Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Kohl's Corp (KSS, Financial). The stock, which is currently priced at 21.41, recorded a gain of 6.52% in a day and a 3-month decrease of 5.18%. The stock's fair valuation is $49.41, as indicated by its GF Value.
Understanding GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Caution Ahead: Potential Value Trap
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Kohl's (KSS, Financial) should not be ignored. These risks are primarily reflected through its low Altman Z-score of 1.66. These indicators suggest that Kohl's, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Decoding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: Kohl's Corp (KSS, Financial)
Kohl's operates about 1,170 department stores in 49 states that sell moderately priced private-label and national brand clothing, shoes, accessories, cosmetics, and home furnishings. Most of these stores are in strip centers. Kohl's also operates a large digital sales business. Women's apparel is Kohl's largest category, having generated 27% of its 2022 sales. The retailer, headquartered in Menomonee Falls, Wisconsin, opened its first department store in 1962.
Breaking Down Kohl's Low Altman Z-Score
A dissection of Kohl's's Altman Z-score reveals Kohl's's financial health may be weak, suggesting possible financial distress:
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Kohl's's historical data, 2021: 0.89; 2022: 0.91; 2023: 0.19, we observe a declining trend in this ratio. This downward movement indicates Kohl's's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
The EBIT to Total Assets ratio serves as a crucial barometer of a company's operational effectiveness, correlating earnings before interest and taxes (EBIT) to total assets. An analysis of Kohl's's EBIT to Total Assets ratio from historical data (2021: 0.06; 2022: 0.08; 2023: 0.01) indicates a recent dip following an initial rise. This reduction suggests that Kohl's might not be utilizing its assets to their full potential to generate operational profits, which could be negatively affecting the company's overall Z-score.
When it comes to operational efficiency, a vital indicator for Kohl's is its asset turnover. The data: 2021: 1.21; 2022: 1.22; 2023: 1.17 from the past three years suggests a recent decline following an initial increase in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services. This shift in Kohl's's asset turnover underlines the need for the company to reassess its operational strategies to optimize asset usage and boost sales.
Conclusion: A Value Trap?
Given Kohl's low Altman Z-Score and the declining trends in key financial ratios, it appears that Kohl's (KSS, Financial) might be a potential value trap. Despite its seemingly attractive valuation, the underlying financial health and operational efficiency of the company raise concerns. Therefore, investors should exercise caution and perform thorough due diligence before considering an investment in Kohl's.
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