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Grow or Die - The Future of Kohl's in a Challenging Retail Environment
Posted by: Victor Selva (IP Logged)
Date: December 18, 2013 04:00PM
With an online channel segment that is gaining importance, while modifying purchasing habits, companies in the department store industry are facing strong competition in a market that is dominated by larger peers such as Macy's (M) and J.C. Penney Company Inc. (JCP).
Let's take a look at Kohl's Corp. (KSS), a company which is engaged in the operation of family-oriented department stores and a website (www.Kohls.com) that sell apparel, footwear and accessories for women, men and children; soft home products and housewares.
Strong brands help establish the firm's identity in the market place. Exclusive brands such as Levi´s, Columbia Sportswear and Reebok help build strong businesses. Additionally, Kohl´s has made a great effort to improve and expand its e-commerce business, which offers customers the convenience of online shopping which is driving sales growth (sales increased by 40% in fiscal 2012) with three distribution centers that solve online orders. This improvement as well as the company’s investments in IT has helped improve operating margin. Last but not least, the company intends to open 10 stores and to remodel between 35 and 50 stores in fiscal year 2015.
New Merchandise Team
Although the firm has been working on improving its merchandising strategy, competitors like TJX, Ross and Old Navy are gaining market share on stronger merchandising and more impactful marketing.
Good Cash for Investors
Looking at the financials, the company has a strong balance sheet: good cash holdings that allow it to reward current shareholders through dividends. Dividend-payment history since 2011 affirms its commitment to maximize shareholder wealth, with a 2.56% dividend yield we think is good enough to protect consumer power purchasing and is attractive for investors.
In terms of valuation, the stock sells at a trailing P/E of 13.1x, trading at a discount compared to an average of 18x of the industry. Analysts’ expectations imply a forward P/E of 14.67. To use another metric, its price-to-book ratio of 2 indicates a premium versus the industry average of 1.69, and the price-to-sales ratio of 0.63 is below the industry average of 0.72.
Although Earnings per share (EPS) decreased by 51.2% in the most recent quarter compared to the same quarter a year ago, share price has surged by 25.64% over the past year. Also, it has demonstrated a positive trend over the past 20 years. We include in the next graph the stock price because EPS often lead the stock price movement.
Finally, I always like to see of one of the most important financial ratios applying to stockholders, the best measure of performance for a firm's management: return on equity. ROE has increased when compared to a year ago, but down during the third quarter when compared to the same quarter one year ago. I have to emphasize this because it is a signal of weakness within the company.
In an industry where we expect consumer spending is going to increase due to labor market improvement, Kohl´s brand portfolio, growing e-commerce business, strong balance sheet and good dividend yield make the stock attractive over the long term.
I would advise fundamental investors to consider adding Kohl´s to their portfolios as it seems to be an attractive option. Hedge fund managers have also been active in the company. Hedge fund gurus like Joel Greenblatt and David Dreman have invested in it.
Disclosure: Victor Selva holds no position in any stocks mentioned.
Guru Discussed: David Dreman: Current Portfolio, Stock Picks
Stocks Discussed: KSS, JCP, M,