Kohl's Is Likely To Survive The Coronavirus Crisis Without Excessive Damage

Summary

• Kohl's has needed to reduce capex by $500 million and suspend its share repurchase program in response to the coronavirus crisis.
• If stores close for six weeks and its sales end up down -15% on the year, Kohl's may still be able to cover its current dividend.
• It could skip or reduce its next dividend payment while it assesses the damage, though.
• If Kohl's can then get 2021 sales to within 5% of 2019 levels, it should be worth around $22 per share.
• Looking for more stock ideas like this one? Get them exclusively at Distressed Value Investing. Get started today »

Kohl's (NYSE:KSS) has been badly affected by the coronavirus, as it has been forced to shut down its stores for an indeterminate amount of time. To deal with its the financial effects of this crisis, Kohl's is furloughing many of its workers, drawing down its $1 billion credit facility, cutting its capex budget, suspending its share repurchase program and reevaluating its dividend.

I believe that the store closures will last for around six weeks and foot traffic may be depressed for months afterwards. In that scenario (reducing Kohl's sales by 15% from 2019), it should still be okay financially in the end. The reduction in capex from $750 million to $250 million will help offset much of the impact of the crisis on Kohl's cash flow.

Store Closures

Kohl's has extended its store closures until further notice. Based on the trends in coronavirus cases in other countries, I believe that its stores will remain closed until around the end of April. It takes around four weeks (after shutdowns start) for the daily growth in confirmed cases to end up in the low-single digits percentage-wise. A couple more weeks after that should make the situation decent enough for stores to re-open.

After an initial surge in business after the store re-openings, foot traffic may remain depressed for months due to the economic fallout from this whole situation as well as some caution among shoppers trying to protect against a potential resurgence of the virus.

I am thus modeling Kohl's sales as down -15% for 2020, reflecting six weeks of store closures plus several months of depressed foot traffic.

2020 Outlook

This would result in Kohl's ending up with around $16.05 billion in net sales in 2020. I've also assumed that gross margins decrease by 3% (compared to previous guidance) due to the need to clear

Analyst’s Disclosure:I/we have no positions in any stocks mentioned, but may initiate a long position in KSS over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.