KOHLS Corp (KSS) stock intrinsic value fair value estimate & owner earnings analysis

Kohl's runs about 1,150 moderately priced department stores across the United States, roughly 400 of them on owned property, together with Kohls.com, a large private-label assortment, a store-brand credit card program and Sephora shop-in-shops in nearly every store. Sales have fallen from $19.4 billion in fiscal 2021 to $15.5 billion in fiscal 2025 (the year ended January 2026), about 5% a year, with comparable sales down 3.1% last year. The decline slowed in the first half of fiscal 2026 (sales down 1.4%, net income flat at $137 million), and management expects sales between flat and down 2% this year. How we measure earnings. We take operating cash flow, strip out swings in inventory, payables and other working capital, subtract stock compensation and capital spending, and treat lease payments as rent. Because sales have been falling, we treat all capital spending as the cost of maintaining the business. On that basis owner earnings over the last ten years ranged from $1.31 billion (fiscal 2018) down to a $93 million loss (fiscal 2022, a year of heavy Sephora build-out spending and weak margins), and were $486 million, $334 million and $653 million in the last three years. Fiscal 2025 included a one-time $129 million cash gain from a credit card interchange-fee lawsuit settlement, which we do not treat as recurring. Last year's cash flow also looked much stronger than profit because inventory was cut by $203 million. That is a one-time release, and our measure removes it. Capital spending ($372 million last year, $350 to $400 million guided) is now well below depreciation of about $700 million. Some of that gap reflects past Sephora build-outs running off, but an aging store base may eventually need more spending than we assume. Before its lenders, the business produced about $820 million in cash in fiscal 2023 and fiscal 2025 (excluding the settlement), $650 million in fiscal 2024 and under $200 million in fiscal 2022. We anchor on about $730 million a year, the median of fiscal 2022 to 2025. We use that window because it describes today's smaller, post-pandemic business with Sephora in place. Earlier years came from a $19 to $20 billion sales base that no longer exists. Last year this pre-interest cash flow grew about 27% excluding the settlement, but that came from cost cuts and lower capital spending on falling sales. We assume no growth in year one and credit no growth anywhere. No store openings, market share gains or margin expansion are in the cases, because the company has none it can point to. What it owes. Senior notes total about $1.34 billion after recent open-market repurchases. They include $360 million of 10% secured notes due 2030, issued in 2025 after the credit rating fell to B3/BB-, plus $425 million of 2031 notes whose coupon has risen 175 basis points through rating-triggered step-ups, and smaller issues due 2029, 2033, 2037 and 2045. Finance leases and financing obligations add about $2.4 billion. We credit about $450 million of the $821 million cash balance at August 2026 as surplus, since cash builds seasonally before the holidays. We add about $100 million for refinancing costs, because the bonds trade below face value and recent debt was raised at 10%. That puts net debt at about $3.4 billion, or roughly $29 a share. There is no going-concern warning, and the revolving credit line had nothing drawn at year end. Base case: sales keep eroding at roughly the slowed pace of the last year, and pre-interest cash flow falls 3% a year from $730 million with no end point assumed. The business is worth about $7.9 billion. After $3.4 billion of debt that leaves about $4.5 billion, or roughly $38 a share. Bear case: the 2022 to 2025 decline of about 5% a year continues, and lower sales spread fixed store costs thinner, so cash flow shrinks about 8% a year. On top of that comes one recession like 2008 to 2009 or fiscal 2022, which removes about 40% of cash flow for two years. Fiscal 2022 shows this business can swing to negative owner earnings. The 2030 and 2031 maturities are refinanced at roughly 10%. The business is then worth about $4.4 billion against $3.55 billion of debt, leaving about $7 a share. By the tenth year cash flow would barely cover interest and lease costs, so in this case the owned real estate and store closures, not operations, are what protect shareholders. Bull case: the first-half 2026 stabilisation holds, and pre-interest cash flow stays near the $820 million already earned in fiscal 2023 and fiscal 2025, fading only 1% a year. The business is worth about $11.6 billion against $3.35 billion of debt, about $70 a share. Margin of safety price. We are not sure of the earnings level. Owner earnings ranged from a loss to $653 million over four years, and the only reliable trend is lower sales. The worst plausible outcome is a recession arriving while sales are still shrinking, with $2.4 billion of lease-type obligations that cannot be cut quickly and bonds rated deep junk. What makes that survivable is the hard assets: roughly 400 owned stores and $6.7 billion of net property, part of which already secures the 2030 notes and is therefore not available to common shareholders first. The things we are most likely to be wrong about are the pace of sales decline and whether capital spending can stay this far below depreciation. If both go against us, the shares are worth single digits. At $11 a share, owner earnings after interest of about $3.70 a share would be a cash return of roughly a third of the price, and the 50-cent dividend is about 4.5% of that price over the holding period. Even with earnings halved in a downturn, the cash yield would stay in the high teens, and only a modest re-rating within three to four years would be needed for the cases to imply 20% a year. Below $11 the bear case is the main risk and the base case implies several times the price. Much above it, the gap between a business that stabilises and one that keeps shrinking 5% a year is too wide to be confident of 20% a year.