After Kohl's (NYSE:KSS) disastrous first-quarter earnings report that saw revenue fall 3%, comparable-store sales tumble 3.4% and earnings drop 5%, the retailer needs its partnership with Amazon.com (NASDAQ:AMZN) to work.

Serving as the drop-off point for Amazon's package returns has the potential to generate more store traffic for Kohl's, and there's some proof it may actually be working. It also underscores why CEO Michelle Gass is taking the program nationwide to all 1,000 Kohl's stores beginning July 1.

A woman puts tape on a box.

Amazon.com customers no longer need to package their purchases when returning them through Kohl's. Image source: Getty Images.

Drawing customers in

Data from Earnest Research indicates the pilot program in 82 stores in the Chicago and Los Angeles markets delivered a 9% increase in new customers visiting participating Kohl's stores and buying merchandise, while also resulting in an 8% increase in revenue at the test locations. Those numbers far surpassed the 1% and 2% increases, respectively, in those two metrics that Kohl's saw companywide during the trial period.

Looking at anonymized credit, debit, and bill-paying activity of millions of U.S. consumers, Earnest compared Kohl's data from stores in the test markets with those in the rest of the country. It found the sales between the two largely marched in lockstep in the year leading up to the returns program, and then widely diverged afterward.

For example, sales growth in Chicago closely tracked with the rest of the U.S. until the first quarter of 2018  (it began its Amazon partnership in November 2017), when revenue growth surged ahead 10% in the test market, compared with 5% for the rest of the U.S. In other words, Kohl's saw immediate sales growth following its partnership with Amazon. 

Perhaps more importantly, new customers coming into Kohl's stores started making purchases around the same time. Earnest found that growth in new customers (defined as customers who had not shopped at the retailer at all during 2017) rose 9% in the trial markets versus 1% nationally.

The market researcher concluded "the Amazon initiative has driven new customers to store locations, accomplishing the partnership's goal."

Moreover, it builds on the geolocation data that Gordon Haskett Research Advisors used that found traffic at five test stores in Chicago rose 8.5% during the first six months of the program and that 56% of those visiting were new customers, or shoppers who hadn't been at Kohl's in the prior three months. That was better than the less than 43% increase recorded at other locations.

More paths to growth

Kohl's has shown a willingness to think differently about retail. Amazon, which is largely responsible for the crisis confronting the industry, has sought out a greater physical retail presence, and Kohl's was willing to invite it into its stores in hopes of riding the e-commerce leader's coattails.

Before the returns program began, Kohl's had opened an Amazon boutique in its stores staffed by Amazon employees, where the e-tailer could sell its Alexa-enabled Echo smart-home gear. While that particular partnership was eventually scrubbed, Kohl's agreed to stock Echo products just like it would other merchandise.

The two then began exploring other ways they might profit from each other, and the returns program was born. Kohl's is also subletting space to supermarket giant Aldi and gym operator Planet Fitness to attract people to its stores who might not otherwise shop there.

Scaling up the potential

I've been skeptical that Kohl's is deriving any meaningful benefit from a partnership that improves the customer experience for Amazon, and does so at a cost to Kohl's, which pays for the packaging and shipping of the products being returned. But the latest data increasingly looks like it just might be paying dividends.

Although customers might have numerous other options to return a package, like the post office or a local UPS store, the no-cost aspect of the Kohl's service seems to outweigh the relative inconvenience of driving to one of its stores. And while there, they may as well just look around and buy something.

Now Kohl's needs it to work nationally, because its first-quarter earnings signal that more pain is coming if it can't reverse customer defections.