The world of stand-alone, physical retail is brutal. The multi-decade transition of shopping habits by consumers from in-person buying to e-commerce has left in its wake countless retailers who have failed to adapt to the new reality of how consumers shop.
Some of the strongest players in the space remain, albeit somewhat diminished versions of their former selves. Today we will examine the stand-alone retailer Kohl’s (NYSE:KSS), which has endured a trying few years and attempt to determine whether brighter days ahead.
Those familiar with the recent history of Kohl’s will know of course that the company rejected a takeover bid, which, unfortunately, is probably looks a lot better to some shareholders in the rearview mirror. Not long after in November 2022, the company announced a CEO transition plan, with Thomas Kingsbury being announced as the incoming CEO in February, 2023.
On a total return basis, Kohl’s has lagged the broader S&P 500 (SPY) over the last five years, falling by nearly 50% during that time and delivering a negative 12.8% CAGR.
New Leadership, New Day?
With a recent CEO transition and other moving pieces at the top of its executives ranks, investors could be forgiven for wondering what the plan is for the company going forward. In 2021, CFO Jill Timm (who still remains in the role) provided details on the company’s at-the-time new growth plan, where she stated “[w]e are confident in our ability to expand our operating margin to 7% to 8% by 2023”, among other things.
It seems unfair to hold a (partially) new management team to the promises of the past, but nonetheless the company has not thus far delivered. In the company’s first quarter 2023 earnings press release Kohl’s stated that “Operating income was $98 million compared to $82 million in the prior year. As a percentage of total revenue, operating income was 2.8%, an increase of 55 basis points year-over-year.” Further, the company provided guidance that operating margin for the full year was targeted at 4%.
Of course, new CEOs set new strategic visions. Kingsbury addressed his on the March conference call, stating:
We are focused on four overarching priorities in 2023 that will drive overall sales and profitability. They are: enhance the customer experience, accelerate and simplify our value strategies, manage inventory and expenses with discipline and strengthen the balance sheet. Successful execution across these priorities will unlock considerable long-term shareholder value.
We also note that Kingsbury is no stranger to in-person retail–he led Burlington Stores (BURL) from 2008-2019, leading the company through an IPO in 2013. By the end of his tenure, Burlington stock had appreciated by roughly 600%. For his part, Kingsbury seems aware of the challenge ahead. On his first conference call with the company in March he stated of the company’s results “[c]andidly, I know we can do better.”
The question, of course, is whether or not the value proposition intrinsic to Burlington–a discount retailer–can be revived at Kohl’s by Kingsbury. The answer, of course, cannot be known, but needless to say we are intrigued at what Kingsbury may do given his previous experience.
Analyst estimates for the company are, however, are priming the market for negative expectations even with Kingsbury’s arrival.
EBITDA estimates for the coming year are a consensus $1.45 billion against a consensus $17.5 billion in expected revenues. On this basis, Kohl’s is incredibly cheap with an implied EV multiple of only 0.7x.
Many stocks are beaten down unnecessarily, so we now find ourselves at a crossroads: is Kohl’s too cheap to ignore? On the one hand, this is a company currently trading at $28 a share which turned down a buyout offer a little more than a year ago from a presumably sophisticated buyer for $53 per share. Is it possible or likely that the value of the company has truly fallen by roughly half in that time? Is Kohl’s a compelling value play, or an alluring value trap?
While there is no definitive answer to these questions, we point out that over the next two years the company is expected to generate more EBITDA than its current market capitalization of $3.2 billion, which is in our minds significant.
With earnings around the corner, we’ll be keeping a close eye on how the company is able to progress on the four pillars outlined earlier in the article by Kingsbury. Of specific interest to us will be how the company plans to increase the value proposition for customers outside of promotional activities (though promotional activities are to be expected). We are also curious to see how, or if, management more fully embraces an e-commerce strategy. Our second area of focus will be inventory levels and management, how the leadership team views the current inventory velocities, and whether those velocities increase.
The Bottom Line
While turnarounds are incredibly difficult to execute and notoriously difficult to predict, the market seems to have taken notice of both the cheapness of Kohl’s and appears to be somewhat confident in Kingsbury’s ability to guide the ship. To support this, we note that over the past three months, the stock has rallied by 42%.
With all of this considered, it is with some trepidation that we say we are optimistic on Kohl’s outlook for the near term. Given the intrinsic cheapness of the stock against expected results (even in the face of the stock’s recent rally), we think that Kohl’s could be compelling for investors of a certain risk tolerance. Risks to our thesis include a recession which drives consumers away from non-discount retailers, as well as execution risk on the part of management.