KSS – New Black Book. Putting Our Credit Thesis To The Test

Takeaway: Our new Black Book/consumer survey will test our thesis that 25% of KSS’ EBIT is at risk of going away – contrary to management’s guidance.

Please join us on Tuesday May 12 at 1pm for a call in conjunction with our latest Black Book on Kohl’s, which is a Best Idea Short. Note that the call will be two days before KSS 1Q results. Despite the obvious strength in the stock and the business year to date, we think that earnings growth will decelerate sharply as the year progresses, and that earnings power will prove to have peaked at $4.26 last year. We think consensus estimates are high by 15% this year (after we pass 1Q), and by 30-40% over the following two years. Ultimately we think that KSS will shift from trading at a peak multiple on peak earnings, to more of a mid-cycle multiple on something closer to $3.50. That suggests a stock in the low $40s, or about 45% downside from here.

 

The key issue as we see it links back to the company’s credit card and rewards program. Specifically, we think that the rationale behind the recent change in KSS Rewards is evidence that KSS is in the 10th inning as it relates to finding new customers. About 85% of profits are linked to the credit card, and we think that 25% of EBIT is at risk due to the recent changes implemented by KSS management.

 

In order to put our thesis to the test, we are in the process of completing a very detailed consumer survey of 1,000 KSS shoppers who either hold a Kohl’s credit card or the new Yes2You rewards program. The results (which we have not yet seen and might well prove us wrong!) should give us an accurate picture as to who is shopping, how much they are spending, and how much of a customer’s incremental purchases are flowing through KSS Card or some other Third Party Card (Visa, MC, etc).

 

Participant Dialing Instructions (We’ll Also Have  A Live Streaming Presentation in Conjunction with the Call)

US Toll Free:

US Toll:

Confirmation Number: 39610531


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