Over the last five years, Kohl's (KSS 3.20%) really hasn't delivered much in terms of top-line growth. The retailer has struggled to get back to the nearly $20 billion in revenue that it reported in 2020. Because of its sluggish growth, Kohl's has to attempt to squeeze earnings out of weaker revenue streams. Based on how long the company has been dealing with this, along with the retailer's forward guidance, I think it's time to steer clear of the stock, as it will likely continue to underperform the broader market.
The second quarter and first half of the year
The second quarter pretty much showcased the problem here. Comp sales were down 5.1%, with net sales decreasing 4.2% year over year to $3.5 billion. In contrast, Kohl's squeezed more out of sales, with an increase in net income to $66 million, versus $58 million a year ago. This led to $0.59 per diluted share, a 13.4% increase year over year.
Some might like the earnings growth, but I don't think it's sustainable long term if the company keeps reporting weak sales.
When looking at the first six fiscal months of 2024, things don't look as promising. Net sales are down 4.7% year over year, while comp sales are down 4.8%. Earnings per diluted share are at $0.35, versus $0.65 per diluted share a year ago.
Looking ahead
For the full year, Kohl's projected net sales declines of 4% to 6%, with comp sales decreasing 3% to 5%. Total earnings per diluted share are expected to be between $1.75 and $2.25 per share. On the liberal side, that would give the stock a forward price-to-earnings (P/E) ratio of 8.56 times full fiscal year earnings. A short-term trader might look at that and say: "Holy cow, what a bargain." For long-term investors, it's important to understand that the continually weak sales results are going to make it very difficult for value to be realized here.
There are two reasons for a company to have a low valuation like this. The first is that the company has been missed by the market. The second is that the company's results support the low valuation. Unfortunately, in this case, it seems to be the latter.
With an average price target of $19.88, there isn't much implied upside here. On an earnings basis, estimates are calling for average full-year earnings of $2.47 per share, without any change in 2025. That would give Kohl's a forward P/E ratio of just under 8 times earnings, very much in line with the company's own guidance.
That's not far off from where the stock is trading at today, and rather than viewing it as unrealized value, I see it as a lack of confidence in a company that has simply struggled to drive sales growth. Given these factors, it's not surprising that the stock is down 62.5% over the last five years.
Unless you want to bet on a complete turnaround that we've been waiting years to see, Kohl's is likely to continue underperforming the market. The retailer is going to have to keep squeezing value out of stagnant sales, making long-term success harder to realize.
