Kohl’s (NYSE:KSS) stock plummeted in mid-August after the struggling department store reported second-quarter numbers that — while better than expected — were still pretty awful because of the novel coronavirus. Worse yet, those bad numbers from KSS stock were accompanied by management’s commentary that things aren’t going to get much better anytime soon.

No wonder KSS stock tanked 15%.

But this near-term weakness is a longer-term buying opportunity in Kohl’s stock.

Here’s why.

Kohl’s Earnings Were Bad

Kohl’s second-quarter numbers weren’t great.

Second-quarter revenues were down 23% year-over-year. Gross margins fell 569 basis points. Selling, general and administrative dollars dropped only 17%, so you had some deleveraging going on. Net profits dropped 80%.

Everyone expected these bad numbers.

After all, Kohl’s stores were closed for most of the quarter. When they reopened, they operated with limited hours, and at limited volumes. Wall Street was fully aware that Kohl’s revenues and profits were going to tank in the quarter, and indeed, neither fell by as much as expected.

Why, then, did KSS stock fall off a cliff?

Because Wall Street also expected things to get better in the third quarter. But management said that probably won’t happen. July sales decelerated relative to June, and with school reopenings this year massively disrupted, back-to-school sales are off to a choppy start.

So, it increasingly appears that Kohl’s will suffer from significant sales and profit erosion for at least the next few months.

Near-Term Weakness in KSS Stock Won’t Last

This slowdown in the Kohl’s growth trajectory won’t last.

The reality is that consumer behavior is already starting to normalize and — while this normalization has paused thanks to a resurgence of Covid-19 cases nationally — it will resume much more rapidly once we get a vaccine. Such a vaccine will likely be broadly and easily accessible to the general public in 2021. Once that happens, consumers will start going back to retail stores again, consumer spending trends will meaningfully rebound and Kohl’s will get back to business as usual.

For Kohl’s, returning to “business as usual” is a good thing.

That’s because — unlike many of its peers — Kohl’s is a differentiated, high-quality department store retailer with many attractive features, including:

• 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.
• 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 robust convenience value prop and a widespread 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. This program accounts for the lion’s share of total sales.

In other words, a return to “normal” in 2021 will be a return to steady growth for Kohl’s.

Longer-Term Market Share Opportunity

One thing worth mentioning here is that, when Kohl’s does return to normal in 2021 and 2022, the retailer will have a huge opportunity in front of it to expand its brick-and-mortar retail market share on the back of multiple Covid-19-inspired retail bankruptcies.

According to CNBC, 44 retailers have filed for bankruptcy in 2020. And we’re only in August.

Many of those retailers have heavy location and product inventory overlap with Kohl’s, particularly J.C. Penney (OTCMKTS:JCPNQ) and Neiman Marcus. This overlap gives Kohl’s a visible and compelling opportunity to capture up-for-grabs sales from those now defunct retail operations.

Such brick-and-mortar retail market share expansion should help offset share losses at the hands of e-commerce players, and overall guide Kohl’s to more stable, 2%-3% revenue growth post-pandemic. Retail industry consolidation will also improve gross margins by reducing competitive pressures and promotional activity.

Kohl’s could be looking at a very strong 2021 and 2022.

Kohl’s Stock Is Undervalued

Considering that near-term weakness will turn into longer-term strength, KSS stock is dramatically undervalued at $20 today.

This is a company that, last year, did almost $5 in earnings per share.

There’s really no reason that Kohl’s can’t get back to $5 in EPS within the next few years.

Covid-19 headwinds will abate. Kohl’s will leverage its winning attributes to capture up-for-grabs market share on the back of multiple retail bankruptcies in 2020. Gross margins will improve as the apparel retail industry consolidates and promotional pressures ease. Tight cost control from management will drive marginally positive operating leverage.

Connecting the dots, it’s very reasonably to think that, by 2024 or 2025, Kohl’s is back at $5 in earnings per share.

The stock normally trades around 11 times forward earnings.

An 11 times multiple on $5 in earnings per share implies a future price target for KSS stock of $55.

That’s almost triple today’s price tag.

Bottom Line on KSS Stock

Kohl’s stock certainly doesn’t look like a winner right now.

But it is.

Today’s headwinds will pass. Growth will come back into the picture. Profits will come roaring back. And so will KSS stock.

So buy today, and wait out the storm. Patience will be rewarded handsomely.