Kohl's says it's not trying to get acquired by Amazon -- but traders are preparing just in case

  • Kohl’s has been cozying up to Amazon in recent months, but the company’s incoming CEO says it’s not an attempt to get acquired.
  • Traders are positioning anyway for a stock increase that would likely result from a deal.

Kohl’s is trying a novel approach to fending off the Amazon-led retail apocalypse: play nice with the enemy.

Last month, the department store operator said that it would open up Amazon shops in 10 of its locations, with a focus on technology products. A few weeks later, Kohl’s announced that it would start accepting returns for items purchased on Amazon.com.

The decisions were the epitome of “if you can’t beat ’em, join ’em'” logic, and investors rewarded the company with a 7.7% stock rally from the initial announcement through the end of September.

It also started chatter that Kohl’s was cozying up to Amazon with hopes of being acquired.

Incoming Kohl’s CEO Michelle Gass addressed this speculation in a Bloomberg TV interview on Tuesday. When asked whether Kohl’s is looking to get bought, she simply said, “I don’t think so, no.”

But traders are taking no chances. If Amazon does purchase Kohl’s, it would likely be for a large premium over its current stock price, creating a big payday for investors who stuck with the company through an increasingly difficult retail environment. For evidence of this, look no further than Amazon’s $US13.7 billion acquisition of Whole Foods earlier this year, which saw the company pay a whopping 27% premium.

In order to position for this, traders are paring hedges on the company, leaving them more directionally exposed to profit from a stock price increase. The implied volatility spread between Kohl’s shares and an exchange-traded fund tracking the retail industry has fallen to the lowest in more than two years. (Implied volatility reflects investor expectations of price swings, and lower levels imply bullishness.)

KSS implied vol spreadBusiness Insider / Joe Ciolli, data from BloombergJudging by the implied volatility spread, traders are the most bullish on Kohl’s in more than two years, relative to the SPDR S&P Retail ETF.

What’s more, the three most traded Kohl’s options contracts on Tuesday were calls — which reflect wagers on a stock price increase.

Gains would be welcome news for Kohl’s shareholders who saw the stock plunge 19% in a single day at the beginning of the year, after the company made big cuts to its annual profit forecast. Shares are up 3.1% since then, but remain down more than 12% on a year-to-date basis.

Some analysts have been won over since Kohl’s announced its collaboration with Amazon. On October 9, Telsey Advisory analyst Dana Telsey upgraded the stock to outperform and increased her price target to $US50, citing continued momentum for the company.

Kohl’s “continues to play offence in a defensible world,” she wrote.

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