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Turnaround Letter
Out-of-Favor Stocks with Real Value

August 25, 2023

We include our comments on earnings from Macy’s (M) and Kohl’s (KSS). Duluth Holdings (DLTH) will report on August 31.

Earlier this week, due to circumstances beyond our control, we suspended our rating on shares of Kopin Corporation (KOPN). This means that the shares have no rating: They are not a Buy, Sell, Hold or any other rating, but are in essence unrated. We apologize for this unusual situation.

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We include our comments on earnings from Macy’s (M) and Kohl’s (KSS). Duluth Holdings (DLTH) will report on August 31.

Earlier this week, due to circumstances beyond our control, we suspended our rating on shares of Kopin Corporation (KOPN). This means that the shares have no rating: They are not a Buy, Sell, Hold or any other rating, but are in essence unrated. We apologize for this unusual situation.

Earnings Updates

Kohl’s Corporation (KSS) – Investors see Kohl’s as a broken company left behind by time, trends and technology, with unsettled leadership, further pressured by bloated inventory, a possible recession, and rising labor and goods costs. Major changes, however, are underway, led by a refreshed board and new CEO (Tom Kingsbury). Kingsbury is a proven operator whose mandate and expertise is to restore and upgrade rigor and discipline in the company’s operational performance. The company’s profits and free cash flow, while weakened, are resilient. The debt burden is reasonable but being trimmed further. While the turnaround carries risks, the deeply undervalued shares provide a margin for safety.

Kohl’s reported a weak quarter yet revenues were in-line with estimates and earnings were significantly above estimates. The company is maintaining its full-year revenue, margin and earnings guidance, the debt picture is reasonable and improving, and inventories are in good shape (down 14% from a year ago). While the macro outlook is murky, the Kohl’s turnaround appears to be in capable hands.

Revenues fell 5% but were in-line with estimates. Adjusted earnings of $0.52/share fell 53% but were more than double the $0.23 estimate. Adjusted EBITDA of $349 million fell 26% but was 14% above estimates.

Revenues were weak as customers felt economic pressures although Sephora sales continue to show impressive gains. The gross margin fell due to product cost inflation and shrink (mostly theft) but were helped by lower shipping costs. Overhead costs rose about 2% due to more Sephora openings, wage inflation and higher in-store spending to improve the customer experience, but the company seems to be spending its money in a much more disciplined manner than before. The EBITDA margin of 9.0% fell about 2.6 percentage points. Free cash flow was a positive $176 million – a highly encouraging indicator for a seasonally weak quarter. Debt is seasonally elevated with management saying that the $560 million seasonal borrowing will be fully repaid by the end of the year.

Kohl’s reiterated its commitment to the $0.50/share quarterly dividend, backed by the company’s positive and improving free cash flow and profit picture.

The shares trade at 3.0x EV/EBITDA based on our year-end projected balance sheet.

Macy’s (M) – Macy’s is aggressively overhauling its store base, cost structure and e-commerce strategy to adapt to the secular shift away from mall-based stores.

The company reported a weak quarter that nevertheless was better than analysts’ estimates. Macy’s maintained its full-year revenue and earnings guidance although it provided little else to boost investor confidence in the near-term outlook. The company continues to chip away at its debt, remains well managed and its shares are undervalued, but it might take until the next economic upcycle to see the shares make major upward progress.

Revenues and same-store sales fell 8% and were fractionally above estimates. Adjusted earnings of $0.26/share fell 74% but were nearly double the $0.14 estimate. Adjusted EBITDA of $347 million fell 44% but was 13% above estimates.

Sales in the Macy’s chain fell 9%, Bloomingdale’s sales fell only 3% and Blue Mercury sales rose 6%. The company saw weaker demand, motivating it to cut prices to clear out excess inventory – lower volumes and lower prices weighed on revenues and gross margins (which slipped to 38.1% from 38.9% a year ago). While gross profits suffered, the tactic was successful in that inventories remain in good shape. Overhead costs fell modestly.

Credit card revenues fell 41%, or $84 million. While Macy’s doesn’t take direct credit risk, it participates in the card’s profits, which can vary based on usage and credit losses. The decline in revenues reflected both higher actual delinquencies and higher adjustments for potential future losses. Card revenues are essentially pure profit, so the $84 million decline accounted for nearly a third of the total $269 million decline in overall Macy’s EBITDA.

While full-year revenue and profit guidance were unchanged, investors are assuming that actual full-year results will not meet this guidance. The shares fell on the news and now trade at pandemic period prices. On consensus 2023 estimates, which are also the same as estimated 2024 and 2025 results, the shares trade at 3.1x EV/EBITDA and 4.3x per share earnings. Macy’s is highly likely to generate positive full-year free cash flow in each of the next few years, even after its temporarily elevated capital spending program. The company is well managed and the leadership is wide awake in running the business (a recent and favorable example is the negotiated return of Nike and Under Armour gear to the stores).

