🛒 Can Kohl’s Create Value By Itself?
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🛒 Kohl's: Left In The Lurch?
Seven months and two dozen negotiations later, Kohl’s Corporation (KSS) is back to square one. The sale plan is off the table amidst uncertainty. Can the management convince investors of other value creation ways? More importantly, will shareholders buy that argument?
Activism Impact
When Michelle Gass became Kohl’s CEO in 2018, the company’s average full-size store did 15% less business than in 2013. It pivoted to smaller locations to cut costs, leaving only the best-selling inventory on the floor, and opened up the business in newer markets.
Post-2018, Kohl’s has formed partnerships with Amazon, Sephora, brought new brands on board, and improved its loyalty program. But all of this has failed to spur its underperforming stock price. The stock has been down 35% over the last ten years.
From demanding better governance to improving operations and profitability, activist shareholders have shaken boards of many companies over the last two years.
Engine Capital Management, a New York-based “value-oriented special situations fund,” has been on Kohl’s trail since 2020. It demanded that Kohl’s either spin off its e-commerce business or sell the entire company to boost shareholder value.
Kohl’s has been on loggerheads with Macellum Advisors, led by veteran Jonathan Duskin. Macellum accused Kohl’s of not doing enough to improve business. It attempted to take over Kohl’s board by asking for all 13 directors to be replaced. However, shareholders rebuffed the move, re-electing all of them at its annual meeting.
Macellum, who owns a 5% stake in Kohl’s, said that the vote is a shareholder referendum on the company’s potential sale and not the company’s board. It pushed the company for a deal at the earliest.
Kohl’s announced in March that it has engaged with over 20 parties for a potential sale of the company. The number increased to 25 by April. Preliminary non-binding bids went up to as high as $72 per share, a significant premium from its market price. Among the bidders were starboard-backed Acacia Research, PE firm Sycamore Partners, and Hudson’s Bay Co., a Canadian department store operator.
After rejecting previous bids, saying they undervalued the company, Kohl’s entered into exclusive talks with Franchise Group last month. The group owns retail brands like Vitamin Shoppe and Pet Supplies Plus. The group initially offered to pay $60 a share for a potential sale.
Much Ado About Nothing
Kohl’s pulled itself off the block last week after multiple rounds of negotiations. The two sides faced “significant obstacles” to reaching a fully executable agreement. Franchise Group revising its bid lower to $53 a share without definitive financing acted as a dealbreaker.
Persistent inflation has hurt retailers the most. Companies are grappling with rising input costs and a cut in discretionary spending as consumers rethink their shopping needs. Walmart’s shares dropped the most in 35 years after it cut its full-year profit forecast. Target also announced a hit to profitability by cutting down on unwanted inventory. Target’s guidance cut in June was the second in as many months.
Wisconsin-based Kohl’s, which operates 1.1K stores across the US, earlier cut its sales and profit outlook in May. It now expects a high-single-digit drop in current-quarter sales, compared to the earlier guidance of a low-single-digit drop.
Inflation has also hurt the deal market after a record 2021. Walgreens Boots Alliance decided to keep its Boots and No7 Beauty Co. business with itself after failing to receive adequate bids. Panera Brands, the owner of Panera Bread and other brands, called off a deal with Danny Meyer’s SPAC to retake the sandwich chain public, citing market conditions.
Kohl’s management admitted that several bidders were reluctant to invest in the brick-and-mortar retail business. Others could not add more value beyond the management’s current plan. The administration wants to navigate the current situation independently and is confident of doing so effectively.
In a reversal from its prior stance, Kohl’s management is open to selling some of its real estate. Macellum believes that the company should sell some of its real estate and lease it back as a way to unlock capital. During the pandemic, Kohl’s made a $127M gain on a small sale-leaseback deal. Kohl’s owns 410 locations, leases another 517, and operates ground leases on 238 shops with a total value of $8B.
The company also plans on conducting an accelerated share repurchase program worth $500M in August. However, analysts expect Kohl’s woes to deepen as the US economy tackles recession fears. One has questioned whether the company’s management will remain in place after consistently poor results.
Kohl’s investors deserve a case study on themselves. They continue to back the management despite years of underperformance. The hope remains that the current leadership will create value for them sooner or later. Time will tell whether that happens, but for now, Kohl’s is that black line that won’t beautify the shareholders’ portfolio.
Market Reaction
KSS ended at $28.68, down 19.66%.
Newsworthy 📰
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