Should You Buy Kohl’s After Earnings?

Back In September I showed you 4 Reasons To Avoid Kohl’s to protect your retirement portfolio…

Today, I answer the question – Should You Buy Kohl’s After Earnings? To help you figure this out. 

Below is a brief recap of what I said in September about avoiding its stock.  If you want to read the previous article in full, use the link above.

4 Reasons To Avoid Kohl’s

4 Reasons To Avoid Kohl’s Stores Stock

  1. It’s Got A Lot Of Debt

As a percentage of its balance sheet, Kohl’s Stores (KSS) looks fine… But it’s not.

As of the most recent quarter its balance sheet is made up of 68.3% of total liabilities.  And its debt to equity ratio is 1.54.

I want to invest in safe stocks that will be around for decades to come to help me build wealth over the long term.  This helps insure I lose as little money as possible over 

When you look at its financial statements you see it has $7.73 billion in debt.  Against a market cap of $3.74 billion.

Even when you subtract its $2.43 billion in cash, Kohl’s net debt position is $5.3 billion.  Which is still higher than its market cap.

Having more debt and net debt than its market cap makes investing in Kohl’s enormously risky.

But there’s another thing that compounds this.

  1. It’s Not Producing Enough Profits and Cash Flow

In the most recent quarterly data Kohl’s is unprofitable on an operating income and net income basis.  And is only profitable on a free cash flow basis because it issued $1.6 billion in debt in the most recent quarter.

These due to increased costs and store closures related to the coronavirus which I’ll detail more below…

Its net income profitability margin in the trailing twelve months (TTM) period was negative 1.3%.  Its operating profit margin was negative 0.01%. And its free cash flow to sales (FCF/Sales) margin in this same time was 3.9%.

EDITOR’s NOTE – Trailing twelve months just means the last 12 months consecutively.

These important metrics are all far below what I look for to invest in a company.

And these lead to problems paying off debt which is shown with the interest coverage ratio.

This number now sits at 0.06.

Anything above 1 shows that the company can pay its debt with current profit levels.  And anything below 1 shows the company will have issues paying debt payments.

This is why it took out another $1.6 billion in debt in the most recent quarter because it couldn’t keep operations running without the new debt.

  1. The Retail Apocalypse

The Retail Apocalypse is former great retailers like Sears, JC Penney, Macy’s, Bed Bath & Beyond, Burlington Stores, and others losing out to people shopping online and collapsing.

But millions of jobs have been lost.  And thousands if not tens of thousands of stores have closed nationwide.

And it’s only going to continue with the rise of people shopping online and getting things delivered directly to their houses.

This has been going on for years… But retail store closures due to the coronavirus is accelerating this.

Since the start of the coronavirus pandemic in March the following retailers declared bankruptcy.

  • JC Penney
  • Brooks Brothers
  • Lucky Brands
  • GNC
  • J. Crew
  • Neiman Marcus
  1. Uncertainty Related To The Coronavirus

Air travel, hotels, and restaurants are still getting hammered.

But so are many other industries worldwide.  And clothing retail stores are one of those industries.

Retail sales in general are way down from their high levels before the pandemic hit in March.

Clothing sales specifically are down 63.3% in the year to year period from May 2019 to May 2020.

And consumer spending stalled in August as the extra $600 per week government stimulus for unemployed workers ended.

“Traditional” retail stores like Kohl’s are in big trouble.

I recommend you stay far away from investing in this entire industry for the time being for the reasons above.  But especially stay away from Kohl’s stock.

***

This thesis to avoid Kohl’s stock continued playing out after it released its most up to date quarterly earnings on November 17th, 2020.

Revenue was down 14% in the year to year quarterly period to $4 billion.

Sales in the first 9 months of 2020 are down 25.3% to $9.8 billion.

Earnings per share fell 110% in the year to year quarterly period to negative $12 million.

Earnings per share for the first 9 months of 2020 are down 223% to negative $3.28 per share.

And on and on…

This was expected due to the massive negative impacts the coronavirus has on retail so far this year.

What wasn’t likely expected by the company though is that now that coronavirus cases are exploding nationwide again, cities and states are beginning to enact more lockdowns.

This had a devastating impact on the economy back in March and April… And it’s going to devastate things again.

And one of the hardest hit industries will be traditional retail stores like Kohl’s.

Plus, its still got too much debt.  And could be on its way to bankruptcy with an interest coverage ratio of 0.06 showing it can’t cover its current interest payments with earnings.

For these reasons – and the ones in the previous article – continue avoiding Kohl’s… Because its likely to get hammered even more by this second set of lockdowns.

Click here to see some of the stocks we recommend to Depression Proof Your Portfolio.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

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