Kohl’s Corporation (KSS): Take Advantage of Short-Term Volatility and Buy This Long-Term Value

Although J.C. Penney is floundering, Target Corporation (NYSE:TGT) is still a formidable competitor for Kohl’s Corporation (NYSE:KSS). Target and Kohl’s both fared much better during the recent recession than J.C. Penney. In addition, Target’s REDcard initiative has boosted same-store sales and its Canadian store openings are driving top-line growth.

However, Target’s foray into the food business will inevitably lead to declining margins over time. The company’s grocery section attracts more foot traffic into its stores, but the square footage and capital investment required to maintain the food aisle will hamper the chain’s profitability in the long run.

Investment case

As a slow and steady grower, Kohl’s Corporation (NYSE:KSS) is in a better position than its peers in terms of current profitability and future growth prospects. The company has yet to fully penetrate the Northeastern United States, and its continued adoption of private label products serves as potential margin expansion.

Over the last four quarters, the company earned $4.22 per share — an 8.3% earnings yield on its recent share price. Over the last decade, however, the company grew earnings per share at a compound annual rate in excess of 10%.

If Kohl’s can grow earnings per share over the next decade at just half the rate that it grew over the last decade, then investors will get a return in excess of 13%. For a consistently profitable retailer with a runway for growth, that is a pretty good bargain.

The article Take Advantage of Short-Term Volatility and Buy This Long-Term Value originally appeared on Fool.com and is written by Ted Cooper.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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