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Kohl’s Growth Plans Should Deliver Gains Going Forward

Although shoppers generally recognize the brand name all across the land, very few recognize that Kohl’s (KSS) is one of the most innovative and forward-thinking retailers in the industry.

With approximately 1,162 stores in 49 states, Kohl’s is a leading retailer in active and casual apparel and other men’s and women’s lines. The stores also offer soft home products and beauty products. Kohl’s was one of the early adopters of advanced retail technologies in such areas as real-time dynamic pricing and creating an omnichannel experience.

Kohl’s revenues were hurt during the COVID-19 pandemic in 2020 and fiscal year revenues declined 20% while the company reported a net loss of $163 million. This broke a long-term track record of not only positive net profits but positive growth.

Although KSS has a robust e-commerce business, its physical stores attract substantial foot traffic. However, revenue for 2021 is estimated to be close to 2019 levels.

I am bullish on KSS stock as I believe the company’s disciplined capital management and low valuation will result in positive gains over the next one to two years. (See Analysts’ Top Stocks on TipRanks)

Amazon Partnership

One of the early positive retail collaborations for Kohls was with Amazon (AMZN). In 2017, Kohl’s entered into a partnership with the giant online retailer where a program was initiated in which select stores would accept Amazon returns.

In 2019 the program was expanded nationwide. Kohl’s says its Amazon partnership has drawn in 2 million new shoppers, a third of them millennials. The increased foot traffic has been very beneficial to the company.

Sephora Transaction

At the end of 2020, Kohl’s announced a strategic partnership with Sephora, one of the leading beauty brands in the world. The goal was to create a Sephora At Kohl’s immersive beauty experience, which would involve 2,500 sq feet of retail space within a traditional Kohl’s store.

As of Q3 2021, Kohl’s had rolled out approximately 200 of these locations. The plan is to expand the rollout to about 400 stores during 2022 and 850 by 2023. The company is seeing a robust initial response and appears to be attracting a younger and more diverse customer base.

Third-Quarter Results

Kohl’s reported impressive results for its third-quarter ending October 30, 2021. The company achieved records in both sales and earnings as they executed on gross margin expansion efforts and SG&A leverage.

Gross margins increased over 4% compared to the prior-year period through disciplined inventory management efforts and pricing optimization strategies. The gross margin improvement came despite the adverse effects of global supply chain challenges.

Year-to-date operating cash flow was also strong at almost $1.8 billion. Free cash flow was also impressive at $1.26 billion. The company repurchased over $500 million in stock during the quarter due to that strong free cash flow. The company’s total cash position was almost $1.9 billion at the end of the quarter.

Future Strategy

Kohls has created definitive plans for the future in terms of growth and margin enhancement. The company wants to be a top destination for active and casual brands across North America. These include brands like Nike (NKE), Under Armour (UA), Champion, and Eddie Bauer.

The goal is to drive active brands to 30% of revenues. The growth in the beauty business is also a key growth driver, particularly with its Sephora store-in-a-store concept.

In addition, although Kohl’s was one of the early innovators in a customer-driven omnichannel experience, the company feels there are still continued enhancements and strong opportunities in the evolving digital landscape.

Kohl’s is also planning to revitalize and enhance its women’s merchandise and expand its variety of home goods products.

Valuation Seems Reasonable

Most retailers rarely get sustainable high multiple valuations due to the cyclical nature of consumer spending. However, Kohl’s forward P/E (January 2022) of approximately 7.5x seems low even by retail standards. The company’s focused growth plans and margin improvement opportunities seem to suggest that a higher P/E is forthcoming.

I am bullish on KSS stock as I believe the company’s disciplined capital management, low valuation, and dividend yield will result in market-beating total returns over the next one to two years.

Wall Street’s Take

Turning to Wall Street, KSS has a Hold consensus rating based on five Buys, five Holds, and two Sell ratings assigned in the past three months. At $69.08, the average Kohl’s price target implies 24.9% upside potential.

Disclosure: At the time of publication, Tom Kerr did not own shares of any stocks mentioned above.

Disclaimer: The information contained in this article represents the views and opinion of the writer only, and not the views or opinion of TipRanks or its affiliates  Read full disclaimer >