We came across a bullish thesis on Kohl’s Corporation (KSS) on Substack by Hugo Navarro. In this article, we will summarize the bulls’ thesis on KSS. Kohl’s Corporation (KSS)’s share was trading at $18.34 as of Nov 25th. KSS’s trailing and forward P/E were 7.19 and 8.22 respectively according to Yahoo Finance.
A busy retail store floor with customers trying on apparel and browsing the products.
Kohl’s Corporation presents a controversial but intriguing investment case, primarily due to its high short interest, valuable underlying assets, and ongoing turnaround strategy. With over 40% of its float shorted, the stock is a prime candidate for a short squeeze, especially if positive catalysts materialize. While Kohl’s faces declining revenues and challenges within the retail sector, its substantial real estate holdings, valued at $10 billion, provide a solid foundation. Even after accounting for liabilities like capital leases and long-term debt, the company’s tangible book value remains at $34.50 per share—well above its current market valuation. This asset-backed valuation limits downside risk and underscores the company’s potential to deliver outsized returns.
The cornerstone of Kohl’s turnaround strategy lies in leveraging its extensive real estate to drive growth through strategic partnerships and operational improvements. The collaboration with Sephora has already added $1.3 billion in revenue, with expectations to reach $2 billion by 2025. Building on this momentum, Kohl’s plans to introduce 200 Babies “R” Us shops in 2024, targeting an additional $2 billion in revenue. Enhancements to the in-store experience, like queue management systems, and an emphasis on operational efficiency aim to restore operating margins to 7-8%. Despite revenue declines, Kohl’s has maintained gross margins, demonstrating resilience in its core operations.
Debt management remains a priority, with manageable interest payments and a Fitch rating of BB+ signaling financial stability. The company’s 12% dividend and cash flow capacity further bolster its position, while long-term stock incentives for management align their interests with shareholders. However, Kohl’s has consistently revised its guidance downward, fueling pessimism. Nonetheless, this conservative outlook de-risks the stock for potential investors, particularly given its undervaluation relative to its assets.
Upcoming catalysts add further intrigue. Quarterly results, set to be announced shortly, could trigger a significant price rally if they surpass expectations, amplified by the high short interest. Additionally, a strong holiday season and a potential share repurchase program could drive further gains. Such a program would increase demand for shares, forcing short sellers to cover and potentially triggering a short squeeze. In the longer term, Kohl’s valuable real estate makes it an attractive acquisition target for other retailers or private equity firms.
While Kohl’s is far from a great company, it represents a special situation where the risk/reward ratio is compelling. With substantial downside protection and multiple catalysts for upside, this contrarian play could yield significant returns, much like other undervalued opportunities that have defied the odds.
Kohl’s Corporation (KSS) is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 30 hedge fund portfolios held KSS at the end of the third quarter which was 31 in the previous quarter. While we acknowledge the risk and potential of KSS as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than KSS but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.