FNCE6019 Advanced

Equity Analysis
Dr Chan Soon Huat

Section G5 Team No. 5

Esther Ou Jia Hui

Hans Christian Don

Janvi Dharmesh Sanghvi

Jaskaran Jaiya

Tan Jie Jun (Don)

William Winston Lacoste

Kohl’s Corporation
Market Cap: US$11.343B, Stock Price: US$68.69 31 January 2019

BUY
Executive Summary
We issue a BUY recommendation on KSS with a target price of $96.39, presenting
40.33% upside potential on the closing price of $68.69 on 31 January 2019. Our
valuation is based on a Discounted Cash Flow (DCF) Free Cash Flow to Firm model.
Current Price: $68.69 Our recommendation is grounded on the following key pillars: (1) Strong brand
portfolio and regular innovation are catalysts, (2) Expanding E-commerce Business,
Target Price: $96.39 and (3) Adopting a smaller stall format and partnerships bear fruit.

Upside: 40.33% Company Overview:

Sector: Consumer Discretionary Kohl's Corporation (Kohl’s) is an omni-channel retail organization operating
Industry: Retail departmental stores, websites and mobile applications, with its headquarters based in
Wisconsin, United States of America. Organised in 1988, it operated as a privately-
owned company until its IPO in 1992. Kohl’s sales penetration consists of 6 product
Market cap (S$B) 11.343 segments consisting of a range of mid-priced merchandise and 2 brand types.

Enterprise value (S$B) 13.58

Investment Thesis
52-week range ($) 57.89 - 83.28
Shares outstanding (M) 165.13 Strong brand portfolio and regular innovation are catalysts: Kohl's has established
a strong brand portfolio and it has the ability to increase its share of national-branded
Exchange NYSE products as well as revamping its existing private label and launching new and more-
Ticker KSS relevant brands. Sales of national branded products rose 4% in 3Q, making up 60%
of the total, and helped draw traffic. Management continues to improve private-brand
assortments, to better-appeal to customers. In addition to exclusive brands such as
Current P/E (ttm) 10.98 Simply Vera by fashion designer Vera Wang which have helped draw customers to
Current EPS (ttm) 6.01 Kohl's stores due to its exclusivity to Kohl’s, Kohl’s also regularly introduces new
brands in order to keep the inventory assortment fresh and drive customer traffic to its
stores and website. In line with its strategy to draw customers, Kohl's launched a
Price Performance Graph fresh apparel collection — POPSUGAR at Kohl’s — in September. Being a popular
media and technology company, POPSUGAR is likely to expand Kohl’s millennial
brand portfolio and help the company identify customers’ needs more accurately.
Moreover, Kohl’s plans to launch the iconic Nine West brand in 2019, which will
strengthen its stores and online assortment, and solidify Kohl’s brand position.

Expanding e-commerce business: Kohl’s has experienced significant growth in its

e-commerce business and this trend is expected to continue as it saw a 20%
increase in year over year online sales during Q1 2018. Kohl’s has been expanding its
e-commerce fulfillment centers to support its online sales growth and unveiled plans
to construct a sixth fulfillment center that is equipped with high automation facilities.
Kohl’s departmental stores traffic and sales is also set to benefit from its growing E-
commerce business as it launched Buy-Online-Ship-to-Store in July 2018, that allows
its customers to pick up their online purchases at any Kohl’s stores free of delivery
costs. According to a report by CBRE, Kohl’s saw up to an additional 25% in sales in
its stores as it benefitted from the additional purchases shoppers make when they
enter the stores for pick-up.

Research Analysts
Adopting a smaller stall format and partnerships bear fruit: Kohl’s has taken an
Esther Ou Jia Hui
approach of shrinking hundreds of its stores from around 90,000 square feet to
around 60,000. This will allow consumers to shop with more ease and facilitating ship-
Hans Christian Don
from-store logistics since consumers do not want to have the anxiety of too much
choice. Further inventory reduction remains an opportunity. The shrinkage of stores
Janvi Sanghvi
also frees up the excess spare space for Kohl’s to lease out to Aldi, a German grocery
giant to increase store traffic and expected to strengthen its store base. Kohl’s has
Jaskaran Jaiya
been strengthening its ties with retail giant Amazon to drive traffic. In addition, Kohl’s
has established a partnership with Amazon (Fig. 1) and started accepting returns for
Tan Jie Jun (Don)
Amazon customers on select products and it will also provide free packing and
shipping services for the merchandise to Amazon’s fulfilment centers. This move
William Winston Lacoste

