Are better margins enough to turn KSS stock around?

Department store chain Kohl’s Inc. New York Stock Exchange: KSS has returned to profitability after a period of normalization lasting many years. Stocks have skyrocketed on the back of pent-up demand during COVID-19, but rising inflation and weakening consumer discretionary spending have caused inventories to rise. Most retailers were overloaded with inventory in an effort to mitigate any future supply chain disruptions. This isn’t exclusive to Kohl’s. Inventory management has also been a problem for retailers such as Under Armor Inc. NYSE: UAA, Macy’s Inc. NYSE:M and Nordstrom Inc. New York Stock Exchange: JWN.

Inventory normalization promotes margin recovery

Rising inventories have caused retailers to ramp up promotions to move products, which has resulted in reduced margins. This created lopsided earnings reports showing top-line revenue growth but bottom-line profit contraction as they applied steep discounts. As inventory levels reduced, margins began to improve, once again strengthening EPS. This is the case of Kohl’s, which managed to reduce its inventory by 10% year-on-year to $2.9 billion in the fourth quarter of 2023.

A strong finish for 2023

On March 12, 2023, Kohl’s reported fourth-quarter 2023 EPS of $1.67, beating consensus analyst estimates of $1.28 by 39 cents. Revenue fell 1.1% year over year to $5.71 billion, missing consensus estimates of $5.8 billion. Comparable sales fell 4.3%. Inventories were $2.9 billion, down 10% year over year. Operating cash flow was $789 million in the fourth quarter and $1.2 billion in full-year fiscal 2023. Gross margin as a percentage of net sales increased 347 basis points in 2023 to 36.7 %. Operating profit improved to $717 million from $246 million in 2022. Operating cash flow was $1.2 billion. Net income in 2023 was $217 million or $2.85 per diluted share compared to a net loss of $19 million or minus 15 cents per diluted share in 2022.

Online help provided by Kohl

Kohl’s posted in-line guidance for fiscal 2024 with EPS of $2.10 to $2.70 versus consensus analyst estimates of $2.62. Full-year 2024 revenues are expected to decline 1% to 1% year-over-year, or $16.42 billion to $16.75 billion versus consensus estimates of $16.8 billion dollars. Comparable sales are expected to be unchanged at 2%.

Kohl’s CEO Tom Kingsbury commented, “As we look ahead, we are incredibly focused on delivering comparable sales growth in 2024. Our strategic initiatives are positioned to build momentum and contribute more meaningfully. We will partner with Babies” R” Us to significantly expand our presence in the children’s category, which represents an exciting white space opportunity for Kohl’s.”

The acquisition wildcard

On March 3, 2024, Arkhouse Management and Brigade Capital Management increased their takeover bid to acquire Macy’s for $24 per share in a $6.6 billion all-cash offering. This is an improvement over the previous offer of $21 per share, or $5.8 billion, which the board rejected. Macy’s confirmed that it had received the offer and that the Board would review it. No further comments will be provided until the evaluation is complete.

Kohl’s had its round of takeover bids in 2022. The Franchise Group Inc. (NYSE: FRG) and Sycamore Partners were reportedly bidding for the company in the $64 to $54 range, but were ultimately rejected and withdrew further offers. There is always the possibility that buyers will take the opportunity of depressed stock prices to go after the company again. Kohl’s real estate assets were valued at approximately $8 billion in 2022, significantly more than the current market capitalization of $2.75 billion. Watch AI-powered insights on MarketBeat.

The value perspective seems economical

Kohl’s shares are trading at 10.79X forward earnings and have heavily discounted its real estate holdings. The stock has a short interest of 25.5%, making it very susceptible to short squeeze potential.

Telsey Advisory reiterated its Market Perform rating and raised its price target to $28 per share, up from $25. The company noted that improved gross margin leverage, lower transportation costs and markdowns, shipping costs and the 10% decline in inventory were all factors in the price target update. The analysts commented: “As such, we maintain our Market Perform rating. However, following the fourth quarter beat, we raise our price target to $28 from $25 previously, implying a 10.7x multiple on the our two-year EPS estimate of $2.62 versus the recent NTM multiple of 10.3x and the average five-year multiple of 10.6x.”

Kohl’s Analyst Ratings and Price Targets I’m on MarketBeat. The titles of Kohl’s competitors and competitors can be found with MarketBeat Stock Screener.

Daily breakdown of the symmetrical triangle

The daily candlestick chart on KSS illustrates a symmetrical triangle pattern. This pattern consists of a descending upper trend line consisting of lower highs starting at $29.44 on December 27, 2023 and an ascending lower trend line with higher lows starting at $24.07 on January 18, 2024. Both trend lines connect to the apex point, at which point a breakout or breakdown occurs. In this case, the split formed after an initial breakout attempt on the Q4 2023 earnings report. Shares fell below the $26.80 lower trend line as shares sold off in the following days. The daily relative strength index (RSI) has fallen below the 40 band. The pullback support levels are at $24.07, $22.59 at the low level of the weekly market structure, $21.78 and $20 ,36.

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