S&P: Kohl's 'Highly Attractive At Current Levels' (KSS, JCP)

Includes: JCP, KSS

S&P Equity Research made retailer Kohl's (NYSE:KSS) its 'Focus Stock of the Week' -- excerpts from the enthusiastic note:

Retail chain Kohl's, with its "Expect Great Things" tag line, has positioned itself as a preferred shopping destination for busy moms. In response to changing customer preferences, it has invested in new brands and marketing initiatives. Kohl's has also, in our view at Standard&Poor's Equity Research, stayed on course with its investments in new stores, renovations, and systems improvements.

We think these initiatives are paying off, and we look for Kohl's to maintain its positive sales and earnings momentum over the next few years. Based on what we see as the company's leadership position in the midrange department store sector, which is being supported by an ever-expanding store base and new merchandising and marketing initiatives, and above-peer-average EPS growth projected over the next five years, we think Kohl's shares are highly attractive at current levels. The stock carries S&P's highest investment recommendation of 5 STARS, or strong buy...

From fiscal 2000 (ended January) through fiscal 2005, Kohl's increased its selling square footage at a compounded annual growth rate of about 21% as it expanded its store count from 259 to 637. It currently operates 732 stores in 41 states, having recently opened 95 new stores for fiscal 2006. By comparison, Kohl's closest peer, J.C. Penney (NYSE:JCP), opened 18 new stores for fiscal 2006...

We expect the U.S. retail environment to remain promotional and competitive over the near term. However, we see Kohl's improvments in it sales mix and its focus on lifestyle merchandising driving 4% to 6% quarterly same-store sales growth through fiscal 2007...

The stock trades at approximately 16 times our fiscal 2007 EPS estimate of $2.90, below its historical range. We are projecting about 16% growth in earnings over the next five years (which is more conservative than Kohl's projected 18%), giving the shares a current p-e-to-growth (NYSE:PEG) ratio of 1, a modest discount to a peer-median PEG of 1.1, and well below the S&P 500's 1.4. Our expectation of superior earnings growth for Kohl's relative to its peers and the S&P 500 offers a compelling reason for purchasing the shares, in our view.

Our 12-month target price of $58, which is based on discounted cash-flow analysis, implies potential appreciation of approximately 27%.

KSS 1-yr chart:

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