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Kohl's Deepens Its Unlikely Partnership With Amazon

In just the past few months, Kohl's (NYSE: KSS) has expanded its relationship with Amazon (NASDAQ: AMZN). First, the apparel store chain unveiled a store-within-a-store concept for Amazon devices, and now, Kohl's will even accept Amazon returns at some of its stores.

In this Industry Focus segment, Vincent Shen is joined by Motley Fool contributor Daniel Kline to discuss what Kohl's motivation might be for pairing up with the archrival of all brick-and-mortar retailers. Is it a precursor to an acquisition? Will the two companies be working more closely together? Though this might seem like dangerous ground for Kohl's, it does offer some significant opportunities as well.

A full transcript follows the video.

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This video was recorded on Sept. 26, 2017.

Vincent Shen: But our next story, we have the unlikely partnership between Kohl's and Amazon. There are two parts to this, and we can hit them one at a time. First, there was the announcement that Kohl's would test some store-within-a-store concepts that featured Amazon's smart-home products in a small number of their stores, and these are 1,000 square foot spaces launching in October. So they'll feature the well-known products of the Echo, the Fire TV, the Fire tablets, all in an interactive space like we've been talking about. And Amazon's sales associates will actually staff that space. So Dan, to me, this seems like a keep your friends close but your enemies closer kind of thing.

Daniel Kline: I love this. If you look at the retailers that have turned it around, I would say Best Buy is probably the most implausible turnaround. A few years ago, Best Buy was left for dead. And what they did was they invited MicrosoftSamsung, the cellphone providers, Apple, to build, to varying degrees, these store-within-a-store concept. And instead of Best Buy being this vague place full of electronics, it became a place to go for expertise, for hands-on products, for your kid to get to play the video game you're not going to buy. It became a destination. And you've seen, J.C. Penney is not doing as well as Best Buy, but it's certainly doing better than Sears, and part of that is the Sephora stores and the salon and the picture taking, and all the different store-within-a-store concepts. On that level, I like this partnership.

Shen: Well, let's get to the second part of it. That's the first part, which seems OK. And most recently, Kohl's announced that they're also going to be accepting returns for Amazon orders at almost 100 locations, so a bigger test for them. That means you can take your Amazon order to a Kohl's and return it like you bought the merchandise there, and Kohl's will actually pack it up and ship it back for you. There's no details yet that I could find as to how the compensation will work for Kohl's in offering this service, but the way I see it, for Kohl's itself, their comparable sales have been negative through the past four years. And it hasn't reduced its footprint and closed a ton of stores like some of the other department stores have.

Kline: They're adding stores.

Shen: But it seems like these are some examples of initiatives for them where they're really trying to find ways to boost traffic.

Kline: This scares me. We've talked a little bit about the fox in the henhouse. There's an aspect where, if Kohl's and Amazon have not discussed where this might go, then I question it. The history, we talked about this earlier, of companies letting Amazon in -- Toys "R" Us being a big example, they managed, Amazon managed the Toys "R" Us website, which literally just redirected to Amazon, and there was a lawsuit, and there was a $51 million settlement. But it derailed Toys "R" Us on the digital end.

You could argue the same thing for a few other companies. But, I don't think that's what's happening here. Kohl's a few months back, said it was going to reduce the retail footprint of its stores to increase the back end to allow for more omni-channel delivery, meaning they were going to act as their own warehouses and not just supply stores, but also supply online orders. If this is the first step of a cozier relationship, maybe a purchase, or maybe just Kohl's stocking all the new Amazon apparel lines, that might be a positive driver. As just a traffic move, where I bring my Amazon return and walk into a Kohl's, I don't buy that Kohl's has enough impulse items, or I'm going to be like, you know what? I do need a new suit.

Shen: Even all the way at the back of the store, walking through all those aisles?

Kline: I don't think Kohl's sells the right merchandise for that. I think they mostly sell merchandise that you plan for. Now, if they were to add a section of impulse buys like at the front of Marshalls or the front of Bed Bath & Beyond, as seen on TV products, but that doesn't feel like the Kohl's brand. So just getting more people in, unless they're getting well paid by Amazon, which I don't think they are. But if this is the beginning of Kohl's and Amazon working back and forth, I could see some levels on the fulfillment end where Amazon could help with the Kohl's product, and where all these new Amazon branded lines would do very well from having a physical display in an 1,100 store chain.

Shen: I think it's important, too, what you brought up in terms of how they're shrinking the floor space for their actual merchandise and dedicating more of that for their back end fulfillment. The company said their fulfillment for online orders is over 30% now directly from their stores, that's obviously progress that they're seeing with that initiative. But overall, some of the people who I've seen who are more bullish on this partnership with these two different initiatives, they've spoken to the massive customer base that Amazon has and the potential, whether or not that pans out to boost traffic.

At the same time, you mentioned the fox in the henhouse kind of story here. We have another Fool.com contributor, Jeremy Bowman, he's much more bearish on this idea and he mentioned a few examples like Toys "R" Us, but also Borders and Target, companies that took the partnership with Amazon initially. Probably none of them are looking back on that collaboration praising what a good idea it was. But we'll have to see. The last part of this story, you spoke about very briefly, Kohl's shares are up over 10% in September so far as a result of this news. There's some talk of this being the courting process for the two companies. I'm curious what you think, so quickly and so soon after the Whole Foods buyout, if that's really something investors should be taking seriously at all.

Kline: Here's the thing, I think Amazon is kicking the tires. I think Amazon management is very keen, and they clearly very quickly believed in the Whole Foods merger. I think they're trying to figure out if Kohl's has a team that they could integrate. Having a physical retail presence in apparel, an area where they have marked for growth, yes, they have the look and some new techniques, but I still don't think the average man is going to buy a dress shirt, or a woman is going to buy a dress or a pantsuit, without trying it on, without the ability. Now, I might buy the second one. If I own a shirt, I bought it at Kohl's -- I actually think I bought it at J.C. Penney -- I would buy another one digitally. I'm not going to buy the first one, because you have to get the sizing right. Same is true with sneakers, hats, whatever it may be. I think Amazon sees the potential of that, just like it's a Whole Foods as a way into groceries. And I think they're considering it. But I think bidding up the stock because of that, it's way too early.

Shen: We have to wait, then, until the next quarterly report, most likely, from Kohl's, which is coming out in November, where hopefully management will share some initial takeaways from this partnership, how things are going.

Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool’s board of directors. LinkedIn is owned by Microsoft. Daniel B. Kline owns shares of Apple and Microsoft. Vincent Shen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.