Kohl’s Corporation (NYSE:KSS) shares are up more than 12.71% this year and recently increased 3.87% or $2.28 to settle at $61.12. Dillard’s, Inc. (NYSE:DDS), on the other hand, is up 9.91% year to date as of 01/11/2018. It currently trades at $66.00 and has returned 15.28% during the past week.
Kohl’s Corporation (NYSE:KSS) and Dillard’s, Inc. (NYSE:DDS) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.
Companies that can increase earnings at a high compound rate over time are attractive to investors. Analysts expect KSS to grow earnings at a 6.05% annual rate over the next 5 years. Comparatively, DDS is expected to grow at a -9.50% annual rate. All else equal, KSS’s higher growth rate would imply a greater potential for capital appreciation.
Profitability and Returns
Just, if not more, important than the growth rate is the quality of that growth. Growth can actual be harmful to investors if it comes at the cost of weak profitability and low returns. To adjust for differences in capital structure we’ll use EBITDA margin and Return on Investment (ROI) as measures of profitability and return., compared to an EBITDA margin of 3.86% for Dillard’s, Inc. (DDS). KSS’s ROI is 8.80% while DDS has a ROI of 9.00%. The interpretation is that DDS’s business generates a higher return on investment than KSS’s.
The value of a stock is simply the present value of its future free cash flows. KSS’s free cash flow (“FCF”) per share for the trailing twelve months was +1.53. Comparatively, DDS’s free cash flow per share was -0.27. On a percent-of-sales basis, KSS’s free cash flow was 1.38% while DDS converted -0.12% of its revenues into cash flow. This means that, for a given level of sales, KSS is able to generate more free cash flow for investors.
Liquidity and Financial Risk
Liquidity and leverage ratios are important because they reveal the financial health of a company. KSS has a current ratio of 1.60 compared to 1.40 for DDS. This means that KSS can more easily cover its most immediate liabilities over the next twelve months. KSS’s debt-to-equity ratio is 0.90 versus a D/E of 0.51 for DDS. KSS is therefore the more solvent of the two companies, and has lower financial risk.
KSS trades at a forward P/E of 15.61, a P/B of 2.02, and a P/S of 0.56, compared to a forward P/E of 18.27, a P/B of 1.20, and a P/S of 0.29 for DDS. KSS is the cheaper of the two stocks on an earnings basis but is expensive in terms of P/B and P/S ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.
Analyst Price Targets and Opinions
A cheap stock isn’t a good investment if the stock is priced accurately. To get a sense of “value” we must compare the current price to some measure of intrinsic value such as a price target. KSS is currently priced at a 25.45% to its one-year price target of 48.72. Comparatively, DDS is 44.74% relative to its price target of 45.60. This suggests that KSS is the better investment over the next year.
The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 2.60 for KSS and 3.60 for DDS, which implies that analysts are more bullish on the outlook for DDS.
Risk and Volatility
No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. KSS has a beta of 1.22 and DDS’s beta is 1.28. KSS’s shares are therefore the less volatile of the two stocks.
Insider Activity and Investor Sentiment
The analysis of insider buying and selling trends can be extended to the aggregate level. Short interest, which represents the percentage of a stock’s tradable shares currently being shorted, captures what the market as a whole feels about a stock. KSS has a short ratio of 7.01 compared to a short interest of 10.82 for DDS. This implies that the market is currently less bearish on the outlook for KSS.
Kohl’s Corporation (NYSE:KSS) beats Dillard’s, Inc. (NYSE:DDS) on a total of 10 of the 14 factors compared between the two stocks. KSS is growing fastly, is more profitable, has higher cash flow per share, has a higher cash conversion rate and higher liquidity. KSS is more undervalued relative to its price target. Finally, KSS has better sentiment signals based on short interest.