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Why an Activist Investor Group is Targeting Kohl’s

Four activist investors have banded together to take aim at Kohl’s.

Macellum Advisors, Ancora Holdings, Legion Partners Asset Management and 2010 Capital, which together hold 9.5 percent of the retailer’s shares, have some ideas about what Kohl’s should do to maximize shareholder value, starting with its real estate portfolio.

What the activists say

In a letter to Kohl’s dated Feb. 22, the activist group said the retailer has between $7 billion and $8 billion in real estate value that is “frozen on the balance sheet.” A sale-leaseback program, it added, would enable the company to sell a non-earning and non-core asset for 14 to 15 times earnings before interest, taxes, depreciation and amortization (EBITDA), versus the current stock price, which it says reflects just 4.8 times 2019 EBITDA. Kohl’s shares closed Friday at $52.70 but jumped 6.5 percent to $56.13 in early Monday trading on the activist news. Kohl’s 52-week range saw a high of $57.48 and a low of $10.89.

Faster inventory turn would also release a significant amount of cash tied up in slow moving product, according to the activist group, which is also pushing for Kohl’s to reduce experimental technology spending, which it claims has failed to produce meaningful results, and implement a zero-based budgeting program that nixes increased spending unless there’s a corresponding reduction.

On the merchandising side, the investor group wants Kohl’s to accelerate the time it takes to get new product onto the sales floor, delineate a good-better-best assortment and re-establish women’s apparel as a traffic driver. Among other points of contention, the activists also said that the retailer’s focus on active and athleisure has failed to drive top-line growth, even though Kohl’s executives have “stressed the opportunity in active” since February 2014, and most recently again in 2019.

On the financial front, the activist group also expressed concern over the company’s decision in April 2020 to raise $600 million of debt due in 2025 at a 9.5 percent interest rate. They also charged that Kohl’s has an excessive executive compensation program. Weak results should justify lower executive pay, the group said in its letter, noting that “compensation for the top five executives instead increased to $30 million in 2019,” at a time when annual sales were under $19 billion as operating income fell 42 percent to $1.2 billion.

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And although Kohl’s says its Amazon relationship is an “accretive arrangement,” the activists are “skeptical” of the arrangement. Industry sources say the program is a costly one for Kohl’s, they added.

In looking at the ten-year performance leading up to 2020, it’s no surprise that the activist group is also pushing for a board refresh, as control of the board will help the group push the company in a different direction. The group included a list of nine board members as nominees—all would be considered independent directors—who will stand for election for the 2021 board slate at the next annual shareholders’ meeting. Among the nominees are Marjorie Bowen, a former investment banker who has served on a number of audit committees; David Duplantis, who held several senior level management positions at Coach Inc. and is now a consultant to early-stage firms; Jonathan Duskin, CEO of Macellum, who has led activist moves at now-bankrupt Christopher & Banks, Citi Trends, and The Children’s Place, and Jeffrey Kantor, former retail executive who held several senior management roles at Macy’s Inc., among others.

Kohl’s has a 12-member board, including CEO Michelle Gass; chairman Frank V. Sica; former Safeway Inc. CEO Steven A. Burd; former Goldman Sachs retail analyst Adrianne Shapira, who is now managing director for private equity firm Eurazeo Brands; Peter Boneparth, former president and CEO of Jones Apparel Group, and now chairman of JetBlue Airways and a senior advisor to Irving Place Capital; and former CEO of Libbey Inc. Stephanie A. Streeter.

What Kohl’s says in response

In reaction to the recent activist activity, a Kohl’s spokeswoman said the retailer’s board and management have been in contact with the four-pronged group and remains “open to hearing new ideas.”

“Kohl’s is deeply committed to enhancing shareholder value and is confident the company’s new strategic framework, published in October 2020, will accelerate growth and profitability,” the spokeswoman said, noting that the company have earned seven equity analysts upgrades while the stock price has “appreciated more than 150 percent” in the wake of its new strategy.

In a public response to the letter, Kohl’s said it rejected the activists’ “attempt to seize control of our board and disrupt our momentum, especially considering that we are well underway in implementing a strong growth strategy and accelerating our performance, and we have refreshed half our board with six new independent directors since 2016.”

What’s more, Kohl’s says its strategic plan encompasses several initiatives the activists proposed, thought it “also determined that other ideas they propose would not be accretive to shareholder value.” Its board and management “will continue to engage with the Investor Group with the goal of identifying new ideas that could enhance shareholder value,” it added.

Kohl’s says “investments over the last three years in stores, digital, technology, supply chain and marketing capabilities have supported the continued transformation of the business and positioned [it] for future growth.” Steps taken to boost traffic and customer acquisition translated into a larger customer base, reaching a record 65 million customers in 2019, it added, citing omnichannel efforts buy online, pickup in store, drive up, and the Amazon returns partnership.

And the forthcoming Sephora launch should lay the groundwork for a transformational beauty business that will attract new and younger customers, it said. It restated plans to grow the active business to 30 percent of sales, and grow outdoor through new partnerships, such as its launch with Eddie Bauer. It’s also revamping the women’s portfolio, moving away from 10 lackluster brands. The chain said it will continue to invest in omnichannel to increase productivity.

Addressing real estate holdings, Kohl’s said the sale-leaseback approach has not historically offered the optimal cost of capital relative to other alternatives, and noted a 1995 document restricting additional such transactions. And finally, Kohl’s said most executive only earn their compensation when they achieve specific financial targets.