looking statements. Forward-looking statements also include comments about our future sales or financial performance and our plans, performance and other objectives, expectations or intentions, such as statements regarding our liquidity, debt service requirements, planned capital expenditures, future store initiatives, adequacy of capital resources and reserves and statements contained in the "2015 Outlook" section of Management's Discussion and Analysis of Financial Condition and Results of Operations. There are a number of important factors that could cause our results to differ materially from those indicated by the forward-looking statements including, among others, those risk factors described below. Forward-looking statements relate to the date made, and we undertake no obligation to update them. Our sales, gross margin and operating results could be negatively impacted by a number of factors including, but not limited to those described below. Many of these risk factors are outside of our control. If we are not successful in managing these risks, they could have a negative impact on our sales, gross margin and/or operating results. Declines in general economic conditions, consumer spending levels and other conditions could lead to reduced consumer demand for our merchandise. Consumer spending habits, including spending for the merchandise that we sell, are affected by many factors including prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates, housing costs, energy and fuel costs, income tax rates and policies, consumer confidence, consumer perception of economic conditions, and the consumer's disposable income, credit availability and debt levels. The moderate income consumer, which is our core customer, has been under economic pressure for several years. Recent economic conditions have caused disruptions and significant volatility in financial markets, increased rates of default and bankruptcy and declining consumer and business confidence, which has led to decreased levels of consumer spending, particularly on discretionary items. A continued or incremental slowdown in the U.S. economy and the uncertain economic outlook could continue to adversely affect consumer spending habits. As all of our stores are located in the United States, we are especially susceptible to deteriorations in the U.S. economy. Consumer confidence is also affected by the domestic and international political situation. The outbreak or escalation of war, or the occurrence of terrorist acts or other hostilities in or affecting the United States, could lead to a decrease in spending by consumers. Actions by our competitors. The retail business is highly competitive. We compete for customers, associates, locations, merchandise, services and other important aspects of our business with many other local, regional and national retailers. Those competitors include traditional department stores, upscale mass merchandisers, off-price retailers, specialty stores, internet and catalog businesses and other forms of retail commerce. We consider style, quality and price to be the most significant competitive factors in our industry. The continuing migration and evolution of retailing to on-line and mobile channels has increased our challenges in differentiating ourselves from other retailers especially as it relates to national brands. In particular, consumers are able to quickly and conveniently comparison shop with digital tools, which can lead to decisions based solely on price. Unanticipated changes in the pricing and other practices of our competitors may adversely affect our performance. Our inability to offer merchandise that resonates with existing customers and helps to attract new customers and failure to successfully manage our inventory levels. Our business is dependent on our ability to anticipate fluctuations in consumer demand for a wide variety of merchandise. Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions could create inventory imbalances and adversely affect our performance and long-term relationships 6 Table of Contents with our customers. Additionally, failure to accurately predict changing consumer tastes may result in excess inventory, which could result in additional markdowns and adversely affect our operating results. We may be unable to source merchandise in a timely and cost-effective manner. Approximately 30% of the merchandise we sell is sourced through a third-party purchasing agent. The remaining merchandise is sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors and access products in a timely and efficient manner is a significant challenge which is typically even more difficult for goods sourced outside the United States. Political or financial instability, trade restrictions, tariffs, currency exchange rates, transport capacity and costs, work stoppages, port strikes, and other factors relating to foreign trade are beyond our control and could adversely impact our performance. Increases in the price of merchandise, raw materials, fuel and labor or their reduced availability could increase our cost of goods. The price and availability of raw materials may fluctuate substantially, depending on a variety of factors, including demand, weather, supply conditions, transportation costs, energy prices, work stoppages, government regulation and government policy, economic climates, market speculation and other unpredictable factors. An inability to mitigate these cost increases, unless sufficiently offset with our pricing actions, might cause a decrease in our profitability. Any related pricing actions might cause a decline in our sales volume. Additionally, a decrease in the availability of raw materials could impair our ability to meet our production or purchasing requirements in a timely manner. Both the increased cost and lower availability of merchandise, raw materials, fuel and labor may also have an adverse impact on our cash and working capital needs as well as those of