Kohl’s Corporation (NYSE: KSS) Stock Analysis || 柯爾百貨公司股票分析

Beneficiary of COVID-19 with off-mall presence, underlying unit economics shifting

Target Price

  • 2020/03/07: $60
  • 2021/02/08: $100

Investment Evaluation

2020/03/07: Kohl’s (NYSE: KSS) is a department store focusing on apparel through national brands and private labels. It is worth $60 per share based on Michelle Gass’s strategy to return the company to growth through partnerships. Kohl’s will become an icon for off-mall leisure, foot traffic will increase substantially in the coming years. Substantial stock repurchases throughout the past 2 decades accompanied by sluggish price performance now allows the management to payout safe and stable dividends with yields upwards of 30%.

Table of Content

Intro

Kohl’s (NYSE: KSS) is department store. “Most stores are located in strip malls (67%) with about 26% that are freestanding and 7% of stores are in malls. The company sells both national brands and private-label brands focusing on clothing, shoes, accessories, cosmetics, and home furnishings. Roughly 28% of sales is from women’s apparel. The website generates about 20% of total revenue.” Athleisure has been its focus as of late.

Opportunity

Partnerships

Kohl’s announced partnerships with Amazon in 2017, Aldi in 2018, and Planet Fitness in 2019. The purpose of these collaborations is to drive foot-traffic to the store. The physical retail segment has been decimated by the emergence Amazon, and e-commerce in general, which contributed to the fall of Forever 21, Toys R’ Us, and Sears. What Kohl’s is trying to achieve with its initiative is rather unique in my opinion. With around 1200 locations and an average size of 90,000 ft² per store, Kohl’s is primed to be working with national level businesses that require “actual physical engagement” (referred to as APE from now on). With the emergence of e-commerce, APE is absolutely vital in the current environment. Barbershops and gyms have been largely immune to the IoT movement (not immune to the laziness enabled by the IoT movement though), since haircuts and weight-lifting can’t really be ordered online as of right now.

Competitors

Nordstrom, Macy’s, and other big brand retailers can adopt a similar strategy, but their spaces are simply too big for the strategy to be impactful, and nobody would workout at a mall. On the other hand, many of the smaller department stores or discount retailers are too small to execute the strategy and team up with national brands, both in store size and store count across the US. The only possible competitor that may follow suit it the strategy succeeds are Target and Walmart, both with wider reach and similar store sizes. The problem with Target, is that they are mostly located in downtown metropolitan areas, it is not suited for parking, or traveling in and out of in general. Moreover, the stock has done great due to its off-mall locations (stand-alone rather than strip mall), the management will not likely want to pivot their strategy with shareholders appreciating their current strategy so much. If it ain’t broke, don’t fix it. While Walmart’s “Town Center” idea is interesting, it generally attracts lower income household. According to Kanter Research, the average Walmart shopper is a white, 51-year-old female with an annual household income of $56,482. On the other hand, the average household income of Kohl’s shoppers is $69,442 annually, and nearly 30% of the chain’s shoppers make more than $100,000.

Management

Kohl’s malleability in strategy execution (teaming up with Aldi, Planet Fitness, as well as other options according to the company) is a great strength demonstrated by the management. CEO Michelle Gass is comfortable in changing the company’s image, and with her expertise from Starbucks, I believe the management is fitted to execute this strategy successfully. Willingness to pioneer is a well demonstrated strength of KSS’s management. They tested out small store format and decided against rolling it out due to various reasons. They are not scared of trying things out, and are not scared of moving on when ideas don’t work out. Gass witnessed first-hand, the powerful effects of “the 3rd place” ideology for Starbucks. It’s work, home, Starbucks, and a bunch of other places for you to run errands. Now, you may have a reason to go to Kohl’s for EVERYTHING (almost) that you cannot do online. I expect Kohl’s to leverage their space and continue to lease out to gyms, barbers, shipping centers (Amazon returns), pet hospitals, and other players. It will become the next rendition of places you go to “get things done”.

Execution

I think the number one initiative right now for Kohl’s is to save up on cash to weather potential general economic pressure, retail environmental toughness, and deploy cash to scale its growth strategy nationwide once proven profitable. According to Kohl’s balance sheet, its leased stores on average have a 16-year-long contract, while average for a department store, it can absolutely wreak havoc. I think Kohl’s has the right person, the right strategy, the right balance sheet, and the right property portfolio, it just needs to right its capital allocation policy. If such a strategy is executed successfully, I believe KSS will be considered a high moat company with its extended relationship with local firms, as well as hard to replicate scale and store size, and thus warrant a re-rate to at least 10x FCF.

