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Stock Strategist

Kohl's Is on Sale

The retailer looks like a compelling value as many rivals are closing their doors for good.

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We believe the coronavirus crisis and the resulting turmoil in clothing retail have created an opportunity to invest in Kohl’s (KSS) at a price well below our fair value estimate. We do not believe the company has an economic moat, and we share widespread concerns about the future of traditional retailers in the age of apparel discounters and Amazon (AMZN). Indeed, we do not expect Kohl’s to approach peak sales growth or profit margins. However, it was not in financial distress before the pandemic, and we believe its large base of customers keeps it viable.

Kohl’s served 65 million individual shoppers in 2019 and is one of America’s largest online retailers at about $4.5 billion in 2019 digital sales. While many of its rivals are downsizing or disappearing, we do not think Kohl’s will have to shutter a significant number of its 1,150-plus stores. The company is a consistent generator of cash under normal market conditions and allocated more than $4 billion of its cash to dividends and share and debt repurchases over the past four years. We forecast that Kohl’s will produce about $700 million in annual free cash flow after 2020 and use most of it to pay dividends, reduce debt, and retire its own shares, which we view as an attractive use of cash, given the stock’s current discount to our valuation.

David Swartz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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