Only a year ago, the question was whether Kohl’s (NYSE:KSS) deserved a bid in excess of $70. Now, investors don’t even want to pay $25 for the off mall department store retailer. My investment thesis is ultra bullish on the retailer stock not priced for elevated profits in the future.
Pre-Covid Levels
Like a lot of stocks, any boosts from the covid period have been completely eliminated. Kohl’s was a struggling department store retailer that figured out how to compete against online retailers like Amazon during covid shutdowns due to improving shipping options. The results produced during 2021 weren’t elevated by sales that aren’t achievable in the a return to a normal economy in 2023 and beyond.
Kohl’s ended 2019 with an EPS of only $4.86 and now the company plans to earn just $3.00 during 2022. The apparel sector has been hit hard with excess inventory and a promotional environment during the holidays leading to the difficult year.
The retailer is in a far better position to ride the business higher in 2023 with the Sephora partnership in full swing next year. Not to mention, Kohl’s still owns the very valuable real estate estimated at worth $7+ billion, in excess of the current stock valuation below $3 billion.
Activist Macellum Capital wanted Kohl’s to engage in a sales-leaseback transaction to boost EPS by 55% via share buybacks. At the time, the investment firm estimated the retailer could produce an EPS in excess of $13.
For FY19, Kohl’s generate an EPS of $4.86 following $5.60 in FY18 even with negative comp sales. The retailer originally guided to FY20 EPS of only $4.40 based on further weak comp sales of negative to flat.
Remember, the stock trades at $25 despite the company being better positioned now than when Kohl’s was earning $4 to $5 per share. The department store retailer just faces a tougher retail environment to end 2022.
Back To 8%
Kohl’s changed shipping options, improved inventory management and cut SG&A costs. The retailer now has an operating margin goal of up to 8%, actually below the record FY21 levels. The retailer actually provides targets where the operating margin could reach 10% with gross margins at 37% and SG&A down to only 27%.
The company would struggle to hit operating margins in the 7% range in pre-covid years. The question for investors is whether Kohl’s can turn in margins above prior year levels after a year with an EPS of only $3.
Kohl’s produced $20 billion in revenues in FY19 and analysts only forecast $17.5 billion for FY22. Even with the snap back in FY21, the department store only recaptured a portion of the lost revenues during covid and the Sephora business is forecast to add $2.0 billion in additional revenues to the business.
The stock opportunity is that Kohl’s is able to recapture a lot of the lost revenues plus adding the Sephora business.
Due to all of the share buybacks in the last year, Kohl’s has reduced the share count to only 119 million for the October quarter. The department store retailer earned nearly $5 per share back in FY19 based on 158 million shares outstanding.
The same income level of $769 million in FY23 would now generate an EPS of $6.46 now. A simple 15x EPS multiple would place the stock price at $97 and Kohl’s has the potential to utilize real estate and other asset to boost profits in future years.
Takeaway
The key investor takeaway is that Kohl’s isn’t even valued correctly based on the earnings stream of a disaster year and the large real estate holdings. The department store retail has the potential to top peak FY21 EPS numbers due to a much lower diluted share count and better operations to combat online competition.
Investors should use the current weakness to load up on Kohl’s knowing better times are ahead.
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