Number Crunching & Assumptions

Key Assumptions

  1. Average member count of Planet Fitness is 8,000, members visit on average once a week, and 30% of gym goers will shop at Kohl’s on the same day they visit the gym.
  2. The average spending of Planet Fitness gym members at Kohl’s are 90% of regular Kohl’s customers.
  3. Kohl’s store downsizing of approximately 25% will only lower average transaction ticket by 10%.
  4. 90% of strip malls are reworkable, and 50% of stand-alone stores are reworkable.
  5. Rent contribution from leased out spaces for Planet Fitness (more remodeling) is 80 cents per square foot per month, while rent contribution from Aldi/Amazon/Others (less remodeling) is 40 cents per square foot per month. https://blog.gyminsight.com/307-health-club-sales/
  6. Kohl’s revenue 20% comes from online, meaning 16 billion generated through physical visits. With an average of 1000 visits per day per store, an average visit roughly generates $35-40 in revenue for Kohl’s. According to Town Sports International (NASDAQ: CLUB) filings, an average member visits the gym once per week.

Valuation

Upside: Successful partnership with third parties, driving retail foot-traffic and revenue growth while successfully maintaining store-level sales with downsized area and lowered SKUs.

Risks: Change of management, slower-than-anticipated-execution, and significant drop in sales due to store downsizing, and significant drop in sales resulting in insolvency remain as risks.

Conclusion

Kohl’s stock price has been an absolute disaster in terms of total return throughout the past 2 decades. However, it wasn’t completely due to a weak business, but rather, constant de-rating had led to this phenomenon. The company will turn this around in the coming years.

I believe Kohl’s is primed to capitalize on this mall-apocalypse by showing its customers that strip-malls are a better option to spend your day than shopping at malls. I also believe Michelle Gass is the right person to execute this strategy, and I wish her all the best in the endeavor.

Target

  • 2020/03/07: $60
  • 2021/02/08: $100

Investment Evaluation

2020/03/07: Kohl’s (NYSE: KSS) is a department store focusing on apparel through national brands and private labels. It is worth $60 per share based on Michelle Gass’s strategy to return the company to growth through partnerships. Kohl’s will become an icon for off-mall leisure, foot traffic will increase substantially in the coming years. Substantial stock repurchases throughout the past 2 decades accompanied by sluggish price performance now allows the management to payout safe and stable dividends with yields upwards of 30%.

Table of Content

Intro

Kohl’s (NYSE: KSS) is department store. “Most stores are located in strip malls (67%) with about 26% that are freestanding and 7% of stores are in malls. The company sells both national brands and private-label brands focusing on clothing, shoes, accessories, cosmetics, and home furnishings. Roughly 28% of sales is from women’s apparel. The website generates about 20% of total revenue.” Athleisure has been its focus as of late.

Opportunity

Partnerships

Kohl’s announced partnerships with Amazon in 2017, Aldi in 2018, and Planet Fitness in 2019. The purpose of these collaborations is to drive foot-traffic to the store. The physical retail segment has been decimated by the emergence Amazon, and e-commerce in general, which contributed to the fall of Forever 21, Toys R’ Us, and Sears. What Kohl’s is trying to achieve with its initiative is rather unique in my opinion. With around 1200 locations and an average size of 90,000 ft² per store, Kohl’s is primed to be working with national level businesses that require “actual physical engagement” (referred to as APE from now on). With the emergence of e-commerce, APE is absolutely vital in the current environment. Barbershops and gyms have been largely immune to the IoT movement (not immune to the laziness enabled by the IoT movement though), since haircuts and weight-lifting can’t really be ordered online as of right now.

Competitors

Nordstrom, Macy’s, and other big brand retailers can adopt a similar strategy, but their spaces are simply too big for the strategy to be impactful, and nobody would workout at a mall. On the other hand, many of the smaller department stores or discount retailers are too small to execute the strategy and team up with national brands, both in store size and store count across the US. The only possible competitor that may follow suit it the strategy succeeds are Target and Walmart, both with wider reach and similar store sizes. The problem with Target, is that they are mostly located in downtown metropolitan areas, it is not suited for parking, or traveling in and out of in general. Moreover, the stock has done great due to its off-mall locations (stand-alone rather than strip mall), the management will not likely want to pivot their strategy with shareholders appreciating their current strategy so much. If it ain’t broke, don’t fix it. While Walmart’s “Town Center” idea is interesting, it generally attracts lower income household. According to Kanter Research, the average Walmart shopper is a white, 51-year-old female with an annual household income of $56,482. On the other hand, the average household income of Kohl’s shoppers is $69,442 annually, and nearly 30% of the chain’s shoppers make more than $100,000.

