Expect An Uneven Recovery For Kohl's Post-Covid

Kohl’s stock (NYSE: KSS) has rallied 40% since late March (compared to a similar growth for the S&P 500) to its current level of over $18, after falling to a low of close to $13 in late March, when a rapid increase in the number of Covid-19 cases outside China resulted in heightened fears of an imminent global economic downturn. The stock remains 63% below year-t0-date levels of $49. Are any gains warranted from here? We think that the company’s stock could grow slightly and hover around the $20-$22 range. We believe the stock is likely to recover only partially to its pre-crisis levels in the coming quarters, as fears surrounding the pandemic are put to rest and the economic recovery gathers steam. In the current scenario, Kohl’s became vulnerable due to its high operating costs and nonessential product assortment. Our conclusion is based on our detailed comparison of Kohl’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

  • 12/12/2019:             Coronavirus cases first reported in China
  • 1/31/2020:               WHO declares a global health emergency.
  • 2/19/2020:              Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
  • 3/23/2020:              S&P 500 drops 34% from the peak level seen on Feb 19, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid a Saudi-led price war
  • Since 3/24/2020:  S&P 500 recovers 49% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

Kohl’s Performance During 2020 Coronavirus

KSS stock declined from levels of around $42 in mid-February (the pre-crisis peak) to roughly around $13 as of March 23 (as the markets bottomed out) – implying that the stock lost as much as 69% of its value from its approximate pre-crisis peak. It then rallied to levels of over $19, rising by 47% since March 23. However, it is still down 60% from levels of over $49 seen in early January.

S&P 500 Index Performance During 2020 Coronavirus/Oil Price War Crisis

The S&P 500 index declined from levels of around 3,386 in mid-Feb (pre-crisis peak) to levels of around 2,237 as of Mar 23 (as the markets bottomed out), implying the index lost 34% of its value from its approximate pre-crisis peak. It then rallied to levels of about 3,300 currently, rising by 47% since Mar 23. It is also up 2% from levels of 3,231 seen in early January.

2007-08 Financial Crisis

Timeline of 2007-08 Crisis

  • 10/1/2007: Approximate pre-crisis peak in S&P 500 index
  • 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
  • 3/1/2009: Approximate bottoming out of S&P 500 index
  • 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

Kohl’s Stock Performance Over 2007-08 Financial Crisis

KSS stock declined from levels of around $41 in October 2007 (the pre-crisis peak) to roughly $25 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 39% of its value from its approximate pre-crisis peak. However, KSS stock recovered post the 2008 crisis, to levels of about $38 in early 2010, rising by 53% between March 2009 and January 2010.

S&P 500 Performance Over The 2007-08 Financial Crisis

S&P 500 Index fell 51% from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124 – rising by about 48% between March 2009 and January 2010.


How Do KSS Fundamentals Look In Recent Years?

Kohl’s revenues grew 2% from $19.7 Bil in 2016 to $20.0 Bil in 2019. In addition, earnings growth, on a per-share basis, was higher by 40% between 2016 and 2019.

Survival Check

Does Kohl’s Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis? 

Kohl’s total debt declined from $2.8 billion in 2016 to $1.9 billion in 2019, while its total cash also decreased from $1.1 billion to around $700 million over the same period. The company also generates close to $1.7 billion in cash and appears to be in a good position to weather the crisis.


Phases of Covid-19 crisis:

  • Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
  • Late-March 2020 onward: Social distancing measures + lockdowns
  • April 2020: Fed stimulus suppresses near-term survival anxiety
  • May-June 2020: Recovery of demand, with the gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
  • July-September 2020: Poor Q2 results for many companies, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Clearly, Kohl’s faces a difficult time through the Covid-19 crisis, but its performance could likely recover gradually as the economy normalizes. Although Kohl’s is on track to report a full-year loss in fiscal 2020, the company also noted that rivals’ bankruptcies and store closures create a multibillion-dollar market share opportunity going forward. The company’s cost-cutting moves along with improved merchandise assortment should help the gross margin improve sequentially in the back half of the year  – helping Kohl’s stock to only partially recover back to the pre-crisis levels of $49.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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