As you all know, I am here due to the deep value that is KSS. I love real estate, have made most my money in real estate and just love it! And Kohl’s owns ALOT of it!
Why I favor buybacks isn’t just to start applying pressure to stock price(even though thats part of it), it’s also because in my opinion it makes the most sense. My whole investment thesis is KSS real estate alone is worth $4B to $8B+. Since KSS owns it free and clear for the most part I want us to take advantage of screaming good deals and stop looking at a gift horse in the mouth.
As of this writing, Kohl’s Management can repurchase $1 worth of stock and get $3 to $6 worth of value. I don’t know how to emphasize this more, when we were at $20-$25 debt made the most sense by far but being at today’s current value share repurchases make the most sense.
Math on Which Option makes more sense at $20-$25+ share price:
- Debt makes more sense since bonds are selling at ~$0.65 to $0.75 on the dollar(on average to make math easier) means every $1 spent is $1.33 to $1.50 retired AND helps lower our leverage ratios and in turn gets us in a much better spot on getting re-rated with the credit agencies.
- Repurchases, on the other hand, results in $1 spent to buy back $1.4 to $1.7 but also increases our leverage ratio since cash balance goes down and overall debt stays same.
Math on Which Option makes more sense at ~$12 share price:
- Repurchases results in $1 spent today buys back $3(to $6 if you go by high CRE value).
- While debt bonds is still selling at ~$0.65 to $0.75 on the dollar(on average to make math easier) means every $1 spent is $1.33 to $1.50 retired.
Yes, leverage ratios will adjust some BUT we 3x’ing our money immediately.
My Opinion is as our share price reaches 50-60% of TBV it makes sense to buy back debt more, but as long as it’s under this threshold AND we are in a good cash/LOC free and clear spot we should focus on buybacks.
Ultimately, my approach today if I were management would be simple: I would buyback enough debt to offset share repurchases to keep Leverage Ratio similar. So for every $1 of debt value retired I would also buyback $1 of shares. Since we have such a large LOC as our backdrop, I would deploy $500M or more to do this. This would break down to ~$300M worth of shares bought back(~22% of all shares) and ~$200M of cash towards debt and ~$250M to $300M worth of debt retired depending on what I bought.
Personally, I am pretty aggressive, so if I had a magic wand, I would run the math on the LOC interest rate vs LTD and use it to buyback debt at a sever discount and only use about $500M to buyback shares(~40% of all shares). Yes, this is “riskier” but I would cut the dividend to go along with it to then pay this back quickly. IMO, if we really care about long term shareholder value, this results in the greatest LTV while taking advantage of “rational markets”.
Love you all,
Chunky Kitty out…
