To hear the analysts tell it, Kohl’s (NYSE:KSS) is dead. The company doesn’t report its Christmas quarter until March 3, but preliminary results indicate that earnings per share will be down 2% from last year. Christmas 2018 saw the company earn $272 million on $6.8 billion of revenue. That doesn’t sound great for Kohl’s stock.
Yet TV analyst Jim Cramer called Kohl’s “roadkill,” said he was left “speechless” by the numbers and added that Kohl’s is “just trying to stay in the game.”
This reaction from traders sent shares down 10%. Kohl’s stock recovered only slightly, opening Jan. 13 at $46.48 per share, a market capitalization just under $7 billion. The company’s trailing price-to-earnings ratio is below 11 and the yield on its 67-cent dividend is up to 5.3%.
Either this is a classic yield trap or it’s time to buy.
The Amazon Connection
What has made Kohl’s controversial was the realization of CEO Michelle Gass that her stores are too big. So she made a deal with Amazon (NASDAQ:AMZN) to share space.
People returning merchandise to Amazon can now drop it off at a Kohl’s. They can also buy things like Echo devices in Kohl’s stores. The idea is that Kohl’s sees more traffic, and Amazon customers get convenient drop-off points. Kohl’s also gave Amazon the right to buy 1% of its shares, when they were trading at about $75 each.
The partnership could be extended. Kohl’s might stock merchandise from the Amazon Basics line, that company’s store brand. It could also offer Amazon pick-up, reducing porch theft. Amazon might even buy Kohl’s, which represents less than 1% of Amazon’s valuation.
This wasn’t the only partnership Gass announced last year. Kohl’s also leased parts of 10 stores to Planet Fitness (NYSE:PLNT) as part of a move into activewear.
The Real Problem
The bigger problem is something I have been noting repeatedly, the changing nature of retail.
Retail used to be in the business of breaking bulk between merchandise and consumers. That’s Amazon’s job now. Instead, successful retailers like Target (NYSE:TGT) create their own store brands. Brands like Nike (NYSE:NKE), meanwhile, increasingly sell out of their own stores.
Kohl’s is moving in that direction with a new home furnishings department, partnering with TV real estate brothers Drew and Jonathan Scott.
At this week’s National Retail Federation conference, CEO Gass also talked up “The Beauty Checkout,” originally offered in just 11 stores but now rolling out to 200. This includes new retail partnerships with brands like Europe’s Dolce & Gabbana and Ralph Lauren’s (NYSE:RL) Polo Ralph Lauren Brand. “The Beauty Checkout” also features a marketing partnership with Facebook (NASDAQ:FB).
Moves like this make Gass’ first deal, bringing Under Armour (NYSE:UA, NYSE:UAA) merchandise into its stores, make some sort of sense. Kohl’s is moving into up-market retail.
The problem is that partnering with external brands, as opposed to building in-house ones, leaves Kohl’s dependent on others and doesn’t provide the mark-ups of a store like Lululemon (NASDAQ:LULU), which controls design, manufacturing, branding and retailing.
That’s what analysts are looking for, and Gass doesn’t seem to be offering it.
The Bottom Line on Kohl’s Stock
Analysts aren’t seeing Gass’s vision and may be dumping her stock prematurely.
It’s possible that her vision is flawed. Gass’s Kohl’s isn’t a discounter like Target (NYSE:TGT), nor is it a merchandise brand. It’s a re-imagined department store, selling experiences and convenience on behalf of select brand partners.
But unlike Macy’s (NYSE:M) or J. C. Penney (NYSE:JCP), Kohl’s does have a plan. The stock is a speculation, but one where you can draw a huge dividend yield while you wait to see how it plays out. Something like Bed, Bath & Beyond (NASDAQ:BBBY).
Dana Blankenhorn is a financial and technology journalist. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Write him at email@example.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN.