Kohl’s Makes Steady Inventory Improvements. Will Buyers Step In?

Key Points

• Kohl's has been trying to stage a turnaround.
• Kohl's beat Q4 2023 EPS estimates by 39 cents, while revenues slipped 1.1% YoY.
• Kohl's ended 2023 with inventory down 10% YoY to $2.9 billion.

Department store chain Kohl's Inc. NYSE: KSS has swung back into profitability after its multi-year-long normalization period. Shares rocketed higher on the pent-up demand during COVID-19, but rising inflation and weakening consumer discretionary spending caused inventories to swell up. Most retailers were overstocked with inventory as they tried to mitigate any future supply chain disruptions. This isn't unique to Kohl's. Inventory management has also been a problem for retailers such as Under Armour Inc. NYSE: UAA, Macy's Inc. NYSE: M and Nordstrom Inc. NYSE: JWN.

Inventory Normalization Drives Margin Recovery

The swelling inventories caused retailers to go heavy on promotions to move products, which resulted in depressed margins. This created lopsided earnings reports showing top-line revenue growth but shrinking bottom-line profits since they were applying heavy discounts. As inventory levels shrunk, margins began to improve, bolstering EPS again. Such is the case with Kohl's, which has managed to shrink its inventory 10% YoY to $2.9 billion in its fourth quarter of 2023.

A Strong Ending to 2023

On March 12, 2023, Kohl's reported a Q4 2023 EPS of $1.67, beating consensus analyst estimates for $1.28 by 39 cents. Revenues fell 1.1% YoY to $5.71 billion, missing the $5.8 billion consensus estimates. Comparable sales fell 4.3%. Inventory was $2.9 billion, down 10% YoY. Operating cash flow was $789 million in Q4 and $1.2 billion in fiscal full year 2023. Gross margin as a percentage of net sales rose 347 bps in 2023 to 36.7%. Operating income improved to $717 million compared to $246 million in 2022. Operating cash flow was $1.2 billion. Net income in 2023 was $217 million or $2.85 per diluted share compared to a net loss of $19 million or negative 15 cents per diluted share in 2022.

Kohl's Delivered In-Line Guidance

Kohl's issued in-line guidance for fiscal 2024 with EPS between $2.10 to $2.70 versus $2.62 consensus analyst estimates. Full-year 2024 revenues are expected to be down 1% to up 1% YoY, which is $16.42 billion to $16.75 billion versus $16.8 billion consensus estimates. Comparable sales are expected to be between unchanged to 2%.

Kohl's CEO Tom Kingsbury commented, "Looking ahead, we are incredibly focused on delivering comparable sales growth in 2024. Our strategic initiatives are positioned to build momentum and contribute more meaningfully. We will partner with Babies "R" Us to meaningfully expand our presence in the baby gear category, which represents a compelling white space opportunity for Kohl's."

The Acquisition Wildcard

On March 3, 2024, Arkhouse Management and Brigade Capital Management raised their takeover offer to acquire Macy's for $24 per share in an all-cash $6.6 billion offer. This was an improvement from their earlier $21 per share offer or $5.8 billion, which the Board rejected. Macy confirmed it had received the offer and that the Board would review it. No further comments will be provided until the evaluation is complete.

Kohl's had its round of acquisition offers in 2022. The Franchise Group Inc. (NYSE: FRG) and Sycamore Partners were reportedly bidding from the company in the $64 to $54 range, ultimately being rejected and pulling further offers. There's always the potential for acquirers to take the opportunity of depressed share prices to stalk the company again. Kohl's real estate was valued at around $8 billion in 2022, significantly more than its $2.75 billion current market cap. Check out AI-powered insights on MarketBeat.

Value Perspective Looks Cheap

Kohl's stock is trading at 10.79X forward earnings and severely discounted its real estate holdings. The stock has 25.5% short interest, making it very susceptible to short squeeze potential.

Telsey Advisory reiterated its Market Perform rating and raised its price target to $28 per share, up from $25. The firm noted that better gross margin leverage, lower freight and markdowns, shipping costs, and the 10% drop in inventories were all drivers for the price target upgrade. Analysts commented, "As such, we maintain our Market Perform rating. However, following the Q4 beat, we take our price target up to $28 from $25 prior, which implies a 10.7x multiple on our two-year forward EPS estimate of $2.62 vs. the recent NTM multiple of 10.3x and the five-year average multiple of 10.6x."

Kohl's analyst ratings and price targets are at MarketBeat. Kohl's peers and competitor stocks can be found with the MarketBeat stock screener.

Daily Symmetrical Triangle Breakdown

The daily candlestick chart on KSS illustrates a symmetrical triangle breakdown. This pattern is comprised of a descending upper trendline comprised of lower highs commencing at $29.44 on December 27, 2023, and an ascending lower trendline of higher lows commencing at $24.07 on January 18, 2024. Both trendlines connect at the apex point, at which time a breakout or a breakdown occurs. In this case, the breakdown formed after an initial breakout attempt on the Q4 2023 earnings report. Shares collapsed under the $26.80 lower trendline as shares sold off in the following days. The daily relative strength index (RSI) fell under the 40-band. Pullback support levels are at $24.07, $22.59 at the weekly market structure low trigger, $21.78 and $20.36.