What Did Customers See Coming In Kohl's?

Includes: ACSI, KSS
by: Josh Blechman

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)

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