Figure 1: Kohl’s Partnership with Amazon
Source: Kohl’s Corporate Website
Figure 2: Kohls’s Product Segments & Brand
Portfolio
Source: Kohl’s 2017 Annual Report
followed Kohl's decision to sell Amazon devices, accessories and smart home
devices in selected stores in Los Angeles and Chicago. Kohl’s believes that this store-
within-store concept will boost stores traffic, thanks to the availability of Amazon’s
varied electronics options. In the long run, the company is expected to receive
significant boost to its business through this partnership.
Current Highlights
Partnership with WW: Kohl's recently announced a partnership with WW (formerly
known as Weight Watchers) that will see the retailer selling an assortment of WW
Healthy Kitchen products online and in select stores in June 2019. The Healthy
Kitchen line includes a variety of kitchenware, cookware, and tools for meal
preparation which are designed to promote healthy eating. We hold an optimistic view
of Kohl’s management’s willingness to think outside the box give the company a
better ability to attract new customers and grow their businesses.
Stock outperformance compared to its peers: Institutional investors and funds
such as USA Financial Portformulas Corp., Restructuring Capital Associates Lp. and
Personal Resources Investment Strategic Management Inc. reduced their holdings of
Kohl’s as of February 2019, leading to a total sale of 131,382 shares of the company
as of 22nd January, 2019. This comes despite an increase in Kohl’s stock price since
January 2018 following an uptrend, further emphasized by the company’s
outperformance of the S&P 500 by 30.59%.
Positive outlook despite headwinds: After experiencing difficulties and stock price
decline due to stagnation of sales, Kohl’s has enacted new strategies to surpass
those contrary winds and remains competitive.  Kohl’s is shrinking hundreds of its
stores from 90,000 square feet to around 60,000 square feet, so that it allows the
company to settle in new markets such as city centers.
Business Description
Kohl’s Corporation (Kohl’s) is an omni-channel retail organization operating
departmental stores, websites and mobile applications, with its headquarters based in
Wisconsin, United States of America. Organised in 1988, it operated as a privately-
owned company until its IPO in 1992. Kohl’s sales penetration consists of 6 product
segments consisting of a range of mid-priced merchandise and 2 brand types (Fig. 2).
Geographic Location: As of 3rd February 2018, Kohl’s operates in 1,158
departmental stores, 4 Off-Aisle clearance centers and 12 FILA outlets across 49
states in the U.S..
Business segments:
• Brick and mortar stores: The primary business of Kohl’s involves the operation of
1,158 brick and mortar departmental stores across the USA under the proprietary-
owned “Kohl’s” trademark. Aside from that, its other businesses lie in the operation
of 12 retail stores under the “FILA” trademark, along with several off-aisle clearance
centres.
• Online stores: Kohl’s sells their merchandises online that are also available in their
stores and merchandises that are exclusive to their online stores.
Product segments:
• Women’s: Casual, formal, and workout. Tops, bottoms, undergarments, coats and
jackets, swimwear, dresses, and beauty.
• Men’s: Casual, formal, and workout. Tops, bottoms, undergarments, coats and
jackets, and swimwear.
• Children’s: Encapsulates both gender babies through juniors. Tops, bottoms,
undergarments, coats and jackets, swimwear, dresses, toys, baby feeding and
nursing, strollers, car seats, and other infant necessities.  
• Accessories: Jewelry, handbags and wallets, belts and suspenders, scarves &
wraps, cold weather gear, hats, sunglasses, ties, hair accessories, cologne and
perfume  


