Amazon WIll Buy Kohls. Bet on It. I Did.

 

Amazon Will Buy Kohls. Bet on it. I Did.

A recent article in Forbes, “It’s Time For Amazon & Kohl’s To Consummate Their Relationship With An Amazon Go Partnership” by Chris Walton envisions that the next step for Amazon and Kohls, who already have partnered with Kohls accepting Amazon online returns, would be an Amazon Go partnership within the 1158 Kohls stores (or some part thereof).

 

He points out that several competitors in the mass market genre have found a windfall during the pandemic, while Kohls has dropped: “ Kohl’s sales were down 23% over the last quarter, a stark contrast to the performance at places like Walmart WMT -1%, Home Depot HD -0.4%, and most especially Target TGT -0.1%, where Target’s same-store sales were up an insane flipt-the-script 24%.”

 

I agree with his statement that the other retailers listed above have found greater relevance during the pandemic, while Kohls has not, and was, as with all the other Pandemic victims, searching for relevance even before the Pandemic started having an influence on retail sales.

 

If you can’t find relevance, what do you do? Chapter 11 is one solution that many have resorted to (although I find it puzzling that Kohls couldn’t come up with a solution to this problem), tantamount to saying, I give up, can’t find relevance anywhere (how hard did you look? Are you the right management to be looking?).

 

Kohls has taken the approach that partnering up with the Big Kahuna of retail, Amazon, is one way to solve the problem since it will drive traffic into their stores. There is one giant flaw to this business logic: Even if you drive customers into your stores who are intending to return goods to Amazon, that is only a good thing if they stop and buy something from you. The above numbers indicate that this has not been the case.

 

So, failing to reinvent yourself with relevant merchandise, and in an image customers clearly understand (like TJX and unlike Sears and JC Penney), looking to Amazon is not a bad idea.

 

Except that the future relationship as Walton envisions it (a sex partner), is not advantageous to Kohls because it is not a relationship of equals; what Kohls needs is a rabbi- or a daddy.

 

From Amazon’s standpoint, the deal that Walton proposes makes no sense. Why go to the expense of retrofitting 1158 stores with Amazon Go when you could buy the whole company and do what you want with it (like expanding the Whole Foods or Amazon Grocery network, which Amazon desperately needs to do to keep their edge with Walmart). Amazon’s one weakness in their competition with WM is their lack of Brick & Mortar; buying Kohls would put a huge dent in that problem.

 

Amazon also wants to increase their share of Apparel Business. Kohls is a way to do that.

 

I am betting that will happen. And I put my money where my mouth is- I bought (some) Kohl’s stock, which is trading at about 34% of its 52-week high, on the premise that Amazon will take my suggestion and buy the whole shooting match. Check out the numbers:

 

Kohls market cap: $3.22Billion

Kohls share price today: $20.22

Kohls share price 52 Week high: $59.28

Kohls revenue: $17.29Billion

Kohls LT Debt: $3.38 Billion

Kohls Liabilities: $2.73Billion

 

Some numbers about Amazon, which you really didn’t need to know to agree with me:
Amazon Market Cap: $1.66Trillion

Amazon Share Price today: $3353

Amazon Cash on Hand: $71.39Billion

 

(All numbers from Seeking Alpha www.seekingalpha.com )

 

IF Amazon offered $25/share (which is 25% higher than today’s share price) for Kohls stock, the 157millon shares outstanding would add up to a buy price of $3.925 billion. Pocket change?

At that share price, a .25% increase would furnish enough money to buy Kohls at the above price. Do I need to say more?

 

Most importantly, buying the whole Kohls Corporation makes abundant sense for Amazon, as I pointed out above, rather than strictly putting Amazon Go into some Kohls stores which may or may not drive the traffic that Amazon wants.

 

I agree with Chris Walton that a relationship with Amazon may be the best or only saving grace for Kohls at this point. I don’t agree that an Amazon Go partnership is “going all the way.” Buying Kohls is.

 

Those of you who read my blog www.isourcerer.com will remember I recently (June 24, 2020) wrote an article suggesting that Amazon buy Macys. I am not just crazily spending Amazon’s money (as if- but I would spend it wisely, you can guarantee. Macy’s and Kohl’s are different market targets. I would envision Amazon buying both. Which would I buy first, if I were Jeff Bezos? Kohls.

