Retail department store chain Kohl’s Co. (NYSE: KSS) could be an end-of-year turnaround story for 2023. The company had disastrous earnings in the last quarter of 2022 heading into the new year. Kohl’s was bogged down with bloated inventory and a miscalculated product mix as the company failed to pivot for the post-pandemic return to office trend. However, the company onboarded a new CEO, Tom Kingsbury, on Jan. 3, 2023.
Kingsbury is a 30-year retail industry veteran, previously leading Burlington Stores Inc. (NASDAQ: BURL) as its CEO from 2013 to 2022. The company has made strong progress in its turnaround to become a compelling investment for value investors. Here are four reasons that Kohl's stock should be on your shopping list going into the holiday season.
1. Inventory Improvement
After a strong pandemic performance in 2021, retailers faced normalization hangover issues, causing inventory levels to swell as consumers tightened their spending budgets hurt by high inflation. This resulted in depressed margins due to heavy promotions and discounting to get consumers to bite.
This was notable among most retailers during the 2022 holiday shopping season. Kohl's had disastrous inventory bloat, resulting in margin shrinkage. In its Q2 2023 earnings report, the company reported an inventory decline of 14% YoY.
Gross margin shrinkage was slowed down to just 1 basis point. This was a vast improvement from Q4 2022, when gross margins collapsed 1,016 bps to 23% of net sales, comprised of 200 bps in inflation impact and 750 bps in clearance markdowns.
2. Earnings Improvement
On Aug. 23, 2023, Kohl’s released its fiscal second-quarter 2023 results for July 2023. The company reported an adjusted earnings-per-share (EPS) profit of 52 cents, more than double analyst estimates of 23 cents—a 29-cent beat. Revenues fell 4.8% YoY to $3.68 billion, missing consensus analyst estimates of $3.76 billion. Compared sales fell 5% for the quarter. Operating cash flow was $430 million.
Kohl’s reaffirmed full-year 2023 guidance of EPS between $2.10 to $2.70 versus $2.38 consensus estimates. Revenues are expected to fall 2% to 4% YoY to $16.51 billion to $16.86 billion versus $17.09 billion analyst estimates.
3. Compelling Valuation
Kohl’s shares are trading down 13.3% year-to-date (YTD). Shares are trading at just 8.76X forward earnings, 0.13X sales with a cash flow multiple of 2.3X. The stock is capable of a short squeeze on any bullish news due to its hefty 22.63% short interest. Its 9.39% annual dividend yield is very compelling.
Most compelling is that Kohl's owns approximately 400 of its 1,162 stores. Its real estate holdings were estimated between $7 billion and $9 billion. In June 2022, the Franchise Group Inc. (NYSE: FRG) proposed to acquire Kohl's for $60 per share by leveraging its real estate holdings. The company had a rumored 25 bidders at the time. This also raises the potential for acquisition talks to spawn at these depressed price levels.
Kohl's has a $2.3 billion market cap, while its real estate is estimated to be worth $8 billion with $1.67 in long-term debt. Real estate holdings among big retailers are quite common. Marcy’s Inc. (NYSE: M) has a $3.1 billion market cap with nearly $21 billion in estimated real estate holdings. However, most of Macy's department stores are in shopping malls, which can be detrimental.
4. Second-Half Turnaround Story
CEO Kingsley is making progress with his turnaround strategy. They opened at additional 200 Sephora at Kohl’s shops in the second quarter. While the retail shopping environment has been uncertain, 95% of Kohl's stores are not attached to regional mall locations, and it owns 35% of its stores.
This enables them to raise additional capital by financing through sale-leaseback options. Kingsley said, “Many of our strategic efforts are just underway, which we expect will contribute incrementally in the back half of the year, and even more so in 2024 and beyond.”
Kohl's analyst ratings and price targets are at MarketBeat. Kohl’s peers and competitor stocks can be found with the MarketBeat stock screener.
Weekly Rounding Top
The weekly candlestick chart on KSS illustrates the rounding top that commenced in May 2023 at $17.97, rising to $29.09 by July 2023 and falling back down to retest the $17s by October 2023. After six consecutive lower low candles, KSS formed a weekly market structure low (MSL) buy trigger at $21.37 as the weekly relative strength index (RSI) oscillator rose towards the 50-band. Pullback support levels are $20.00, $19.43, $17.68 and $17.12.
