THE MILLEGAN MEMO: POST-AUGUST 2025
Brought to you by The Woodworth Contrarian Fund
Kohl’s keeps cashing checks while analysts call it a meme, Nvidia finds out it’s not the only chip in town, and the jobs market cools just enough to make everyone equally nervous. This issue sees earnings beats, $10B mystery orders, and tariffs that hit everyone—unless you’re big enough to dodge them.
- Managing Partners Drew Millegan & Quinn Millegan
“Luck is what happens when preparation meets opportunity.”
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KOHL’S: FROM MEME STOCK TO MONEY MACHINE (KSS)
Kohls + Sephora | Kohl’s Corporate
Kohl’s Q2 earnings continue to beat the street’s expectations. Adjusted net income reached $64 million, or $0.56/shr non-GAAP. GAAP income was $1.35/shr, largely due to a large legal settlement gain from a credit card interchange fee lawsuit. This compares to $0.59/shr earnings non-GAAP from the same quarter of the prior year. Same-store comparable sales were down 4.2%, however gross margins expanded to 39.9%, up from 39.6% prior year. The company’s quarterly operating cashflow expanded as well, reaching $598 million compared to $254 million in the same quarter prior year, enabling a significant $335 million reduction in borrowings under their revolving credit facility to just $75 million at the end of the quarter.
Analysts wrote Kohl’s off as a meme stock, but digging beyond the headlines reveals a difficult to dismiss underlying value. Jitters about underlying macro consumer sentiment in the retail space are understandable, especially in the face of rising import costs and constant pressures to update supply chains to remain competitive and optimized. However, the market’s report of Kohl’s death as a company appears to have been particularly exaggerated. Yes, Kohl’s is up more than double from the doldrums of April, catching many analysts’ attention as a quote “meme stock” which appeared to be rising dramatically in part due to social media chatter. However, a longer view reveals there is a reason for the so-called “hype” - the name is still down from its 2024 range of between $18-$30 per share, which itself is a much lower valuation than Kohl’s has commanded in the recent past. Kohl’s underlying financial position, in the meantime, has continued to improve as they have undergone transitions in many of the key market segments that originally pushed the stock out-of-favor. The company’s underlying balance sheet of real estate assets and moderate borrowings also favor a recovery, granting management tremendous flexibility to follow-through on their transition plans. The company has real estate assets nearing $8bn and a book value of nearly $34/share only to be currently trading around $17-18 with a market cap below $2bn - part of our own cost basis of KSS was purchased around $9 when the market cap of the company dipped into the hundreds of millions. Even at current levels we believe KSS is dramatically undervalued. From our analysis the name has also broken out of a technical level in recent days and volume may even suggest some big names are accumulating the stock. Based on our original fundamental & technical research, we could easily see $20-30 out of KSS. In short, Kohl’s has a very low bar to continue to meet and outperform market expectations.
Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently holds a position of KSS as of the publication date of this article. They may or may not choose to decrease or increase their exposure to this name for any reason at any time. This is not a recommendation to buy or sell KSS or any other name - investments incur significant risk, our risk tolerance may be significantly higher than the average investor, and any discussion in this article does not take into consideration your individual circumstances.
ECONOMIC REASINGS: NOT HOT, NOT COLD, JUST UNCOMFORTABLE
The BLS posted initial jobs numbers for August, showing negative job growth for the second time this year since June, with unemployment rising to 4.3%. This unemployment reading is still very low in a historical context (full employment is generally considered by economists to be around 4%), but the rise is nonetheless notable considering national unemployment has been consistently creeping higher from the record low mid 3% range it sat at for several years post-covid. Inflation remained elevated for August as well, with consumer prices up 2.9% year over year and increasing 0.4% month-over-month for a simple annualized pace of 4.8%, though still below the higher inflation rates experienced at the peak of covid-era stimulus-induced inflation. Heavy import taxes are beginning to be felt in domestic consumer prices, though the effects are uneven. Tariff exemptions negotiated by larger US companies, stockpiling ahead of import taxes, and supply chain re-adjustments have all served to dampen and delay the impact of raising trade barriers.
