Baird's Bull Case For Kohl's

Kohl's Corporation KSS's third-quarter earnings report on Thursday included an earnings miss, adding conviction to the theory of some investors that physical retailers are ultimately doomed.

The Analyst

Baird's Mark Altschwager.

The Rating

Altschwager upgraded Kohl's stock rating from Neutral to Outperform with a price target raised from $46 to $47. (See Altschwager's track record here.)

The Thesis

Kohl's holds many advantages over its department store and retail rivals that make it a compelling investment, Altschwager said in an upgrade note. The most important differentiating factor is that more than 90 percent of stores are located in freestanding and strip mall locations, making the Wisconsin-based retailer somewhat immune from shopping mall trends. Kohl's acknowledged in its earnings report and conference call that its new customer acquisition grew in the quarter for the "first time in quite a long time," according to Baird. 

Kohl's Q3 was "solid" except for a disappointing gross margin number, the analyst said. But the company continues to improve its inventory management, which generated improved merchandise trends, Altschwager said. Even with a disappointing Q3  margin, Kohl's is set to achieve its full year margin guidance, which calls for an improvement of 14 basis points, the analyst said. 

Even if Altschwager's outlook fails to play out, the stock's more than 5 percent dividend yield, stock buyback program and takeout speculation would protect the it from any downside, he said. 

Price Action

Shares of Kohl's were trading higher by more than 4 percent Friday morning, but are still down around 14 percent since the start of 2017.

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Photo courtesy of Kohl's.