Even before the onset of the COVID-19 pandemic accelerated consumers' shift away from bricks-and-mortar stores and toward a greater use of e-commerce, Kohl's (KSS 0.54%) was already a major disappointment to long-term shareholders. The stock has bounced up and down at times, but for the better part of the past two decades, it has gone essentially nowhere.
Perhaps patience will reward Kohl's investors, much as it did for Target's shareholders, who saw modest returns for more than a decade until the stock broke out in recent years on the heels of strong financial results.
Indeed, Kohl's jailbreak might already be underway: The stock recently jumped 36% in a single day. That sharp price move wasn't driven by Kohl's improving financial profile, though, but by takeover talk. However, the possibility of an acquisition shouldn't distract investors from less speculative reasons to buy shares of this surprisingly solid retailer.
Image source: Getty Images.
Speculation begets speculation
On Wall Street, it seems, all it takes is a hint of M&A talk to set fire to traders' imaginations. On Jan. 24, Kohl's announced that it had gotten initial offers from interested acquirers, but it said little more on the matter.
Elsewhere, though, it was reported that two companies were bidding to buy Kohl's: Acacia Research, backed by Starboard Value, allegedly offered to pay $64 per share, while Sycamore apparently upped the ante to at least $65.
Kohl's hasn't given any further public comments, so confirmed details on the matter remain elusive. Of course, this hasn't stopped commentators from speculating on the who, the when, and the how much regarding a potential takeover. In particular, fantasies of Amazon buying out Kohl's have started popping up lately.
Kohl's claps back
Meanwhile, activist investor Macellum Advisors has encouraged Kohl's on multiple occasions to pursue various strategies and options, including allowing a buyout. Macellum's claim that Kohl's is "materially mismanaging the business" surely stings -- and it is undeniable the the retailer struggled with year-over-year net sales and net income decreases in 2019 and 2020.
Macellum has a point that in early 2021, Kohl's "was only benefiting from the economy reopening from the depths of the pandemic." Maybe that wasn't its only source of improvement, but the rising retail tide undoubtedly lifted all boats.
Macellum's most damning argument is that Kohl's has underperformed its peers across a multiplicity of metrics:
- Total shareholder returns since the end of 2019: +65.8% retail peer average vs. -2.9% for Kohl's stock
- Revenue growth from Q1 2019 through FY 2021 (est.): ranging from +16% to +23% for peers vs. generally flat for Kohl's
- Gross margin change from FY 2019 to FY 2021 (est.): average of 640 basis points for retail peers vs. 185 basis points for Kohl's
In response, Kohl's highlighted the recent performance of its stores and e-commerce sites, asserting that higher sales and rising profit margins, will help to drive record earnings per share in 2021. Among its other defenses:
- Kohl's third-quarter 2021 net sales increased 16%, with strong performance across both stores and digital
- Operating margin reached a nine-year high of 8.4%
- The company's full-year 2021 adjusted EPS outlook of $3.80 to $4.20 represents an all-time high for the company
- It expects to repurchase $1.3 billion in shares in fiscal 2021
Perhaps Kohl's could also have mentioned that it swung from a $506 million net loss in the nine months ended Oct. 30, 2020, to a net gain of $639 million during the equivalent period of 2021. Granted, the pandemic wasn't likely as much of a headwind for Kohl's in 2021 as it was in 2020, but the bottom-line improvement is dramatic nonetheless.
Time to go shopping?
Make no mistake about it: Kohl's post-pandemic future is far from clear. It's understandable if some downtrodden shareholders would prefer to see Kohl's just go ahead and get taken over already. But beyond Kohl's acknowledgement that it's received letters of interest, the chatter is mostly fancy and fantasy.
Kohl's relative underperformance has already been priced into the company's shares, so an effective turnaround effort could produce considerable upside for investors. Perhaps that effort could include Macellum's suggestions -- particularly selling real estate to fund share buybacks. With that, Kohl's might actually not need to be taken over.
Among other signs of improvement, the bottom-line stats indicate that Kohl's is in rebound mode -- though admittedly, the retailer could probably benefit from considering Macellum's suggestions for change. So if you appreciate the company's gumption in the face of aggressive activism, a small stake in Kohl's stock could be appropriate. And who knows -- Kohl's might relent and allow a takeover, thereby replacing rumors with facts and probably sending the share price higher in the short term.
