I’m not one to take issue with a colleague, but James Brumly here at InvestorPlace has a thick skin, so I’m going to challenge him on his assertions about a tie-up between Kohl’s Corporation (NYSE:KSS) and Amazon.com, Inc. (NASDAQ:AMZN).
As expected, ever since Amazon purchased Whole Foods, there has been plenty of speculation as to who might be next. I’m guilty of making a few suggestions myself. However, Amazon is not in the brick-and-mortar business. The Whole Foods purchase was specific and synergistic.
The problems with buying up just any old company for billions of dollars are that first, it costs billions of dollars and while Amazon has a few billion, it doesn’t have many many billions, and second, it requires overhead. Amazon doesn’t want the overhead of brick-and-mortar and certainly doesn’t want it if it involves clothing, which is a terrible business.
So I don’t think Kohl’s stock is going to get a bump from Amazon. In fact, Kohl’s stock has likely seen its all-time high for the last time in several years.
Amazon Won’t Buy Out Kohl’s Stock
The first assertion regarding Amazon and Kohl’s stock doesn’t really hold water. We know Amazon is talking to clothing manufacturers about developing an athletic brand. But Amazon doesn’t need Kohl’s or any other store to sell it. So I don’t see how this makes any sense for Kohl’s stock.
While Kohl’s has a partnership with Amazon, it is a pilot program that is effectively a “store within a store” concept. Amazon Smart Home Shops are in 10 Kohl’s stores. This concept does work in a few other retailers for bringing in foot traffic. Yet that alone explains why Amazon would not buy out all of Kohl’s stock. It doesn’t need to. It can just set up these Smart Home Shops inside existing stores and leave it at that.
Accepting Amazon returns at Kohl’s store is another idea that is floating around as a reason for Amazon to buy up KSS stock. I disagree. That excuse could be used for any chain. It makes far more sense for Amazon to scoop up a distressed play like Rite Aid Corporation (NYSE:RAD), netting its pharmacy management business along with 2,500 locations (instead of 1,100), and for far less than paying for KSS stock.
However, Kohl’s stock price is still in good shape because it has somehow managed to remain profitable in a terrible retail environment. Although profits have been falling, they are stabilizing a bit. Net income for fiscal year 14-16 came in at $867 million, $673 million,and $556 million, respectively. However, the trailing 12 months (TTM) is back up to $672 million.
Bottom Line on Kohl’s Stock
Free-cash flow has been faltering and inconsistent, though. $1.36 billion in FY14 gave way to $784 million in FY15, recovered to $1.38 billion in FY16, but the TTM is down again to about $800 million.
The other thing Kohl’s stock has going for it is a solid 4.61% dividend. That’s high enough to keep dividend investors from going anywhere. With the payout totaling about $355 million, there’s plenty of cash flow to sustain it.
Again, however, I don’t see growth here. Why invest in a stock that is not growing net income? Sure, it trades at only 12x earnings, but we pay for growth, not for stagnation.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the Manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
