Stocks of most retailers, especially department stores, seem worthless in today’s market. Kohl‘s Inc. (NYSE:KSS) is an exception.
Macy’s Inc. (NYSE:M) is worth just $6.62 billion on annual sales of $25.77 billion. Dillards Inc. (NYSE:DDS) is worth just $1.64 billion on revenue of $6.4 billion. JC Penney Co. Inc. (NYSE:JCP) is valued at $1.23 billion despite sales of over $12 billion.
Partly because it’s known as a discount clothing chain and its stores aren’t in malls, but in strip centers and out-parcels, Kohl’s has bucked the trend. It carries a market cap of $7.65 billion on annual revenue of $18.68 billion and, for the quarter ending in July, it made a respectable profit — $208 million or $1.44 per share, on revenue of $4.14 billion.
But the stock is being propped up by something else, even beyond a 55-cent-per-share dividend yielding 4.85%.
Kohl’s is getting points for trying.
Rage Against the Dying of the Light
This week, Kohl’s announced it would pack and ship Amazon.com Inc. (NASDAQ:AMZN) customer returns in Los Angeles and Chicago.
The deal covers just 82 stores and to get it Kohl’s is stocking some of Amazon’s Echo speakers (Alexa, can I get a better price for this blouse?), but investors got a tingle from it. KSS shares, which started at $45, shot up past $47 per share on Sept. 19 before finally settling at $45.38.
Kohl’s is getting favorable press coverage because, rather than wait for other brands and the internet to swallow it whole, its managers are trying things. Earlier, the chain had made a deal to stock Under Armour Inc. (NYSE:UAA) at full mark-up. Early results were promising.
Luke Lango thinks all this makes Kohl’s a “retail gem.” The company’s sales grew between the spring and summer quarters, although July’s figures still trailed those of a year ago. With a price-to-earnings multiple of 11.2 and that dividend yield of nearly 5% fully supported by earnings, what’s not to like? It’s better than the other retailers.
What’s not to Like?
Professional analysts are not yet convinced.
Of the 22 following the company, 15 are solidly on the fence, rating Kohl’s a “hold,” while the others are almost evenly split between those urging investors to buy and those urging them to sell. The company is next due to report its earnings on Nov. 9, with analysts expecting 71 cents per share on revenue of $4.3 billion. These figures would be just short of those achieved a year ago.
Despite all the ink being spilled on the “Kohl’s turnaround,” the fact is the chain is barely holding its own in the present environment. Sales are not growing and, on an annual basis, neither are margins. What’s keeping the stock price up is the dividend, supported by earnings. KSS is being pushed as a value stock, but it’s mainly an income stock, and you want to watch those earnings carefully to make sure they cover the dividend should you decide to buy it.
The Bottom Line
What could Kohl’s do differently?
It might start with a Web site that doesn’t look quite so much like that of JC Penney, with “sponsored products” that aren’t mysteriously out of stock. It might act strategically, not just tactically, and let investors know what it plans to be, say, five years from now, rather than just going from deal to deal.
It’s good that Kohl’s is trying things, that it’s not just letting itself get pulled into the tar pit with the other mainline retailers, but I think it’s still lacking strategic sense — something that makes it truly different. When it can explain what makes it unique in 25 short words or fewer, I’ll consider it.
You don’t just get points for trying. Success, and a vision for future success, is required.
Dana Blankenhorn is a financial and technology journalist. He is the author of the historical mystery romance The Reluctant Detective Travels in Time, available now at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.
