Kohl's is building a legion of loyal shoppers

At a time when shoppers have more options than ever, Kohl's is placing a wager that one set of customers can help revive its sales: Its loyalists.

The discount department store, which outperformed Macy's during the third quarter, is hoping to ride its momentum into the critical holiday shopping period, which accounted for one-third of its sales last year.

There are several winds at the retailer's back. For one, it's the first holiday season in which its shoppers can pick up their online orders in-store, a tactic that's led to additional purchases 25 percent of the time.

It's also the first Christmas that its new loyalty program has been rolled out in earnest, with more than 34 million shoppers now enlisted. By combining this initiative and its Kohl's charge card memberships, the retailer is using customer data to provide shoppers with more relevant promotions and store visits, to encourage future purchases.

But while analysts are optimistic about the strategic moves Kohl's is making, they're not yet convinced it will be enough to combat an influx of inventory in the sector, or a general slowdown among department stores.

Though Kohl's reiterated last month that it expects to earn between $4.40 and $4.60 this year, consensus estimates trail that forecast, at $4.31, according to Thomson Reuters.

"Over the last 12 months, management has admirably bitten the bullet to focus on change initiatives," Evercore ISI analyst Omar Saad said. "However, we believe these efforts may not be enough to counter balance the falling tide."

Kohl's has offered a store-branded charge card since the 1970s. But only recently did it realize the "fertile ground" of data that could be mined from analyzing customers' purchase behaviors, said Will Setliff, Kohl's executive vice president of marketing.

To capture insights from even more shoppers, the retailer decided to introduce a tender-agnostic loyalty program, called Yes2You. Since launching nationally last October, Kohl's has more than tripled its membership base from the roughly 10 million it had during testing; it's also doubled its email database.

Combined with the information from its credit customers, the company is now able to track 80 percent of its purchases to known shoppers — numbers typically reserved for the likes of grocery stores or pharmacies, which can receive multiple visits from a shopper each week.

"The amount of customer data we have has just absolutely exploded," Setliff said.

The more frequently members shop with Kohl's, the more the company learns about their behavior. That means if someone consistently purchases young girls' clothing, Kohl's can send them emails when it launches a new toy property that would appeal to a child around that age.

It can also pool customer analytics by location, to make its floorsets match the wants of customers who shop there. In the Northeast, for example, its exclusive Jennifer Lopez line is more popular than in other parts of the country.

Setliff said one of the biggest challenges the retailer faces is converting new shoppers into returning visitors. To do so, his team looks at the customer's initial purchase behavior, and offers additional incentives to get them to come back.

"If a new customer doesn't shop again within 30 days, they'll lapse pretty much permanently," he said. "We have a very short window to give them a reason to come back to the store."

Once Kohl's has built rapport with a shopper, the next step is getting them to enroll in a store-branded charge card. Credit consumers are crucial to the company's sales performance, as they account for a whopping 60 percent of its $19 billion in annual revenue.

Converting loyalty members into credit customers remains a huge opportunity for Kohl's, as more than half of its loyalty members do not yet have a charge card, according to Stifel Nicolaus.

To encourage more sign-ups, the company is now prescreening shoppers to see if they meet the requirements to qualify. Kohl's then tells shoppers what type of discounts they could receive as a member.

In an effort to further build allegiance to its stores, the retailer has integrated its loyalty program into the updated Kohl's mobile app, providing customers with a wallet where they can see their rewards and other offers. Then, by scanning an item's bar code, shoppers can see not only the initial price tag, but how much it would ultimately cost them.

The majority of the 9 million people who have downloaded the retailer's app use it to view their wallet, or to see how many reward points they have, said Krista Berry, chief digital officer of Kohl's.

Mark Taylor, an expert on digital customer experience at Capgemini Consulting, said the team at Kohl's is applying "interesting techniques" to build customer loyalty. He emphasized that for loyalty programs in general to truly engage with customers, they need to offer more than purchase-based rewards.

Some examples of what Taylor considers best practices — including rewarding customers for interacting with the brand on social media, or creating a central place to house all of their interactions with the retailer — are being employed by Kohl's.

"They've really made some tremendous strides," Taylor said.

Kohl's isn't just relying on a robust loyalty program to help capture more sales. Other initiatives include the rollout of an expanded beauty department to its entire fleet. Because beauty items by their nature need to be replenished, these departments have helped increase the number of visits to its stores as well as the number of items a shopper has placed in their basket.

Kohl's also rolled out a more extensive activewear selection, including a built-out presence for Nike and Columbia. Along those lines, it's also increased the amount of space dedicated to national brands, which help it attract new customers.

Of all the changes it's made, Setliff and Berry agreed that the biggest game changer for Kohl's this holiday season is that shoppers can now pick up their online orders in any of its 1,000-plus stores.

Over the Black Friday and Cyber Week shopping period, the company said roughly a quarter of Kohls.com purchases were fulfilled by stores, either via customer pickup or the retailer shipping the order from a store's inventory.

Berry added that the week of Thanksgiving, the retailer had four record days on digital that were "not even remotely close to last year."

"We're off to an amazing start for holiday," she said.

According to Cowen and Co. analyst Oliver Chen, there are several external factors driving Kohl's outperformance of one of its key competitors, Macy's. These include an added emphasis on activewear, its lack of dependence on tourism, and less exposure to slowing brands such as Michael Kors and Ralph Lauren.

Still, some analysts are hesitant that Kohl's initiatives will be enough to offset an overabundance of inventory throughout the retail sector, and shrinking sales among the department store set. Whereas department stores in October 2005 generated $18 billion in sales, according to the Commerce Department, they pulled in just $14 billion during the same month in 2015.

For Kohl's specifically, revenues have remained stationary, coming in at roughly $19 billion for the past several years.

Stifel Nicolaus analyst Richard Jaffe, who has a "buy" rating on Kohl's, said he's optimistic about the company's performance during the fourth quarter.

"The company's strategic initiatives that were put in place over the last year continue to play out favorably," he said. "We anticipate a continuation of positive [comparable sales] and are encouraged for holiday."