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Activist Investor Calls on Kohl’s to Replace CEO and Chairman

An activist investor is pushing Kohl’s to replace CEO Michelle Gass and chairman Peter Boneparth, for what it calls a failure to conduct a productive review of strategic alternatives and produce a viable turnaround plan.

Ancora Holdings Group, LLC, which has a 2.5 percent stake in the department store, specifically called for new appointees that “possess operating expertise and turnaround pedigree,” and urged the board to announce a “thoughtful succession plan and run a robust search process that accounts for interviewing a highly diverse group of qualified candidates.”

In a letter, the hedge fund called out the company’s board of directors for rejecting multiple potential suitors in the $64-$65 per share range at the start of the year, including Acacia Research and private equity firm Sycamore Partners. At the time, Kohl’s said it wanted $70 per share.

In the ensuing months Kohl’s rejected two deals from Vitamin Shoppe owner Franchise Group, which came in at $60 per share at $7.4 billion and then later $53 per share at $6.84 billion. By July 1, Kohl’s had concluded its strategic review without a sale.

Kohl’s has remained defiant amid the activist criticisms, which were co-penned by Ancora chairman and CEO Frederick DiSanto, as well as James Chadwick, president of sister entity Ancora Alternatives LLC.

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“The Kohl’s board unanimously supports Michelle Gass and her leadership team,” a company spokesperson told Sourcing Journal. “We remain committed to maximizing value and acting in the interests of all our shareholders by staying focused on running the business, and the board continues to actively engage with management to navigate the current retail environment.”

The company has been under the microscope by Ancora and other activist investors since early 2021, when the hedge fund and three other firms that collectively owned 9.5 percent of the retailer recommended it to implement a sale-leaseback program for its real estate and pivot away from its activewear push back further into women’s wear. The company settled the activist investor concerns by adding three new board members in April last year.

Engine Capital urged Kohl’s to separate its e-commerce and store operations into separate businesses in December 2021. The move came after Saks split off its business into two standalone companies, and shortly after Macy’s was recommended to do the same during its own activist battle. Macy’s never went through with a split, but it did hire AlixPartners—the same consulting firm that engineered the Saks spinoff—to examine the company’s overall business structure.

At the time the letter was sent on Thursday, Kohl’s stock had dropped 43.78 percent over the past year, Ancora pointed out. It argued that Kohl’s repeated takeover rejections destroyed “billions of dollars” in equity value, painting the company into a corner.

“With a failed review of alternatives and recent credit downgrade now casting shadows over what is a shrinking business, we estimate that Kohl’s has begun to trade at a steep discount to its liquidation value,” the letter said. “The onus is now on management to begin executing flawlessly against a backdrop that includes high inflation, intense competition and recessionary headwinds. Unfortunately, the facts indicate Kohl’s lacks the right leadership for the exceedingly challenging period ahead—one that will require the Company to reverse high-single-digit sales declines, contain capital expenditures and operating expenses, and immediately optimize fulfillment, marketing and merchandising.”

Ancora tied many of the company’s concerns to its stock price, which was $25.90 a share as of noon on Friday. On a three-year basis, Kohl’s stock has declined 39.61 percent, and dipped 22.81 percent from five years ago, Ancora pointed out. In its most recent quarter, Kohl’s saw net sales decline 9 percent to $3.86 billion, and revised its full-year guidance downward amid the poor quarter. And in the period prior, Kohl’s saw a 5.2 percent sales decline.

The wealth management firm aired three more grievances within its recommendation, first harping on the “unsettling” level of C-suite turnover in recent quarters as sales have declined. In particular, the departures indicated “suboptimal personnel selection” on Gass’ behalf, it argued. The firm also expressed disappointment that the board did not disclose the recent departures of certain senior executives, including its former chief merchandising officer Doug Howe, until after the company’s annual shareholders meeting.

Ancora also said that Kohl’s’ most recent strategic plan received “a very poor reaction from the market,” with the activist investor suggesting that Gass “is not commanding the trust of the investment community.”

And finally, Ancora pointed to Kohl’s top competitors, namely Macy’s and Dillard’s, as examples of where the department store had fallen short. Macy’s, which unveiled second quarter earnings just one week after Kohl’s, reported a mere 1 percent sales dip to $5.6 billion. And Dillard’s saw sales tick up 1 percent to $1.6 billion. Both retailers’ results came amid a quarter where apparel retail in general got rocked, particularly by an overreliance on markdowns as merchants scrambled to sell off excess inventory.

“Similar to how it handled recent executive departures, the board did not disclose a material financial miss prior to a critical shareholder vote at this year’s annual meeting,” the letter said. “These disclosure decisions suggest to us—and presumably other shareholders—that the board has been focused on maintaining control above all else.”

Aside from its main grievances, Ancora disagreed with Gass’ sizable executive compensation, which totaled $60 million between fiscal 2017 and 2021. Her most recent fiscal year compensation was more than 1,000 times that of the median employee’s compensation, the letter stated.

The letter wasn’t all negative, with Ancora highlighting Boneparth’s willingness to listen to private feedback in recent months. The company also called Gass “a talented leader” who deserves credit for establishing Kohl’s store-in-store partnership with Sephora, steering the business through the Covid-19 pandemic and diversifying the executive ranks.

“We have been proud to invest in a business that maintains strong gender diversity in the C-suite, as it aligns with our recognized focus on installing female leaders in more corporate boardrooms,” the letter said.