Why BofA Is Bullish On Kohl's

Department store Kohl's Corporation KSS said in a recent investor presentation that it expects to fully return to pre-pandemic operating margin levels and this is a bullish signal, according to BofA Securities. 

The Kohl's Analyst: Lorraine Hutchinson maintains a Buy rating on Kohl's stock with an unchanged $30 price target.

The Kohl's Thesis: Kohl's highlighted an operating margin goal of 7% to 8% in a normalized shopping environment, Hutchinson said in a Wednesday note.

This goal is not only consistent with historical trends, but marks an improvement from 2019's margin of 6.4%, the analyst said. 

The company's strategy to achieve its goals include further sales growth in active apparel, supply chain improvements, sourcing initiatives, inventory management, operating efficiencies, store automation and improved marketing productivity, she said. 

Kohl's focus on maintaining a strong balance sheet to keep an investment-grade rating is also "key to the story," Hutchinson said.

Recent progress from Kohl's toward these goals includes a sooner-than-expected $1-billion revolver payment in October.

The company should continue allocating excess cash toward reducing leverage, and its adjusted debt-to-EBITDAR should improve from 6.1 times at the end of the second quarter to 3.5 times in fiscal 2021, according to BofA. 

KSS Price Action: Shares of Kohl's ended Wednesday's session 6.73% higher at $22.04.