What Did Customers See Coming In Kohl's?

|
Includes: ACSI, KSS
by: Josh Blechman
Summary

For Q1 2019 Kohl's reported worse than expected Rev, EPS and cut full year guidance.

For three consecutive quarters the ACSI ETF - which weights companies by their levels of customer satisfaction relative to peers - had reduced its position in KSS.

KSS has partnered with Amazon in an effort to drive traffic to their stores and should emulate AMZN's customer centered approach to keep them satisfied.

Kohl’s (Ticker: KSS) shares dropped more than 12% on 5/21/2019 after reporting worse than expected revenue (for the third straight quarter), EPS and cutting full year guidance. Along with the broader department store industry, Kohl’s has a customer satisfaction problem. Below is a quote from the February 2019 American Customer Satisfaction Index Retail industry report for 2018-2019 (ACSI conducts over 300,000 customer surveys a year and rates companies on 0-100 customer satisfaction scale).

Department and discount stores struggle to keep up on multiple fronts. The industry continues to grapple with the shift in demand to online shopping, and in-store customer service is not living up to expectations either. Despite a promising holiday season, many large chains posted disappointing results. According to the ACSI, customer satisfaction with department and discount stores is down 1.3% to an ACSI score of 76

One key trend the report identified, is that customers far preferred the online shopping experience to any other category of retail. This creates further challenges to traditional brick and mortar stores and potentially a driving factor behind KSS’s initiative to drive traffic through accepting Amazon returns in their stores.

What department store satisfaction metrics dropped the most? Call center satisfaction dropped -3.9% Year over Year, while satisfaction with in-store cleanliness and layout dropped -1.3%. It stands to reason that customers have value relevant information about their future buying behaviors – so how does Kohl’s’ recent customer satisfaction stack up and how has the stock price responded?

For that, we can look to the American Customer Satisfaction ETF (ASCI) – which tracks an index that uses proprietary customer satisfaction data from the American Customer Satisfaction Index, to weight a portfolio of top satisfaction companies measured by the American Customer Satisfaction Index. Full Standardized performance for the ACSI ETF can be found here.

The chart above (which was sourced from Factset) shows the twelve-month price history of KSS (blue line, measured on the right axis from 5/21/2018-5/21/2019) against the contemporaneous number of KSS shares held within the ACSI ETF (green line, measured on the left axis).

During the October 15, 2018 ETF rebalance (a day on which KSS closed at $71.15/share), ACSI cut its KSS position nearly in half, from 0.71% to 0.41% and eventually to a 0.36% position during the April 15th, 2019 rebalance. As of the earnings announcement May 21st close, KSS is trading at $55.14 – representing a -22.5% decline in share price.

Kohl’s customer satisfaction, which is measured annually has stayed constant at 79 since 2016 - but got left behind as the overall National Satisfaction score has increase +3.8% over that span.

Kohl’s CEO Michelle Glass referred to the above-mentioned Amazon partnership as the “biggest initiative of the year” and integral to their plan of driving customer traffic. To satisfy those customers, they would be well served to take a page out of Amazon’s company ethos by maintaining a relentless focus on putting the customer at the center of everything they do. To this point, (as seen below) Jeff Bezos lead off his April 2018 letter to shareowners by noting that “The American Customer Satisfaction Index recently announced the results of its annual survey, and for the 8th year in a row customers ranked Amazon #1.”.

Time will tell if Kohl’s can capitalize on the increased traffic the Amazon buy focusing on delivering a great customer experience.

Disclosure: I am/we are long KSS. Business relationship disclosure: The author, Josh Blechman is the Director of Capital Markets at Exponential ETFs, an SEC Registered Investment Advisor. Exponential ETFs is the issuer of the American Customer Satisfaction ETF (Ticker: ACSI)

Additional disclosure: Performance data quoted represents past performance and does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance of the Funds may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 734.882.2401.

Click here to view the Prospectus.

Fund holdings and/or sector allocations are subject to change and are not a recommendation to buy or sell any security. Click here for top 10 holdings.

Investments involve risk. Principal loss is possible. The securities of large-capitalization companies may be relatively mature compared to smaller companies and therefore subject to slower growth during times of economic expansion. The Index relies heavily on proprietary quantitative models as well as information and data supplied by third parties (Models and Data). Because the Index is composed based on such Models and Data, when such Models and Data prove to be incorrect or incomplete, the Index and Fund may not perform as expected. As with all index funds, the performance of the Fund and its Index may differ from each other for a variety of reasons. For example, the Fund incurs operating expenses and portfolio transaction costs not incurred by the Index. In addition, the Fund may not be fully invested in the securities of the Index at all times or may hold securities not included in the Index. The Fund has the same risks as the underlying securities traded on the exchange through the day. Redemptions are limited and often commissions are charged on each trade, and ETFs may trade at a premium or discount to their net asset value. To the extent the Fund invests more heavily in particular sectors of the economy, the Fund’s performance may be more sensitive to developments that significantly affect those sectors.

Shares of the American Customer Satisfaction ETF may be sold throughout the day on the exchange through any brokerage account. However, shares may only be redeemed directly from the Fund by Authorized Participants, in very large creation/redemption units. There can be no assurance that an active trading market for shares of an ETF will develop or be maintained. Market price is the price at which shares in the ETF can be bought or sold on the exchanges during trading hours, while the net asset value (NAV) represents the value of each share’s portion of the fund’s underlying assets and cash at the end of the trading day.
The American Customer Satisfaction ETF is distributed by Quasar Distributors, LLC. Exponential ETFs, a
registered investment adviser, serves as investment adviser to the American Customer Satisfaction ETF