Liquidity Still Good for Kohl's After Huge Loss
We expect to reduce our fair value estimate but view shares as undervalued.
No-moat Kohl’s (KSS) reported a staggering loss of about half a billion dollars in the first quarter of 2020 as COVID-19 forced the temporary closures of its stores for about half of the quarter. While its digital sales jumped 24% (including 60% in April), e-commerce could not offset sales lost to closed stores, where about three fourths of Kohl’s sales typically occur. The net sales decline of 43.5% in the quarter was worse than our forecast of a 39.8% decline. Moreover, the negative 27% operating margin was far below our forecast of negative 10% as a result of permanent markdowns, a reserve on seasonal inventory, elevated e-commerce fulfillment, and an unfavorable product mix. Kohl’s did not provide guidance, but it now appears that our full-year expectations for a 20% sales decline and negative 2% operating margin were too optimistic. We expect to reduce our $42 fair value estimate by a high-single-digit percentage but still think the shares are very attractive for long-term investors following a mid-single-digit price decline on the report.
We believe Kohl’s liquidity will allow the company to get through the pandemic. Kohl’s, which has no debt maturities until 2023, closed the quarter with $2.0 billion in cash and $500 million remaining on its revolving credit facility. It raised $600 million in an April bond offering, which while expensive (9.5% interest rate) should allow it to avoid distress. We think Kohl’s has enough cash to survive several months of store closures. We are encouraged that the firm acted aggressively to conserve cash, as it suspended dividends and share repurchases (saving about $650 million in cash), canceled orders, furloughed staff, and slashed planned 2020 capital expenditures to $250 million (from $855 million last year). Despite the large loss, Kohl’s generated positive operating cash flow of $53 million in the quarter, thanks primarily to a roughly doubling of payment days from last year.
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David Swartz does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.