Kohl's has been on fire lately. In the past six months alone, the company’s stock price has rocketed 46.8%, reaching $21.45 per share. This was partly due to its solid quarterly results, and the performance 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?
We’re happy investors have made money, but we’re sitting this one out for now. Here are three reasons we avoid KSS, plus one stock we’d rather own.
1. Shrinking Same-Store Sales Indicate Waning Demand
Same-store sales is an industry measure of whether revenue is growing at existing stores, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Kohl’s demand has been shrinking over the last two years as its same-store sales have averaged 3.8% annual declines.
2. 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 operating margin has generally stayed the same over the last 12 months, averaging 3.7% over the last two years. This profitability was lousy for a consumer retail business and caused by its suboptimal cost structure.
Final Judgment
We see the value of companies helping consumers, but in the case of Kohl's, we’re out. Following the recent surge, the stock trades at 14.5× forward P/E (or $21.45 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - we think there are better opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
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