Kohl’s Corp. (KSS) was founded in 1962 and has grown into a leader in the retail industry, with over 1,100 stores; the $7.9 billion market cap company should generate about $19 billion in sales this year, notes Ben Reynolds, editor of The Sure Retirement Newsletter.
From 2007 through 2018, the company was able to grow earnings-per-share by about 4.7% annually thanks to the company’s aggressive share buyback program.
Kohl’s is set for a mid-single-digit decline in earnings-per-share this year. Thereafter, we are more cautious with our growth rate assumption since the share repurchase program becomes more difficult with a much higher dividend payout ratio.
Compared to other retailers, we believe Kohl’s has a competitive advantage in its well-entrenched store footprint outside of large malls, private-label brands, a large loyalty program, and an Amazon return service that is driving traffic.
This is offset somewhat by the competitive nature of the business, but it still allows Kohl’s to stand out. During the last recession Kohl’s held up quite well, with earnings per share of $3.39, $2.89 and $3.23 during the 2007 through 2009 period — representing a decline of just 15% when competitors were faring much worse.
Additionally, we are encouraged by management’s commitment to extinguish debt early, which bodes well for interest coverage.
Over the past decade, Kohl’s average price-to-earnings multiple is about 13. We believe that 11 times earnings represents a good estimate of fair value for the company, given its recent weak results and increasing competition in the space.
Given that we expect Kohl’s to generate full-year earnings of $5.30 per share for 2019, the stock trades for a price-to-earnings ratio of just 9.2.
This makes shares appear quite undervalued, and an expansion of the price-to-earnings ratio could boost annual returns by 3.6% per year over the next 5 years. In addition, we expect the company to report 4.0% annual earnings growth through 2024.
Lastly, the stock has a current dividend yield of 5.4%. In total, we expect annual returns of 13.0% per year for
Kohl’s over the next 5 years.
