Kohl’s Earnings: Signs of Progress Despite Difficult Economic Conditions; Shares Very Undervalued

Kohl’s second-quarter profitability surpassed our expectations even as its same-store sales fell 5.0% versus our estimate for a 4.3% decline. Kohl’s, like many other retailers of apparel, accessories, and home goods, is feeling the effects of inflation and slowing consumer demand. Even so, we believe Tom Kingsbury, named permanent CEO six months ago, is making progress on key growth and margin improvement plans, including opening Sephora shop-in-shops, better inventory control, more effective promotions, and debt reduction. We view shares as undervalued in relation to our $50 per share fair value estimate, which we do not expect to change materially. Although we rate Kohl’s as a no-moat retailer due to the competitive pressures on traditional department stores, we believe it has strengths, including its large e-commerce (about one third of sales), its 65 million active customers, and its largely off-mall store base. In addition, Kohl’s offers a dividend yield above 7%; while such a high yield suggests the expectation of a cut, we think it can and will be maintained.