On Monday, Kohl's (KSS +1.36%) revealed new long-term financial goals at its investor day meeting. Based on the company's targets, it appears that Kohl's expects to grow quite slowly for the foreseeable future, despite the company's turnaround initiatives.
Investors weren't impressed, sending the stock down 13% on Monday. (To be fair, the broader market sold off, too.) However, notwithstanding this uninspiring long-term guidance, Kohl's looks like one of the best value stocks in the market today.
Pursuing multiple growth opportunities
The company's biggest growth initiative of the past few years has been its partnership with Sephora. Last year, the department store chain opened Sephora boutiques in 200 of its stores and converted its online beauty offerings to a new collection co-branded with Sephora. It plans to expand its partnership with the popular beauty retailer to 600 stores later this year and at least 850 locations in 2023.
Image source: Kohl's.
At its investor day, Kohl's provided financial targets for its new Sephora partnership for the first time. It aims to grow the Sephora business to $2 billion of annual revenue by 2025. Much of this growth will come from completing the Sephora in-store rollout (and potentially growing beyond 850 stores). But the company is also planning merchandise enhancements, greater omnichannel integration with Sephora, and coupons for customers using the company's Amazon returns service to drive traffic and sales growth.
Kohl's is also gearing up for its first major store base expansion in many years to help drive top-line growth. The retailer intends to open at least 100 small-format stores over the next four years to reach new customers in smaller markets. It expects these stores to generate over $500 million of annual sales.
Lastly, Kohl's is using data science, loyalty program enhancements, and continued upgrades to its merchandise assortment to support sales growth.
Not expecting much growth
The company's ambitions for the Sephora business and its new stores are significant relative to its recent annual revenue of approximately $20 billion. Furthermore, the Sephora shops are bringing in new customers, many of whom are shopping other departments, too. Kohl's also has a significant opportunity to gain market share in apparel from weaker rivals that closed stores during the pandemic.
Image source: Kohl's.
Nevertheless, Kohl's set very modest financial targets. Over the next few years, it aims to grow sales at a low-single-digit annual rate and earnings per share (EPS) at a high-single-digit rate compared with fiscal 2022. In short, the slow growth that management predicted in its 2022 guidance may continue for the foreseeable future.
Investors weren't impressed by this outlook. In particular, activist fund Macellum Capital Management pointed to the subpar growth expectations as yet more evidence that Kohl's needs a big board and management shakeup.
An attractive stock regardless
Based on its Tuesday closing price of $53.35, Kohl's stock trades for a little more than seven times the midpoint of its fiscal 2022 EPS guidance range of $7 to $7.50. This kind of rock-bottom valuation is typically reserved for companies with very weak balance sheets and companies with declining earnings.
NYSE: KSS
Key Data Points
By contrast, Kohl's has a solid balance sheet, with investment-grade credit ratings from all of the major ratings agencies. And while its long-term forecast doesn't call for very impressive growth, even high-single-digit EPS growth would justify a much higher stock price.
Moreover, management is likely offering conservative long-term targets, perhaps because of the volatile external environment (e.g., inflation fears, supply chain pressure, and high oil prices). In addition, EPS growth will depend on how much stock the company buys back, which in turn depends partly on the share price. The longer the stock stays stuck in the $50 to $60 range, the greater the impact the company's share repurchase program will have on EPS growth.
In fact, I think the company's adjusted EPS is likely to reach $10 by 2024, or 2025 at the latest. As investors begin to recognize the company's long-term earnings power, the stock could soar into triple-digit territory within a few years.
