Consider Buying Dillard’s Instead of Kohl’s Stock

Kohl’s (NYSE:KSS) stock surged 35% after getting a buyout offer from Starboard Value at $64/share, with other hedge fund and private equity groups reportedly circling.

Shares are trading January 28 at over $60.50, a market cap of $8.27 billion. Shares ended the previous week below $47. Analysts were going on TV to claim the department store’s value is really $72/share.

What the private equity guys want is to sell Kohl’s real estate, then lease it back for quick cash. They also want it to spin-off its e-commerce operations.

They don’t care for CEO Michelle Gass. I boosted her for using the stores’ extra space for Amazon.Com (NASDAQ:AMZN) pick-ups, Planet Fitness (NASDAQ:PLNT) studios and specialty displays for Under Armour (NYSE:UAA), LVMH Moet Hennessey’s (OTCMKTS:LVMUY) Sephora, and other big brands.

If you want to invest in a department store, look elsewhere.

Dillard’s a Star

The quiet star of the retail pack has been Dillard’s (NYSE:DDS), up 159% over the last year with none of the drama of its rivals.

Dillard’s hasn’t left its mall anchor positions. Yet its business is back to pre-pandemic levels. The key is location. Most stores are in suburban or exurban malls far from major cities. There are three stores in California but 14 in Louisiana. The chain is huge in “flyover country,” avoiding the coasts in favor of places like Pecanland in Monroe, Louisiana, where it can stand out.

For the first three quarters of its 2022 fiscal year, which ends this month, Dillard’s has been killing it. It had generated $25.87/share in net income before the Christmas quarter started. Another $8.75/share is expected for the current quarter, with total sales of $6.54 billion, $200 million ahead of pre-pandemic 2020.

Dillard’s is based in Little Rock, Arkansas, two miles from the Clinton Library. It’s still family-run, with the Dillards serving as chairman, president, and a senior vice president still in his early 50s. Even with the stock’s spectacular rise the trailing price to earnings ratio is still just 9.04.

Department Stores Great?

Dillard’s seems to have convinced Wall Street that department stores can be great again. In recent days Nordstrom (NYSE:JWN) and Macy’s (NYSE:M) have also drawn interest, speculators looking for a bid.

Their performance has been nothing like Dillard’s. Both are expected to fall short of pre-pandemic sales rates this year. But they are getting closer, and both should be profitable for the full year.

If the department stores represent a return to normalcy, so do the rise in the stocks. Private equity buyouts, run out of Wall Street, have been a way to take out undervalued companies for decades. Instead of having a bunch of Reddit wannabes flashing buy signals at each other, Wall Street lurks in the shadows, then pounces, leading to a frenzy by the small fry.

The Bottom Line

Dillard’s seems to have proven to Wall Street what department stores can be worth, without the kind of chopping-and-changing Gass has done at Kohl’s. 

Gass became CEO in May of 2018, and has had almost four years to move the needle. She hasn’t. Even if Christmas brings in the expected $6.6 billion in revenue, it will still likely fall below fiscal 2018, before she got there.

Finding value is what private equity does. They find what works, they take that out, they book the profit and move on. They’re not very good at operations. If you’re buying KSS stock today, it’s in anticipation of collecting that small margin between today’s price and what the smart guys finally pay before a break-up.

Smart investors might want to buy Dillard’s instead of KSS stock.

On the date of publication, Dana Blankenhorn held a long position in AMZN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Dana Blankenhorn has been a financial and technology journalist since 1978. He is the author of Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com, tweet him at @danablankenhorn, or subscribe to his Substack https://danafblankenhorn.substack.com/.