Will Amazon save Kohls from Oblivion?
Nothing shows how desperate and pathetic department stores have become than Kohl’s (NYSE: KSS) recent deal with Amazon (NASDAQ: AMZN).
Customers will be will be able to return Amazon merchandise at 82 stores in the Los Angeles area and Chicagoland under the arrangement announced on 19 September. Some Amazon-branded items including the Echo and Fire will also be sold at Kohls.
This plan reeks of desperation Kohl’s is admitting that the only way it can get some customers into its stores is by tapping Amazon. The idea is a good one, but it might be five years too late.
Had Kohl’s made such an arrangement five years ago, it would have been a real game-changer. Today the return deal is an act of desperation that tells investors and shoppers how much trouble Kohl’s is in.
How the Kohl’s-Amazon Deal Can and probably will backfire
Taking Amazon returns would only help Kohl’s if it is the only store in town doing so.
If the arrangement increases Kohl’s foot traffic, every other retailer in town will run to Jeff Bezos’ office to ink a similar deal. People will be able to return Amazon merchandise at Kroger (NYSE: KR), Whole Foods (NASDAQ: WFM), Walgreens (NASDAQ: WBA), Best Buy (NYSE: BBY), Safeway, Costco Wholesale (NASDAQ: COST), Office Depot (NASDAQ: ODP), Publix, CVS Health (NYSE: CVS) and possibly 7-Eleven.
Supermarkets would be perfect locations for Amazon returns because they already have customer service desks. Customers can send packages, buy money orders, cash checks, buy stamps, wire money, and much more at Kroger supermarkets service desks.
It would also be fairly easy for Kroger to add an “Amazon Store” featuring electronics and returns to its larger Marketplace Stores. Since Marketplaces already sell a wide variety of dry goods, adding Amazon would be a natural.
Kohl’s would be finished if supermarkets start taking Amazon returns. The only other thing you can do at Kohl’s is to shop for clothes, something a large percentage of the consumer base has already proven it does not want to do there. At Kroger, you can buy milk, pick up a pizza, buy beer or wine, pick up your prescriptions, and even fill your gas tank. Why would anybody drive past Kroger to Kohl’s, just for a return?
Amazon will not save Kohl’s
All the Amazon arrangement will buy Kohl’s is a few months of foot-traffic increases. This department store and its business model are probably doomed by the march of history.
The most obvious sign of that doom is Kohl’s revenue which fell by $450 million over the last-recorded year. Kohl’s reported $18.97 in revenues in July 2016, and $18.52. The revenue figures reported by ycharts also tell us why Kohl’s is so anxious to get into bed with Amazon.
This company got no revenue boost from Holliday Season 2016. Kohl’s reported $18.87 billion in revenue on Halloween Day 2016 and $18.69 billion at the end of January 2017. Its’ revenues actually fell by $180 million during the course of last year’s holiday season.
My guess is that Kohl’s management is hoping for a post-Christmas foot-traffic bump generated by Amazon returns. A pretty smart strategy but one that will be easily imitated by a wide variety of dangerous competitors including Best Buy, Kroger, and Amazon itself through Whole Foods or other acquisitions.
Any revenue boost from Amazon returns will be temporary and not result in the long kind of sales boosts Kohl’s needs. Another problem facing Kohl’s is that there is no evidence the foot traffic generated by returns will lead to new sales. Customers are likely to run into Kohl’s drop the item off and rush back out the door.
A related trouble is that Kohl’s employees might not be prepared to handle the returns All it would take is a few days of lousy customer service to sink this arrangement.
Is Kohl’s Making Money?
The final shortcoming to the Amazon returns scheme is that it may cost Kohl’s money while not adding new revenues. Kohl’s might have to add new fixtures and employees to stores, but not see any additional sales.
New sales are needed because Kohl’s reported a net income of $673 million in July 2016, a definite improvement over $573 million in July 2016 but hardly out of the woods. Additional operations costs are dangerous because Kohl’s cash from operations is down. It reported $1.678 billion in cash from operations in July 2016, down from $1.967 billion a year earlier.
Increasing expenses seems a poor strategy for a company with limited cash resources which is what Kohl’s has. It reported a free cash flow of just $147 million, $552 million in cash and short-term investments, and assets of $13.04 billion on July 31, 2017.
Kohl’s is making money, but it is not far off from the place where competitors like JC Penney (NYSE: JCP) are. Penney’s spent the last few years in a series of costly overhauls, adding appliance sales, changing images, etc., much like Kohls. None of that helped, Penney’s has not reported an income in over four years and reported a loss of -$117 million on July 31, 2017.
The Amazon deal might be the factor that pushes Kohl’s off the cliff, Penney’s ran over. Added expenses from Amazon returns might eat up Kohl’s income and send it in a death spiral.
Kohl’s is a Terrible Investment
All this shows us why Kohl’s is a terrible investment right now. It has no future, like CBS (NYSE: CBS) the only it can attract business is to jump onto Amazon’s coattails. CBS is now streaming its NFL football broadcasts through Amazon Prime in a desperate attempt to attract viewers.
The 55¢ dividend that Kohl’s investors enjoyed on September 1, 2017, is probably doomed. That dividend is in itself a sign of problems, Kohl’s management is trying to pump up stock values by paying out a high dividend, instead of reinvesting the money in the stores. Also likely to become a thing of the past is the 13.19% return on equity investors enjoyed on July 31, 2017.
Stay away from Kohl’s folks, this retailer is doomed. Not even Amazon will be able to save it from the retail apocalypse.
