Refocusing On Core Categories And Omnichannel Strategy Will Strengthen Future Customer Loyalty

Key Takeaways

• Kohl's merchandise strategy optimization, focusing on core categories and proprietary brands, is set to drive revenue and improve net margins.
  
• Enhancing omnichannel platforms and simplifying promotions aim to boost customer engagement, revenue, and loyalty while reducing operational costs.
  
• Declining sales and digital setbacks, along with strategy shifts, indicate operational inefficiencies and potential future revenue challenges for Kohl's.

Catalysts

Operates as an omnichannel retailer in the United States.

• Kohl's plans to optimize its merchandise strategy by refocusing on categories that have historically resonated with core customers, such as fine jewelry and proprietary brands, while maintaining growth in key areas like Sephora and Home Decor. This is expected to drive revenue growth by better aligning product offerings with customer demand.
  
• The company aims to reestablish itself as a leader in quality and value by enhancing its proprietary brand offerings, which provide lower price points and differentiate Kohl’s from competitors. This is likely to improve net margins by leveraging higher-margin private label products.
  
• Kohl's is making efforts to simplify promotions by reducing brand exclusions from coupons and increasing clarity in price messaging. This initiative seeks to enhance the customer shopping experience and could positively impact revenue and customer loyalty.
  
• The expansion and optimization of Kohl’s omnichannel platform aim to provide a consistent and frictionless shopping experience across digital and physical channels. This strategy is expected to boost revenue by increasing customer engagement and conversion rates, particularly in the digital channel.
  
• The company is undertaking cost reduction initiatives, including store closures and operational efficiencies, to create a more disciplined and efficient organization. This focus on lowering expenses is likely to support improved operating margins and future earnings growth.

Kohl's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kohl's's revenue will decrease by 5.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.7% today to 1.5% in 3 years time.
• Analysts expect earnings to reach $204.4 million (and earnings per share of $2.0) by about March 2028, up from $109.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $337 million in earnings, and the most bearish expecting $71.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 8.5x today. This future PE is lower than the current PE for the US Multiline Retail industry at 16.4x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

Kohl's Future Earnings Per Share Growth

Risks

• Net sales declined by 9.4% in Q4 2024 and 7.2% for the year, with comparable sales also decreasing, indicating challenges in retaining customers and driving store visits, which could impact future revenue growth.
  
• Kohl's experienced significant underperformance in its digital sales with a 13.4% decline in Q4 2024, highlighting issues in its online platform that could further decrease revenue and affect net margins in an increasingly digital retail environment.
  
• Changes in merchandising strategy have caused friction with core customers, leading to a potential loss of loyal customer base and impacting revenue and earnings as it may take time to regain customer trust and market share.
  
• The forecast for 2025 anticipates further sales declines of 5% to 7%, implying ongoing struggles in revenue growth and operational efficiency, which will likely pressure net margins and overall financial performance.
  
• The closure of 27 underperforming stores and one e-commerce fulfillment center indicates inefficiencies within the current store portfolio, potentially leading to lower operating margins and reduced earnings if not addressed comprehensively.

Valuation

• The analysts have a consensus price target of $11.192 for Kohl's based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $45.0, and the most bearish reporting a price target of just $5.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $13.9 billion, earnings will come to $204.4 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $8.33, the analyst price target of $11.19 is 25.6% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.