Figure 3: Kohl’s Brand types
Source: Kohl’s Corporate Website
Figure 4: Kohl’s Mobile Applications
Source: Kohl’s Corporate Website
Figure 5: U.S. Industry Market Capitalisation
Source: J.P. Morgan
Figure 6: U.S. Quarter on Quarter GDP
Growth Rate
Source: U.S. Census Bureau
• Footwear: Men’s, women’s, juniors, and baby’s. Athletic, sneakers, casual,
comfort, slippers, sandals, evening, flats, heels & pumps, wedges, wide-width
shoes.  
• Home: Bedding, mattresses, bath, kitchen & dining, small appliances, home décor,
seasonal décor, electronics.
Brand types: Merchandise mix includes both national brands ( Nike, Dockers, Levi’s,
etc.) and proprietary brands that are exclusive at Kohl’s. The portfolio of proprietary
brands includes established private brands (Apt. 9, Croft & Barrow, Jumping Beans)
and exclusive brands brands that are developed and marketed through agreements
with nationally-recognised brands such as Rock & Republic, Jennifer Lopez Collection
and Simply Vera Vera Wang (Fig. 3). Generally, National brands have higher selling
price albeit lower gross margins compared to proprietary brands.
Market Strategies
Offering a wide range of products: Kohl’s offers their customers a wide variety of
products with strong branding that are catered to the customers’ needs.
Focus on customer loyalty: Kohl’s leverages on technology like their Mobile App,
Digital Wallet, Kohl’s Smart Cart functionality to enhance their customers shopping
experiences. Kohl’s also generates customer loyalty via rewards program that saw 30
million active members participating in.
Offering products at a low cost: Kohl’s apply the concept of centralised buying and
distribution which helps it to pass on the savings to the customers. In addition, Kohl’s
remain cost competitive by having a price match policy which any customer can bring
a cheaper identical product from Kohl’s competitor and Kohl’s will match the price. In
addition, they offer great discounts on their products like a clearance section on their
website where people can save up to 80%.
Industry Overview
The retail industry in the U.S. remains strong as the National Retail Federation (NRF)
raised its U.S. retail sales forecast last year that was boosted by a strong economy.
This is further supported in a report by Moody’s Investors Service which changed the
outlook for the US retail industry from stable to positive. While there is a general
consensus on the positive prospects in this industry as a whole (Fig. 5), we still expect
certain headwinds in the sub-industry which Kohl’s operates in that may have
implications on the growth prospects of Kohl’s.
Kohl’s operates in the highly-competitive department store sub-industry. Key
differentiators include price, quality, service, location, speed, omni-channel
experience, reputation, credit availability, customer loyalty and availability of in-store
services. Kohl’s main competitors include Nordstrom Inc., Macy's Inc., J.C. Penney
Company Inc. and Dillard’s Inc. According to the U.S. Census Bureau, sales at
department stores (excluding leased departments) decreased 1.6% in 2017, to $150.4
billion, following a 6.8% decline in 2016.
Weakness in the U.S. economy despite strong economy backdrop in 2018: The
U.S. economy was healthy last year as the the consumer sector remains strong and
was supported by job growth, rising wages and rising disposable income. The job
market boasted record job openings and jobless claims neared 50-year lows, and
measures of aggregate wage growth was on an upward trend. However, the economy
may face some headwinds as the global economy has potential to slow down in 2019
(Fig 6). Decline in global growth amid political challenges may be the root cause of
this slowdown. A report by Deloitte forecasts slowing retail sales in the subsequent
year due to the slowing of economy, with a decelerating year-over-year growth of
5.5% in Q4 2018 to 3.4-4.1% in Q4 2019. Since all of Kohl’s stores are located in the
U.S., they are directly impacted by the health of the U.S. economy.

Figure 7: U.S. imports from China
Source: U.S. Census Bureau
Figure 8: U.S. Historical Retail Sales Growth
Source: Deloitte Industry Outlook
Figure 9: General sales from Customer
Loyalty Programs
Source: Deloitte Industry Outlook
Figure 10: Overall Porter’s Five Analysis
 become more and more limited (Fig. 10). This has left retailers to differentiate on
Source: Team Assessment
Figure 11: Intensity of Rivalry

Source: Team Assessment
Tariff concerns: There is an uncertainty ongoing with the outcome of the US-China
trade tensions still uncertain. Retailers will certainly be affected with an expected
increase if cost of goods since a considerable amount of their merchandises are
imported from China. According to the Centre for Financial Research & Analysis
(CFRA), about 20% of items on the tariffs list (Fig. 7) imposed by President Donald
Trump on Chinese goods on September 17 belong to the textiles, apparel and luxury
goods industry. Major developments regarding the trade war and tariffs could have a
material adverse effect on their business and operations as cost of goods rises.
Rise in mobile commerce: Many customers now expect brands to deliver a
seamless experience across all channels and mobile is expected to represent 28% of
e-commerce sales this year, growing four times faster than desktop e-commerce. As
mobile shopping continues to grow as the preferred platform, the convergence of
mobile and social media, known as “m-commerce,” has become a critical factor to a
brand’s holiday strategy. Although social media has traditionally been utilized as a
discovery tool, mainly to find discounts and research gift ideas, more consumers are
beginning their purchase journeys on mobile. In an emerging trend, m-commerce is
estimated to reach $144 billion with a 39% year-over-year growth. (J.P. Morgan, 2019)
Kohl’s is well positioned to leverage on this trend as their mobile commerce
accounted for 70% of digital traffic and represents almost half of digital sales. Rising
investments in mobile can aid conversion, narrowing the gap between traffic and
sales. Kohl's mobile-sales penetration is outpacing broader industry averages, which
were 22-24% in 2017, based on comScore data. With larger smartphone screens and
improvements in the mobile-app experience for navigation and checkout, sales made
on such devices will continue to climb.
Customer loyalty and digital media: Retailers face the challenge of capturing
customers’ loyalty. According to a report by Deloitte, the retail industry accounts for a
majority (42%) of loyalty memberships in the U.S but retailers face the challenge of
leveraging on such programs as customers become increasing disengaged with the
retailers due to the number of choices they have (Fig. 8). An average customer in the
U.S. reports being a member of more than 6 loyalty programs and 65% of them are
engaged with less than half of them. Against this backdrop and retailers bid to gain
customer loyalty, digital media is the most effective way to do so since customer
relationships are now digital-centric (Fig. 9) due to the large amount of time
consumers spend on digital media. Digital channels have increasingly become the
source of most retail growth and influencing most retail purchases. A Forrester
Research estimates that by 2022, e-commerce will account for 17 percent of total
retail sales (ranging, by category, from 4 percent in grocery to 66 percent in
electronics), while an additional 41 percent will be digitally influenced offline sales
(with digital channels influencing as much as 30% of offline sales, even in mostly
offline categories like grocery).
Competitive Positioning (Porter’s 5 Forces Analysis)
Through our extensive research, and having mentioned earlier, the U.S. retail
department store industry competition is assessed as high with relatively low growth
prospects. Given the nature of the industry, identical brands and products can be
carried by multiple retailers, accessibility to pricing information and the global retail
base has become nearly unlimited, and barriers to entry and pricing power have
customer service and the retail environment, which are very difficult characteristics to
leverage, as consumers remain primarily focused on price. Furthermore, we find these
points of differentiation too structurally difficult to be defensible but we believe Kohl’s
has the capabilities to sustain. In this segment, we adopt the Porter’s 5 Forces
Framework for ample justification of Kohl’s current competitive position in the U.S.
retail market.
Intensity of rivalry (High) (Fig. 11): The growth of off-price retailers has eroded Kohl’s
brand positioning as the lowest-cost provider. Additionally, the growth in e-commerce
makes us concerned that Kohl’s is overstored with 1,158 stores at the end of 2018.
Currently, apparel makers’ aggressive direct-to-consumer push, will also likely
continue to present long-term challenges in the market for Kohl’s. We also note that
Kohl’s faces intense competition from not just established retailers such as Macy’s