Higher import taxes and trade barriers are bad for the economy, but the impacts of unemployment are unevenly felt compared to inflation. Overall, the economy remains remarkably robust despite continued alarms being raised by prominent economists across the spectrum. It remains to be seen whether inflation will rise anywhere near the 8% plus heights of covid-era stimulus, and many economists are dubious about whether inflation will be persistent (assuming tariffs paid by US consumers aren’t hiked further). Larger firms should find it easier to cope with tariff-induced supply chain disruptions, meaning public companies (such as Kohl’s) will find it easier to adjust without raising prices as high as quickly - the question is what costs will continue to rise and by how much. Unemployment will also be unevenly felt. While unemployment is bad for those who lose their jobs and causes declines in overall consumer spending, there will be winners as well as losers from a weak labor market, particularly for countercyclical companies that would benefit from lower labor costs and less upward pressure on wages.
BROADCOM’S $10B MYSTERY PUNCH: NVIDIA CAN’T CARRY THE MARKET ALONE
Nvidia, semiconductor manufacturer and market darling, reported quarterly earnings about in-line with market expectations. NVDA’s competitor Broadcom also reported a similarly market-meeting quarter of earnings, with one important distinction. Broadcom landed a mysterious $10 Billion order from an undisclosed customer for AI-related products, fueling speculation that the market is beginning to see intensifying competition to provide processing power for the AI arms race. Still, net income from NVDA continues to march upwards, up 59% compared to the same period last year driven by continued growth in both GPUs and data centers.
Competition means Nvidia can’t rest on its laurels. As with any market, a first-mover advantage only lasts as long as it takes the second- and third-movers to catch up to you, who in turn benefit from the first-mover’s tailwinds. Market watchers have good reason to pay close attention to the fortunes of chipmakers even if they have no exposure to the space. NVDA alone now represents over 7.2% of the S&P 500 index, and a gargantuan over 13.5% of the Nasdaq 100, meaning that the movements in this singular stock are critically important for overall market performance. So goes Nvidia, so goes the rest of the market averages, and with it billions upon billions of dollars in fund flows. From our analysis, NVDA has to meet a very high bar in order to see any appreciation. That being said - it is one of the very few examples of companies that have grown into sky high estimates, so there is always potential that it continues to do so; however, as contrarian, value investors we see so many opportunities with significantly lower risk than betting that NVDA continues to grow into insane multiples, especially in this current environment for chipmakers (ie. KSS - which has a very low bar for investors to see significant appreciation).
Please note that the Woodworth Contrarian Stock & Bond Fund, LP, of which the Millegan Brothers manage and are invested in, currently does not hold a position of NVDA as of the publication date of this article. They may or may not choose to decrease or increase their exposure to this name for any reason at any time. This is not a recommendation to buy or sell NVDA or any other name - investments incur significant risk, our risk tolerance may be significantly higher than the average investor, and any discussion in this article does not take into consideration your individual circumstances.
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Drew Millegan (left) & Quinn Millegan (right) in front of the Charging Bull in New York City.
About the Managers: Brothers Drew Millegan and Quinn Millegan manage the Woodworth Contrarian Stock & Bond Fund, a hedge fund based in McMinnville, Oregon. They grew up in the finance world, and specialize in contrarian investment strategies in the US Public and Private markets.
Something missing from your portfolio may be a diversification into the Woodworth Contrarian Fund for accredited investors. Now is a great time to diversify your portfolio with an investment into a multi-award-winning fund. An exposure to a value-based contrarian strategy is a unique opportunity for your long term capital that you’re seeking aggressive returns for. With nine years of the Woodworth Fund under management, the Millegan Brothers are trained stock-pickers and experienced venture capital investors with a proven track record. Give us a call today to discuss a liquid investment with independent administration and independently audited monthly statements and a personal relationship.