 

 

Chapter 11 Bankruptcy: Pardon or Stay of Execution? EXPANDED EDITION

 Chapter 11 Bankruptcy: Pardon or Stay of Execution? Expanded Edition

(The original version of this article was the most popular in the shortest time during the more than 3 year history of this blog- below is an expanded edition of the same post for your enjoyment!)

 

What is Bankruptcy?

 

Per Investopedia:

 

Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common. All of the debtor's assets are measured and evaluated, and the assets may be used to repay a portion of outstanding debt.

 

So, in my simple terms, a company that owes more to its suppliers, landlords, employees, etc. than its sales will repay can file Chapter 11 to protect it from these debts- temporarily. Temporarily should mean that the company can stay open and earn revenue while it figures out how to pay these debts.

 

IF you owe more than you take in, there are only two ways to change that situation: 1. Generate more sales; and 2. Borrow more to pay the debts.

 

Can you actually “emerge” from Bankruptcy and not go back?

 

what you couldn’t before you filed; In case 2, if you don’t accomplish case 1, all you are doing is like the song, Sixteen Tons: “Another day older and deeper in debt.”

 

There is case after case of companies filing bankruptcy and being so overwhelmed with the debt service that they have to do the only thing possible: File Chapter 7 which may allow discharge of debt and liquidation of assets.

 

There are fewer cases of companies that have emerged from bankruptcy (and stayed viable, not returning to bankruptcy) to become profitable enterprises. Those that did have had to rejuvenate their offering, or venture into blue oceans. Examples of this are Apple (near bankruptcy in 1997 and saved by Microsoft, yes, it’s true), Marvel Entertainment, bankrupt in 1996, now owned by Disney and wildly popular. (Investopedia)

 

In the apparel industry, fewer still have emerged and stayed out. One example was Wet Seal, which ventured into plus sizing to save itself. Many others, such as Toys R Us and Sears were too choked by debt and too lost as to what to do.

Below is a graphic of Chapter 11 filings in 2020:

 

IF we view Bankruptcy as a disease, the main cause is the loss of relevance. Either someone took the company’s relevance while it was asleep, or it just forgot to evolve, or both. Great companies survive all manner of financial downturns, some may become even more relevant during it (there are many cases of this during the Pandemic, starting with Amazon, Walmart, Best Buy, etc.). IN summary, there are five main causes for retail bankruptcy in general:

 

1.     Loss of Relevance- The retailer was successful or iconic in a former period, and failed to maintain its relevance in today’s e-commerce driven world; Loss of relevance can occur because either the retailer fails to change, OR is disrupted by other companies taking its business away by offering;

a.     A more attractive value proposition and/or

b.     A superior customer experience which includes friction-free purchasing

 

2.    Failure to Evolve with the Customer:

a.     The influencer groups and the social imperative today have changed from years ago- if the company stands on its brand and does not evolve, it becomes a dinosaur with extinction as the inevitable consequence.

b.     The customer’s view of value is changing with the dominance of e-commerce. Beyond ecommerce, Omnichannel shopping has become ubiquitous; Walmart, Amazon, Target are aggressively balancing their online and Brick & Mortar offerings, with great success.

 

3.     Brands lose significance in favor of retailers:

a.     In today’s world, a retailer is a brand, along with any private brands they bring along. Amazon, Costco, Trader Joes, Target, LIDL, Walmart all are prime examples of retail branding. As a consequence, self-standing brands lose the loyalty and respect of customers that they used to have.

 

4.     The Polarization of Retail and loss of significance of the Great Moderate Middle:

a.     There are two dominant value perceptions on the part of customers today:

                                               i.     The Value of an Item Determines its Price- This is attributable to customers who are willing to spend money for quality, sustainability, beautiful material, longevity, etc. Common amongst customers who shop for designer or high-end brands;

                                             ii.     The Price of an Item Determines its Value- For these customers, the lower the price the higher the value; e.g., if I get something for $10 it is inherently a greater value than if I paid $20 for it or something like it. Common perception of Dollar Tree, Walmart, TJX etc. shoppers.

 

5.    Management Lost Their Way or Never Found It:

a.     Always: The Fish Stinks From the Head

b.     More often than not, in cases of Chapter 11, Management has no Clue as to what to do to save the company; or

c.     It is hamstrung by lenders who want to cut costs and not invest in the company they lent to;

d.     They are hired from outside, because the company has failed to build succession leading all the way back to when they were successful and they need to find a patch.

