Kohl’s NYSE: KSS shares languished for much of 2020 as the pandemic ravaged department stores. But the November 9th vaccine news changed everything. Finally, there was an end in sight. Kohl’s sales dropped again in the fourth quarter – down 10% yoy – but the market is a forward-looking mechanism; an imminent recovery has shares trading up nearly 200% since the November news.
Has the recovery already been fully priced in? Or is there more upside for Kohl’s investors?
To answer that, let’s start by drilling down on the fourth-quarter results.
In Q4, sales improved sequentially for the third consecutive quarter, showing that Kohl’s has done a good job adjusting to the new-normal. Peaking COVID cases and cold weather combined to prevent a strong in-store sales recovery, but digital sales grew 22% yoy. Digital sales accounted for 42% of net sales, up from 31% in the year-ago period. Kohl’s is leveraging its stores to satisfy the elevated digital demand, fulfilling nearly 45% of digital sales vs. 35% in Q4 2019.
Adjusted fourth-quarter EPS of $2.22 a share blew away consensus estimates of $1.01 and narrowed the full-year loss to $1.21 a share. For context, Kohl’s adjusted earnings came in at $4.86 a share in 2019.
Kohl’s attributed part of its fourth-quarter rebound to Amazon NASDAQ: AMZN returns. Yes, Kohl’s processes Amazon returns at its 1,160 stores. Why would the company do that? Because those people often buy Kohl’s products during the trip. January was an excellent month for that business due to holiday returns.
Double-Digit Growth is in the Cards for 2021
Kohl’s expects sales to increase “in the mid-teens percentage range” for full-year 2021, which may be a little lower than Wall Street’s expectations for 17.5% sales growth, depending on how you look at it. Operating margins are expected to be around 4.5% to 5%. Management is projecting adjusted EPS of $2.45 to $2.95 a share; the midpoint of $2.70 a share is a little higher than consensus estimates of $2.67.
The revenue growth looks impressive at first glance, but it is coming off a low base. If revenue grows 17.5% in 2021, as Wall Street expects, it would still be more than $2 billion lower than 2019 levels. The operating margin of 4.5% to 5% would also be lower than the 6.1% recorded in 2019.
Wall Street expects revenue to grow in 2022 and 2023 as well. But it doesn’t see revenue reaching 2019 levels in either of those years.
So, why are shares trading higher than they were at the beginning of 2020?
Kohl’s management believes it can get the company’s operating margin up to 7% to 8% by 2023. On the Q4 call, CFO Jill Timm said, “Four key areas driving margin improvement are inventory management, sourcing cost reduction, price and promotional optimization, and supply chain transformation.”
Kohl’s is Benefiting from Off-Mall Position
Mall-based companies face a tough road ahead. People will shop in-person post-pandemic, but some of the habits that have been developed over the last year will stick.
Kohl’s, with its off-mall positioning, stands to benefit. On the Q4 call, CEO Michelle Gass said, “I think the factors that have heightened during the pandemic, like convenience, play to our strengths given our off-mall position. I think consumers will continue to like curbside offerings, that type of thing. So that doesn't go away. But like I said, again, we'll expect that they'll be wanting to come in the store, probably a bit more than the pandemic.”
How Should You Play Kohl’s?
There are reasons to believe that Kohl’s shares have more upside from here. The 2023 operating margin goal is ambitious, but very possible. Shares are changing hands at just 11.7x projected 2023 earnings.
But 2023 is a long way off. So much can happen between now and then. While Kohl’s is doing a lot of things right, there are legitimate doubts as to whether the company can thrive in an e-commerce dominated future.
It might be best to wait for a pullback before considering a Kohl’s investment. If shares dip 15-20%, the risk-reward would get a lot more favorable.
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