our suppliers. If any of our significant vendors were to become subject to bankruptcy, receivership or similar proceedings, we may be unable to arrange for alternate or replacement contracts, transactions or business relationships on terms as favorable as current terms, which could adversely affect our sales and operating results. Failure of our vendors to adhere to our Terms of Engagement and applicable laws. A substantial portion of our merchandise is received from vendors and factories outside of the United States. We require all of our suppliers to comply with all applicable local and national laws and regulations and our Terms of Engagement for Kohl's Business Partners. Our Terms of Engagement include employment and ethical standards as well as environmental, legal, communication, monitoring/compliance and other requirements. From time to time, suppliers may not be in compliance with these standards or applicable laws. Significant or continuing noncompliance with such standards and laws by one or more suppliers could have a negative impact on our reputation and our results of operations. Ineffective marketing. We believe that differentiating Kohl's in the marketplace is critical to our success. We design our marketing programs to increase awareness of our brands and to build personalized connections with our customers. We believe our marketing programs will strengthen customer loyalty, increase the number and frequency of customers that shop our stores and website and increase our sales. If our marketing programs are not successful, our sales and profitability could be adversely affected. Damage to the reputation of the Kohl's brand or our private and exclusive brands. We believe the Kohl's brand name and many of our private and exclusive brand names are powerful sales and marketing tools. We devote significant resources to promoting and protecting them. We develop and promote private and exclusive brands that have generated national recognition. In some cases, the brands or the marketing of such brands are tied to or affiliated with well-known individuals. Damage to the reputations (whether or not justified) of the Kohl's brand, our private and exclusive brand names or any affiliated individuals, could arise from product failures; concerns about human rights, working conditions and other labor rights and conditions where merchandise is produced; perceptions of our pricing and return policies; litigation; vendor violations of our Terms of Engagement; or various other forms of adverse publicity, especially in social media outlets. Damage to our reputation may generate negative customer sentiment, potentially resulting in a reduction in sales, earnings, and shareholder value. Product safety concerns. If our merchandise offerings do not meet applicable safety standards or our customers' expectations regarding safety, we could experience lost sales, experience increased costs and/or be exposed to legal and reputational risk. Events that give rise to actual, potential or perceived product safety concerns could expose us to government enforcement action and/or 7 Table of Contents private litigation. Reputational damage caused by real or perceived product safety concerns, could have a negative impact on our sales. Disruptions in our information systems or an inability to adequately maintain and update those systems. The efficient operation of our business is dependent on our information systems. In particular, we rely on our information systems to effectively manage sales, distribution, and merchandise planning and allocation functions. We also generate sales though the operations of our Kohls.com website. We frequently make investments that will help maintain and update our existing information systems. The potential problems and interruptions associated with implementing technology initiatives or the failure of our information systems to perform as designed could disrupt our business and harm sales and profitability. Weather conditions could adversely affect consumer shopping patterns. A significant portion of our business is apparel and is subject to weather conditions. As a result, our operating results may be adversely affected by severe or unexpected weather conditions. Frequent or unusually heavy snow, ice or rain storms; natural disasters such as earthquakes, tornadoes, floods and hurricanes; or extended periods of unseasonable temperatures could adversely affect our performance by affecting consumer shopping patterns, diminishing demand for seasonal merchandise and/or causing physical damage to our properties. Inability to successfully execute a profitable omni-channel strategy. Our business has evolved from an in-store only shopping experience to a multi-channel experience which includes instore, on-line, mobile, social media and/or other interactions. We strive to offer a desirable omni-channel shopping experience for our customers and use social media as a way to interact with our customers and enhance their shopping experiences. Our ability to compete with other retailers and to meet our customer expectations may suffer if we are unable to execute a relevant customer-facing technology in a timely manner. Our ability to compete may also suffer if Kohl's, our suppliers, or our third-party shipping and delivery vendors are unable to effectively and efficiently fulfill and deliver orders, especially during the holiday season when sales volumes are especially high. Consequently, our results of operations could be adversely affected. Our omni-channel business currently generates a lower operating margin than we have historically reported when we were primarily a store-only retailer. This profitability variance is due to a variety of factors including, but not limited to, an increase in the volume of lower margin merchandise, especially home products; costs to ship merchandise to our customers; and investments to provide the infrastructure necessary to expand our omni-channel strategy. There