(Bloomberg Opinion) -- Kohl’s Corp.’s dismal first-quarter earnings report made one thing clear: The innovative partnership it struck with Amazon.com Inc. is more important than ever.
The department-store chain reported Tuesday that comparable sales fell 3.4% in the first quarter, a figure that was far below analyst expectations and made for its weakest performance on that measure in three years. Gross margin slipped to 36.8% and the company slashed its earnings per share guidance for the full year.
And keep in mind, with a trade war looming, things could get more challenging from here: President Donald Trump’s latest batch of proposed tariffs, which could slap 25 percent levies on $300 billion of goods, including clothing and shoes, is a big wild card for the chain and many of its peers. Kohl’s shares plunged more than 10% in early trading.
The weak performance casts Kohl’s imminent rollout of a nationwide a program in which it accepts returns of Amazon purchases at its stores in a different light. It creates much greater pressure for the initiative – which I think is one of the bolder and more interesting transformation efforts in the entire retail industry – to bolster results immediately.
Fortunately, I think there is a good possibility the Amazon partnership does bear fruit relatively quickly. The department store’s CEO, Michelle Gass, has said gaining market share with millennial moms is a particular priority. While it’s hard to know exactly which Amazon shoppers are choosing to make returns at Kohl’s, we know Amazon’s customers generally skew younger than Kohl’s, meaning it could help the retailer make inroads with this important group.
There are promising signals that the Amazon partnership is, indeed, delivering a much-needed surge in foot traffic in the stores where it has already been rolled out. Chuck Grom, an analyst with Gordon Haskett Research Advisors, estimates that customer growth in three markets that have launched Amazon returns has been, on average, 5.20 percentage points greater than at the Kohl’s chain overall, since the service debuted.
And there’s no reason to doubt that pattern won’t continue after the nationwide rollout. Kohl’s stores are conveniently located for many shoppers; the chain says 80 percent of the U.S. population lives within 15 miles of one of its stores. Kohl’s offers ample parking and its stores are open seven days a week late into the evening. The same typically isn’t true of the UPS Stores where you might otherwise have to make your Amazon return.
Success at the chain-wide level with the Amazon partnership could help give Kohl's the thing it badly needs: more footsteps in its stores. That would complement the work Kohl’s has been doing to improve its profitability. In particular, it has been shrinking the footprint of its stores and selling or leasing the empty space to partners such as Planet Fitness. This also allows it to carry less inventory in those locations.
Unfortunately for Kohl’s, I worry Tuesday’s results might weaken investors’ appetite for another bold, potential initiative. Reuters reported last week that the department store has approached At Home Group Inc., a fast-growing big-box home goods chain, about an acquisition. At Home Group shares have come down quite a bit in recent months, making for a good moment to strike.
At Home Group – which has, on average, 110,000-square-foot stores and intends to grow from 180 to about 600 locations – could gobble up some of the department-store square footage Kohl’s has demonstrated it is looking to repurpose. But maybe now looks like a moment to focus on its core business, not branch out.
The first quarter was a major stumble in Kohl’s bid to win over more customers and to remake the department store for the future. But Gass has enough big ideas that I’m not writing off the chain’s transformation chances just yet.
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Sarah Halzack is a Bloomberg Opinion columnist covering the consumer and retail industries. She was previously a national retail reporter for the Washington Post.
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