KOHL’S HARD CASH: DIGGING UP VALUE IN $KSS - Long term price target of $34

Long term price target of $34

Originally published on 3/31/25 in The Millegan Memo

https://www.woodworth.fund/news/the-millegan-memo-march-2025

KOHL’S HARD CASH: DIGGING UP VALUE IN $KSS

Kohl’s continues to drop despite a relatively rosy reported earnings and balance sheet. In what appears to be an overreaction to broader uncertainties in the US economy, consumer sentiment, and possibly disappointing performance of certain internal segments, Kohl’s has declined over 30% since it reported earnings earlier this month.  The name is now trading around 65% below the price it was at just a year ago.  Total market capitalization has dropped solidly below $1 Billion, despite nearly $8 Billion in real estate assets and long-term debt of just over $1.1 Billion.  The company, which continues to report sizable free cash flows and declining debt, is now effectively priced as though the street expects it to go bankrupt.  Kohl’s also announced a cut to their dividend and downward revisions to forward expectations for full-year 2025.

Won’t somebody buy my dollar for a quarter?  The recent drop in price mirrors drops in other retail names in response to tariff threats and recession expectations, however Kohl’s in particular is now far below even its liquidation value.  Speculation of bankruptcy seems poorly supported at best, and investors may be actively misinterpreting underlying financials at worst.  Short interest in the company has been floating around 50% - this is likely aiding in the price drop, but those short sellers will quite literally have to eat their shorts if this company comes anywhere near even 50% of fair value. It is not an exaggeration to say that the cost of Kohl’s taking itself private at these levels would be less than the cost of going through the bankruptcy process, which makes the prospect of Kohl’s going out of business in any sort of near-term somewhat irrational. Investors have made hay over store closures when, in reality, management is trimming the fat with their remaining stores (over 1,100) nearly all profitable. Most Americans still live within 15 miles of a Kohl’s store.  There has also been speculation that some investors are misinterpreting Kohl’s lease liabilities, which in fairness is contributing to bottom-line net debt picked up by typical reporting outlets to the tune of over $5 Billion.  However, it strains credulity to treat such leases in the same manner as traditional debt obligations, as leases can be typically renegotiated with relative ease in the event that the company becomes distressed, and furthermore obscures the underlying equity that Kohl’s can still draw on in the form of actual real estate for collateral and potential refinancings.  We at the fund continue to view Kohl’s as a strong buy and current pricing as an excellent entry point for any interested investors.  Currently trading below $8.30, even at a conservative historical valuation we see Kohl’s worth north of $20 per share, and optimistically more than double that long-term with a current book value alone above $34. Who knows, there could even be a buyout or privatization down the road at these discounted levels.

Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of KSS as of the publication date of this article.