can be no assurances that future profitability will return to historical levels. Our revenues, operating results and cash requirements are affected by the seasonal nature of our business. Our business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the back-to-school and holiday seasons. If we do not properly stock or restock popular products, particularly during the back-to-school and holiday seasons, we may fail to meet customer demand, which could affect our revenue and our future growth. If we overstock products, we may be required to take significant inventory markdowns or write-offs, which could reduce profitability. We may experience an increase in costs associated with shipping on-line orders due to complimentary upgrades, split shipments, and additional long-zone shipments necessary to ensure timely delivery for the holiday season. If too many customers access our website within a short period of time due to increased holiday demand, we may experience system interruptions that make our website unavailable or prevent us from efficiently fulfilling orders, which may reduce the volume of goods we sell and the attractiveness of our products and services. Also, third-party delivery, direct ship vendors and customer service co-sourcers may be unable to meet the seasonal demand. This seasonality causes our operating results and cash needs to vary considerably from quarter to quarter. Additionally, any decrease in sales or profitability during the second half of the fiscal year could have a disproportionately adverse effect on our results of operations. 8 Table of Contents Our inability to raise additional capital and maintain bank credit on favorable terms could adversely affect our business and financial condition. We have historically relied on the public debt markets to raise capital to partially fund our operations and growth. We have also historically maintained lines of credit with financial institutions. Changes in the credit and capital markets, including market disruptions, limited liquidity and interest rate fluctuations, may increase the cost of financing or restrict our access to these potential sources of future liquidity. Our continued access to these liquidity sources on favorable terms depends on multiple factors, including our operating performance and maintaining strong debt ratings. If our credit ratings fall below desirable levels, our ability to access the debt markets and our cost of funds for new debt issuances could be adversely impacted. Additionally, if unfavorable capital market conditions exist if and when we were to seek additional financing, we may not be able to raise sufficient capital on favorable terms and on a timely basis (if at all). If our access to capital was to become significantly constrained or our cost of capital was to increase significantly, our financial condition, results of operations and cash flows could be adversely affected. Inefficient or ineffective allocation of capital could adversely affect our operating results and/or shareholder value. Our goal is to invest capital to maximize our overall long-term returns. This includes spending on inventory, capital projects and expenses, managing debt levels, and periodically returning value to our shareholders through share repurchases and dividends. To a large degree, capital efficiency reflects how well we manage our other key risks. The actions taken to address other specific risks may affect how well we manage the more general risk of capital efficiency. If we do not properly allocate our capital to maximize returns, we may fail to produce optimal financial results and we may experience a reduction in shareholder value. Changes in our credit card operations could adversely affect our sales and/or profitability. Our credit card operations facilitate merchandise sales and generate additional revenue from fees related to extending credit. The proprietary Kohl's credit card accounts are owned by an unrelated third-party, but we share in the net risk-adjusted revenue of the portfolio, which is defined as the sum of finance charges, late fees and other revenue less write-offs of uncollectible accounts. Changes in funding costs related to interest rate fluctuations will be shared similar to the revenue if interest rates exceed defined amounts. Though management currently believes that increases in funding costs will be largely offset by increases in finance charge revenue, increases in funding costs could adversely impact the profitability of this program. Changes in credit card use, payment patterns and default rates may also result from a variety of economic, legal, social and other factors that we cannot control or predict with certainty. Changes that adversely impact our ability to extend credit and collect payments could negatively affect our results. An inability to attract and retain quality associates could result in higher payroll costs and adversely affect our operating results. Our performance is dependent on attracting and retaining a large number of quality associates. Many of those associates are in entry level or part-time positions with historically high rates of turnover. Many of our strategic initiatives require that we hire and/or develop associates with appropriate experience. Our staffing needs are especially high during the holiday season. Competition for these associates is intense. We cannot be sure that we will be able to attract and retain a sufficient number of qualified personnel in future periods. Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation, actions by our competitors in compensation levels and changing demographics. Changes that adversely impact our ability to attract and retain quality associates could adversely affect our performance. In addition, changes in federal and state minimum wage laws and other laws relating to employee benefits could cause us to incur additional wage and benefit costs, which could negatively impact our profitability. Regulatory and litigation developments could adversely affect our business operations and financial performance. Various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time. The costs and other effects of new or changed legal requirements cannot be determined with certainty. For example, new legislation or regulations may result in increased costs directly for our compliance or indirectly to the extent such requirements increase prices of goods and services, reduce the availability of raw materials or further restrict our ability to extend credit to our customers. We continually monitor the state and federal legal/regulatory environment for developments that may impact us. Failure to detect changes and comply with such laws and regulations may result in an erosion of our reputation, disruption of business and/or loss of associate morale. Additionally, we are regularly involved in various litigation matters that arise out of the conduct of our business. Litigation or regulatory developments could adversely affect our business operations and financial performance. 9 Table of Contents Unauthorized disclosure of sensitive or confidential customer, associate or company information could severely damage our reputation, expose us to risks of litigation and liability, disrupt our operations and harm our business. As part of our normal course of business, we collect, process and retain sensitive and confidential customer, associate and company information. The protection of this data is extremely important to us, our associates and our customers. Despite the considerable security measures we have in place, our facilities and systems, and those of our third-party service providers, may be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors, or other similar events. Any security breach involving the misappropriation, loss or other unauthorized disclosure of confidential information, whether by us or our vendors, could disrupt our operations, damage our reputation and customers' willingness to shop in our stores or on our website, violate applicable laws, regulations, orders and agreements, and subject us to additional costs and liabilities which could be material. Item 1B. Unresolved Staff Comments Not applicable Item 2. Properties Stores As of January 31, 2015, we operated 1,162 stores with 83.8 million selling square feet in 49 states. Our typical, or \"prototype,\" store has approximately 88,000 gross square feet of retail space and serves trade areas of 150,000 to 200,000 people. Most \"small\" stores are 55,000 to 68,000 gross square feet and serve trade areas of 100,000 to 150,000 people. Our typical store lease has an initial term of 20-25 years and four to eight renewal options for consecutive five-year extension terms. Substantially all of our leases provide for a minimum annual rent that is fixed or adjusts to set levels during the lease term, including renewals. Approximately one-fourth of the leases provide for additional rent based on a percentage of sales over designated levels. 10 Table of Contents The following tables summarize key information about our stores. Number of Stores Net 2013 2014 Change Mid-Atlantic Region: Delaware Maryland Pennsylvania Virginia West Virginia Total Mid-Atlantic Midwest Region: Illinois Indiana Iowa Michigan Minnesota Nebraska North Dakota Ohio South Dakota Wisconsin Total Midwest Northeast Region: Connecticut Maine Massachusetts New Hampshire New Jersey New York Rhode Island Vermont Total Northeast 5 23 50 30 7 115 South Central Region: Arkansas Kansas Louisiana Missouri Oklahoma Texas Total South Central Southeast Region: Alabama Florida Georgia Kentucky Mississippi North Carolina South Carolina Tennessee Total Southeast West Region: Alaska Arizona California Colorado Idaho Montana Nevada New Mexico Oregon Utah Washington Wyoming Total West Total Kohl's 5 23 50 30 7 115 66 39 18 45 26 7 4 58 3 40 306 Number of Stores Net 2013 2014 Change 66 39 18 45 26 7 4 58 3 40 306 21 5 25 11 38 51 3 1 155 1 (1) 22 5 25 11 38 50 3 1 155 11 8 12 6 26 10 85 147 2 1 3 8 12 8 26 11 85 150 14 53 35 16 5 31 15 20 189 1 1 2 14 53 35 17 5 31 16 20 191 1 26 128 24 5 2 12 5 11 12 18 2 246 1,158 (2) 1 (1) 4 1 26 126 24 5 2 12 5 11 12 19 2 245 1,162 Table of Contents Number of Stores by Store Type Net 2013 2014 Change Prototype Small 993 165 1,158 (5) 9 4 Number of Stores by Ownership Net 2013 2014 Change 988 174 1,162 Owned Leased* Operating lease On-balance sheet Total leased 2014 * Includes locations where we lease the land and/or building Number of Stores by Location 2013 Strip centers Community & regional malls Freestanding 777 85 296 1,158 Net Change 3 1 4 412 413 1 246 500 746 1,158 4 (1) 3 4 250 499 749 1,162 780 85 297 1,162 Distribution Centers The following table summarizes key information about each of our distribution centers. Year Opened 1994 1997 1999 2001 2001 2002 2002 2005 2006 2008 2010 780,000 420,000 540,000 540,000 1,200,000 605,000 575,000 560,000 360,000 328,000 970,000 2011 2012 Findlay, Ohio Winchester, Virginia Blue Springs, Missouri Corsicana, Texas Monroe, Ohio* Mamakating, New York San Bernardino, California Macon, Georgia Patterson, California Ottawa, Illinois San Bernardino, California* Edgewood, Maryland* DeSoto, Texas* Square Footage 1,450,000 1,200,000 * On-line fulfillment centers We own all of the distribution centers except Corsicana, Texas, which is leased. Corporate Facilities We own our corporate headquarters in Menomonee Falls, Wisconsin. We also own or lease additional buildings and office space which are used by various corporate departments, including our credit operations. Item 3. Legal Proceedings We are not currently a party to any material legal proceedings, but are subject to certain legal proceedings and claims from time to time that arise out of the conduct of our business. Item 4. Mine Safety Disclosures Not applicable 12 Table of Contents PART II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities (a) Market information Our Common Stock has been traded on the New York Stock Exchange ("NYSE") since May 19, 1992, under the symbol \"KSS.