Shares of Kohl’s (NYSE:KSS) soared on Tuesday after the department store retailer reported fourth quarter numbers which topped analyst expectations, and included a fiscal 2019 profit guide was came in well ahead of Street estimates. Investors celebrated the strong numbers and good guide, and they bid KSS stock up more than 5% in response.
Source: Hailey Pollard via Flickr
This post-earnings pop continues what has been a multimonth rally for KSS stock. Since late 2018, Kohl’s stock is up more than 20%. Against that backdrop, one could reasonably argue that the stock needs to take a breather here after coming so far, so fast.
On the other hand, KSS stock is still more than 10% off its mid-2018 highs. Against that backdrop, one could reasonably argue that this rally has runway to continue for the foreseeable future.
Which backdrop should you pay attention to more? The former. Kohl’s is a great and stable company. They have a unique value prop as an off-mall, off-price department store retailer with some interesting partnerships with Amazon (NASDAQ:AMZN), Under Armour (NYSE:UA, NYSE:UAA), and now Planet Fitness (NYSE:PLNT). But, it’s also a slow-growth company with margins that are largely topped out. As such, profit growth over the next several years will be tepid.
Tepid profit growth is priced into KSS stock here and now. Higher prices simply aren’t warranted considering the company’s low growth outlook. As such, the best way to look at Kohl’s is as a low-growth, stable retail giant that has finally popped back to fair value. That isn’t a great investment proposition. But, with a near 4% yield, it isn’t an awful investment prop, either.
Kohl’s Is Stable
In the big picture, Kohl’s is no longer being victimized by the e-commerce revolution. Instead, the company has found its niche during this retail disruption process as an off-price, off-mall retailer with all-in-one product offering convenience. This niche has staying power and enduring value in today’s retail landscape.
The numbers speak to this. Unlike other major retailers, Kohl’s never went through a disastrous period of large and consistently negative comparable sales growth and/or huge margin compression. Instead, comps dipped into slightly negative territory for a while. Now, they are back into positive territory. Gross margins fell back some, but not a lot. Now, they are rebounding slowly.
Going forward, top- and bottom-line growth will stable due to Kohl’s enduring value prop in an omni-channel retail landscape. Growth will also be slightly positive thanks to certain unique growth initiatives, including partnerships with Amazon, Under Armour, and Planet Fitness, the sum of which will further differentiate the Kohl’s value prop, increase customer reach and loyalty, and ultimately provide a tailwind for sales and margins.
Thus, in the big picture, Kohl’s is stable. Retail apocalypse fears are all gone. Sales deterioration fears are all gone. So are persistent margin compression fears. But, just because those fears are gone, that doesn’t mean KSS stock is a good buy at current prices.
But Low Growth Will Cap Upside
On the positive side, Kohl’s is stable. On the negative side, this stability is accompanied by exceptionally low growth prospects.
The company isn’t opening any new stores. In fact, the company’s store base has shrunk slightly over the past several years. Meanwhile, comparable sales growth is running around 1-2%, and will likely cool as the lap gets tougher. Gross margins are moving higher, but only by 10 to 50 basis points year-over-year. The opex rate will normalize lower, but not by much with only 1%-2% comps.
Overall, while Kohl’s growth drivers are stable, they aren’t particularly potent. Instead, even in combination, Kohl’s growth drivers will only power mid single digit earnings growth over the next several years. As such, I see EPS shaking out around $8 by fiscal 2025.
Based on a historically average 12x forward multiple, that equates to a fiscal 2024 price target for KSS stock of nearly $100. Discounted back by 6% per year (4 points lower than my normal 10% discount rate to account for the yield), that equates to a fiscal 2019 price target of just over $70. That’s exactly where Kohl’s stock trades today.
Bottom Line on KSS Stock
The best way to look at Kohl’s stock is as follows: this is a retail giant that has carved out a niche for itself in the dynamic retail landscape, and has thereby secured itself stable growth going forward. But, that growth will be tepid, at best. Tepid growth is already priced in here, meaning further gains will be hard to come by. Dips from here should be bought. But, rallies above here should be faded.
As of this writing, Luke Lango was long AMZN.
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