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'Shopping' for a Bargain - Kohl's Corp [KSS]

February 09, 2008 | About:
Kohl's Corp. [NYSE:KSS] Feb. 8, 2007 closing price: $44.67

52-week range: $37.31 [Jan. 15, 2008] - $79.55 [Apr. 20, 2007]

Kolh's operates a chain of department stores in 47 states throughout the US. Their sales mix is approximately 33% women's apparel, 19% men's apparel, 18% home goods, 13% children's clothing, 9% accessories, and 8% footwear. FY 2007 [ended Jan. 2008] sales are expected to have been around $16.5 billion.

With almost eveyone concerned about slowing consumer sales due to a weak US economy, most analysts have been scaling back their estimates and enthuiasm for all retailing companies. This has given us a chance to own one of the best in its category at a very discounted valuation based on all historical comparisons.

The latest estimates for the just completed FY are now at $3.38/share and the FY 2008 consensus view is for $3.58 even knowing the state of the US economy. That makes KSS's trailing P/E 13.2X and its forward looking multiple just 12.5X. This compares with a 10-year median P/E of 35 - too high by far, but it happened.

Value Line estimates Kohl's will trade for an 18X multiple over the 3 - 5 year horizon. That seems pretty reasonable to me, and perhaps even too conservative, as the lowest average annual P/E for KSS over the past 16 years has been 18.3X.

Why did Kohl's command premium valuations in the past? Steady growth. In the 10 FYs from 1997 - 2007 sales grew from $3.06 billion to $16.5 billion, cash flow/share went from $0.63 to $4.80, EPS surged from $0.46 [split adjusted] to $3.38 and book value/share expanded from $3.03 to $19.65. Record EPS were hit in 15 of the last 16 years.

While this year may have less than typical increases, the current valuation seems to more than discount the subdued environment. A return to even that 18X multiple on the $3.58 estimate leads to a target price of $64.44 or + 44% from today's quote.

Is that share price attainable? Sure. Kohl's shares hit $75.50 and $79.60 in 2006 & 2007 when EPS were $3.31 and $3.38. In fact, KSS traded at $72.20, $78.80 and $65.40 at its peaks in 2001, 2002 and 2003 when earnings averaged less than half of present levels.

Risk? If consumer spending completely erodes, things could get worse than expected and estimates might turn out to need downward adjustment. Kohl's balance sheet would allow it to weather any storm, however. Value Line assigns them an A+ financial strength rating and an 85th percentile earnings predicatability score.

Excepting the total market meltdown that took place this January [when KSS hit its 7-year low] these shares have rarely been under $42 since the year 2000.

Gurus Chris Davis and Bill Nygren own shares of Kohl's.

As of the latest proxy statement- AXA Financial owned 7.3%, Capital Research owned 7.2% and officers and directors held 8.9% of the shares. Two insider buys [4000 shares total] were made on Nov. 19-20, 2007 at prices of $48.10 - $48.99 [well above the current price].

With upside of 40% - 70% and not too much apparent downside I like KSS shares right now.

The best bargain in Kohl's today... may very well be its own shares.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.1/5 (15 votes)

Comments

stocnurse
Stocnurse - 6 years ago
How many shares do you own, are you heavly invested in this stock? I was thinking about following you into this one?

Stocnurse....
mrubsam
Mrubsam - 6 years ago
Picking any of these department stores seems like going to a podunk town in the middle of nowhere and selecting a beauty queen.

How do you pick one when all the contestants are homely?

Many retailers look cheap, but they can't all be cheap.

There seem to be too many stores and companies selling the same stuff.

I have a couple retail positions, but I think many of these will continue to struggle for a long time.
alanb9
Alanb9 premium member - 6 years ago
mrubsam Wrote:

-------------------------------------------------------

> Picking any of these department stores seems like

> going to a podunk town in the middle of nowhere

> and selecting a beauty queen.

>

> How do you pick one when all the contestants are

> homely?

mrubsam,

well, I live in a Podunk town in the middle of nowhere and two of my friends are married to Miss America top ten finalists :)

Beauty can be found if you are looking for it.

alan
mrubsam
Mrubsam - 6 years ago
I gave a bad analogy.

I should have said that retailers are, in general, unattractive to me. I don't see how KSS stands out.

Good point and I didn't mean to offend small town residents. I live in a podunk town and there are plenty of lookers here.
alanb9
Alanb9 premium member - 6 years ago
no offense taken. I agree with you re: retailers. I do find it interesting about those two of my friends, though. My experience has to be beyond 2 standard deviations from the mean.
vooch
Vooch - 6 years ago
> I do find it interesting about those two of my

> friends, though. My experience has to be

> beyond 2 standard deviations from the mean.

There's only six degrees of separation from Kevin Bacon. ;-)

- Vooch

stocnurse
Stocnurse - 6 years ago
Stocdocx99,

I did not hear back from you , is it ok to buy this one , you sound like you really know what you are doing , so I wanted to know how much of this stock you have so I don't make a mistake?

should I buy like 5000 shares to start then buy more as it goes way up? I also have a friend that was telling me about a stock that lends money to kids for school that he said you really liked..but I can't remember the name of it?

Help....Doc
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru Bill Nygren increased his position in Kohl's during 2007's fourth quarter.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru Bill Nygren added 6.51% to his Kohl's position during the March quarter. His average cost for the new shares was $42.90.

He held 2,076,900 shares as of March 31, 2008.

KSS closed at $46.93 yesterday.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Guru Ron Baron took a new position in Kohl's during the March quarter.

He bought 62,190 share at an average cost of $42.90.

KSS closed at $46.93 yesterday.
Dr. Paul Price
Dr. Paul Price premium member - 6 years ago
Gurus Richard Snow and Richard Pzena bought new positions in KSS during Q1.

They owned 244,710 and 340,460 shares respectively by March 31, 2008 at identical average costs of $42.90/share.

KSS closed at $46.93 yesterday.

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