In late 2017, 82 Kohl's (NYSE: KSS) stores in the Chicago and Los Angeles regions became returns centers for Amazon.com (NASDAQ: AMZN). Under a partnership between the No. 2 U.S. department store chain and the e-commerce leader, Amazon customers gained the ability to return unwanted items to those Kohl's locations. This partnership promised to save customers both time and money. Kohl's employees pack up the returned items and send them back to Amazon, and customers don't have to pay for return shipping.
Kohl's expanded this pilot program to the Milwaukee area last year, but that still meant it was accepting Amazon returns in less than 10% of its stores. However, on Tuesday, the company announced that the Amazon returns partnership will be rolled out to the remainder of its more than 1,100 stores nationwide in July. Investors applauded, sending Kohl's stock soaring 12%.
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Let's take a look at why Kohl's and Amazon are expanding their partnership and what it could mean for these rivals-turned-allies.
A fruitful collaboration
E-commerce offers lots of convenience for consumers. However, returns can be a significant pain point. Not only is repackaging and shipping unwanted items a hassle, it can also be costly. For example, while Amazon pays for return shipping for certain items -- including most clothing, shoes, watches, and jewelry -- customers must foot the bill for many other purchases.
Meanwhile, national omnichannel retailers like Kohl's offer customers a choice between going to a convenient store location or buying items online. However, the growth of e-commerce has put pressure on store traffic, making it harder to cover the fixed costs of operating big stores.
Thus, the Amazon-Kohl's partnership was designed to solve key challenges for both companies. Amazon was able to offer customers who live near a participating Kohl's location an easier (and cheaper) option for returns. Kohl's stood to benefit from additional store traffic related to those returns. Financial terms of the arrangement were never disclosed.
In the months after the partnership began, analysts debated whether Kohl's was smart or foolish to team up with Amazon. Ultimately, most investors concluded that the upside for Kohl's far outweighed the downside. Last May, Gordon Haskett analyst Chuck Grom estimated that Chicago-area Kohl's stores participating in the pilot were seeing an 8.5% traffic bump compared to nearby "control" stores. Much of the additional traffic seemed to come from new and lapsed Kohl's customers, giving the department store chain a chance to broaden its customer base.
Traffic has risen at Kohl's stores that offer Amazon returns. Image source: Kohl's.
The returns program goes national
Many Kohl's shareholders were hoping for the company to expand the Amazon returns program rapidly. Instead, Kohl's has been careful to test big changes in pilot markets before rolling them out broadly.
Given that Kohl's has now decided to accept Amazon.com returns across the country, management appears to be confident that the program is a net positive for the business. The company noted in an SEC filing that rolling out the returns program nationwide would impact both sales growth and operating expenses for the remainder of fiscal 2019 and beyond. However, Kohl's doesn't plan to update its guidance until it releases its first-quarter earnings report next month.
The wide rollout of this partnership is also great news for Amazon. Kohl's has stores in every state but Hawaii. And while its store base skews toward suburban areas, it also has plenty of urban and semi-rural locations. That means the vast majority of the U.S. population lives near a Kohl's store that will accept Amazon returns come July.
Is there more to come?
The returns program isn't the only way that Kohl's cooperates with Amazon. Last month, the department store announced that it would expand a separate program to sell Amazon devices to more than 200 locations.
Additionally, in conjunction with the nationwide rollout of the Amazon returns program, Kohl's gave Amazon warrants to purchase up to around 1.75 million shares of Kohl's stock for $69.68 per share -- near where it was trading for most of last week -- subject to certain adjustments. The warrants will vest over the next several years, assuming the partnership isn't terminated, and they give Amazon a financial stake in Kohl's success.
The issuance of the warrants by itself isn't likely to have a material impact on either company's long-term financial results. However, this piece of news may have helped fuel the rally in Kohl's stock on Tuesday by reviving hopes that Amazon might eventually acquire the brick-and-mortar chain.
There's no pressing reason for Amazon to buy Kohl's outright. The returns program already gives the e-commerce leader most of the benefits of having a broad brick-and-mortar presence, with little or no financial risk. Still, depending on how both companies fare in the coming years, it's certainly plausible that Amazon will one day decide to take its partnership with Kohl's to the next level.
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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.