The group controls a combined 9.5 % stake in the department-store chain
By guest author Cara Lombardo from the Wall Street Journal
A group of activist investors has a big stake in Kohl’s Corp. KSS and is attempting to take control of the department-store chain’s board, according to people familiar with the matter.
A group that includes activists Macellum Advisors GP LLC, Ancora Holdings Inc. and Legion Partners Asset Management LLC, as well as 4010 Capital LLC, controls a combined 9.5 % stake in Kohl’s and earlier this year nominated nine people to its now-12-person board, the people said.
Neither the size of the stake nor the board bid previously has been revealed.
The trio of activists, which previously teamed up on a campaign that remade the board of housewares retailer Bed Bath & Beyond Inc., BBBY thinks Kohl’s isn’t moving fast enough to address stagnant sales and declining operating margin, issues that predate the pandemic, the people said.
The company’s operating margin fell to 6.1 % in 2019 from 11.5 % in 2011, while its sales were little changed. Then the coronavirus pandemic hit, and total revenue fell 25% to USD 9.8 billion in the nine months ended Oct. 31. Losses for the period totalled USD 506 million compared with a profit of USD 426 million a year before.
Kohl’s is set to report its fourth-quarter and full-year 2020 results March 2.
The activists are calling for Kohl’s to take a range of actions, including adding directors with retail experience who can work with Kohl’s Chief Executive Officer Michelle Gass and considering a sale-leaseback of some of its more than USD 7 billion in noncore real estate, according to the people and a letter, viewed by The Wall Street Journal, that the group plans to send to other shareholders. The group also is calling on Kohl’s to reduce inventory levels while improving offerings and make discounts and promotions easier for customers to follow.
Kohl’s said in a statement it has been in discussions with the group since early December and remains open to new ideas. It said it is confident its new strategy published in October 2020 will accelerate growth and profitability. It also noted that since the plan was unveiled, Kohl’s has received seven upgrades from equity analysts and its stock price has appreciated 150 %.
Menomonee Falls, Wis.-based Kohl’s has a market value of around USD 8.3 billion. Its shares have risen roughly 18 % over the past year, trailing a 73 % jump for an index tracking the retail sector as a whole.
While amassing enough shareholder support to take control of a company the size of Kohl’s can be a tall order, and activists often settle for fewer seats than they initially seek, there is some precedent for a bid like this to succeed. The majority of Bed Bath & Beyond’s directors were replaced in connection with the activists’ 2019 campaign: five by the company and four as part of a settlement.
The group has held off and on talks with Kohl’s, but the two sides have so far failed to reach an agreement that would avert a full-fledged proxy fight at the company’s annual meeting this spring.
The group’s slate of nominees include Macellum Chief Executive Officer Jonathan Duskin and former Burlington Stores Inc. CEO Thomas Kingsbury.
Business at Kohl’s slowed in 2019, well before the pandemic hobbled nonessential retailers. As Covid-19 forced retailers to temporarily close their stores and people to shelter at home, Kohl’s suffered along with other chains that sell mainly apparel.
Since becoming CEO in 2018, Ms. Gass has been lauded for her willingness to experiment and try new ideas. The former Starbucks SBUX executive joined with Amazon.com Inc. AMZN to accept returns of items shoppers bought on the e-commerce giant’s website, helping to boost foot traffic at Kohl’s stores. They aren’t located in enclosed malls, which has helped it escape the fate of other department stores such as Macy’s Inc. and J.C. Penney Co. that have closed hundreds of stores.
Kohl’s last week added retail consultant Robbin Mitchell to its board in what could be a move to quell the activists. The retailer has already been culling its offerings and has said shoppers are returning to its physical locations. It also has plans to open hundreds of Sephora beauty and makeup shops inside its stores.
New York-based Macellum is known for campaigns at retailers including Big Lots Inc., BIG where it teamed up with Ancora, and Citi Trends Inc. Ohio-based Ancora, which typically takes activist positions in small-cap companies, launched a proxy fight at trucking company Forward Air Corp. FWRD earlier this month. California-based Legion previously urged Perry Ellis International Inc. to sell itself.
No Easy Fix for Kohl’s Troubles
Activist investors are itching for change at the department-store chain, but it is actually better run than its peers.
By guest author Jinjoo Lee from the Wall Street Journal
A group of activist investors thinks Kohl’s KSS can do better, but that may be easier said than done.
An investor consortium with a combined 9.5 % stake in Kohl’s is attempting to take control of the department-store chain’s board, nominating nine to its 12-person board. The investors are calling for a plan to grow sales and are pitching a sale-leaseback of some of Kohl’s real-estate assets, among other changes.
But Kohl’s faces industrywide problems. For more than a decade now, department stores have been losing market share to discounters, which grew quickly starting in the recession that followed the 2008 financial crisis. The pandemic has made things worse with online retail grabbing more share and apparel brands shifting focus to direct-to-consumer sales.
In fact, Kohl’s is the best-performing of the struggling bunch, making it a curious target for activists. For the nine-month period ended Oct. 31, 2020, its top line declined 26 % from a year earlier. Macy’s, Nordstrom and Dillard’s all lost roughly 35 % in the same period. Both operating margins and returns on invested capital declined between 2011 and 2019 at Kohl’s, but its numbers are still mostly better than those peers.
Sale-leasebacks could help juice returns for a while, but holding on to assets isn’t such a bad strategy either. Macy’s, for example, managed to raise USD 3.15 billion in credit last year to bolster liquidity, using its real estate as collateral. The move helped the department-store chain distance itself from bankruptcy.
At the end of the day, a retail business needs to offer compelling reasons for customers to come in the door. Kohl’s has actually been the most proactive on that front. It has a program to allow customers to return Amazon.com items through its stores, and an initiative under way to lease space next to its stores to traffic drivers such as Aldi’s and Planet Fitness. Last year, it began opening highly popular Sephora stores inside its department stores.
Kohl’s shares rose almost 10 % after The Wall Street Journal’s late Sunday report on the activist moves. While an extra push certainly doesn’t hurt, it would be a pity if the shake up only leaves investors with unrealistic expectations.