Friday, July 08, 2011

Should You Add Kohl's To Your Stock Shopping List?

Kohl's (NYSE: KSS) -- a specialty department store offering brand apparel, shoes, accessories, beauty and home products through 1,097 stores in 49 states -- reported an unexpectedly high increase in June same store sales and its stock jumped. Is now the time to add its stock to your stock shopping cart?

Kohl's June sales were much better than expected. Thanks to June's nice weather, Kohl's same store sales were up 7.5% -- better than 2010's 5.9% and analysts' forecasts of 2.9%. Kohl's total sales in June rose 9.2% to $1.75 billion. And its stock was up 7.1% on the news -- which also may bode well for U.S. GDP growth since 70% of it comes from consumer spending.

Here are four reasons to consider adding it:
  • Long-term financial strength. Kohl's has grown steadily. Its $18.5 billion in revenues have increased at an average rate of 6.5% over the last five years and its net income of $1.1 billion has risen at a 5.8% annual rate over that period. Its debt is declining from $2.1 billion in 2009 to $1.7 billion in 2010 and its cash grew at a 37.7% annual rate between 2006 ($620 million) and 2010 ($2,227 million).
  • Solid first quarter performance. Kohl's first quarter profit rose 6% to $211 million, or 73 cents a share equal to Wall Street estimates and its sales were up 3.1% at $4.16 billion. Kohl’s, raised its full-year earnings forecast to $4.25 to $4.40 a share. Thomson Reuters surveyed analysts expecting $4.36.
  • Out-earning its capital cost. Kohl's earned more after-tax operating profit than its cost of capital and it has positive EVA Momentum, which measures the change in “economic value added” (essentially, profit after deducting capital costs) divided by sales. In 2010, Kohl's EVA momentum was 1%, based on 2009 revenue of $17.2 billion, and EVA that improved from negative $9 million in 2009 to $111 million in 2010, using a 10% weighted average cost of capital.
  • Bargain priced stock. Kohl's price to earnings to growth (PEG) ratio of 0.93 makes it slightly under-valued (a PEG of 1.0 is considered fairly priced). Kohl's P/E is 14.9 and its earnings are expected to grow 16% to $5.07 in 2012.
Kohl's looks inexpensive despite Thursday's rise. And given the gloomy mood on the economy, the odds of upside surprise remain good.


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