[Note: Kohl’s fiscal year 2023 will end near the last week of January]

Kohl’s stock (NYSE: KSS), a department store that features apparel, footwear, accessories, soft home products, and housewares targeted to middle-income customers, currently trades at $26 per share, around 60% below its level of $64 seen on May 17, 2021 (pre-inflation shock high), and has the potential for sizable gains. Kohl’s has been struggling since the pandemic as consumer buying habits have shifted away from department stores. While it operates an e-commerce platform, Kohl’s faces online competition even stronger than its brick-and-mortar rivals. So far in 2023, Kohl’s sales are down 5% to $11.5 billion through the first nine months of FY 2023, earnings are down more than 40% year-over-year (y-o-y) to $1.18. To add to this, the company continues to struggle with negative cash flow and high levels of long-term debt of $1.6 billion. In fact, the retailer has been missing out on what’s proving to be at least a decent recovery for other store chains. The stock is quite cheap, and it will be interesting to see how the company moves ahead going forward. According to the company’s management, many of its strategic efforts are just underway, which are expected to contribute incrementally

KSS stock has suffered a sharp decline of 35% from levels of $40 in early January 2021 to current levels now, vs. an increase of about 30% for the S&P 500 over this roughly 3-year period. Notably, KSS stock has underperformed the broader market in each of the last 3 years. Returns for the stock were 21% in 2021, -49% in 2022, and 14% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 – indicating that KSS underperformed the S&P in 2021, 2022, and 2023. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Discretionary sector including AMZN, TSLA, and HD, and even for the megacap stars GOOG, MSFT, and AAPL. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could KSS face a similar situation as it did in 2021, 2022, and 2023 and underperform the S&P over the next 12 months – or will it see a recovery?

Returning to the pre-inflation shock level means that KSS will have to gain about 148% from here. While it has the potential to recover to those levels eventually, we estimate KSS’ Valuation to be around $25 per share, 4% lower than the current market price. Our detailed analysis of KSS’ upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to a high demand for goods; producers were unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline
• October 2022 – July 2023: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses
• Since August 2023: Fed keeps interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.

In contrast, here’s how KSS stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

KSS and S&P 500 Performance During 2007-08 Crisis

KSS stock declined from nearly $58 in October 2007 (pre-crisis peak) to around $35 in March 2009 (as the markets bottomed out), implying that KSS stock lost almost 39% of its pre-crisis value. It recovered from the 2008 crisis to levels of around $54 in early 2010, rising roughly 53% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

KSS Fundamentals Over Recent Years

KSS revenues declined from around $20 billion in 2019 to about $16 billion in 2020, due to the impact of Covid-19. However, sales rose to $18.1 billion in 2022, as demand picked up. Earnings per share declined from around $4.39 in 2019 to a negative $1.06 in 2020, although it rose back to about $6.41 in 2021 before falling hard to -$0.15 in 2022. In 2022, inflation has curbed consumer spending and pushed up freight costs for the company, as well as supply chain challenges.  

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe KSS stock has the potential for strong gains once fears of a potential recession are allayed.

It is helpful to see how its peers stack up. KSS Peers shows how KSS stock compares against peers on metrics that matter. You will find other useful comparisons for companies across industries at Peer Comparisons.