Management

Kohl’s malleability in strategy execution (teaming up with Aldi, Planet Fitness, as well as other options according to the company) is a great strength demonstrated by the management. CEO Michelle Gass is comfortable in changing the company’s image, and with her expertise from Starbucks, I believe the management is fitted to execute this strategy successfully. Willingness to pioneer is a well demonstrated strength of KSS’s management. They tested out small store format and decided against rolling it out due to various reasons. They are not scared of trying things out, and are not scared of moving on when ideas don’t work out. Gass witnessed first-hand, the powerful effects of “the 3rd place” ideology for Starbucks. It’s work, home, Starbucks, and a bunch of other places for you to run errands. Now, you may have a reason to go to Kohl’s for EVERYTHING (almost) that you cannot do online. I expect Kohl’s to leverage their space and continue to lease out to gyms, barbers, shipping centers (Amazon returns), pet hospitals, and other players. It will become the next rendition of places you go to “get things done”.

Execution

I think the number one initiative right now for Kohl’s is to save up on cash to weather potential general economic pressure, retail environmental toughness, and deploy cash to scale its growth strategy nationwide once proven profitable. According to Kohl’s balance sheet, its leased stores on average have a 16-year-long contract, while average for a department store, it can absolutely wreak havoc. I think Kohl’s has the right person, the right strategy, the right balance sheet, and the right property portfolio, it just needs to right its capital allocation policy. If such a strategy is executed successfully, I believe KSS will be considered a high moat company with its extended relationship with local firms, as well as hard to replicate scale and store size, and thus warrant a re-rate to at least 10x FCF.

Number Crunching & Assumptions

Key Assumptions

  1. Average member count of Planet Fitness is 8,000, members visit on average once a week, and 30% of gym goers will shop at Kohl’s on the same day they visit the gym.
  2. The average spending of Planet Fitness gym members at Kohl’s are 90% of regular Kohl’s customers.
  3. Kohl’s store downsizing of approximately 25% will only lower average transaction ticket by 10%.
  4. 90% of strip malls are reworkable, and 50% of stand-alone stores are reworkable.
  5. Rent contribution from leased out spaces for Planet Fitness (more remodeling) is 80 cents per square foot per month, while rent contribution from Aldi/Amazon/Others (less remodeling) is 40 cents per square foot per month. https://blog.gyminsight.com/307-health-club-sales/
  6. Kohl’s revenue 20% comes from online, meaning 16 billion generated through physical visits. With an average of 1000 visits per day per store, an average visit roughly generates $35-40 in revenue for Kohl’s. According to Town Sports International (NASDAQ: CLUB) filings, an average member visits the gym once per week.

Valuation

Upside: Successful partnership with third parties, driving retail foot-traffic and revenue growth while successfully maintaining store-level sales with downsized area and lowered SKUs.

Risks: Change of management, slower-than-anticipated-execution, and significant drop in sales due to store downsizing, and significant drop in sales resulting in insolvency remain as risks.

Conclusion

Kohl’s stock price has been an absolute disaster in terms of total return throughout the past 2 decades. However, it wasn’t completely due to a weak business, but rather, constant de-rating had led to this phenomenon. The company will turn this around in the coming years.

I believe Kohl’s is primed to capitalize on this mall-apocalypse by showing its customers that strip-malls are a better option to spend your day than shopping at malls. I also believe Michelle Gass is the right person to execute this strategy, and I wish her all the best in the endeavor.

Target

  • 2020/03/07: $60
  • 2021/02/08: $100

Investment Evaluation

2020/03/07: Kohl’s (NYSE: KSS) is a department store focusing on apparel through national brands and private labels. It is worth $60 per share based on Michelle Gass’s strategy to return the company to growth through partnerships. Kohl’s will become an icon for off-mall leisure, foot traffic will increase substantially in the coming years. Substantial stock repurchases throughout the past 2 decades accompanied by sluggish price performance now allows the management to payout safe and stable dividends with yields upwards of 30%.

Table of Content

Intro

Kohl’s (NYSE: KSS) is department store. “Most stores are located in strip malls (67%) with about 26% that are freestanding and 7% of stores are in malls. The company sells both national brands and private-label brands focusing on clothing, shoes, accessories, cosmetics, and home furnishings. Roughly 28% of sales is from women’s apparel. The website generates about 20% of total revenue.” Athleisure has been its focus as of late.

