Takeaway: People are bidding up KSS with zero consideration for the detrimental financial impact of this AMZN deal. Black Book Monday at 10am.

Does anyone do math anymore? They certainly did not today in bidding up KSS 11.9% in what we think is both a dilutive and desperate deal with AMZN. We'll give our take on the earnings impact  -- both the bull and the bear case -- of this 'partnership' in a Black Book on Monday at 10am.

Call Details:
Date/ Time: Monday, April 29th, 10AM EDT
Toll Free:
Toll:
UK: 0
Confirmation Number: 13690333
Live Video Link: Will be provided prior to the call

NOTE FROM EARLIER TODAY

KSS | SLEEPING WITH THE ENEMY

Takeaway: KSS is paying AMZN, its largest existential threat, for the right to expand a test partnership that was not working.

Is it me, or did KSS just decide to pay its largest competitive/existential threat for the right to accept non-KSS product returns in its full fleet of stores? It’s expanding the ~18 month 60 to 80-store test to the full 1150 store fleet after never having ever come out touting that the test actually was accretive/working (which it would clearly have done over the past year if it helped KSS's bottom line). And now all of a sudden it is basically writing a check to roll the dice on rolling AMZN out to the full store fleet? Something changed inside KSS as it relates to its ability to drive traffic – likely negative. This is a move of desperation. KSS even left the mention of the warrants out of its press release – which suggests to me that it’s not proud of what its giving up to fund the initiative.

A key callout here is that this is NOT Amazon investing in KSS. It’s simply accepting a stock payment to get closer to consumers. The twittersphere is already suggesting that this is a move for AMZN to get closer to buying KSS. This couldn’t be further from the truth. Amazon is not taking a stake, it's putting up ZERO capital. If Amazon wanted to buy KSS, it would just buy it, you wouldn't make a deal that inflates the stock price. And why buy it when you can make it PAY YOU TO WORK FOR YOU! KSS is giving up economics in a desperation move to drive traffic. This deal is NOT exclusive. Expect AMZN to strike similar deals with other retailers as well.

Any AMZN-prompted press release is good for a painful short-squeeze in a heavily shorted name like KSS. But when all is said and done, you need to sit back and ask why Kohl’s would ever even consider doing this at such a cost – especially when the initial test has not been shown to yield positive results. So what’s good for KSS stock today is actually quite bad when you consider what it means for the underlying core business.

I’m short KSS, and wrong today. But as bears capitulate, it gets me more intrigued in shorting ahead of what I think will be a 2H earnings miss (and this announcement makes me think that it could be missing sooner than later).

Details on the Warrants:

  • Kohl’s is issuing warrants to Amazon to purchase shares at $69.68.
  • At each of the five vesting dates over the next four anniversaries Amazon will receive 349,489 warrants for a total of 1,747,445.
  • If all of the warrants are vested and exercised it would represent a $122mm "investment" in Kohl’s at the exercise price.
  • Amazon acknowledged that its intention is to acquire the warrants for investment only and not for their distribution (not for sale to other parties).
  • After today’s share price increase Amazon is already showing a ~$1.7mm gain on its gift from Kohl’s.