Will Pressure On Kohl’s Management Drive Share Price? – ValueWalk Premium

Will Pressure On Kohl’s Management Drive Share Price?

Growth stagnation hampers value expansion

The post was originally published here.

Highlights:

  • Strategic partnerships to escape growth stagnation
  • Activist investors increase pressure after poor performance
  • Ramp-up of share repurchases spices up returns

Q1 2022 hedge fund letters, conferences and more

Download the full report as a PDF

Price signal unclear, volume is bearish

  • Share price has been flat for years
  • Recently, the 50 DMA has fallen below the 200 DMA
    • Both lines converged leaving an unclear signal
  • The RSI-Volume stayed below the 50%-line which suggest a bearish signal

Kohl’s revenue breakdown 2021

Strategic partnerships to escape growth stagnation

  • Kohl’s entered a partnership with largest US specialty beauty retailer, Sephora
  • The agreement moves Sephora’s shops to Kohl’s locations
    • With a 25m customer base, Sephora could bring more traffic into Kohl’s stores
    • 200 Sephora stores already opened with an additional 400 planned by 1H22
  • The partnership could bring Kohl’s revenue back to over US$20bn

Activist investors increase pressure after poor performance

  • In Dec 2021, an activist hedge fund called for a split-off of Kohl’s e-commerce business making up around 29% of revenue
    • The hedge fund values the e-commerce business as a stand-alone business more than the total market cap of Kohl’s
  • It also suggested another way to unlock value by delisting Kohl’s and selling it to private investors
    • Although unlikely to be successful, it increases pressure on management to improve the business to increase share price performance

What is an activist investor?

  • Activist investors are an individual or group of investors with a significant stake in a company, who aim to influence or make material changes to how the business is run. Changes like:
    • Board composition
    • Share repurchases and dividends
    • Advancing ESG issues
    • Privatization of the business
    • Spin-off of business segments
    • Divestitures of inefficient segments

It’s not the first time that Kohl’s has been targeted

  • In early 2021, activist investors with around 9% share aimed to take control of the company’s board
    • Kohl’s share price has chronically underperformed the market
    • As a compromise, Kohl’s extended its board to include two directors nominated by the investor group
  • This investor activism appears to be a good wake-up call for Kohl’s management to reengineer its flat business

Ramp-up of share repurchases spices up returns

  • Kohl’s has a strong commitment to return as much cash as possible to its shareholders
    • The dividend yield could return to 5% in 2022
  • In addition, activist shareholders pressed to get a commitment to a new share repurchase program worth US$2bn
    • Even if the share price were to stay flat, investors could still enjoy attractive returns

FVMR Scorecard – Kohl’s

  • A stock’s attractiveness relative to stocks in that country or region
  • Attractiveness is based on four elements
    • Fundamentals, Valuation, Momentum, and Risk (FVMR)
  • Scale from 1 (Best) to 10 (Worst)

Consensus remains cautious but sees upside

  • Most analysts still have HOLD recommendations
    • The poor share price performance over the past two decades has made analysts skeptical
  • They forecast that the increased profit margin is likely to fade over the next two years

Get financial statements and assumptions in the full report


P&L – Kohl’s

  • Net profit has a strong rebound and exceeds its pre-pandemic level
    • The strong bottom-line is mainly driven by the margin expansion

Balance sheet – Kohl’s

  • As of 2021, the company holds a record US$2bn in cash which it will distribute to its shareholders over time
  • The company continues its massive share repurchase program which is the main driver of increasing EPS over time

Cash flow statement – Kohl’s

  • Strong operating cash flow allows the company to pay out dividends which are in line with its pre-pandemic policy
    • We expect that the dividend yield over the near-term to range between 5-6% like in 2019 and 2020

Ratios – Kohl’s

  • After the revenue rebound in 22E, we assume revenue growth to normalize
    • Going forward, we see poor revenue growth potential between 2-3%
  • EBIT margin expansion in 22E probably only short-lived
    • Going forward, we see the EBIT margin to range between 7-8%

Long-term share price performance potential

Free cash flow – Kohl’s

  • Strong cash flow generation is crucial for returning cash to shareholders

Value estimate – Kohl’s

  • Like consensus, we expect a slightly stronger margin compared to the past
  • The revenue growth CAGR is distorted by growth rebound in 2022
    • Expect lower growth 23E onward

World Class Benchmarking Scorecard – Kohl’s

  • Identifies a company’s competitive position relative to global peers
  • Combined, composite rank of profitability and growth, called “Profitable Growth”
  • Scale from 1 (Best) to 10 (Worst)

Key risk is falling behind in online sales

  • Activist investors might not decide in favor of the long-term future
  • Increased transportation costs and worsening of inventory management
  • Failure to keep up with e-commerce could lead to lost of market share

Conclusions

  • Don’t expect high growth, but price discount offers upside
  • Intervention of activist investors could be accretive
  • Attractive dividend yield and share repurchase program can be satisfying enough

Download the full report as a PDF

Article by Andrew Stotz, Become a Better Investor.


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