No-Moat Kohl's Bleak Outlook Puts Even More Pressure on Management; Shares Undervalued

No-moat Kohl’s eventful 2022 took another turn as the company revealed disappointing second-quarter results and a poor outlook. Management cited slowing sales due to inflation’s impact on spending by middle-income shoppers, necessitating discounts and causing margin compression. We expect to lower our $58 fair value estimate by nearly 10% as we slash our full-year $6.50 earnings per share forecast to align with current company guidance of $2.80-$3.20 (down from $6.45-$6.85). Despite this revision, we view Kohl’s, trading at about 10 times depressed earnings, as undervalued. Although its recent execution has left much to be desired, the company owns valuable real estate that it may monetize and remains committed to returning cash to shareholders through its current $2 per share annual dividend (6% yield) and a $500 million accelerated share-repurchase plan.