Throughout the last decade, Kohl's (KSS) has underperformed the market. Of the Street's latest 15 revisions to EPS estimates, all have gone down for a net change of -2.5%. From poor same-store sales in December to a weakening brand, the retailer is showcasing its weakness. Even though I have lowered my own price target from $40 (see here), I still believe that high-risk adjusted returns will be meaningful in the next two years.
After all, from a multiples perspective, Kohl's is the cheapest of its peers. It trades at a respective 11x and 9.1x past and forward earnings. Macy's (M), Walmart (WMT), and Nordstrom (JWN) meanwhile, trade at a respective 12.8x, 13.3x, and 16.2x past earnings. The problem for Kohl's is that it is left in a precarious position being eaten away from both sides of the industry. While Walmart takes away marketshare from the low-end market, Macy's and Nordstrom take away share from middle- and high-end market. The ratings on the Street for the companies follows:
Macy's: Near "Strong Buy"
Nordstrom: Weak "Buy"
At the third quarter earnings call, Kohl's CEO, Kevin Mansell, noted success in the key areas of today's retail environment:
Our private and exclusive brands continue to increase in penetration as they were approximately 51% of our sales in the third quarter, up approximately 270 basis points. In our private brand portfolio, Apt. 9, So and Urban Pipeline all reported double-digit increases as the FILA SPORT, Food Network, Lauren Conrad, Mudd and Simply Vera Vera Wang in our exclusive national brand portfolio.
From a regional perspective, the Southeast reported the strongest comps. The Midwest and South Central regions were consistent with the company average. The Northeast and Mid-Atlantic regions slightly underperformed the company average but were positive. The West was the only region to report a decline in comparable store sales.
Our e-commerce sales year-to-date have surpassed $0.5 billion and remain on target to reach our goal of $1 billion.
In December, same-store sales came well below expectations and fell 0.1% versus the consensus of a gain of 2.4%. The retail environment is shifting towards brand names, particularly for beauty products. In regards to this, I find that Kohl's lacks of upscale lines have already been factored into the price given the discounted multiples. If the Mark Anthony and J-Lo brands are any indication, the company has the marketing capabilities to capitalize on fluctuating demands.
Consensus estimates for Kohl's EPS are that it will grow by 18.4% to $4.52 in 2012 and then by 16.2% and 15.7% more in the following two years. Assuming the multiple expands to 12.5x and a 2013 EPS of $4.94, the rough intrinsic value of the stock is $61.75, implying 32.8% upside.
In my view, Macy's has greater downside, but also greater upside. Of the latest 5 revisions to EPS estimates, all have gone up - quite a contrast to Kohl's. Third quarter results were strong overall as operating income increased by 64% and operating margins expanded by 13.3%. And in December, the retailer beat expectations with same-store sales growth by 6.2% versus 5.9% consensus. This was just behind Nordstrom, which had same-store sales growth of 8.7% versus 4.7% consensus. One reason why investors are attracted to the company is because volumes have held up well despite pricing increases. Unlike many retailers that are slashing prices, like Walmart, Macy's is taking the opposite approach and it is paying off.
Consensus estimates for Macy's EPS are that it will grow by 33.5% to $2.79 in 2011 and then by 15.1% and 13.7% more in the following two years. Assuming a multiple of 13.5x and a conservative 2012 EPS of $3.17, the rough intrinsic value of the stock is $42.80, implying 23.8% upside. Even if the multiple were to hold steady and 2012 EPS turns out to be 7.6% below the consensus, the stock would still rise by 13.3%. Accordingly, Macy's is a strong defensive play that also will meaningful appreciate in a full recovery.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.