Want a solid pair of Dockers? How about a reasonably priced tie? Or maybe you just want to get a jumpstart on your holiday shopping. There is an abundance of retailing choices available to you, but perhaps you might find your way to Kohl’s (KSS). With over 1,100 stores in 49 states, it’s not unimaginable that there’s one relatively close by.
Given Kohl’s recent announcement to hire over 50,000 seasonal employees this holiday season – or a touch more than 40 associates per store – it would appear that the company expects a solid upcoming quarter. And if history is any guide, this makes quite a bit of sense: roughly a third of Kohl’s sales are derived from the fourth quarter of the year.
Of course the question becomes: why choose Kohl’s over any one of the numerous other retailers? To be sure there are a variety of similar businesses providing the same types of clothing. However, Kohl’s does enjoy a limited economic moat in the form of both types of merchandise offered and the selection that is available. For instance, products made by the “Apartment 9,” “Croft & Barrow,” or “Sonoma” lines are only available at Kohl’s. Or if you happen to desire products from certain celebrities like Bobby Flay, Jennifer Lopez or Tony Hawk, once again Kohl’s is your store. Over half of their sales come from private or exclusive labels. In addition, due to its clothing specialty, Kohl’s tends to offer a wider selection than lower cost providers.
In addition, Kohl’s has demonstrated its ability to integrate e-commerce into its core business. Currently about 7% of its sales are derived from online transactions, with management expecting this number to grow to 10%-15% over the next few years. In turn, this allows new stores to be a bit more efficient (smaller) while simultaneously allowing for refurbishing to play a bigger role in the company’s overall strategy.
In considering an investment in Kohl’s it is especially useful to review the operating results of the company. This can be easily accomplished through the powerful lens of the Fundamentals Analyzer Software Tool, F.A.S.T. Graphs™. By looking at the Earnings and Price Correlated Graph below, one can see that operating earnings (orange line) grew by about 14% over the last decade and a half. In addition, one can see that Kohl’s initiated a dividend (pink line) in 2011.
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Sure there were some bumps along the way, but in general it’s pretty easy to see that Kohl’s has been providing solid business results as of late. In addition to solid operating results, Kohl’s has also been diligently reducing common shares outstanding (csho) going from a high of 345 million shares in 2006 to today’s mark around 218 million. Furthermore, Kohl’s has about $2.8 billion of remaining authorization under its current repurchase program – which management expects to complete by the end of Fiscal 2015. Said differently, Kohl’s management intends on buying back roughly a quarter of the outstanding shares in the next few years.
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With this in mind – solid operating results and a propensity to reward shareholders – it seems like a reasonable assumption that shareholder performance did quite well over this time period as well. But that’s not necessarily what we see. From the end of 1998 until today, Kohl’s had operating results that grew by about 14% a year. Yet at the same time, performance results only compounded at about 3.4% a year – barely beating out the market average and trailing the business results drastically. So what’s going on here?
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If you compare the business results to the performance results you find a large disconnect. And the underlying reason is relatively straightforward. By adding price to the first Earnings and Price Correlated Graph that was first displayed, one can easily see that Kohl’s was largely overvalued during the first part of the new millennium. Only after the most recent recession did Kohl’s stock see a more reasonable valuation. In fact, in the beginning of 1999 Kohl’s was selling for roughly 50 times earnings as compared to today’s price-to-earnings ratio near 12. If you think about it, it’s relatively impressive that Kohl’s squeaked out any gain after that kind of P/E compression, not to mention beating the market average.
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But of course only viewing a company’s past would likely lead one to miss the most important aspect of evaluating a business. While a strong operating history provides a solid platform for evaluation, it does not by itself indicate a decision. It’s simply information. Thus it’s necessary to have an eye on the past but a focus towards the future prospects of the company. In the example of Kohl’s for instance, it’s useful to determine whether or not you believe customers will continue to demand their exclusive brands, if the wide name-brand selection is truly an advantage and whether or not Kohl’s will successfully assimilate its e-commerce business. To this end, an investor develops their own opinions and corresponding thesis for growth. Once that’s accomplished, it might be useful to determine whether or not the predictions seem reasonable.
To this end, 23 analysts reporting to Standard & Poor’s come to a consensus estimated earnings growth rate of 8.3%. In addition, as previously mentioned, Kohl’s has a P/E around 12.3 which is below both the normal 10-year and 5-year P/E ratios of 16.3 and 12.7. If the earnings materialize as forecast, this would indicate a target price of $97.57 by the end of 2018, or a 14.7% rate of return including dividends.
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Now, it’s paramount to consider that this is simply a calculator. It’s reliant of the consensus estimates of analysts along with a P/E ratio of 15 in 5 year’s time. In addition, it is presumed that the dividend will grow in line with earnings over this time period. However, it does provide a reasonable band of possibilities when evaluating the company.
Kohl’s CEO Kevin Mansell recently reiterated the company’s mission:
“Our mission remains clear – to be the leading family-focused, value-oriented, specialty department store offering quality exclusive and national brand merchandise to the customer in an environment that is convenient, friendly and exciting.”
Your job, as an individual investor, is to decide whether or not you believe Kohl’s has a sustainable economic moat in the future. That is, your job is to determine if Kohl’s will be able to meet its mission. Kohl’s currently appears reasonably attractive given its strong operating history, propensity to reward shareholders, upcoming growth opportunities and reasonable valuation. However, as always, I recommend that the reader conduct his or her own thorough due diligence.
Disclosure: Long KSS at the time of writing.
Disclaimer: The opinions in this document are for informational and educational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned or to solicit transactions or clients. Past performance of the companies discussed may not continue and the companies may not achieve the earnings growth as predicted. The information in this document is believed to be accurate, but under no circumstances should a person act upon the information contained within. We do not recommend that anyone act upon any investment information without first consulting an investment advisor as to the suitability of such investments for his specific situation.