Opportunity

Partnerships

Kohl’s announced partnerships with Amazon in 2017, Aldi in 2018, and Planet Fitness in 2019. The purpose of these collaborations is to drive foot-traffic to the store. The physical retail segment has been decimated by the emergence Amazon, and e-commerce in general, which contributed to the fall of Forever 21, Toys R’ Us, and Sears. What Kohl’s is trying to achieve with its initiative is rather unique in my opinion. With around 1200 locations and an average size of 90,000 ft² per store, Kohl’s is primed to be working with national level businesses that require “actual physical engagement” (referred to as APE from now on). With the emergence of e-commerce, APE is absolutely vital in the current environment. Barbershops and gyms have been largely immune to the IoT movement (not immune to the laziness enabled by the IoT movement though), since haircuts and weight-lifting can’t really be ordered online as of right now.

Competitors

Nordstrom, Macy’s, and other big brand retailers can adopt a similar strategy, but their spaces are simply too big for the strategy to be impactful, and nobody would workout at a mall. On the other hand, many of the smaller department stores or discount retailers are too small to execute the strategy and team up with national brands, both in store size and store count across the US. The only possible competitor that may follow suit it the strategy succeeds are Target and Walmart, both with wider reach and similar store sizes. The problem with Target, is that they are mostly located in downtown metropolitan areas, it is not suited for parking, or traveling in and out of in general. Moreover, the stock has done great due to its off-mall locations (stand-alone rather than strip mall), the management will not likely want to pivot their strategy with shareholders appreciating their current strategy so much. If it ain’t broke, don’t fix it. While Walmart’s “Town Center” idea is interesting, it generally attracts lower income household. According to Kanter Research, the average Walmart shopper is a white, 51-year-old female with an annual household income of $56,482. On the other hand, the average household income of Kohl’s shoppers is $69,442 annually, and nearly 30% of the chain’s shoppers make more than $100,000.

Management

Kohl’s malleability in strategy execution (teaming up with Aldi, Planet Fitness, as well as other options according to the company) is a great strength demonstrated by the management. CEO Michelle Gass is comfortable in changing the company’s image, and with her expertise from Starbucks, I believe the management is fitted to execute this strategy successfully. Willingness to pioneer is a well demonstrated strength of KSS’s management. They tested out small store format and decided against rolling it out due to various reasons. They are not scared of trying things out, and are not scared of moving on when ideas don’t work out. Gass witnessed first-hand, the powerful effects of “the 3rd place” ideology for Starbucks. It’s work, home, Starbucks, and a bunch of other places for you to run errands. Now, you may have a reason to go to Kohl’s for EVERYTHING (almost) that you cannot do online. I expect Kohl’s to leverage their space and continue to lease out to gyms, barbers, shipping centers (Amazon returns), pet hospitals, and other players. It will become the next rendition of places you go to “get things done”.

Execution

I think the number one initiative right now for Kohl’s is to save up on cash to weather potential general economic pressure, retail environmental toughness, and deploy cash to scale its growth strategy nationwide once proven profitable. According to Kohl’s balance sheet, its leased stores on average have a 16-year-long contract, while average for a department store, it can absolutely wreak havoc. I think Kohl’s has the right person, the right strategy, the right balance sheet, and the right property portfolio, it just needs to right its capital allocation policy. If such a strategy is executed successfully, I believe KSS will be considered a high moat company with its extended relationship with local firms, as well as hard to replicate scale and store size, and thus warrant a re-rate to at least 10x FCF.

Number Crunching & Assumptions

Key Assumptions

  1. Average member count of Planet Fitness is 8,000, members visit on average once a week, and 30% of gym goers will shop at Kohl’s on the same day they visit the gym.
  2. The average spending of Planet Fitness gym members at Kohl’s are 90% of regular Kohl’s customers.
  3. Kohl’s store downsizing of approximately 25% will only lower average transaction ticket by 10%.
  4. 90% of strip malls are reworkable, and 50% of stand-alone stores are reworkable.
  5. Rent contribution from leased out spaces for Planet Fitness (more remodeling) is 80 cents per square foot per month, while rent contribution from Aldi/Amazon/Others (less remodeling) is 40 cents per square foot per month. https://blog.gyminsight.com/307-health-club-sales/
  6. Kohl’s revenue 20% comes from online, meaning 16 billion generated through physical visits. With an average of 1,000 visits per day per store, an average visit roughly generates $35-40 in revenue for Kohl’s. According to Town Sports International (NASDAQ: CLUB) filings, an average member visits the gym once per week.

