When Amazon (NASDAQ: AMZN) bought the Whole Foods grocery chain, it picked up an asset that added a brick-and-mortar presence to an important part of its business. The $13.7 billion deal gave the online retailer a platform to expand its grocery delivery business while also adding distribution for its consumer electronics products.
The company did not tap into any of its cash reserves to close that deal. Instead, it borrowed the money on a long-term basis. That was a surprising decision, but it gives the company added flexibility to make another deal.
Amazon closed 2017 with over $30 billion in cash, cash equivalents, and short-term investments. That puts the company in position to make another major deal easily and quickly. The logical contender for the company to spend its cash hoard on would be a retailer it's already partnered with: Kohl's (NYSE: KSS).
Amazon already has a presence in some Kohl's stores. Image source: Kohl's.
Amazon and Kohl's are already working together on a limited basis. The brick-and-mortar chain accepts Amazon returns in a select number of its stores, and those locations also have store-within-a-store concepts selling the online retailer's consumer electronics line.
That deal is useful, but expanding it is not the main reason Amazon could buy Kohl's. It would make more sense for the online retailer to purchase the physical chain to market its growing number of private-label clothing lines as well as its private-label furniture.
These products would fit well into the Kohl's lineup and help the retailer compete when it comes to price. It would also allow customers considering buying clothing from Amazon to see it in person, and even try it on. That should accelerate acceptance of these lines, which would increase their sales on Amazon.com.
Kohl's, which has shrunk some of its stores, could use its excess space to support Amazon's delivery efforts. That could include grocery delivery or acting as mini-warehouses.
Could it happen?
Kohl's had a market cap of roughly $11.6 billion on July 13. It paid a 27% premium for Whole Foods over the price it was trading at the day before the sale was announced.
You can argue that Whole Foods was a struggling company at the time of its purchase, and that Kohl's is currently in better shape. But, even if Amazon had to pay a 50% premium to close a Kohl's deal, the online retailer has the cash to make this happen.
Will this happen?
Amazon and Kohl's are in the early stages of a partnership. If their deal expands, it could make sense for the online retailer to make this happen.
Kohl's solves multiple problems for Amazon. It gives it a place to show off its private-label clothes and furniture, while also giving it excess space to play with. That extra square footage could also be used to grow its line of bookstores, or its Amazon Go convenience stores, in addition to the reasons mentioned above.
Neither company needs to move quickly, here. Kohl's appears to be one of the retail chains that will succeed in the current marketplace, and Amazon obviously has no need to jump into any deal. Still, this purchase makes a lot of sense.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Daniel B. Kline has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.