Time to stay away from Kohl’s

Over the past five years, Kohl’s (KSS -4.16%) really didn’t do much in the way of revenue growth. The retailer has struggled to get back to the nearly $20 billion in revenue it reported in 2020. Given the slow growth, Kohl’s has had to try to squeeze profits out of weaker revenue streams. Given how long the company has been dealing with this problem, as well as the retailer’s future guidance, I think it’s time to stay away from the stock, as it will likely continue to underperform the broader market.

Second quarter and first half of the year

The second quarter essentially showed the problem. Comparable sales fell 5.1%, and net sales fell 4.2% year over year to $3.5 billion. Kohl’s, on the other hand, squeezed more from sales, increasing net income to $66 million, up from $58 million a year ago. That led to $0.59 per diluted share, up 13.4% year over year.

While some may like the earnings growth, I don’t think it can be sustained in the long term if the company continues to post weak sales.

Looking at the first six months of fiscal 2024, the picture is not looking promising. Net sales fell 4.7% year over year, while comparable sales fell 4.8%. Earnings per diluted share are $0.35, compared to $0.65 per diluted share a year ago.

Looking to the future

For the full year, Kohl’s net sales are projected to decline 4% to 6%, with comparable sales falling 3% to 5%. Full-year diluted earnings per share are projected to be between $1.75 and $2.25. On the liberal side, that would give the stock a price-to-earnings (P/E) ratio of 8.56 times full-year earnings. A short-term trader might look at that and say, “Oh boy, what a bargain.” It’s important for long-term investors to understand that consistently weak sales will make it very difficult to realize value.

There are two reasons why the company has such a low valuation. The first is that the company has been overlooked 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.

At an average price target of $19.88, there isn’t much upside here. Based on earnings, estimates suggest average full-year earnings of $2.47 per share, with no change in 2025. That would give Kohl’s a P/E ratio of just under 8 times earnings, which is in line with the company’s own forecasts.

That’s not far off from where the stock is currently trading, and rather than seeing this as unrealized value, I see it as a lack of confidence in a company that has simply struggled to grow sales. 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 the total turnaround we’ve been waiting years for, Kohl’s will likely continue to underperform the market. The retailer will have to squeeze value out of stagnant sales, making long-term success harder to achieve.