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Amazon (AMZN) Deal Confirms Kohl’s (KSS) Is a Retail Gem

Luke Lango

Amazon.com, Inc. (NASDAQ:AMZN) smart home products are coming to a Kohl’s Corporation (NYSE:KSS) store near you. Starting in October, Amazon will start selling its suite of smart home products and services in select Kohl’s stores in Chicago and Los Angeles.

Doesn’t that sound weird? After all, Kohl’s is a brick-and-mortar retail dinosaur. And Amazon is the very company which turned Kohl’s into dinosaur. Right?

Wrong.

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Kohls KSS

While many brick-and-mortar retailers do continue to struggle as Amazon’s e-commerce business scales, KSS is starting to turn a corner. Comps are approaching the flat-line and will likely turn positive soon. Gross margins are stable, as is the operating expense rate. The retailer is actually opening more stores than its closing.

And now, the e-commerce behemoth which has decimated brick-and-mortar retail is partnering with KSS.

Is that a vote of confidence from Amazon in the Kohl’s business model?

I think so. And that makes KSS stock, which is still trading a hugely depressed valuation, a compelling long-term buy.

Kohl’s Is In Turnaround Mode

Kohl’s is in full-blown turnaround mode.

Not too long ago, KSS reported better-than-expected comparable sales, revenues, and earnings in its second quarter earnings report. The big story-line is on the comparable sales front. Comparable sales were essentially flat in Q2, a huge improvement from the 1.8% decline in the same quarter one year ago.

This improvement is expected to continue. The sequential uptick in comps continued in July, when transaction growth actually turned positive. With the back-to-school catalyst really hitting full stride in August and September, its likely that comparable sales growth will be positive in the third quarter.

Positive comps is a rarity in the retail world. So are stable gross margins and operating expense rates. But Kohl’s offers both of those as well. And while the rest of the retail world is closing stores, KSS is actually opening stores.

Why is Kohl’s proving to be a retail standout? Because its off-mall and off-price. Off-mall retail has significantly less hassle than in-mall retail. You don’t have to deal with parking headaches and mall traffic concerns. You also don’t have to walk through a crowded mall to get to the store you want.

Off-price retail is also succeeding because it can compete with Amazon prices. Consumers don’t look at Kohl’s price tags and scoff at them.

So Kohl’s is in the overlap of two thriving sectors in the retail market right now. Amazon knows this, and that is likely why they partnered with Kohl’s. Amazon is looking for increased brick-and-mortar retail exposure for its suite of consumer electronic goods, hence the bookstores. Because of its off-price and off-mall nature, KSS offers Amazon the best and most diverse brick-and-mortar retail exposure.

Bottom Line on KSS Stock

Amazon is showing confidence in the KSS business model by partnering with them. That is a pretty bullish signal.

And its not like KSS won’t benefit from this deal. A new Amazon product section will be a fresh sight for consumers. That will drive positive comp and traffic trends, much like new Under Armour Inc (NYSE:UAA) product has sparked this recent rebound in KSS comp trends.

Meanwhile, KSS stock is dirt cheap trading at 11.2-times this year’s consensus earnings estimate. The S&P 500 is trading around 18.7-times this year’s consensus earnings estimate. Granted, the market is looking at more robust earnings growth potential over the next several years, but an 11-times multiple undervalues a business which is in full-blown turnaround mode.

Overall, KSS stock looks good here. The Amazon partnership underscores that KSS is a retail gem, and that means buy the stock while its still low.

AS of this writing, Luke Lango was long KSS and AMZN. 

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