We recently initiated a position in Kohls and the following are the fundamentals and technicals behind the addition. Kohls is a retail outlet with over 1100 stores in all but one state Hawaii.
Overview:
We recently initiated a position in Kohls and the following are the fundamentals and technicals behind the addition. Kohls is a retail outlet with over 1100 stores in all but one state Hawaii.
They have survived and thrived where other retailers like JC Penny's and Macy's have faltered. One reason for this is they were ahead of the game with their online store.
They have an easily site to navigate and their rewards for shopping at Kohls are second to none. I mainly shop at Kohls online now for clothing, shoes etc..
Three years ago most of the packages that came to the house were from Amazon. Now they come from various online retailers but at Christmas it is mainly Kohls. I like to buy stocks for which I use their products.
Technicals
Kohls is a highly cyclical stock as most retailers are. After the IPO and 10 years of growth it has overall cycled between 45.0 and 69.0 for the most part.
These types of well defined ranges over a long period of time can provide a guide as to when to enter and when to exit a position. The peaks range from 2-8 years so this is a short term investment strategy, not one to bank your retirement on.
The goal with these types of charts is to accumulate near the lower end of the range and sell near the upper end. Its that simple, unfortunately it takes a great deal of patience to see the fruits of your investment.
Now all ranging equities are not equal. The key is to have a solid fundamental basis for buying the lower end of the range. The reason is simple. You do not want to get stuck in a bearish trend.
Ranges hold till the don't and getting caught in a bearish trend long can be painful, especially with a retail or cyclical stock to begin with. There needs to be fundamental reasoning to back the buy.
Financials:
First we want a solid balance sheet and Kohls is not perfect with around $540 million in cash and long term debt of 1.85 Billion. Starting in 2018 they had 2.8 billion in debt and 1.3 billion in cash and have significantly paid down that debt while maintaining a healthy cash position.
In addition Kohls has consistently raised its dividend by an average of 11.8% over the past 5 years. Currently the dividend stands at a healthy 5.3% which provides a nice premium to those who don't mind waiting for the stock to recover.
In addition Kohls has been buying back shares and in March it would buyback as much as $500 million in shares this year. To investors this is just another form of a dividend. It also is prudent for a company to buy back shares at a low, not a high.
Again this shows that Kohls is using its capital wisely, as it is paying around 5% on their debt notes and 5.3% in dividends, in lieu of paying down debt they are buying their stock, providing additional value to owners.
Why this is good financial maneuvering is debt is tax deductible, dividends are generally taxable income. With an effective tax rate around 25% you either pay the taxman or reward shareholders.
Though Free Cash Flow was down in April, the TTM was over $1.17 Billion. This is more than enough for them to pay debt, dividend and buyback shares.
Partners
With an average store size of 80,000 sqft one of the initiatives was to lease a portion of their foot print to increase traffic and streamline their retail offerings as they are relying more on internet sales.
Partnering with Planet Fitness, Aldi and others will enable them to cut costs and drive traffic. However their biggest partnership is with Amazon where they announced Kohls will be accepting Amazon returns in all their stores. This is significant for two main reasons.
- In their Chicago stores which were pilots, YoY revenue gains were 8% vs 2% for other Kohls stores, and saw a 9% increase in new customers vs 1% for other locations for the 2018 year. (According to USA today and Earnest Research)
- This takes another step towards a potential acquisition by Amazon as they are now feeling more competition with Walmart and other brick and mortar stores.
According to Reuters,
Kohls has approached At Home Group for a potential acquisition. This does not make sense when this sector is struggling. Bed Bath and Beyond, Pier 1 and others have seen their share prices crushed.
However if the intent is for Kohls to acquire At Home and then Amazon acquire Kohls it makes perfect sense. At Home has locations in 38 states and the importance of these locations is most are in the fastest growing states such as Texas, Florida and Arizona. They even have 5 stores in Utah which is also in the top growing states.
Sales Growth
After a dismal quarterly report in May the stock sold off hard, and is down around 24% after reporting. It is also down nearly 35% from its high in 2018. Is this a potential value trap?
I don't think so personally. Missing on one quarter and lowering guidance by 5-8% for the year, does not equal a 25% reduction in the price. There roll out with Amazon is just in time for Prime Day which will result in a lot of foot traffic going into the fall school year and Xmas shopping season.
According to Retail Dive, Whole Foods sales growth grew by 1% YoY in their stores and 6% YoY if you include digital sales. Amazon retail growth, which used to be in the triple digits, has slowed to under 10%.
With Kohls seeing 9% growth in their pilot stores in Chicago, this makes it even more enticing for Amazon to acquire them in a deal. As they compete with Best Buy and others they will eventually need brick and mortar stores.
Kohls is a perfect way to expand this and adding At Home Group gives them a nice brick and mortar retail foot print to add to Whole Foods.
More Technicals
There is some evidence of accumulation under 50 was the stock is attempting to form a rounded bottom. These types of patterns form as those dumping the stock are met with those looking to accumulate.
The recent reversal that formed a higher low may be a sign that investors are now interested in the stock and we are near the bottom. We can always push lower which is why we step into a position and not shove all in.
Our targets are 58.0 and 65.0 where we want to reduce risk and start removing our investment capital. We never buy a stock based on take-over rumors, but it is a bonus if the technicals and fundamentals align.
Under 50.0 is an area for us to accumulate and we will use a mix of options and purchases outright to do so. For those just stepping into investing, buy some shares here, buy some more on pullbacks.
Do not expect this to go vertical anytime soon, there is still some risk to the downside here. Technically we are not out of the woods, nor in a bullish trend.
Summary
I generally invest in companies who's products I use. Walmart was one of them, and when it was left for dead at $68 a share paying a fat 3.8% dividend, I said heck, this hasn't stopped Melissa from shopping there. I never go to Walmart and see an empty store! I bought the company.
Same goes with Apple and many other companies that I buy. If I like the companies products or services, it is likely others do as well.
Even if Amazon does not acquire Kohls outright the partnership is likely to increase foot traffic and add to their online presence. As other retailers like JC Penny's, Macy's and of course the now defunct Sears contract, it will shore up growth for companies that adapted to the environment like Kohls.
In addition, we are getting paid 5.3% in dividends while we wait for the stock to recover with a healthy balance sheet. As with any investment there is no guarantee that the stock does not sink lower, so this does not come without risk. You can lose your money.
However I am willing to take the risk in companies I like and use with strong balance sheets and pay fat dividends. If the economy slows, and the stock sees further selling pressure I am getting paid to own it. Of course like any stock they can always cut their dividend so there is never any guarantee.
Received a flurry of emails on which stock broker to use for stocks. Interactive Brokers is a discount broker and their fees are great, but do not expect a lot of help. TD Ameritrade, E-Trade, Fidelity and Schwabb have higher fees, but also good customer service.
I see many younger investors using Robin Hood which charges no fees for stock purchases, which is great for building with smaller accounts.