Kohl’s Earnings: Fair Start to 2023 Creates Confidence in Value Creation Plans

Kohl’s Stock at a Glance

• Fair Value Estimate: $50
• Morningstar Rating: 5 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: None

Kohl’s Earnings Update

Kohl’s KSS outperformed modest expectations in 2023′s first quarter, creating confidence in newly appointed CEO Tom Kingsbury’s stabilization plans. We view the 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 fair value estimate for Kohl’s stock of $50 per share. 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.

While Kohl’s suffered a 4.3% decline in same-store sales in the first quarter, this was better than our forecast for a 5.5% drop. While home and women’s apparel were disappointing, the company highlighted 150% growth in beauty sales due to the Sephora expansion. Kohl’s claims a payback period on the Sephora shops of 3.5 years, but our view is that the partnership must increase sales in other parts of Kohl’s stores to justify the cost and effort.

Turning to profitability, Kohl’s 39% gross margin on net sales in the quarter was 260 basis points better than our forecast, as shipping costs abated and discounting was less than we feared. This was a welcome recovery after the abysmal 23% gross margin the company reported in the prior quarter. Kohl’s first-quarter operating margin was 2.8%, 210 basis points above our estimate, as operating costs were in line with our forecast. In the long run, we believe the firm will hold operating margins around 5%-6% on 1% annual sales growth as it implements its merchandising, pricing, and inventory management plans. Kingsbury previously had success with similar efforts as CEO of narrow-moat Burlington BURL.