Kohl’s Corporation

Here is one of several stocks for consideration. Kohl’s Corporation (KSS) keeps popping up on screens for quality growth companies. Kohl’s operates 669 family-oriented specialty department stores in virtually all areas of the U.S. except the Pacific Northwest and Florida. It sells name-brand merchandise with emphasis on value pricing. The fundamentals look good for Kohl’s with a projected average return over the next five years of 16.2%. Value Line rates Kohl’s financial strength “A” and earnings predictability 85 (out of 100). Value Line also projects revenue growth at 17%. Kohl’s has an RQR quality rating of 80.4. See annotated stock selection guide.

Different analysts have different expectations for Kohl’s. For example, the First Call analysists’ consensus for the 5-year earnings growth rate is 19.2%. In contrast, Morningstar only gives Kohl’s a mediocre rating. MS rates Kohl’s with three star and puts it’s fair value at $51.00 (below its current price of $55.63.) MS has assumed 12% revenue growth. The attached SSG assumes 17% based on the Value Line estimate. (Note: PAR on the SSG would drop to 11.2% with 12% sales growth.) More interesting are MS’ bull and bear comments.

Bulls Say

• Kohl’s has recovered after its 2003 missteps. Although revenue growth continues to be a little disappointing, margins and inventory levels recovered nicely.
• Kohl’s still has plenty of room to expand into new and existing markets, so it should be able to open stores at a brisk pace over the next few years.
• Earnings have grown faster than sales, thanks to widening margins. MS expects the company to continue to leverage its SG&A spending as the store base expands, but increasing competition may make it tougher to expand gross margins.
• Kohl’s off-the-mall format distinguishes it from the rest of the department-store industry, which is dominated by mall-based stores that consumers have found less convenient in recent years.

Bears Say

• Recent lackluster same-store sales results illustrate that Kohl’s is not immune to slowdowns in consumer spending.
• Some traditional department-store chains have copied elements of the firm’s strategy in an effort to regain lost share, so competition may continue to heat up.
• Retail powerhouse Wal-Mart is coming on strong in apparel retail. Wal-Mart’s operational efficiency trounces that of Kohl’s.
• The company stumbled in late 2003, cluttering stores with excessive inventory and creating a less-pleasant shopping environment. Management is correcting the problem, but this shows that smart executive teams can still falter.

Bottom line. KSS is a quality growth stock. Whether it falls into the buy zone depends on the assumed revenue growth. Based on the Value Line estimates for growth and net profit margins, KSS is a buy up to $62.