Why Should You Invest in Kohl´s?

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Aug 21, 2014

In this article, let's take a look at Kohl's Corp (KSS, Financial), a $12.15 billion market cap company, which is a company that is engaged in the operation of family oriented department stores and a website (www.Kohls.com) that sell apparel, footwear and accessories for women, men and children, soft home products and housewares.

Key to Kohl's success

The stores are new if we think that 75% are less than 15 years old and half of them are new or remodeled in the past six years.The plan is to open 10 stores and to remodel between 35 and 50 stores in FY 15.

It managed to have lower SG&A ratios thanks to efficiencies reached. Also, high gross margins from exclusive brands, generates double-digit operating margins, above most of its peers.

Moreover, merchandise efforts focused on reaching a high gross margin. Further, updating the portfolio of products will benefit the business and Kohl's store environment can give better presentation that national brands will find attractive.

I think the firm has plenty of possibilities to expand into new and existing markets. It plans to improve and expand its e-commerce business, which offers customers the convenience of online shopping.

Main risk

Although the firm has been working on improving its merchandising strategy, competitors like J.C. Penney (JCP, Financial) could emerge by opening off-mall stores. Also, competitors such as Target (TGT, Financial) and Wal-Mart (WMT, Financial) are expected to continue efforts to enhance their apparel offerings.

Dividend payment

The company has good cash that allows it to reward current shareholders through dividends, in addition to opening stores or remodeling existing ones.

Dividend-payment history since 2011 affirms its commitment to maximize shareholder wealth. With a 2.5% dividend yield it is good enough to protect consumer power purchasing and is attractive for investors.

Revenues, margins and profitability

Although the firm has a negative revenue growth, earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.13 vs $1.04).

Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.

Ticker Company ROE (%)
KSS Kohl´s 14.87
TGT Target Corp 12.14
TJX The TJX Companies, Inc. 50.53
 Industry Median 9.14

The company has a current ROE of nearly 15% which is higher than the one exhibited by Target Corp. In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. So for investors looking those levels or more, the TJX Companies Inc. (TJX, Financial) could be the option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.

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Relative Valuation

In terms of valuation, the stock sells at a trailing P/E of 15x, trading at a discount compared to an average of 22.3x for the industry. To use another metric, its price-to-book ratio of 2x indicates a premium versus the industry average of 1.92x while the price-to-sales ratio of 0.7x is below the industry average of 0.79x.

As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $11,381, which represents a 2.6% compound annual growth rate (CAGR).

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Final comment

I imagine a future with consumer spending increasing as the labor market is improving. Kohl´s brand portfolio, growing e-commerce business, strong balance sheet as well as its dividend yield make me feel bullish on the stock.

The PE relative valuation and the return on equity that exceeds the industry average make me feel bullish on this stock.

Hedge fund gurus like Ray Dalio, Jim Simons, Paul Tudor Jones, Bill Nygren, Richard Pzena and John Buckingham added this stock to their portfolios in the second quarter of 2014.

Disclosure: Omar Venerio holds no position in any stocks mentioned