2023-03-31 18:24:54 ET
Summary
- Kohl's Corporation's new CEO just bought $2 million worth of shares close to multi-years lows.
- The department store retailer had recently guided to dire FY23 targets.
- Kohl's Corporation stock is too cheap at 4.5x normalized earnings and far cheaper if Kohl's can recapture peak post-covid earnings.
Only a month ago, Kohl's Corporation (KSS) reported a brutal quarter. The department store retailer fell to new lows with the CEO painting the picture of a tougher year ahead than originally thought. My investment thesis remains ultra Bullish on the stock following the CEO buying a lot of shares after painting a very dire outlook.
Source: Finviz
Brutal Quarter
When Kohl's reported the FQ4'22 results , the new CEO probably kitchen-sinked the quarter. The department store retailer saw gross margins collapse leading to a large quarterly loss, and profit forecasts for FY23 were particularly weak.
The company saw FQ4'22 gross margins dip 1,000 basis points to only 23% primarily for the following two reasons:
- 750 bps - clearance markdowns
- 200 bps - product inflation.
Kohl's was aggressive clearing inventory in the quarter. The department store retailer actually ended the quarter with a slightly higher merchandise inventories level than the end of FY21 at $3.2 billon, but the inventory levels are now more inline with demand.
On the FQ4'22 earnings call , new CEO Tim Kingsbury had the following to say about the improving inventory position to start FY23:
Let me now turn to our third priority for 2023, which is managing inventory and expenses with discipline. As I mentioned earlier, we took proactive actions during the fourth quarter to clear out excess inventory and slow selling goods. This is best seen through our inventory progression over the past few quarters. Inventory was up 48% year-over-year at the end of Q2, up 34% at the end of Q3 and up just 4% at year-end, despite a tougher sales environment. Inventory is now generally back in line with our sales performance when compared to 2019.
The company guided to FY23 earnings of only $2.10 to $2.70 per share. The target is far below the $4 to $5 EPS the retailer produced before covid, and the business is far better now with the additional delivery options and the addition of the Sephora stores.
Kohl's will add another 250 Sephora locations this year, bringing the total to 850 stores. Ultimately, the company aims for 1,100 Sephora locations by 2025.
Large Insider Buy
In a surprising move considering the dire outlook for FY23, the new CEO purchased 92,500 shares for roughly $2 million. The stock traded above $30 a few weeks prior to earnings, so Tim Kingsbury clearly understood to wait until after the earnings report to buy shares.
Kohl's Corporation stock traded at the recent lows below $22, and such large purchases by the CEO can cause bottoms to form in stocks down over 60% from the highs hardly a year ago. Kohl's trades at only ~4.5x normalized EPS targets similar to the ~$5 earned by the company in FY19.
Our view remains that the department store has the potential to recapture most the earnings upside post-covid. Kohl's saw EPS swell to $7.33 in FY21 ending on January 29, 2022 and the new Sephora stores were set to add $2 billion to revenues when fully implemented in 2025.
The CEO buying shares would signal the dire EPS outlook for FY23 is the low point and these other catalysts will likely occur to boost EPS targets to at least the low end of prior ranges. Investors have the potential to buy the shares now and actually see Kohl's return to the high-end numbers of FY21, after all some retailers like DICK'S Sporting Goods, Inc. ( DKS ) continue to maintain those peak EPS levels , levels far above pre-covid numbers.
Takeaway
The key investor takeaway is that the department store retailer Kohl's Corporation has far higher earnings potential with the Sephora stores with the inventory issue resolved. With the new Kohl's Corporation CEO likely lowballing the EPS estimates for FY23, the insider purchase should signal an all-clear sign for investors to start buying shares.
For further details see:
Kohl's: Follow The New CEO