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Is Kohl's (KSS) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Value-focused investors are consistently seeking stocks priced below their intrinsic value. One such stock that deserves attention is Kohl's Corp (NYSE:KSS). The stock is currently priced at $21.9, recording a daily loss of 3.95% and a 3-month decrease of 2.58%. According to its GF Value, the fair valuation of the stock is $49.42.

Understanding the GF Value

The GF Value represents the current intrinsic value of a stock based on our unique method. The GF Value Line on our summary page provides an overview of the stock's fair value. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow), the GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.

Is Kohl's (KSS) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Is Kohl's (KSS) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

However, a deeper analysis is crucial before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Kohl's (NYSE:KSS) should not be overlooked. These risks are primarily reflected through its low Altman Z-score of 1.68. These indicators suggest that Kohl's, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.

Decoding the Altman Z-Score

The Altman Z-score, invented by New York University Professor Edward I. Altman in 1968, is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. It combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.

Company Snapshot: Kohl's Corp (NYSE:KSS)

Kohl's operates about 1,170 department stores in 49 states that sell moderately priced private-label and national brand clothing, shoes, accessories, cosmetics, and home furnishings. Most of these stores are in strip centers. Kohl's also operates a large digital sales business. Women's apparel is Kohl's largest category, having generated 27% of its 2022 sales. The retailer, headquartered in Menomonee Falls, Wisconsin, opened its first department store in 1962.

Is Kohl's (KSS) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap
Is Kohl's (KSS) Too Good to Be True? A Comprehensive Analysis of a Potential Value Trap

Dissecting Kohl's Low Altman Z-Score: Key Drivers

A breakdown of Kohl's's Altman Z-score reveals potential financial distress. The Retained Earnings to Total Assets ratio provides insights into a company's ability to reinvest its profits or manage debt. Evaluating Kohl's's historical data, we observe a declining trend in this ratio, indicating Kohl's's diminishing ability to reinvest in its business or effectively manage its debt.

The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness. An analysis of Kohl's's EBIT to Total Assets ratio from historical data indicates a recent dip following an initial rise, suggesting that Kohl's might not be utilizing its assets to their full potential to generate operational profits.

When it comes to operational efficiency, a vital indicator for Kohl's is its asset turnover. The data from the past three years suggests a recent decline in this ratio, signifying reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services.

Conclusion: Navigating the Thin Line Between Value and Trap

While Kohl's (NYSE:KSS) appears undervalued based on its GF Value, the low Altman Z-Score and declining operational efficiency indicators suggest potential financial distress, making it a likely value trap. Therefore, investors must exercise caution and conduct thorough due diligence before investing.

GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .

This article first appeared on GuruFocus.