Kohl’s Corporation (KSS): Finding Value in This Market

TJX is the leader in off-price retailing. The company buys excess inventory from manufacturers and retailers for extremely low prices and can therefore offer bargains to its customers. This is a different business model than Kohl’s Corporation (NYSE:KSS), but both companies focus on offering low prices. TJX is slightly better at turning revenue into free cash flow than Kohl’s, and growth has been faster over the past few years. Analysts expect earnings growth for The TJX Companies, Inc. (NYSE:TJX) to be 11.73% annually over the next 5 years, compared to Kohl’s 7.7%. However, TJX trades at more than double the adjusted P/OE ratio of Kohl’s. That’s an awfully big premium for modestly higher growth.

The Gap Inc. (NYSE:GPS) operates its namesake stores as well as Old Navy, Banana Republic, and Athleta. While Gap is the best of these three companies at turning revenue into free cash flow and has the highest gross margin, revenue growth has been non-existent over the past decade. The company has bought back a tremendous number of shares, cutting the share count in half since 2004, which has led to a doubling of the EPS during that time. But there’s been essentially no real growth, which is concerning. And Gap trades at quite a premium to Kohl’s Corporation (NYSE:KSS) as well.

The bottom line

Kohl’s trades at a very reasonable valuation given its growth prospects, even after a 20% increase in the stock price since my last article. With a solid dividend and plenty of cash flow to fund meaningful share buybacks the company is creating exceptional value for shareholders. Kohl’s is a slow-grower for sure, but at the current price the stock offers a great deal compared to other retailers.

Timothy Green has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article Finding Value in This Market originally appeared on Fool.com.

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