Kohl’s Is a Classic Value Trap

Kohl’s Corporation (KSS) is a retailer of clothing, home décor, and other products in the United States. The company is among the largest clothing-based department stores in the country and has been public since 1992.

I am neutral on KSS stock. (See Analysts’ Top Stocks on TipRanks)

Pandemic Effects

The pandemic had a severe negative impact on Kohl’s earnings. In the quarter ended February 1, 2020, just prior to the pandemic in the United States, revenues reached $6.5 billion. Revenues for the following quarter plummeted to just $2.2 billion. This was a decrease of over 66%. Revenues did creep back up later in the year. However, they remained well under pre-pandemic levels.

For the fiscal year ended January 31, 2021, encompassing the worst of the pandemic, revenues came in at just $15 billion compared to $18.9 billion in the prior year. Operating income also collapsed from $1.2 billion to just $15 million, year-over-year.

Still, the company did quite well to just about break even. In fact, considering the tremendously unfavorable conditions, management should be commended for its performance. It successfully survived the worst of the pandemic and even restored the dividend after only three quarters.

The stock price has also eclipsed its January 1, 2020, level by nearly 10%. However, the stock is down 16% over a three-year period and has underperformed the overall market significantly.

Classic Value Trap

A value trap is a stock that trades at an attractive PE ratio, which draws in investors, yet continues to underperform the market year after year. Kohl’s has underperformed the market on a ten, five, and three-year timeline. It is only over the prior year that the company has beaten the market. This “beat” is quite misleading due to the immense decline in share price during the pandemic.

One reason that Kohl’s consistently underperforms is the complete lack of revenue growth. The rise in e-commerce has hurt them significantly over the years. In Fiscal Year 2012, Kohl’s posted 18.8 billion in top-line revenue. Fast-forward to fiscal 2021, Kohl’s posted $18.9 billion in top-line revenue, representing almost no growth for nearly a decade.

Operating profits also decreased over this time as margins were constricted. Because of this, Kohl’s often trades at an attractive PE; however, it never seems to take off. The stock is currently trading at a PE ratio of 8.6.

As mentioned previously, Kohl’s suspended its dividend during the pandemic but now pays out $0.25 quarterly for a yield of 1.8%. Before the pandemic, Kohl’s had paid a dividend, which had increased each year for eight years, that peaked at a $0.70 quarterly payout. Despite the attractive PE and dividend, the stock still significantly underperformed the market for years, including dividends, making it a classic value trap.

Kohl’s Website Traffic

According to TipRanks’ Website Traffic Tool, monthly visits in the prior full month to the company’s website were down 8.58% from the same period last year.

This is not unexpected, as many “stay-at-home” orders were in effect at this time in 2020, and most have since been lifted.

Wall Street’s Take

Wall Street analysts are neutral on Kohl’s stock, with a Hold consensus rating, based on five Buys, five Holds, and two Sells.

The average Kohl’s price target of $69.08 implies 24.9% upside potential.

The Kohl’s Conclusion

Kohl’s management should be commended for shepherding the company successfully through the pandemic. The company has also survived the rise in e-commerce and looks to be on solid footing.

The problem is that growth has been nonexistent for a decade and the stock is a chronic underperformer. The PE ratio is low which makes it appear to be an attractive investment. Nonetheless, the stock will likely continue to underperform the market over the long term.

Disclosure: At the time of publication, Bradley Guichard did not have a position in securities mentioned in this article.