Why Kohl’s Just Soared Into Meme Stock Territory

Key Morningstar Metrics for Kohl’s

• Fair Value Estimate: $40.00
• Morningstar Rating: ★★★★★
• Morningstar Economic Moat Rating: None
• Morningstar Uncertainty Rating: Very High

On July 22, Kohl’s KSS stock rallied nearly 40% on about 10 times normal trading volume as retail investors promoted it heavily on social media. Rather than fundamentals, these traders were attracted to Kohl’s short interest of more than 50 million shares, or about half the available float.

Why it matters: Following the recent dismissal of its chief executive officer of only a few months, Kohl’s is trying to find stability after three years of declining sales and poor margins. Adding to its woes, the firm faces the prospect of higher tariffs on its merchandise, most of which is imported.

• The rally in the shares has no discernible impact on Kohl’s business prospects or financial stability. Some companies that have experienced sudden rallies in their shares have raised capital by selling new stock, but there is no indication that Kohl’s will attempt to do this.
• Moreover, despite the firm’s problems, we do not think a capital raise is needed. Kohl’s recently raised $360 million in secured debt as part of a refinancing. Although the interest on this debt is high (10%), the company’s long-term debt is at a 10-year low, and it has no maturities until 2029.

The bottom line: We are not making any change to our $40 fair value estimate and view the shares as very undervalued. Although we rate Kohl’s as having no moat, we do not think the current valuation reflects its prospects for sales and operating margin improvement over the next few years.

• As it looks for a new leader, we are encouraged that Kohl’s continues to address past mistakes with merchandising changes. That said, we forecast negative comparable sales through the end of 2025 as economic conditions depress spending by the company’s largely lower-middle-class customer base.
• The shares have been very volatile, having fallen by about half between January and April before the recent rebound. We encourage investors to focus on the company’s long-term prospects and ignore short squeezes that are unlikely to persist.