Morningstar | No-Moat Kohl’s FVE Raised on Debt Reduction and Free Cash Flow Expectations
We are raising our fair value estimate for Kohl’s to $77 per share from $59. While we maintain our no-moat view, we do not anticipate the turnaround plan will require large capital expense increases. We have reduced our annual capex forecast over the next decade to about $850 million from $1.1 billion. We also expect greater debt reduction from Kohl’s and have lowered our forecast of average long-term debt over the next decade to $1.6 billion from $2.3 billion. As we expect more cash to be available for shareholders, we have increased our expectations of annual stock buybacks over 2020-27 to about $550 million from about $250 million. We have also increased our forecasts for Kohl’s average gross (to 39.4% from 38.8%) and operating (to 7% from 6%) margins over the next 10 years on expectations of 2% inflation in credit card revenue (previously 0%).Despite our increased fair value estimate, we believe no-moat Kohl’s will struggle to generate growth as e-commerce, discount, and specialty stores take apparel sales from department stores. While Kohl’s has responded to threats with increased e-commerce and discounts, these efforts have degraded operating margins by more than 400 basis points since 2011 (to 7%). Kohl’s 2014 Greatness Agenda plan has produced some successes, including greater digital capabilities and a large loyalty club (more than 30 million members), but operating income has dropped since the plan was announced. Also, while we think Kohl’s new partnerships with Amazon and Aldi have promise, we think it is too early to conclude they will add sales.
We view Kohl’s reported 1.2% same-store sales growth for the 2018 holiday season as disappointing. Although we forecast same-store sales of 1.8% in 2018 and 0.5% in 2019, we do not believe Kohl’s will report positive same-store sales after 2019. We think competitive forces continue to overwhelm Kohl’s turnaround efforts.
After our increase in valuation, we view Kohl’s as undervalued at current levels.
Kohl's operates department stores, a website (www.Kohls.com), FILA outlets, and Off-Aisle clearance centers. The company's Kohl's stores and website sell proprietary and national brand apparel, footwear, accessories, beauty and home products. The company's website includes merchandise that is available in its stores, as well as merchandise that is available only online. The company's portfolio includes private brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life and exclusive brands that are developed and marketed through agreements with brands such as Food Network, LC Lauren Conrad, Elle and Simply Vera Vera Wang.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.