Kohl’s Corporation (KSS): This Discount Department Store Chain Could Pay Off

Cheaper Than the Alternatives?

At just over 11 times last year’s earnings, Kohl’s is very attractively valued at the current price, especially considering that the consensus calls for average annual earnings growth of about 9.3%. The company’s dividend yield, currently at 2.9%, should be very sustainable and should continue to increase over the years ahead, especially because it represents a pretty low 33% payout ratio. Their main competition in the years ahead should come from stand-alone discount retailers such as Ross Stores, Inc. (NASDAQ:ROST), as opposed to companies like Dillard’s and J.C. Penney whose product assortment is closer to Kohl’s, but are usually located inside a mall.

Let’s see how Ross Stores, Inc. (NASDAQ:ROST) is valued, so we can get a better picture of Kohl’s investability. With about 1,200 stores, Ross is similar in size to Kohl’s and targets a similar demographic, making it a good comparison. Ross trades at a slightly higher P/E of 18.6 times TTM earnings, making it appear more expensive at first glance. Ross Stores, Inc. (NASDAQ:ROST)’ forward growth rate is projected to be a little better than Kohl’s at 11.2% annually, but the real difference between the two is Ross’ much stronger balance sheet which features about $500 million more cash than debt. In sharp contrast, Kohl’s has about $2 billion more debt than cash. This extra leverage creates a substantial amount of extra risk.

The Bottom Line

If you have a little bit of risk tolerance and can handle the extra leverage on Kohl’s Corporation (NYSE:KSS) balance sheet, the company may be worth a look right now. A P/E of 11 with forward growth of over 9% is a pretty good combination, especially if you think (as I do) that the economic recovery will continue for several more years. And don’t forget, for now you’ll be paid a nice 3% yield while you wait (Ross yields just over 1%).

The article This Discount Department Store Chain Could Pay Off originally appeared on Fool.com and is written by Matthew Frankel.

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