Figure 12: Threat of New Entrants 
 need for strong distribution channels. The ability to attract and retain a large customer
Source: Team Assessment
Figure 13: Threat of Substitutes
 competitors offering alternative purchase methods and/or similar products. E-
Source: Team Assessment
Figure 14: Bargaining power of buyers
 relatively small basket size of individual purchases. However, the low switching costs
Source: Team Assessment
Figure 15: Bargaining power of suppliers 
 Revenue and Profitability Analysis: In FY 2017, Kohl’s reported a revenue of $19.05
Source: Team Assessment
Figure 16: Competitor Analysis: Revenue 

Source: Team Assessment
and Nordstrom whom are aggressively rolling-out of off-price concepts such as
Nordstrom Rack and Macy's Backstage; but also off-price retailers such as TJX
Companies and Ross Stores.
Threat of new entrants (Moderate): Given the rise in e-commerce and the general
stagnation of brick-and-mortar businesses, these prospects have made the retail
department store industry not as attractive. Larger department store chains have also
steadily increased their number of locations, making it increasingly difficult for new
entrants to find leasing and supply deals with manufacturers and retail outlets.
Furthermore, barriers to enter and exit the market on a large-scale are strong agents
of deterrence (Fig. 12). This can be attributed to the high capital requirements and a
base is another factor for consideration; of which this is mainly attributed to the
degree of customer loyalty to established brands. With distribution networks and
familiar branding created over the past few decades, it is considerably difficult for
newcomers to challenge Kohl’s existing position in the U.S. market. Thus, given these
cost synergies and intangible branding that Kohl’s possesses, the threat of new
entrants is determined to be moderate.
Threat of substitutes (High): The department stores industry has a low risk of
substitute goods since they are primarily a retailer of branded merchandise. Since
department store retailers produce very little, their main threat of substitutes are
commerce has encroached on the market share of the retail industry by a substantial
margin. Even though players within the industry are adopting e-commerce programs
to compete, it should be noted that the products / brands sold by Kohl’s are not
highly differentiated from other current and potential department store competitors.
Further, given that they are targeting low-end products i.e. the cost-conscious
consumer, there are many alternatives available, rendering a high threat of substitutes
(Fig. 13).
Bargaining power of buyers (Moderate): The balance of power between retailers
and their customers is highly dependent on the saturation of the distribution network.
As Kohl’s largely adopts a traditional brick-and-mortar retail business model targeting
the middle-class consumer, customers do not have much influence due to their
due to minimal information barriers have powered product dispensability and a
tendency of customers to switch (Fig. 14). Thus, we render buyer power to be
moderate in this market.
Bargaining power of suppliers (Low): Kohl’s has a low dependence on its suppliers
as it has a well-diversified supplier base which consists of many foreign and domestic
vendors.  In FY2018, none of its vendors individually accounted for more than 10% of
Kohl’s purchases. Thus, their suppliers are unable to significantly influence the market
prices (Fig. 15).
Financial Analysis
billion which represents a 2.2% increase versus its revenue in FY 2016 of $18.69
billion. This performance is relatively better than its 3 close competitors: Dillard’s with
a revenue growth rate of 0.07%, Macy’s and Sears which have negative revenue
growth rate of -3.7% and -24.6% respectively. We have reason to believe that Kohl’s
expanding e-commerce business and business partnerships are starting to gain
traction which is reflected in their revenue numbers. We projected a 2.33% revenue
growth rate from FY 2018 to FY 2023 moving forward. Our projected revenue
translates to a slight overall decline in % year on year growth as we note the
competitive industry which Kohl’s is operating in.
Kohl’s saw a 1.52 % increase in net profit margin in FY2017 which is due to its Kohl’s
efficient inventory management that have been helping the company to boost

