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Roundup: Kohl’s, Compass and Coupang

Kohl’s looks to the future, plus a few extra tidbits.
(Ken Wolter)
(Ken Wolter)
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“Kohl’s Corp. said it would start paying a dividend and buying back shares again after a group of activist investors pushed to take control of the company’s board,” WSJ writes.

Why It Matters: It’s been a better-than-expected year for Kohl’s, which temporarily closed down its stores during lockdown last year. Since then, it has moved into cash conversion mode as activist investors try to reshape the company.

Numbers To Consider:

  1. Kohl’s is planning at least $200 million in stock buybacks.
  2. Sales fell to $5.88 billion for fiscal Q4 (ending Jan. 30) from $6.54 billion the year before.
  3. Net income, however, did increase to $343 million from $265 million.

Future Plans: Kohl’s new investors want the company to “add directors with retail experience, consider a sale-leaseback of some of its real estate holdings and reduce inventories, among other changes.” It also has around $550 million earmarked for a tie-up with Sephora and the addition of its sixth e-commerce fulfillment center.

Meanwhile:

  1. Compass, a real estate brokerage with SoftBank’s Vision Fund as an investor, revealed a narrowing net loss of $270 million in its IPO filings. The company cut that number down from $388 billion “largely due to layoffs in the company’s marketing and operations divisions.” It also grew revenue by 56% to $3.7 billion last year.
  2. Coupang, a Korean e-commerce company, announced it intends to price its upcoming IPO between $27 and $30, resulting in around a $3 billion raise and $49 billion valuation. Coupang’s 2020 revenue was $12 billion.

Justin Oh:

An investment in Kohls ($KSS) at $57 would be a value play that involves faith in:

  1. A full recovery in customer shopping by 2022
  2. Monetization of assets, such as some of its real estate holdings
  3. Operational success with big initiatives such as the Sephora partnership
  4. Good governance amid activist pressure

All-in-all, there is a reasonable chance that $KSS is a lucrative value investment during a turnaround, but at 6.3x EBITDA, it doesn’t screen particularly cheap. Given the amount of work required for conviction, it is probably not our cup of tea on the Big Board for now, especially since we don’t have the analyst resources to do super deep dives on these types of trades (yet).

Regarding Compass, its last funding round in 2019 valued the company at $6.4 billion. It impressively grew revenues by 56% over 2020. The issue with the business is that it is a low margin business, given the agents make the majority of the commissions, and Compass is saddled with a high cost structure. 

If we assume they continue this growth into 2021 and improve to a 10% Gross Margin profile, a $10 billion valuation would represent 17x forward Gross Profit. 

But given this is NOT a sticky recurring software business with high profit flow throughs, along with the fact that there are headwinds for the entire real estate brokerage industry, Compass’ IPO doesn’t seem particularly compelling compared to other opportunities in this valuation range.

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