This Iconic Retail Chain Got Rocked, But Absurd Yield Is Still Possible

We could go on and on about lost opportunities to sell the firm at much for much more money than the firm is now worth, but this is about the here and now: Kohl's KSS currently trades at a market cap of about $2.65 billion, which technically makes the firm a small mid-cap, as mid-caps generally run from market caps of $2 billion to $10 billion. 

That said, the firm is a member of the S&P Small-Cap 600, so while not a stock that trades at less than $10 per share, I think it qualifies for coverage under our small-cap section.

Kohl's Gets Rocked

Kohl's reported the firm's fiscal first quarter financial performance last week. The firm posted a GAAP EPS of $-0.24, down from the year ago comp of $0.13 and below expectations for $0.06. The firm generated sales of $3.382 billion for the quarter, which beat Wall Street, but was partially due to "other revenue." Actual sales fell short of expectations and reflected a year over year contraction of 5.3%. Comparable sales printed at -4.4% year over year. Regular price sales increased by 2.4%, as clearance impacted the overall comp sales performance by over 600 basis points. On the bright side, inventory was down some 13%.

Operations

While sales were contracting 5.3%, the cost of merchandise sold decreased by 6.1%, sending gross margin from an even 39% last year up to 39.5%. Operating expenses were down small to $1.228 billion. After factoring for depreciation and amortization, operating income dropped from $98 million for the year-ago period to $43 million. After accounting for interest and taxes, net income/loss dropped from $14 million to $-27 million. That works out to $-0.24, down from $0.13 once the shares are diluted.

Tough Guidance

For the full year, Kohl's included probable impacts for credit card late fee regulatory changes at some point this year. The firm sees net sales down between 2% and 4%, and comp sales down between 1% and 3%. Operating margin should land around 3% to 3.5%, and diluted EPS is now seen between $1.25 to $1.85. On the bright side, the firm expects to redeem $113 million worth of 9.5% notes due in May 2025. This at least gets that debt off of the books, The redemption will be completed by late next week.

Fundies

For the quarter reported, Kohl's generated $789 million in operating cash flow. Out of that number, the firm spent just $82 million on capital expenditures. That left free cash flow of $707 million, out of which the firm paid out $55 million in cash dividends to shareholders.

Checking out the balance sheet, Kohl's ended the period with a cash position of just $183 million and inventories of $2.88 billion. That's a lot, but it's down from over $4 billion 18 months ago. This puts current assets at $3.41 billion versus current liabilities of $2.612 billion that includes just a net $101 million worth of short-term debt that we discussed above and $327 million worth of unearned revenue, which is not really a financial obligation.

That makes for a current ratio of 1.31, which certainly passes muster and, once adjusted for unearned revenue, rises to 1.49. Of course, figuring out a quick ratio would be ridiculous with inventories like that, but we often let retailers slide on the quality of their quick ratios given the nature of the business.

Total assets amount to $14.009 billion including no goodwill or other intangibles. Total liabilities less equity comes to $10.116 billion, including long-term debt of $2.076 billion. Given the size of that debt-load, I would not call this balance sheet healthy, but I will say that it is in better shape than I thought it would be when I started researching this piece. The cash flows are there to, over time, put this balance sheet in a better place.

My Thoughts

Cash flows are stronger than I had expected. The balance sheet has its warts, but the current situation of the balance sheet is healthy. This is how CEO Jill Timm closed his address during the call: "In closing, I want to reiterate that our underlying financial structure remains solid. We are expanding gross margin through effective inventory management and managing expenses with discipline. And we continue to strengthen our balance sheet by reducing long-term debt." 

Seems simple, yet it's difficult for so many. If you watch the firm though, it seems like there really is a plan. If you go into the stores and look around, which I do in two states, the locations that I am exposed to clearly appear to be better organized with less "superfluous" inventory on the shelves.

What we see is a stock that gave up 22.86% after those results and that guidance. Even with today's decline, the shares have retaken a hunk of that lost ground. Relative strength is on the soft side. The daily MACD is postured bearishly. One thing, though: The 61.8% Fibonacci retracement level of the October into late March rally has made a stand. It's been pierced, in early April and again in the wake of that earnings report.

This stock is obviously no slam dunk. That said, if one could accumulate some equity between $23 and $21, there is a likelihood that technical support will be there. Then one would look to the 200-day SMA for a potential pivot. That's less than $25 right now... and if it works, we're talking about a target in the $29 to $30 range, which is right where resistance has been.

I'm not saying you have to be in love. I am saying that this name is probably tradeable and if you trade it through the use of equity and not through the options market, the stock pays shareholders $2 per year just to be there. That's a yield of about $8.4%, which is absurd, but I did tell you that the cash flow is there. Kohl's is not burning cash.

At the time of publication, Guilfoyle had no positions in any securities mentioned.