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Activist Investor Revives Gripe With Kohl’s

Kohl’s is once again under attack by a familiar foe.

For the second year running, Macellum Capital Management is pushing for a shakeup at the Menomonee Falls, Wisc.-based retailer. The activist investor’s demands call for Kohl’s to replace its board or sell itself to beef up its share price. The hedge also wants Kohl’s to streamline its product assortment and replace third-party agents with a cost-efficient in-house team sourcing for its private labels.

Macellum accused Kohl’s leadership and board of “materially mismanaging the business,” claiming their failure to “implement necessary operational, financial and strategic improvements” drove the chain’s share price down 22 percent since “we settled with Kohl’s for two director designees in April 2021,” it said Tuesday.

Kohl’s shares are currently trading in the range of $50, compared with a 52-week high of $64.80 on May 18, 2021, and a low of $42.68 on Feb. 2, 2021. Shares ended Friday’s trading session at $47.77, before Macellum sent its letter to the Kohl’s board.

Kohl’s board brouhaha began in February last year when a Macellum-led group of investors aired some ideas about maximizing shareholder value, namely urging the company to get creative with its real estate assets. The group, including Ancora Holdings, 2010 Capital and Legion Partners, the activist investor that locked horns with Genesco, also told the department store retailer to look at a sale-leaseback program, turn inventory more quickly and flow product onto the floor faster. The parties’ eventual settlement added Macellum-backed Margaret Jenkins and Thomas Kingsbury and Kohl’s-approved Christine Day, former CEO of Lululemon, to the board. The truce staved off a proxy fight at Kohl’s annual shareholders meeting last year.

As if one activist headache wasn’t enough, Kohl’s faced a second showdown last year. In December, activist investor Engine Capital urged the retailer’s board to separate Kohl’s e-commerce business from slow-growth stores, similar to what Saks Fifth Avenue did and to the strategy Jana Partners is pushing at Macy’s Inc. Engine also suggested Kohl’s put itself up for sale.

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Though it shoehorned two directors onto the board less than a year ago, Macellum is looking for even greater influence at Kohl’s, now threatening to nominate new candidates at the upcoming shareholders meeting “unless the board decides to collaborate with us” and switch out some directors, it said. If that board is unwilling to take some of its suggestions, the investor said Kohl’s should explore strategic alternatives, especially since “well-capitalized strategic and financial buyers” would “pay a meaningful premium” to acquire the chain. “We also see value-creation potential in separating the company’s e-commerce and brick-and-mortar businesses,” it added.

Macellum’s letter published Tuesday reiterated many of last year’s complaints. Last year’s campaign, it said, showed how Kohl’s missed out on making good money by letting $7 billion to $8 billion of owned real estate languish on its balance sheet. And the board’s decision to increase its share buyback from $300 million “fell short of” Macellum’s demands to reach $2 billion.

The hedge fund also took aim at Kohl’s revenue performance. Compared to its peers’ “meaningful growth above its 2019 levels,” Kohl’s sales performance was among the worst,” Macellum said, claimed that “big box, specialty, on-mall, off-mall, discount retailers and dollar stores all performed better.” It also questioned Kohl’s focus on athleisure when many consumers relished the chance to emerge from casual lockdown clothing and dress up again.

What’s more, Macellum said Kohl’s “rebuffed overtures from credible buyers,” an “unacceptable” move that “would seem to constitute a meaningful breach of the board’s fiduciary responsibilities.”

“In our view, Kohl’s should engage independent financial advisors to review all strategic alternatives in a parallel path to further refreshing the board,” it added.

So what exactly does Macellum want?

Macellum managing partner Jonathan Duskin said the retailer should enhance its merchandising, align executive compensation goals with shareholder value creation, build an in-house sourcing team, repurchase more shares, adopt a sale-leaseback structure for its real estate assets, consider selling itself, and explore decoupling stores from digital.

In a statement, Kohl’s said it has “continued to engage with Macellum” since last year’s settlement and is “disappointed with the path they have taken and the unfounded speculation” in its publically aired missive.

The retailer countered Macellum’s assertions that it wasn’t moving quickly enough.

“Our strategic plan to transform Kohl’s into the leading omnichannel destination for the active and casual lifestyle continues to gain traction. Our third quarter 2021 performance demonstrates continued progress: Net sales increased 16 percent, beating expectations, due to strong performances across both stores and digital. Operating margin reached a nine-year high of 8.4 percent and our full year EPS (earnings per share) outlook represents an all-time high for our company,” Kohl’s said.

The retailer claims its refreshed board has the skills and expertise to continue to deliver long-term value creation. Brand partnerships including the 200 new Sephora at Kohl’s shops that opened in the fall are also delivering results. And based on its 2021 performance, the retailer said it is positioned to “exceed our key 2023 financial goals two year ahead of plan. We remain confident in our future and have accelerated our share repurchase activity. In 2021, we continue to expect to repurchase $1.3 billion in shares, reinforcing our commitment to driving shareholder value. We will discuss our 2021 results in more detail on our earnings call on March 1, 2022.”

Kohl’s said it will share an updated financial framework and capital allocation strategy at its March 7 investor day event. The retailer also pointedly said it that as “recently as this weekend, Macellum refused to enter a confidentiality agreement to hear about the company’s progress across operating performance metrics, strategic initiatives and capital allocation plans, and provide input on these matters as a shareholder. They have been unwilling to constructively engage. The board and management remain focused on sustained value creation. Distracting the company from this focus does not benefit shareholders.”