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The 3 Ways Kohl's Can Still Save Itself

By Leo Sun - Jan 22, 2020 at 7:25AM

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Renegotiating its deal with Amazon, launching off-price stores, and attracting more real estate partners could get Kohl’s back on the right track.

Kohl's (KSS 2.27%) has shed roughly a third of its market value over the past 12 months, as its comparable-store sales withered and its gross margin contracted. Like many other struggling brick-and-mortar retailers, Kohl's is desperately using markdowns to stay afloat.

That strategy flopped throughout fiscal 2019. Kohl's comps declined in the first half of the year, then stayed nearly flat in the third quarter. It recently revealed that its sales fell 0.2% annually in November and December, and revised its full-year earnings guidance toward the "low end" of its prior forecast for a decline of 12% to 15%.

In short, none of the turnaround strategies Kohl's implemented over the past year -- including its partnership with Amazon (AMZN 3.58%) and an apparel deal with the Olsen Twins -- brought back shoppers. Kohl's didn't offer any guidance for fiscal 2020, which starts in February, but analysts expect its revenue to rise less than 1% and for its earnings to dip another 4%.

Those estimates suggest that Kohl's will continue sacrificing its margins to generate anemic comps growth, but it's not down for the count yet. Let's take a look at three ways Kohl's can still save itself as the retail apocalypse rages on.

A Kohl's store.

Image source: Kohl's.

1. Renegotiate its deal with Amazon

Kohl's expanded its partnership with Amazon to all of its stores last year, which allowed Kohl's to accept product returns purchased through Amazon and sell Amazon products at its stores. Customers could simply drop a product off at a Kohl's counter without a box, and Kohl's will repackage and ship it back to Amazon without charging the customer.

Kohl's hoped that those customers would also buy a few products at Kohl's, which would partly offset the processing costs for Amazon's returns. Unfortunately, Kohl's weak holiday sales indicated that Amazon customers simply dropped off their products and left. Meanwhile, Amazon recently reported "record-breaking" sales during its holiday season.

This partnership clearly benefits Amazon more than it does Kohl's. If Kohl's wants to salvage this deal, it should press for more benefits. It can push Amazon to subsidize its packaging and shipping expenses, promote a dedicated online store for Kohl's on, or allow Amazon gift cards to be used at Kohl's stores. Any of those solutions would be preferable to blindly accepting returns for Amazon.

An Amazon return counter at Kohl's.

Image source: Kohl's.

2. Launch an off-price banner

Kohl's is struggling with competition from Amazon, superstores like Walmart and Target, fast-fashion retailers like Zara, and off-price challengers like The TJX Companies (TJX 5.13%). Kohl's can't match the scale of Amazon or Walmart, but it can consider challenging TJX with its own off-price banner.

TJX, the parent company of T.J. Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post, consistently outperforms full-price brick-and-mortar retailers by buying products at liquidation prices and selling them at lower prices than Amazon. That's why it expects to post its 24th straight year of comps growth this year.

Kohl's rival Macy's (M 9.91%) already pursued this strategy with its Backstage banner. Last quarter, CFO Paula Price noted that Macy's had opened 50 new Backstage stores throughout the year, and that the locations that had been open for over a year "continued to perform well, up mid-single digits, and have improved both margin and turn."

If Kohl's converts some of its stores to an off-price format and liquidates its excess inventories through them, it could boost its sales growth again. That strategy would weigh down its gross margins, but it could widen its moat against its rivals and generate more sustainable revenue growth in the future.

3. Secure more real estate partners

Kohl's is shrinking its stores and renting out the remaining space to partners like Planet Fitness gyms and Aldi grocery stores. Once again, the idea is that customers visiting those businesses will pick up some products at Kohl's. That's a promising start, but Kohl's should secure more real estate partners to bring back shoppers.

To offset its ongoing weakness in women's apparel, it can secure partnerships with hotter brands like American Eagle Outfitters' Aerie or lululemon athletica -- which are both looking to expand their brick-and-mortar presence beyond malls with stand-alone stores. It could also secure partnerships with fast-food chains like Chick-fil-A or Starbucks to convert diners into shoppers. These moves could generate more sustainable growth than its one-sided deal with Amazon.

The key takeaway

Kohl's 5.7% forward dividend yield and its forward P/E of 10 make it look like an undervalued dividend stock. But Kohl's stock is cheap for obvious reasons, and the company is clearly losing ground against the competition. Kohl's isn't out of options yet, but it should consider renegotiating its deal with Amazon, launching off-price stores, and gaining more real estate partners to bring back shoppers.


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Stocks Mentioned

Kohl's Corporation Stock Quote
Kohl's Corporation
$39.25 (2.27%) $0.87, Inc. Stock Quote, Inc.
$116.46 (3.58%) $4.02
Macy's, Inc. Stock Quote
Macy's, Inc.
$20.96 (9.91%) $1.89
The TJX Companies, Inc. Stock Quote
The TJX Companies, Inc.
$60.24 (5.13%) $2.94

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