The past six months have been a windfall for Kohl’s shareholders. The company’s stock price has jumped 59.4%, hitting $18.16 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Kohl's, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Do We Think Kohl's Will Underperform?

We’re glad investors have benefited from the price increase, but we're swiping left on Kohl's for now. Here are three reasons there are better opportunities than KSS and a stock we'd rather own.

1. Shrinking Same-Store Sales Indicate Waning Demand

Same-store sales is a key performance indicator used to measure organic growth at brick-and-mortar shops for at least a year.

Kohl’s demand has been shrinking over the last two years as its same-store sales have averaged 4.9% annual declines.

2. EPS Trending Down

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Sadly for Kohl's, its EPS declined by 29.6% annually over the last three years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.

3. High Debt Levels Increase Risk

As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.

Kohl’s $6.80 billion of debt exceeds the $144 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.21 billion over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Kohl's could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Kohl's can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.

Final Judgment

Kohl's doesn’t pass our quality test. After the recent surge, the stock trades at 14.3× forward P/E (or $18.16 per share). This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find more timely opportunities elsewhere. Let us point you toward a fast-growing restaurant franchise with an A+ ranch dressing sauce.

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