Over the last six months, Kohl’s shares have sunk to $14.41, producing a disappointing 6.9% loss - a stark contrast to the S&P 500’s 5.4% gain. This may have investors wondering how to approach the situation.
Is there a buying opportunity in Kohl's, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.
Why Do We Think Kohl's Will Underperform?
Even though the stock has become cheaper, we're cautious about Kohl's. Here are three reasons we avoid KSS and a stock we'd rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.
Kohl’s demand has been shrinking over the last two years as its same-store sales have averaged 4.7% annual declines.
2. Revenue Projections Show Stormy Skies Ahead
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect Kohl’s revenue to drop by 1.2%. it’s tough to feel optimistic about a company facing demand difficulties.
3. Weak Operating Margin Could Cause Trouble
Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.
Kohl's was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.3% was weak for a consumer retail business.
Final Judgment
We see the value of companies helping consumers, but in the case of Kohl's, we’re out. Following the recent decline, the stock trades at 10.5× forward P/E (or $14.41 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward a dominant Aerospace business that has perfected its M&A strategy.
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