Company Reports

We assign a no-moat rating to Kohl's, which has lower sales now than it did 10 years ago despite widening its store base. We think its competitors, such as wide-moat Amazon and other online sellers, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low-double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling indoor malls. We think, however, that its store visitation is declining. Sales per square foot have declined since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to around $5 billion at present. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

No-moat Kohl’s fourth-quarter results and initial 2024 guidance align with our forecasts. We believe the company is making progress on its initiatives under CEO Tom Kingsbury that include efforts to improve its offerings, simplify its promotions, operate more efficiently, and strengthen its balance sheet. While strong sales and margin improvement is unlikely before 2025, we believe Kohl's depressed results offer an opportunity to invest at a very attractive price. We do not expect to make any material change to our $50 fair value estimate.

We assign a no-moat rating to Kohl's, which has lower sales now than it did 10 years ago despite growing its store base. We think its competitors, such as wide-moat Amazon and other online sellers, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling indoor malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to $5.5 billion in 2022. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

Kohl's third-quarter 5.5% same-store sales decline was worse than our estimate for a 2.5% drop, but its profitability was better than expected. The firm guided to a full-year sales decline of 2.8%-4% and $2.30-$2.70 in EPS, little changed from prior guidance and in line with our forecast. Although shares fell by about 10% on the report, we do not expect to make any material revision to our $50 fair value estimate, leaving shares very undervalued. We rate Kohl's as a no-moat company due to the competitive challenges for traditional department stores, but also believe it has strengths, including its loyalty program of more than 30 million members and value positioning.

We assign a no-moat rating to Kohl's, which, unlike many competitors, has lower sales now than it did 10 years ago. We think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to $5.5 billion in 2022. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

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.

No-moat Kohl’s rebounded from the COVID-19 crisis with improved results in 2021, but its performance has since declined. We think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to $5.5 billion in 2022. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

Kohl’s outperformed modest expectations in 2023’s first quarter, providing confidence in newly appointed CEO Tom Kingsbury’s stabilization plans. We view results as fair given that many apparel retailers struggled with excess inventories in an environment of declining consumer demand. Kohl’s reiterated its full-year outlook for sales down 2%-4%, a 4% operating margin, and $2.10-$2.70 in EPS. As our estimates align with this outlook, we do not expect to make any material change to our $50 per share fair value estimate. Shares edged up by a mid-single-digit percentage on the report, but we continue to view the firm as extremely undervalued. Our view is that Kohl’s, although a no-moat retailer, will generate consistent free cash flow with modest improvements in sales and margins.

No-moat Kohl’s rebounded from the COVID-19 crisis with improved results in 2021, but its performance has since declined. We think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to $5.5 billion in 2022. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

Indicative of the challenges facing new CEO Tom Kingsbury (see our Feb. 2 note), Kohl’s reported an unexpected loss in 2022’s fourth quarter and offered weak guidance for 2023. Like many peers, it had to resort to high discounting to move inventory in an apparel retail market characterized by excessive amounts of product amid slowing consumer demand. Additionally, Kohl’s continues to struggle to find the optimal merchandising and pricing strategies to hold or gain share. While we think Kingsbury has reasonable plans to fix these and other problems, they will take time to implement.

In two pieces of separate but related news, Kohl’s announced that interim CEO Tom Kingsbury has assumed the position permanently and that it has signed a standstill agreement with 5%-holder Macellum Capital. We had previously speculated that Macellum might wage a third proxy battle this year (which would have been very costly and potentially damaging), but it is satisfied with Kingsbury’s appointment as Kohl’s CEO. Indeed, Kingsbury originally joined Kohl’s board in 2021 on Macellum’s recommendation. This is not to say that Kohl’s chose him merely to mollify its antagonist shareholder, we believe he is well-qualified, with extensive retail experience that includes more than a decade as narrow-moat Burlington’s CEO. Thus, in our view, he was both a logical and a practical choice.

