With November ending, and Black Friday behind us, I find myself thinking a lot about the holiday sales that retailers are hoping to reap this year. And no, I'm not thinking about Amazon (AMZN) . That stock is plain old too expensive. I'm thinking about Kohl's (KSS) .
When most people read Kohl's, they're probably immediately thinking about the big 20% pullback that the stock has suffered in the last few weeks. While it certainly is reason for many to be skeptical, I view Kohl's as a good opportunity right now. The retailer is getting involved in deals with Amazon, a very complementary partner. They have good brand names in their stores. The balance sheet is healthy.
It's always an interesting turn of events when a company reports earnings results that beat estimates, and the stock plummets. That's what happened with Kohl's after reporting its third quarter results. Overall it seems to stem around guidance for the end of the year. I'm not dissuaded. If the retailer reports diluted earnings (after the extinguishment of debt) of $5.16 to $5.36, the stock is conservatively trading at around 13 times the full year earnings. Minus the extinguishing of debt, the company's high end guidance suggests full year earnings of $5.55 per diluted share.
I for one like what Kohl's is doing. In the first nine months of the year, revenues are up 2.9% to $13.4 billion. Comp sales are up 2% compared to a nine month decline of 1% in 2017; while gross margins are up to 37.8% vs. 37.4% a year ago. Net income grew 38% in the third quarter. For the first nine months of the year, net income is up 35% to $529 million. Diluted earnings per share are up 37% to $3.19. I'm sorry but it's hard for me to see problems with any of this. I like this stock. Even if full year guidance suggests the retailer might have slower growth in the fourth quarter than last year, I think there's upside.
For one, guidance (just like analyst' estimates) is not always right. It's a suggestive take on what management expects; or what they want you to expect. With conservative guidance, a surprisingly good holiday season could give the fourth quarter a boost that drives the stock. Second, really like that Kohl's has taken advantage of its strong year and is reducing its debt. Long term debt is down 18.7% year over year to $2.27 billion. They have a strong cash position of over $1 billion, and I think they're setting up a good balance sheet by decreasing liabilities. Total equity is nowhere near the $5.9 billion that was there back in 2014; but at $5.45 billion, it's 8.5% higher than last year.
The holiday season seems to have started out on the right foot. With sales up 9% on Black Friday alone, there certainly seems to be money for the taking if retailers can position themselves right. Based on Kohl's ability to keep comp sales rolling when other names are struggling, I like their odds of gaining some market share on that $23 billion that was thrown around last Friday. I'm strongly considering some shares if this thing rolls back to $65. To answer the inevitable question, no I don't have a technical reason for $65. It's simply the price I'm set on. If the market gets a little too bullish (something I doubt will happen) I might consider a higher price. Either way, I think Kohl's pullback has presented an opportunity that didn't exist a few weeks ago. If the holiday shopping season stays strong, there's very little reason for Kohl's upward sales trend to stop. Let's not forget the retailer has also entered into deals with Amazon. What's the old adage? If you can't beat them, join them? Kohl's is now getting involved in a new deal where it sells Amazon's products in its stores. It also handles Amazon returns at its stores. I personally think this is a great idea. Giving consumers a reason to come into your shop is half the battle. Once they're there, your odds of selling goods is so much higher. It's a strategy that should pay off well for Kohl's. They're essentially using the rise of Amazon to their advantage by complementing their own brick and mortar. I love it. The stock is cheap, and the 3.7% dividend makes it worth the ride.