With Kohl’s Corp. (NYSE: KSS) and Amazon.com ( AMZN) striking a partnership, is there a stock market investment opening for retailer chains?
In the short term, the partnership announced last week provides a boost for Kohl’s stock, which rose about 4.7 percent on the announcment. That’s a sign that investors approve of its “smart homes” rollout set to launch in October.
Under the terms of the deal, Kohls will open 10 of its stores to include the Amazon smart home experience, and allow shoppers to buy Amazon products like the Fire tablet and Amazon Echo.
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Kohls isn’t exactly on groundbreaking turf here. Sears Holding Corp. ( SHLD) already sells it Kenmore appliances on Amazon, and Best Buy Co. ( BBY) also provides an Amazon “store-in-store” experience for its customers.
Still, the Kohls move does signify a trend where brick-and-mortar retailers are taking an “if you can’t beat ’em, join ’em,” stance on online competitors like Amazon.
Sleeping with the enemy. While that model is working for Kohl’s in the short term, does it bode well for retail stocks and funds in the long term?
Maybe so, investment experts say — but only under certain conditions.
“Based on our own experiences, there are department stores that are able to withstand the impact of online retailers such as Amazon,” says Palash Misra, a management director at Stax, a strategy consulting firm working with corporations, private equity firms and their portfolio companies, based in Boston.
Discount retailers are one example, Misra says. “Stores like TJ Maxx ( TJX), Burlington Stores ( BURL) and Ross Stores ( ROST) have created a treasure-hunting experience for consumers that cannot simply be replicated online,” he says. “These stores carry a limited selection of apparel and home furnishings that consumers desire. Furthermore, the store’s ability to rapidly turn over limited quantities of products creates a constant treasure hunt, which is a rarity.”
That notion of “discovery at a low price” is what draws shoppers back to the store, Misra says. “That’s a distinct barrier that protects these off-price or discount retailers from the Amazon or e-commerce effect,” he says.
Other retail sector gurus say physical stores like Kohl’s continue to face an uphill climb, especially with the high cost of real estate, a scenario nowhere near as vexing for online retailers.
“Brick-and-mortar retailers must transform physical stores beyond store rooms with an eye toward how online retailers use their physical space today,” says Christian Magoon, chief executive officer of Amplify ETFs, in Colorado Springs, Colorado. “That means less showroom and more capability for package delivery and pick up, increased automation behind the scenes and better technology within the store.”
Online giants looking for a physical component. On the other side of the retailer space, leading online companies like Alibaba Group Holding ( BABA) and Amazon are realizing that they need a physical footprint to better compete in tomorrow’s retail landscape, Magoon says.
“The retail world is quickly moving to an omnichannel experience,” he says. “The omnichannel approach is to have both a recognizable online and physical footprint in order for consumers to browse, purchase or pick up any way they want. Omnichannel retail is designed to be a seamless experience for today’s consumers as they bounce between the online and physical word when shopping.”
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Even so, the bulk of retail industry financial growth comes from the online side, a trend that Magoon expects to accelerate at the expense of Kohl’s, Target Corp. ( TGT) and other retailers.
“We’ve seen an unbelievable performance difference between companies that receive the majority of their sales through online channels versus the brick-and-mortars,” he says. “For brick-and-mortar, it just continues to be a downward spiral of bad news or dead cat bounces on news that’s not as bad as expected. So, we think online is the place to be and we’re still really early in the game in terms of market share for online sales.”
Currently, online retail sales comprise less that 10 percent of all retail sales, but that number is growing each year.
“On the flip side, traditional brick-and-mortar sales are falling close to double digits,” Magoon says. “As online and traditional market share numbers move closer to each other, the race is on for retailers to control their future by becoming an omnichannel leader. While brick-and-mortar stores struggle with legacy models, online retailers appear poised to extend their momentum across clicks to bricks. For consumers this means lower prices, more convenience and increased selection.”
Today’s consumer is used to technology making life easier and more convenient, Magoon says. “The growth of online retail sales (a 20 percent-a-year growth rate in the U.S. going back to 1999) relative to the decline of brick-and-mortar sales is all about the convenience online retail continues to offer — competitive pricing, ability to easily check pricing, increased selection and delivery options,” he says.
One brick-and-mortar retailer that market watchers like is Wal-Mart Stores ( WMT) — but only if the retail giant keeps pushing further into the online space.
“Walmart is wisely experimenting with its brick-and-mortar advantage — it’s in the neighborhood so to speak — to get items to customers more conveniently,” Magoon says. “This move is also likely motivated by Amazon’s acquisition of Whole Foods and Aldi’s recent delivery initiative.”
Forward-thinking retailers like Walmart and Amazon are looking into the future and racing to develop cutting edge delivery for the growing online retail market, Magoon says.
“In the future, there will be autonomous vehicles delivering packages — mostly in the form of autos and trucks with potentially some robots in small delivery areas,” he says. “Drone delivery is also likely to happen and delivery hubs are likely to be brick-and-mortar locations and there is a possibility low-level air hubs will be used to recharge and fuel drones.”
Physical retailers that are making inroads into online delivery and digital services are the stocks that will thrive going forward, especially as Amazon has stumbled recently, other market mavens say.
“I’ve classified Amazon as a ‘sell,'” says Brent M. Wilsey, owner of Wilsey Asset Management in San Diego California. “That’s as Amazon has been a stock market star, and while the stock has surged with its lofty growth expectations.”
[Read: Will Partnering With Amazon.com Save Retailers?]
The problem is that Amazon has valuation ratios that are hard to justify, Wilsey says. “The price-earnings ratio of 240.7 is well above the industry average of 54.2, while its price/sales ratio of 3.1 is expensive against the industry average of 1.25. In addition, Amazon’s price/tangible book value of 24.2 exceeds the industry average of 16.5, and its price/cash flow of 40.2 also is well above the industry average of 16.4,” he says.
The company’s growth expectations have stemmed from the sales growth which has seen an increase of 24.4 percent over the last 12 months, Wilsey says. During the same time frame, EPS has declined 1.2 percent. “I don’t like to see EPS declining when sales are growing,” he says.
Correspondingly, Wilsey has issued a “buy” call on brick-and-mortar mainstays Best Buy and Target, both buoyed by strong back-to-school sales numbers, and strong valuations for both retailers.
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Is Kohl’s Move With Amazon a Market Mover for Retailers? originally appeared on usnews.com
