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Kohl's Partnerships Have Yet to Give it a Lift

By Lawrence Rothman, CFA – Jul 15, 2020 at 11:45AM

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Kohl's is trying to draw customers into its stores through an arrangement with, but this hasn't produced meaningfully higher sales.

It's easy to gloss over Kohl's (KSS 3.76%) fiscal first-quarter (ended May 2) results due to COVID-19, which forced the company, like many other retailers, to close its stores in mid-March. Predictably, this hurt the company's revenue, which fell from last year's $4.1 billion to $2.4 billion. It swung to a $652 million adjusted operating loss from an adjusted operating income of $118 million.

Certainly, if Kohl's had been heading into the pandemic from a position of strength, that would assuage my concerns. But last year, its same-store sales (comps) dropped 1.5% and its adjusted operating income fell by 17% to $1.2 billion.

While management is trying out moves to bolster traffic to Kohl's stores, the effects are not yet apparent in the company's sales and profitability.

A woman accepting a package delivery.

Image source: Getty Images.

Linking with Amazon

Kohl's headline-grabbing deal was the one it inked with (AMZN 1.75%) in April 2019. This allowed the e-commerce giant's customers to return merchandise to a Kohl's store without having to worry about packing up the goods or even putting on a label. Management hoped that providing this convenience would draw people into the stores to shop.

Of course, with physical stores closed, Kohl's couldn't accept returns for about half of the first quarter. But looking further back, its third-quarter comps rose just 0.4% and its fourth-quarter comps were flat.

On the fourth-quarter earnings call, management said the program helped boost traffic during the end-of-year holidays, but this hasn't yet resulted in strong comps.

Kohl's isn't the only retailer accepting Amazon returns, either. Stein Mart (SMRT) announced last year that it would install lockers where people can return their merchandise as well as pick up their orders. Other places of business also provide lockers. True, Kohl's service is more convenient because customers just bring their returns to the store and Kohl's does all of the work. However, there are other options being provided for consumers.

The coronavirus pandemic makes it challenging for investors to judge Kohl's first-quarter results. But looking back at last year, selling, general, and administrative expenses rose about 2% to $5.7 billion, which was partly due to the Amazon Returns program and higher store wages. Higher distribution costs and increased marketing spending were also factors.

It is hasty to call the program a failure, but it is fair to say that it hasn't provided a significant boost to sales and profitability.

Other partnerships

In fairness to management, it is pushing other ideas. New partnerships being tested include a deal with Planet Fitness whereby Kohl's will lease out space next to stores. When people can shop freely, will this mean they will stop in after a workout? Perhaps, but the company is facing strong competition that is set to intensify in a tough economy.

This includes discount operators Ross Stores (ROST 0.64%) and TJX Companies (TJX 0.47%), which have compelling offerings, particularly in an economic downturn when they can typically buy more closeout merchandise.

Kohl's management deserves credit for trying new things, but the payoff right now is unclear. Given the current economic conditions, Kohl's customers are facing challenges. Under these circumstances, they may very well find lower-priced alternatives. Hence, even with the share price at less than half of February's level, this is one I would pass up.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends The TJX Companies and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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