• It's Coming...

    MARKET EDGES

    Identify global risks and opportunities with essential macro intel using Hedgeye’s Market Edges.

Takeaway: Decoupling KSS Credit from the Rewards Program is fine. But 57% of revs and $1.24 in EPS is dependent on Credit. KSS shouldn't disrupt this.

Yesterday KSS announced an 'official' change to its rewards program. We think this represents more of a risk than anything else.

Here's the Release

Kohl’s Pioneers New Approach to Customer Engagement with Launch of Yes2You Rewards Loyalty Program

(http://phx.corporate-ir.net/phoenix.zhtml?c=60706&p=irol-newsArticle&ID=1974215)

What It Is: Put in simple terms, this is a decoupling of KSS' credit card from its loyalty program. Previously, anyone that wanted to enroll in the 'rewards program' also had to have a KSS Credit Card. 

Why It's Not New: This was largely a press release to the general public -- not to Wall Street. Earlier this year KSS decoupled its rewards program from its credit card in Pittsburgh, Milwaukee, and most markets in Texas and California. The company said that it would change up the rest of the US in the back half of the year -- which it just did.

Why We're Concerned

  1. First off, in our recent survey, 18% of people said that they are members of KSS rewards program, which is the highest rate of any department store in our survey (ie might not go much higher). The interesting thing is that 57% of KSS Sales flow through the credit card -- up from 47% 5-years ago.
  2. This is a program with CapitalOne, switched three years ago from Chase. It's worth noting that the median credit scores for CapitalOne's portfolio range from 600-650 compared to Chase at 700-750. So it's safe to assume that the last 700bp in KSS sales bought on the store card came from a consumer with lower credit quality, and presumably is in a less enviable financial position.
  3. While it's possible that Kohl's 'Pioneered Approach to Customer Engagement' increases customer loyalty, we'd actually wonder if this gives an outlet for current rewards members to no longer use the KSS card. KSS flowed $407mm in credit card income through its P&L as an offset to SG&A last year -- that's 9.5% of total SG&A, or $1.24 per share in earnings. That's probably headed down, not up. 

KSS - The Risk In 'KSS Rewards' - 10 7 kss1

KSS - The Risk In 'KSS Rewards' - 10 7 kss 2