The above graphic is taken from an online article entitled, “Here’s A List Of 113 Bankruptcies In The Retail Apocalypse And Why They Failed”. If you go through the list, you can see that all of the failures touch upon all or some of the Five Reasons I listed above.

 

Among the examples is my favorite case, Brooks Brothers, which has been a dominant name in menswear, especially shirts, for as long as I can remember (that’s a while!), lost its way as a brand leader with poor merchandising, including a discount brand, Red Fleece, which was housed in the same physical location (how confusing is that about a brand?) and transitioned its value proposition to the Price Mode, thus losing its core customer. The article says about BB:

 

Storied menswear brand Brooks Brothers has grappled with evolving its brand in recent years, as more casual dress styles have become the norm. After it filed for bankruptcy in July, retail management firm Authentic Brands Group and mall landlord Simon Property Group won the bid to buy out the brand by offering a zero-interest loan.

 

Ouch. A realtor and a “retail management” firm. What chance do you think that BB has to really reinvent itself and invest in rebranding?

 

Finally, as I have said in other articles, for companies like JCrew, JC Penney, Ascena and more, COVID-19 is not the cause of death. It is the executioner. Chapter 11 is merely a stay of execution. Why? Tell me, as in the case of Wet Seal, who reinvented themselves in Plus Sizes, what plans for improving its relevance via product mix and customer base, have you heard from the latest list of casualties?

 

 

One retailer who, in my view, has a very good chance to emerge from bankruptcy is Neiman Marcus. Clearly, they are making efforts to get closer to their customer and personalize their offering; IF they match these efforts with great and sustainable investment dressing, they will have completed their task and should be able to generate the income necessary to pay down and back the debt. I have said this a few times, most recently in my last article, “What is the Future of Retail?”

As a former department store retailer, I believe I am right. Let’s see.

 

The bottom line is that Chapter 11, for most, is just a stay of execution. Companies who found themselves in the position to have to resort to Chapter 11 Bankruptcy filing, were usually lost as to their relevance in the marketplace. What is the answer for those companies: Use the Brand Name or Store Name good will and retool, revitalize; strip anything that didn’t work and reinvent themselves. In most cases, as with Sears and JCrew, the Brand has value; it just needs to be applied to the current market.

 

 

US Retail Store Closings-A Good Death

 US Retail Store Closings-A Good Death

Original Publication Date: 7/22/2018-Picture from 1/5/2017

 

 

Almost daily reports of retail store closings, bankruptcies, and shopping malls becoming ghosts of times past is being greeted with alarm or deep concern for the fate of brick and mortar. Ecommerce, and especially Amazon, is almost always blamed.

 

It is true and logical that the growth of ecommerce has siphoned sales from traditional retail; further, the growth of mobile shopping makes it even easier to buy without the trip. 20% of ecommerce sales today are estimated to originate from mobile devices. Ecommerce is a gift of technology.

 

That being said, below I will take the position that 1. Ecommerce is only a small part of the reason for the shuttering of thousands of stores and closing of malls; that 2. There were too many malls in the first place and the shakeup is a good and warranted culling of the herd which will be healthy for traditional retail in the long run; and that 3. Some of the stores that have closed entirely either lost their relevance or failed to compete in a changing world-ecommerce is the catalyst for this, not the reason.

 

Let’s look at a partial list of the casualties:

1.     Traditional department stores- Macy’s, Sears, Kmart, JC Penney- closing stores by the hundreds if not thousands before we are done.

2.     Specialty Stores- Limited, Wet Seal, Aeropostale, Radio Shack (truthfully, I thought they were gone a while ago). They either failed to update or change with the times, to offer an attractive and competitive product to their customers, or just lost their Mojo

3.     Brands sinking into the sunset- Ralph Lauren just closed their flagship store on 5^th Avenue in New York. Why? As the fast fashion specialty chains seek more and more locations in good urban locations, Ralph Lauren closes. Can only be the brand has lost its mojo. At one time it was a status symbol to wear a Polo polo; now, it makes you look almost embarrassingly antiquated.

