Amazon is driving people to Kohl’s, but will they shop there?

Krystal Hu

A brick-and-mortar retailer’s latest traffic driver is an unlikely source — Amazon (AMZN).

Kohl’s (KSS) gave the e-commerce giant a big shoutout during its first earnings call Tuesday since announcing it will accept Amazon returns in all of its locations. Executives at Kohl's called the nationwide rollout of the Amazon Returns program a strategic move to acquire young customers and “the single biggest initiative of the year.”

In July, over 1,100 Kohl’s stores around the country will accept Amazon returns. The retailer has been testing the program in Chicago and Los Angeles for the past 18 months. It recently rolled out the program in Southeast Wisconsin.

“Our testing has shown that we are driving engagement with our existing customers and attracting new and younger customers. This gives us great confidence in rolling it out nationwide in time for our significant back-to-school launch, which begins in July,” Bruce Besanko, Kohl's CFO, told analysts on Tuesday. The department store chain reported weaker-than-expected sales for its first quarter, which sent its shares down 10%.

The traffic lift from Amazon comes at a cost. Kohl’s has been adding staff and investing in reverse logistics to handle Amazon returns, which is the main reason for the $25 million increase in its Selling, General and Administrative (SG&A) expenses for 2019.

Kohl’s needs to increase sales

Kohl's stock is down 12% year-to-date.

The bigger question is whether Kohl’s could turn the boost in foot traffic into actual sales. Lorraine Hutchinson, an analyst at BofA Merrill Lynch, estimates the mall chain needs the Amazon initiative to generate an additional 1.5% in comparable store sales growth from the previous year to offset the incremental SG&A cost.

Kohl’s said it can’t break down the sales from stores in the pilot because it was not large enough to have a material impact on the company’s quarterly results. But it expects to see “immediate benefits” from the program in July.

“We need to take that traffic and convert it into sales. And we've modeled some sales into the back half, and we're pressing our teams to be sure that they do that efficiently and that they do it well,” Besanko said. The retailer lowered its annual adjusted earnings guidance to $5.15 from $5.45 per share due to tariffs, but said the Amazon program could offset some losses. “This is our No.1 priority for the company, and we're going to make sure that we get everything we think we can.”

“The return program is definitely a good way of lifting footfall and bringing in younger shoppers to Kohl’s. However, it also needs to lift sales and that can only happen if Kohl’s puts good product in front of shoppers,” Neil Saunders, managing director of retail at GlobalData told Yahoo Finance. “As good as the Amazon initiative is, Kohl’s shouldn’t be overly reliant on a third party to drive its business forward.”

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