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3 Reasons to Buy the Post-Earnings Dip in Kohl’s Stock

KSS stock could rise by 100% over the next few months

Off-mall retail giant Kohl’s (NYSE:KSS) was supposed to report bad numbers this quarter thanks to the novel coronavirus pandemic. But when the company finally updated investors in its first-quarter earnings report, the numbers were shockingly bad. So bad that KSS stock plunged 10% after the retailer announced earnings, bringing shares more than 60% off their pre-Covid-19 levels.

3 Reasons to Buy the Post-Earnings Dip in KSS Stock
Source: Sundry Photography/Shutterstock.com

How bad were the numbers?

First-quarter sales plunged 43.5%. Gross margins compressed by nearly 20 percentage points. What was a narrow adjusted net profit in the year ago quarter, swung to a wide adjusted net loss this quarter.

In short, Covid-19 killed Kohl’s in the first quarter of 2020.

That much is obvious. What’s less obvious, however, is that playing the contrarian here may be the smart move. That is, I think it’s time to actually buy the dip for three big reasons:

  1. The worst is over. Pandemic hysteria is dying down. Consumer behavior is normalizing. Kohl’s is re-opening stores. First-quarter numbers were as bad as they are gonna get. Second, third, and fourth-quarter numbers will be much better.
  2. Kohl’s is attractively positioned longer-term to survive the “Retail Apocalypse” and actually thrive as other, less differentiated physical retailers go under.
  3. Kohl’s stock is dramatically undervalued at current levels. Economic normalization over the next few quarters should spark huge gains.

All in all, then, I think it’s time to go shopping with Kohl’s stock. Rock bottom is in. The rebound rally is coming next.

The Worst Is Over for KSS Stock

It increasingly appears that the worst of the coronavirus pandemic is over for Kohl’s.

On March 20, the company closed all of its stores. Kohl’s first quarter ended in early May. That means that for over a third of the first quarter, Kohl’s was operating without a physical store base — which is a huge deal since 76% of this company’s sales happen in the physical channel.

Kohl’s began reopening those stores in early May amid broader economic re-opening measures across the U.S. Since May 4, Kohl’s has re-opened about 50% of it stores.

Over the next few months, more states will join the economic reopening wave — including California, where Kohl’s has a large presence. As they do, Kohl’s will keep reopening stores, and consumers will gradually get back to regular shopping patterns.

As all that happens, Kohl’s growth trends will only improve. Second, third, and fourth-quarter numbers will be much better than first-quarter numbers. Indeed, there is an opportunity for third- and fourth-quarter sales to maybe even grow year-over-year.

Big picture: I think it’s safe to say that Kohl’s has already hit rock bottom.

Attractively Positioned

Zooming out, investors are fearful that even if the coronavirus lows are in, Kohl’s may not survive the e-commerce driven “Retail Apocalypse” that has taken the lives of physical retail peers like Sears and J.C. Penney.

Such fears are grossly overstated.

Kohl’s is a strong retailer, with differentiating features, and an enduring value prop, the sum of which will help this company thwart e-commerce competition, stabilize market share in the U.S. retail vertical, and ultimately grow sales and profits in the long run.

Simply consider:

  • Kohl’s is both off-mall and off-price, meaning that the retailer has limited exposure to declining mall traffic and robust exposure to strong off-price shopping trends (i.e. consumers always love low prices).
  • Four out of Kohl’s top five selling brands are private brands (you can only buy them at Kohl’s), meaning that the company has built a product moat for itself.
  • About 80% of Americans live within 15 miles of a Kohl’s store, giving the company a strong convenience value prop and a strong fulfillment network for e-commerce logistics.
  • Kohl’s digital business is booming, growing at a 17% compounded annual growth rate since 2014 to comprise an impressive 24% of total sales in 2019. Importantly, 50% of those sales happen in the mobile channel.
  • Kohl’s also has a strong loyalty program, with 30 million members accounting for the lion’s share of total sales.

Given these favorable attributes, Kohl’s will survive the “Retail Apocalypse”. More than that, Kohl’s will actually gain market share as peer retailers, like J.C. Penney, go under. Such market share gains will help Kohl’s return to positive sales and profit growth in the coming years.

Kohl’s Stock Is Undervalued

At present, Kohl’s stock is priced as if the company’s sales and profit trends are going to forever remain depressed.

That won’t happen.

Over the next few years, Kohl’s will leverage its favorable attributes to stabilize and even gain market share in the wake of peer retailer bankruptcies, paving the path for positive revenue and profit growth. When that happens, KSS stock will soar.

How high? My numbers say this stock could finish 2020 up near $33 — nearly 100% above where shares trade today.

That’s based on my modeling, which assumes revenue growth trend stabilization and slight margin expansion into 2025, and yields a potential 2025 earnings per share goal for Kohl’s of $4. Kohl’s stock normally trades around 12-times forward earnings. That combination, plus a 10% annual discount rate, gets you to a 2020 price target for KSS stock of nearly $33.

Bottom Line on KSS Stock

Yes, this is arguably the worst possible macro-environment for Kohl’s. But the coronavirus nightmare is coming to a close.

As the Covid-19 situation improves over the next few months — and economic activity normalizes and Kohl’s keeps re-opening stores — Kohl’s growth trends will only improve, especially since this retailer is supported by favorable long-term fundamentals.

As they do improve, KSS stock will soar. Not by 10%. Or 20%. But by potentially 100% into the end of the year.

Luke Lango is a Markets Analyst for InvestorPlace. He has been professionally analyzing stocks for several years, previously working at various hedge funds and currently running his own investment fund in San Diego. A Caltech graduate, Luke has consistently been recognized as one of the best stock pickers in the world by various other analysts and platforms, and has developed a reputation for leveraging his technology background to identify growth stocks that deliver outstanding returns. Luke is also the founder of Fantastic, a social discovery company backed by an LA-based internet venture firm.  As of this writing, he did not hold a position in any of the aforementioned securities but may initiate a long position in KSS within the next 72 hours.


Article printed from InvestorPlace Media, https://investorplace.com/2020/05/3-reasons-to-buy-the-post-earnings-dip-in-kss-stock/.

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