\" The prices in the table set forth below indicate the high and low sales prices of our Common Stock per the New York Stock Exchange Composite Price History and our quarterly cash dividends per common share for each quarter in 2014 and 2013. High Fourth Quarter Third Quarter Second Quarter First Quarter 2014 Low $61.54 62.50 55.89 57.89 $54.95 53.74 51.00 49.09 Dividend $0.39 0.39 0.39 0.39 High 2013 Low $58.47 57.04 54.16 49.32 $49.97 49.84 47.00 45.21 Dividend $0.35 0.35 0.35 0.35 On February 25, 2015, our Board of Directors approved a dividend of $0.45 per share which will be paid on March 25, 2015 to shareholders of record as of March 11, 2015. In 2014, we paid aggregate cash dividends of $317 million. (b) Holders As of March 11, 2015, there were approximately 4,200 record holders of our Common Stock. (c) Securities Authorized For Issuance Under Equity Compensation Plans See the information provided in the \"Equity Compensation Plan Information\" section of the Proxy Statement for our May 14, 2015 Annual Meeting of Shareholders, which information is incorporated herein by reference. 13 Table of Contents (d) Performance Graph The graph below compares our cumulative five-year shareholder return to that of the Standard & Poor's 500 Index and a Peer Group Index that is consistent with the retail peer group used in the Compensation Discussion & Analysis section of our Proxy Statement for our May 14, 2015 Annual Meeting of Shareholders. The Peer Group Index was calculated by Capital IQ, a Standard & Poor's business and includes Bed, Bath & Beyond Inc.; The Gap, Inc.; J.C Penney Company, Inc.; Limited Brands, Inc.; Macy's, Inc.; Nordstrom, Inc.; Ross Stores, Inc.; Sears Holding Corporation; Target Corporation; and The TJX Companies, Inc. The Peer Group Index is weighted by the market capitalization of each component company at the beginning of each period. The graph assumes an investment of $100 on January 30, 2010 and reinvestment of dividends. The calculations exclude trading commissions and taxes. Company / Index Jan 30, 2010 Jan 29, 2011 Kohl's Corporation S&P 500 Index Peer Group Index $100.00 100.00 100.00 $101.65 121.26 118.35 Jan 28, 2012 $94.58 127.72 140.64 Feb 2, 2013 $95.78 150.20 169.67 Feb 1, 2014 Jan 31, 2015 $108.30 180.70 187.33 $131.35 206.41 239.18 (e) Recent Sales of Unregistered Securities; Use of Proceeds from Registered Securities We did not sell any equity securities during 2014 which were not registered under the Securities Act. (f) Purchases of Equity Securities by the Issuer and Affiliated Purchasers In 2012, our Board of Directors authorized the repurchase of $3.5 billion of our shares of common stock. Purchases under the repurchase program may be made in the open market, through block trades and other negotiated transactions. We expect to execute the share repurchase program primarily in open market transactions, subject to market conditions. There is no fixed termination date for the repurchase program, and the program may be suspended, discontinued or accelerated at any time. 14 Table of Contents The following table contains information for shares repurchased and shares acquired from employees in lieu of amounts required to satisfy minimum tax withholding requirements upon the vesting of the employees' restricted stock during the three fiscal months ended January 31, 2015: Period Total Number of Shares Purchased During Period Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (Dollars In Millions) November 2 - November 29, 2014 November 30, 2014 - January 3, 2015 January 4 - January 31, 2015 Total 942,839 713,532 494,521 2,150,892 15 $ 56.61 58.19 60.02 $ 57.92 941,999 712,237 466,162 2,120,398 $ $ 1,714 1,673 1,645 1,645 Table of Contents Item 6. Selected Consolidated Financial Data The selected consolidated financial data presented below should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this document. The Statement of Income and Balance Sheet Data have been derived from our audited consolidated financial statements. 2014 2013 2012 (d) 2011 2010 (Dollars in Millions, Except Per Share and Per Square Foot Data) Statements of Income Data: Net sales Cost of merchandise sold Gross margin Selling, general and administrative expenses Depreciation and amortization Operating income Interest expense, net Income before income taxes Provision for income taxes Net income Basic earnings per share Diluted earnings per share Dividends per share Operating Data: Net sales growth Comparable sales growth (a) Net sales per selling square foot (b) As a percent of sales: Gross margin Operating income Return on average shareholders' equity (c) Total square feet of selling space (in thousands) Number of stores (end of period) Balance Sheet Data: Working capital Total assets Long-term debt Capital lease and financing obligations Shareholders' equity Cash flow from operations Capital expenditures $19,023 12,098 6,925 4,350 886 1,689 340 1,349 482 $ 867 $ 4.28 $ 4.24 $ 1.56 $ $ 19,031 12,087 6,944 4,313 889 1,742 338 1,404 515 $ 889 $ 4.08 $ 4.05 $ 1.40 % (0.3)% 226 $ 36.4 % 8.9 % 14.7 % 83,750 1,162 $ 2,839 14,431 2,793 1,968 5,991 2,024 682 $19,279 12,289 6,990 4,267 833 1,890 329 1,561 575 $ 986 $ 4.19 $ 4.17 $ 1.28 (1.3)% (1.2)% 227 $ 36.5 % 9.2 % 14.8 % 83,671 1,158 $ 2,556 14,357 2,792 2,069 5,978 1,884 643 $ 18,804 11,625 7,179 4,243 778 2,158 299 1,859 692 $ 1,167 $ 4.33 $ 4.30 $ 1.00 2.5% 0.3% 231 $ 36.3% 9.8% 15.8% 83,098 1,146 $ 2,184 13,905 2,492 2,061 6,048 1,265 785 $ 18,391 11,359 7,032 4,190 750 2,092 304 1,788 668 $ 1,120 $ 3.69 $ 3.66 2.2% 0.5% 232 $ 38.2% 11.5% 16.4% 82,226 1,127 $ 2,222 14,148 2,141 2,103 6,508 2,139 927 7.1% 4.4% 231 38.2% 11.4% 14.1% 80,139 1,089 $ 2,888 14,891 1,894 2,104 7,850 1,750 801 (a) Comparable sales growth is based on sales for stores (including relocated or remodeled stores) which were open throughout both the full current and prior year periods and omni-channel sales. Fiscal 2013 comparable sales growth compares the 52 weeks ended February 1, 2014 to the 52 weeks ended January 26, 2013. Fiscal 2012 comparable sales growth compares the 52 weeks ended January 26, 2013 to the 52 weeks ended January 28, 2012. (b) Net sales per selling square foot includes on-line sales and stores open for the full current period. 