Kohl’s Stock Offers Strong Upside At $20

Despite a 57% rise since the March 23 lows of this year, at the current price of around $20 per share we believe Kohl’s Corporation stock (NYSE: KSS) has more room to grow. Kohl’s stock has rallied from $13 to $20 off the recent bottom compared to the S&P which moved 55% over the same time period. Gradual store re-openings, as well as a rebound in demand for discretionary products, has helped the stock perform in line with the overall market. However, the stock is down 57% from levels seen in early 2018, over two years ago, and is well below the level it was at before the drop in February due to the coronavirus outbreak becoming a pandemic. Nevertheless, we feel that the company’s stock is currently undervalued and still has potential as it will see an upswing in demand as the situation normalizes, and its valuation implies it has further to go. Our dashboard, ‘Why KSS Stock Moved -57%?‘ provides the key numbers behind our thinking, and we explain more below.

Some of the stock price decline over the last 2 years is justified by the roughly 19% fall seen in Kohl’s net income margin from 4.3% in FY2017 to 3.5% in FY2019. This decline was partially offset by a 5.8% reduction in share count due to stock repurchases worth $1.17 billion made over the same time period. Overall, Kohl’s earnings per share basis fell by nearly 15%, which led to a decline in the company’s stock price. Notably, though, the company’s revenues have remained flat between 2017 and 2019.

Finally, Kohl’s P/E multiple improved from around 9x in 2017 to around 11x in 2019. While the company’s P/E has declined to around 5x now, it seems to be undervalued when the current P/E is compared to levels seen in the past years – P/E of 11x in 2019 and 9x in 2017. We believe the stock is currently undervalued and is likely to witness a steady upside despite the recent rally and the potential weakness from a recession-driven by the Covid outbreak.

How Is Coronavirus Impacting Kohl’s Stock?

The Coronavirus crisis has hit the consumer discretionary industry hard. Fading consumer demand, reduced discretionary spending, and stay-at-home orders resulting in stores remaining closed continue to take their toll on the retail industry. The effects of Covid-19 were clearly evident in the company’s Q2 2020 (ending July) earnings, with the company’s revenues plunging by 23% y-o-y to $3.4 billion. However, the company is one of the largest retailers with the company operating more than 1,150 stores in the US. The company’s stores have re-opened which should provide a boost to the company’s revenues as traffic returns to normal. Moreover, the company offers a wide variety of brand apparel, footwear, accessories, beauty, and home products which should also provide a boost to the company’s revenues. Additionally, Kohl’s has a robust digital channel, which grew nearly 58% in Q2 2020 – further supporting the company’s revenue growth. To sum things up, although Kohl’s revenues are likely to be lower in FY’20, the company’s stock currently seems undervalued due to its strong retail footprint and a robust digital network.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

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