Choosing Between Kohl’s Corporation (KSS) and American Eagle Outfitters, Inc. (AEO)

Kohl’s Corporation (NYSE:KSS) shares are up more than 14.46% this year and recently increased 1.19% or $0.73 to settle at $62.07. American Eagle Outfitters, Inc. (NYSE:AEO), on the other hand, is up 15.05% year to date as of 04/16/2018. It currently trades at $21.63 and has returned 2.61% during the past week.

Kohl’s Corporation (NYSE:KSS) and American Eagle Outfitters, Inc. (NYSE:AEO) are the two most active stocks in the Department Stores industry based on today’s trading volumes. Investor interest in the two stocks is clearly very high, but which is the better investment? To answer this question, we will compare the two companies across growth, profitability, risk, and valuation metrics, and also examine their analyst ratings and insider activity trends.


Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect KSS to grow earnings at a 8.80% annual rate over the next 5 years. Comparatively, AEO is expected to grow at a 5.60% annual rate. All else equal, KSS’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns

Growth isn’t very attractive to investors if companies are sacrificing profitability and shareholder returns to achieve that growth. We will use EBITDA margin and Return on Investment (ROI), which control for differences in capital structure between the two companies, to measure profitability and return., compared to an EBITDA margin of 12.03% for American Eagle Outfitters, Inc. (AEO). KSS’s ROI is 10.30% while AEO has a ROI of 16.00%. The interpretation is that AEO’s business generates a higher return on investment than KSS’s.

Cash Flow

The amount of free cash flow available to investors is ultimately what determines the value of a stock. KSS’s free cash flow (“FCF”) per share for the trailing twelve months was +3.63. Comparatively, AEO’s free cash flow per share was +0.83. On a percent-of-sales basis, KSS’s free cash flow was 3.19% while AEO converted 3.88% of its revenues into cash flow. This means that, for a given level of sales, AEO is able to generate more free cash flow for investors.

Liquidity and Financial Risk

Liquidity and leverage ratios provide insight into the financial health of a company, and allow investors to determine the likelihood that the company will be able to continue operating as a going concern. KSS has a current ratio of 2.00 compared to 2.00 for AEO. This means that KSS can more easily cover its most immediate liabilities over the next twelve months. KSS’s debt-to-equity ratio is 0.83 versus a D/E of 0.00 for AEO. KSS is therefore the more solvent of the two companies, and has lower financial risk.


KSS trades at a forward P/E of 11.25, a P/B of 1.88, and a P/S of 0.56, compared to a forward P/E of 14.19, a P/B of 3.07, and a P/S of 1.00 for AEO. KSS is the cheaper of the two stocks on an earnings, book value and sales basis. 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

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. KSS is currently priced at a -11.02% to its one-year price target of 69.76. Comparatively, AEO is 6.29% relative to its price target of 20.35. This suggests that KSS is the better investment over the next year.

Risk and Volatility

Analyst use beta to measure a stock’s volatility relative to the overall market. Stocks with a beta above 1 tend to have bigger swings in price than the market as a whole, the opposite being the case for stocks with a beta below 1. KSS has a beta of 1.28 and AEO’s beta is 1.01. AEO’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest is another tool that analysts use to gauge investor sentiment. It represents the percentage of a stock’s tradable shares that are being shorted. KSS has a short ratio of 7.13 compared to a short interest of 3.11 for AEO. This implies that the market is currently less bearish on the outlook for AEO.


Kohl’s Corporation (NYSE:KSS) beats American Eagle Outfitters, Inc. (NYSE:AEO) on a total of 9 of the 14 factors compared between the two stocks. KSS is growing fastly, is more profitable, has higher cash flow per share and higher liquidity. In terms of valuation, KSS is the cheaper of the two stocks on an earnings, book value and sales basis, KSS is more undervalued relative to its price target. Finally, ETFC has better sentiment signals based on short interest.

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