2012 excludes the impact of the 53rd week. (c) Average shareholders' equity is based on a 5-quarter average. (d) Fiscal 2012 was a 53-week year. During the 53rd week, total sales were $169 million; selling, general and administrative expenses were approximately $30 million; interest was approximately $2 million; net income was approximately $15 million and diluted earnings per share was approximately $0.06. 16 Table of Contents Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Executive Summary As of January 31, 2015, we operated 1,162 family-focused, value-oriented department stores and a website (www.Kohls.com) that sell moderately-priced private label, exclusive and national brand apparel, footwear, accessories, beauty and home products. Our stores generally carry a consistent merchandise assortment with some differences attributable to regional preferences. Our website includes merchandise which is available in our stores, as well as merchandise which is available only on-line. In the first quarter of 2014, we introduced a multi-year strategic framework which we refer to as "the Greatness Agenda". It is built on five pillars - amazing product, incredible savings, easy experience, personalized connections and winning teams. All of the Greatness Agenda initiatives are designed to increase sales, primarily by increasing the number of customers that shop at our stores and on-line. To ensure newness and excitement in our merchandise assortment, we added new brands, including Fitbit, IZOD, Juicy Couture, Gaiam, Nespresso, PUMA and various Jumping Beans collections featuring Disney characters, and improved the beauty department in many of our stores. We renewed our emphasis on national brands as the name recognition of these brands often increases customer traffic. We improved the Kohl's mobile shopping experience and personalized our marketing. We also launched the Yes2You rewards program which has increased customer loyalty by providing future discounts based on past purchases. We knew that 2014 would be a transitional year as we implemented Greatness Agenda initiatives. Though we are early in the program, we are pleased with the results that we saw in its first year. Comparable sales and number of transactions improved throughout the year. In the fourth quarter, both comparable sales and number of transactions were higher than the prior year. Net sales for the year were $19.0 billion, consistent with 2013. Comparable sales decreased 0.3%. Gross margin as a percentage of sales was 36.4% in 2014, 8 basis points lower than in 2013. Merchandise margin increased, but was more than offset by higher shipping losses attributable to growth in the number of on-line orders. Selling, general and administrative ("SG&A") expenses increased both in dollars and as a percentage of sales. We increased our marketing expenses to launch our new loyalty program and to increase customer traffic and invested in omnichannel technology initiatives. Variable expenses, including store payroll, were well managed throughout the year. For the year, net income was $867 million, 2% lower than last year, and diluted earnings per share was $4.24, an increase of 5% over 2013. We generated $1.2 billion of free cash flow in 2014, a 9% increase over 2013. We ended the year with $1.4 billion of cash and cash equivalents. See Results of Operations and Liquidity and Capital Resources for additional details about our financial results and how we define comparable sales and free cash flow (a non-GAAP financial measure). 17 Table of Contents 2015 Outlook Our current expectations for 2015 are as follows: Total sales Comparable sales Gross margin as a percent of sales SG&A Depreciation Interest Effective tax rate Earnings per diluted share Capital expenditures Share repurchases: Total repurchases Cost per share Increase 1.8 - 2.8% Increase 1.5 - 2.5% Increase 0 - 20 bps Increase 1.5 - 2.5% $940 million $335 million 37% $4.40 - $4.60 $800 million $1 billion $70.00 Results of Operations Net Sales. As our omni-channel strategy continues to mature, it is increasingly difficult to distinguish between a "store" sale and an "E-Commerce" sale. Our website increases store sales as in-store customers have often pre-shopped on-line before shopping in the store. Below is a list of some omni-channel examples: Stores increase on-line sales by providing customers opportunities to view, touch and/or try on physical merchandise before ordering on-line. On-line purchases can easily be returned in our stores. Kohl's Cash coupons and Yes2You rewards can be earned and redeemed on-line or in store regardless of where they were earned. In-store customers can order from on-line kiosks in our stores. Order on-line and pick-up in store is available in approximately 100 stores and is expected to be available in all stores by the second quarter of 2015. Customers who utilize our mobile app while in the store may receive mobile coupons to use when they check out. On-line orders may be shipped from a dedicated E-Commerce fulfillment center, a store, a retail distribution center, direct ship vendors or any combination of the above. Because we no longer have a clear distinction between "store" sales and "E-Commerce" sales, we do not separately report E-Commerce sales. Comparable sales include sales for stores (including relocated or remodeled stores) which were open during both the current and prior year periods. We also include omni-channel sales in our comparable sales. 