Figure 17: Competitor Analysis: Liquidity
 management. It is worthy to note that Kohl’s quick ratio of 0.49 which is less than 1
Source: Team Assessment
Figure 18: Competitor Analysis: Activity
 compared to its peers (Fig. 18). This represents Kohl’s ability to convert its
Source: Team Assessment
Figure 19: Kohl’s Capital Structure
 method allowed us to accurately predict the intrinsic value of the company regardless
Source: Kohl’s Reports, Team Assessment
Figure 20: U.S. population growth
Source: U.S. Census Bureau
Figure 21: Kohl’s WACC 
 revenues would be able to have a larger growth rate than the current one. With this
Source: Team Assessment
profitability albeit the increase in profitability was partially offset by higher shipping
costs caused by online sales growth. This also translated a 2.29% increase in Return
on Assets which shows Kohl’s efficiency in using its assets to generate earnings as
seen from it continually being able to generate a steady stream of cash flows from its
operations.
Liquidity Analysis: Kohl’s have a relatively better liquidity as compared to its peers.
Its higher current ratio of implies that it has sufficient liquidity to cover short term
operating expenses as well as its debt obligations in comparison to its peers. In
addition, its current ratio of 2.01 would suggest an efficient working capital
(Fig. 17) would suggest a risky position as they would not have adequate current
assets net of inventory to cover short term obligations. However, due to the nature of
the industry which Kohl’s operates in and inventories constituting a relatively large
proportion of   of its total assets, we feel that Kohl’s is still in a good liquidity position
as it manages a higher ratio compared to its peers.
To further evaluate Kohl’s liquidity position, we also utilised Altman’s Z-score to gauge
Kohl’s probability of filing for bankruptcy within the next 2 years. In fiscal year 2018,
Kohl’s has a Altman’s Z-score of 4.20 which indicates bankruptcy is unlikely.
Activity Analysis: Overall, Kohl’s has the lowest cash conversion cycle of 68.56 days
investments in inventory and other resources into cash flows from sales. Having a
lower inventory outstanding than its competitors indicates that Kohl’s takes lesser
days to clear its inventory in comparison with most of its peers apart from Sears.
Having no outstanding accounts receivable eliminates Kohl’s risk of a credit default
from its customers and thereby strengthening its cash flow position.
Valuations
We issue a BUY recommendation on Kohl’s Corporation (KSS) with a target price of
USD $96.39, representing a 40.32% upside from the closing price of USD 68.69 per
share as of Jan 31st, 2019. Our target price calculation is based on the Discounted
Cash Flow (DCF) Free Cash Flow to Firm model. In addition, the intrinsic FCFF
of what the market’s sentiment towards the firm. FCF is a true measure of how much
money is left with the investors of the firm which are the equity and debt holders.
Relative valuation methods may induce biased valuation based on the performance of
other comparable companies in the industry as a whole, and this may be misleading
in some cases.
Kohl’s revenue along with their FCFF are expected to grow 2.33% yearly from 2023
onwards forever after the forecast period. This value is obtained by doing a regression
of revenue growth against population, economy, inflation, and consumption growth.
This forecasted perpetual growth rate is considered reasonable since ideally the
perpetual growth rate should be between the inflation rate and real gdp growth. This
is mainly because the growth rate should at minimum grow at the same rate as
inflation, and the company would not be growing faster than the economy in the long
run. The relatively low terminal growth rate is due to the fact that Kohl’s is already a
stable and mature company, and this terminal growth rate is a reasonable number for
a mature firm in the retail industry.
During the forecasted period, the year on year revenue growth rate is assumed to be
growing in straight line from 0.5% in 2018 to the terminal growth rate of 2.33% of
2023. Sales growth rate in FY2018 is assumed to be 0.5% since Kohl’s management
are expecting a -1 to 1% revenue growth in their latest annual report. This assumption
is based on the idea that Kohl’s would undergo an expansion in their online shopping
sector. They are currently investing around half of their capital expenditures for IT
purposes. Therefore, with the expansion of their online shopping sector, their
assumption of Kohl’s growing online store presence, it is befitting to have an approx-