 

At the same time, fast fashion retailers like Inditex/Zara and Fast Retailing/Uniqlo are both closing and opening stores. They are all closing stores in malls where the anchor store and the mall itself is failing, and opening in urban areas where the traffic and relevance is enhanced and their success depends entirely on their product. During the first quarter of 2017, Inditex opened 71 new stores in 31 markets giving them a total of 7,085 stores for all brands.

 

Please make a note above of the 31 markets. Sad to say that the retail brands that are becoming ubiquitous in US traditional retail are not American brands: Inditex-Spain; Uniqlo-Japan; H&M-Germany; Aldi- Germany; Primark-UK. What they have in common is a comprehensive knowledge of global retailing and the ability to customize their offerings to many markets. No monolithic product arrogance here. This has been the failure of many a traditional retailer- for example, Marks & Spencer recently closed all their stores in China after many years (wait-China? The fastest growing economy in the world?). The main reason is that their product was not managed to suit the market (just my opinion, but it also looked dated and sometimes just plain ugly). I am sure you would have found most or all of it in their stores in UK. That doesn’t work in global retailing-while some product is relevant to multiple markets, most or all of it will never be.

 

But what about shopping malls? Once an anchor store in a mall closes, that mall’s days are probably numbered.  And why are so many shopping malls becoming ghosts or discount centers? Certainly all three reasons given above related to the store or product are part of the story, but the main part of the story is that there are too many shopping malls in the first place.

 

Between 1970 and 2015, the number of shopping malls grew twice as fast as the population. Now the US finds itself with 23.5 square feet of GLA (Gross Leasable Area) per capita! This means you can go into any shopping mall, carve out a 20’x20’ space, and claim it as your share of US Mall Retailing.  And so could the rest of our 321million population.

 

How did this happen? Can’t prove it, but my answer is that the growth of more and more shopping malls, double what was needed based on the population was based on Gordon Gecko’s virtue-Greed. This was a real estate boom and hugely profitable, with no concern or control over the overabundance and concentration of stores. IF a new mall opened, everyone had to be in there, even if it was a stone’s throw from another shopping area with exactly or virtually the same offerings.

 

So don’t blame ecommerce for closing these stores- say Thank You. The economy will be better off for this adjustment, and hopefully those displaced will get new jobs downtown.

 

What about ecommerce? It must be eating so many sales that it is directly causing the retail failures, right? Especially Amazon, right? Wrong. First, if someone is buying clothing on Amazon rather than at Wet Seal (maybe not the same someone), is that Amazon’s fault or Wet Seal’s? You know the answer.

 

But, in general, while ecommerce is growing strongly and steadily, it is not growing as massively as we generally imagine, nor is it yet making enough of a dent in traditional retail so as to cause economic disruption. Here are the facts, courtesy of the US Department of Commerce : In the first quarter of 2017, Ecommerce total sales were $105.7 billion, a growth rate of  4.1% from the 4^th quarter of 2016. Traditional retail sales were $1,250 billion and increased 1% from the previous quarter (a much more mature sector). So the share of total retail for ecommerce is still only 8.5% of adjusted total. Or, conversely, traditional retail still holds 91.5% share of market.

 

Now here’s the most amazing part. Everyone has a web site these days, but of the $105.7 billion, Amazon’s first quarter 2017 (global) sales were reported at $35.71 billion. Revenue grew from $29.1 billion the previous year. If not for Amazon, ecommerce share of market would be truly wimpy. So ecommerce is not growing handily-Amazon is. So Amazon is the main reason ecommerce is growing so rapidly, but it is not  the main reason traditional retailers are closing stores.

 

Retail spending continues to grow steadily. A growing portion is going to dining, entertaining, and resort areas. Apparel is either not growing or declining. So what does that tell you? It tells me clothes just aren’t interesting enough.

 

As far as I know, nobody is complaining that there are not enough Macy’s or Sears or Kmarts to go to now. This is because-there are still plenty-if not too many-of them left.

 

I would suggest to these retailers that they start thinking about their store presentation, merchandise assortments, and general relevance to what the public wants (this starts with buyers who are merchants and can find this relevance-not with spreadsheet keepers).

 

There are about 1250 shopping malls in the US, predicted to shrink to 900. Given the fact that there seem to be twice as many as needed, this culling of the herd is not a sign of apocalypse, but a needed adjustment-a good death.