Kohl’s Shares Jump on Unexpected Q3 Profit; Target Price $32

Kohl’s, the largest department store chain in the United States, reported a surprise profit in the third quarter, but net sales plunged over 13% as consumers bought less apparel and footwear during the COVID-19 pandemic.

The U.S. department store retail chain reported adjusted diluted earnings per share of 1 cent per share, better than market expectations of a 43-cent loss. That was largely driven by cost-cutting and layoffs.

Following a surprise quarterly profit, Kohl’s shares closed 11.58% higher at $29.18 on Tuesday. However, the stock is down over 40% so far this year.

Kohl’s net sales plunged over 13% to $3.78 billion in the third quarter, below Wall Street estimate of $3.86 billion.

“3Q EPS upside driven by better GM and much better exp control while topline a bit softer. Management doing a good job playing DEFENSE during COVID-19 by shoring up the balance sheet (recent debt offering), cutting capex/op-ex, and reducing inventories substantially. A return to OFFENSE is visible on the horizon signalled by the return of a dividend in 1H’21. Shares cheap and we raise price target to reflect EPS beat. However, topline needs firmer footing for shares to break out,” said Randal J. Konik, equity analyst at Jefferies.

“Shares have likely bottomed as sales trends are getting less worse and earnings losses have turned to slight profits. The stock is not widely held and could benefit from the continued market rotation out of “growth” stocks into “value” names. We think the biggest driver of stock upside ahead would be: a) continued improvement in topline (needs to turn positive), b) indications that share losses to TGT and others are dissipating, and c)a return of op margin improvement towards recent historical avg (e.g., +MSD% – HSD%),” J. Konik added.

Executive Comments

“Our third-quarter results exceeded our expectations with significant sequential sales and profitability improvement. Digital sales growth remained strong and our actions to improve our gross margin showed great progress. We also further strengthened our financial position and fully repaid our revolver during the period, which underscores the solid cash flow generation of our business,” said Michelle Gass, Kohl’s chief executive officer.

“As we look ahead, we are incredibly focused on executing against our new strategic framework, which represents our greatest opportunity to drive long-term sales and profit growth and create shareholder value in the coming years. In addition, through disciplined capital management, we plan to reinstate a dividend during the first half of 2021,” added Gass.

Kohl’s Stock Price Forecast

Eight equity analysts forecast the average price in 12 months at $25.71 with a high forecast of $30.00 and a low forecast of $19.00. The average price target represents a -11.89% decrease from the last price of $29.18. From those eight analysts, one rated “Buy”, six rated “Hold” and one rated “Sell”, according to Tipranks.

Morgan Stanley gave the base target price of $15 with a high of $32 under a bull-case scenario and $9 under the worst-case scenario. The firm currently has an “Underweight” rating on the Department store company’s stock. Evercore ISI raised their target price to $33 from $20 and Credit Suisse upped the stock price forecast to $30 from $23.

Several other analysts have also recently commented on the stock. Telsey Advisory Group increased their target price to $24 from $20. Kohl’s had its price objective boosted by investment analysts at Bank of America to $30 from $27. The firm presently has a “buy” rating on the stock.

Analyst Comments

“Kohl’s (KSS) comped the comp in 2018, however, momentum struggled to continue in 2019 as a series of tailwinds began to wane (eg. Tax Cuts and Jobs Act, competitor closures). 2020 recession risk likely exacerbates sales declines and market share loss, while delaying expected strategic initiatives,” said Kimberly Greenberger, equity analyst at Morgan Stanley.

“Merchandise offering (40% private label) has lost resonance with consumers over the past 5 years, leaving Kohl’s in a weakened competitive position, particularly relative to the more compelling value of Off-price retailers. We believe sales declines, falling store margins, and revenue shift to the high variable cost eCommerce channel could make it difficult for Kohl’s to ever grow earnings again,” Greenberger added.

Upside and Downside Risks

Risks to Upside: 1) Kohl’s exceeds its comp forecast while gross margin exceeds the company plan. 2) Buybacks increase above our forecasts. 3) Kohl’s gains distribution access to “hot” center core brands. 4) CECL has no impact to credit profit share – highlighted by Morgan Stanley.

Risks to Downside: 1) Margin contracts more than expected. 2) CECL has a larger impact to credit profit share than anticipated. 3) COVID-19 impact more severe than expected.

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