Figure 22: Valuation Assumptions
 $89.04. On the contrary, the best scenario (WACC = 8.1% & g = 2.6%) is $105.98.
Source: Team Assessment
Figure 23: Kohl’s Investor Types
Source: MarketLine: Kohl’s
Figure 24: Kohl’s Key Board of Directors
Source: MarketLine: Kohl’s
Figure 25: Kohl’s Major Shareholders
Source: MarketLine: Kohl’s
Figure 26: Kohl’s Subsidiary Information
Source: MarketLine: Kohl’s
-mately straight line growth of the year-on-year revenue growth rate until it reaches
the terminal growth rate.
The tax rate of Kohl’s is taken to be 24.00% Their management assumes a 24.00 -
25.00% effective tax rate based on their notes in the latest annual report. This is very
different from their historical effective tax rate of 35 - 36% on average. However, over
the last 1 - 2 years Kohl’s had a 23 - 25% effective corporate tax rate. This is mainly
due to to the fact that Trump’s administration made a corporate tax cut from 35% to
21% federal corporate tax rate in 2017. However, the new statutory tax rate is not as
easy to compute as before the tax cut, therefore it is assumed to be 24%.
Sensitivity Analysis
The calculated fair value of Kohl’s implied share price (Fig. 22) is very sensitive to the
assumptions of the Weighted Average Cost of Capital (WACC) and the Terminal
Growth Rate. This can be seen from the sensitivity table above. A stepwise change of
0.1% in the WACC and terminal growth rate value would cause the implied share
price to change around $1.50 - $2.00. As calculated before, the worst scenario
(WACC = 8.6% & g = 2.1%) implies that the fair market value of the share price is at
Corporate Governance
Group structure: Kohl’s Corporation, with its headquarters in Menomonee Falls,
Wisconsin, United States is composed of the holding company (Kohl’s Corporation), 2
main subsidiaries; namely Kohl’s Department Stores, Inc. and Dana Buchman, Inc.,
also located in the US. Kohl’s Department Stores, Inc. in turn has nine wholly owned
subsidiaries in different states and one holding company in British Columbia (Fig. 26).
Their subsidiaries are all retail department stores, with distribution and fulfilment
centers operating as further step-down subsidiaries. The company also has certain
financial plans for their employees such as the Kohl’s Corp., 401K Plan providing
defined contribution for part-time and full-time employees. Although geographically
undiversified, the company has well managed stores in key target market locations
and fulfilment centers driving their e-commerce sales distribution.
Group Executive Committee & Board of Directors: The group’s executive
committee is comprised of Michelle D. Gass (CEO), Sona Chawla (COO), Bruce H.
Basanko (CFO), Nancy Feldman (Executive Vice President of Women’s apparel) and
John Grosso (Executive Vice President and Director of Store Operations). The Board
of Directors comprises of Michelle D. Gass (CEO). However, the board is led by Frank
Sica who is the chairman of the board, Stephen E. Watson is the director. The rest of
the board comprises and 5 other independent directors. However, it is to be noted
that Nina Vaca, a board member plans to not stand for reelection as a director in the
company. This decision has not been borne out of conflict with other board members
but by a personal decision
Shareholder structure: Kohl’s has 165 million shares outstanding. The company has
99% free float market capitalisation with a value of US$ 10.887 billion, of which
85.56% is owned by traditional investment managers and less than 5% owned by
hedge fund managers. The largest shareholder of Kohl’s Corporation is The Vanguard
Group, Inc. (Fig. 25) with 11% ownership of the common stock and over 18.5 million
shares outstanding owned. The company’s current private equity ownership involves
stakes of J.P. Morgan Investment LLC., T. Rowe Price Associates, Inc., and Blackrock
Fund Advisors. Which also has a similar investment in Kohl’s competitor J.C. Penny
Company, Inc. (See appendix 15). We believe that the high free float of the company
makes the stock very liquid and more resistant towards market transactions.
Corporate Management: Kohl’s current group executive, Kevin Mansell, has retired
from the CEO position in May 2018, while Michelle Gass took the helm at Kohl's.
Given her tenure and wellness bent (a trend we think resonates well with consumers),
we feel she is well qualified for the position. Gass joined Kohl's in 2013 as chief
customer officer, a role that has since expanded to chief merchandising and strategy
roles. The board of directors has 11 members, 10 of whom are
independent. We deem the board to be sufficiently independent
and executives as qualified for their positions. Kohl's total
shareholder return in comparison with the peer group (which
includes Bed Bath & Beyond, Gap, J.C.Penney, L Brands,
Macy’s, Nordstrom, Ross, Sears, Target, and TJX) was at the
63rd percentile for the three years between 2015 and 17.
Although this underperformance is indicative of numerous past
missteps, in our opinion, including a narrowed exposure to
national brands and a delayed response to e-commerce
growth, we think the strategic plan that addresses these issues
is appropriate.
Corporate Governance: We have carefully analysed the
