There’s been plenty of coverage of the American brick-and-mortar retail sector’s decline. Kohl’s (NYSE:KSS) in particular was struggling prior to the onset of the novel coronavirus. The pandemic only made the situation worse for the company and for KSS stockholders.
Sure, Kohl’s made a splash in the financial headlines when the company started accepting returns from e-commerce behemoth Amazon (NASDAQ:AMZN). I discussed this important development in a previous InvestorPlace article about Kohl’s.
Then I read a power-packed article by InvestorPlace contributor Larry Ramer that really opened my eyes. In it, Ramer argues that there are better places for retail-sector investors to park their capital than KSS stock.
In addition to that, I recently came across a prominent analyst’s opinion on Kohl’s. This, along with Ramer’s research, changed my outlook on Kohl’s stock. It might be best to sell your shares if you own them, or to avoid the stock completely if you’re thinking about buying them.
A Closer Look at KSS Stock
For several decades, $80 was a hard ceiling for Kohl’s stock. There were five instances of the bulls attempting to break through that resistance level but failing miserably.
The most recent attempt occurred in late 2018. Hopes were high as it really looked like the bulls were going to have their moment this time. Yet, it wasn’t meant to be. Probably due to the Amazon effect (a.k.a. the e-commerce revolution), Kohl’s stock declined to the $50 by the beginning of 2020.
And as we now know in hindsight, things only got worse from there. The coronavirus crisis forced people to stay home and shoppers made their purchases online, mostly through Amazon. Kohl’s, which relies heavily on in-person shopping, simply couldn’t compete in this dire scenario.
The already-battered KSS stockholders now had to watch aghast as the shares dropped from $50 to a mind-melting 52-week low of $10.89. Alas, the bulls’ dreams of KSS trading above $80 were thoroughly shattered.
Kohl’s stock did manage to regain the $22 level in early August. Interestingly, though, the trailing 12-month price-to-earnings ratio is 39.53, which isn’t even that low. This suggests that even at a reduced price, KSS shares aren’t necessarily a bargain.
Kohl’s Gets a Downgrade
Analysts certainly aren’t always spot-on in their assessments, but sometimes they’re worth listening to. A team of analysts at UBS, led by Jay Sole, offered a particularly interesting perspective on Kohl’s recently.
Sole and his team downgraded Kohl’s stock and lowered their price target to $14. That suggests significant downside from the current share price.
In defense of this position, they explained, “To deliver steady long-term growth, we believe brands can no longer rely on Malls or Dept. Stores to drive traffic… Brands have to generate their own audiences and become destinations.”
Their point is well taken. Kohl’s has never had a strong online presence and relies heavily on in-store foot traffic. In a world dominated by e-commerce, Kohl’s has utterly failed to adapt.
Better Alternatives To Kohl’s
Sure, AMZN stock is comparatively expensive, but at least it represents a business model that can thrive while shoppers stay at home.
And AMZN stock isn’t the only alternative to KSS. If you must invest in brick-and-mortar department store chains, Ramer has a couple of ideas for you:
“Based on multiple metrics, TJX (NYSE:TJX) and Macy’s (NYSE:M) are stronger than Kohl’s. In TJX’s fiscal 2020, its net sales surged to $41.7 billion from $38.97 billion in FY18, and its earnings per share climbed to $2.67 from $2.43.”
Even when I was defending Kohl’s stock in my previous article, I couldn’t find stats like that. Kohl’s simply doesn’t have the earnings to justify its price-to-earnings ratio. I’m sorry to say it, but you’re just better off finding a different stock to invest in.
The Bottom Line
I’ve learned a lot from other market commentators, and in this instance, they actually caused me to do a U-turn on Kohl’s stock. Until Kohl’s can demonstrate an ability to adapt to a drastically changed world, KSS shares aren’t the ideal retail-niche investment.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.