The deal for Kohls Corp. (KSS, Financial) to accept Amazon.com returns is only one side of the story. On the other side is the issuance of warrants to buy up to 1.75 million shares of Kohl's by Amazon. The announcement sent shares up 12% yesterday, pushing them closer to all time highs.
Retail is not dead; however, Im still skeptical of who this deal actually benefits. Kohls has an enterprise value just under $14 billion, about what Amazon generates in free cash flow annually. Amazon also has about $40 billion in cash, making the $131 million investment in Kohls a no brainer.
Long term, Kohls will have to convert shoppers returning items into buyers in order for top-line growth to outweigh extra costs from shipping and returns. Or, maybe Amazon will just buy them if they want more front facing stores. Kohls has over 1,100 stores with approximately 28% of its sales from womens apparel. It also has 129,000 employees that Amazon could repurpose. Or, maybe this is just one of many retailers that Amazon will convince to take returns in return for investment capital. Amazon is already the platform online shoppers turn to most.
Kohls strengths include more than 25 million proprietary credit cardholders and a standalone footprint of stores. Being attached to large shopping malls has hurt rivals Macys and JC Penny, where Kohls has been able to expand its gross margins and free cash flow, which has allowed the company to buy back over 46% of its shares outstanding in the last decade and boost its annual dividend to $2.44from $1.00 per share.
More importantly, the company continues to improve both its same-store sales and digital revenue, which saw double-digit growth in transactions last quarter. Earnings for 2019 and 2020 are expected in the $6.05 and $6.25 range, respectively, and investors getting involved in the stock now can expect to pay a premium to the industry average, but for good reason. This partnership with Amazon further solidifies its omnichannel approach and illustrates just how dedicated the company is to future growth and survival.
If the company meets its earnings goals and remains priced at 15.6x the stock could see $100 per share by the end of 2020, good for a 33% gain.
Disclosure: I am not long/short Kohl's.
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