Kohl's is betting its Amazon partnership will boost sales, but ROI remains unclear

Kohl's third quarter was rocky, but executives still expect Amazon returns to have a positive contribution to the company's operating income in 2019.

Kohl's third quarter was rocky, but the company is betting that a partnership with Amazon will pull it out of a tailspin. The retailer's chief executive Michelle Gass said the company is "leaning into" the Amazon Returns program in terms of investments and marketing, and also looking at it as a means to customer acquisition, conversion, and signups for its branded store card. 

Kohl's began accepting Amazon returns in its more than 1,150 US locations in July. If all goes as planned, Gass said the program will have a positive contribution to the company's operating income in 2019.

"The program is driving incremental traffic into our stores, and we are particularly encouraged by the disproportionate amount of new customers, which on average are also younger than the typical Kohl's customer," Gass said on the company's third quarter conference call. "We are very much looking forward to the holiday season, which will be the first with Amazon Returns in stores nationwide."

Neither Gass nor Kohl's CFO Jill Timm would speak numbers directly, or to whether the Amazon program is producing positive conversion rates or getting customers to sign up as new Kohl's cardholders. However, the executives did say that conversion is meeting expectations and in line with the successful Amazon pilot program, which produced additional foot traffic in stores with Amazon returns in place. 

"We are seeing a disproportionate amount of new customers relative to the amount of new customers we generally acquire," Gass said. "And we're seeing a younger customer, which is also very exciting and right in line with our strategic priority. And we have overt efforts to be messaging the value that you get with Kohl's charge at that point of interaction with the Amazon Return customer."

CFO Timm added: "Over the last two years, we've mentioned that we've acquired customers in the low double digits during this time frame, and this year we had the unique Amazon Returns partnership that we're going to be able to capitalize on to actually accelerate that customer."

Nonetheless, analysts remain skeptical about the Amazon ROI. A research note from analyst firm Jefferies cautions that the Amazon partnership doesn't appear to be providing noticeable benefits and "has yet to fully prove that it is providing a meaningful incremental sales lift and ROI."

Looking at its financials, Kohl's reported third quarter earnings of $123 million, or 74 cents a share, on revenue of $4.63 billion. Same store sales were up 0.4%. Wall Street was looking for earnings of 86 cents per share on revenue of $4.66 billion.

Kohl's also cut its full-year EPS target to $4.75 to $4.95 from $5.15 to $5.45, signaling a potentially weak holiday quarter. Analysts had expected Kohl's to report earnings of $5.11 a share. Kohl's ended the day Tuesday with its shares down nearly 20%.

The retailer pointed to an "increasingly competitive promotional environment" and warmer weather at the start of the fall season for the underperforming quarter. Kohl's said it lowered its forecast because it expects heightened discounting among its competitors to continue for the rest of the year. 

Digital sales growth remained a bright spot for the company, increasing at a mid-teens percent rate with most gains coming from mobile. Like other retailers, Kohl's is melding its in-store and digital experiences, and in its financial report noted that it's seeing some lift from offering buy online, pickup in store (BOPUS). 

"In Q3, in-store customer pickup penetration further increased as a percent of digital orders," said Gass. "We are also improving on speed, with 95% of BOPUS orders available within 1 hour, which positions us very well for the holiday rush. Our stores are also fulfilling more Digital ship-to-home orders. In this holiday, we will expand the number of stores from 10 to 135 carrying incremental inventory to support the peak volume periods of our digital business."

RELATED: