KOHL'S CORP KSS
March 04, 2020 - 12:46pm EST by
SpocksBrainX
2020 2021
Price: 35.82 EPS 4.4 0
Shares Out. (in M): 154 P/E 8.2 0
Market Cap (in $M): 5,516 P/FCF 5.5 0
Net Debt (in $M): 1,257 EBIT 0 0
TEV ($): 6,773 TEV/EBIT 0 0

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  • Retail
  • 2nd grade book report
  • Value trap

Description

This isn't going to be a popular idea and in recognition of that fact I'll go ahead and preemptively score myself a 1 just to save you the trouble (though my ideas always seem to attract a lot of votes (downward!) cause I don't do left field (sans the occasional CAD idea) and because I'm not that inventive or intelligent), but while many things look grim in a story you get much cheaper prices in situations like that.   

I'm going to skip details on the business itself - note there are four different write-ups on KSS you can see on VIC but if you don't know the story then all you need to do is go to the nearest store for a shopping visit - what you will find is a clean, efficient layout that looks up-to-date, professional, and appealing (my opinion, but based on 30 years of shopping retail as investor).   Suffice it to say, KSS is a brick and mortar saturated retailer (1146 stores in 2012 and 1159 in 2018 and end of Q3; no indication of openings in 2020 but likely minimal).    

So with that said, let me note again on this site I am not a "punchcard" investor cause that's not how I do things (I am old, relatively speaking) - I believe in having multiple picks, all representing some sort of bet (fast growers, stalwarts, asset plays, etc.) with position sizes spaced over large breakpoints (10% typically), with rapid buying and selling based on changing risk/reward (I don't compute any IV in my ideas - whack a mole investing).  In declines like we've been having, I am moving money in and out of many multiples of ideas (HD as an example, which has fluctuated over $20 in the past 5 days even though nobody in their right mind would really think that made a lick of sense if they stopped a minute to think about it), and would not hesitate to move a position like this out with a 10% move (even less) and trade it multiple times in a year.  IMO, that's what you do with these types of stocks IMO - you don't ever hold them, but maybe you can do it better.  

That said, a few small observations:

*over the past 13 years or so KSS has traded at $24.3 (in 2008) and a high of $83.3 (in 2018) with an average price hovering around the 50s, so this is the bottom on the range.  In essence, the stock has gone nowhere for a very long time, so again it is purely a trading vehicle where you play the ranges.  And the best time to buy is when everybody hates it and it goes way down (and sell when people get excited by recent good results), cause whatever the issues that exist today become tomorrow's compares and vice versa.

*over the past 3 to 5 years, the business has generated 5455 to 9092 in gross cash flow, with the current market cap at 5581.  Using the average (weirdly, the same for 3 and 5 years), you get 1818 in yearly cash flow.  Granted, many see KSS as road kill with good reason, but AMZN has been gaining shares for years and KSS keeps putting up cash flow and I think they have a real niche (again, visit a store).  I don't think anything is going to seriously change that dynamic at least in the near term (5 years for sure), but if you trade the stock anyway none of the hang-wringing about specific concepts and the wide open future makes any sense anyway cause you can take a profit and be gone.  Besides, if things really get bad, it will be easy to see quickly.  

*the company currently pays a ttm dividend of $2.68, or 412m.  This dividend is covered by 1.8b in average cash flow over the past 3 and 5 years  and it compares to a 10 year treasury under 1% at present.  At $35.82 as I type this, that's a 7.5% yield.  This is a bonus only - nobody owns KSS cause of the yield. 

*the BS contains 723m in cash, 1856 in long term, with 124m in financing leases and obligations.  Inventory finished 2019 at 3537m up 1.8%.   The BS is fine - no issue here, nothing to see.  

*Q1 is going to suck - projection is for 40c, with some issues in the women's section in particular, but Q1 is a low earnings quarter anyway and the news is in the stock (though obviously it could make things go down again in 3 months).  Q4 last year wasn't so great and the year was forgettable - down 9% and 19% in operating income from the previous two years, though unlike those years KSS let inventory run and now they are going to step back from that.  pus, consider that Q4 was a weird season, with a fluky calendar leading to fewer Holiday shopping days - this is the compare for next year.  

*the virus.  This is a risk, but the US is a big country and....well, you can think about this yourself.  If need be, KSS can cut the CapEx budget (750m in 2020; DA is expected to be 900m) to free up cash, and the buyback plan is optional.  Inventory availability via supply chain disruption if not currently an issue.

*lastly, KSS has been pretty smart about the single most demoralizing thing with retailers - buyback plans which any sane person knows has ZERO correlation with shareholder value in no-moat business models like this one (proof - this was a $60 stock in 2009, the price now about half that - despite the share count going from 305m to 154m).  In the last 4 years they've spent 1729m on this useless activity, or 432m a year, with a plan for 400m for 2020.   At least they don't get wild and crazy like some value traps with more buybacks than CFFO, but it is unfortunate they don't devote most of this to the dividend if they want to distribute cash.

So what makes this work?

You got me.  I know people hate this on this board cause you always come up with intelligent and brilliant ways of predicting what will happen, but I'm sorry - I don't do that, rarely do that, and won't start now, especially since the dynamic of predicting success in no-moat retailers fundamenally changed with the advent of e-comm. 

I could go over the things the company is doing (changing up women's sections; changing leadership;  becoming an Amazon drop-off point; tinkering with store sizes and the like;  expanding beauty;  shifting space to athletic, etc. etc. etc. )  as the company says, it is making 'bold moves' but everybody makes bold moves when you get eh results so they are constantly trying new things.  Predicting when something turns up is darn near impossible (for me at least) - but back in 2017 the stock was at $35 and the bold moves had it go up to $83 in short order.  These things happen in retail, and if they don't - you get a dividend while you wait and you DCA here to get a lower price if things get worse.   

Suffice it to say, this would be a single idea in a diversified portfolio.  As a pure WAG, I don't think a 50% gain in 3 years or sometime in three years would be outlandish (you aren't required to agree), esp. since you'd get that dividend while you wait.  On the other hand, it could fall 10% at the end of Q1 ($29 would put you at a cap of 4.4b or less than 3 years of GCF even if the 1.8b  proves overly optimistic) too, but I can live with that risk cause I can always buy more.   But there is a lot of risk anytime you venture in retail in particular.  This would mark my, don't know, 100th trade in KSS over the past umpteenth years.  

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.

Catalyst

investors attracted to 7.4% dividends covered by significant cash flow and the eventual upturn in results 

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