What happened
Retailing stocks had a volatile but positive trading week. Shares of Kohl's (KSS 2.87%), Nordstrom (JWN 5.38%), and The Gap (GPS 0.65%) each jumped more than 10% through Thursday trading even as the wider market fell by 1.6%.
Buyout speculation was the main factor pushing up the stocks. Kohl's shares are up 21% so far in 2022 compared to a 9% slump in the wider market. Gap and Nordstrom are both in negative territory, but still outperforming the market year to date.
Image source: Getty Images.
So what
Rumors surfaced over the weekend suggesting that Kohl's had received two offers to be taken private, reportedly at a large premium to the $6.5 billion market capitalization that the stock was trading at before the news. That news pushed the retailer's stock up over 30% on Monday while lifting many of its peers higher as well. Kohl's went on to confirm that it has received at least two letters expressing interest in acquiring the company.
A large merger deal with one company often pushes up shares of its rivals for two main reasons. First, the buyout usually implies that valuations have become too low across the industry. That might be true in this case, given that retailing stocks have fallen hard over the last few weeks. Nordstrom is down over 40% in the past year, for example, and Gap shares are down 10% compared to the wider market's 15% increase.
A buyout deal also sparks investor optimism that more acquisitions could be on the way. Kohl's might get more offers, for example, and private equity companies might turn to the chain's peers in hopes of winning similar deals. Those factors helped lift stock prices for Gap and Nordstrom this week, despite declines for the wider market.
Now what
Kohl's hasn't confirmed important deals about the price of any buyout offer. Its management team hasn't announced whether it will accept the terms, either. Yet the acquisition idea wasn't rejected out of hand, suggesting that there's a good chance it will go through. Kohl's "will determine the course of action that it believes is in the best interests of the company," executives said on Monday.
That update leaves shareholders with plenty of uncertainty about the timing of any potential deal. However, the rumored purchase price implies a valuation for Kohl's of roughly 0.5 times the $19 billion of annual sales that the retailer is expected to post in the current fiscal year. The stock had been valued at a higher premium as recently as early 2021, yet management might still find a cash deal attractive.
KSS PS Ratio data by YCharts
Both Gap and Nordstrom are valued at significantly below that price-to-sales ratio even after the stocks jumped this week. These businesses aren't growing as quickly, though, with Gap recently announcing a 1% revenue decline and Nordstrom notching an 18% increase. Kohl's, in contrast, recently upgraded its growth outlook and is looking for sales to rise by about 25% in the fiscal year that ends in late January.
Kohl's shares will likely remain volatile as more details emerge about its negotiations. And developments here will likely affect valuations for its peers. Yet the big question, of how retailing demand held up over the holiday season, will be answered as the companies announce Q4 earnings results over the coming weeks.
