Brick-and-Mortar Decline And Sephora Rollout Will Redefine Retail Outlook

Key Takeaways

• Persistent decline in core customer transactions and shifting shopping habits threaten future revenue growth and profitability for Kohl's traditional retail model.
  
• Increased promotional activity, higher labor costs, and slow digital transformation weigh on margins and hinder sustainable sales recovery.
  
• Enhanced own brands, Sephora partnership, digital upgrades, and strict cost controls may boost margins, drive customer growth, and support lasting revenue improvement.

Catalysts

Operates as an omnichannel retailer in the United States.

• Persistent decline in store transactions, especially among lower
• and middle-income, value-oriented consumers (Kohl's core base), despite focused investments and promotional efforts, signals ongoing headwinds from shifting shopping behaviors and demographic changes away from traditional department stores; this is likely to weigh on future revenues and limit comp growth prospects.
  
• The ongoing migration toward online and mobile shopping continues to reduce overall foot traffic to Kohl's brick-and-mortar stores; although digital investment is underway, slower adoption relative to industry innovators and mixed omnichannel execution could suppress sales recovery and put further pressure on operating margins.
  
• Chronic margin compression risk from intensified promotional activity-such as expanding coupon eligibility to regain customers-may erode gross margin improvements made through proprietary brand mix, limiting the sustainability of net margin gains even if short-term traffic lifts are achieved.
  
• Shrinking addressable market as middle-class consumers (Kohl's primary demographic) continue to experience economic strain and actively reduce discretionary spending, with no clear sign of reversal; this trend poses a structural headwind to revenue growth and earnings potential.
  
• Heightened exposure to wage inflation and increasing labor costs (potentially amplified by higher minimum wage legislation and competition for retail workers) will pressure SG&A and reduce operational leverage, likely undermining long-term net margins regardless of incremental cost-containment initiatives.

Kohl's Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Kohl's's revenue will decrease by 4.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.8% today to 1.1% in 3 years time.
• Analysts expect earnings to reach $157.0 million (and earnings per share of $1.53) by about August 2028, up from $121.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $227 million in earnings, and the most bearish expecting $45 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.4x on those 2028 earnings, down from 12.1x today. This future PE is lower than the current PE for the US Multiline Retail industry at 19.7x.
• Analysts expect the number of shares outstanding to grow by 0.72% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.32%, as per the Simply Wall St company report.

Kohl's Future Earnings Per Share Growth

Risks

• Kohl's ongoing expansion and reinvestment in proprietary brands, supported by strong initial results in key categories (Women's, petites, jewelry, and home), could drive higher gross margins and help stabilize or grow core revenue as consumer demand for value increases over time.
  
• The full rollout of the Sephora partnership and new store-within-store concepts, with measurable cross-shopping behavior and a strategy to build a $2 billion beauty business, may generate increased traffic from younger and new customers, bolstering revenue growth and customer retention.
  
• Improvements in digital channel performance, including new leadership and strengthened omnichannel integration, have led to higher conversion rates and new-customer growth; ongoing investments in e-commerce infrastructure position Kohl's to benefit from secular shifts to online shopping, positively impacting both top-line sales and net earnings.
  
• Inventory discipline, cost controls (including a 5% reduction in inventory, 4% SG&A decrease, and lower interest/depreciation expense), and cash flow strength have enabled Kohl's to reduce debt and fund growth initiatives, which may protect or expand net margins and support long-term earnings improvement.
  
• The company's ability to swiftly adapt its promotional strategy (e.g., reintroducing coupon eligibility across more brands and categories), reengage previously disengaged core customers, and show progressive improvement in traffic trends suggests potential for stabilization and sequential improvement in revenue, especially if macroeconomic pressures ease.

Valuation

• The analysts have a consensus price target of $10.071 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 $40.0, and the most bearish reporting a price target of just $4.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $14.0 billion, earnings will come to $157.0 million, and it would be trading on a PE ratio of 10.4x, assuming you use a discount rate of 12.3%.
  
• Given the current share price of $13.04, the analyst price target of $10.07 is 29.5% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.