Shopping for Profits

04/15/2005 12:00 am EST


John Dessauer

President, John Dessauer Investments, Inc.

John Dessauer rarely "goes shopping" for retail stocks. His last retail buy, over a year ago, was Abercrombie & Fitch, which has since risen 68%. While he still sees more potential for the stock, for "new money" he now suggests a different retailer, department store chain Kohl's. 

"Kohl’s Corp. (KSS NYSE) operates 637 stores in 40 states. Until 2003, its record was outstanding as earnings per share climbed at a rate of 20% or better for many years. In 2003, however, management stumbled, and an 8% decline in earnings raised questions about the future. The stock plunged, falling from near $80 to $44 and later to less than $40. However in the fiscal year that ended January 29, 2005, management put all the pieces back together. Earnings for fiscal 2004 were $2.12 a share, up 25% from fiscal 2003. For this year, Wall Street estimates range from $2.50 to $2.60, a 20% gain. Management’s goal is to grow earnings at a 20% annual rate. Wall Street trims that to an expectation of 17% a year, but that is still excellent.

"This year, Kohl’s will enter the Florida market, which I believe will be a big growth opportunity. New brands — such as Chaps in men’s and Royal Velvet — will also spur new sales in existing stores. Organization, systems, experience, and financial management are the keys to success in retail and Kohl’s has demonstrated a truly remarkable ability to compete and grow in a tough business. Assume Wall Street’s modest projections are correct. On that basis, in two years Kohl’s will earn $3.50 to $3.55 a share. If the p/e matches the growth rate, the stock will trade at $60. If management beats expectations, earnings will be $3.70 and the p/e could reach 20 or better for a stock price of $75 to $80. With Kohl’s, we have a strong company with proven management and a strong balance sheet. That keeps the risks low for a stock that could double in two years or less. Buy up to $55."

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