Thread by @goodalexander

Put 3% in Kohl's $KSS @ $45.1. Shorted 3% Consumer Staples $XLP @ 69.99. Overwrote $KSS Jan 21'22 50 Call for $2.48 (5%). Market is over-discounting Kohl's long term story & huge buyback with a short term supply chain narrative.

1/ Debt holders are unconcerned

2/ A double downgrade out of BoFa on supply chain concerns 'derailing' turnaround plan has caused Kohl's equity to implode versus other retail comps and elevated near term equity volatility. Per the charts above, however, this has not flowed into the company's LT financing costs

3/ Carry. The yield of this trade is extreme. Kohl's has likely 300m of buyback auth into end of the year - an 18% annualized yield on top of the overwriting yield of 22%. When you net out consumer staples capital return of 5-7% annualized leaves you 33% of annual low beta yield

4/ Let's quickly cover the company's financials. The company overcame threats from ecommerce to generate record free cash flow of 2.4b$ in the last year (only $6.7b market cap). It's partnered with Amazon as a deliver hub and is becoming a Sephora destination nationwide

4/ There are 3 reasons why recent underperf is likely too extreme. 1] Back to school is easy covid comp. 2] Sephora transition is a 2022-2023 event. 3] Supply chain isn't a surprise. This was all covered in Sept 9 call from Goldman's retailing conference. investors.kohls.com/events-and-pre…

5/ This isn't controversial. Despite large underperformance vs peers on supply chain issues 2022 EPS expectations are largely unchanged near $6 Thus the stock trades at only 7.5x fwd earnings. Consumer Staples, also supply chain effected, $XLP at near 22x forward earnings

6/ Sephora should accelerate Kohl's traffic. 100 initial Sephora stores are performing above expectations per Sep investor day. LVMH gave an Oct 13 update implying the Kohl's rollout took Sephora back to pre-covid levels. There will be 200 Sephora Kohls in 2022, and 800 in 2023.

14/ In September, The CFO also outlined that Kohl's partnership with Amazon -- as a place to pick up packages - drove an additional 2 million customers to the store over the past 2 years, and sounded excited about this continuing to roll out. This mitigates disruption concerns

15/ Long term expectations are very low. 2023 revenue growth is expected to only be 2.5% and EPS is actually expected to decline versus 2022 to 5.91. This doesn't line up with a mix shift of higher end e-commerce and make up customers increasing by a factor of 4 into 2023

16/ Mgmt stated their inventory problems are known but viewed their stock as grossly undervalued vs this long term vision at $60 a share (now down 25% from there). Already have $400m buyback auth into year end. Given debt markets it'd be surprising if they don't increase buyback

17/ As a final point -- per Google Trends, searches for Christmas shopping and early Christmas shopping in the US started a-seasonally surging in August and shoppers are being warned by the media to get going now. This should be able to give companies more time to sort issues.

18/ I believe Consumer Staples is the right hedge here because A] They are heavily affected by supply chain issues as well per almost every recent investor day (including $PG). B] They are affected by food inflation on top of this. So if the supply chains spiral, $XLP will drop.

19/ In summary - low inventory caps Kohl's $KSS Xmas upside but long term transition to an Amazon pickup center and Sephora makeup destination look to be on track, which given uninterrupted debt financing should embolden mgmt to ramp buyback into Nov 19 EPS providing huge yields