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.
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