What a brutal six months it’s been for Kohl's. The stock has dropped 31.7% and now trades at $15.41, rattling many shareholders. This might have investors contemplating their next move.
Is there a buying opportunity in Kohl's, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, 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 why KSS doesn’t excite us, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales show the change in sales for a retailer’s e-commerce platform and brick-and-mortar shops that have existed for at least a year. This is a key performance indicator because it measures organic growth.
Kohl’s demand has been shrinking over the last two years as its same-store sales have averaged 4.3% annual declines.
2. Weak Operating Margin Could Cause Trouble
Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses — everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Kohl's was profitable over the last two years but held back by its large cost base. Its average operating margin of 3.4% was weak for a consumer retail business.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Kohl’s $6.53 billion of debt exceeds the $429 million of cash on its balance sheet. Furthermore, its 5× net-debt-to-EBITDA ratio (based on its EBITDA of $1.20 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Kohl's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Kohl's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Kohl's, we’re out. After the recent drawdown, the stock trades at 11.1× forward P/E (or $15.41 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. There are superior stocks to buy right now. We’d recommend looking at a top digital advertising platform riding the creator economy.
Stocks We Would Buy Instead of Kohl's
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