Why Kohl's Expanded Relationship With Amazon Could Be A 'Game Changer'

Kohl's Corporation KSS announced an expansion of its partnership with Amazon.com, Inc. AMZN across 1,150 stores in the United States. Is the new relationship a "game changer" for Kohl's?

The Analysts

UBS' Jay Sole maintains a Neutral rating on Kohl's with an unchanged $72 price target.

Morgan Stanley's Kimberly Greenberger maintains at Underweight, unchanged $58 price target. 

UBS: Upside Isn't Fully Priced In

Kohl's stock gained more than 10 percent after confirming its partnership expansion and the double-digit move doesn't fully incorporate the true potential, Sole said in a research report. Even though initial details are limited, the fact Amazon chose to partner with Kohl's likely implies it's a best-in-class off-mall department store.

The agreement also allows Amazon to buy 1.47 million shares of Kohl's stock at an exercise price of $69.68. Sole said it would be reasonable to guess Amazon is assuming the partnership will result in Kohl's gaining a "meaningful amount" of new business so it can earn a profit on the stock. Perhaps more important, Amazon taking a stake in Kohl's would lower its need to seek out other partners to help manage returns.

Kohl's made it clear in the early stages of the relationship it's only interested in an expansion if it makes economic sense for it to do so. Since the partnership will soon expand across the U.S., Sole said there is "no reason to doubt" Kohl's is benefiting financially and this deal could be a potential "game changer" in the retail space.

Morgan Stanley: But What About Cost?

Kohl's is likely to see a boost in traffic to stores from the Amazon partnership, but Greenberger said it's not clear if this can be sustained over time. Kohl's is handling the SG&A expenses, including processing returns at no cost to the customer. The department store can take advantage of empty space in its trucks that are already leaving its stores.

It's not year clear if the incremental revenue and gross profit dollars from the partnership will more than offset the incremental costs.

When the deal was confirmed, the warrants had a value of around $25 million but at Tuesday's $75.48 closing price the warrants have a value of around $30 million. It's clear how Amazon benefits financially from this aspect of the deal, but the analyst is "puzzled" as to why Kohl's agreed to essentially give away free value.

Price Action

Kohl's stock traded lower by 2 percent at $74.10 per share Wednesday morning.

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