Kohl’s Corporation (NYSE: KSS) stock price has been wallowing near long-term lows despite signs of turnaround and an improving outlook for cash flow. This market needs a catalyst to get it moving, and there is one at hand. Results from TJX Companies (NYSE: TJX) suggest strength across the off-price universe, and analysts have set the bar low for Kohl’s, which reports in mid-month. 

Analysts Underestimate Kohl’s Strengths and Value

Analysts expect Kohl’s Q4 revenue to fall slightly compared to last year, setting it up for a significant outperformance. Competitor TJX Companies grew by 13% in Q4 to lead the retail sector. That compares to only 3.8% for the retail industry and 5% for leading player Walmart (NYSE: WMT). Target (NYSE: TGT), which has been losing share to Walmart and the off-price retailers, contracted by 5%. The TJX Companies also significantly widened its margin and provided solid guidance. 

Kohl’s is expected to improve margin significantly but may still outpace forecast due to the expected revenue strength. Regardless, the analysts’ consensus is sufficient to sustain the high-yielding dividend, and earnings growth is expected in the 2024 calendar year. Kohl’s dividend is substantial, yielding more than 7% for only 11X earnings, which is a deep value for the sector. Off-price leader TJX Companies trades at a much higher 25X earnings. 

The dividend payout is high at 80% of earnings, playing into the valuation discrepancy, but the cash flow outlook, balance sheet, and spending discipline offset the risk. Spending discipline, including a 13% reduction in Q3 inventory, is helping to improve cash flow and the balance sheet. Balance sheet highlights from Q3 include a flat cash position and a reduction in long-term debt that should be compounded in Q4. Because Q4 margin and profitability are expected to improve again in Q4, investors should expect additional balance sheet improvement for improvements to continue in 2024. 

The Sell-Side Put a Floor In Kohl’s Price

The institutional activity is telling and may foreshadow a strong report. Institutions have bought this stock on balance for most quarters of the last three years, and activity spiked in Q1. The to-date activity is a three-quarter high and the 2nd highest in the last three years, bringing total ownership to 98%. The largest institutional holders are BlackRock and Vanguard, with about 25% of the stock, but ownership is broad and includes public retirement funds and private capital. 

Analysts' sentiment will be a catalyst for the market following the release. The analysts lowered their ratings and price targets in 2022 and early 2023, putting intense pressure on the stock’s price, but relented later in the year. The 2nd half of 2023 analysts' activity is mixed but includes an upgrade to Positive from Mixed, a reiterated Moderate Buy, and an initiated equal-weight equivalent with a firmed price target. If Q4 is strong and guidance solid, the analysts' shift could gain traction and lift the price action. Until then, the consensus reported by MarketBeat aligns with the 150-day moving average, which is about 13% below recent action. 

The Technical Outlook: Kohl’s Is On the Brink of a Reversal

Kohl’s stock bottomed over the last twelve months and is trading near the top of the range. The pattern suggests bottoming and potential for reversal that will be confirmed or refuted soon. The critical level is $29, a trigger for bullish trades if crossed. A move above that level may find resistance near $34.50, so upward movement may be capped near term. If the news cannot catalyze a rally, a move back to the bottom of the range is expected but would present a deeper value higher yield opportunity provided no bad news is delivered.