The Market Essentially Expects Kohl's Will Turn Around Or Go Private

In a report published Friday, Credit Suisse analysts said that the shares of

already seems to be pricing in a "major turnaround" or a "potential buyout." Kohl's shares have been trading at a 5 percent premium to department stores on 2015E EV/EBITDA since the time the company announced its first positive comp in five quarters. In comparison, the stock has a five-year average discount of 7 percent. In the report Credit Suisse noted, "Current share price implies comp acceleration to 4% over next five years and operating margin leverage of 10-20 bps per year. Valuation does not reflect a discount for execution risk or incremental capex that may be necessary for store refreshes. Without a change in merchandising strategy to significantly drive the top-line, these assumptions are likely aggressive." Following the recent surge in share price, a leveraged buyout (LBO) appears challenging, since the expected returns would probably not clear the "hurdle rates" of most private equity (PE) acquirers. Kohl's top-line has been flat for the last couple of years. Against this background, the management has been focusing on SG&A. The shift to e-commerce "inherently puts pressure on gross margin rate," the analysts commented. The next full-store remodel cycle appears poised to commence in 2016 and the company will need to continue with its reinvestment in stores. This would limit its ability to maximize cash flow and pay down debt. "Planned ramp-up of remodels only partially offset by flat new store capex and moderating distribution center investments – total capex of $600-700 mn appears more realistic," the analysts added.