Time to stay away from Kohl’s

In the last five years, Kohl’s (KSS -4.16%) it really hasn’t produced much in the way of top-line growth. The retailer has struggled to return to the nearly $20 billion in revenue it reported in 2020. Because of its sluggish growth, Kohl’s must try to squeeze revenue from 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.

Second quarter and first half of the year

The second quarter pretty much showed the problem here. Comp sales fell 5.1%, with net sales down 4.2% year over year to $3.5 billion. Instead, Kohl’s squeezed more out of sales, with net income rising to $66 million from $58 million a year ago. This resulted in $0.59 per diluted share, an increase of 13.4% year over year.

Some might like the earnings growth, but I don’t think it’s sustainable in the long term if the company continues to report weak sales.

When we look at the first six months of fiscal 2024, things don’t look as promising. Net sales fell 4.7% year-over-year, while offset sales fell 4.8%. Earnings per diluted share are $0.35, compared to $0.65 per diluted share a year ago.

Looking ahead

For the full year, Kohl’s estimates net sales to decline 4% to 6%, with offset sales to decline 3% to 5%. Total diluted earnings per 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-year earnings. A short-term trader might look at this and say, “Holy cow, what a bargain.” For long-term investors, it is important to understand that continued poor sales results will make it very difficult for value to be realized here.

There are two reasons why a company has a low rating like this. The first is that the company was missed by the market. The second is that the company’s results support the low valuation. Unfortunately, in this case, it appears to be the latter.

With an average price target of $19.88, there’s not much going for it. On an earnings basis, estimates call for average full-year earnings of $2.47 per share, flat in 2025. That would give Kohl’s a forward P/E ratio of just under 8 times earnings, well in line with own companies. guidance.

That’s not far off from where the stock is currently trading, and rather than seeing 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 no surprise that the stock is down 62.5% over the past 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 to underperform the market. The retailer will have to continue to squeeze value out of stagnant sales, making long-term success more difficult to achieve.