KSS - Kohl’s More Likely to Shrink Than be Sold
First of all, if anybody was wondering why KSS outperformed its peer group by 9% for the year-to-date, now you know. Presumably, the Board and the potential Bankers are the only ones who knew about this (as it should be), but it appears that someone leaked something. A lot of something.
Nonetheless, we should be clear about something. KSS is not looking for strategic alternatives because its 'Greatness Agenda' is over-delivering on value creation. Quite the opposite. We think that this business model is terminal, and just maybe management is starting to catch wind.
If KSS were to close half of its stores, and cut the size of the remaining stores in half -- we don't think that the consumer would really care. This is a business that was built upon shopping by convenience -- i.e. going to a local strip mall for mediocre brands (10-15 min drive) instead of driving to a regional mall (20-30 min drive). Unfortunately, there's a new alternative to the regional mall -- it's called the Internet. KSS can't win that battle.
This strategy, which actually worked well for about 20 years (1) is also part of the structural reason why KSS does not have real-estate optionality like Macy's or Dillard's. KSS is almost entirely based in strip malls, and they are simply a dime a dozen. 20 years ago, there were about 2,500 such strip malls. Now there's closer to 7,100. But the regional mall count, on the flip side, has remained fairly constant over time at 1,100. That means that the value per square foot of Regional Mall space has gone higher, while strip malls has been flat to lower as more properties were built. Too many people who claim that KSS has real-estate optionality simply don't understand this dynamic.
We're at $3.70 in the coming year vs the Street at $4.60, and we think that the company will never earn over $4.00 again. Ultimately, our numbers head below $3.00, while the Street's are headed above $6.00.
The biggest delta in our thesis from consensus is our view that the company has literally run out of customers (our math suggests that KSS already landed 75% of people that could be KSS customers). This is manifesting itself in declining traffic, risky promotional strategies that meaningfully put at risk the company's credit income . The key there is that this risk holds even if we don't see the credit environment roll over. If the credit environment goes bad, then we think that KSS earnings goes closer to a buck -- again, the Street is at $6.00+. For our full thesis see note link here: KSS | Here’s Why KSS Is Expensive
This company is hiring a banker because it has to -- not because it needs help with all the inbound requests. Selling this company is one of the hardest jobs around.
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