Key insights
- Citi Research upgraded Kohl's (KSS) to a Buy, citing strong free cash flow generation despite sales declines. The analyst projects significant FCF over five years, exceeding debt and lease obligations. The company's FCF yield is estimated at over 30%, vastly outperforming the S&P 500 average. This suggests potential undervaluation, with a recommendation for management to prioritize debt reduction and stock buybacks.
Citi Research analyst Paul Lejuez upgraded Kohl’s from Neutral to a Buy yesterday. He raised his price target to $22/share, a 57% increase over his previous target. His reasoning for the upgrade was due to Kohl’s ability to generate significant free cash flow in spite of sales declines. He estimates Kohl’s will generate $3.2B of free cash flow over the next 5 years even after assuming sales declines of 2% annually over that period. He says this significantly exceeds the long term debt of $1.4B and contractually obligated leases which amount to $1.1B. Factor in cash and their actual net debt is only $2.1B. KSS generated $1.3B of EBITDA over the last 12 months.
With Kohl’s management guidance of $500-600M of FCF in 2026, their market cap of $1.67B represents a FCF yield of 30%+. This guidance does not include $139M they are expecting in tariff rebates. This metric helps identify how ridiculously undervalued the market values this company. An average company in the S&P 500 would sport a FCF yield in the 4-5% range. I would like to see Kohl’s management continues to use this free cash flow to buy in their under par debt while they can. Once the debt appreciates to par, they should then buy in stock as it trades well below book value of $36/share. I am long KSS and continue to buy as my rationale is consistent with Mr. Lejuez’s assessment that their FCF generation is under appreciated.