"Expect Great Things" From This Retailer

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

Kohl's (NYSE: KSS) has become one of America's favorite places to shop since opening the doors to its first store over 51 years ago. Today, they operate 1,146 stores in 49 states and have 9 distribution centers in 8 states. Kohl's has one of the greatest loyalty programs you will find, which brings customers back on a regular basis. By obtaining a Kohl's charge card, you earn points towards rewards and can receive Kohl's Cash. I have witnessed first-hand the greatness of this program. My mother and I had gone to Kohl's to get dress shirts, and by the time we were done shopping we had over $300 in goods. As we checked out, my mother used her Kohl's card and handed the cashier coupons as well as her Kohl's Cash, which looks more like a receipt. Our total dropped from $300+ to just $4 and change. I was absolutely amazed. I questioned both my mother and the cashier, who just laughed it off like it was an every day thing. The funny thing is that this is, in fact, an everyday occurrence at Kohl's. I now understand why my mom goes to Kohl's twice a week, and I join in as often as I can. It is this kind of customer care and service that makes Kohl's a great retailer.

Brands Mix

Kohl's carries national brands as well as private and exclusive brands available only in their stores. National brands include Nike, Reebok, Adidas, Carter's, Jockey, and New Balance. Kohl's also carries and is the number one retailer in the United States of Lee, Gold Toe, Bali, Levi's, Dockers, and Columbia. 

Exclusive brands are important to the business model because customers shopping for those products must go to a Kohl's location or on to their website. Kohl's says that these brands are their "differentiator." Exclusive brands include Jennifer Lopez, LC Lauren Conrad, Simply Vera and Princess Vera by Vera Wang, Tony Hawk, Food Network, and Rock & Republic. These and other exclusive brands are key contributors to the gross margin of Kohl's, as they state in their factbook. Since Kohl's has significant control in the production and manufacturing of the products, they have much more pricing flexibility. This allows them to minimize costs and maximize profits.

Store Growth

Kohl's store growth has slowed compared to recent years. They added 547 stores from 2002 to 2008, but only 38 stores in 2011 and 19 in 2012. In the third quarter 2012 factbook they state, "We will continue to focus our future expansion efforts on opportunistic acquisitions given the current retail environment." Kohl's could expand if they wanted to, but their expansion strategy is designed to achieve profitable growth, and the current condition of the market does not fully support this. When the market is stronger, look for store growth to ramp up.

Current Share Price

Kohl's is currently trading at around $45.50. The shares are up around 8% this year, but down over 12.5% over the last 6 months. The stock is currently 17.6% below its 52 week high of $55.25 reached on Nov. 1, 2012. Kohl's has a very low beta of 0.8, meaning this stock is less volatile than the overall market. 

Nov. 29, 2012 was the major trading day that caused this stock's under-performance. On that day Kohl's reported November sales, which decreased 5.6% year-over-year, missing Wall Street expectations. This report caused the stock to drop 11.9% in one day, and it continued lower over the next several weeks. This sell-off was warranted, but was also way overdone. 

Earnings Growth

Kohl's reported third quarter 2012 earnings in November of 2012, stating that third quarter sales increased for the 4th straight year and were up 2.6% from 2011. Kohl's reports fourth quarter earnings on Feb. 28, and is expected to bring in $1.63 per share. This is a 10% decrease from the fourth quarter in 2011, but these earnings will be on the rise in 2013. Full year earnings for 2012 will be around $4.14 per share, which is down from $4.30 per share in 2011. Earnings are expected to grow to $4.55 per share in 2013 and $5.13 in 2014. These earnings would mean that, at $45.50, Kohl's trades at just 10 times 2013 earnings and 8.9 times 2014. With an average price-to-earnings ratio of 14 for the last 5 years, Kohl's could trade around $63 per share in 2013. I think this is a bit high, but a return into the mid-$50's is very likely.

Other Key Statistics

In Kohl's third quarter 2012 factbook, they reported numerous positive statistics. Their gross margin has reached 38.2%, a 1.3% jump from 2008. Operating income is up to 11.5% from 10.1% in 2008, and net income as a percent of sales has reached 6.2% from just 5.2% in 2008. Return on average shareholders equity and return on average assets have also been on the rise. Positive statistics such as these are crucial for continued growth.

The Dividend

In 2011, Kohl's initiated its first quarterly dividend of $0.25. This bullish move by management reflected their confidence in the long term cash flow of Kohl's. The very next year, the quarterly dividend was raised to $0.32 per share. This annual dividend of $1.28 makes their stock yield 2.8%. This is a great yield for a stock with as much upside as Kohl's has. If 2013 turns out as strong as projected, management could up the dividend by another few cents. I would like the stock to get to a 3% yield so that dividend seeking investors pile in. 

Competition

Dillard's (NYSE: DDS) and J.C. Penney (NYSE: JCP) are two of Kohl's top competitors. Dillard's operates 284 stores and 18 clearance centers in 29 states. They sell apparel, cosmetics, and home furnishings, along with beauty services at most locations. The key brands Dillard's carries include Coach, Ralph Lauren, MAC, UGG, Jessica Simpson, and the very popular Michael Kors. Dillard's, like Kohl's, has brands exclusive to their locations, and they grow each year. Dillard's has had one of the most impressive runs since 2009, going from just $3 and change to almost $90 before falling to $77 as of today. Dillard's is very strong financially and will continue to grow, but I believe the return on investment from Kohl's is higher at this point in time. Keep an eye on Dillard's though--if this one continues to fall it will be worth an investment.

J.C. Penney has been around since 1902 and currently operates 1,100 stores in the United States and Puerto Rico. They offer apparel, cosmetics, home furnishings, and other products similar to those of Dillard's and Kohl's. This stock has been beaten down as of late and just cannot seem to get any positive press. Over the last year, the stock is down over 48% and has traded up and down over the last few months. Analysts cannot seem to get a grasp on this one and other analysts have just given up trying. They have missed earnings for three consecutive quarters, and CEO Ron Johnson has been under fire because of it. He has been blamed for everything from earnings misses to where he lives and how he travels. Regardless of the high risk-to-reward this company may have, I do not want to invest in a stock with as much negativity around it as this one has. 

Foolish Bottom Line

I think this is a great time to own Kohl's. With the pullback the market has provided and the growth expected in 2013 and 2014, Kohl's has the potential to run up well over 20%. With this expected gain, I am initiating an outperform call on CAPS. They report earnings on Thursday, Feb. 28 so if you do not get in this stock before-hand, wait to read the updated statistics before making a move. Also, keep an eye on Dillard's because if they continue to drop, they will be worth an investment.


JoeySolitro1 has no position in any stocks mentioned. The Motley Fool owns shares of Dillard's. 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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