No-Moat Kohl’s Sales Process Fails as Its Sales Weaken, but We See a Contrarian Opportunity

No-moat Kohl’s reported a double dose of bad news. To start, its potential sale to Franchise Group fell through, and, due to slowing consumer spending, it also now expects second-quarter sales to decline by a high-single-digit percentage, below our negative 2% forecast. The $60 per share (later cut to $53) offer by Franchise Group to buy Kohl’s appeared unlikely to succeed from the start given Franchise Group’s small size and rising interest rates, and we do not expect any other bidders to emerge in the foreseeable future. Kohl’s share price plummeted below $30 for the first time since 2020 on the news and now trades at a roughly 50% discount to our $58 fair value estimate. We will revisit our expectations after the full second-quarter results are announced on Aug. 18, but we expect the negative impact of the sales miss on our valuation will be small.