corporate governance of the company (Appendix: 14) to
understand how the company balances the interests of its
various stakeholders. Overall, Kohl’s manages their
stakeholders well, as analysed in the corporate governance
assessment scoreboard, which we adapted from the ASEAN
Corporate Governance Scorecard (ACGS).
projects in progress. Although these technology are intended to
Social Responsibility: Kohl’s places an emphasis on social
responsibility. By adopting a ‘customers first’ approach in their
business, Kohl’s gives back to their customers through their
philanthropic platform, Kohl’s Cares. Kohl’s staffs volunteered
nearly 500,000 hours in 2017 in support of nearly 8,500
organizations and in year 2016 alone, Kohl’s donated more than
$50 million to charitable organisations. In addition, they are
committed to protecting and conserving the environment by
seeking solutions that encourage long-term sustainability. For
example, Kohl’s hosts over 200,000 solar panels on 163
rooftops around the country and a total of nine solar trees
between two locations in Wisconsin and Texas. In addition to
solar power, Kohl’s hosts two wind turbines at its distribution
center in Findlay, Ohio (Kohl’s CSR report, 2017) (Fig 27). Kohl’s
also adopts a Ethical and Fair Business Practices which
consists of a clear code of conduct and Terms of Engagement
that they share with their merchandising vendor partners.
Market risks
Figure 27: Kohl’s CSR efforts
Source: Kohl’s Corporate Website
In addition, a partnership with Weight Watchers (WW) has given
birth to a program which enables the community in which the
business operates to live healthier. This would involve Kohl’s
introducing WW Healthy Kitchen products at select Kohl’s
stores and on their website. Along with this, they plan to offer a
community space where Kohl’s would host Weight Watchers
Wellness workshops for patrons in its stores. They also plan to
offer WW Healthy Kitchen products which are designed to
make healthy cooking and living easier. This is in conjunction
with its ambitions to include a variety of home and lifestyle
wellness products in 2019. In addition, it plans to provide
subsidized WW membership to its associates. This provides
another dimension to its employee benefits package.
Investment Risks
Strategic risks
Negative information technology projects outcome:
Currently, Kohl’s has many internal information technology
increase productivity and operating efficiencies, they may not
achieve their desired outcome may deliver an adverse user or
customer experience. Thus, Kohl’s may incur significant costs
due to the failure to implement these technology effectively
which can adversely affect their operations, liquidity and
financial condition.
Unsuccessful execution of omni-channel strategy: The
advancement of technology has increased customer
expectations for procurement methods. They are increasingly
leveraging on online methods to rapidly compare products,
prices and purchase products. Once products are purchased,
they are seeking alternate options for delivery of those
products. Even though Kohl’s is dedicated to pursue is omni-
channel strategy, they may suffer if they fail to continually
anticipate and adapt, and unable to provide relevant customer-
facing technology and omni-channel experiences.
Consequently, they may lose their ability to compete with their
rivals and the company will be adversely affected.
Trade policies: Government trade regulations between the
United States and other countries can have a direct impact on
Kohl’s since the majority their merchandises are sourced from
manufacturers located outside of the United States, primarily in
Asia. For example, the imposition of tariffs on imported
products can have a material adverse effect on their business
operations.
Deteriorating economic conditions: Worsening general
economic conditions such as higher unemployment, fall in
consumer disposable income, inflation can affect consumer
spending habits. As all of Kohl’s stores are located in the
United States, they are very susceptible to the deterioration of
U.S. economy. In addition, the moderate income consumer,
which is their core customer, is especially sensitive to these
factors. The fall in consumer spending will negatively affect
Kohl’s earnings and the outlook of the company.
Financial risks
Fall in capital raising ability and bank credit terms: Kohl’s
have historically relied on both the public debt markets and
lines of credit with financial institutions to raise capital for
lines of credit with financial institutions to raise capital for
operations and growth funding. They may face a risk of a higher
cost of financing or a relatively harder access to capital due to
changes in the market conditions such as interest rate
fluctuations. In addition, Kohl’s has to maintain a certain level of
operating performance and credit rating in order to have
the applicable United States regulations and Kohl’s Terms of
Engagement which includes provisions regarding laws and
regulations, employment practices, ethical standards, etc.The
risk of non compliant of these standards by the suppliers may
have a negative impact on Kohl’s reputation and results of
operations.

