Value Shopping at Kohl's

09/05/2016 8:00 am EST

Focus: STOCKS

Chris Quigley

Contributing Editor, The Prudent Speculator

While retail stocks have been in the investor doghouse, we remain long-term fans of the stock of this leading department store operator, notes value investors Jason Clark and Chris Quigley in The Prudent Speculator.

Department-store operator Kohl’s (KSS) reported quarterly financial results that surprised investors, resulting in shares rising more than 18%.

Despite reducing its full-year guidance (the Street was already expecting a lower EPS figure), Kohl’s quarterly results showed adjusted earnings per share of $1.22, 18% above consensus analyst expectations.

Additionally, the firm reported top-line results of $4.18 billion that was slightly better than forecasts.

Kohl’s ended the quarter with 1,150 Kohl's stores, 12 FILA Outlet stores, and three Off/Aisle clearance centers in 49 states, compared with 1,164 Kohl's stores at the same time last year.

The company now expects full-year adjusted EPS of $3.80 to $4.00, compared to prior guidance of $4.05 to $4.25.

We were pleased to see that Kohl’s realized growth in units per transaction, which seemingly indicates that newer products are resonating with customers.

Additionally, we think its new deal -- which will bring Under Armour (UA) products into its locations and online platform –- should help sales and could boost traffic.

Also, it is not out of the realm of possibility that Macy’s (M) announcement that it will shutter another 100 stores could benefit Kohl’s in some regions.

We continue to like that management is looking for creative ways to drive new traffic and increase ticket levels, via key initiatives like localization of store assortments, expanded beauty offerings and its loyalty program.

There is no doubt that Kohl’s will have to continue to invest in and evolve its online business, while decreasing its store count, though we like the experimentation with a smaller store concept.

Kohl’s has a solid balance sheet and generates robust free cash flow. KSS currently trades for less than 12 times the next-12-month earnings projection and offers a 4.5% dividend yield. Our Target Price has been raised to $66.

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By Jason Clark and Chris Quigley, Co-Editors in The Prudent Speculator

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