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Kohl's Stock Upgraded: What You Need to Know

By Rich Smith - Oct 9, 2017 at 2:56PM

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Kohl's stock looks too cheap not to buy, but is that reason enough?

Every day, Wall Street analysts upgrade some stocks, downgrade others, and "initiate coverage" on a few more. But do these analysts even know what they're talking about? Today, we're taking one high-profile Wall Street pick and putting it under the microscope...

It's been a topsy-turvy year for investors in Kohl's Corporation (KSS -6.94%). Up 3.5% since the year began, Kohl's stock has nonetheless underperformed the S&P 500 badly. Though it was up as much as 11% at one point, Kohl's stock has suffered some steep declines along the way, and is in fact lagging the S&P by nearly 25% over the past year.

But it could have been worse, and it might get better.

At one point this year, Kohl's stock was actually down as much as 12%, before reviving as value hunters swarmed. Management hoped to bolster its stock success further with a bold plan to ride's (AMZN 0.73%) coattails to retail success, accepting Amazon purchase returns in-store at Kohl's, and selling Amazon-branded devices there as well. Instead, investors revolted at the idea of ceding floor space to Kohl's fiercest rival, and bid Kohl's stock down in response.

Now, one analyst thinks it's time for Kohl's stock to go up again.

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Is it time to add Kohl's stock to your shopping cart? Image source: Getty Images.

Telsey upgrades

This morning, NYC-based stockpicker Telsey Advisory Group announced it is upgrading Kohl's stock to outperform and assigning the shares (which currently trade below $43) a $50 price target. As detailed on (requires subscription) this morning, Telsey has three main reasons why it thinks this is so.

First and foremost: Sales.

Telsey notes that same-store sales at Kohl's were down 0.4% year over year in Q2, but down 2.7% in Q1 -- so while still not growing absolutely, Kohl's performance is at least less bad now compared to the previous quarter. (Overall sales, from both stores open a year or more and new stores combined, were down 0.9% in Q2, and down 3.2% in Q1, according to data from S&P Global Market Intelligence.)

Sales down -- but costs down, too

Telsey also believes that Kohl's is doing a good job of managing its sales decline by cutting costs in tandem. Selling, general, and administrative expenses in Q2, for example, were down 0.3%, while in Q1, Kohl's shaved 3.3% off of its SG&A costs -- a bigger decline than seen in its same-store sales.

Cost of goods sold, too, declined in both quarters -- 0.8% and 4.5%, respectively.

Better management, better results

Finally, Telsey argues that Kohl's inventory management has been "exceptional" lately. S&P Global data suggests that inventory turnover accelerated to 0.65 turns in Q2 2017, up from 0.64 turns in Q2 2016 (as calculated by dividing cost of goods sold by inventory).

This was an improvement -- both sequentially and year over year -- compared to Q1 2017, in which inventory turns dropped to 0.61 versus 0.63 in Q1 2016.

Caveats and provisos

Granted, the improvements in inventory turnover these past couple quarters seem rather modest -- and sales are still going down, not up, neither of which facts seems exactly like a clarion call to action. In fact, they kind of suggest that Telsey is grasping at straws, and seeking a reason to upgrade the stock today.

And yet, if that's what's happening, I kind of understand the analyst's desire to find a reason -- any reason -- to recommend Kohl's stock, which really does look cheap. Priced at just 11 times earnings today, Kohl's stock has less than half the average P/E ratio of the S&P 500. The stock is also paying a monster 4.8% dividend yield, which seems easily sustainable given that the company needs less less than 55% of its profits to maintain its dividend.

Growth expectations on Wall Street are modest -- just 6% annual earnings growth projected over the next five years. On the one hand, such low expectations make it easier for Kohl's to beat expectations (which would probably lift the stock). On the other, combining 6% earnings growth with 4.8% dividend payouts results in a 10.8% expected return on Kohl's stock, keeping the stock well within buy range for value investors, at a total return ratio of less than 1.0.

Kohl's stock looks so cheap today that it's really hard to resist the urge to buy it. That being said, aside from the obviously cheap price, Kohl's shares still aren't showing any obvious signs of improvement. As much as I like Kohl's stock myself, I'm not 100% convinced that it's out of the woods yet, or that more cautious investors should invest in it.

When considering Kohl's stock for investment, patience may be your best virtue.

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