has won over the wallets of shoppers with its discount prices, quality assortment of goods and its easy-to-shop store formats.
The stock also has been an investor favorite for its rapid expansion and stellar growth in same-store sales, a key metric for judging the health of a retailer. Yet this year, the stock is down about 10%, and is off nearly 24% from its 52-week high. But the long-term fundamental outlook remains strong -- the company boasts an estimated 24% annual five-year earnings growth rate, according to Thomson Financial/First Call.
Time to buy, right? Wrong.
While only a fool would argue that Kohl's time in the sun is over, now is not the time to load up on the stock. The reasons are twofold: Number one, the company, which has experienced some surprising weakness in its same-store sales this year, is entering a holiday season facing some of the toughest sales comparisons -- which often drive retail stocks in the short term -- of any retailer.
The company has faced slowing growth in comparable-store sales this year, a trend that is likely to continue for the remainder of the year. In the first half, same-store sales rose 5.6%, compared with 7% for the year-ago period. In the fourth quarter, the company faces its toughest test yet. Last year, same-store sales in the quarter rose an impressive 12.5%, a figure that is unlikely to be matched this year. Which brings us to the second reason for holding off on Kohl's stock: the shaky economy.
Many economists are predicting the worst holiday season in a decade. For example, Pricewaterhouse Coopers' senior retail economist is predicting only a 2.5% gain in core retail sales, which excludes autos and gasoline, in the fourth quarter. That would be the slowest growth since 1991, in the middle of a recession.
Kohl's is likely to do better than most, yet probably won't come close to its 12.5% growth in same-store sales last year. This, accompanied by a lofty valuation -- shares currently trade near 40 times this year's estimated earnings -- is not a recipe for heady gains in the short term.
In keeping with TSC's editorial policy, Tim Arango doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Arango welcomes your feedback and invites you to send it to