Retail

Why Credit Suisse Doubled Its Kohl's Price Target

Kohl’s Corp. (NYSE: KSS) released its most recent quarterly results before the opening bell on Tuesday. The results were fairly positive, and one analyst has practically doubled its price target to keep up with the stock’s move over the past month.

Credit Suisse reiterated a Neutral rating and raised its price target to $58 from $30, which represents an upside of 1% from Tuesday’s closing price of $57.36. While the implied gain is not that impressive, the doubling of the price target should be interesting to current shareholders — maybe effectively calling a price floor.

The brokerage firm noted that Kohl’s delivered a solid fourth quarter in a tough sales backdrop. Importantly, the company detailed plans to reach 7% to 8% EBIT margins by 2023. However, Credit Suisse has concerns about whether Kohl’s will fully achieve its target. That being said, the structural changes management presented (direct sourcing, increase inventory turns to 4x, better brand mix to reduce promos somewhat, higher BOPIS, self-checkout/returns) do add some comfort that margins can move higher on a multiyear basis, according to Credit Suisse.

What’s important here is that Kohl’s strategic choices are improving the relevance of stores (Sephora shops, rapidly growing list of impactful national brands) at a time when the durability of the traditional department store model is under serious scrutiny.

Kohl’s guidance embeds 2021 revenues 7% to 9% below 2019, pre-COVID-19 levels. Note that mall department store bellwether Macy’s guidance embeds 2021 revenues 15% to 20% below 2019.

Credit Suisse detailed:

We think that relative spread will prove to be a fairly accurate reflection of where consumer trends are headed over the next few years, and think Kohl’s strategy arms it to gather that share—making proof points on the ability to drive its margin targets key to the stock trajectory over the next few quarters, in our view.

In terms of the valuation and massive increase to the price target, Credit Suisse further commented:

Raising target price to $58 from $30 based on 13x (prev. 11x) CY22 EPS. A solid sales/margins plan vs Softlines retail peers warrants some valuation expansion, in our view. That said, Kohl’s comments that it doesn’t plan to pursue more aggressive financial options (like activists recently urging a sale/leaseback, which sent the stock up 6% that day) likely limit’s Kohl’s ability to fetch a mid-teens multiple (where we expect global brands to trade to) in the near-term.

Kohl’s stock traded down about 1% to $56.79 on Wednesday, in a 52-week range of $10.89 to $58.73. The consensus price target is $53.93.