Kohl's Corporation: The next short squeeze?Overview
Kohl's Corporation, a U.S.-based retail giant operating in 49 states, has seen stagnant performance in recent years. Like traditional department store chains, Kohl's has struggled to grow revenue, facing competition from online retailers and shifting consumer preferences. Despite this, the company maintains significant cash flow and profit margins, offering an opportunity for activist investors to unlock value through operational improvements, asset monetization, and strategic financial maneuvers.
Investment Thesis
Kohl’s is currently undervalued due to the following factors:
High Dividend Yield: Kohl’s offers a dividend yield of approximately 11%, which is fully covered by its free cash flow. This high yield has led to high costs for short-sellers, who must cover both the dividend payments and the borrowing fees, thereby increasing short interest risk and making a short squeeze more likely.
Short Interest and Potential for Short Squeeze: Approximately 35% of Kohl’s free float is sold short, which is unusually high. As seen in past short squeezes in the market, such high short interest can catalyze upward price pressure, especially if the company demonstrates any positive financial or operational developments.
Asset-Heavy Balance Sheet: Kohl’s owns two-thirds of its retail locations and real estate. The market value of these properties is estimated to be at least four times the current stock market valuation, representing significant latent value. Monetizing these assets, whether through sales or leveraging for additional liquidity, could create substantial shareholder value and provide capital for operational improvements or share buybacks.
Activist Investor Involvement: Recent activism has brought in investor demands for more aggressive management strategies to enhance shareholder value, including buybacks and property monetization.
Key Points for Value Creation
Asset Monetization: Kohl’s real estate portfolio is an undervalued asset on the balance sheet, with depreciated values far below market worth. A partial sale of properties could allow Kohl’s to raise substantial funds, enhancing financial flexibility while potentially retiring a portion of its debt or funding share buybacks.
Dividend Stability and Potential Buybacks: While the high dividend yield supports Kohl’s appeal, the company could further boost its stock price by initiating a robust share buyback program. This strategy could create pressure on short-sellers by reducing available shares, thereby increasing the likelihood of a short squeeze.
Management Realignment: A new CEO, appointed two years ago, has already started strengthening the balance sheet by paying down debt. Activists have proposed further buybacks and asset monetization, which could unlock shareholder value and signal stability to investors. A tender offer, in which the company buys back shares at a premium to the market price, could accelerate short-seller pressure, potentially leading to a positive feedback loop that raises the stock price.
Catalysts and Downside Risks: Kohl’s rejected a takeover offer in 2022 in the $50-$60 per share range, suggesting that the stock may be significantly undervalued at current levels (around $17-18). Given the substantial short interest and Kohl’s stable financial position, an acquisition proposal could re-emerge, or an activist’s push for operational changes could provide substantial upside. However, if the dividend is cut or operational numbers weaken, the stock could see additional short-term pressure. A temporary dip could offer buying opportunities for those with a longer investment horizon.
Financial Position
Debt Structure: Kohl’s debt is manageable, with limited near-term maturities. Lease obligations make up a portion of the debt load, while bank debt due next year has been partially paid down. The remaining obligations are spread out until 2029, reducing financial risk from an overburdened debt schedule.
Cash Flow and Dividend Coverage: Despite recent operational stagnation, Kohl’s free cash flow (about $600 million in 2022) is more than sufficient to cover dividend payouts and proposed buybacks. Even under a pessimistic scenario, where free cash flow falls by a third, the dividend could still be sustained, albeit with limited room for additional capital expenditure or shareholder distributions.
Risks and Considerations
Operational Decline: While the company has stable cash flow, revenue has been declining. A continued drop in sales, especially in a weaker economy, could strain cash flow and increase the likelihood of a dividend cut, which would likely lead to further share price declines.
Dividend Cut Potential: A dividend cut would likely affect investor sentiment, especially given Kohl’s high current yield. While activists see the dividend as a valuable tool to pressure short-sellers, any reduction could deter income-focused investors.
Short-Seller Resistance: With a high cost of shorting and substantial short interest, short-sellers may attempt to push the stock down further. However, significant real estate assets, coupled with activist interest, add a foundation of underlying value that could stabilize the stock.
Price Target and Outlook
Based on the above considerations, activists see a potential upside of 50-100% within the next 6-12 months, contingent on successful execution of asset sales or buybacks. The stock could rise from its current level of around $17-18 to a fair value range of $30-40 per share based on real estate valuation and improved sentiment.
Short-Term Price Target: $25-$30, assuming stabilization and initial buyback steps
Long-Term Potential: $40-$50, assuming asset monetization and strategic buybacks are fully implemented
Conclusion
Kohl’s represents a high-risk, high-reward investment, suitable for investors comfortable with volatility and potential short-term declines. With significant short interest, valuable real estate, and a history of activist involvement, Kohl’s has multiple potential catalysts to unlock shareholder value. Investors should be prepared for potential interim dips if the dividend is cut or economic conditions worsen, but long-term prospects are strong for those who view this as an opportunity to capitalize on an undervalued asset-heavy retailer.
This information is for informational purposes only and does not constitute financial or investment advice. Always do your own research or consult a financial professional before making investment decisions.
