Many retail stocks performed well in 2021, as strong consumer demand and pandemic fatigue powered big increases in retail spending. Kohl's (KSS 0.68%) was no exception. Shares of the department store giant rose about 21% last year -- and at one point, Kohl's stock was up 60% for the year.

Nevertheless, activist investors are demanding radical changes to boost the stock price, such as spinning off the e-commerce business or selling the company outright. Moreover, some of management's critics are threatening to mount a challenge to the board.

Investing legend Warren Buffett would view these criticisms and suggestions as short-sighted. Instead, he would likely urge the company to keep doing what it has been doing already. Indeed, while Kohl's may be too small to be of interest as an investment for Berkshire Hathaway, it looks like just the kind of stock Buffett loves to own.

An impressive cash cow

At one level, it's easy to see why many investors are frustrated with Kohl's. Over the past decade, Kohl's stock has barely budged, whereas the S&P 500 has nearly quadrupled.

KSS Chart

Kohl's stock vs. S&P 500 performance, data by YCharts.

However, the underlying business performance has been quite solid, albeit not flawless. The company has consistently generated free cash flow over the past decade, averaging around $1 billion annually, a statistic that would surely impress Buffett.

Even in fiscal 2020, Kohl's posted free cash flow of $1 billion, despite the severe impact of the pandemic on sales (particularly in the first half of the year). And in the first nine months of fiscal 2021, the company generated over $1.3 billion of free cash flow.

KSS Free Cash Flow (Annual) Chart

Kohl's free cash flow (annual), data by YCharts.

The main reason for the stock's uninspiring performance over the past decade is that its price-to-earnings and price-to-free cash flow ratios have shrunk considerably. In effect, the stock has done poorly because investors have become increasingly worried about the company's future -- even though Kohl's continues to churn out as much cash flow as ever. Conversely, the market as a whole has experienced significant multiple expansion in recent years.

The fundamentals remain solid

The activist investment funds that own Kohl's stock find the continuing share price underperformance alarming. Buffett wouldn't agree.

First, as noted, Kohl's still generates strong cash flow year after year. Market share gains at the expense of retailers that closed stores during the pandemic and the benefit of new Sephora shops that Kohl's is rolling out in most of its stores could drive further growth.

Thus, the company's intrinsic value is stable or growing. That's more important to long-term investors like Buffett than the stock's performance, even over a period as long as a decade. Indeed, Buffett stuck with Coca-Cola stock despite two decades of nearly zero share price appreciation between 1998 and 2018.

Meanwhile, Kohl's has used most of its free cash flow to buy back stock. This reduced its share count from more than 300 million shares entering 2010 to 139 million as of late November. Kohl's is on track to shrink its share count by about 15% in fiscal 2021 alone.

The exterior of a Kohl's store.

Image source: Kohl's.

Buffett has frequently praised companies that repurchase stock, as long as they are careful not to overpay. He would be thrilled to see Kohl's increasing its share repurchases as its intrinsic value has increasingly diverged from the market value of Kohl's stock.

Don't fear share price declines

Bluntly speaking, activist shareholders are desperate for Kohl's to do something to boost its stock price so they can make a quick profit. For long-term investors, though, the lagging share price isn't a problem.

As Buffett pointed out in his 1997 annual letter to Berkshire Hathaway shareholders, investors who plan to hold their shares or buy more stock should be happy when the market falls. That's particularly true when they have invested in companies that are buying back stock. Lower near-term stock prices allow a company like Kohl's to repurchase more shares with each dollar allocated to buybacks.

Sooner or later, Mr. Market will catch on to this stock's growing value. For now, long-term investors should be delighted that they -- and the company itself -- have the opportunity to buy shares for around $50. That makes Kohl's just the kind of stock that Buffett would find appealing for 2022 (and beyond).