Key strengths
Kohl’s greatest strength is its management. CEO Kevin Mansell has been with the company for the last 29 years, and former CEO William Kellogg retired after 34 years but remains on the Board of Directors. Interestingly, William Kellogg had bought out Kohl’s through a leveraged buy-out in 1986, grew it under his leadership, and took it public in 1992. Kohl’s management still owns a significant stake in the company.
Despite weak economic conditions, Kohl’s has been able to hold up its cash flow generation characteristics. In 2011, it announced its first-ever dividend, then increased the dividend by 28% in 2012.
Management has a well-laid-out capital allocation strategy. In the past two decades, it has grown its stores exponentially in the United States. Now, given the low valuation of the stock, it has been decreasing capital expenditure on new stores (FY12 capital expenditure was lower by 15%) and increasing share repurchases.
The company’s building an increasing portfolio of impressive private and exclusive brands. It increased its sales from private and exclusive brands from 25% in 2004 to 48% of 2012. It can boast of brands like Jennifer Lopez and Marc Anthony, Rock and Republic, and Princess Vera Wang, giving it an advantage over competitors like J.C. Penney, Wal-Mart, and Amazon.
Is Macy’s a better stock?
Kohl’s key competitor, Macy’s, Inc. (NYSE:M) faced similar issues during November – January, i.e. weak November and December comps and strong January comps. But it posted positive comps of 2.5% during the November-December period, and strong positive comps in January, which were a result of fresh assortments that were added post-Christmas, not a dependence on clearance stocks.
Furthermore, Macy’s, Inc. (NYSE:M) has higher price points vs. Kohl’s, which help to drive higher revenue. Macy’s indeed has a better ROE vs. Kohl’s (22.28% vs. 15.71%).
On the other hand, Kohl’s definitely has a better positioning against J.C. Penney Company, Inc. (NYSE:JCP). The company continues to struggle to remold itself, and fails to deliver the desired results, continuing with its spree of losses. It has announced a plethora of initiatives like new pricing, a fresh logo, cost reduction and strategic merchandise initiatives, but those initiatives are failing and there seems to be no respite. Further, Fitch recently cut this company’s rating to ‘B-‘ from ‘B’ with a negative outlook due to lack of visibility in terms of the company’s ability to stabilize its business in 2013.
Conclusion
There has been recent news that Kohl’s might be a leveraged buy-out target, given its lower valuation. The situation may arise only if it is management-driven and, given the recent increase in share buybacks, it could be a possibility as this has happened before. Even if it doesn’t work out, the speculation may cause institutional shareholders to see the value of the stock. In my opinion, HOLD the stock and you will reap the benefits over the next few years.
The article Kohl’s Corp (NYSE:KSS) : Refocus of Strategies originally appeared on Fool.com and is written by Sujata Dutta.
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