In this article, let's take a look at Kohl's Corp (KSS, Financial), a $12.15 billion market cap company that is engaged in the operation of family oriented department stores and a website (www.Kohls.com) that sells apparel, footwear and accessories for women, men and children; soft home products and housewares.
A growing national chain
The company is one of the fastest-growing national chains in the U.S. In five years from fiscal 2006 to fiscal 2011, the company increased its selling square footage at a compound annual growth rate (CAGR) of 7.2%. Also, it has expanded its store by almost 50% from 732 to 1,089. About 75% of the stores are less than 15 years old, and half of them are new or remodeled in the past six years. The firm plans to open 10 stores and to remodel between 35 and 50 stores in fiscal 2015.
Further, we still think that Kohls 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.
The main risk
I think the main risk is a switch to other competitor that has more branded offerings. In that sense, Kohls has been working on improving its merchandising strategy, but competitors like JC Penney (JCP, Financial) could emerge begin opening off-mall stores. Merchandise efforts focused on reaching a high gross margin. Also, competitors such as Target (TGT, Financial) and Walmart (WMT, Financial) are expected to continue efforts to enhance their apparel offerings.
Dividend yield
The company was able to buy back shares and maintain dividend growth while opening stores as we have seen. Dividend-payment history since 2011 confirms its commitment to maximize shareholder wealth. With a 2.77% dividend yield, it is good enough to protect consumer power purchasing and is attractive for investors.
Revenues, margins and profitability
The firm has a negative revenue growth, but earnings per share increased in the most recent quarter compared to the samequarter a year ago ($1.13 vs $1.04).
The net income increased by 0.4% when compared to the same quarter one year prior, going from $231.00 million to $232.00 million. Although the debt-to-equity ratio is low, the quick ratio is weak, demonstrating a lack of ability to pay short-term obligations. 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 | 14.65 |
| TGT | Target Corp | 9.30 |
| TJX | The TJX Companies, Inc. | 52.42 |
| Â | Industry Median | 8.84 |
The company has a current ROE of 14.65% which is higher than the one exhibit 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 an attractive option. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 13.4x, trading at a discount compared to an average of 22.4x for the industry. To use another metric, its price-to-book ratio of 1.93x indicates a discount versus the industry average of 1.98x while the price-to-sales ratio of 0.62x 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 $10.984, which represents a 1.9% compound annual growth rate (CAGR).
Final comment
I imagine a future with consumer spending increasingas 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 (Trades, Portfolio), Jim Simons (Trades, Portfolio), Paul Tudor Jones (Trades, Portfolio), Bill Nygren (Trades, Portfolio), Richard Pzena (Trades, Portfolio) and John Buckingham (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as Manning & Napier Advisors, Inc. and HOTCHKIS & WILEY.
Disclosure: Omar Venerio holds no position in any stocks mentioned
