Kohl’s Has Bigger Problems Than the Meme-Stock Trade

Kohl’s same-store sales have declined for 13 consecutive quarters. Above, a store in Lincolnwood, Ill. (Scott Olson/Getty Images)

Retail traders briefly pumped up the retailer’s heavily shorted shares. A sustained rally will depend on fixing its flagging business.

Kohl’s heavily shorted shares caught the attention of meme-stock traders in mid-July, who briefly piled in and sent the stock up nearly 50%. But the newfound attention won’t solve Kohl’s longstanding problems, and investors shouldn’t mistake the rally for renewed optimism about the department-store company’s business.

Nearly 40% of Kohls’ 112 million shares were sold short as of July 29, making the retailer the most heavily shorted stock in the U.S., according to S&P Global Market Intelligence. The short interest is largely a reflection of investors’ concerns about the business, which has seen several years of declining sales, shrinking profitability, and management turmoil.

Short sellers sell borrowed shares in the expectation of buying them back later at a lower price. Kohl’s stock has fallen about 70% since 2021, and recently traded for $10.70, but the bears are betting it will fall even further. Meme-stock traders often target heavily shorted stocks and try to “squeeze” short sellers by bidding up the price, which spurs the shorts to buy back shares to limit losses.

Kohl’s, based in Menomonee Falls, Wisc., operates more than 1,100 midprice stores in 49 states, and the Kohls.com e-commerce business. Like most midtier merchants, and especially department stores, the company has struggled since the Covid-19 pandemic. The growing popularity of online shopping has shifted dollars away from the stores, straining the business model.

Kohl’s earnings fell 48% in the fiscal year ended Feb. 1, to $1.50 a share, on a 7% decline in revenue, to $15.4 billion. Analysts expect the company to earn 43 cents a share this year, on revenue of $14.6 billion, according to FactSet. Same-store sales have fallen for 13 consecutive quarters, while operating margins and free cash flow have also been declining.

Free cash flow fell to $104 million in fiscal 2024 from $591 million the prior year. Adjusted operating margins were 3.1% that fiscal year, down from 7.7% in 2015.

Kohl’s cut its quarterly dividend in March to $0.125 a share from a previous 50 cents to focus on conserving cash and paying down debt. Shares currently yield about 4.2%.

Kohl’s operating challenges have been compounded by frequent management turnover. The company has had five chief executives in the past 10 years, each with a vision and turnaround plan that in many cases reversed changes made by the prior leadership team.

Under former CEO Tom Kingsbury, who joined Kohl’s board in 2021 and held the top job from December 2022 until January 2025, Kohl’s shifted to more of an off-price model, which included cutting back on private-label brands and Kohl’s Cash coupons, and eliminating popular merchandise categories such as jewelry. These actions essentially “fired” the brand’s core customer, says Chuck Grom, an analyst at Gordon Haskett, who rates the stock Underweight.

Kingsbury couldn’t be reached for comment. A Kohl’s spokeswoman declined to make a company executive available for this article, citing the company’s quiet period ahead of its next earnings report.

The next CEO, Ashley Buchanan, started to walk back these measures, but was fired in May after an investigation found he had violated Kohl’s conflict-of-interest policies by pushing the company to strike a deal with a vendor with whom he had a personal relationship. Interim CEO Michael Bender, a former Walmart executive who joined Kohl’s board in 2019, is following Buchanan’s business strategy so far, but analysts say the latest efforts**,** which hinge on the return of private-label merchandise and former product lines, may not be enough to get more people into the stores and allow Kohl’s to reclaim lost market share.

“The market, based on the short interest, is saying it doesn’t believe that can happen,” said Grom. “And I don’t think it can happen, either. It’s really hard.”

History suggests that when retailers lose loyal customers, they rarely get them back, Grom said. Kohl’s, like other department stores, is also struggling to connect with younger shoppers who prefer to shop at specialty stores or online, he added.

For all the skepticism, Kohl’s also has fans who think the company is undervalued. Some bullish investors are betting on an improvement in operations, while others say the value of Kohl’s real estate isn’t reflected in its $1.3 billion market cap.

David Swartz, an analyst at Morningstar, acknowledges Kohl’s business challenges and management turnover, but puts the company’s fair value at $40 a share, implying upside of about 260% from recent levels. The shares are “incredibly undervalued,” he says, adding that Kohl’s margins are so low that they allow for easy improvement, which could provide a boost to cash flow.

Kohl’s commanded far more than that just a few years ago, when it attracted a flurry of buyout offers. Franchise Group, then-owner of The Vitamin Shoppe, offered as much as $60 a share for the company in 2022, but later lowered its bid to $53, citing macroeconomic concerns. Kohl’s board of directors rejected the offer, and the stock subsequently slid.

Department stores such as Kohl’s and Macy’s have become attractive takeover targets due to their low valuations and sizable real estate portfolios. As of Feb. 1, Kohl’s owned 405 of its stores, and most of its distribution centers. Swartz says the real estate could potentially be worth more than his calculation of the company’s enterprise value, which he puts at $3.1 billion.

Kohl’s real estate is what sparked Caleb Harbert’s initial interest in the company. Harbert, a small-business owner and investor who posts his thoughts about Kohl’s on the social-media site Reddit, believes the property assets alone warrant a valuation of at least $35 a share. He bought shares in April, hoping a buyout offer or the involvement of an activist investor would boost their value. Although a meme-stock run-up and short squeeze wasn’t part of his original thesis, its emergence is a welcome development, he said.

“I look at the short squeeze as a really cool financial catalyst, but honestly, I just see [the stock] getting up to my price target a lot faster than if we’d just kept doing what we’d been doing,” he said, meaning posting positively about the stock in the expectation it would gradually rise.

Harbert recognizes that the meme-stock-related gains could be short-lived. Indeed, Kohl’s has already fallen more than 20% from its mid-July meme-stock peak. Stocks buoyed by retail traders and social-media chatter are usually volatile, and the euphoria that comes from chasing a rally also carries risk.

Kohl’s may have fewer risks than the stock’s substantial short interest suggests. While the company has $7.2 billion of net debt, including leases, according to FactSet, it recently refinanced its debt to pay off current maturities, and the next payment isn’t due until 2029, giving management financial flexibility and time to improve the business.

As for the stock, meme traders might circle back to Kohl’s and try to squeeze the short sellers further. But a sustained recovery will depend on management’s ability to unlock value, whether through asset sales, other strategic initiatives, or a turnaround in the business. Right now, the outlook is cloudy.

Write to Sabrina Escobar at sabrina.escobar@barrons.com