This Retailer Looks Undervalued

Daniel is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Being on the lookout for bargains is part of being an investor. Many retailers have taken it on the chin since the beginning of the crisis as consumers have been squeezed for disposable income. While the stock market as a whole doesn’t look particularly cheap at the moment, a number of retailers are still trading at very attractive valuations, compared not only to the broader market, but also to their industries. One of these inexpensive retail stocks is Kohl’s (NYSE: KSS), an American department store chain.

Stock Overview

Kohl’s operates a chain of department stores in the US, with almost 1,150 branches in 49 states. Largely aimed at selling apparel, the retailer also offers home products and housewares. The firm has a market cap of $9.74 billion and has around 30,000 employees. The stock is down almost 11% in the last year, putting it close to its 52-week lows. With a beta of .83, the stock is less volatile than its benchmark, and offers a respectable 3% dividend sustained by a payout ratio of 28%.

Earnings and Guidance

EPS has beaten analyst expectations for five consecutive quarters, beating by $0.03 in the most recent report. For Q3 2012, sales were up 2.6% to $4.5 billion and comp store sales were up 1.1%. The ecommerce division especially is achieving strong growth, with a 50% increase in sales over the same period last year. For Q4 2012, management expects a total sales increase of 7%-8% with a comp sales increase of 3%-4%. For the full-year, EPS guidance has been narrowed from $4.50-$4.65 to $4.52-$4.60. The company is fairly optimistic as well about its growth prospects for 2013.

Fundamentals and Valuations

The stock appears unabashedly cheap, trading at 9.7x earnings compared to the industry average of 17.5x and the S&P average of 18.8x. The price to book is only 1.6 and the price to sales is a very low 0.51. The operating margin is very decent at 10.6% and the return on equity is also respectable at about 17%. The company has about $550 million in cash, which should allow them to continue expanding their chain and the process of remodeling some of their stores. Total debt sits at $4.58 billion, which gives the company a total debt to equity ratio of about 75.

Kohl's largest competitor is Target (NYSE: TGT), which operates nearly 1,800 stores in the United States. The company trades at 13.34x earnings and 2.35 to book, with a lower 7% operating margin. The retail giant, which offers free WiFi in all its stores to allow customers to quickly compare prices, has also been doing very well in terms of earnings. Additionally, the company this week announced the continuation of its price matching program. 

TJX (NYSE: TJX), another American competitor, trades at a pricey 18.95x earnings and an enormous 9.08 to book, although their quarterly growth rate of 11% is considerably higher than Kohl’s’ 3%. TJX has an enviable cash position and little debt, as well as encouraging earnings and stock performance in the last 12 months. But its rich valuation leaves some room for it to drop. 

Bottom Line

While the market as a whole looks somewhat expensive to me at the moment, there are certainly still bargains to be found. The retail sector especially seems to have some good deals, of which Kohl’s is an example. With strong earnings and a reasonably comfortable cash position, the company appears able to continue its good performance in the coming year. Additionally, it is priced very attractively compared to the industry and the overall market. 


DUJames has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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