continued access to these capital raising on favourable terms. A

failure to do so will adversely affect the company’s cash flow
and operations.
sensitive and confidential customer, staff and company
Ineffective capital allocation: According to Kohl’s Annual
Report, their goal is to invest capital to maximize their overall
long-term returns which includes inventory expenditures, capital
projects and expenses, managing debt levels, and periodically
returning value to their shareholders through share repurchases
and dividends. If they do not properly allocate their capital to
Data risks: As part of Kohl’s normal course of business,
information is collected and retained in the system, consisting of
their own database and third party service providers. Any
security breaches to the system involving the improper
disclosure or lost of those data can exposed Kohl’s to risks of
litigation and liability, disrupt their operations, damage their
reputation and customers' willingness to shop in our stores or
on our website.

maximize returns, they may fail to produce optimal financial

results and may experience a reduction in shareholder value.
Natural risks
Operational risks
Fall in labour retention and rising cost of labour: Kohl’s may
be unable to attract, develop and retain quality staffs due to
external and uncontrolled factors such actions by their
competitors’ staff compensation levels, prevailing wage rates,
Adverse weather conditions: Severe or unexpected weather
conditions can adversely affect consumer shopping patterns.
For example, heavy snow, natural disasters such as
earthquakes, tornadoes, floods can deter consumers from going
to the physical stores and this can adversely affect their
performance and causing physical damage to their properties.

changing demographics, etc. This can adversely affect their

operations since their stores’ performances is directly Damage To Inventory: Since Kohl’s has to keep an inventory of
dependent on their labour force. In addition, competitive and its stock at all times. Damage to its inventory due to theft,
regulatory pressures have significantly increased their labor natural calamities or other unforeseen adverse events poses a
costs with potential changes in federal and state laws relating to reasonable risk.
employee benefits,   such as sick time, paid time off, leave of
absence can cause them to incur additional costs and
negatively impact their profitability.

Supplier risk: Approximately 25% of Kohl’s merchandise sold is

sourced through a third-party purchasing agent and the
remaining merchandise is sourced from a wide variety of
domestic and international suppliers. If any of their significant
suppliers were to face bankruptcy or terminate their supply
contracts with Kohl’s unexpectedly, Kohl’s may be unable to deal
with the sudden occurrence of such event. This can adversely
affect their sales and operating results as they are unable to
source for alternate or replacement suppliers or get supply terms
as favorable as their existing ones.

Increase in cost of goods sold: Kohl’s is exposed to the Figure 28: Kohl’s Risk Matrix

increases in the price of merchandise and raw materials from Source: Team Assessment
their suppliers which can increase the cost of merchandise sold
by Kohl’s. The price and availability of raw materials may
fluctuate substantially, depending on a variety of factors,
including demand, weather, transportation costs, trade policies,
etc. This can cause a decrease in their profitability if Kohl’s is
unable to mitigate the increase in costs. Even though they are
able to offset these costs with an increase in pricing of their
products sold, it might cause a decline in their sales volume.

Regulatory & legal risks

Rising tax Rate: Tax reforms may affect Kohl’s in the future,
with an increase in tax rate causing a drop in earnings, vice
versa.

Failure to comply with Terms of Engagement: Kohl’s receives

a large portion of their merchandises from suppliers outside of
United States and these suppliers are required to comply with

Appendix 1: SWOT Analysis

Appendix 2: Balance Sheet

Appendix 3: Income Statement

Appendix 4: Cash Flow Statement

Appendix 5: Ratio Analysis

Appendix 6: Discounted Cash Flow Analysis

Formulas:
• Enterprise Value = Total PV of FCFF + PV of Terminal Value
• Equity Value = Enterprise Value - Net Debt
• Net Debt = Total Debt - Cash
• Terminal Value = [Final Year Growth Rate + (1+ Long Term
Growth Rate)]/ (Discount Rate - Long Term Growth Rate)

Notes:
*Enterprise Value highly depends on the Terminal Value instead of
the forecasting period
*This is true since PV of Terminal Value is around 70% of the Total
Enterprise Value
*Therefore, the value drivers are the terminal growth rate and the
WACC
*Tax rate is assumed to be 21% after Donald Trump's U.S.
Corporate Tax reform
*Pricing is as of 31 Jan 2019

Appendix 7: Sensitivity Analysis

Appendix 8: Cost of Debt

Appendix 9: Risk Free Rate

Appendix #: Shareholder Structure
Appendix 10: Beta Calculation
Appendix 11: Terminal Growth

Appendix #: Shareholder Structure

Appendix 12: CAPEX

Appendix 13: Changes in Working Capital

Appendix 14: Corporate Governance

Appendix #: Shareholder Structure

• The company has a comprehensive risk management program that segregates every risk applicable to the company for better
management.

• A risk management committee has been formed among key senior managers from across our company to actively review each risk
owner’s progress toward reduction, mitigation or elimination of each particular risk.

• Each non-management member of the Board of Directors is expected to own Kohl’s stock, including shares of unvested time-based
restricted stock.

• A Director is not permitted to sell any stock, either through the exercise of stock options or otherwise, until he or she attains a 5 year
ownership level.

Appendix 15: Shareholder Structure

Kohl’s Shareholder Structure
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