Kohl's Trade Could Be Profit Opportunity as New CEO Drives Pivot

Almost six months ago, I wrote to you concerning retailer Kohl's KSS. I was becoming optimistic on the stock. It had been down big. Third quarter earnings were coming up. Tom Kingsbury had replaced Michelle Gass (who was awful) as CEO in 0222. Kingsbury wasn't much better, if at all.

That said, readers with sharp memories may recall that I was seriously considering grabbing a few shares ahead of the holiday season as the firm seemed to be trying to clean up its fundamentals. Long story short: Those earnings badly missed on both the top and bottom lines, guidance was just putrid, the stock sold off further and I obviously never took on that long position. Hence, there was never any follow up piece.

Here we are a few miles down the road. The stock has fallen from a last sale of $18.72 when I wrote that piece in October to a close of $8.33 last night. Yuck. Over that time, the percentage of the float held in short positions has expanded from a scary 49%, which I had looked at as potential support at that time, to a scarier 68%. That shows me that there are enough traders that, while they will have to buy those shares back at some point, still expect more air to come out of these tires.

The Fourth Quarter for Kohl's Stock

Last week, Kohl's posted an adjusted EPS of $0.95 for the fourth quarter that beat Wall Street by a whopping $0.21. Huzzah! Not so fast. 

The firm's GAAP EPS print hit the tape at $0.43, which fell $0.34 short of consensus. Sales printed at $5.39 billion, which actually beat Wall Street. The hiccup was in comp sales, which crossed the tape at a putrid -6.7% year over year. The firm also guided the current full year towards net sales "growth" of -5% to -7% (with Wall Street looking for -1.35%) and a diluted EPS of $0.10 to $0.60 (with Wall Street looking for a rough $1.26). Yuck. Wall Street said sold, sold, sold and sold.

The Current Quarter for Kohl's

For Q1 2025, which the firm will report in mid-to-late May, Kohl's is projected by the community of analysts to post adjusted EPS of $-0.52 or a GAAP EPS of $-0.60. 

Sales are seen at $3.02 billion. This would be down from the year-ago comps of an adjusted -$0.24 on $3.18 billion. All six sell-side analysts that I can find that still follow this name have revised their Q1 estimates to the downside since the quarter started.

Kohl's Leadership

In January, Ashley Buchanan replaced Kingsbury as the chief executive. Last week, Buchanan emphasized the company's strategic pivot toward customer satisfaction. Guess that had not been a prior concern? He (yes, Buchanan is a "he") wants to re-establish the firm as a value leader and refocus on proprietary brands that operate within the stores such as Sonoma and Flex.

CFO Jill Timm (who is indeed a "she") detailed areas of underperformance and discussed planned reinvestment in inventories where the firm is strong or has had some growth. The firm also announced the closure of 27 underperforming locations and one ecommerce fulfillment center. These closures will result in a one-time $76 million charge.

Kohl's Stock Fundamentals

Free cash flow has been positive for three successive quarters, which I found as a pleasant surprise. The balance sheet is a little rough. While the firm's current ratio stands at 1.08, which technically just barely does pass muster, most (86.9%) of the firm's current assets are in inventories. 

The firm only has a cash position of $134 million (down 42% in six months), while the short-term debt load stands at $643 million. This means that the firm will have no choice but to refinance most of that debt load at prevailing interest rates.

The firm's long-term debt load stands at $1.174 billion, which has not been whittled down at all for three successive quarters, which maybe should scare investors. That said, the firm owns much of its own locations and the property it stands on. While Kohl's does have $5.159 billion on the liability side of the ledger in capital leases, it also has $9.691 billion on the books on the asset side in property, plant and equipment.

Know What That Does?

That makes the firm's tangible book value per share a cool $34.25. This is a stock that closed at $8.33. 

Close 27/28 locations? Sell some land. Improve the balance sheet. Continue to run the most efficient, more profitable locations. I'm not promising gummy bears and candy canes. However, with a brand new CEO trying to turn around the firm, an enviable tangible book value and an obvious way to monetize some of that tangible value while firming up the core business, oh... and all of those short sellers, the stock could return a couple of bucks per share on a small investment.

The Kohl's Stock Chart

Though my gut was wrong on this name six months ago, KSS has historically been a good stock for me. The firm's performance saved me from myself at that time. Is this an opportunity? Or... is this once great retailer going away? I don't think Kohl's is going away. It does, however, have a lot of work to do.

Readers will see a downtrend in place since April 2024, so for almost a year. The stock had recently lost the lower trendline but is fighting to take it back as I write. Relative strength is pitifully weak. The daily MACD looks like something Svengoolie would air on Saturday night. That said, there are three unfilled gaps that the stock has left in its wake over the past year. Those gaps would require ticks of $11.80, $17.50 and $26.70 to fill. Filling all of them is probably too much to ask, but filling the gap created last week would still be a gain of 42% from here. That's possible and would not even get the stock to the 50-day SMA.

My thought is that this trade is worth a small level of exposure. The time frame is the May earnings release. No commitment. No large allocation. Just an opportunity to make a few bucks on the side. 

I still like TJX TJX much more as a retailer going into a tougher economy.

At the time of publication, Guilfoyle was long TJX equity.