Why activist investors are onto Kohl’s
Retailer doing well, but group sees possibilities
Kohl’s Corp. appears to have an opportunity.
There’s a chance the Menomonee Falls-based retailer will emerge a winner coming out of the COVID-19 pandemic, which has absolutely bludgeoned the retail industry.
Kohl’s has some splashy new partnerships that will debut later this year and has thus far avoided the permanent store closings that occurred across the retail sector as customer traffic was plunging during the pandemic.
As the number of COVID-19 cases continues falling, it would seem that Kohl’s is poised to grow at the expense of competitors who have fewer stores and, as a result, a smaller presence in the marketplace.
A group of activist investors has its doubts and is seeking to fill the Kohl’s board with a new slate of directors.
The group of investors, which controls about 9.5% of Kohl’s stock, outlined the plan in a letter to shareholders last week. It filed a preliminary proxy statement with the SEC Tuesday.
Observers say they aren’t surprised by the move.
“We’ve seen for quite a period of time a number of retailers being attractive targets,” said Anne Brouwer, a senior partner with retail strategy consultant McMillan Doolittle. “It’s not a surprise that someone is interested in Kohl’s.”
Kohl’s has a customer base of more than 65 million and more than 1,150 locations in 49 states that are mostly standalone sites. The off-mall locations are especially attractive during the pandemic when curbside pickup and buy online, pickup in store options are gaining traction.
“In many cases, what (activist investors) are looking for is a company that has some inherent strength but a significant opportunity for improvement,” Brouwer said.
A ‘good company’ — but not good enough
Collectively, the group of investors is Kohl’s largest shareholder. The group includes Macellum Advisors GP LLC, Ancora Holdings Inc., Legion Partners Asset Management LLC and 4010 Capital LLC.
The activist investors are trying to take over nine seats on the company’s 12person board of directors.
Kohl’s leadership disagrees that the
company needs a new set of directors.
Kohl’s executives have been talking with the activist investors since late last year about their ideas for the company. Kohl’s tried to appease the investors, offering the group two board seats during a Feb. 6 meeting, according to records filed with the SEC.
The group members rejected the offer, opting instead to take their plan — and their criticisms of the company — public.
“This is a company that’s a good company,” Jonathan Duskin, CEO of Macellum, said in an interview with Yahoo Finance. “It should be a great company.”
A nearly 30-page document from the activist investors outlined changes they believe are needed at Kohl’s. That includes tighter expense and inventory control.
“The criticisms were perfectly fair. They were all valid points,” said Jen Redding, a senior equity research analyst who follows Kohl’s for Wedbush Securities.
“There is a tremendous amount of opportunity with Macy’s and JC Penney stores closing,” Redding said. “There’s this low hanging fruit that Kohl’s can pick from and increase their margins and I think that’s what the activist investors see.”
The National Retail Federation anticipates retail sales will grow between 6.5% and 8.2% in 2021, according to forecasts released Wednesday. The NRF said the industry could have its best year for growth since 2004.
Group takes issue with strategy
Many of the criticisms from the investor group center on Kohl’s new strategy, which was unveiled in October.
The company has seen down or flat comparable store sales for pretty much the last two years. Comparable store sales are sales at stores open at least a year and are an important measure of a retailer’s overall health.
But comparisons are tough in the era of COVID-19. The pandemic forced Kohl’s to temporarily close all of its stores for weeks last spring.
The company appears to have succeeded in slowing its declining sales.
Sales were down about 40%, 22% and 13% in the first three quarters of 2020. Preliminary results show sales were down about 11% for the fourth quarter. That would be the company’s best sales number since the coronavirus pandemic disrupted the economy.
Kohl’s will release its fourth quarter and year-end earnings on Tuesday.
“We successfully navigated the business through an extremely challenging year and we have three consecutive quarters of progressive improvement and strong momentum going into 2021,” CEO Michelle Gass wrote in a message to employees on Monday.
Gass succeeded Kevin Mansell as Kohl’s CEO in May 2018.
“As we look toward building our business for the future, please be assured that our management team and board have great confidence in our current performance and the plans we have in place for the next chapter of Kohl’s,” Gass wrote in the message.
Gass does not appear to be the target of the activist investors. Duskin told Yahoo Finance that he believes Gass can be the right CEO for Kohl’s right now.
Still, any CEO — Gass included — has to have a board of directors she can work with in order to lead the company and take it in the direction she believes it must go.
Discounters soar, department stores struggle
The activist investors argue the new strategy varies little from the strategy Kohl’s has pursued for years.
To some, the fact that Kohl’s is still operating outside bankruptcy and is doing so without having closed massive numbers of stores, is a sign of good management.
The activist group is demanding that the company do better.
Retailers including Amazon, Walmart and Target all reported record sales throughout the pandemic.
Department stores have not fared as well.
Macy’s, which owns Bloomingdale’s and Bluemercury, said sales were down 29% last year. Dillards reported that total sales decreased 31%.
Still, it’s not like Kohl’s has stood still as the pandemic raged.
Last year, Kohl’s dropped a handful of brands the retailer said were underperforming.
Kohl’s has partnered with Amazon to allow customers to return purchases at Kohl’s stores. Aldi supermarkets are moving into space in some Kohl’s stores.
Later this year, around 200 “Sephora at Kohl’s” locations will open.
A new private label activewear brand is about to launch.
Meanwhile, the new strategy introduced in October includes some of the same improvements sought by the activist investors.
“(Gass’) goals and the investor activists goals are not too far apart,” Redding said.
Assuming the situation with the activist investors does not change, the matter is likely headed to a shareholder vote at the Kohl’s annual meeting later this year.