18 Table of Contents The following table summarizes net sales: 2014 2013 $ 19,023 Net sales (In Millions) Increase (decrease) in sales: Total Comparable (a) Net sales per selling square foot (b) $ $19,031 % (0.3)% 226 $ 2012 $ 19,279 (1.3)% (1.2)% 227 $ 2.5% 0.3% 231 (a) Includes sales for stores (including relocated or remodeled stores) which were open throughout both the full current and prior year periods and omni-channel sales. 2013 compares the 52 weeks ending February 1, 2014 to the 52 weeks ending January 26, 2013. 2012 compares the 52 weeks ended January 26, 2013 to the 52 weeks ended January 28, 2012. (b) Net sales per selling square foot includes on-line sales and stores open for the full current period. 2012 excludes the impact of the 53rd week. The following table summarizes the changes in net sales: 2014 $ 2013 % $ % (Dollars in Millions) Net sales - prior year Comparable sales (a) New stores and other revenues Net change before 53rd week Net sales in 53rd week Total decrease in net sales Net sales - current year $ $ 19,031 (54) 46 (8) (8) 19,023 $ (0.3)% % % $ 19,279 (233) 154 (79) (169) (248) 19,031 (1.2)% (0.4)% (1.3)% (a) 2013 compares the 52 weeks ending February 1, 2014 to the 52 weeks ending January 26, 2013. Drivers of the changes in comparable sales were as follows: 2014 2.8 % (0.8) 2.0 (2.3) (0.3)% Selling price per unit Units per transaction Average transaction value Number of transactions Comparable sales 2013 (0.4)% 1.5 1.1 (2.3) (1.2)% The increase in selling price per unit was primarily due to increases in national brand merchandise penetration. Units per transaction decreased as customers purchased fewer items in response to the higher prices. Transactions improved throughout the year and were higher in the fourth quarter as the Greatness Agenda initiatives gained traction. From a regional perspective, including on-line originated sales, the West, Southeast, and Midwest reported higher sales, which were offset by sales decreases in the Northeast, Mid-Atlantic, and South Central regions. By line of business, Children's, Footwear, and Men's reported sales increases. All Children's categories reported sales increases, with toys reporting the largest increase. Accessories, led by bath and beauty, was slightly above the Company average, primarily as a result of our beauty remodel program. Home and Women's both underperformed the Company average. Active was the strongest category in the Men's,Women's, and Footwear businesses. Electrics and luggage reported the highest sales increases in the Home business. Net sales per selling square foot (which includes on-line sales and stores open for the full current period and includes omni-channel), decreased $1 to $226 in 2014. The decrease is consistent with the decrease in comparable sales. 19 Table of Contents Net sales for 2013 decreased $248 million from 2012 and comparable sales decreased 1.2%. From a line of business perspective, Children's, Men's and Home outperformed the Company average in 2013. Comparable sales in Women's was consistent with the Company average, while Accessories and Footwear were below the Company average. All regions, except the West, which reported sales consistent with 2012, reported modest sales decreases. Gross margin. 2014 2013 2012 (Dollars in Millions) $ 6,925 $ 6,944 $ 6,990 36.4% 36.5% 36.3% Gross margin As a percent of net sales Gross margin includes the total cost of products sold, including product development costs, net of vendor payments other than reimbursement of specific, incremental and identifiable costs; inventory shrink; markdowns; freight expenses associated with moving merchandise from our vendors to our distribution centers; shipping and handling expenses of on-line sales; and terms cash discount. Our gross margin may not be comparable with that of other retailers because we include distribution center costs in selling, general and administrative expenses while other retailers may include these expenses in cost of merchandise sold. Gross margin as a percentage of sales decreased 8 basis points from 2013 to 2014. Merchandise sales margin increased 9 basis points. Shipping losses reduced margin 22 basis points more in 2014 than in 2013. Gross margin as a percentage of sales increased approximately 20 basis points in 2013 over 2012. The increase included a 45 basis point increase in our merchandise sales margin. This increase was primarily due to modest decreases in apparel costs in 2013. Partially offsetting this increase were higher shipping losses in our on-line business. The losses were due to higher costs to ship merchandise during the fourth quarter holiday season and to growth in our on-line business. Selling, general and administrative expenses. 2014 2013 2012 (Dollars in Millions) $ 4,350 $ 4,313 $ 4,267 22.9% 22.7% 22.1% Selling, general, and administrative expenses As a percent of net sales SG&A expenses include compensation and benefit costs (including stores, headquarters, buying and merchandising and distribution centers); occupancy and operating costs of our retail, distribution and corporate facilities; freight expenses associated with moving merchandise from our distribution centers to our retail stores and among distribution and retail facilities; advertising expenses, offset by vendor payments for reimbursement of specific, incremental and identifiable costs; net revenues from our Kohl's credit card operations; and other administrative revenues and expenses. We do not include depreciation and amortization in SG&A. The classification of these expenses varies across the retail industry. The following table summarizes the changes in SG&A by expense type: 2014 2013 (Dollars In Millions) $ Corporate expenses Marketing costs, excluding credit card operations Distribution costs Store expenses Net revenues from credit card operations SG&A in 53rd week Total increase $ 34 21 10 (4) (24) 37 $ $ 32 9 27 27 (19) (30) 46 Many of our expenses, including store payroll and distribution costs, are variable in nature. These costs generally increase as sales increase and