The Kohl's History
Here's a timeline of Kohl's Corp
1962: The first Kohl's department store was opened in Brookfield,
Wis. Its founder Max Kohl had already succeeded in turning a
small grocery store into the largest supermarket chain in the
Milwaukee area. Max Kohl positioned its department store between
the high-end stores and the discounters. He sold everything from
shoes and candy to engine oil and sporting gear.
1978: A division of British American Tobacco PLC, purchased an
80% stake and subsequently took control of the entire business.
The Kohl family withdrew from the management.
1983: British American Tobacco sold Kohl's food stores to Great
Atlantic and Pacific Tea Company which subsequently closed all
the food stores in 2003.
1986: A management-led group of investors formed
and acquired Kohl's Department Stores consisting of 40 stores and
$300 million in annual sales from British American Tobacco.
1992: Kohl's Corp completed its IPO with 11.1 million shares.
Late in 1996 and 2000 the stock split 2-to-1. Meanwhile, it
joined S&P in 1998.
2001: Kohl's went online.
2008 : The current CEO Kevin Mansell took office in August and
was also made the chairman in September 2009.
2011: Kohl's paid its first dividend and its e-commerce business
exceeded $1 billion in revenue.
Kohl's is a U.S. department store chain headquartered in Wis. Its
mission statement is:
"To be the leading family-focused, value oriented, specialty
department store offering quality exclusive and national brand
merchandise to the customer in an environment that is convenient,
friendly and exciting."
Kohl's operates 1,134 stores across 49 states. It sells
moderately priced apparel, footwear, and accessories for men,
women and children. It also sells home products like furniture,
pillow, sheets, and cookware. The merchandise mix has been
Kohl's sells both private and exclusive brands which are "only at
Kohl's" as well as national brands like
, Lee, Levi's, Jockey, Van Heusen. Private and exclusive brands
contribute a lot more to the gross margin as Kohl's has
significant control over the production, manufacturing and
marketing expense of these brands.
Keeping this in mind, Kohl's has shifted its merchandise
gradually towards this section of merchandise. In 2004, Kohl's
carried 25% in Private and Exclusive Brands, but in 2011 it
Kohl's operates smaller stores compared to Macy's (
), JC Penney (
) and Dillards (
). Also, its sales per square feet is higher than each of the
three companies mentioned above. Higher sales coupled with
smaller general expenses gives Kohl's a small competitive
In 2011 Kohl's advertising cost was 5.1% of the sales.
Kohl's has been remodelling and expanding the number of stores it
operates. Approximately 50% of its stores are either new or have
been remodeled in the last five years. Furthermore, 36% of the
stores it operates are owned by Kohl's and the remaining 64% are
Kohl's has been able to expand and remodel its business, maintain
a positive FCF and keep its margins stable.
At year-end (Jan 2012) Kohl's has a very healthy balance sheet
with $1.2 billion in cash. It has $2.1 billion in long-term debt
at an interest rate of 6%. It has $303 million in interest
expense (out of which $183 million is rent expense) which is well
covered by operating income of $2.1 billion.
The CEO and Chairman of Kohl's in Kevin Mansell. He has 36 years
of retail experience and has risen in Kohl's from Divisional
Merchandise Manager in 1982 to CEO in August 2008 and Chairman
since September 2009.
The strong generation of FCF from the business has been put to
good use by buying back shares and starting a dividend in 2011.
The company paid its first dividend in 2011 of $1 per share for
the fiscal year. In February 2012, the dividend was hiked 28%.
The company also has a very large buyback program in place. In
November 2012, the BoD increased the remaining authorization by
$3.2 billion. Over the next three years, the company expects to
repurchase its shares in the open market.
The management measures it performance by RoI, which is defined
by earnings before interest, tax, depreciation and amortization,
and rent divided by average gross investment. On the other hand,
the RoIC is is around 9%. For a retailer, I would say, this is a
very good return.
The company also has a stock-based compensation plan.
As of January 28, 2012, there were 18.5 million shares authorized
and 16.1 million shares available for grant under the 2010
Long-Term Compensation Plan. Options and nonvested stock that are
surrendered or terminated without issuance of shares are
available for future grants. More than half of the stock options
are underwater at the current price.
More than 50% of the shares are held by institutional investors.
At current price of $46.66, Kohl's has -$0.9 billion in net debt
and and $10.6 billion of market cap, for an EV of $11.5
billion.It trades at PE of 10.6 and EV/FCF of 9.5.
Also, notice that the leftover buyback will continue to increase
the EPS and drive shareholder value.
Even a reasonable figure of 12 time FCF will land the share price
at $63. A 30% discount for margin of safety will lead to buy
price of $44.
Retail is hardly for the faint hearted. Numerous competitors,
cut-throat pricing and fluid customers make it a very risky
business. Management missteps will be dear for the shareholders.
Failure in the supply chain, inflation in price of raw material
which cannot be passed to the customers, failure in effective
capital allocation, seasonality of the business, consumer
spending habits and many other factors may negatively impact the
The e-commerce business has lower margin than the stores and it
seems that currently the e-commerce business is gaining revenue
at the expense of the store business. This is because the
e-commerce business has lower margin merchandise, has shipping
costs and the investment to provide the infrastructure to run the
e-commerce business take their toll on the margin.
Kohl's also runs a credit card operation. The proprietary Credit
card accounts have been sold to an unrelated third party but
Kohl's shares some of the risks. A failure in extending credit to
customers will adversely affect the results.
The data has been taken from Kohl's fact book, Kohl's proxy
statement 2012, and Kohl's annual report 2011. Some of the graphs
have been made by GuruFocus graphing tool and the data in the
table is taken from Morningstar.About GuruFocus: GuruFocus.com
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