Valuation

Upside: Successful partnership with third parties, driving retail foot-traffic and revenue growth while successfully maintaining store-level sales with downsized area and lowered SKUs.

Risks: Change of management, slower-than-anticipated-execution, and significant drop in sales due to store downsizing, and significant drop in sales resulting in insolvency remain as risks.

Conclusion

Kohl’s stock price has been an absolute disaster in terms of total return throughout the past 2 decades. However, it wasn’t completely due to a weak business, but rather, constant de-rating had led to this phenomenon. The company will turn this around in the coming years.

I believe Kohl’s is primed to capitalize on this mall-apocalypse by showing its customers that strip-malls are a better option to spend your day than shopping at malls. I also believe Michelle Gass is the right person to execute this strategy, and I wish her all the best in the endeavor.

UPDATE: 2Q20 & 3Q20 & 4Q20 Prelim takeaways, Sephora partnership, and new assumptions
  • 2Q20 & 3Q20 & 4Q20 Prelim Takeaways
    • 2Q20:
      • Store productivity was 75% for reopened stores
      • Physical stores fulfilled 50% of digital sales (customer trend adopting BOPIS, acronym for buy online pickup in store)
      • Significantly reducing our choice counts, operate across women’s and men’s to increase depth and meet our customers’ expectations, in the fourth quarter, women’s choice counts will be down over 40% with depth up 50% (emphasizing depth not breadth)
      • Exit of 8 underperforming private label brands (Kohl’s is aggressive with testing, but quick to cut lose underperforming projects, looks to be building on existing brand equity)
      • Expanding “Curated by Kohl’s” to 300 plus stores (social media initiative to give smaller brands exposure)
      • Amazon returns moved to the back of the store “for safety reasons”
      • Brought digital research in-house in 4Q19, paying dividends
      • Fitting rooms closed (remain a pain point for customers)
    • 3Q20:
      • OP Margin goal of 7-8%
      • Expand Active from 20% to 30% of business
      • Introducing FLX, new athleisure private label focusing on sustainable materials with modern fit and aesthetics (current offerings include plus sizes, could fill a niche market)
      • Inventory turn at 5-year high (better with inventory management, lower shipping related costs for better margins)
      • PLNT at 20 stores so far, slight pause
      • More than USD 1.9 B in cash
    • 4Q20 prelim:
      • Revenue in the range of 6 billion ish
      • EPS between 1-1.05 (means extreme cost control, perhaps OP margin in high single digits already)
      • Digital sales over 40% of total sales
  • Model update
    • New assumptions:
      • COVID reduces stores visits by 10% indefinitely
      • Gym to penetrate 30% of stores by 2025, with a 20% willingness to visit kohl’s for every trip to gym, flat ticket size of USD 35, nearly 1.5 MM visits per year
      • Cash/share of USD 9 by 2025, discount rate of 10%, multiple of 10x/15x would yield 93/140 TP
  • Sephora partnership
    • Sephora and Kohl’s win-win situation with 25M users from Sephora and 65M users from Kohl’s (30M are members)
    • Brings younger demographic into Kohl’s (good for Kohl’s private label brand and lacking social engagement)
    • KSS expects to open 200 Sephora shop-in-shop locations in Fall 2021, and at least 850 locations by 2023. They will be designed within a 2,500 square ft. space and prominently located at the front of the Kohl’s store
    • Kohl’s will fund capex for store build, with estimates of less than USD 700-800 MM historical run rate for the next few years, while Sephora will be in charge of brand curation
    • 50/50 split for operating profits
    • Sephora and JCP partnership led to USD 1,300 per square ft. revenue, with Sephora’s eventual expansion, it could contribute USD 2.75 billion annually, amounting to around 13% of KSS’s current revenue
  • Conclusion & TP update
    • Aldi and PLNT seems to have taken a backseat amid pandemic, but Sephora is a great move nonetheless and presents a quick turnup in unit economics, where traffic and ticket size are likely to increase
    • 4Q20 expenses seems to be in control, cash position should remain strong after distribution center lease-back
    • New modeling suggests minimum TP of $100 after rounding up, with potential upside in ticket price and better expense controls, unit economics are still in favor
    • Structural change in retail space continues, a mix of store closure in underperformers and share taking in leaders will continue to happen, Kohl’s continues to be one of the most well-positioned players

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