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Can Kohl's Stock Keep Going After Last Week's 24% Pop?

By Rick Munarriz – Nov 14, 2016 at 9:08AM

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The discount retailer moves higher after a better-than-expected quarterly report. A few analysts are feeling more optimistic following the results.

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Back-to-school season has come and gone, and Kohl's (KSS -2.34%) is passing with flying colors. Shares of the discount department store chain soared 24.3% last week, moving higher after posting better-than-expected financial results. Wall Street noticed, with a couple of analysts jacking up their price targets.

The report may not seem so hot at first glance for the 1,166-store operator. Net sales declined 2.3% to $4.3 billion, fueled largely by a 1.7% dip in comparable-store sales. Adjusted net income clocked in at $142 million, just shy of the $144 million it posted a year earlier. Earnings did rise on a per-share basis -- going from $0.75 to $0.80 -- as a result of Kohl's aggressive share buybacks over the past year. Analysts were only holding out for $0.70 a share. 

It was an up-and-down-and-up quarter for Kohl's. The company had a strong back-to-school shopping season, but that was followed by softness in September. There was progressive improvement in October, which is just the kind of momentum that the retailer likes to have as it heads into the pivotal holiday shopping season.

Lumps of Kohl's

Wall Street warmed up to the retailer following the report. Stifel analyst Richard Jaffe boosted his target price on Kohl's stock from $50 to $60. He is naturally sticking to his buy rating. Jaffe feels that the chain's growth initiatives and its recovery last month bode well for the stock's near-term prospects.

Jaffe isn't alone. Baird analyst Mark Altschwager also bumped his share price goal higher, going from $48 to $55. He concedes that growth has been lackluster, but he feels that the retailer's shift to a more nimble operating model -- as well as moves to refresh its product lines and marketing -- will pay off in the near future. Altschwager is staying with his outperform rating. 

Kohl's is sticking to its earlier guidance for the entire fiscal year. Back out impairments, store closings, and other one-time costs, and it's targeting $3.80 to $4.00 a share. The market often frowns when a company reiterates its full-year guidance after a blowout, suggesting that the balance of the year won't be so great. Some analysts did go on to nudge their profit forecasts for the holiday quarter slightly lower.

The stock's surge, with guidance staying intact, does make Kohl's more expensive. The stock's fiscal 2016 earnings multiple went from 11.1 to 13.7 last week. The chunky yield went from 4.7% to 3.8%. A stock fetching 13.7 times this year's profit target, yielding 3.8%, isn't necessarily expensive. However, that may not be the case, given the stagnant growth at the retailer. It's also wrapping up what will probably be its fifth consecutive year of contracting net margin since peaking in fiscal 2011. Kohl's will need to turn sales around and improve its margins to keep a substantial rally going at this point.

Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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