Option Trade 
Kohl's Corporation (NYSE:KSS) Calls 
Wednesday, May 13, 2015

**OPTION TRADE: Buy the KSS Jul 2015 75.000 call (KSS150717C00075000) at or under $2.70. Place a protective stop loss at $1.05, and a pre-determined sell at $5.00.

by Ian Harvey

May 13, 2015

Introduction

Kohl's Corporation (NYSE: KSS), which operates family-oriented department stores and a website (www.Kohls.com) that sells apparel, footwear, accessories, soft home products and housewares, will report this coming Thursday before the bell.

For its upcoming report, analysts are expecting $0.55 on revenue of $4.18 billion, as compared to $0.60 on revenue of $4.07 billion a year prior. The outlook for Kohl's full year is to post earnings of $4.55 for 2016 and $5.03 for 2016. These expectations make Kohl's an attractive buy at its current price.

Over the course of the last 12 months, Kohl's has been up 37.3% and it has been up 25.5% since the beginning of 2015. The company has been embarking on a multi-year breakout since the end of 2013.

The company's performance will continue to be a residual result of its strategic initiative that was launched in late 2014. They're working on controlling their product mix, increasing loyalty; beauty offerings and zoning in on each individual product channel that they offer to target a specific audience. Continued enrollment in the company's loyalty program, which has already exceeded expectations, is expected to continue.

Kohl's is backed by many of the analysts to deliver a good quarter, as well. In early April, channel checks from MKM partners revealed strong trends. MKM said that they think the stores SSS comps could top expectations due to sales of athleisure and electronics.

Technical Details

Kohl's Co. closed trading yesterday at $74.30. 2,792,600 shares of the company’s stock traded hands. Kohl's Co. has a 52-week low of $50.90 and a 52-week high of $79.60.

The stock has a 50-day moving average of $74.42 and a 200-day moving average of $74.45.

The company has a market cap of $15.07 billion and a price-to-earnings ratio of 17.36.

Earnings

Kohl's Co. last released its earnings data on Thursday, February 26th. The company reported $1.83 earnings per share (EPS) for the quarter, beating the consensus estimate of $1.80 by $0.03. The company had revenue of $6.34 billion for the quarter, compared to the consensus estimate of $6.33 billion.

During the same quarter in the previous year, the company posted $1.56 earnings per share. The company’s revenue for the quarter was up 3.9% on a year-over-year basis. Analysts expect that Kohl's Co. will post $4.56 EPS for the current fiscal year.

Earnings Forecast

While there were a few challenges in the quarter, including adverse weather in February and the ports disruptions, it is expected that a solid report will meet Street expectations. The key initiatives, including a renewed focus on national brands (50% of sales LY vs. 48% in FY13), as well as the new loyalty and beauty programs, and are gaining traction against a generally constructive macro backdrop.

Kohl's launched Yes2You nationwide in October 2014 and had added 25 million members by the end of January, surpassing its internal goal by 20 percent. The sign-ups continue to be robust and the program could be a meaningful traffic driver.

The analysts consider Bliss to be a significant win for Kohl's "beauty push." Around 43 percent of the company's stores had newly renovated beauty departments at the end of 4Q14. The penetration is expected to increase to about 80 percent by the fall.

The same-store sales and EPS estimates for 1Q15 has been raised from 2.0 percent to 3.0 percent and from $0.53 to $0.56, respectively. The EPS estimates for 2015 and 2016 have been raised from $4.55 to $4.58 and from $5.10 to $5.13, respectively.

Valuation

From a valuation perspective when compared to peers, Kohl's looks like an obvious buy as it is undervalued. The reasons are--

1. They're trading at about 14.8x what they're expected to earn next year, well below the S&P average of about 18x right now.

2. KSS trades at just 0.8x sales, an astronomically low multiple that seems to be suggesting that the company isn't going to be able to continue generating growth.

3. The company has a decent balance sheet, despite having a low 1.9 current ratio and $14.1 billion in cash on hand, compared to $4.76 billion in total debt. Despite this, the company has a book value of $29.81, putting their price at only about 2.4x book value.

Balance Sheet and Debt

When considering the balance sheet and the debt, it's important to note that the company is a robust generator of cash. The company's ability to generate free cash is impressive which makes Kohl's remain in a nice spot here for a buy. Not out of the question is multiple expansion to about 17x forward earnings, which would put the stock around $89.

Analysts Opinions

On Tuesday morning of this week, Jefferies lifted estimates on Kohl's heading into the earnings report. They follow a long line of analysts that have shared a bullish view of Kohl's.

Also, Zacks upgraded shares of Kohl's Co. from a hold rating to a buy rating in a research report sent to investors on Monday morning, May 4th. The firm currently has $82.00 price target on the stock.

Zacks’ analyst wrote….

“Kohl’s delivered better-than-expected results in the fourth quarter of 2014. Earnings of $1.83 per share grew 17% from the prior-year quarter, backed by higher sales, better expense and inventory management. Sales of $6.3 billion increased 3.9% owing to an increase in comps, which was driven by higher transactions per store and average transaction value. We are impressed with Kohl’s continuous efforts to improve its base business and its focus on the strategic initiative, Greatness Agenda. The initiatives helped to deliver the first quarter of positive comps after persistent declines for more than a year. Overall, Kohl’s has a solid brand portfolio, strong e-commerce business and impressive dividend yields. However, rising apparel costs and gross margin pressure remain headwinds.”

The company has also been the subject of a number of other research reports:-

• Analysts at MKM Partners raised their price target on shares of Kohl's Co. from $77.00 to $87.00 and gave the company a buy rating in a research note on Tuesday, April 7th.

• Analysts at Telsey Advisory Group downgraded shares of Kohl's Co. from an outperform rating to a market perform rating and set a $33.00 price target on the stock in a research note on Friday, February 27th.

• Analysts at Maxim Group raised their price target on shares of Kohl's Co. from $68.00 to $77.00 and gave the company a buy rating in a research note on Friday, February 27th.

• Finally, analysts at JPMorgan Chase & Co. reiterated a hold rating and set a $65.00 price target (up previously from $55.00) on shares of Kohl's Co. in a research note on Monday, February 9th.

There are currently twenty-six analysts that cover KSS stock. Of those twenty-six, twelve have a Buy rating, eleven have a Hold rating and three have a Sell rating. On a consensus basis this yields to an Overweight rating. The consensus target price stands at $74.77.

Conclusion

Kohl's shares have risen 25 percent year-to-date, as compared to the 3 percent rise in the XRT and 2 percent gain in the SPX. The stock is now at a premium to Macy's, Inc. (M), which the analysts believe is "warranted" given their view that "Kohl's is positioned to outperform Macy's for the first time in a number of years."

Therefore, based on the facts above the following options trade is recommended…..


**OPTION TRADE: Buy the KSS Jul 2015 75.000 call (KSS150717C00075000) at or under $2.70. Place a protective stop loss at $1.05, and a pre-determined sell at $5.00.



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