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Kohl's Might Be Turning a Corner

GuruFocus.com
·3 min read

- By Nicholas Kitonyi

Shares of U.S. retail company Kohl's Corp. (NYSE:KSS) popped more than 10% on Tuesday following its pre-market earnings announcement. The department store retail chain's most recent quarterly results beat expectations on both the top and bottom lines.

Kohl's Might Be Turning a Corner
Kohl's Might Be Turning a Corner


The share price of Kohl's is still down more than 40% this year despite today's gains. However, with earnings expected to grow over the next few quarters, the company could soon return to profitability, prompting a significant surge in price.

The retailer's transition from a pure-play department store into a hybrid that embraces the change in consumer behavior toward online shopping has not been the smoothest. However, it has made progress in the last few years and is already delivering great experiences to customers through an omnichannel strategy.

Highlights from recent quarterly results

In the third quarter, Kohl's earnings declined 98.65% to 1 cent per share. This was still significantly better than the consensus analyst estimate of a net loss of 43 cents per share.

The company's revenue of $3.98 billion was also better than expectations of $3.86 billion. Kohl's posted revenue of about $4.6 billion in the prior-year quarter.

The company's cash and cash equivalents stood at $1.9 billion at the end of the quarter after adding $910 million in cash flows from operations.

Despite posting a nine-month net loss of $3.45 per share, Kohl's also revealed that it managed to pay all of its revolving credit dues, which gives it more flexibility going into the final quarter of the year.

CEO Michelle Gass said the company "further strengthened our financial position and fully repaid our revolver during the period, which underscores the solid cash flow generation of our business."

Kohl's nine-month revenue fell 25.3% to $9.8 billion, which was down from $13.1 billion last year.

Valuation

From a valuation perspective, shares of Kohl's are trading at a forward price-earnings ratio of 13.19. This implies significant earnings growth over the next year based on the trailing 12-month price-earnings ratio of 43.36.

By comparison, close peers Bed Bath & Beyond Inc. (NASDAQ:BBBY) and Target Corp. (NYSE:TGT) trade at forward price-earnings ratios of 34.60 and 20.62. This suggests that Kohl's could be potentially undervalued relative to its peers.

In summary, Kohl's appears to be closer to turning a profit again after a few disappointing quarters amid the coronavirus pandemic. The company surprised in the most recent quarter after posting earnings of 1 cent per share compared to a predicted net loss of 43 cents. If this continues, the current rebound could be just the beginning of a major rally.

Disclosure: No position in the stocks mentioned.

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This article first appeared on GuruFocus.