It Would Be a Mistake for Kohl's to Buy This Retailer

Buying home-goods retailer At Home (NYSE: HOME) wasn't a good idea for Kohl's (NYSE: KSS) before its disastrous first-quarter earnings report. Now, following its dismal performance, it's even less so.

The home-goods market is saturated with competitors all trying to remain relevant, and though At Home has grown sales, comparable sales, and profits at a healthy clip, it's run into "patches of softness" that portend a coming slowdown. Kohl's was already dealing with its own weaknesses -- significantly exacerbated by its dismal earnings showing -- so tasking itself with improving another business when it so desperately needs to fix its own is a tall order.

Desperately trying to drive traffic

Kohl's has been juggling to keep its numbers up and launching numerous initiatives to drive traffic. It's divvying up its stores so partners like supermarket Aldi and gym chain Planet Fitness can take over the spaces, as well as teaming up with (NASDAQ: AMZN) to serve as a point of package returns for the online retailer.

Reducing its store size should lower Kohl's operating costs while potentially bringing in more customers in the form of those going to buy their groceries or work out. Assuming the costs of returning packages for Amazon customers could also get customers into its store. There's even circumstantial evidence that it's working, causing Kohl's to expand the Amazon program to all of its stores.

While an argument can be made in favor of these initiatives because they attempt to boost customer traffic at Kohl's stores, it's hard to make a similar case for Kohl's buying At Home.

Housewares at a crossroads

At Home operates 188 superstores in 38 states that stock furniture, housewares, and seasonal decor. Reuters reported that it has been actively exploring a sale for the past three months, and it was already in advanced deal negotiations with private equity firms. Citing sources familiar with the negotiations, the news outlet said it was Kohl's that approached At Home about a possible deal, though no offer has been made.

Home products represented about 20% of Kohl's revenue in 2018, or over $3.6 billion, though sales rose less than 1% year over year. Women's apparel has typically been its forte, with almost $5.4 billion in sales, or 28% of total revenue last year, but that was down 6% from the year before. CEO Michelle Gass described the segment's performance in the current quarter as "mixed," suggesting it hasn't recovered.

This is why Kohl's pursuing At Home at this particular moment is worrisome. It's willing to accept the task of growing a different business, but it still hasn't identified how it will fix its biggest sales generator, and its own housewares business was soft in the first quarter.

Worse, it could be taking on this acquisition just as the housewares industry is suffering from increased tariffs as the trade war between the U.S. and China heats up. Gass told analysts they hadn't expected tariffs to go up when she gave guidance last time, but they were just hiked to 25%, and the hit will be felt largely in the housewares and home category for Kohl's.

An unsettling time

During its fourth-quarter earnings conference call in April, At Home said it had effectively navigated the tariff increase to 10%, and it too was operating under the assumption it was going to stay at that level. The cost reductions and price hikes it imposed to mitigate the original tariffs may not prove as effective this time around.

Further, home and housewares is a segment is targeting for growth. A report last year by One Click Retail found that housewares is second only to consumer electronics in importance for Amazon.

Analysts have speculated that Amazon could be grooming Kohl's for an acquisition through its partnership as the spear-tip for its physical store strategy. Letting Kohl's buy At Home and then acquiring Kohl's would give Amazon a massive brick-and-mortar presence and a significant foothold in the housewares sector. However, there's no proof such an effort is under way, and Kohl's buying the housewares superstore retailer still isn't in its own best interest.

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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. Rich Duprey has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.