What’s next for Kohl’s (NYSE:KSS)? Kohl’s stock has doubled off its novel coronavirus lows. But, with a long road “back to normal” for retail, it’s a challenge for shares to bounce back to their pre-pandemic price levels (around $45 per share).
Yet, for investors looking at shares today, there could be opportunity. Granted, trends are not on this company’s side. But, other dynamics at play make it easier for this department chain, relative to its rivals.
Sure, this may not be the best retail comeback play out there. More discount-focused names like TJX Companies (NYSE:TJX) are in a much stronger position. But Wall Street knows that full well, and has valued TJX shares accordingly.
On the other hand, investors have largely written off Kohls’ near-term prospects. As a result, shares could move signficantly higher from today’s prices if an earnings rebound happens much sooner than expected.
In short, the risk/return proposition may mean shares today are a cautious buy. Let’s dive in, and see why that’s the case.
Kohl’s Stock Post-Pandemic
With lockdown orders ending across the country, and the company’s stores mostly reopened, can Kohl’s quickly get back on track? It’s possible. That’s the view of BofA Merrill Lynch’s Lorraine Hutchinson. Earlier this month, the analyst upgraded shares from the equivalent of “hold” to “buy.”
Her rationale? The company’s “superior reopening trends versus peers,” for one. But also, the fact this department store chain, unlike its rival, Macy’s (NYSE:M), is almost entirely (95%) non-mall based. With its primarily suburban, strip-mall locations, Kohl’s is much better positioned to make a comeback.
With her upgrade, Hutchinson also increased her price target from $20 per share, to $27 per share. In other words, about 18.5% upside from today’s prices.
Granted, given continued retail uncertainty post-pandemic, you may think it’s not worth it to dive into Kohl’s stock at about $22 per share, only for the chance shares head back to $27 per share. But, the potential return may be greater than this analyst’s target.
Back in June, this commentator noted how the company may be a potential winner from the J.C. Penney’s (OTCMKTS:JCPNQ) bankruptcy. As Penney’s shutters stores, those sales may move over to Kohl’s locations.
Yes, this is only a needle-mover if Penney’s liquidates and goes out of business completely. But, an accelerated decline of that bankrupt retailer may accelerate this retailer’s sales and earnings rebound.
And, if earnings rebound sooner than Wall Street currently projects, shares could move much higher from here.
Shares Are Already Priced for the Worst
In a July 10 article on Kohl’s, InvestorPlace’s Larry Ramer made the case why TJX and Macy’s may be better retail comeback plays.
With regards to Macy’s, I think the jury’s still out. As our own Matt McCall recently wrote, the legendary retailer’s near-term and long-term prospects are questionable.
But, when talking about TJX, I agree that the TJ Maxx and Marshall’s parent is in a much stronger position as we navigate the Covid-19 situation.
Yet, Wall Street already knows this, and has given shares a rich valuation. Due to the pandemic, near-term earnings are not a great metric for valuation, so let’s use the fiscal year ending January 2022 estimates to compare. Right now, TJX trades for 20.9 times estimated FY22 earnings. By comparison, Kohl’s stock trades for 14.2 times its estimated FY22 numbers.
Sure, that’s in line with the company’s historical earnings multiple before the pandemic.
But, what if the company’s earnings bounce-back faster than expected? The forward P/E mentioned above is based on the average projections for FY22. The range runs from massive losses ($4.99 per share) all the way to earnings of $4 per share. Perhaps $4 per share next fiscal year is a far reach. But, what if earnings manage to claw back to $3 per share? At a 14x P/E, that’s $42 per share. In other words, potential share price upside of 80%.
So, what’s the takeaway? Today’s valuation more than factors in the worst-case scenario coming out of the pandemic. But, if results exceed expectations, shares could move significantly higher in the next 12 months.
Kohl’s Stock Is Still a Cautious Buy
In hindsight, many investors are kicking themselves. After March’s coronavirus-driven market sell-off, hard hit retail stocks were changing hands at fire sale prices. But, in the past four months, many (like this company) have seen their shares move significantly higher.
Yet, that doesn’t mean the party’s over. As uncertainty continues to linger over this stock, there’s additional upside opportunity for those willing to take a contrarian position.
Sure, there’s no guarantee that a faster-than-expected rebound for this retailer will happen. But, weighing downside risks against potential gains in the next year, consider KSS stock a cautious buy.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.
