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Amazon may not be able to save Kohl's

Brian Sozzi
Editor-at-Large

Kohl’s (KSS) management really, really, REALLY wants all its investors to know that 2019 will be the year of Amazon (AMZN) in its generally no frills suburbia stores.

The word “Amazon” was mentioned more than 30 times by executives and Wall Street analysts on the company’s first quarter earnings call Tuesday. Most of the questions stemmed from analysts wondering about the financial impact of Kohl’s new in-store returns program with the digital retailer, that in many respects, is also stealing sales from Kohl’s.

Kohl’s tight-lipped executive team largely sidestepped the questions (shocker, we know). And that begs the bigger question: Are investors just being too optimistic on Kohl’s stock because of its tie-up with Amazon?

The lowdown on Kohl’s and Amazon

“The nationwide rollout of the Amazon returns program is the single biggest initiative of the year,” Kohl’s CEO Michelle Gass told analysts on the Tuesday conference call.

Gass is right, the roll-out of the Amazon returns program is a big under-taking for the retailer.

By July, Kohl’s plans to be capable of accepting Amazon returns at all of its 1,150 stores. That means Kohl's employees handle all aspects of the return process. The partnership was inked in 2017 — it has since been tested at 100 stores in Chicago, Los Angeles and Milwaukee.

Thus far, Kohl’s has seen positive results from these test markets.

“We have found the program to be highly successful in achieving our goals in creating a convenient and easy experience for both Kohl's and Amazon customers. Our testing has shown that we are driving engagement with our existing customers and attracting new and younger customers,” Gass said.

But how much money Kohl’s will make from the Amazon initiative this year is highly unclear. It's one thing to drive sales from package returners, but Kohl's has to see that translate to its bottom line. Kohl’s Chief Financial Officer Bruce Besanko didn’t explicitly say the tie-up will be a profitable venture this year.

"We do expect that it'll be a contributor to the return to growth that we expect in the second half along with the brands and the expansions that Michelle [Gass] talked about. The SG&A [Selling, General and Administrative] is obviously an increase.”

“We know that we will receive traffic from Amazon customers coming into our stores. We need to take that traffic and convert it into sales. And we've modeled some sales into the back half and we're pressing our teams to be sure that they do that efficiently and that they do it well," Besanko said on the call.

A Kohl's retail store in Salem, N.H. (AP Photo/Charles Krupa)

Gass also side-stepped the profitability question.

"It is about driving traffic and sales in the immediate term. And we've studied this for 18 months so we feel confident about that. But I think what's really key and what our data would suggest is that we're also bringing in new customers and we're bringing in a younger customer. And so as we think about the long-term value that is significant," Gass explained.

For investors who have ridden Kohl's stock to out-perform mostly other retailers this past year on optimism around Amazon, the commentary is hardly inspiring.

Kohl’s is trying to evolve

Kohl’s first quarter earnings and outlook stunk up the joint similar to many other of its retail rivals. Sales were pressured in many merchandise categories, which management blamed mostly on unfavorable weather. Even still, this notion that people will spend money at Kohl’s every time they return an Amazon package (which could be argued is priced into Kohl’s stock here) is far-fetched. In fact, there could be no guarantee that shoppers will buy anything at Kohl’s while returning an Amazon package.

Moreover, Kohl’s is eating the labor costs related to servicing Amazon returns. So if people aren’t spending during their trip to return Amazon junk, Kohl’s bottom line could be pressured.

Hat tip, nonetheless, to Kohl’s for trying to evolve. The Amazon partnership makes some form of sense as does one with Planet Fitness to open gyms in select locations. But it boils down to whether investors are being too optimistic around these initiatives.

The answer could be yes — Kohl’s is still a discretionary trip, and competition is fierce with Macy’s and others. And yes, that includes frenemy Amazon.

Brian Sozzi is an editor-at-large and co-host of ‘The First Trade’ at Yahoo Finance. Follow Brian Sozzi him on Twitter @BrianSozzi

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