No-moat Kohl’s rebounded from the COVID-19 crisis with greatly improved results in 2021, but it could not maintain this performance in 2022. We think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to competitive threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce from about $700 million in 2010 to $5.9 billion in 2021. We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

Befitting a year full of twists and turns, no-moat Kohl’s withdrew its 2022 outlook and provided no specific guidance for the fourth quarter. Neither outgoing CEO Michelle Gass nor interim CEO Tom Kingsbury (see our note of Nov. 8) participated on the earnings call, leaving the heavy lifting to CFO Jill Timm and Chairman Peter Boneparth. While Timm expressed optimism concerning the holiday season, she also warned that discounting is prevalent across apparel retail and that Kohl’s core middle-income consumer is under pressure from inflation. Moreover, like no-moat Macy’s, Kohl’s experienced slowing sales in late October and early November, possibly due to unseasonable weather and an unusually long holiday shopping season in 2021 as shoppers were concerned about stock-outs. However, we do not expect to make significant revisions to our fourth-quarter forecast as we had already anticipated a sales decline of about 5% against a difficult comparison (up 6% last year). Similarly, we do not expect to make a material change to our $54 fair value estimate and, thus, continue to view Kohl’s as undervalued. Although the year has been very chaotic, the retailer remains profitable and its long-term debt of about $1.9 billion is manageable.

Kohl’s announced Michelle Gass will step down as CEO on Dec. 2 and be replaced on an interim basis by current board member Tom Kingsbury. A former CEO of narrow-moat Burlington, Kingsbury joined the Kohl’s board in 2021 as part of an agreement with activist shareholder Macellum Capital. Gass, meanwhile, will join Levi Strauss as an executive and board member, and is expected to assume the CEO role within 18 months. While she has implemented some positive changes at Kohl’s, she has been under intense pressure all year as a possible sale of the company ended without a deal, the company fought off a proxy challenge from Macellum, and operating results have deteriorated.

Investors have forsaken apparel manufacturers and retailers, which we believe present numerous attractive opportunities. These firms have struggled with many issues in 2022, including higher inventories, lower operating margins, inflation, logistical challenges, tough comparisons with 2021, low international travel, and an extremely strong U.S. dollar. However, we see positive signs. In recent weeks, shipping has shown signs of normalizing, and gas prices have dropped. Moreover, we anticipate inventory levels will improve as manufacturers cancel shipments and sales increase in the holiday season (as is typical). In 2023, we anticipate the benefits of investments in supply chains and other operations by many apparel firms will become more apparent. Consequently, despite widespread pessimism in the market, we believe now is a good time to consider the many apparel stocks trading well below our fair value estimates.

No-moat Kohl’s rebounded from the COVID-19 crisis with greatly improved results in 2021. However, we think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to competitive threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce of more than $5 billion (from about $700 million in 2010 to $5.9 billion in 2021). We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

No-moat Kohl’s rebounded from the COVID-19 crisis with greatly improved results in 2021. However, we think its competitors, such as wide-moat Amazon and other e-commerce, discount, and specialty retailers, will continue to siphon apparel sales from it and other department stores. Thus, while Kohl’s has responded to competitive threats with increased e-commerce, improved merchandising, and an enhanced loyalty program, its operating margins have declined from the low double digits over the past 10 years, and we do not expect they will rise above the midsingle digits over the next 10. Kohl’s has strengths, including its reputation for reasonable prices and more than 30 million loyalty members. Also, unlike some peers, it does not have large numbers of stores in struggling malls. We think, however, that its store visitation is declining. Sales per square foot have been stagnant since 2010 despite an increase in annual e-commerce of more than $5 billion (from about $700 million in 2010 to $5.9 billion in 2021). We believe Kohl’s large fleet of big-box stores is unnecessary in an increasingly fragmented market.

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.

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.

In the latest twist in an ongoing saga, Kohl’s has entered an exclusive three-week negotiating period with Franchise Group to give it time to finalize an offer to buy Kohl’s for $60 per share. Franchise Group is a collection of retail concepts, including The Vitamin Shoppe and Pet Supplies Plus, that are mainly franchised, so operating a nationwide department store company with nearly $20 billion in annual sales would be a change in strategy and a huge step-up. Moreover, Franchise Group’s market capitalization is only $1.5 billion, a fraction of the $8 billion or so it will cost to buy Kohl’s. According to the company and media reports, Franchise Group intends to contribute $1 billion through borrowing and work with Oak Street Real Estate Capital to finance the rest of the purchase price with Kohl’s real estate. While we have reservations whether it can do this, especially as the market value of the real estate is unproven, the announcement of an exclusive negotiation suggests some confidence by the parties involved that it can.