decrease as sales decrease. We measure both the change in these variable expenses and the expense as a percent of sales. If the expense as a percent of sales decreased from the prior year, the expense "leveraged" and indicates that the expense was well-managed or effectively generated additional sales. If the expense as a percent of sales 20 Table of Contents increased over the prior year, the expense "deleveraged" and indicates that sales growth was less than expense growth. SG&A as a percent of sales increased, or "deleveraged," by approximately 20 basis points in 2014. IT spending, which is included in corporate expenses, increased over 2013 due to growth and infrastructure investments related to our omni-channel strategy. Corporate expenses also increased due to higher incentive compensation. Marketing costs increased in 2014 as we increased our spending in digital and broadcast. In addition, we launched our loyalty program nationwide in the third quarter of 2014. The increased spending was partially offset by a decrease in spending in newspaper inserts and direct mail. Distribution costs were $281 million for 2014, $271 million for 2013 and $245 million for 2012. Distribution costs increased in 2014 due to higher distribution and fulfillment costs related to our growing on-line business, particularly in the fourth quarter. The decrease in store expenses are the result of lower operating expenses, such as common area maintenance, utilities, and janitorial. Revenues from our credit card operations were $430 million in 2014, $406 million in 2013 and $388 million in 2012. The increases in net revenues from credit card operations are the result of higher finance charge revenues and late fees due to growth in the portfolio. Partially offsetting these increases were higher bad debt expenses and operational costs. The increased operating costs were primarily due to growth in the portfolio. SG&A for 2013 increased $46 million, or 1% over 2012. As a percentage of sales, SG&A increased, or "deleveraged", by approximately 60 basis points in 2013. The increase in SG&A was due primarily to higher distribution costs, increased marketing, investments in technology and infrastructure related to our on-line business. These increases were partially offset by lower incentive costs. Other Expenses. 2014 $ Depreciation and amortization Interest expense, net Provision for income taxes Effective tax rate 2013 2012 (Dollars In Millions) 886 $ 889 $ 833 340 338 329 482 515 575 35.7% 36.7% 36.8% Depreciation and amortization were consistent in 2014 and 2013, as higher IT amortization was offset by a decrease due to maturing stores. The increase in depreciation and amortization in 2013 was primarily due to our on-line fulfillment centers and IT amortization. Net interest expense increased $2 million, or 1%, in 2014 and increased $9 million, or 3%, in 2013. The increases in interest expense are primarily due to higher outstanding long-term debt following the September 2013 debt issuance. The decreases in the effective tax rate for 2014 and 2013 were primarily due to favorable settlements of state tax audits in both years. Inflation Although we expect that our operations will be influenced by general economic conditions, including food, fuel and energy prices, and by costs to source our merchandise, we do not believe that inflation has had a material effect on our results of operations. However, there can be no assurance that our business will not be impacted by such factors in the future. 21 Table of Contents Liquidity and Capital Resources The following table presents the primary cash requirements and sources of funds. Cash Requirements Operational needs, including salaries, rent, taxes and other costs of running our business Capital expenditures Inventory (seasonal and new store) Share repurchases Dividend payments Source of Funds Cash flow from operations Short-term trade credit, in the form of extended payment terms Line of credit under our revolving credit facility Our working capital and inventory levels typically build throughout the fall, peaking during the November and December holiday selling season. Share repurchases are discretionary and can be discontinued at any time should we require cash for other uses. The following table includes cash balances and changes. 2014 2013 (In Millions) 2012 Cash and cash equivalents $ 1,407 Net cash provided by (used in): Operating activities Investing activities Financing activities $ 2,024 $ 1,884 $ 1,265 (593) (623) (660) (995) (827) (1,273) Free Cash Flow (a) $ 1,234 $ 971 $ 1,127 $ $ 537 381 (a) See the Free Cash Flow discussion later in this Liquidity and Capital Resources section for additional discussion of this non-GAAP financial measure. Operating activities. Cash provided by operations increased $140 million, or 7%, in 2014 to $2.0 billion. Merchandise inventory decreased $60 million in 2014 to $3.8 billion. Inventory per store decreased 2% and units per store decreased 3% from 2013. Accounts payable as a percent of inventory was 39.6% at January 31, 2015, compared to 35.2% at February 1, 2014. The increase reflects higher receipt volume and timing of payments to some of our vendors. Cash provided by operations increased $619 million to $1.9 billion in 2013. The increase was primarily due to reduced inventory growth and to lower bonus and other payroll-related liability payments in 2013. Investing activities. Net cash used in investing activities decreased $30 million to $593 million in 2014. Capital expenditures totaled $682 million in 2014, a $39 million increase over 2013. The increase in capital spending is primarily due to the expansion of our corporate campus, increased IT spending and the purchase and build out of a call center in Texas, partially offset by decreased new store spending. Proceeds from sales of investments in auction rate securities totaled $82 million in 2014 and $1 million in 2013. All of our auction rate securities have now been sol