No change to our Macy’s rating.

Friday, August 25, 2023 Subscribers-Only Podcast:

Covering recent news and analysis for our portfolio companies and other topics relevant to value/contrarian investors.

Today’s podcast is about 6½ minutes and covers:

Earnings Reports

  • Kohl’s (KSS)
  • Macy’s (M)

Ratings Changes

  • Kopin Corp (KOPN) – Suspending our rating on these shares.

Comments on Recommended Companies

  • Capital One Financial (COF) – Sold a $900 million office real estate loan portfolio.
  • Kaman Corp (KAMN) – CFO departs.

Market CapRecommendationSymbolRec.
Price at
Rating and Price Target
Small capGannett CompanyGCIAug 20179.22 2.77 - Buy (9)
Small capDuluth HoldingsDLTHFeb 20208.68 7.46 - Buy (20)
Small capDril-QuipDRQMay 202128.28 27.63 - Buy (44)
Small capL.B. FosterFSTRJul 202313.60 18.25 - Buy (44)
Small capKopin CorpKOPNAug 20232.03 1.33 - Suspended
Mid capMattelMATMay 201528.43 21.27 - Buy (38)
Mid capAdient plcADNTOct 201839.77 37.99 - Buy (55)
Mid capXerox HoldingsXRXDec 202021.91 15.486.5%Buy (33)
Mid capViatrisVTRSFeb 202117.43 10.954.4%Buy (26)
Mid capTreeHouse FoodsTHSOct 202139.43 44.53 - Buy (60)
Mid capKaman CorporationKAMNNov 202137.41 21.653.7%Buy (57)
Mid capThe Western Union Co.WUDec 202116.40 11.927.9%Buy (25)
Mid capBrookfield ReBNREJan 202261.32 32.991.7%Buy (93)
Mid capPolarisPIIFeb 2022105.78 111.00 - Buy (160)
Mid capGoodyear Tire & RubberGTMar 202216.01 12.82 - Buy (24.50)
Mid capJanus Henderson GroupJHGJun 202227.17 26.645.9%Buy (67)
Mid capESAB CorpESABJul 202245.64 68.341.4%SELL
Mid capSix Flags EntertainmentSIXDec 202222.60 21.47 - Buy (35)
Mid capKohl’s CorporationKSSMar 202332.43 25.667.8%Buy (50)
Mid capFirst Horizon CorpFHNApr 202316.76 12.384.8%SELL
Mid capFrontier Group HoldingsULCCApr 20239.49 6.65 - Buy (15)
Large capGeneral ElectricGEJul 2007304.96 111.040.3%Buy (160)
Large capNokia CorporationNOKMar 20158.02 3.772.4%Buy (12)
Large capMacy’sMJul 201633.61 12.335.4%Buy (25)
Large capToshiba CorporationTOSYYNov 201714.49 15.836.6%SELL
Large capHolcim Ltd.HCMLYApr 201810.92 12.953.4%SELL
Large capNewell BrandsNWLJun 201824.78 10.202.7%Buy (39)
Large capVodafone Group plcVODDec 201821.24 9.1011.2%Buy (32)
Large capBerkshire HathawayBRK.BApr 2020183.18 354.30 - HOLD
Large capWells Fargo & CompanyWFCJun 202027.22 41.433.4%Buy (64)
Large capWestern Digital CorporationWDCOct 202038.47 39.87 - Buy (78)
Large capElanco Animal HealthELANApr 202127.85 11.67 - Buy (44)
Large capWalgreens Boots AllianceWBAAug 202146.53 25.327.5%Buy (70)
Large capVolkswagen AGVWAGYAug 202219.76 14.406.4%Buy (70)
Large capWarner Bros DiscoveryWBDSep 202213.13 12.70 - Buy (20)
Large capCapital One FinancialCOFNov 202296.25 101.482.4%Buy (150)
Large capBayer AGBAYRYFeb 202315.41 13.464.0%Buy (24)
Large capTyson FoodsTSNJun 202352.01 54.183.5%Buy (78)

Disclosure: The chief analyst of the Cabot Turnaround Letter personally holds shares of every Rated recommendation. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time. Please feel free to share your ideas and suggestions for the podcast and the letter with an email to either me at or to our friendly customer support team at Due to the time and space limits we may not be able to cover every topic, but we will work to cover as much as possible or respond by email.

Bruce Kaser has more than 25 years of value investing experience in managing institutional portfolios, mutual funds and private client accounts. He has led two successful investment platform turnarounds, co-founded an investment management firm, and was principal of a $3 billion (AUM) employee-owned investment management company.