Morningstar | No-Moat Kohl's Expands Amazon Partnership; No Change to FVE
No-moat Kohl’s has announced an expansion of its returns program with wide-moat Amazon. Since 2017, Kohl’s has been testing a program in approximately 100 stores in three markets (Chicago, Milwaukee, and Los Angeles) in which consumers can return unpackaged Amazon-purchased products at Kohl’s stores. On April 23, Kohl’s announced that it will accept Amazon returns at all of its roughly 1,150 stores beginning in July. While Kohl’s did not provide any financial implications of the new program, it indicated that it will update sales and expense guidance when it reports its quarterly sales on May 21. Although Kohl’s has provided no quantitative data on the success of the Amazon trial, we think it must have shown promise for both firms. Kohl’s issued a warrant to Amazon whereby the latter can purchase as many as 1.75 million shares at $69.68 over a five-year vesting period. While this warrant provides Amazon with upside in Kohl’s shares at no risk, it is an immaterial potential investment for both firms.Despite the 12% increase in Kohl’s shares after the announcement, we are not changing our $76 fair value estimate, and we view the shares as fairly valued. We think it is too early to judge the scope of the Amazon returns partnership. Amazon benefits because it does not need physical retail for returns and Kohl’s bears the service costs of Amazon customers. Kohl’s may gain incremental sales if the program attracts Amazon customers who never or rarely visit Kohl’s stores. Kohl’s hopes to entice these people to shop in its stores while making returns. A person returning ill-fitting clothing to Amazon might, for example, find similar items at Kohl’s that fit better. However, we don't think that the Amazon partnership will reverse traffic declines at Kohl’s. We believe Kohl’s will continue to lose customers to e-commerce and discount retail. The Amazon partnership could even hasten customer losses as people realize they can return items to Amazon more easily.
Kohl's operates department stores, a website (www.Kohls.com), FILA outlets, and Off-Aisle clearance centers. The company's Kohl's stores and website sell proprietary and national brand apparel, footwear, accessories, beauty and home products. The company's website includes merchandise that is available in its stores, as well as merchandise that is available only online. The company's portfolio includes private brands such as Apt. 9, Croft & Barrow, Jumping Beans, SO and Sonoma Goods for Life and exclusive brands that are developed and marketed through agreements with brands such as Food Network, LC Lauren Conrad, Elle and Simply Vera Vera Wang.
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