Analysts Downgrade Kohl’s Stock due to Inflation, Inventory Build-Up: See Risks to the Stock

Phoenix, United States- August 25, 2011:  Kohl's  department stores offer clothing and household merchandise across the United States.
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A number of analysts recently downgraded Kohl’s following the company’s July 1 announcement it was ending talks to sell its business to the Vitamin Shoppe owner Franchise Group (FRG). The downgrade also comes due to inflation-related low consumer demand and other concerns. Shares of Kohl’s were relatively flat as of midday July 8, and are down 43% year-to-date.

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Bank of America analyst Lorraine Hutchinson downgraded shares of Kohl’s to underperform from neutral, “as inflation is pressuring consumption” in addition to “the associated gross margin headwind from inventory build-ups,” according to a note sent to GOBankingRates.

“We are downgrading Kohl’s back to Underperform to realign it with our negative view on the department store industry; we have been concerned about fundamentals but were Neutral given the possibility of a take-out. With a deal off the table, we see risk to estimates and the stock from here,” Hutchinson wrote in the note.

BofA also revised its target objective to $26 from $50, due to a “difficult macro picture,” according to the note.

Kohl’s / FRG Deal Falls Through

On July 1, Kohl’s said that after engaging with more than 25 parties in an exhaustive process, “FRG emerged as the top bidder and we entered into exclusive negotiations and facilitated further due diligence.”

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“Despite a concerted effort on both sides, the current financing and retail environment created significant obstacles to reaching an acceptable and fully executable agreement. Given the environment and market volatility, the Board determined that it simply was not prudent to continue pursuing a deal,” Peter Boneparth, chair of the board, said in a press announcement.

Kohl’s said that it would remain a standalone company and was “reviewing other opportunities to unlock shareholder value, including reevaluating monetization opportunities for portions of the Company’s real estate portfolio.”

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This is also a matter of concern for BofA’s Hutchinson, who said that “this represents a change in tone to a more flexible stance, but we would view any large leaseback negatively. While unlikely, it would add leverage during a time of decelerating demand and deteriorating margins,” according to the note.

In addition, Seeking Apha reported on July 7 that Gordon Haskett’s Chuck Grom also downgraded the stock to “Hold” and cut his price target to $30 from $52.

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Grom said that in addition to the end of the potential deal, a weak back-to-school season might also affect the retailer.

“We are becoming incrementally concerned around the Back-to-School period, which for Kohl’s could become problematic,” he said, per Seeking Alpha. “Said differently, we think it’s prudent to take the ‘under’ on upcoming expectations following a relatively strong BTS period a year ago along with the high likelihood that the consumer undergoes a post summer vacation hangover in the coming months given today’s record high energy and food price backdrop.”

Some Analysts More Optimistic on Kohl’s

Meanwhile, there are some analysts who have a more optimistic outlook on the stock, including those at CFRA Research, which still has a buy opinion concerning Kohl’s.

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Equity analyst Zachary Warring wrote in a report sent to GOBankingRates that the opinion “reflects a view that Kohl’s is the best choice in the department store subindustry and continues to execute on its long term strategic plan.”

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“We believe Kohl’s is well positioned for the rapidly changing retail industry and continues to invest in the right merchandise and technology to grow their topline over the long-run,” he wrote. “Kohl’s also used the elevated cash flow over the past 18 months to pay down a significant amount of debt and fortify its balance sheet. Kohl’s recently partnered with Sephora to bring a Sephora section to 850 Kohl’s stores by 2023 which should help drive store traffic and bring new customers to its stores.”

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About the Author

Yaël Bizouati-Kennedy is a full-time financial journalist and has written for several publications, including Dow Jones, The Financial Times Group, Bloomberg and Business Insider. She also worked as a vice president/senior content writer for major NYC-based financial companies, including New York Life and MSCI. Yaël is now freelancing and most recently, she co-authored  the book “Blockchain for Medical Research: Accelerating Trust in Healthcare,” with Dr. Sean Manion. (CRC Press, April 2020) She holds two master’s degrees, including one in Journalism from New York University and one in Russian Studies from Université Toulouse-Jean Jaurès, France.

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