2023-11-22 03:00:33 ET
Summary
- Kohl's reports weak sales but boosts EPS targets for FY23, indicating potential for better days ahead.
- Sephora remains a growth driver for Kohl's, but weakness in apparel offsets the growth in beauty.
- The department store has reduced inventory levels and is poised for solid growth in the future, with the potential to produce a $5+ EPS in FY24 and beyond.
The retail space has seen a brutal year due to inventory issues and consumer spending shifts to experiential events. Kohl's ( KSS ) has been hit hard by weak demand, but the department store retailer continues to deliver substantial profits with better days ahead. My investment thesis is ultra Bullish with KSS stock trading at the lows while profits are scraping along the bottom.
Source: Finviz
Not Horrible
Kohl's reported weak sales for FQ3'23, but the company has an initiative to strip out some online promotions impacting sales, but not profits. The department store reported the following quarterly numbers :
The stock is down substantially due presumably to the sales miss, but the company boosted EPS targets for FY23 following the FQ3 beat. Kohl's now forecasts a yearly EPS of $2.30 to $2.70, up from $2.10 to $2.70, with a very low operating margin of just 4%.
The department store owner generated a $7+ EPS back during the Covid boosts, but the retail sector has run into tough comps along with a weak demand environment. New CEO Tom Kingsbury made the following statement on the FQ3'23 earnings call summing up the headwinds:
We achieved this despite a softer-than-expected demand environment driven by less-than-ideal weather and persistent macroeconomic pressures on our customer.
Sephora remains a big growth driver with a target of reaching 2025 sales of $2 billion. The strong growth in the beauty segment hasn't helped the overall business as weakness in areas like apparel have completely offset all of the growth in beauty.
The CEO was clear the retailer is positioned correctly to benefit from trends outside of apparel per this moment on the earnings call:
Enhancing the customer experience remains our top priority and represents the largest growth opportunity for Kohl's. As I shared on our Q2 call, we believe Sephora, gifting, impulse and home decor, and longer-term, new stores, will be the most significant contributors to our future growth, as these are largely white space opportunities for Kohl's.
A lot of investors see the department store retailer as a dying company, but Kohl's remains poised for solid growth in the years ahead.
The company has dramatically reduced inventory levels heading into the holiday period setting up the better FY24. Inventory ended the quarter at $4.2 billion, down 13% from last year's level of nearly $4.9 billion.
Kohl's actually has less inventory going into the 2023 holidays than back in 2019 prior to Covid when inventories were a similar to the $4.9 billion level last year.
Double Margins
All Kohl's has to do in order to produce a $5+ EPS is to recapture an operating margin in the 8% range. When combined with actual sales growth, the company has the potential to grow EPS by single digit rate on top of the $5 EPS target.
Source: Kohl's FQ3'23 presentation
Not long ago, venture firms were battling over paying $60+ for the stock. Kohl's only needs to trade at 12x a normalized $5 EPS in order to return to $60.
Back in FY19, the department store retailer was a struggling concept working on initiatives to return to consistent growth. Even in that period, Kohl's earned ~$5 per share with an operating margin of 5.5%.
The company appears vastly improved with the Sephora business and the improvements in beauty, home goods and impulse providing actual catalysts for growth. All while investors are getting a $2 dividend with a massive 8% yield due to the normalized path of the business back to a place where the payout ratio is sub-50% and the dividend yield likely dips back to a normal 3% level.
Takeaway
The key investor takeaway is that Kohl's is scraping along the bottom in FY23 due to the macro headwinds and the apparel sector inventory levels. The department store has better days ahead and investors get the opportunity to load up on the stock here at the multi-year lows.
For further details see:
Kohl's: Scraping Along The Bottom