Is Kohl’s stock overvalued or undervalued? (NYSE: KSS)

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Recently, the Wall Street Journal and the New York Post reported that Sycamore and Hudson’s Bay are preparing an offer for Kohl’s Corporation (NYSE: KSS) with an offer in the $60 range. This news about the proposed takeover came as no surprise as earlier this month Kohl’s revealed that its adviser Goldman Sachs (GS) had engaged with a number of private, strategic and real estate investors. concerning a potential type of real estate purchase or sale operation under sale-leaseback. Kohl’s has come under attack from various activist investors like Starboard Value, Acacia Research (ACTG) and Macellum Advisors for considering potential alternatives to enhance shareholder value. Real estate company Oak Street Real Estate has also expressed interest in buying the department store chain’s properties.

Kohl’s outlook

On the business front, after recording a decline of around 20% in sales in 2020 due to Covid-related disruptions, the company’s sales have recovered, showing an increase of around 21.8% in 2021. KSS revenue was helped by demand fueled by the relaunch and fewer promotions. operations last year, resulting in increased revenue and operating margin benefits. For fiscal 2022, management expects sales growth of 2% to 3%, helped by the implementation of the various strategies, in particular the expansion of beauty products through the Sephora brand as well as the strengthening of their active and casual clothing assortments.

On the athleisure side, Kohl’s is changing direction to become a lifestyle brand that meets the changing needs of consumers who lead more laid-back and active lifestyles. It has strengthened its relationships with top national brands such as Nike (NKE), Under Armor (UAA), Adidas (OTCQX:ADDYY) (OTCQX:ADDDF) and Champion, and also leverages its strong private label portfolio , which includes Tek Gear and Flex. The company replaces the active catalog and positions it at the front of the store. With an expanded product offering and repositioning strategies, the company is well positioned to take advantage of this growing trend in the active category. The results of these efforts are already visible and management reported strength across all active categories (women, men and children as well as footwear) in the fourth quarter of 2021.

In addition to athleisure, Kohl’s is also expanding its outdoor offerings led by brands like Eddie Bauer, Lands’ End and Colombia. He is launching a line of premium denim products from Buffalo Jeans and Levi’s SilverTab to expand his casual lifestyle portfolio. Kohl’s is underutilized in the dress category and dresses rank among the most searched items on a digital platform. Thus, the company is expanding its offerings to Sonoma, SO, Nine West, Lauren Conrad and Simply Vera Vera Wang with Tommy Hilfiger and Calvin Klein, to create a clothing destination in its stores.

The company is also focusing its efforts on improving its women’s clothing category. As a result, they teamed up with Draper James RSVP, a collection from the Reese Witherspoon-founded brand specializing in women’s clothing and accessories. Sonoma, Kohl’s private flagship brand, could also play a key role in this initiative. It already accounts for $1 billion in total sales, with women accounting for half of those sales volumes.

The Kohl’s Women category will also benefit from the company’s recent partnership with the Sephora brand. In 200 stores, he built 2,500 square foot Sephora stores. These stores reported positive results, with sales increases of single digit percentages and new customers flocking to the stores. According to management, 25% of Sephora’s total customers were new to Kohl’s. In the coming years, the Sephora brand is expected to generate $2 billion in sales. They plan to open at least 850 Sephora-branded stores over the next two years. I believe this will drive the company’s comparable store sales for years to come.

While the company’s revenue outlook looks encouraging, its margins are expected to decline in FY22. The company’s FY22 operating margin guidance of 7.2% to 7.5% indicates a decline of about 129 basis points year-on-year at the midpoint. Management expects an impact of approximately 100 basis points on GM due to higher freight costs and inflation, partially offset by benefits from procurement initiatives. The company’s investments in Sephora stores and rising labor costs and wages would also impact S,G&A costs and operating margins.

Global management expects FY22 EPS to be between $7 and $7.5, which at the midpoint is slightly lower than FY21 annual EPS of $7.33 .

Is Kohl’s stock overvalued or undervalued?

Kohl’s stock is trading at ~8.72x the forward adjusted P/E and its trailing twelve-month (non-GAAP) P/E is ~8.55x. It’s a reduction from its historic levels and it’s not expensive. However, Kohl’s is not alone in having such low valuations. Almost all retailers facing significant online competition from Amazon (AMZN) or similar e-commerce companies are trading at similar valuations. Macy’s (M) is trading at ~6.29x forward earnings, Nordstrom (JWN) is trading at ~8.20x and Marks and Spencer Group plc (OTCQX:MAKSY) is trading at ~8.40x.

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Kohl’s P/E Rating (Looking for Alpha)

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Kohl’s evaluation compared to peers (Looking for Alpha)

KSS’s valuation looks even more attractive when looking at its free cash flow profile. Over the past five years, the company has generated average FCF of approximately $1.1 billion. Over the next three years, the company is expected to generate approximately $2.5 billion in additional free cash flow. I believe the company’s healthy FCF attracts diverse bidders and the take-out valuations offered in the $60 or $70 range seem plausible. Management has already rejected buyout offers at $64 and $65. Thus, the stock looks undervalued in the $60 range.

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KSS free cash flow (Introducing Kohl’s Investor Day)

Key measures of KSS actions

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Kohl’s Net Sales Growth and Margins (Company Data, GS Analytics Research)

Looking at the company’s net sales growth (excluding credit card revenue), it increased slightly in 2018 and declined slightly in 2019. However, Covid led to a sharp drop in revenue in 2020 with a recovery just as strong in 2021. the case of gross and operating margins. Interestingly, the company’s margins exceeded their pre-Covid levels in fiscal 2021 due to strong demand. However, if we look at the guidance for fiscal year 2022, operating margins are expected to be around 7.35% at the midpoint, which is only slightly higher than fiscal year 2018 levels. of company stores remained more or less the same around the current level of 1,174.

Do analysts like KSS stocks?

If we look at Wall Street ratings, most analysts have neutral or hold ratings on the stock. Although the stock price is attractive, I think most sell-side analysts are wary of the threat of e-commerce.

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Kohl’s Wall Street Ratings (Looking for Alpha)

However, Quant Ratings is bullish and SA Authors also has a positive view on the stock.

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Kohl’s Quantitative Ratings (Looking for Alpha)

Is KSS stock a buy, sell or hold?

I believe KSS is a buy at current levels. With several activists interested in the company and management itself involving Goldman to examine strategic alternatives, I think there is a strong chance that we will eventually see a takeover. Earlier this year, the company received an offer of $64 per share from a consortium led by Starboard Value and Acacia Research. Sycamore Partners then offered to buy the company for at least $65 per share. Management rejected these offers saying that these offers do not adequately reflect the value of the business in light of its future growth and cash flow generation. As investor interest continues, we will likely see a higher bid in the high $60s or low $70s. Therefore, I think the company is a buy that is trading in the $60 range.

James T. Quintero