It's been almost two years since Kohl's (NYSE: KSS) began testing a returns partnership with Amazon.com (NASDAQ: AMZN). The pilot program enabled Amazon customers to return unwanted items for free to any of about 100 Kohl's stores in the Chicago, Los Angeles, and -- later -- Milwaukee metro areas. Kohl's takes care of boxing up the returned items and sending them back to Amazon.
In April, Kohl's announced plans to roll out the Amazon Returns program to all of its more than 1,100 stores across the U.S. Kohl's stock soared 12% on the day that this news broke, surpassing the $75 mark. But it's been all downhill from there. Kohl's shares have lost more than a third of their value since then, falling below $50.
Kohl's Year-to-Date Stock Performance. Data by YCharts.
On Monday, Kohl's confirmed that it had completed the planned nationwide rollout of Amazon Returns. The benefits of this partnership should help Kohl's stock start to recover in the second half of 2019.
Kohl's has hit a speed bump
Just a few months ago, Kohl's seemed to have successfully turned itself around. The company had grown its comparable-store sales for six consecutive quarters, including a decent 1.7% increase for the full 2018 fiscal year. This allowed it to post strong profit growth in each of the last two fiscal years.
However, in May, Kohl's reported a surprising 3.4% comp-sales decline for the first quarter of fiscal 2019. Despite the sales slowdown, adjusted earnings per share fell just 5% in the quarter, to $0.64. However, the company slashed its full-year EPS forecast by more than 10%, from a range of $5.80 to $6.15 to a new range of $5.15 to $5.45.
On the subsequent earnings call, management remained upbeat about the likelihood that sales would rebound beginning in the second half of the year. The Amazon Returns partnership is a big reason for that optimism.
Kohl's rolled out its Amazon Returns program in all of its remaining stores this week. Image source: Kohl's.
Why teaming up with Amazon is such a big deal
One of the biggest problems facing department stores today is falling store traffic. The rise of e-commerce has encouraged consumers to make fewer shopping trips, which has made it hard to achieve sales growth in physical stores.
By turning its stores into hubs for Amazon returns, Kohl's expects to get more traffic through its doors. Some people will just show up, drop off their unwanted items, and leave immediately -- but others may stay to browse. As a result, the program should drive incremental sales for Kohl's.
Third-party research has confirmed that stores included in the pilot program saw a significant uptick in traffic, relative to control stores.
Of course, processing returns for Amazon will also lead to incremental expenses for Kohl's. From the outside, it's hard to know what the net impact on the company's profitability will be. However, management's bullishness about this program -- following a year and a half of testing -- suggests that the benefits outweigh the costs. Kohl's CEO Michelle Gass is particularly excited about the returns program bringing younger consumers into Kohl's stores, giving the retailer a chance to expand its customer base.
Investors have overreacted
Kohl's first-quarter earnings report and guidance cut certainly were disappointing. However, investors are underestimating the company's chances of making a comeback. After its recent plunge, Kohl's stock trades for a mere nine times forward earnings.
The Amazon Returns partnership is just one of several moves that Kohl's is making to reinvigorate sales and earnings growth. For example, Kohl's is improving its merchandise assortment by introducing new national brands. The company has also begun leasing excess space in certain stores to high-traffic tenants. This initiative -- which could be extended to hundreds of stores in the coming years -- has the potential to boost store traffic in addition to creating a new stream of rental income.
Importantly, very few Kohl's stores are located in enclosed malls, so Kohl's is far less vulnerable to falling mall traffic than most department stores. The company also has a strong balance sheet, so it should have no trouble recovering from a potential strategic misstep or a retail downturn.
In short, Kohl's is an underrated company. The recently expanded Amazon Returns partnership is just one of several important initiatives in the works that could lead to improved results -- and a rebound in Kohl's shares -- over the next several quarters.
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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. Adam Levine-Weinberg owns shares of Kohl's. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.