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Stock Analyst Update

Kohl's: Strong Holiday Sales Lead to Lift in Fair Value

Improved inventory management and merchandising, a stronger consumer, and success with marketing, branded products, and partnerships will drive performance for the no-moat retailer.

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Although we had previously increased our  Kohl's (KSS) forecast to reflect our expectations for improved top-line performance following Amazon-related initiatives, 6.9% comparable sales growth in November and December was still well ahead of our 2% implied fourth-quarter comparable sales growth estimate. As a result, we believe that improved inventory management and merchandising, a stronger consumer, and success with marketing, branded products, and partnerships will drive performance ahead of our estimates. Therefore, we expect to raise our $45 fair value estimate by $3-$4 and see our current fiscal 2017 adjusted earnings per share of $3.73, falling within management’s updated guidance range ($3.98 to $4.08, compared with its prior guidance of $3.60 to $3.80). That said, we still believe that the company lacks an economic moat and are modeling a below peak adjusted operating margin going forward (falling to the 6%-7% range in five years versus its 8% three-year average) as we see increased expenses and investments in national brands and e-commerce offsetting some of the top-line strength. We look forward to receiving more color on performance during the fourth-quarter earnings call scheduled for March 1.

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Bridget Weishaar does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.